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When Congress passed the Employee Retirement Income Security Act (ERISA) in 1974, it planted the seeds of the managed care revolution: The ERISA shield from state regulation drove the transformation of health insurance from physician-driven fee-for-service reimbursement to insurer-controlled negotiated reimbursement. In the mid-1980s, the U.S. Supreme Court established the broad outlines of ERISA pre-emption of state regulation. For more than a decade, the Court was silent while managed care organizations increased their domination of health care services through their ability to escape state regulations that made traditional insurance models less competitive. The Court revisited managed care regulation in cases starting in 2000 and culminating this term with Kentucky Assn. of Health Plans v. Miller, 123 S. Ct. 1471 (2003). This article discusses how these cases are likely to reshape the managed care market and what questions the Court left unanswered in Kentucky. CASES THAT ESTABLISHED ERISA PRE-EMPTION In Metropolitan Life Ins. v. Massachusetts, 471 U.S. 724 (1985), the Court reviewed a state law that mandated that health insurance plans include mental health care coverage. The Court found that this was a legitimate state regulation as applied to traditional health insurance products, but that it was pre-empted by ERISA when applied to self-funded health insurance plans. In a companion case, Massachusetts Mutual Life Ins. v. Russell, 473 U.S. 134 (1985), the Court limited tort recoveries against self-funded plans, finding that ERISA provided a comprehensive scheme for addressing benefits issues and that this was a plaintiff’s sole remedy. The Supreme Court did not address how a plan’s business model might alter its ERISA status, and the presumption of most subsequent court decisions was that the business model of the plan did not matter as long as it was self-funded, i.e., that the employer paid the full cost of claims rather than buying insurance that paid claims for a predetermined fixed rate. During the next 15 years, managed care business models became very complex, including many hybrid models where self-funded plans were serviced by third-party administrators using provider networks that also serviced insured plans. Until Kentucky, all self-funded plans, regardless of their relationship with third-party administrators, were insulated from state regulation. Their physicians, however, enjoyed no ERISA protection and were subject to both state regulations on practice of medicine and medical malpractice claims. Physicians were dependent on managed care organizations for their livelihood, but bore the brunt of litigation for the organizations’ case-management policies that imperiled patient care. This asymmetry drove the Court to re-examine the limits of ERISA pre-emption. All health plans, whether insured or self-funded, exist to provide access to medical care. In Pegram v. Herdrich, 120 S. Ct. 2143 (2000), the court distinguished the delivery of medical care from the provision of benefits. It held that medical care decisions about individual patients are not protected by ERISA. The Court discussed this in terms of mixed decision-making-decisions about whether the plan would provide care for a particular patient as opposed to providing a benefit available to all beneficiaries. If a plan excludes payment for all bone-marrow transplants, that is a benefits decision and is protected by ERISA. If it pays for them when they are medically necessary, then deciding whether a particular patient receives a transplant is a mixture of a benefits and medical care decisions and is not protected by ERISA. In the next case, the Court examined the ability of states to regulate a managed care organization’s preutilization review process. In Rush Prudential HMO v. Moran, 536 U.S. 355 (2002), it found that decisions about medical necessity were outside of ERISA pre-emption and that the state could require their submission to binding third-party review. The key to this authority was the McCarran-Ferguson Act, which left the business of insurance to state regulation. McCarran-Ferguson was passed when health insurance was relatively unimportant, with most of the industry devoted to life and property insurance. States were clearly allowed to regulate reserve requirements and other factors related to the spreading of risk. Such regulation was essential to ensuring that companies were properly funded and were not fraudulently operated. The Kentuckydecision dealt with an “any-willing-provider” law, which requires an insurer using open panel models, such as preferred provider organizations, to allow any physician in the community to participate in the plan on the same terms as other participants. Any-willing-provider laws prevent plans from demanding price concessions in return for exclusive contracts. This increases the insured’s choice of physicians and protects physicians from being locked out of providing care to large patient groups. Plans oppose any-willing-provider laws because they increase the cost of providing care and decrease the plan’s flexibility in dealing with physicians. Kentuckyalso dealt with another exemption in ERISA pre-emption, the savings clause. Under the savings clause, states could not deem a self-insured ERISA plan to be an insurance company subject to state regulation. The managed care organization in Kentuckyargued that the any-willing-provider law did not affect risk-spreading and thus was not part of the business of insurance. That is, the organization argued that because the third-party administrators for self-funded plans do not resemble traditional insurance companies, they are not seen in the business of insurance. The Court disagreed, finding that the selection of physicians at least indirectly affects risk-spreading. The Court rejected the use of the McCarran-Ferguson analysis to determine the business of insurance for ERISA health plans because the laws were passed for different purposes and had different regulatory objectives. By broadening the definition of the business of insurance to anything that affects risk-spreading, the court greatly expanded state authority over third-party administrators of health plans. Kentuckyleft open the question of whether it applies to all arrangements with third-party administrators that can be characterized as risk-spreading, or whether ERISA pre-emption still applies to pure self-funded plans that are not in hybrid arrangements. The confusion results from footnote 1, which says that the opinion does not reach this issue because the Kentuckyany-willing-provider law was limited to plans “not exempt from state regulation by ERISA.” Many commentators read this as applying to the question of whether the Kentuckylaw should be struck for overbreadth and believe that it is not a limitation on the risk-spreading test for the business of insurance. A significant number of health plan counsel, however, read this footnote in terms of the ERISA savings clause. Under this reading, Kentuckywill let states regulate hybrid plans that are run by third-party administrators, but not pure self-funded plans run by third-party administrators. WHERE DO PLANS GO FROM HERE? Kentuckyappears to be an expression of the court’s distinction between benefit plans, which are protected by ERISA, and medical services, which are not. Under this analysis, Kentuckyapplies to all third-party-administrator arrangements with physicians, without regard to the nature of the underlying plan. If the plan is self-insured, and the plan itself makes all the decisions, under Pegramit is exposed to the extent that any part of a decision is medical. Moreover, employee physicians also subject the plan to vicarious liability without regard to ERISA. This is a rational limitation of ERISA to plan benefits, consistent with its application to pension plans. The regulation of medical care and insurance is thus returned to the states. Given this increased exposure to liability for medical decision-making, ERISA self-insured plans and third-party administrators will need to make adjustments. One response will be to operate “lean” plans, which have extensive cooperative agreements with medical groups that shift plan-administration costs to the providers. These agreements will increase the money that medical groups can make by complying with the plan’s terms, but they will also include more risk, so any willing provider who does not abide by the terms will risk financial ruin. Another response would be to expect enforcement of ever-broadening indemnification agreements that shift liability to the providers. A better response is consolidation in the industry. Increasing market share not only increases bargaining power over providers, but also expands the size of the insurance pool. Since insurance enjoys significant protection from antitrust claims, such consolidation would not be difficult. Once an insurer achieves a critical mass by becoming a third-party administrator for multiple employers, it will be able to demand more favorable terms from physicians and thus will be able to gain more market share by offering cheaper insurance. Megaplans with power in large markets could achieve the economies that are possible in the state-controlled plans offered in all other westernized countries. While such plans might not offer the friendly care that consumers demand, consumers may become more compliant when faced with the alternative of no health care. Whether such plans are preferable to a national health care system is moot, given the current political climate. Thomas R. McLean is CEO of Third Milennium Consultants in Shawnee, Kan.; clinical assistant professor of surgery at the University of Kansas; and attending surgeon at the Leavenworth, Kan., Veterans Administration Medical Center. Edward P. Richards ([email protected]) is Harvey A. Peltier Professor of Law at the Louisiana State University Law Center and director of its program in law, science and public health. If you are interested in submitting an article to law.com, please click here for our submission guidelines.

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