States Can Regulate ERISA HMOs Under Insurance Codes - Rush Prudential HMO, Inc. v. Moran, 122 S.Ct. 2151 (2002)

Brief by Tom McLean

By 5-4 majority, the Supreme Court in Rush Prudential HMO, Inc. v. Moran, 122 S.Ct. 2151, upheld the Seventh Circuit finding that Illinois' Health Maintenance Organization Act (215 Ill. Comp. Stat., 125, § 4-10 (2000)(providing recipients of health coverage by such organizations with a right to independent medical review) was not preempted by the Employee Retirement Income Security Act (ERISA)(29 U.S.C. § 1001 et seq.).

Debra Moran was diagnosed with Thoracic Outlet Syndrome [TOS] by her PCP and Dr. Julia Terzis, an out of network surgeon who specializes in TOS.  As treatment for Debra's condition, Dr. Terzis recommended a complex surgical procedure. Two HMO affiliated surgeons agreed with the diagnosis of TOS, but recommended a less extensive surgical procedure. Although the HMO denied Debra coverage for Terzis' procedure, because it was medically unnecessary, the HMO was willing to pay for the standard TOS procedure offered by the HMO-affiliated surgeons. Debra opted to be treated by Dr. Terzis at a cost of $94,841.27.

Prior to undergoing surgery, Debra gave a written demand to the HMO requesting that it comply with § 4-10 of Illinois' HMO Act which "requires HMOs to submit to an independent physician review when there is a disagreement over whether a course of treatment is medically necessary between a patient's primary care physician and the HMO." (215 Ill. Comp. Stat., 125, § 4-10 (2000)).  When the HMO failed to comply, Debra sought specific relief from the courts. After the case was removed to federal court based on ERISA, the case was remanded. The trial court ordered the HMO to comply with § 4-10. Subsequently, an independent medical review determined that the appropriate surgical intervention for Debra was the standard TOS operation proposed by the HMO affiliated surgeons. After reviewing all of the evidence available at the time, the HMO concluded that Dr. Terzis' surgery had not been medically necessary and declined payment. (Moran v. Rush Prudential HMO, 230 F.3d 959 (2000).)

Debra again sought judicial intervention, and again the case was removed to federal court. This time around, however, the federal district court determined that Debra's action was properly characterized "as a claim for benefits" and therefore ERISA applied. Moreover, ERISA's saving clause (29 U.S.C. §  1144(b)(2)(A).) was not applicable because Illinois' HMO Act failed to satisfy all of the McCarran-Ferguson factors for the business of insurance (15 U.S.C. § 1011 et seq.). The trial court dismissed the plaintiff's action for failure to state a claim.

On appeal to the Seventh Circuit, Debra argued that the saving clause was applicable because all three McCarran-Ferguson factors do not need to be present to define the business of insurance. UNUM Life Insurance Co. v. Ward, 526 U.S. 358 (1999). While the appellate court agreed that Debra's claim was for benefits, it disagreed with the trial court on the applicability of the saving clause. Because § 4-10 of Illinois' HMO Act was directed at the HMO industry as insurers and directly regulated the contractual relationships of the industry, the court concluded that two of the three McCarran-Ferguson factors were present. (Moran, 230 F.3d at 959). The Seventh Circuit rejected the contention that Illinois' independent review requirement constituted a forbidden "alternative remedy" and "emphasized that § 4-10 does not authorize any particular form of relief in state courts."  See Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41 (1987). Accordingly, the Seventh Circuit held that § 4-10 of the HMO Act regulated the business of insurance and was therefore saved from ERISA preemption. Having freed the HMO Act from ERISA preemption, the Seventh Circuit observed that the HMO should have accepted the recommendations of the independent physician reviewers.  However, this Seventh Circuit holding conflicts with the "Fifth Circuit's treatment of a similar provision of Texas law in Corporate Health Ins., Inc. v. Texas Dept. of Ins., 215 F.3d 526 (2000), cert. granted certiorari, 533 U.S. 948 (2001)."

J. Souter began his opinion by observing that "Rush's "Certificate of Group Coverage," which is issued to employees who participate in employer-sponsored plans, promises that Rush will provide them with "medically necessary" services. The terms of the certificate give Rush the "broadest possible discretion" to determine whether a "medical service claimed by a beneficiary is covered under the certificate." Further, the certificate specifies that a "medically necessary" service exists if 1) the service is authorized by a participating physician; 2) the service is safe and effective for its intended use, and that its omission would adversely affect the person's medical condition; and 3) the service is rendered by a "provider with appropriate training, experience, staff and facilities to furnish that particular service or supply." (Plaintiff's Exh. A, p. 21.)

J. Souter then noted that, like many other ERISA cases, this case was predicated on the intended meaning of the words "related to" when Congress preempted state law related to ERISA in order to safe guard employee health and pension plans. 29 U.S.C. § 1144(a).  To extrapolate congressional intent, the Court has "no choice" but to use the ordinary meaning of the words.  (Park '  N Fly v. Dollar Park and Fly, Inc., 469 U.S. 189 (1985).) Here it is "beyond serious dispute that under existing precedent § 4-10 of the Illinois HMO Act "relates to" employee benefit plans within the meaning of § 1144(a)." However, long before the passage of ERISA, when the federal government passed the McCarran-Ferguson Act, 15 U.S.C. § 1011 et seq., it placed the "business of insurance" under the control of the state governments.  See also Group Life & Health Ins. Co. v. Royal Drug Co., 440 U.S. 205, (1979). For this reason, when Congress passed ERISA it explicitly saved state regulation of the business of insurance from operation of ERISA preemption. (§ 1144(b)(2)(A)).

Rush argues that "seeing an HMO as an insurer distorts the nature of an HMO, which is, after all, a health care provider, too." True, HMOs do also provide health care, but there is no question that HMOs are recognized to be insurers. In support of this position the Court discussed the theory behind HMOs (see R. Shouldice, Introduction to Managed Care 450-462 (1991)) and the legislative history of the Federal HMO Act of 1973 (42 U.S.C. § 300e). Importantly, "[n]othing in the saving clause requires an either-or choice between health care and insurance in deciding a preemption question, and as long as providing insurance fairly accounts for the application of state law, the saving clause may apply." Accordingly the Court did not "see anything standing in the way of applying the saving clause if we assume that the general state definition of HMO would include a contractor that provides only administrative services for a self-funded plan." The Court then summarily dismissed Rush's arguments that ERISA's saving clause was not applicable because of  ERISA's "deemer" clause. (29 U.S.C. § 1144(b)(2)(B); See FMC Corp. v. Holliday, 498 U.S. 52, 61, (1990)).

The application of the McCarran-Ferguson Act itself provided further support. A law regulating insurance for McCarran-Ferguson purposes targets practices or provisions that "have the effect of [regulating] an integral part of the policy relationship between the insurer and the insured." (see Union Labor Life Ins. v. Pireno, 458 U.S. 119, 129 (1982)). Echoing the logic of the Seventh Circuit's opinion, the Supreme Court noted that not all of the McCarran-Ferguson factors are required for the act to be saved from preemption. Moreover, the court observed that in this case it is "obvious enough that the independent review requirement regulates 'an integral part of the policy relationship between the insurer and the insured.' Illinois adds an extra layer of review when there is internal disagreement about an HMO's denial of coverage." The Court has repeatedly observed that "the interpretation of insurance contracts is at the 'core' of the business of insurance. (SEC v. National Securities, Inc., 393 U.S. 453, (1969)). Thus the Illinois act satisfies the second McCarran-Ferguson factor. Moreover, the third McCarran-Ferguson factor ("law be aimed at a 'practice . . . limited to entities within the insurance industry'") is present.  "[Once it is] established that HMO contracts are, in fact, contracts for insurance (and not merely contracts for medical care), it is clear that § 4-10 does not apply to entities outside the insurance industry (although it does not, of course, apply to all entities within it)."

Having concluded that the plain meaning of §4-10 was that it regulates insurance, and that the savings clause of ERISA was applicable, thereby foreclosing preemption, the Court observed that Rush "does not give up." Specifically, Rush "contend[s] that § 4-10 fills that bill by imposing an alternative scheme of arbitral adjudication at odds with the manifest congressional purpose to confine adjudication of disputes to the courts." (See 29 U.S.C.A. 1132(a)(detailing the procedure for civil enforcement of ERISA)).  J. Souter then summarily dismissed Rush's collateral attack. 

Rush says that the day has come to turn dictum into holding by declaring that the state insurance regulation, § 4-10, is preempted for creating just the kind of "alternative remedy" we disparaged in Pilot Life. [] We think, however, that Rush overstates the rule expressed in Pilot Life. [] Since Pilot Life, we have found only one other state law to "conflict" with § 1132(a) in providing a prohibited alternative remedy.

The case the Court was referring to was Ingersoll-Rand Co. v. McClendon, 498 U.S. 133 (1990), where the Court "had no trouble finding that Texas's tort of wrongful discharge, turning on an employer's motivation to avoid paying pension benefits, conflicted with ERISA enforcement; while state law duplicated the elements of a claim available under ERISA, it converted the remedy from an equitable one under § 1132(a)(3)." Therefore, Ingersoll-Rand fit within the category of state laws Pilot Life held incompatible with "ERISA's enforcement scheme; the law provided a form of ultimate relief in a judicial forum that added to the judicial remedies provided by ERISA." In contrast the instant "case addresses a state regulatory scheme that provides no new cause of action under state law and authorizes no new form of ultimate relief." Moreover, while "independent review under § 4-10 may well settle the fate of a benefit claim under a particular contract, the state statute does not enlarge the claim beyond the benefits available in any action brought under § 1132(a)."

J. Souter observed that the "[a]ct does not give the independent reviewer a free-ranging power to construe contract terms, but instead, confines review to a single term: the phrase "medical necessity," used to define the services covered under the contract." But in Pegram v. Herdrich, 530 U.S. 211 (2000), the court had "explained that when an HMO guarantees medically necessary care, determinations of coverage 'cannot be untangled from physicians' judgments about reasonable medical treatment.'" Id., at 229. Here, the

independent examiner must be a physician with credentials similar to those of the primary care physician and is expected to exercise independent medical judgment in deciding what medical necessity requires. Accordingly, the reviewer in this case did not hold the kind of conventional evidentiary hearing common in arbitration, but simply received medical records submitted by the parties, and ultimately came to a professional judgment of his own. (Citations omitted).

Thus rather than providing an alternative and conflicting remedy to ERISA, the Illinois statute involves a review process that "is similar to the submission to a second physician, which many health insurers are required by law to provide before denying coverage."  (See, Cal. Ins. Code Ann. § 10123.68 (West Supp. 2002); Ind. Code Ann. § 27-13-37-5 (1999); N. J. Stat. Ann. § 17B:26-2.3 (1996); Okla. Admin. Code § 365:10-5-4 (1996); R. I. Gen. Laws § 27-39-2 (1998)). The import of this observation is that the practice of obtaining a second opinion is "far removed from any notion of an enforcement scheme, and once § 4-10 is seen as something akin to a mandate for second-opinion practice in order to ensure sound medical judgments, the preemption argument that arbitration under § 4-10 supplants judicial enforcement runs out of steam."

The final collateral attack on § 4-10 raised by Rush stressed a "feature of judicial review highly prized by benefit plans: a deferential standard for reviewing benefit denials." (See Firestone Tire & Rubber Co. v. Bruch, 489 U.S., at 115 (recognized that an ERISA plan could be designed to grant "discretion" to a plan fiduciary, deserving deference from a court reviewing a discretionary judgment.))  Unfortunately for Rush, "ERISA itself provides nothing about the standard. It simply requires plans to afford a beneficiary some mechanism for internal review of a benefit denial and provides a right to a subsequent judicial forum for a claim to recover benefits." 29 U.S.C. § 1132(a)(1)(B)1133 (2). Further, not only is there no ERISA provision providing a

lenient standard for judicial review of benefit denials, but there is no requirement necessarily entailing such an effect even indirectly. [] Nothing in ERISA, however, requires that these kinds of decisions be so "discretionary" in the first place; whether they are is simply a matter of plan design or the drafting of an HMO contract.

In affirming the Seventh Circuit's holding, the Court observed that "Illinois has chosen to regulate insurance as one way to regulate the practice of medicine, which we have previously held to be permissible under ERISA, see Metropolitan Life 471 U.S., at 741." Moreover, regulation of medicine is quintessentially a state law issue. In the "field of health care, a subject of traditional state regulation, there is no ERISA preemption without clear manifestation of congressional purpose." Pegram, 530 U.S., at 237.

The footnotes in this closely decided case suggest that if the allegations, and not necessarily the underlying facts in the case had been different, the case might have gone the other way.  In footnote two the court noted that "[a]lternatively, the proper course [for Moran] may have been to bring a suit to recover benefits due, alleging that the denial was improper in the absence of compliance with § 4-10. We need not resolve today which of these options is more consonant with ERISA." Similarly, footnote three observed that neither "party has challenged Rush's status as defendant in this case, despite the fact that many lower courts have interpreted ERISA to permit suits under § 1132(a) only against ERISA plans, administrators, or fiduciaries."

The conservative faction of the Court, lead by J. Thomas provided a dissent. Following from footnote two, J. Thomas' opinion is predicated on belief that this case should have been brought under ERISA's civil enforcement mechanism. According to J. Thomas, the majority opinion takes an

unprecedented step of allowing respondent Debra Moran to short circuit ERISA's remedial scheme by allowing her claim for benefits to be determined in the first instance through an arbitral-like procedure provided under Illinois law, and by a decision maker other than a court.

 Here Moran, who after "exhausting the plan's internal review mechanism" remains unsatisfied "chose to bypass the relief provided by ERISA." Worse, because some 40 other states have laws similar to Illinois, the uniformity of ERISA will be disrupted because "§ 4-10 constitutes an arbitral-like state remedy through which plan members may seek to resolve conclusively a disputed right to benefits."

The initial reaction of the media and physicians is that Supreme Court's opinion is positive because it supports a mechanism for curbing the perceived abuses of the HMO industry. However, the Court's upholding of Illinois' HMO Act is a double edged sword. The next regulation out of the Illinois general assembly may not be so favorable to physicians. For example, Illinois could promulgate an insurance regulation that requires that all insurers must have in place clinical practice guidelines as objective criteria to judge physician performance. If Illinois should pass such an insurance regulation it will be interesting to see just how important footnotes two and three become.