Supreme Court ruling: It’s time for the states to control managed care

The national organization representing health plans is downplaying the recent Supreme Court decision on Kentucky’s any willing provider (AWP) laws because plans are responding to consumer demands for broader provider choices and states no longer pass such laws.

But several attorneys see potential implications that are broader than the Kentucky law.

Francis Serbaroli, partner in the law firm Cadwalader, Wickersham & Taft of New York City, tells State Health Watch the decision may not have a wide-ranging impact because it was decided on narrow terms involving the Kentucky laws. Legislation from any other state would have to be looked at individually, he adds. "The court upheld the Kentucky law and said it didn’t violate ERISA [Employee Retirement Income Security Act of 1974]. But it didn’t give states carte blanche for wide-ranging any willing provider laws."

Susan Conway, a health attorney with Vincent and Elkins in Austin, TX, tells State Health Watch the decision could encourage state medical societies and other groups interested in seeing AWP laws passed, but can’t gauge how much interest there still is in that approach.

According to Ms. Conway and Michael Richman, an attorney with Reed, Smith in Washington, DC, the more important impact lies in the clarification the court gave to the test to determine whether a state law is pre-empted by ERISA.

Ms. Conway and Mr. Richman say that the court’s change from a three-prong test borrowed from other law to a two-prong test simplifies the issue. That means more state laws will stand on their own without being superceded by ERISA, they say.

New test is key element

"I’m impressed that it was a unanimous decision," Mr. Richman tells State Health Watch. "That’s not always the case with ERISA. And it’s significant that it was a unanimous decision with a new test. I think the Court is hoping that with the new test it won’t have to take these [ERISA] cases any more."

Also struck by the unanimous decision in an ERISA case was Diane Fuchs, an attorney with Womble Carlyle in the Washington, DC, office, who tells State Health Watch that while the high court addressed only one of three clauses in the ERISA law dealing with preemption, it is significant that it developed a new test for determining whether state law applies, especially since it upheld district and appeals court decisions that had relied on the former test. In essence, the high court said the lower courts reached the right conclusion, but then came up with a new way to get there.

"It’s a fairly significant case with implications beyond the AWP statute because the court made a clean break from the old standard," Ms. Fuchs says. "There are implications for all types of health insurance statutes."

To her, one that sprung to mind immediately was mandated benefits laws. The new test enunciated by the Supreme Court looks at whether a statute is directed specifically at the insurance industry and also at risk pooling, two conditions that are met by mandated benefits laws.

"Why should people care about this decision?" Ms. Fuchs asks. "It’s important to keep in mind that whoever is assembling a provider network guarantees the doctors money based on a guaranteed volume of patients. If they can’t control the volume of patients by restricting the number of doctors, the doctors won’t agree to the price structure.

"Costs will increase because if they let any provider in, they can’t promise the few who are in the network a sufficient number of patients," she adds. "Some people have estimated that this decision could increase costs by 15%. I think it really will vary based on the number of doctors in an area. The biggest impact will be in the geographic areas where there are a lot of doctors."

Ms. Fuchs says that one intriguing question still to be decided is whether self-insured plans are affected. They have been covered under a clause that was not at issue in the Kentucky case. But a footnote in the Supreme Court decision has fueled some speculation that the court wants to apply its findings to noninsuring HMOs. She says it’s hard to believe the court intended to make such a major change in policy through an unclear footnote, but more cases will have to be decided before it is known for sure.

"This decision was not a surprise," she says. "It’s a continuation of what has happened in recent years in terms of state law being able to regulate more than insurers. It endorses state power to regulate."

The nation’s highest court upheld a ruling from the Sixth Circuit Court of Appeals that allowed Kentucky to continue its open network policy designed to ensure patients’ access to the physicians they wanted and to give qualified physicians a guarantee that their businesses wouldn’t be jeopardized because a health plan refused to make them part of its network.

At issue were two AWP laws. The first prohibited health insurers from discriminating against any provider in the geographic coverage area of the health benefit plan who is willing to meet the terms and conditions for participation established by the health insurer. The second provided that any health plan with chiropractic benefits must permit any licensed chiropractor who agreed to provide by the terms, conditions, reimbursement rates, and standards of quality of the health benefit plan to serve as a participating primary chiropractor to anyone covered by the plan.

The Kentucky Association of Health Plans had brought the suit, claiming the state’s AWP law was preempted by ERISA because it did not specifically regulate insurance, a prerequisite for exemption from ERISA control. Writing for a unanimous court, Justice Antonin Scalia said the plans believe that the AWP laws frustrate their efforts at cost and quality control, and ultimately will deny consumers the benefits of their cost-reducing arrangements with selected providers.

The plans, he said, claimed that the state AWP laws were not specifically directed toward insurers because they regulated not only the insurance industry but also doctors seeking to form and maintain limited provider networks with HMOs.

"That is to say," Mr. Scalia wrote, "the AWP laws equally prevent providers from entering into limited network contracts with insurers, just as they prevent insurers from creating exclusive networks in the first place. We do not think it follows that Kentucky has failed to specifically direct its AWP laws at the insurance industry. Neither of Kentucky’s AWP statutes, by its terms, imposes any prohibitions or requirements on health care providers. . . . And Kentucky health care providers are still capable of entering exclusive networks with insurers who conduct business outside the Commonwealth of Kentucky or who are otherwise not covered" by the statutes.

Mr. Scalia said regulations directed toward certain entities almost always would disable other entities from doing, with the regulated entities, what the regulations forbid. "[But] this does not suffice to place such regulation outside the scope of ERISA’s savings clause," he said.

The health plans also argued that the AWP laws did not regulate insurers regarding an insurance practice because they did not control the actual terms of insurance policies. Rather, the laws focused on the relationship between an insurer and third-party providers, which, according to the plans, does not constitute an "insurance practice."

"Those who wish to provide health insurance to Kentucky [any health insurer] may not discriminate against any willing provider," Mr. Scalia wrote. "This regulates’ insurance by imposing conditions on the right to engage in the business of insurance; whether or not an HMO’s contracts with providers constitute the business of insurance’ is beside the point. We emphasize that conditions on the right to engage in the business of insurance must also substantially affect the risk pooling arrangements between the insurer and the insured to be covered by ERISA’s savings clause."

Donald J. Palmisano, president-elect of the American Medical Association (AMA), hailed the decision as a victory that "adds clarity to patient projections established by state lawmakers against the abuses of managed care." The AMA had joined the Kentucky Medical Association and several other medical societies in a "friend of the court" brief that had argued that health plans should have to abide by state laws that regulate insurance, as the AWP law did.

Observers trace the shift in Supreme Court thinking on state control over health plans to a 2000 decision in which it said that situations in which benefit decisions were intertwined with medical judgment could be subject to state laws that traditionally govern insurance and medicine. Then last year, the Supreme Court ruled that a health plan was subject to an Illinois independent review law that plans had said should be pre-empted by ERISA.

But Mr. Serbaroli said he believes there will be very little carry-over effect from the Kentucky decision in terms of ERISA and state control.

"The rest of ERISA has been upheld so often that I don’t think there will be real impact, although with health care, you never can be positive," he says.

Kentucky Association of Health Plans executive director Melody Shrader expressed disappointment at the decision, saying that when plans are forced to include all doctors and other health professionals in a network, costs increase and have to be passed on to employers and consumers.

"The unintended consequences of this decision will be that fewer employers will be able to afford health insurance for their employees in the future," she says.

Also disappointed was Health Insurance Association of America president Donald Young, who says that AWP laws "are one more instance of government unnecessarily interfering in private relationships between doctors and health plans. The requirement for health plans to open their provider networks will result in higher health insurance premiums and the real possibility of diminished quality of care. It is another step for those who believe the government can best determine how health care should be financed and delivered, further limiting choices for health care consumers. Ultimately, it is the American worker who will bear the brunt of this decision."

But American Association of Health Plans executive director Karen Ignani says the ruling changed little in terms of current practice.

"In the nine years since Kentucky’s any willing provider legislation was passed, insurers responded to consumer demands, offered more product choices, and built a higher quality health care system. Innovation is the hallmark of this industry, and we will continue to adapt to the interests of consumers and the demands of regulators. In a time of rising health care costs, today’s ruling underscores the critical need for state legislators to carefully evaluate the consequences of legislation of affordability and quality. Polls consistently show that consumers’ top health care priorities are enhanced access to affordable coverage and quality."

Mr. Serbaroli says he agrees with Ms. Ignani’s analysis, adding that AWP laws effectively gutted the whole purpose of managed care in terms of the desire to put together a network of doctors that would be cost-effective in delivering high-quality care.

"While they were well intentioned, any willing provider laws hurt the effort to run managed care properly," he says.

An analysis of the decision prepared by attorneys Gregory Pimstone of the Los Angeles firm of Manatt Phelps & Phillips and Michael Shpiece of Shpiece and Tischler in Southfield, MI, who represented the Kentucky Association of Health Plans, and distributed to members of the American Health Lawyers Association, says the decisions is the court’s 20th on ERISA since 1981.

Before the Kentucky case was brought, they say, AWP laws had been considered by at least five circuit courts of appeals, with three ruling that the laws were saved from pre-emption by ERISA and two favoring ERISA preemption.

"After Kentucky Association, it appears that the bar for concluding that a state law is directed at the insurance industry has been set low," Mr. Pimstone and Mr. Shpiece write.

"Apparently the state law need only be aimed at insurers, even if it also impacts noninsurance entities to some degree," they point out.

The two attorneys say that while most state AWP laws only apply to providers willing to accept all of the terms and conditions set by the carrier, an AWP law conceivably does not need to do so.

"A state could adopt a law requiring the carrier to accept all providers who, for example, were willing to accept the carrier’s payment terms," they write, "thus potentially eliminating the ability of the carrier to enforce credentialing or other requirements. Similarly, laws like that enacted in Washington that requires carriers to provide coverage for alternative providers or treatments should also survive challenge. . . . Kentucky Association could result in an increase in the number and scope of AWP laws in some states. In states where open networks are already prevalent, however, the opinion may have little if any direct impact."