Court: States can regulate HMOs

By MICHAEL KIRKLAND, UPI Legal Affairs Correspondent  |  June 20, 2002 at 12:35 PM
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WASHINGTON, June 20 (UPI) -- The Supreme Court struck a blow for HMO accountability Thursday, ruling in effect that states can regulate health maintenance organizations.

Specifically, a narrow court majority said Illinois insurance law is not pre-empted by federal law governing health plans.

The court split along ideological lines, with moderate Justice Sandra Day O'Connor joining the liberals to cast the deciding vote.

The high court had already ruled last term in Pegram vs. Hedrich that patients can't sue under federal law when doctors, acting as officers of HMOs, make decisions based on economics rather than sound medical practice.

"Today's action by the U.S. Supreme Court in Moran v. Rush Prudential HMO represents a major victory for America's patients and their physicians," said Dr. Donald Palmisano of New Orleans, the president-elect of the American Medical Association.

"It is a big win for patients," he told United Press International.

The AMA had filed an amicus curiae brief on behalf of patient Debra Moran and the Illinois HMO Act, Palmisano explained as the annual meeting of the AMA House of Delegates wrapped up a week of deliberations in Chicago, Ill.

Palmisano, a surgeon as well as an attorney, said that Moran sought reimbursement for a treatment that her health maintenance organization deemed not medically necessary. She asked for an independent review of that decision as allowed in Illinois state law. But the HMO would not participate in the procedure, he said.

The HMO claimed its health plan fell under provisions of the 1974 Employee Retirement Income Security Act (ERISA), and that because ERISA is a federal statute, the HMO's actions were not subject to Illinois law.

After a series of court actions, Palmisano said the case arrived at the Supreme Court which upheld that -- at least in cases where states have laws similar to the ones in Illinois -- the state regulation was enforceable.

"This is an extremely important decision," Palmisano said. "We are excited about it and its potential implications." He said AMA staff is studying the decision to see how far the decision extends.

But, he said, "We still need a comprehensive patient's bill of rights." That bill, which more clearly spells out the relationship between doctors and their HMOs, is still in Congress.

Palmisano is believed to be the first AMA president-to-be who is both a physician and a lawyer. He was elected Tuesday.

The latest case dealing with HMO accountability comes out of Illinois. At issue was whether a federal act pre-empts laws in 41 states requiring independent review when a medical procedure is denied by an HMO.

The Supreme Court dispute is at the core of an ongoing national political debate -- whether decisions by doctors regarding health care may be overridden by a health care provider, sometimes for economic reasons.

Like laws in 40 other states and the District of Columbia, Section 4-10 of the Illinois Health Maintenance Organization Act requires independent review when a patient's primary care doctor considers a proposed procedure to be medically necessary but an HMO denies coverage.

Under such laws, the patient may have the HMO's decision reviewed by an outside physician, and the HMO must abide by that physician's decision.

Under a health care plan sponsored by the employer of Debra Moran's husband, Rush Prudential HMO Inc. provides access to medical and hospital care.

In 1996, Moran saw Dr. Arthur LaMarre, a Rush-affiliated primary care doctor, for pain, numbness and decreased mobility in her right shoulder.

When physiotherapy did not relieve her symptoms, LaMarre asked for advice from Dr. Julia Terzis, a Virginia surgeon who specializes in micro-reconstructive surgery.

Terzis agreed with LaMarre that Moran's problems were caused by what is commonly called "pinched nerves" -- actually "nerve compression syndrome."

Terzis' surgery technique for relieving the compression is more complicated that normal procedures, but she felt Moran was a good candidate for the procedure.

Two Rush-affiliated thoracic surgeons, however, both recommended more conservative surgery.

Moran persisted in asking for the Terzis procedure, and in October 1997 LaMarre asked Rush to approve it, adding that she would be "best-served" by Terzis' more complicated surgery.

Rush denied the request, saying the surgery was "out of network."

Even though administrative appeals failed, Moran underwent the Terzis surgery anyway in February 1998. She sent the $95,000 bill to Rush.

When Rush did not act on that bill, Moran filed a complaint in Illinois circuit court asking for an order requiring Rush to appoint an independent physician to review her claim. An independent physician eventually determined that the Terzis procedure was "medically necessary."

However, Rush had the case switched to federal court, contending that the federal Employment Retirement Income Security Act of 1974 -- better known to human resources departments as ERISA -- pre-empts the state law.

ERISA doesn't provide for outside review; it simply allows a patient to file a civil suit in an attempt to recover medical expenses. The odds that Moran could prevail in a civil suit under a "denial of benefits" federal claim were remote, since the procedure was performed out of the HMO network.

A federal judge ruled for the HMO, saying ERISA pre-empted the state law requiring independent review. But a federal appeals court reversed, and Rush asked the Supreme Court for review.

The justices heard argument in January, and handed down their decision Thursday.

In the majority opinion, Justice David Souter notes that the Illinois law "regulates insurance," and language in ERISA specifical says none of its key provisions "shall be construed to exempt or relieve any person from any law of any state which regulates insurance."

Justice Clarence Thomas, joinoed by the court's two other conservatives and moderate conservative Justice Anthony Kennedy, dissented.

"This (Supreme) Court has repeatedly recognized that ERISA's civil enforcement provision ... provides the exclusive vehicle for actions asserting a claim for benefits under health plans governed by ERISA," Thomas said, "and therefore that state laws that create additional remedies are pre-empted."

A "report in progress" for the Kaiser Family Foundation by researchers at Georgetown University's Institute for Health Care Research and Policy shows shows the breadth of Thursday's decision.

The report has already come to some conclusions about the effectiveness of outside review programs.

The first state external review requirement was established by Michigan in 1978; over the next 20 years, a dozen more states began operating external review programs. By the end of 2001, 41 states and the District of Columbia had enacted external review laws, with most created in the last three years.

Although the programs vary significantly from one state to the next, the researchers found, consumers are granted relief through external review on average about half the time. The researchers said 45 percent of the time insurance plan denials are overturned completely; 6 percent of the time they are overturned partially.

Currently, almost half of workers with employer-sponsored health insurance cannot use state external review programs because they are in "self-insured" plans (those provided directly by the employer rather than purchased through an insurance company), the Kaiser researchers found.

Under the federal ERISA law, self-insured plans are federally regulated and have been considered exempt from state external review programs.

Both the House and Senate have passed bills that would establish a federal right to independent external review of health plan denials for all privately insured individuals. However, the bills take different approaches to already enacted state laws, the Kaiser researchers said.

The Senate bill would establish a federal floor for external review protections, leaving in place features of state programs that are more protective of consumers, but overriding those that are less protective. The House bill, by contrast, would preempt all state external review programs as well as state requirements for internal appeals, replacing them with a single federal standard.

(No. 00-1021, Rush Prudential HMO vs. Moran and Illinois)

(With reporting by Ed Susman, UPI Science News, in Chicago)

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