WILL LAWS COMPELLING INDEPENDENT REVIEW OF HEALTH INSURER TREATMENT DECISIONS SURVIVE SUPREME COURT SCRUTINY?

By ANTHONY J. SEBOK


anthony.sebok@brooklaw.edu
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Monday, Jan. 28, 2002

There are many ways to screw up medical care in our modern age. One way is to actually harm the patient through the delivery of medical care. This might be called the old fashioned "slip of the knife". Another way is to harm the patient by overlooking something and omitting a treatment or a drug. One might call this being "asleep at the wheel." The third way is to refuse to pay for treatment because one doesn't think one is obliged to under the law. One might call this "thinking like an HMO."

State tort law is supposed to insure that the levels of malpractice caused by slips of the knife and doctors "asleep at the wheel" are kept to a reasonable minimum. Recently, many states have tried to minimize the costs associated with "thinking like an HMO" by rewriting their state insurance laws to require independent review of treatment decisions by health insurers. Two weeks ago, the Supreme Court heard a case that could decide whether such laws will survive.

The Facts In the Moran Case

In 1996, Debra Moran, an Illinois resident, began to experience severe pain in her right shoulder. She had health insurance through her husband's employer with an HMO called Rush Prudential. Her primary care physician, who was associated with Rush, recommended a conservative treatment of physiotherapy.

Dissatisfied with this treatment, Moran discovered Dr. Julia Terzis, a specialist in Virginia who treated people with Moran's symptoms through "microreconstructive surgery." Using her own funds, Moran visited Dr. Terzis. Dr. Terzis recommended that Moran receive microreconstructive surgery on her shoulder.

Following Rush's standard procedures, Moran applied through her primary care physician for permission to go "out of network." Rush had Moran examined by two of their specialists. Each agreed with Dr. Terzis's diagnosis, but disagreed with her recommendation of microreconstructive surgery. They recommended a simpler, less complex operation.

Moran, however, wanted the microreconstructive surgery and she wanted Dr. Terzis to perform it. Rush said Moran would have to pay for that surgery herself. Moran went ahead and had Terzis perform the surgery (which cost almost $95,000) and paid for it herself.

Moran has regained the use of her shoulder, and she attributes this to Terzis's treatment. Rush is not so sure. After the operation, Moran submitted a bill of $95,000 to Rush for reimbursement. Rush, following its standard procedures, consulted an outside expert it selected. The expert, the Chief of Plastic and Reconstructive Surgery at Washington University, stated that she thought that Dr. Terzis's microreconstructive surgery, while not bad medicine, was not necessary in Moran's case.

The Legal Proceedings and Issues In The Moran Case

Moran sued Rush under an Illinois statute that requires HMOs to submit to an independent review in cases where treatment decisions are in dispute. (Forty other states have such laws as well.)

A state court ordered Rush to submit to an independent review. Rush and Moran agreed to have her claim reviewed by an expert at Johns Hopkins. That expert sided with Dr. Terzis. His conclusion was that microreconstructive surgery was "medically necessary" in Moran's case. Accordingly, Moran asked the state court to compel Rush to reimburse her.

Rush now played its trump card: it removed the case to federal court and argued that the Illinois law was "preempted" by the federal Employee Retirement Income Security Act ("ERISA"). (Federal preemption occurs when federal law is thought to be so comprehensive as to displace state law in a given area.)

The federal district court agreed with Rush. Moran appealed to the U.S. Court of Appeals for the Seventh Circuit, which overturned the district court. And now Rush has appealed to the Supreme Court.

ERISA and The Federalization of Employee Health Care Plans

At one time ERISA must have seemed like a good idea. As its name suggests, it was designed primarily to federalize retirement plans administered by employers. Along the way, however, employer-sponsored health care plans also became a big part of ERISA's jurisdiction.

In health care, ERISA basically does two things. In theory, it sets out the substantive rules of the employer-sponsored health care plans, and it insures that disputes about those rules are heard in federal court.

The problem is that ERISA doesn't actually say very much about what the plans must do. Congress, for a variety of reasons, has been unwilling to do very much legislating in this area. So the real effect of ERISA is to block the states from passing their own laws in this area and to move any remaining lawsuits out of state courts.

Moran's case illustrates how the federalization of employee health care plans, coupled with Congressional inaction, produces the worst of all possible worlds. If Moran's primary care physician had misdiagnosed her, she could have sued him under Illinois malpractice law. In fact, there is some case law that suggests that she could even sue Rush for their doctor's malpractice. But Rush did not engage in what normally passes for malpractice. Rather, Rush and Moran were fighting over the interpretation of her contract.

That leads us to ask: What law governs the interpretation of insurance contracts? The answer is that normally, the interpretation of insurance contracts is governed by state common law and state consumer protection law. But ERISA preempts all that.

And what has Congress put in place of the preempted state law? Not much: under ERISA, Moran can sue in federal court for the enforcement of the terms of the contract she signed with Rush. However, the contract she signed with Rush does not by its own language allow an independent review. Instead, the right to independent review came from the state of Illinois - but was it part of the contract as well?

The Independent Review Requirement: Part of the Contract, or of State Law?

Before the Supreme Court, Moran argued that the independent review provision was in fact part of the contract between Rush and Moran, because Illinois is allowed to insist that insurance contracts contain certain minimum content. That is to say, Rush doesn't have to sell insurance contracts in Illinois, but if it does, it has to include things that Illinois requires in its insurance contracts. If there is a dispute about the enforcement of that contract, then ERISA controls.

There is a certain amount of common sense to Moran's argument. ERISA explicitly allows the individual states to require different "housekeeping" rules in their insurance contracts. Thus, for example, the Supreme Court held in UNUM Life Ins. Co. v. Ward that a state law that limited all insurance companies right to ignore late claims was not preempted by ERISA, and covered HMOs as well as auto insurance companies.

Like the law at issue in Unum Life Ins. Co., the Illinois law at issue in the Moran case is not forcing the HMOs to change their prices or to offer more services; rather, it subjects the services already provided to independent review. If the law said, for example, that no HMOs in Illinois may require a copayment for prescription drugs, and thus forced a change in pricing policies, even Moran would admit that would be preempted by ERISA. But no change in price or services appears to be effected by the law. Accordingly, Mora contends the Illinois law is just a matter of "housekeeping" properly left to the state of Illinois by ERISA.

Judge Posner's Argument in Moran - And Why It Is In Error

This line of reasoning, however, is not as simple as it may appear. After all, as Judge Posner pointed out in his dissent in Moran's Seventh Circuit case, the Illinois law in question does give customer something of value, even if it not a direct price discount. It gives the policyholder the right to demand an additional review of a disputed benefit - a right that can easily translate into the ability to recover more money from the company as a result of claims the independent decisionmaker validates, but that the insurance company itself would have denied.

According to Posner, this is exactly the sort of thing that Congress said should stay in their own hands and be decided on the federal level. It might be a good idea to force HMOs to offer the extra benefit of independent review, but that decision must be made by the nation, not the individual states. Otherwise, ERISA is meaningless as a federal law, for it fails to impose federal uniformity where it really matters.

I believe Posner is wrong on two levels, though. First, the distinction between procedural and substantive provisions in a health insurance policy is illusory. The most important substantive part of an insurance contract are its procedures.

The reason for this is simple. Because of state medical malpractice law, the range of procedures that an insurer must pay for is, in theory, determined by a single vague standard--that which is required by "good medicine". The real difference between health insurers is exactly at the level of the application of that vague standard. For this reason, the question of who decides whether the contract requires a certain promised benefit is as important as the question of which benefits the contract promises.

Second, Posner is wrong because, in the area of health care, in a very important way, ERISA is already meaningless as federal law. It is obvious that Congress is unwilling to fill the empty legislative space that it created through preemption.

Before September 11, one of the hottest issues on Capitol Hill was the Patient Bill of Rights, which was never passed because partisan bickering. Ironically, one of the few things on which the Republicans and the Democrats agreed was that everyone with a health insurance contract should have the right to get an independent review of treatment decisions. If Congress had acted sooner, the Moran case could have been avoided entirely.


Anthony J. Sebok is a professor at Brooklyn Law School. His columns on tort issues and other topics may be found in the archive of his columns on this site.

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