Articles

Moran v. Rush-Prudential HMO, Inc.

The New Paradigm of ERISA Preemption

Mark D. DeBofsky

Daley, DeBofsky & Bryant

1 N. LaSalle St., Suite 3800

Chicago, Illinois 60602

(312) 372-5200/FAX (312) 372-2778

mdebofsky@ddbchicago.com

www.ddbchicago.com

            The case of Rush-Prudential HMO, Inc. v. Moran, (U.S.Supreme Court June 20, 2002), is perhaps the most important ERISA preemption case to ever come before the Supreme Court. It has decided the question of whether states have the authority to regulate how insurers evaluate claims or whether ERISA preemption reigns triumphant. In a 5-4 decision, the Court ruled that the state law is saved from preemption.

            Moran involved a claim brought under an HMO (Health Maintenance Organization) for surgical treatment to repair a condition known as thoracic outlet syndrome. The surgery Debra Moran sought was rejected by her insurer as inappropriate and not medically necessary. Moran then sought to invoke §4-10 of the Illinois HMO Act, 215 ILCS 125/1 et seq., which allows an HMO member dissatisfied with the HMO's determination of medical necessity to demand an independent outside review. However, when Moran sought to pursue such a review, Rush-Prudential's response was to ignore her request, triggering Moran's filing of a complaint in the circuit court. Defendant removed the case to federal court, but the district court remanded the case, refusing to find complete or field preemption of Moran's claim for an independent review. On remand, the circuit court ordered the independent review that sided with Moran. However, Rush-Prudential again denied the treatment citing its own experts' reports that the proposed surgical procedure was not medically necessary. Moran then renewed the litigation; and Rush-Prudential again removed the case to the federal court. This time, though, the district judge (Suzanne Conlon) denied a motion for remand, finding the claims asserted by Moran involved a claim for benefits under 29 U.S.C. §1132(a)(1)(B)(ERISA §502(a)(1)(B)) which was completely preempted by §514 of the ERISA law (29 U.S.C. §1144). The court then held that the ERISA law preempted the Illinois HMO Act and could not displace the discretion accorded to plan administrators in determining benefit eligibility.

            Moran appealed; and the Seventh Circuit reversed the district court in a sharply divided decision written by Judge Ripple accompanied by an opinion written by Judge Posner that also served as a dissent from a denial of rehearing (230 F.3d 959 (7^th Cir. 2000)). The court found that Judge Conlon correctly re-characterized Moran's claim as a claim for benefits under §502(a)(1)(B) of ERISA, thus justifying removal of the claim and denial of a motion to remand. However, the general preemption contained in ERISA §514 consists of several provisions; and even if a law is preempted, the ERISA "savings clause" (29 U.S.C. §1144(b)(2)(A)) exempts from preemption state laws that regulate insurance, although the "deemer clause" (29 U.S.C. §1144(b)(2)(B)) excepts from state regulation self-funded plans which are not "deemed" insurance companies subject to regulation.

            In analyzing ERISA preemption, the first question is whether a state law "relates to" an employee benefit plan, which occurs when a state law has a connection with or reference to employee benefit plans. The Seventh Circuit found §4-10 of the Illinois HMO Act relates to employee benefit plans. Since that provision has an effect on benefit determinations, the court determined that the state law fell squarely within ERISA's general preemption.

            However, even though otherwise preempted, the analysis then turned to whether the Illinois HMO Act is "saved" from preemption because it regulates insurance. To determine whether a law regulates insurance, the Supreme Court taught in UNUM Life Insurance Co. of America v. Ward, 526 U.S. 358, 119 S.Ct. 1380 (1999) that a court should first apply a "common sense view" of the issue; then, a court is required to consider factors under the McCarron-Ferguson Act, 15 U.S.C. §1011, which determines whether a regulation fits within the business of insurance, by asking whether: 1) whether the practice has the effect of spreading the policyholders' risk, whether the practice is an integral part of the relationship between insurer and insured, and whether the practice is limited to entities within the insurance industry. All three McCarron-Ferguson factors need not be met, though.

            Applying that analysis to the Illinois HMO Act, the Seventh Circuit ruled that the law constitutes a state regulation of insurance both as a matter of common sense and because at least two of the McCarron-Ferguson factors are met: it is directly solely to HMO's as insurers and goes to the core of the insurer-insured relationship. Thus, the court concluded that the law is "saved" from preemption.

            That does not end the inquiry, though. Even if a law is saved from preemption, it would nonetheless be preempted anyway if it conflicts with a substantive provision of the ERISA law. For example, if the law creates a remedy beyond the exclusive remedies afforded by the ERISA statute, it would be preempted regardless of the savings clause. The dissent in Moran concluded (and a nearly identical ruling, Corporate Health Insurance Co. v. Texas Department of Insurance, 220 F.3d 641 (5^th Cir. 2000) took the same position) that §4-10 of the Illinois HMO Act creates an alternative enforcement remedy. However, the majority disagreed, holding that no new remedy is created by an independent review requirement. Moreover, because the Rush-Prudential health plan states it incorporates the provisions of the Illinois HMO Act, upholding §4-10 is merely an enforcement of the terms of the plan. The actual claim for benefits remains a claim brought under §502(a)(1)(B). The majority also concluded that the HMO Act does not alter the deferential standard of review written into the plan-by definition, a decision contrary to the opinion of the independent reviewer is ipso facto arbitrary and capricious. That outcome is not due to a change in the standard of review but because the contract requires compliance with the state law. Thus, the Illinois HMO Act survives ERISA preemption.

            The dissent vehemently disagreed with that result. In Judge Posner's view, in which he was joined by Judges Coffey, Easterbrook and Diane Wood, the dissent raised the specter of increased costs to health benefit plans by having an imposed independent review. That, in turn, would lead to increased premiums which could result in employers' curtailing benefits or eliminating health benefits altogether. The dissent also expressed concern about the same health plan being subjected to different regulation in different states. The court further viewed the majority opinion as allowing states to impose all sorts of regulation on health plans, thus eviscerating ERISA's preemption and encouragement of uniform regulation of employee benefit plans.

            The Supreme Court, in a decision written by Justice Souter, affirmed the Court of Appeals, although on slightly different grounds. The Court rejected the HMO's argument that it is not an insurer since it also provides health care. Thus, the Court determined that the Illinois HMO Act was a law that regulated insurance; and under the "common-sense" and McCarron-Ferguson guidelines, ruled that the Illinois HMO Act was a law that regulates insurance and therefore is "saved" from ERISA preemption. The Court determined that the independent review regulates "an integral part of the policy relationship between the insurer and insured."  Slip Op. at 16. The Court also deemed the review as a "practice ...limited to entities within the insurance industry."  Slip Op. at 17.

            Turning to the question of whether the independent review either supplements or supplants the remedies enumerated by 29 U.S.C. §1132(a) and therefore would be preempted regardless of the savings clause, the Court ruled that the Illinois HMO Act does neither. The Court ruled the independent review is not an alternative remedy that would be subject to ERISA preemption. Instead, the Court found that while independent review "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)."  Slip Op. at 23. Although the independent review resembles arbitration, unlike arbitration, the reviewer has no power to construe contract terms but merely determines medical necessity. Thus, "[t]he reference to an independent reviewer is similar to the submission to a second physician, which many health insurers are required by law to provide before denying coverage." Slip Op. at 27. The Court therefore characterized the independent review as being no different from other "types of substantive state regulation" that have survived preemption such as mandated benefit statutes and rules prohibiting denial of claims on timeliness grounds in the absence of prejudice to the insurer stemming from the delay.

            Four justices dissented from the ruling, though. In a dissent authored by Justice Thomas, the independent review was deemed as nothing "other than an alternative state-law remedy or vehicle for seeking benefits."  Dissent at 8. The dissent also deemed the independent review as "an arbitral-like state remedy" which it characterized as disruptive of ERISA's remedial scheme. The dissent concluded by warning the decision reached by the majority may result in increased costs and "undermines the ability of employers to provide health care coverage for employees." Dissent at 16.

Both the Court of Appeals and Supreme Court disregard the fact that the independent review could agree with the insurer; thus, independent review is no guarantee of an outcome against the health benefit plan. Therefore, the specter of increased costs may just be a bogeyman.

One disappointment in Moran is that the Court's decision was so narrow. In UNUM Life Insurance Co. of America v. Ward, 526 U.S. 358, 119 S.Ct. 1380 (1999), the Court signaled that it might be willing to revisit its ruling in Pilot Life v. Dedeaux, 481 U.S. 41, 107 S.Ct. 1549, 95 L.Ed.2d 39 (1987) which  held that Mississippi's insurance bad faith law was preempted by ERISA. Moran reaffirmed Pilot Life, though, and held that state insurance laws creating remedies remain preempted by the ERISA law. Thus, even though such laws might otherwise be saved from ERISA preemption, due to a conflict between such laws and ERISA's remedial scheme, bad faith laws are nonetheless preempted. However, because the Illinois HMO Act reviewed in Moran contains no penalty provision imposing a fine or other monetary cost on a plan where an independent reviewer finds against the insurer, the majority's point that the remedy remains within the exclusive realm of ERISA §502(a)(1)(B) remains well-taken even though the independent reviewer's decision could very well usurp the benefit plan's discretion to determine benefit eligibility.

Moran is also consistent with the overall purpose of the ERISA law expressed in 29 U.S.C. §1002(b) which is to protect plan participants and their beneficiaries, provide remedies, and ready access to the federal courts. The availability of an independent review is pro-consumer and affords protection against biased insurer denial of claims contrary to the weight of medical authority. Cost-controls are at the heart of managed care, but access to quality medical care is the paramount reason for having health insurance. Therefore, the Court's ruling in favor of Debra Moran evens the playing field in assuring that patients receive the medical treatment they deserve.