August 2002 Bulletin

U.S. Supreme Court rules in Rush Prudential Inc. v. Moran case

ERISA does not preempt state law

By Jay Fisher, JD

On June 20, patients won a victory when the U. S. Supreme Court—by a narrow 5-4 vote—held that federal law does not preempt state external review laws. The decision upholds the laws of 42 states that allow patients to appeal health plan treatment denials to independent physicians. The case is titled Rush Prudential HMO, Inc. v. Moran et al (see Bulletin, Vol. 50, No. 2, April 2002).

Deborah Moran suffered from shoulder pain. After conservative treatment failed, her primary care doctor recommended that she receive surgery from an out-of-network specialist. Rush Prudential HMO (Rush) denied that the surgery was "medically necessary." After her appeals within Rush failed, Moran requested an independent medical review under the Illinois HMO external review law. Rush declined to allow the independent review to be performed.

Moran sued in Illinois court and Rush was forced to allow the independent review to proceed. The independent reviewer concluded that the surgery had been medically necessary, but Rush again denied her claim. In the interim, Moran had received the surgery and paid for it out of pocket. Moran filed suit to require Rush to reimburse her for the surgery. Rush claimed that it did not have to abide by the Illinois law since the federal Employee Retirement Income Security Act (ERISA) preempted state law.

ERISA governs all employer-sponsored health plans and preempts state laws that "relate to" the health plan. The U.S. Court of Appeals, however, ruled that the Illinois law was saved by the exception under ERISA that allows states to "regulate insurance." This decision was in conflict with the decision of another Court of Appeals, so the U.S. Supreme Court agreed to hear the case.

In its decision, the U.S. Supreme Court concluded that the external review law in Illinois "regulates insurance" and therefore the law was not preempted by ERISA. The Supreme Court went on to hold that the state-mandated independent medical necessity review does not conflict with the remedies provided to patients under ERISA. The Court noted that state external review laws are "akin to a mandate for second-opinion practice in order to ensure sound medical judgments."

The dissent expressed the view that state external review laws that provide the patient with binding arbitration—like that in Illinois—are outside of the uniform and national remedies delineated by Congress in ERISA. In addition, the increased costs to ERISA plans in complying with 42 different remedy schemes—according to the dissent—would drive up the price of health insurance to employers, which would ultimately lead to fewer health plans for employees.

The Rush Prudential HMO, Inc. v. Moran decision means that patients in employer-sponsored health plans who live in the 42 states with external review laws can obtain an independent physician review of treatment denials. Unfortunately, the ruling doesn’t apply to the 47 percent of employees who are covered under "self-insured" plans. "Self-insured" plans do not have to comply with state insurance regulations.

On a political level, the Supreme Court’s decision may decrease the incentive for Congress and the White House to come to an agreement on a federal patients’ bill of rights. The patients’ bill of rights would institute independent external review for all health plans (whether a federal external review law would preempt all state external review laws or provide a floor is still to be determined). If the case had been decided in favor of Rush, a great majority of the population would have suddenly been without this important protection.

External review laws provide an important protection to patients to ensure that they receive all medically necessary care. However, patients in states with these laws have not used this remedy very often. This could be a good thing if treatment is not being denied as "medically unnecessary" very often; or a bad thing if patients are not aware of how to appeal treatment denials.

In March 2002 the Kaiser Family Foundation published a study entitled "Assessing State External Review Programs and the Effects of Pending Federal Patients’ Rights Legislation." The study found that in 32 states that have information on the utilization of external review mechanisms, there have been 3,957 cases accepted. The time frame for statewide reporting varies from state to state. Of the 3,424 cases that have been concluded, the patient prevailed 45 percent of the time; in another 6 percent of the cases, the plan’s treatment decision was modified.

External review laws appear to work. With its June 20 decision, the U.S. Supreme Court has protected millions of Americans who receive their health insurance through non-self-insured ERISA plans by insuring that they will be able to rely on their state external review protection.

Jay Fisher, JD, is a legislative analyst in the AAOS health policy department.

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