June 2003 Bulletin

Supreme Court decision expands physician access

Kentucky’s ‘Any Willing Provider’ laws upheld

By Barbara Straub Williams, Esq. and Justin Hunter, Esq.

On April 2, 2003, the Supreme Court issued a unanimous decision upholding Kentucky’s two "Any Willing Provider" (AWP) laws, thereby signaling that similar laws in other states are also valid. AWP laws generally require insurance companies, HMOs, PPOs and other health coverage or insurance-based businesses and networks to accept physicians and other providers in their plans—provided the providers meet the plan’s contractual requirements.

One of the Kentucky AWP laws protects "any provider who is located within the geographic coverage area of the health benefit plan" from exclusion by insurance companies, and the other law protects chiropractors.

The ruling is a setback for the managed care industry, which argued that its networks can offer lower rates to consumers by limiting the number of participating providers because they are likely to accept lower fees in return for a larger stream of patients.

ERISA does not preempt state laws that regulate insurance

At issue in Kentucky Association of Health Plans, Inc. v. Miller was whether the two Kentucky statutes were preempted by the federal Employee Retirement Income Security Act (ERISA) of 1974. ERISA preempts state laws that "relate to any employee benefit plan," and, therefore, state laws that regulate employee benefit plans are generally invalid. ERISA does not, however, preempt state laws that regulate insurance.

Therefore, the Supreme Court examined whether the Kentucky AWP laws regulated insurance, making them appropriate for state regulation. The petitioners in the case were the Kentucky Association of Health Plans and seven HMOs. The respondent, Janie A. Miller, is the current commissioner of the Kentucky Department of Insurance.

Writing for the Court, Justice Antonin Scalia reviewed whether the Kentucky laws: 1) were specifically directed toward the insurance industry, and 2) regulate insurers with respect to their insurance practice, i.e., substantially affect the risk pooling arrangement between the insurer and insured.

The HMOs argued that because the laws had the effect of prohibiting doctors and other providers from participating in limited or restricted network agreements, they were not specifically directed toward the insurance industry, but were also directed at providers.

The Court rejected this argument by stating that the effect of the law on providers is only a consequence of the law and that laws prohibiting regulated entities from engaging in certain activities will also generally prohibit other entities from contracting with the regulated entity to engage in those activities.

The Court also rejected the HMOs’ contention that the Kentucky AWP laws were not specifically directed toward insurance companies because they also applied to self-insured non-ERISA plans and HMOs that provide only administrative services and not insurance. Regarding self-insured plans, the Court noted that their risk pooling arrangements are largely the same kinds of arrangements that would be used by an entity providing insurance to employee benefit plans.

Application to non-insurers

Second, the Court held that the fact that some of the HMOs provided administrative services to self-insured plans rather than insurance sufficed to "bring them within the activity of insurance," and that a minimal application to non-insurers does not disqualify a state law from the category of insurance regulation.

The Court also determined that the AWP laws regulated insurers with respect to their insurance practice. The HMOs argued that because the AWP laws did not control the terms of insurance policies—but instead focused on the relationship between an insurer and third-party provider—the laws did not regulate the practice of insurance.

The Court held that a law does not necessarily have to regulate insurance policies to regulate insurance but instead the law must "substantially affect the risk pooling arrangement between" insurers and insureds.

The Court stated that "AWP laws alter the scope of permissible bargains between insurers and insureds …No longer may Kentucky insureds seek insurance from a closed network of health-care providers in exchange for a lower premium. The AWP prohibition substantially affects the type of risk pooling arrangements that insurers may offer." Accordingly, the Court held that Kentucky’s AWP laws regulate the practice of insurance and are not preempted by ERISA.

Departure from McCarran-Ferguson Act

In the final pages of its decision, the Supreme Court marked a departure from its previous case law that used factors under the McCarran-Ferguson Act as "checking points" to determine whether a state law regulated the insurance industry.

Supreme Court Justice Scalia said, "We believe that our use of the McCarran-Ferguson case law in the ERISA context has misdirected attention, failed to provide clear guidance to lower federal courts, and, as this case demonstrates, added little to the relevant analysis."

The factors that courts consider under the McCarran-Ferguson Act to determine whether a practice constitutes the "business of insurance" are whether the practice transfers or spreads policyholders’ risks, plays an integral part in the policy relationship between the insurer and the insured, and is limited to entities within the insurance industry. The Sixth Circuit—whose decision the Supreme Court upheld in this case—had determined that the Kentucky AWP laws satisfied the three McCarran-Ferguson factors.

Justice Scalia stated that although the Court had never held the McCarran-Ferguson factors to be an essential component of its analysis, the court was making a "clean break" from those factors.

Accordingly, for a state law to be deemed a law that regulates insurance and therefore exempt from ERISA, it must satisfy two requirements: it must be specifically directed toward entities engaged in insurance and substantially affect the risk pooling arrangement between the insurer and the insured.

Barbara Straub Williams, Esq., is a principal, and Justin Hunter, Esq., is an associate in the Washington, D.C., healthcare law firm of Powers Pyles Sutter & Verville. Both authors can be reached at (202) 466-6550 or at B.StraubWilliams@ppsv.com.

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