A Quiet Revolution: Law as an
Agent of Health Systems Change
.
M. Gregg Bloche, M.D., J.D.
Professor of Law, Georgetown University
Adjunct Professor, Bloomberg School of
Public Health, Johns Hopkins University
How Do Law & Politics Shape
Health Systems Change?
The Standard Wisdom: Law & regulation influence
market actors’ conduct in 3 ways
• Command-&-Control: Law requires some behaviors &
prohibits others.
• Incentives: Law rewards & discourages conduct by
borrowing tools from the marketplace (examples: tax
incentives & Medicare payment rules).
• Levels of Enforcement: Law does these things only to the
extent that legal actors (public officials & private litigants)
monitor compliance & punish violators.
It Follows that …
• You “win” legal & regulatory disputes by
persuading legal decisionmakers to do
things your way.
• If the judge throws out the plaintiff’s case
against you, or if you prevail on appeal,
you’ve “won.”
• If a bill you dislike fails to become law,
you’ve “won.”
I’m going to tell you a different
story:
• Yes, winning & losing matter – the law’s
rules & incentives influence actors
behavior.
• But the influence of legal conflict on market
actors’ perceptions matters more.
• The fate of managed care is a dramatic
example.
A Case in Point:
• Oct. 4, 1999: A legal “dream team” led by David
Boies files a consumer class action suit against
Humana, demanding billions of dollars in
damages for failure to honor contractual promises
to provide “medically necessary” care.
• Within weeks, similar suits are filed against other
large MCOs
• Legal observers predict these suits’ failure.
• 3 years later, a federal court dismisses the suits,
and the “dream team” decides not to appeal.
But …
• Within hours of the filing of the complaint against
Humana, managed care share prices plunged by as
much as 10 percent, as investors panicked.
• Press coverage fed consumer anxiety about
managed care.
• Health plans heard reassuring news from their
lawyers but worrisome news from their investment
bankers and marketing strategists.
The Managed Care Backlash
• Consumer class action suits were part of a broader
legal assault on MCOs through the late 1990s.
• Highly-publicized lawsuits for the consequences
of care denied
• Campaign to get Congress to pass a “Patients’ Bill
of Rights,” expanding MCOs’ liability and
limiting their ability to withhold coverage
• Similar campaigns at the state level
Winning the Battles
Through the 1990s, MCOs successfully resisted this legal &
political onslaught:
• Consumer class actions failed.
• MCOs mostly preserved their immunity, under ERISA,
from suits for damages for coverage denials.
• Federal “Patients’ Bill of Rights” proposals repeatedly
failed.
• Many statehouses enacted MCO regulation, but in such
weakened form that it had little impact on health plans’
business practices.
Losing the War?
Yet by the end of the 1990s, MCOs were rapidly retreating
from aggressive cost-control:
• Pre-authorization review & frequent coverage denial.
• Selective contracting with low-cost providers.
• Financial rewards to caregivers for ordering fewer tests &
treatments.
Through the mid-1990s, these methods held medical cost
increases to little more than the overall rate of inflation.
MCOs prevailed, for the most part, against legal and
legislative challenges to these methods. But victories in
court, Congress, & statehouses weren’t enough.
What Happened?
The Market & the Law:
• MCOs won their legal battles, but remote HMO
bureaucrats & horrific consequences of care denied
became the stuff of popular culture.
• Dramatic news accounts of MCO misdeeds.
• TV & film, political stump speeches, Leno & Letterman.
• Consumer rebellion, in the marketplace, against tightlymanaged care.
• Fear of regulatory backlash led Wall St. to discount the
value of MCO shares.
• To survive, MCOs abandoned the tactics they had
successfully defended in Congress & in court.
Why?
How did health care consumers come to fear &
loath managed care?
• The average MCO subscriber was highly unlikely
to have had a horrific managed care experience.
• But legal conflict produced a stream of press
reports of MCO misdeeds.
• Legal conflict was the main source of such
stories, & it was a vehicle for their spread.
A Market for Exposure
• Plaintiffs’ lawyers, public officials, health care providers,
and journalists had varied & strong incentives to expose
gaps between what managed care promised & delivered.
• Promises of high-quality, “medically necessary” care
contrasted unpleasantly with accounts of lifesaving care
denied, gag rules, and rewards to physicians for
withholding care.
• The “Patients’ Bill of Rights” debate, with its associated
Congressional hearings and political advertising, fed
popular impressions of the HMO bureaucrat as an icon of
greed and indifference.
Perception & Reality: Consumers
• Consumers reacted with fear & anxiety,
perhaps out of proportion to MCOs’ actual
sins.
• In the full-employment economy of the late
1990s, this translated into pressure on
employers to abandon tightly-managed care.
Perception & Reality: Investors
• Investors saw legal conflict as business risk.
• Although MCOs prevailed year after year over federal
“Patients’ Bill of Rights” proposals, investors took the risk
of Congressional action into account.
• Investors took the threat of class action & other liability
into account, perhaps out of proportion to actual risk.
• The novelty and uncertainty of these risks made their
overvaluation more likely.
• Investors’ responsiveness to each others’ negative
expectations amplified the downward pressure on MCO
share prices.
Perception & Reality: MCO
Executives
• In response to these converging pressures – and to
their own concerns about legal risk, health plan
executives profoundly changed the way they did
business.
• Some industry observers today speak of the “death
of managed care.”
• That’s not quite right: the health insurance
industry is now thriving.
• But it is thriving in part because it is no longer
managing care – certainly not to the degree that it
did 8 to 10 years ago.
The U.S. Supreme Court & Health
Systems Change
• A bit after-the-fact, the Justices have entered the fray.
• They’re re-writing the law of ERISA pre-emption – and
redefining the scope of state regulatory authority over
health plans.
• Upwards of 160 million Americans obtain health coverage
through the workplace and are thus affected by ERISA.
• ERISA’s drafters didn’t anticipate the rise of managed care,
but the statute they wrote has become a virtual
“constitution” for the medical marketplace.
Some “Black-Letter” Basics
• ERISA defines the boundaries between state
and federal regulatory authority
• It does so by “pre-empting” some state
statutes, regulations, and common law
• But ERISA imposes few substantive
regulatory requirements on health plans (or
employers)
• So, in practice, ERISA “pre-emption”
means deregulation
Some Political Irony
• Conservative judges who disfavor
regulation of medical and other markets
tend to favor greater state sovereignty and
reduced federal authority
• Justice Scalia is the leading example
• But in the ERISA context, federal preemption means deregulation, so
conservative judicial goals are at war with
each other
Back to “Black Letter” Basics:
ERISA Pre-emption As a Defense
• ERISA Section 514 pre-empts all state laws that
“relate” to an “employee welfare benefit plan.”
• BUT: Section 514’s so-called “insurance savings
clause” makes an exception: it “saves” (from preemption) state law that “regulates insurance.”
• BUT: There’s an exception to this exception: The
so-called “deemer clause” says that “employee
welfare benefit plans” can’t be “deemed” insurers;
thus employers can escape the “insurance savings
clause” by self-insuring.
But It’s Not So Simple
• In practice, of course, the courts make the
rules
• ERISA’s language is vague, to the point of
meaninglessness, about:
– What it means to “relate to” an employee
welfare benefit plan
– What it means to “regulate” insurance
It Gets Even Messier
• The “Other” ERISA Pre-emption: ERISA Section 502(a) provides a
federal remedy for the value of benefits denied.
• Section 502 (a) therefore “completely pre-empts” state law remedies
for denial of benefits.
• This means that defendant health plans can “remove” state lawsuits to
federal courts on 502(a) grounds and ask that plaintiffs be allowed to
pursue only their 502(a) remedies.
• The Catch: Courts have uniformly construed 502(a) to exclude claims
for consequential damages (e.g. lost wages, pain & suffering).
• Thus, for example, a plaintiff who claims that her HMO’s refusal to
authorize a $1000 MRI scan resulted in failure to diagnosis a tumor in
time to save her life can recover – under 502(a) – only the $1000.
Summing Up: The Pre-2000 Story
• State tort & contract remedies for MCOs’ denials of care
“relate” to “employer welfare benefit plans” and are
therefore pre-empted.
• The key distinction: MCOs’ denials of care are “plan
administration,” not medical care, decisions.
• You could sue doctors & hospitals in state court for
negligent provision of medical care.
• But you couldn’t sue your HMO in state court for denying
you care.
• You could sue in federal court, under ERISA, but only for
the cost of the care denied.
• You couldn’t recover damages in state or federal court for
the consequences of care denied.
The Pegram Revolution
• June 2000: For the first time, the U.S. Supreme Court
decides a case, Pegram v. Herdrich, involving MCO cost
containment policy
• The Issue: Does ERISA limit MCOs’ ability to offer
financial rewards to physicians who practice frugally?
• MCOs won, or so they thought: The Court held that
MCOs’ incentives to physicians to withhold care are not
subject to ERISA regulation
• BUT to get to this holding, the Court put “mixed” medical
and plan administration decisions (involving both patient
care and use of MCO resources) out of ERISA’s preemptive reach
The Pegram Revolution, Cont.
• And, the Court declared its intention to henceforth read ERISA’s preemptive provisions more narrowly in the managed care context.
• A week after the Court decided Pegram, it remanded another case,
involving allegations of negligent pre-authorization review by a health
insurer, to a lower court for reconsideration in light of Pegram.
• The strong suggestion – Pegram applies to utilization review.
Preauthorization decisions by health plans are “mixed” medical and
administrative decisions; thus they fall outside ERISA’s pre-emptive
scope.
• Cost-conscious medical judgments – at the bedside and in the
utilization management suite – were put squarely in the sight of state
tort lawyers.
Independent Review of Coverage
Denials
• State laws requiring independent review of coverage
denials posed a distinct legal question.
• By 2002, 40 states had enacted such laws. MCOs argued
independent review is a legal “remedy” & is therefore preempted by 502(a).
• June 2002: A divided Supreme Court rejected this
argument in Rush-Prudential HMO v. Moran (decided 54).
• The Court’s stated reasoning: Independent review
involves medical judgment, not adjudication. It is akin to a
2nd opinion and thus doesn’t overlap with ERISA 502(a)
remedies.
The Upshot: Victory for State
Oversight of Coverage Decisions
• Coverage decisions can be overruled by
independent medical reviewers, applying
professional standards of care to interpret
“medical necessity” provisions in health
insurance contracts.
• Looming prospect of tort liability for
negligent denials of coverage.
Or so it seemed …
• Since Pegram, most lower courts have construed
ERISA to allow state actions against MCOs for
negligently withholding care.
• Since the late 1990s, 10 states, including Texas,
have enacted statutes authorizing such suits – and
thereby strengthening the case against Section 514
pre-emption.
• Oct. 2000: Candidate Bush, in debate with Al
Gore, boasted that Texas was "one of the first
states that said you can sue an HMO for denying
you proper coverage."
The Return of ERISA Pre-emption?
• Aetna, Cigna, & other MCOs challenged the Texas statute
• Argument: The Texas law and ERISA 502(a) create
overlapping remedies, so the Texas law is pre-empted.
• 5th Circuit Court of Appeals rejected this argument
(consistent with post-Pegram caselaw)
• Aetna & Cigna appealed to the Supreme Court, which
granted cert.: (Aetna v. Davila)
• In a brief last Dec. and in oral arguments 2 months ago,
Bush administration lawyers asked the Justices to reject the
bulk of recent caselaw and to strike down the statute
candidate Bush boasted about.
• At oral argument, the Justices seemed inclined to oblige.
Summing Up: Health Care Policy
Implications
• Independent review of MCO coverage decisions will
survive. Review will be based on “professional” standards
of care, limiting MCOs’ ability to economize by offering
lower levels of care.
• Within a few weeks, the Supreme Court is likely to
resurrect MCO immunity from state suits for negligent
denial of coverage – a stunning reversal of recent trends.
• Possible fallout: Re-appearance of MCO immunity &
Patients’ Bill of Rights as national political issues this
summer and fall.