This article originally appeared in the May 2003 edition of Bender’s Labor & Employment Bulletin, Vol. 3, No. 5. © 2003 Matthew Bender & Co., Inc., and is here reprinted with their permission.
On April 2, 2000, the U.S. Supreme Court in Kentucky Ass’n of Health Plans v. Miller held unanimously that ERISA does not preempt Kentucky’s “any willing provider” laws. The Kentucky statutes prohibit health maintenance organizations (“HMOs”) and other health insurers from excluding from their provider networks any health care providers who agree to their participation terms.
Specifically, the Kentucky statute provides that “[a] health insurer shall not discriminate against any provider who is located within the geographic coverage area of the health benefit plan and who is willing to meet the terms and conditions for participation established by the health insurer, including the Kentucky state Medicaid program and Medicaid partnerships.” A later “any willing provider” statute covers chiropractors.
The HMO Dilemma
At stake in the case was the core economic concept propelling HMOs. Network providers agree to discounted rates for their services and to comply with other contract provisions in order to receive a higher volume of patients coming through the limited network. Absent the financial benefits from this limited network, physicians, hospitals and other providers have little or no reason to agree to discount their rates.
Several HMOs and an association of HMOs had challenged the Kentucky “any willing provider” laws, asserting they were invalid as being ERISA-preempted. The HMOs and the trade association argued that Kentucky did not specifically direct its laws towards the insurance industry because the laws also reached physicians who sought to form and maintain limited provider networks with HMOs, and that in any event the laws did not regulate an insurance practice. They further argued that the Kentucky laws impaired their ability to limit the number of providers with network access, and thus their ability to use an assurance of high patient volume as the quid pro quo for the discounted rates which network membership requires. Additionally, they argued that the Kentucky laws frustrated their managed care efforts at cost and quality control, with the consumers ultimately being denied the benefit of their cost-reducing arrangements with providers.
Sharpening The Knife
Applying a new, extraordinarily expansive “saving” clause test, the Supreme Court held the Kentucky statutes regulate insurance and therefore escape preemption. ERISA’s preemption clause broadly states that ERISA “supersede[s] any and all State laws [which] relate to any employee benefit plan….” Taking back much of what was given, the “saving” clause states that nothing in ERISA “shall be construed to exempt or relieve any person from any law of any State which regulates insurance, banking, or securities.” ERISA’s “deemer” clause bars self-funded plans from being considered insured plans subject to state insurance regulation.
In Kentucky Ass’n of Health Plans, the Supreme Court jettisoned the test based on the McCarran- Ferguson Act factors it had previously used in ERISA cases to determine whether state laws “regulate[ ] insurance.” The Supreme Court substituted a two-pronged test, which it said marks a “clean break” from these factors. Under the new test, a state law regulates insurance if:
- it is specifically directed at entities engaged in insurance, and
- it substantially affects the risk pooling arrangement between the insurer and the insured.
The Supreme Court held that the Kentucky “any willing provider” statutes satisfy both prongs of the new test.
In so doing, the Supreme Court sought to clarify and expand the scope of ERISA’s “saving” clause. Under the Supreme Court’s prior decisions, the boundary lines between the preemption and “saving” clauses were far from clear, with the uncertainty spawning much litigation. One of the decision’s purposes appears to be to reduce the ever-increasing volume of litigation over whether ERISA preempts various state statutes and common law rules impacting HMOs and insured employee benefit plans. The Supreme Court accomplished this reduction through a newly-crafted, very broad reading of the “saving” clause.
In the past, when construing ERISA’s “saving” clause the Supreme Court had relied, to varying degrees, on its cases interpreting the McCarran-Ferguson Act, such as Group Life & Health Ins. Co. v. Royal Drug Co. and Union Labor Life Ins. Co. v. Pireno. The Supreme Court now finds this reliance too restrictive. The Court had first looked to whether a state law passed a “common sense” test of regulating insurance in the sense of being specifically directed towards insurers and the insurance industry. Laws of general application that have some bearing on insurance companies did not qualify. The Supreme Court then considered, as guideposts, the three McCarran-Ferguson factors of:
- whether the state law has the effect of transferring or spreading a policyholder’s risk;
- whether the practice is an integral part of the policy relationship between the insurer and the insured; and
- whether the practice is limited to entities within the insurance industry.
See Pilot Life Ins. Co. v. Dedeaux; Rush Prudential HMO, Inc. v. Moran.
The McCarran-Ferguson Act, enacted in 1945, is the historical demarcation line between permissible federal and state regulation of the business of insurance. Section 2 of the Act states in part:
- The business of insurance, and every person engaged therein, shall be subject to the laws of the several States which relate to the regulation or taxation of such business.
- No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance...unless such Act specifically relates to the business of insurance….
For decades, the McCarran-Ferguson Act has been the great federal divide—a continental rift—between permissible federal and state regulation of the business of insurance. “McCarran-Ferguson” is akin to a household name, much like the “Sherman Act.”
In Metropolitan Life Ins. Co. v. Massachusetts, the Supreme Court, in a unanimous opinion, correctly explained that the “ERISA saving clause, with its similarly worded protection of ‘any law of any State which regulates insurance,’ appears to have been designed to preserve the McCarran- Ferguson Act’s reservation of the business of insurance to the states.” “The saving clause and the McCarran-Ferguson Act,” the Supreme Court said, “serve the same federal policy and utilize similar language to define what is left to the States.”
The Supreme Court’s Extraordinary “Discovery” in 2003
Little if anything in ERISA’s text, including its very detailed “Congressional findings and declaration of policy,” suggests that Congress intended the “saving” clause somehow to depart from the historic McCarran-Ferguson boundary line for laws “regulating the business of insurance.” Nor was there any discernible reason for Congress to have framed ERISA’s “saving” clause to differ in scope from the McCarran-Ferguson-preserved state laws. Nothing before Congress supported making insured employee benefit plans subject to a broader (or narrower) range of state laws regulating the business of insurance.
Had Congress wanted to impose such a divide, one would expect a signal of the fact in the “Congressional findings and declaration of policy” if not elsewhere in the statute itself, including the “saving” clause. Why leave the task of revealing this great shift—a Northwest Passage—to the federal judiciary through case law development in the 21st century? The Supreme Court’s sudden “discovery” of this departure in 2003 is striking by any standard.
Back To The Drawing Board
The Supreme Court is certainly correct that its ERISA “saving” decisions did not always square with its McCarran-Ferguson decisions. In fact, that is an understatement. For example, risk-spreading, which Royal Drug described as the “one indispensable characteristic of insurance” under McCarran-Ferguson, suddenly became dispensable when the high court decided that ERISA “saves” California’s common law “notice-prejudice” rule in UNUM Life Ins. Co. v. Ward. The tension between the remarkably broad interpretation the Supreme Court wanted to give to ERISA’s “saving” clause and the more restrictive McCarran-Ferguson Act is well-illustrated by Ward. As shown, McCarran-Ferguson reserves to the states “any law enacted by any State for the purpose of regulating the business of insurance,” with case law making the risk-spreading the “one indispensable characteristic of insurance” and the transfer of risk “complete” once the insurance policy has been issued. In Ward, however, the Supreme Court applied the ERISA “saving” clause to a common law claims-handling rule (insurer must show actual prejudice to deny claim on ground it was late-filed), which is scarcely a “law enacted by any State,” and found that risk-spreading—“indispensable” under McCarran-Ferguson—suddenly was dispensable under ERISA. For its time, Ward was a high water-mark in terms of an expansive reading of the “saving” clause. Nevertheless, the decision exposed a great dissonance between the text and case law of McCarran- Ferguson, on the one hand, and the high court’s reading of ERISA’s “saving” clause, on the other hand.
Not surprisingly, in Kentucky Ass’n of Health Plans, the Supreme Court found it necessary to go back to the drawing board in order to try to come up with a more plausible, results-oriented and consistent test for applying ERISA’s “saving” clause.
Supreme Court Opinion Holding that ERISA “Saves” the “Any Willing Provider” Statutes
On certiorari, the Supreme Court held that ERISA’s “saving” clause. under a brand new amorphous formulation, preserved the Kentucky “any willing provider” statutes from preemption. The Court again stressed that not all state laws specifically directed toward the insurance industry will be protected by the “saving” clause. This section, the high court explained, saves laws that regulate insurance, not insurers. Stated differently, ERISA allows the states to regulate insurers “with respect to their insurance practices.”
The Supreme Court found that the Kentucky “any willing provider” laws, by their terms, did not impose any prohibitions or requirements on health care providers. It acknowledged, however, that as a consequence of the laws, entities outside the insurance industry, such as health care providers, will be unable to enter into certain agreements with Kentucky insurers. It stated that regulations “directed toward” certain entities will almost always disable other entities from doing, with the regulated entities, what the regulations forbid; but this does not put the regulations outside the “saving” clause.
The Supreme Court also rejected the HMOs and association’s argument that the Kentucky “any willing provider” laws do not regulate insurers with respect to an insurance practice because the laws do not control the actual terms of the insurance policy, but rather focus upon the relationship between an insurer and a third-party provider. The high court explained that the Kentucky laws “regulate” insurance by imposing conditions on the right to engage in the business of insurance: insurers and HMOs may not discriminate against any willing provider.
Further, the Supreme Court held that for a state law to be protected by the “saving” clause, it must also substantially affect the risk pooling arrangement between the insurer and the insured. This is the portion of the equation which the Supreme Court cranked wide open. The state law need not alter or control the actual terms of the insurance policy. The high court said that “any willing provider” laws substantially affect the risk pooling arrangement by controlling the type of risk pooling arrangements that insurers may offer. No longer, therefore, may Kentucky insureds seek insurance from a closed network of health care providers in exchange for a lower premium. It added that the “any willing provider” laws alter the scope of the permissible bargain between insurers and insureds in a manner similar to the mandated-benefit laws upheld in Metropolitan Life, the “notice-prejudice” rule upheld in Ward, and the independent-review provisions approved in Rush Prudential.
The Supreme Court also rejected the HMOs and association’s argument that the Kentucky “any willing provider” laws were not “specifically directed toward” insurers because they applied by their terms not only to insured plans, but to “self-insurer or multiple employer welfare arrangements not exempt from state regulation by ERISA.” In the Supreme Court’s view, this fact did not cause the statutes to forfeit their status as a “law ... which regulates insurance” under the “saving” clause. It found this argument foreclosed by Rush Prudential, which held that a “minimal application to noninsurers” would not remove a state law entirely from the “saving” clause.
In the last portion of its opinion, the Supreme Court acknowledged that its prior use in ERISA cases of the McCarran-Ferguson criteria had misdirected attention, failed to give clear guidance to lower federal courts, and added very little to the relevant analysis. It said this “was unsurprising, since the statutory language of § 1144(b)(2)(A) differs substantially from that of the McCarran- Ferguson Act itself.” The “substantial” language difference relied on by the high court was simply that “[r]ather than concerning itself with whether certain practices constitute ‘[t]he business of insurance,’ 15 U.S.C. § 1012(a), or whether a state law was ‘enacted...for the purpose of regulating the business of insurance,’ § 1012(b) (emphasis added), 29 U.S.C. § 1144(b)(2)(A) asks merely whether a state law is a ‘law...which regulates insurance, banking, or securities.’” As if to buttress this conclusion, the Supreme Court observed that the McCarran-Ferguson factors were developed in cases that characterized conduct by private actors, not state laws.
In a polite understatement, the Supreme Court went on to say that its holdings in Ward and Rush Prudential—that a state law may fail the first McCarran-Ferguson factor of risk-spreading, yet still be “saved”—raised more questions than they answered and provided wide opportunities for divergent outcomes. It asked rhetorically, “May a state law satisfy any two of the three McCarran-Ferguson factors and still fall under the saving clause? Just one?” It said that further confusion arises from the question whether the McCarran-Ferguson factors apply to the state law itself or the conduct regulated by the state law. Finally, it remarked that “[w]e have never held that the McCarran-Ferguson factors are an essential component of the § 1144(b)(2)(A) inquiry.” Instead, these were mere supporting factors, considerations” to be weighed, “checking points” and “guideposts.”
True to its word, the Supreme Court made a “clean break” from the McCarran-Ferguson factors by holding that a state law fits within ERISA’s “saving” clause if it satisfies two requirements. First, it must be specifically directed toward entities engaged in insurance; second, it must substantially affect the risk pooling arrangement between the insurer and the insured. The Kentucky “any willing provider” laws, it found, satisfy each of these requirements. Given the extraordinary breadth of the new test adopted by the Supreme Court, this conclusion was foregone.
- 123 S. Ct. 1471, 2003 U.S. LEXIS 2710 (2003). [Back to reference]
- Ky. Rev. Stat. § 304.17A-270, 171 (2). [Back to reference]
- Ky. Rev. Stat § 304.17A-270. [Back to reference]
- Ky. Rev. Stat. § 304.17A-171(2). [Back to reference]
- 29 U.S.C. § 1144(a). [Back to reference]
- 29 U.S.C. § 1144(b)(2)(A). [Back to reference]
- 29 U.S.C. § 1144(b)(2)(B). [Back to reference]
- See, e.g. Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S. 724, 1985 U.S. LEXIS 23 (1985); Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 1987 U.S. LEXIS 1512 (1987). [Back to reference]
- 440 U.S. 205, 1979 U.S. LEXIS 29 (1979). [Back to reference]
- 458 U.S. 119, 129, 1982 U.S. LEXIS 144 (1982). [Back to reference]
- 481 U.S. 41, 1987 U.S. LEXIS 1512 (1987). [Back to reference]
- 536 U.S. 355, 366, 2002 U.S. LEXIS 4644 (2002). [Back to reference]
- 15 U.S.C. § 1012(b) (emphasis added). [Back to reference]
- 471 U.S. 724, 743 n.21 (1985) (emphasis added). [Back to reference]
- 29 U.S.C. § 1001. [Back to reference]
- 440 U.S. at 211-212. Pireno repeated this statement and added that the transfer of risk is effected by means of the insurance policy, with the transfer being “complete at the time that the contract is entered.” 458 U. S. at 127, 130. [Back to reference]
- 526 U.S. 358. 1999 U.S. LEXIS 2839 ( 1999). True, ERISA’s “Definitions” subsection in the “Other laws” section defines “State law” as including “all laws, decisions, rules, regulations...of any State.” 29 U.S.C. 1144(a), (b)(2)(b). The “Other laws” section, however, is a multipurpose one which is not limited to the “saving” clause. Instead, it also refers to “State laws” or “law of any State” in the preemption and deerner clauses, as well as the “saving” clause for generally applicable state criminal law. § 1144(a), (b)(2)(B), (4). If Congress really intended a departure from McCarran-Ferguson, it is odd that Congress would bury this key point in a general definition subsection applying to a panoply of subsections. [Back to reference]
- 15 U.S C. § 1012(b) (emphasis added). [Back to reference]
- Royal Drug, 440 U.S. at 211-212. [Back to reference]
- Pireno, 458 U.S. at 130. [Back to reference]
- Kentucky Ass’n of Health Plans, 2003 U.S. LEXIS 2710, at *8. [Back to reference]
- Id., at *12. [Back to reference]
- Id., at *11. [Back to reference]
- Id., at *15-16. [Back to reference]
- Id., at *16. [Back to reference]
- 471 U.S. 724 (1985). [Back to reference]
- 526 U.S. 358 (1999). [Back to reference]
- 536 U.S. 355 (2002). [Back to reference]
- Kentucky Ass ‘n of Health Plans, 2003 U.S. LEXIS 2710, at *12, n.1. [Back to reference]
- Id. [Back to reference]
- Id., at *17. [Back to reference]
- Id., at *17-18. [Back to reference]
- Id., at *18. [Back to reference]
- Id., at *19. [Back to reference]
- Id. [Back to reference]
- Id., at *20-21. [Back to reference]
- Id., at *21. [Back to reference]
- Id., at *20-21. [Back to reference]