Amicus Curiae Brief — Rush Prudential HMO, Inc. v. Moran

| Supreme Gouri us. 7

Seote moe 10, ooo | Finen |

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SEP 10 200i

CLERK |

No. 00-1021 a —

IN THE

Supreme Court of the United States

RUSH PRUDENTIAL HMO, INC.,

Petitioner,

Vv.

DEBRA C. MORAN AND STATE OF ILLINOIS,

Respondents.

On Writ Of Certiorari

To The United States Court Of Appeals

For The Seventh Circuit

BRIEF OF

AMERICAN ASSOCIATION OF HEALTH PLANS, INC.,

AMERICAN BENEFITS COUNCIL, AND HEALTH

INSURANCE ASSOCIATION OF AMERICA, INC., AS

AMICI CURIAE IN SUPPORT OF PETITIONER

MIGUEL A. ESTRADA

Counsel of Record

ANDREW S. TULUMELLO

GIBSON, DUNN & CRUTCHER LLP

1050 Connecticut Avenue, N.W.

Washington, D.C. 20036

(202) 955-8500

Counsel for Amici Curiae

QUESTION PRESENTED

Whether the external review provision of the [Illinois

Health Maintenance Organization Act, 215 ILL. Comp. STAT.

125/4-10, is preempted by the Employee Retirement Income

Security Act of 1974, 29 U.S.C. § 1001 et seq.

ll

TABLE OF CONTENTS

Page

QUESTION PRESENTED ........:ssscsssecssesssssesssssssesesssesveeses —_

TABLE OF AUTHORITIES. ....0....cscsssscssssscssssesssssessssessseecesees iii

INTEREST OF AMICI CURIAE .essecsssesssecssssesssssssssssssssesessssses 1

TE 2

SUMMARY OF ARGUMENT........:sssessssessssessssssssssessseeseeessees 8

| RT I 9

ILLINOIS’ STATUTE IS CLEARLY

PREEMPTED BY ERISA BECAUSE IT

CONFLICTS WITH SECTION 502(A) AND

IS NOT SAVED FROM PREEMPTION BY

THE INSURANCE SAVING CLAUSE ooeceecsescssssee. 9

A. Illinois’ Statute Constitutes An

Alternative Enforcement Mechanism

Preempted By Sections 502(a) And

POT iccccesemsncniatsddiatassiiiiiienaa ae 10

B. Illinois’ Statute Is Not Saved From

Preemption By The Insurance Saving

Clause, Because Alternative Enforcement

Mechanisms To Section 502(a) Are Not

Laws That Regulate Insurance ..................000.+. 17

C. In Any Event, Illinois’ Statute Does Not

Regulate Insurance As A Common Sense

Matter Or As Measured Under The Three

McCarran-Ferguson Guideposts ............:.00000-. 20

D. Summary Judgment For Respondent Was

RERPRNGED aermenecccnssisttsienaiiaiasdingiieaiesineale 30

CRISTEA IIIS corsesccesrncctentinitenisingeiidiniamemumeadesennn 30

ili

TABLE OF AUTHORITIES

Page(s)

Cases

Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504

Se 19

Anderson v. Humana, Inc., 24 F.3d 889 (7th Cir.

arate aeenermmnmpenmemennnsnamenapnsnsccssenseseceste 26

Arizona v. Maricopa County Medical Soc 'y, 457

nT 23

Bishop v. Wood, 426 U.S. 341 (1976) ........cccecccseeseeseeeereeeees 26

Boggs v. Boggs, 520 U.S. 833 (1997) .........cc0esse0s 16, 18, 20

California v. ARC America Corp., 490 U.S. 93

EE 18

Chappel v. Laboratory Corp. of Am., 232 F.3d

ae 27

Citizens Bank of Maryland v. Strumpf, 516 U.S.

en 14

Corporate Health Ins., Inc. v. Texas Dep't of Ins.,

215 F.3d 526 (Sth Cir. 2000), on reh'g, 220

F.3d 641, petition for cert. filed sub nom.,

Montemayor v. Corporate Health 'ns., Inc.,

No. 00-665 (Oct. 24, 2000) ...........ccccccccceeeneeeeneees 7, 12, 29

Department of Treasury v. Fabe, 508 U.S. 500

tee aeieerichereiemnsenemnmnansnegnnennsenesnsenvenniesssees 29

De Buono v. NYSA-ILA Medical and Clinical

Servs. Fund, 520 U.S. 806 (1997) .........ccccccccccceeeeceeeeeees 20

Egelhoff v. Egethoff, 121 S. Ct. 1322 (2001) ...........cecceeees 10

Firestone Tire & Rubber Co. v. Bruch, 489 U.S.

Ee 14, 30

iv

FMC Corp. v. Holliday, 498 U.S. 52 (1990)..............00+ 21, 25

Fort Halifax Packing Co. v. Coyne, 482 U.S. 1

(FEU nenensensenensensenensenmmnmemnenenpinntannenentegentuenns 15, 19, 20

Group Life & Health Ins. Co. v. Royal Drug Co.,

BiBig GED Gade BO POO men 23, 24, 29

Ingersoll-Rand v. McClendon, 498 U.S. 133

Ne 11, 14, 19

John Hancock Mut. Life Ins. Co. v. Harris Trust

& Sav. Bank, $10 U.S. 86 (1993) .............ccecccerseseeseeseeees 18

Jun v. Lloyds, 37 S.W.3d 59 (Tex. App.—Austin,

ee eG crrcecscenninestnntensininninensnnmennnmmammees 14

Lingle v. Norge Div. of Magic Chef, Inc., 486

aD SE EIEN cevesessdennsienntmnensienitnnunstniiemmmamnninaaes 11

Mackey v. Lanier Collection Agency & Serv., Inc.,

ee crretrreneetensneninnntniantinninatnisiimnieasess 20

- Metropolitan Life Ins. Co. v. Massachusetts, 471

DP erreennnennamninininanbitiaiitemeiiines passim

Metropolitan Life Ins. Co. v. Taylor, 481 U.S. 58

TN 5,11, 19

Mitsubishi Motors Corp. v. Soler Chrysler-

Plymouth, Inc., 473 U.S. 61441985) ..........ccccceeseeseeeeees 27

Moran v. Rush Prudential HMO, Inc., 230 F.3d

a I rctecnnmmnininnnmstintins passim

Nelson v. EG&G Energy Measurements Group,

Inc., 37 F.3d 1384 (9th Cir. 1994) oo. ccccecceceecesneenes 27

New York State Conference of Blue Cross & Blue

Shield Plans v. Travelers Ins. Co., 514 U.S.

ei ccresicsncveesntitatitinasiataintinniiiiatatinintssniatasil passim

Patterson v. McLean Credit Union, 491 U.S. 164

re ee Oe ee 19

Vv

Pegram v. Herdrich, 530 U.S. 211 (2000).............++. 8, 22, 25

Pilot Life v. Dedeaux, 481 U.S. 41 (1987) ..........0c000000 passim

Ravencraft v. UNUM Life Ins. Co. of Am., 212

PO 15

Runyon v. McCrary, 427 U.S. 160 (1976)..........c.ccecseeeeeeeees 26

SEC v. Variable Annuity Life Ins. Co. of Am., 359

ee 26, 29

Union Labor Life Ins. Co. v. Pireno, 458 U.S. 119

RE ccncsenssesecescsnnnnnimememnsamenmsssosscnniemntesesnnen 28, 29

UNUM Life Ins. Co. of Am. v. Ward, 526 U.S. 358

a passim

STATUTES

RD en 27

yD 28

a passim

(A 27

OU passim

29 U.S.C. § LIGELR ZA) ...22220-cceeccecccccesccescesees 5, 6, 7, 17, 26

BERL. 6 SPCC ener 24

BG Eee 16

CAL. HEALTH & SAFETY CODE § 1374.30(3)..........0cceeseee0es 16

215 ILL. COMP. STAT. 125/1-2(9)...........ccsccseesereeereeseeeeees 21, 23

OD 3

OO 4

EE 4

21S BL. Cand. STAT. 134/6S(E) ...222.20.22-ccccccecsecscccscesecssccscsece +

215 ILL. COMP. STAT. 134/45(£)(6) ...........-ecseccceeeeeeeeeeeereeees 28

vi

in SE Bs Ce ccnccetetnnecememntmens 4

ee SE, Be crreentinemnenmmnmennn 16

MD. CODE ANN. § 15-10A-O1.1 ......ccccccssceseseessesesseeseeseeseseee 16

OO ee 28

Tex. INS. CODE ANN. art. 21.58A § 2(17)(B) .....c..ccecceeseeeees 22

Tex. INS. CODE ANN. art. 21.58A § 2(17)(C) coccccccecceeseeeees 22

Tex. INS. CODE ANN. art. 21.58A § 2(21)(B) .....cccccocssesseeees 22

TEX. INS. CODE ANN, art. 21.58A § 6 ..ccccccccccccessscssessessneenes 22

TEX. INS. CODE ANN. art. 21.58A § GA....ccccccscccscecsseessesseeene 22

TEX. INS. CODE ANN. art. 21.58C § 2(g) ...c.cccccecccessseeseeeneeees 28

FR ee 16

VA. CODE ANN. § 38.2-5901(A) ......ccecccseccessessesseseesseseeseenee 16

VA. CODE ANN. § 38.2-5902(C)....cccccccecessoecsesseessesseesecsncenes 28

REGULATIONS

EERE eae eRe ene 15

65 Fed. Reg. 70246 (November 21, 2000)..................... 14, 15

66 Fed. Reg. 35885 (July 9, 2001) ............. penenenininiinmmeaned 14

OTHER AUTHORITIES

Diana J. Bearden & Bryan J. Maedgen, Emerging

Theories Of Liability In The Managed Care

Industry, 47 Baylor L. Rev. 285 (1995) ..............ccecesees 22

Donald R. Levy (ed.), 2001 STATE By STATE

GUIDE TO MANAGED CARE (2001)...........-cccecceeneeeeeeeeees 24

Frank T. Herdman, Doctors, Insurers, And The

Antitrust Laws, 37 Buff. L. Rev. 789 (1988-

vii

Jeffrey W. Stempel & Nadia von Magdenko,

Doctors, HMOs, ERISA, And The Public

Interest After Pegram v. Herdrich, 36 Tort &

BED, Bate GEST QSOED crncsscccnsssnssnessesssnemsssncensevenmencess

Paul Fronstin, Employment-Based Health Bene-

fits: Trends and Outlook, Issue Brief No. 233,

Employee Benefit Research Institute (May

y | re

Peter R. Kongstvedt (ed.), THE MANAGED

HEALTH CARE HANDBOOK (3d ed. 1996)................

Robert I. Cunningham et al., THE BLUES: A

HISTORY OF THE BLUE CROSS AND BLUE

A

Susan P. Serota, ERISA FIDUCIARY LAW (1995)............

U.S. Dep’T OF COMMERCE, BUREAU OF THE

CENSUS, STATISTICAL ABSTRACT OF THE

UNITED STATES (115th ed. 1995) 2........eecececeeeeeeees

BRIEF OF

AMERICAN ASSOCIATION OF HEALTH PLANS, INC.,

AMERICAN BENEFITS COUNCIL, AND HEALTH

INSURANCE ASSOCIATION OF AMERICA, INC., AS

AMICI CURIAE IN SUPPORT OF PETITIONER

INTEREST OF AMICI CURIAE'!

The question presented in this case is whether Illinois’

independent review statute—which requires health mainte-

nance organizations to submit disputed “medical necessity”

coverage determinations to the binding judgment of a non-

plan physician—is preempted by ERISA. Amici have a vital

interest in the correct resolution of this case, because each

(through its members) has a significant stake in preserving

uniformity in the federal law governing employee welfare

benefits plans, and each (through its members) will be ad-

versely affected by a decision upholding a State’s authority

to enact state-law remedies that constitute alternatives to

ERISA’s exclusive civil enforcement scheme.

The American Association of Health Plans, Inc.

(“AAHP”) is the national association for the managed health

care community. Its membership includes health mainte-

nance organizations, preferred provider organizations, third

party health benefit administrators, health care utilization re-

view organizations, prepaid limited health service plans, and

other integrated health care delivery systems. AAHP repre-

sents more than 1000 managed health care organizations

serving nearly 150 million Americans. AAHP’s mission is to

advance health care quality and affordability through leader-

ship in the health care community, advocacy, and the provi-

sion of services to member health plans.

! Pursuant to this Court’s Rule 37.3(a), letters of consent from all par-

ties to the filing of this brief have been filed with the Clerk. Pursuant to

this Court’s Rule 37.6, amici state that this brief was not authored in

whole or in part by counsel for any party, and that no person or entity

other than amici, its members, or its counsel made a monetary contribu-

tion to the preparation or submission of this brief.

2

The American Benefits Council (“Council”) is one of the

nation’s leading advocates of employer-sponsored benefits

programs. Its members sponsor, administer, or provide ser-

vices to health, retirement, and stock compensation plans

covering more than 100 million Americans. The Council is

dedicated to promoting sensible regulation of employer-

sponsored benefits programs and to eliminating regulatory

proposals that impose unnecessary burdens, liabilities and

costs on employers that elect to sponsor benefit plans.

The Health Insurance Association of America (“HIAA”)

is based in Washington, D.C., and is one of the largest

associations of health insurance companies in the world.

HIAA comprises more than 290 members which provide in-

surance for medical expenses, long-term care, and disability

to more than 123 million Americans. HIAA advocates a

private, market-based health insurance system and is

dedicated to promoting federal and state health care policies

that maximize the quality, affordability, accessibility, and

responsiveness of medical services provided to the nation’s

health care consumers.

STATEMENT

1. Petitioner R: 4 Prudential HMO, Inc. (“Rush”) is a

health maintenance organization (“HMO”) that contracts

with employers and others to provide services to employee

welfare benefit plans governed by the Employee Retirement

Income Security Act of 1974 (“ERISA”), 29 U.S.C. § 1001

et seq. In this particular case, Rush contracted with an em-

ployer to provide coverage for medical and hospital care to

subscribing employees on a prepaid basis. Under the terms

of the controlling ERISA plan document, Rush was obliged

to provide coverage only for services that it determined to be

“medically necessary,” as that term was defined by the

ERISA plan, and was afforded “the broadest possible discre-

tion” to make those determinations. Moran, 230 F.3d at 962.

Respondent Deborah C. Moran was covered as a spouse

under the ERISA plan to which Rush provided services.

Moran, 230 F.3d at 962. In 1996, Moran sought treatment

3

for “pain, numbness, loss of function, and decreased mobility

in her right shoulder” from Dr. Arthur LaMarre, a Rush-

affiliated primary care physician, who treated Moran with

physiotherapy and other conservative approaches. Jd. When

those efforts did not relieve her symptoms, Moran requested

an out-of-network referral to be examined by Dr. Julia

Terzis, a thoracic surgeon in Virginia who specializes in neu-

romuscular disorders. After Rush denied that request, Moran

traveled to Virginia on her own accord to see Dr. Terzis, who

diagnosed Moran with a nerve compression abnormality

called thoracic outlet syndrome (“TOS”). Dr. Terzis recom-

mended that Moran undergo a form of microneurolysis sur-

gery that, all parties have conceded, is more complicated than

the operation ordinarily performed on patients afflicted by

TOS. See id. at 963-65.

Upon her return, Moran requested Rush to precertify the

surgery Dr. Terzis had proposed. Although Dr. LaMarre

concluded that the proposed surgery was “medically neces-

sary,” Rush denied coverzge on the ground that it would be

provided by an out-of-network physician. On Moran’s ap-

peal of that decision, and pursuant to its internal grievance

procedure, two Rush-affiliated thoracic surgeons examined

Moran and concluded that the procedure Dr. Terzis had pro-

posed was not medically necessary because Moran required

standard TOS surgery. After reviewing those surgeons’ re-

ports and conducting its own analysis of the relevant medical

literature, Rush affirmed the coverage denial. See id. at 964.

2. Section 4-10 of the Illinois Health Maintenance Or-

ganization Act (the “Act”), 215 ILL. Comp. STAT. 125/4-10,

provides that in the event of a dispute between a primary care

physician and an HMO “regarding the medical necessity of a

covered service proposed by [the] primary care physician,”

the HMO must “provide a mechanism for the timely review”

of the dispute by an independent physician. Enacted in re-

sponse to citizen complaints about the cost-containment prac-

tices of managed care companies, the Act provides that in the

event the reviewing physician determines the covered service

4

to be “medically necessary,” the HMO “shail provide the

covered service.” Jd. (emphasis added).?

Following the final administrative denial of her coverage

request, Moran served Rush with a written demand to ap-

point an independent physician pursuant to Section 4-10. See

Moran, 230 F.3d at 965. Before Rush responded to the de-

mand, Moran elected to undergo the surgery Dr. Terzis had

proposed—a procedure that, including post-operative care,

cost $98,841.27. Moran submitted the bill for the operation

to Rush, which treated her submission as a renewed request

for benefits and asked three medical experts, including the

2 Section 4-10 was enacted in Public Act 85-20 (eff. July 20, 1987). In

the floor debate in the House of Representatives, Representative Shaw, a

principal sponsor of the bill, explained that it “addresses several concerns

which has [sic] been expressed concerning the operation of health main-

tenance organizations over the last year in Illinois.” Transcription De-

bate, 85th General Assembly, 67th Legislative Day (June 24, 1987) at

233. “[T]he patient complaint and grievance procedure. And I think,

from what I’ve heard around the state, the many patients, when they was

[sic] involved in an HMO, they had nowhere to go and this was one of

the things that they protested vigorously about, and I think it’s this type

of procedure that needs to be set forth.” Jd.; see also id. at 233-34 (“if

they can’t agree on the second opinion, then a third opinion is provided,

and that opinion is binding * * * * [I]t doesn’t solve all the problems

that’s dealing with HMO [sic], but I think that this is a milestone in legis-

lation that the people of Illinois can live with and I ask for its adoption”).

Illinois recently enacted an even more comprehensive “external re-

view” provision as part of the Managed Care Reform and Patient Rights

Act, P.A. 91-617 (eff. Jan. 1, 2000), codified at 215 IL. Comp. STAT.

134/1 et seq. The statute applies to HMOs (see 215 It. Comp. STAT.

125/5-3.6), and thus imposes additional procedural requirements on them.

Unlike Section 4-10, the Patient Rights Act does not limit external review

to circumstances in which a primary physician and HMO disagree over

whether treatment is “medically necessary.” It applies to virtually all

“medical necessity” determinations, as well as to coverage decisions

about hospital stays and referrals to specialists. See 215 IL. Comp. STAT.

134/45(e). The Patient Rights Act also establishes precise timetables for

completion of the independent review and expressly requires the plan to

pay the fees of the external reviewer. See 215 IL. Comp. STAT. 134/50(f).

5

Chief of Plastic and Reconstructive Surgery at Washington

University School of Medicine in St. Louis, to review her

medical file. When none of those experts concluded that the

surgery performed by Dr. Terzis was medically necessary,

Rush again denied Moran’s claim. Moran, 230 F.3d at 965.

Undeterred by the second denial of her claim for bene-

fits, Moran filed a complaint against Rush in the Circuit

Court of Cook County seeking “specific performance” of the

independent review provision in Section 4-10. Over Rush’s

objection, the Circuit Court ordered Rush to submit Moran’s

claim to an independent reviewer, and Rush and Moran

agreed to have the independent review conducted by Dr. A.

Lee Dellon of Johns Hopkins Medical Center. Like the

Rush-affiliated thoracic surgeons who had examined Moran,

Dr. Dellon concluded that he would have performed a much

less intrusive and time consuming procedure, but he nonethe-

less opined that the surgery performed by Dr. Terzis had

been “medically necessary.” Moran, 230 F.3d at 965.

3. Citing Dr. Dellon’s findings, Moran amended her

state court complaint to seek “reimbursement” from Rush for

the costs of her operation. Because Moran’s amended claim

was in effect a claim for plan benefits—a claim that already

had been twice denied pursuant to Rush’s internal plan pro-

cedures—Rush then removed the complaint to federal court.

See Metropolitan Life Ins. Co. v. Taylor, 481 U.S. 58, 63-64

(1987) (holding that the exclusivity of the remedies provided

by ERISA § 502(a), 29 U.S.C. § 1132(a), permits removal).

Moran moved to remand the action to state court on the

ground that her suit was predicated on a state law that regu-

lated insurance within the meaning of ERISA’s “saving

clause,” 29 U.S.C. § 1144(b)(2)(A).

The district court first addressed Moran’s motion to re-

mand and concluded that her Section 4-10 cause of action

was preempted by ERISA § 502(a). Pet. App. 41a. “Regard-

less of how she characterizes it,” the district court explained,

“Moran’s current claim is a § 502(a) denial of benefits claim”

because it contests “Rush[’s] refusal to reimburse her for the

6

treatment” rendered by Dr. Terzis. Jd. The district court re-

jected Moran’s claim that Section 4-10 was saved from pre-

emption by ERISA’s insurance saving clause, ERISA

§ 514(b)(2)(A), 29 U.S.C. § 1144(b)(2)(A), reasoning that

Section 4-10 does not regulate insurance because it does not

spread or transfer risk or “affect the disbursement of benefits

* * * to all [Rush subscribers] * * * or mandate or deny a

certain class of benefits.” Pet. App. 42a (citing Metropolitan

Life Ins. Co. v. Massachusetts, 471 U.S. 724, 744 (1985)).

Finding no abuse of discretion in the denial of Moran’s

claim, the district court entered summary judgment for Rush.

4. The Seventh Circuit reversed. Aithough agreeing that

removal had been proper because “Moran’s state law claims

are properly recharacterized as claims for benefits under

§ 502(a)(1)(B) of ERISA” (Moran, 230 F.3d at 967), the

- court of appeals concluded that Rush had abused its discre-

tion in denying Moran’s claim for reimbursement. As the

court of appeals saw the issue, Rush was obliged to comply

with the “independent review of Dr. Dellon” (id. at 965), be-

cause Section 4-10 had become part of Moran’s contract with

Rush “by operation of [Illinois] law.” Jd. at 969 (“[Statutory]

provisions * * * are substantive terms of all insurance poli-

cies in Illinois by operation of law’).

The court of appeals rejected Rush’s contention that Sec-

tion 4-10 was preempted by ERISA. In particular, the court

of appeals rejected Rush’s claim that Section 4-10 is an alter-

native enforcement mechanism to Section 502(a) that is pre-

empted by the teaching of Pilot Life Ins. Co. v. Dedeaux, 481

U.S. 41 (1987). Notwithstanding its recognition that Section

4-10 “establishes an additional * * * mechanism for making

decisions about medical necessity” that adds “an additional

dispute resolving mechanism” to the plan (Moran, 230 F.3d

at 972), the court of appeals concluded that because Section

4-10 had been “incorporated into * * * Moran’s insurance

contract” by operation of Illinois law, it could “not be charac-

terized as creating an alternative remedy scheme that con-

flicts with § 502(a).” Jd. Rather, Moran’s suit was “simply a

suit to enforce the terms of the plan.” Jd. (citing UNUM Life

7

~ ni

Ins. Co. v. Ward, 526 U.S. 358, 377 (1999) (“Ward’)). The

court of appeals went on to explain that although Section 4-

10 nonetheless “relate{[d] to” an ERISA plan within the

meaning of Section 514(a), 29 U.S.C. § 1144(a)—a point that

Moran had in any event conceded (see Moran, 230 F.3d at

968)—it was saved from preemption as a law that regulates

insurance under 29 U.S.C. § 1144(b)(2)(A). Jd. at 969.

The court of appeals expressly noted that its decision

conflicted with the Fifth Circuit’s decision in Corporate

Health Ins., Inc. v. Texas Dep’t of Ins., 215 F.3d 526 (Sth

Cir. 2000) (holding that Texas’ external review statute was

preempted by ERISA because it established an “alternative

enforcement mechanism” to Section 502), on reh’g, 220 F.3d

641 (same), petition for cert. filed sub nom., Montemayor v.

Corporate Health Ins., Inc., No. 00-665 (Oct. 24, 2000)

(“Montemayor”). The court of appeals concluded, however,

that the Fifth Circuit had erred in holding that a state inde-

pendent review law “creates an alternative mechanism

through which plan members may seek benefits due them

under the terms of the plan,” Montemayor, 215 F.3d at 539.

According to the court of appeals, such statutes “simply add[]

to the contract, by operation of law,” and therefore a suit to

enforce them is nothing more than a suit “to enforce the

terms of the plan.” Jd. at 970; see also Moran, 230 F.3d at

971 (the “‘sole launching ground’ for Ms. Moran’s claims to

enforce § 4-10 * * * remains § 502(a)”) (quoting Ward, 526

U.S. at 377).

5. Judge Posner, joined by Judges Coffey, Easterbrook,

and Diane P. Wood, dissented from the denial of rehearing en

banc. Judge Posner characterized the panel’s decision as

“startling” and noted that Section 4-10 is plainly preempted

by ERISA because it “establishes a system of appellate re-

view of benefits decisions that is distinct from” Section

502(a) and thus “interferes with the federally specified sys-

tem for enforcing” plan benefits. 230 F.3d at 973-74. Judge

Posner also dismissed as a “fagon de parler” the panel’s view

that Section 4-10 somehow was incorporated into the terms

of Moran’s plan by operation of law. Jd. at 973. Not only

8

does that approach “invite[] states to evade [ERISA’s] pre-

emptive force * * * simply by deeming its regulations of

ERISA plans to be plan terms,” he observed, but it suffers

from a logical inconsistency: if the plan “merely regulates

insurance and therefore is not preempted,” it cannot “be part

of an ERISA plan and enforceable in federal court.” Jd. at

973-74.

Judge Posner also explained that the panel’s reliance on

Ward was misplaced because Ward saved from preemption a

state law that “was a typical regulation of insurance rather

than anything either special to ERISA plans or likely to be

mischievous in its impact on those plans.” 230 F.3d at 973.

Indeed, “[flar from being compelled by [Ward], the panel’s

opinion is in tension with Pegram v. Herdrich, 530 U.S. 211

(2000),” a decision which—unlike the panel’s—‘“did not

doubt that ERISA applied to HMO-managed ERISA plans.”

Id. Judge Posner cautioned that the panel’s decision would

“add[] heavy new procedural burdens to ERISA plans” and

“undermine[] the * * * federal uniformity in the administra-

tion” of employee benefit plans that ERISA was enacted to

ensure. Jd.

SUMMARY OF ARGUMENT

The judgment of the court of appeals cannot be recon-

ciled with the consistent course of this Court’s ERISA cases,

all of which make clear that the civil enforcement provisions

in ERISA § 502(a) are exclusive and preempt state laws that

purport to authorize alternative avenues of relief. Because

Section 4-10 unquestionably establishes an “alternative en-

forcement mechanism” (New York State Conference of Blue

Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S.

645, 658 (1995)) to the remedies provided in section 502(a),

it is preempted by ERISA §§ 502(a) and 514(a).

The court of appeals erred in concluding that Section 4-

10 is saved from preemption as a law regulating insurance.

In Pilot Life v. Dedeaux, 481 U.S. 41 (1987), this Court

unanimously held that state laws that establish alternative

enforcement mechanisms to section 502(a) do not constitute

9

laws that “regulate insurance” within the meaning of

ERISA’s saving clause. Pilot Life not only stands for the

proposition that Section 502 remedies preempt conflicting

state laws under conventional conflict preemption principles.

It made clear that the exclusivity of Section 502 remedies is

so important to ERISA’s design that it must inform judicial

interpretation of the scope of the business of “insurance” that

Congress intended to reserve for the States. Because “the

role of the saving clause in ERISA as a whole” demonstrates

that it was not intended to save state laws that purport to

“supplement[] or supplant{]” the exclusive remedies that

Congress made available in Section 502(a) (Pilot Life, 481

U.S. at 56), the alternative remedy provided by Section 4-10

cannot be saved under that provision.

In any event, Section 4-10 does not constitute a law that

insurance from “a common sense view of the mat-

ter” (UNUM Life Ins. Co. v. Ward, 526 U.S. 358, 367

(1999)), or as measured by the three McCarran-Ferguson Act

guideposts. Section 4-10 is not directed at insurance or the

insurance industry, but at HMOs. The law does not spread or

transfer risk, it is not integral to the policy relationship be-

tween an insurer and insured, and it does not affect only enti-

ties in the insurance industry. Whatever else it may be, Sec-

tion 4-10 is not a law that regulates insurance within the

meaning of ERISA’s saving clause. The judgment of the

court of appeals must be reversed.

ARGUMENT

ILLINOIS’ STATUTE IS CLEARLY PREEMPTED BY

ERISA BECAUSE IT CONFLICTS WITH SECTION

502(A) AND IS NOT SAVED FROM PREEMPTION

BY THE INSURANCE SAVING CLAUSE.

Illinois’ independent review requirements purport to es-

tablish a binding enforcement mechanism for claimants who

are dissatisfied with the health benefits provided by their

HMOs. Those requirements constitute precisely the sort of

alternative state law remedy that Congress intended to pre-

empt with Section 502(a)’s ive remedial scheme.

10

A. Illinois’ Statute Constitutes An Alternative

Enforcement Mechanism Preempted By Sec-

tions 502(a) And 514(a).

1. Section 514(a) of ERISA preempts State laws “inso-

far as they may now or hereafter relate to any employee

benefit plan.” 29 U.S.C. § 1144(a). Although this Court has

cautioned that “the term ‘relate to’ cannot be taken ‘to extend

to the furthest stretch of indeterminacy,’ or else ‘for all prac-

tical purposes pre-emption would never run its course,””

Egelhoff v. Egelhoff, 121 S. Ct. 1322, 1327 (2001) (quoting

Travelers, 514 U.S. at 655), this Court’s cases make clear

that state laws unquestionably are preempted to the extent

they purport to authorize “alternative enforcement mecha-

nisms” (Travelers, 514 U.S. at 658) to the exclusive remedial

provisions set forth in Section 502 of ERISA, 29 U.S.C.

§ 1132.

That principle was established in this Court’s unanimous

decision in Pilot Life, which held that state-law contract and

tort claims filed against an insurer for the “bad faith” denial

of certain disability benefits under an ERISA plan were pre-

empted by section 514(a). Pilot Life, 481 U.S. at 55-56. Al-

though the tort of “bad faith” had long been used to seek

damages for wrongful benefits denials, the Court concluded

that permitting such a cause of action would amount to giv-

ing plan beneficiaries an alternative enforcement mechanism

for contesting the denial of ERISA benefits. Jd. at 54, 57.

As the Court explained, any state-law cause of action that

amounts to such an alternative enforcement action is pre-

empted by ERISA, because Congress clearly intended for the

remedies set forth in ERISA § 502(a), 29 U.S.C. § 1132(a),

to be exclusive:

The six carefully integrated civil enforcement provi-

sions found in § 502(a) of the statute * * * provide

strong evidence that Congress did not intend to author-

ize other remedies that it simply forgot to incorporate

expressly.

11

Id. at 54 (emphasis in original). The Court explained that

Congress’ decision to make the remedial provisions of Sec-

tion 502(a) exclusive “would be completely undermined if

ERISA-plan participants and beneficiaries were free to obtain

[alternative] remedies under state law[.]” Jd.

On the same day it decided Pilot Life, this Court held

that the preemptive effect of ERISA’s civil enforcement pro-

visions is so strong and complete that an ERISA preemption

defense under section 502(a) provides a sufficient basis to

remove a state cause of action to a federal forum, notwith-

standing the traditional limitation imposed by the well-

pleaded complaint rule. See Metropolitan Life Ins. Co. v.

Taylor, 481 U.S. 58, 63-64 (1987). Like Pilot Life, Taylor

made clear that respect for the exclusivity of ERISA’s civil

enforcement scheme is essential “to ensure that plans and

plan sponsors [are] subject to a uniform body of benefits

law,” Travelers, 514 U.S. at 656, and that state laws that in-

terfere with that enforcement scheme—and especially state

laws that provide alternatives to it—are preempted by both

sections 514(a) and 502(a). Taylor, 481 U.S. at 64.

The Court reiterated and extended those principles in

Ingersoll-Rand v. McClendon, 498 U.S. 133 (1990). There,

the Court held that ERISA preempted a state wrongful dis-

charge cause of action predicated on an employee’s allega-

tion that he had been terminated to prevent his plan benefits

from vesting. Relying on Pilot Life and Taylor, the Court

concluded that McClendon’s claim was preempted by Sec-

tion 514(a) and ordinary “requirements of conflict pre-

emption,” because McClendon’s state-law claim purported

“to provide a remedy for the violation of a right expressly

guaranteed by [ERISA] and exclusively enforced by Section

502(a).” Id. at 144. The Court explained that “when it is

clear or may fairly be assumed that the activities which a

State purports to regulate are protected by * * * [ERISA],

due regard for the federal enactment requires that state juris-

diction must yield.’”” Jd. (quoting Lingle v. Norge Div. of

Magic Chef, Inc., 486 U.S. 399, 409 n.8 (1988)).

12

2. There can be no dispute that under those precedents

Section 4-10 constitutes an impermissible alternative state-

law remedy to recover plan benefits that goes beyond the ex-

clusive remedies set forth in Section 502(a). As Judge Pos-

ner recognized in his dissent from the denial of rehearing en

banc below, Illinois’ “law establishes a system of appellate

review of benefits decisions that is distinct from the provi-

sion in ERISA for suits in federal court to enforce entitle-

ments conferred by ERISA plans.” 230 F.3d at 973. The

Fifth Circuit in Montemayor also had little trouble conclud-

ing that Texas’ external review statute “establish{es} a quasi-

administrative procedure for the review of [benefits] de-

nial[s]” and thus “creates an alternative mechanism through

which plan members may seek benefits due them.” Monte-

mayor, 215 F.3d at 539.

The Seventh Circuit attempted to evade that conclusion

by treating Section 4-10 as a permissible “mandated contract

term” that became part of the ERISA plan—and thus en-

forceable in an action under Section 502(a)}—by operation of

state contract law. Moran, 230 F.3d at 969 (“[Illinois’} statu-

tory provisions enter into and form a part of all contracts of

insurance” in the State). In support of that characterization

of the state statute, the court of appeals cited Ward, which

held that California’s notice-prejudice rule was saved from

preemption as a law regulating insurance, and Metropolitan

Life Ins. Co. v. Massachusetts, 471 U.S. 724 (1985), which

held that a state law mandating mental health benefits was

not within ERISA’s preemptive reach. See 230 F.3d at 969-

70.

Neither Ward nor Metropolitan Life supports the propo-

sition that States may evade preemption under ERISA simply

by adopting a rule that purportedly incorporates state statutes

into any benefits plan “by operation of law.” Metropolitan

Life involved a mandated benefit—a substantive coverage

requirement—not any remedy beyond those enumerated in

ERISA § 502, and the Court did not advert to any Massachu-

contracts “by operation of law” or otherwise. See 471 U.S. at

13

741. Although Ward did state that the notice-prejudice rule

“effectively create[d] a mandatory contract term” (Ward, 526

U.S. at 374) (emphasis added), it did not base that conclusion

on the existence of any California doctrine requiring the in-

corporation of state insurance laws into insurance contracts.

Read in context, that statement merely reflected the Court’s

conclusion that because the state law was saved from pre-

emption, it was “effectively” binding on the plan. Jd. at 375-

76.

At most, Ward and Metropolitan Life stand for the

proposition that a state-law requirement may “effectively”

(Ward, 526 U.S. at 374) be considered a term of an ERISA

plan if it does not otherwise conflict with ERISA’s substan-

tive provisions or stand as an obstacle to the accomplishment

of ERISA’s objectives. Neither decision, however, purports

to establish a principle that would permit States to enact al-

ternative enforcement mechanisms to Section 502(a) simply

by deeming those mechanisms to be provisions of the plan.

Indeed, the panel’s logic would permit the “transparent * * *

evasion of ERISA’s preemption clause,” Moran, 230 F.3d at

972-74 (Posner, J., dissenting from denial of reh’g en banc),

because States could evade Section 514(a)’s preemptive

reach entirely through the simple artifice of declaring their

laws “incorporated” into plan documents. By that logic, a

state law that required all coverage determinations to be re-

viewed by a state “board of HMO review,” or a state law that

purported to require HMOs to pay subscribers compensatory

and punitive damages in the event an “independent reviewer”

determined the plan had denied coverage in “bad faith,”

would be saved from preemption, because a suit to enforce

those requirements would not be an impermissible “alterna-

tive enforcement mechanism” (Travelers, 514 U.S. at 658),

but rather a suit “to enforce rights and to recover benefits un-

der the plan.” Moran, 230 F.3d at 971 (emphasis added).

Ward's description of the notice-prejudice rule as a “man-

dated contract term” simply cannot be stretched so far as to

stand for a rule of law that would completely eviscerate

ERISA preemption whenever States deem preemption incon-

14

venient. See Citizens Bank of Maryland v. Strumpf, 516 U.S.

16, 20 (1995) (“It is an elementary rule of construction that

the act cannot be held to destroy itself.”)°

Moreover, the Seventh Circuit’s “mandated contract

term” analysis is inconsistent with Jngersoll-Rand, which

makes clear that a state law must be viewed as an impermis-

sible alternative enforcement mechanism whenever it “pur-

ports to provide a remedy for the violation of a right ex-

pressly guaranteed by [ERISA’s substantive provisions]”

(Ingersoll-Rand, 498 U.S. at 145), and with Firestone Tire &

Rubber Co. v. Bruch, 489 U.S. 101 (1989), which holds that

federal courts must give deferential review to benefits deter-

minations whenever plan documents give administrators dis-

cretionary authority over those determinations, id. at 110-15.

Respondent’s cause of action under Section 4-10 seeks re-

covery of no more (and no less) than the benefit to which she

is entitled under her plan: coverage for “medically neces-

sary” care. Section 4-10, however, essentially eliminates

“the broadest possible discretion” that plan documents ex-

pressly confer on Rush, and thus the statute compels federal

courts simply to enforce, without further inquiry, the judg-

ment of the state-law “reviewer.” There can be no doubt that

Section 4-10 is not a “mandated contract term,” but an alter-

native “launching ground for an ERISA enforcement action.”

Ward, 526 U.S. at 377.4

3 Under the panel’s analysis, whether state external review statutes

constitute “alternative enforcement mechanisms” will apparently depend

entirely on the vagaries of state contract law. For example, under Texas

law, which was at issue in Montemayor, not every law is incorporated

into every contract of insurance. See Jun v. Lloyds, No. 37 S.W.3d 59

(Tex. App.—Austin, 2000, pet. denied).

4 The Secretary of Labor recently promulgated regulations pursuant to

Section 503. See 65 Fed. Reg. 70246 (November 21, 2000) (eff. January

20, 2001) (applicable to claims filed on or after July 1, 2002 but not later

than January 1, 2003 (see Claims Procedure; Notice of Extension of Ap-

plicability Date, 66 Fed. Reg. 35885 (July 9, 2001)). Although the new

claims processing procedures prescribed by the new regulations do not

purport to preempt State “external review” laws, those regulations none-

15

3. Illinois’ external review statute not only creates an al-

ternative enforcement mechanism forbidden by Pilot Life and

its progeny, but also would, if permitted to survive ERISA

preemption, frustrate Congress’ aim of “avoid[ing] a multi-

plicity of regulation in order to permit the nationally uniform

administration of employee benefit plans.” Travelers, 514

U.S. at 657. As this Court explained in Fort Halifax Packing

Co. v. Coyne, 482 U.S. 1 (1987):

An employer that makes a commitment systematically to

pay certain benefits undertakes a host of obligations,

such as determining the eligibility of claimants * * *

[and] making disbursements * * * The most efficient

way to meet these responsibilities is to establish a uni-

form administrative scheme, which provides a set of

standard procedures to guide processing of claims and

disbursement of benefits. Such a system is difficult to

achieve, however, if a benefit plan is subject to differing

regulatory requirements in differing States. A plan

would be required to * * * process claims in a certain

way in some States but not in others * * *

Id. at 9.

[Footnote continued from previous page]

theless make clear that the Secretary does not share the Seventh Circuit’s

view that external review laws are simply mandated plan terms. See 29

C.F.R. §§ 2950(k)\i)-{ii). That is because the regulations provide that a

beneficiary need not exhaust remedies under those State laws before initi-

ating a suit for benefits under Section 502. See id. Given the well-settled

rule requiring plan beneficiaries to exhaust their plan remedies before

initiating suit under Section 502 (see Ravencraft v. UNUM Life Ins. Co.

of Am., 212 F.3d 341, 343 (6th Cir. 2000), the Secretary of Labor obvi-

ously believes that State external review requirements cannot reasonably

be viewed as an additional plan remedy, but rather amount to alternative

enforcement mechanisms. See 65 Fed. Reg. at 70254 (“[I]n the Depart-

ment’s view, th{ose] [State laws] are not part of the claims procedures

contemplated by Section 503 of the Act, but are ‘external reviews’ that

are beyond the scope of the regulation.”).

16

Validation of Illinois’ external review law or similar laws

enacted by other States would clearly frustrate Congress’

goal of “secur[ing] national uniformity in the administration

of employee benefit plans,” Boggs v. Boggs, 520 U.S. 833,

842 (1997), because plan administrators would be required to

make benefits determinations—a central concern of

ERISA—under statutory regimes that not only vary from one

state to the next, but also potentially subject administrators to

overlapping or inconsistent external review requirements.

Indeed, several states—California, Maryland, and Virginia,

for example—apparently would apply their external review

procedures to any contract concluded in their state, even if

that contract governs the availability of benefits to subscrib-

ers that may reside (and receive medical treatment) else-

where, and even if the state where the subscriber resides has

adopted some other approach to external review.° A result

more antithetical to Congress’ policy could scarcely be imag-

ined.

5 Compare MD. CODE ANN. § 15-10A-01.1 (external review process

“applies to a health benefit plan that: (1) is delivered or issued in the

State; or (2) covers individuals who reside or work in the State * * *”);

CAL. HEALTH & SAFETY CODE § 1374.30(3) (external review require-

ments apply to “[e]very health care service plan contract that is issued,

amended, renewed, or delivered in this state on or after January 1, 2000”)

(emphasis added); VA. CODE ANN. §§ 38.2-5901(A), 32.1-137.7 (inde-

pendent review provisions apply to “a subscriber [or] policyholder

* * * under a policy or contract issued or issued for delivery in Virginia

by a managed care health insurance plan”) (emphasis added); with Az.

STAT. § 20-2531 (“[T]his article applies to all utilization review decisions

made by * * * health care insurers operating in this state”); KAN. STAT.

ANN. § 40-22a04 (external review provisions apply to “utilization review

services in this state or affecting residents of this state”).

17

B. Illinois’ Statute Is Not Saved From Preemp-

tion By The Insurance Saving Clause, Be-

cause Alternative Enforcement Mechanisms

To Section 502(a) Are Not Laws That Regu-

late Insurance.

The conclusion that Section 4-10 constitutes an “alterna-

tive enforcement mechanism” to Section 502 forecloses re-

spondent’s claim that Section 4-10 is saved from preemption

under ERISA’s “saving” clause, 29 U.S.C. § 1144(b)(2)(A).

In Pilot Life, this Court unanimously held not only that the

remedies set forth in Section 502 were intended to be exclu-

sive and thus preemptive of conflicting state laws under ordi-

nary conflict preemption principles. It also held that the ex-

clusivity of Section 502 informed interpretation of the “sav-

ing” clause. See 481 U.S. at 52. Indeed, the Court explained

that Section 502(a)’s exclusive remedial scheme was the

“most important[]” factor indicating that the state law was

not the business of “insurance” that Congress intended to

preserve for State regulation. Pilot Life, 481 U.S. at 52. Pi-

lot Life thus stands for the proposition that the insurance sav-

ing clause will not save from preemption state laws that

“supplement[] or supplant[]” the exclusive remedies that

Congress made available under Section 502(a). Jd. at 56.

1. Respondent contends, however, that Illinois’ law

should be invalidated under the saving clause only if “it

would be impossible to comply with the state * * * regulation

and ERISA” (Resp. Br. Opp. at 8). Respondent places pri- —

mary reliance on the statement in Metropolitan Life Ins. Co.

v. Massachusetts, 471 U.S. 724 (1985), “declin[ing] to im-

6 Respondent's argument is similar to the position taken by the United

States in Ward. There, the Solicitor General suggested that ERISA’s sav-

ing clause may save from preemption state insurance laws that conflict

with the exclusive remedies provided by Section 502 of ERISA—even

though his reasoning to the contrary had been adopted by a unanimous

Court in Pilot Life (see Pilot Life, 481 U.S. at 52). See Br. of United

States as Amicus Curiae in Ward, No. 97-1868 (filed November 1998), at

22-25.

18

pose any limitation on the saving clause beyond those Con-

gress imposed in the clause itself.” Jd. at 746. Respondent

reads that statement as requiring the Court to “[give] effect to

the facially unrestricted scope of the insurance savings

clause.” See Resp. Br. in Opp. at 8. But as the Court ex-

pressly recognized in Pilot Life, “Metropolitan Life * * * did

not involve a state law that conflicted with a substantive

provision of ERISA.” Pilot Life, 481 U.S. at 57 (emphasis

added). Because Section 4-10 does conflict directly with the

exclusivity of the remedies provided by Section 502(a), it is

clearly preempted, by virtue of Pilot Life, even under respon-

dent’s own “conflict” test.

In any event, respondent is wrong to suggest that Section

4-10 is not preempted unless it makes “compliance with both

state and federal law * * * impossible,” California v. ARC

America Corp., 490 U.S. 93, 100 (1989). As this Court has

recognized repeatedly since Pilot Life was decided, ERISA’s

preemptive reach extends to state laws—and even to state

insurance laws—that stand as an obstacle to accomplishment

of ERISA’s objectives. See John Hancock Mut. Life Ins. Co.

v. Harris Trust & Sav. Bank, 510 U.S. 86, 99 (1993) (“where

[state insurance] law stands as an obstacle to the accom-

plishment of the full purposes and objectives of Congress,

federal preemption occurs”); see also Boggs, 520 U.S. at 844

(“Conventional conflict pre-emption principles require pre-

emption where compliance with both federal and state regu-

lations is a physical impossibility, * * * or where state law

stands as an obstacle to the accomplishment and execution of

the full purposes and objectives of Congress.”).

Moreover, whatever force the arguments advanced by

respondent here (and the Solicitor General in Ward) may

have, those arguments are plainly insufficient to justify re-

consideration of Pilot Life’s holding that Section 502(a) pre-

empts all state statutes that establish alternative enforcement

mechanisms to Section 502(a), including those that would

otherwise fall within the saving clause if Section 502(a) did

not inform the scope of “insurance” that Congress intended

to reserve for the States. This Court has recognized the high

19

burden that must be “borne by the party advocating the aban-

donment of an:established precedent,” especially where, as

here, “the Court [may be] asked to overrule a point of statu-

tory cor striction.” Patterson v. McLean Credit Union, 491

U.S. 164, 172 (1989). That burden simply has not and can-

not be met here.

None of the factors historically regarded as necessary to

overturn a settled statutory interpretation is present here.

There has been no “intervening development of the law”

(Patterson, 491 U.S. at 173), casting doubt on that (or any)

aspect of Pilot Life’s holding. To the contrary, the Court has

repeatedly reaffirmed Pilot Life in a variety of contexts. See

Ingersoll-Rand, 498 U.S. at 135; Taylor, 481 U.S. at 62-63.

Nor has the rule of Pilot Life constituted an “obstacle” to im-

portant federal purposes or proved “inconsistent with the

sense -of justice or with the social welfare.” Patterson, 491

U.S. at 174. Quite to the contrary, the number of employee

welfare benefit plans has exploded in recent years, extending

pension, disability, and health care coverage to more workers

than ever before, largely, if not primarily, because of the cer-

tainty and predictability effected by this Court’s holding in

Pilot Life. See Paul Fronstin, Employment-Based Health

Benefits: Trends and Outlook, Issue Brief No. 233, Em-

ployee Benefit Research Institute (May 2001) (noting sharp

increase in number of employees covered by employer-

sponsored health plans since 1994); U.S. DeEp’T OF

COMMERCE, BUREAU OF THE CENSUS, STATISTICAL

ABSTRACT OF THE UNITED STATES at 383, 535 (115th ed.

1995) (noting rapid growth of employee welfare benefit

plans). Employers who adopted welfare benefit plans did so

on the understanding that “the regulation of employee wel-

fare benefit plans [w]as exclusively a federal concern.”

Travelers, 514 U.S. at 656; see also Alessi v. Raybestos-

Manhattan, Inc., 451 U.S. 504, 523 (1981). To unsettle those

expectations by revisiting Pilot Life at this late date could

scarcely fail “to deter some employers from offering health

insurance at all.” Moran, 230 F.3d at 973-74 (Posner, J., dis-

senting from denial of reh’g en banc.); see also Fort Halifax,

20

482 U.S. at 11 (marrowly construing ERISA’s preemptive

effect could cause “those employers with existing plans to

reduce benefits, and those without such plans to refrain from

adopting them”).

Moreover, the interest in stability and predictability in

the law strongly counsels against revisiting any aspect of Pi-

lot Life. This Court has recognized that issues of ERISA

preemption have “generated an avalanche of litigation in the

lower courts.” De Buono v. NYSA-ILA Medical and Clinical

Serv. Fund, 520 U.S. 806, 808 n.1 (1997). The Court itself

has decided 18 cases (the Court identified 16 in De Buono

and since then has decided Egelhoff and Ward), and several

of those were split and deeply fractured opinions. See, e.g.,

Boggs, 520 U.S. at 833, 854; Mackey v. Lanier Collection

Agency & Serv., Inc., 486 U.S. 825, 841 (1988); Fort Hali-

fax, 482 U.S. at 1, 22. This Court’s unanimous opinions in

Pilot Life, Ingersoll-Rand, and Taylor speak with an unmis-

takable clarity that over the long run has redounded to the

benefit of plan participants and administrators alike. No

compelling reason exists to revisit what has become a corner-

stone—and perhaps the only clear, unambiguous rule—of

this Court’s ERISA jurisprudence. Section 4-10 constitutes

an alternative enforcement mechanism and is accordingly

preempted under Pilot Life, whether or not it otherwise might

be said to regulate “insurance” under the alternative—and

untested—world-view championed by respondent and the

State in this case.

C. In Any Event, Illinois’ Statute Does Not

Regulate Insurance As A Common Sense

Matter Or As Measured Under The Three

McCarran-Ferguson Guideposts.

In any event, respondent’s contention that Section 4-10

is a law regulating insurance within the meaning of ERISA’s

saving clause is meritless on its own terms. Section 4-10 is a

regulation of HMOs, not insurance, and it expressly regulates

HMOs when they are acting in purely administrative capaci-

ties. Thus, even assuming arguendo that in some circum-

21

stances a state law alternative remedy might escape Pilot

Life’s preemptive reach, Section 4-10 is not saved from pre-

emption here.

1. This Court’s decisions in Ward and Metropolitan Life

establish a framework for determining whether a law regu-

lates insurance within the meaning of the saving clause.

First, the court must determine “whether, from a ‘common-

sense view of the matter,’ the contested prescription regulates

insurance.” Ward, 526 U.S. at 367 (quoting Metropolitan

Life, 471 U.S. at 740). The court next must consider “three

factors employed to determine whether the regulation fits

within the ‘business of insurance’ as that phrase is used in the

McCarran-Ferguson Act.” Ward, 526 U.S. at 367. Those

factors are “first, whether the practice has the effect of trans-

ferring or spreading a policyholder’s risk; second, whether

the practice is an integral part of the policy relationship be-

tween the insurer and insured; and third, whether the practice

is limited to entities within the insurance industry.” Ward,

526 U.S. at 367; Metropolitan Life, 471 U.S. at 743.

The court of appeals erred in concluding that Section 4-

10 regulates insurance from a “common-sense view of the

matter.” The court of appeals believed that Section 4-10 “is

directed at the HMO industry as insurers.” Moran, 230 F.3d

at 969 (emphasis added). That conclusion, however, is belied

by the definition of “HMO” in the Illinois Act, which in-

cludes any organization that performs services as part of any

arrangement “which causes any part of the risk of health care

delivery to be borne by the organization or its providers.”

215 ILL. Comp. STAT. 125/1-2(9) (emphasis added). That

definition covers not only HMOs that fully insure the risk of

health care delivery, but also applies to HMOs that perform

purely administrative services for self-funded plans, a fact

that destroys any attempt by the State to rely on the saving

clause under this Court’s precedents. See FMC Corp. v.

22

Holliday, 498 U.S. 52, 61 (1990) (discussing “Goomer

clause).’

For example, when HMOs contract to provide purely

administrative services to self-funded plans, they frequently

provide plan subscribers with access to networks of physi-

cians credentialed by, and affiliated with, the HMO. HMOs

contract with those physician networks in a multiplicity of

forms, including “staff model,” “group model,” and “IPA

model” arrangements.’ Several of those arrangements in-

volve payments to physicians on a “capitated” basis—i.e., an

agreement to pay physicians “[a] set amount of money * * *

7 Texas’ independent review statute also applies to HMOs that perform

purely administrative services for self-funded plans. See TEX. INS. CODE

ANN. art. 21.58, §§ 2(17)(B) and (C), 2(21)(B), 6 and 6A (independent

review requirements apply to “any * * * person or entity which * * * ad-

ministers * * * health benefits * * * pursuant to a policy, plan, or con-

tract”) (emphasis added).

8 In a “staff model,” the HMO “directly employs staff physicians and

compensates them as salaried employees.” Diana J. Bearden & Bryan J.

Maedgen, Emerging Theories Of Liability In The Managed Care Indus-

try, 47 Baylor L. Rev. 285, 292 (1995). The physicians are employees of

the plan and make coverage decisions on behalf of the plan. The HMO at

issue in Pegram was a “staff model” HMO. See Pegram, 530 U.S. at

215-17.

In a “group model,” the HMO “contracts with a group of physicians

(typically an incorporated group practice), rather than individual physi-

cians, to devote all or much of its time to providing care to HMO mem-

bers at the group’s clinic and facilities for a fixed monthly fee per cov-

ered individual.” Bearden & Maedgen, supra, 47 Baylor L. Rev. at 292-

93. “The fixed per-member monthly fee is * * * referred to as a ‘capita-

tion rate.”” Jd. at 293.

In an “IPA model,” the HMO “contracts with an independent prac-

tice association, which is usually a partnership or corporation comprised

of various independent practicing physicians. The association, in turn,

contracts directly with each of its independent physicians with respect to

terms and conditions of participation, including the method of payment.”

Id. The HMO “pays the IPA a specified capitation amount and the IPA,

in turn, pays the participating physicians on a fee-for-service” or capi-

tated basis. /d.

23

based on membership [numbers] rather than on services de-

livered.” Peter R. Kongstvedt (ed.), THE MANAGED HEALTH

CARE HANDBOOK at 988 (3d ed. 1996). Regardless of the

quantity of services provided, therefore, the physicians’

compensation is fixed, and thus the providers—not the

HMO—bear “part” of “the risk of health care delivery” under

the plain terms of the Illinois’ statute. See Frank T. Herd-

man, Doctors, Insurers, And The Antitrust Laws, 37 Buffalo

L. Rev. 789, 807 (1988-89) (“The primary benefit of a

capitation system to an HMO is that the risk of providing

health services is no longer borne by the HMO.”) Thus, al-

though the HMO’s purely administrative arrangement with

the self-funded plan has the effect of transferring “the risk of

health care delivery to * * * providers” (215 ILL. Comp.

STAT. 125/1-2(9)), the HMO itself does not assume any

risk—the sine qua non of the “insurance” business, see

Group Life & Health Ins. Co. v. Royal Drug Co. Inc., 440

U.S. 205, 212 (1979) (“Royal Drug”).? The court of appeals’

conclusion that Section 4-10 is aimed “directly at HMOs as

insurers” (Moran, 230 F.3d at 969) (emphasis added)

therefore is manifestly erroneous under the plain terms of the

State’s statute.

The conclusion that Section 4-10 does not regulate in-

surance from a “common-sense view of the matter” finds fur-

ther support in the history of the regulation of prepaid health

plans. In Metropolitan Life, the Court upheld the state-

9 See generally Herdman, supra, 37 Buffalo L. Rev. at 806-17 (ex-

plaining that risk is ordinarily borne by providers in products offered by

HMOs to employers). This Court has noted the difference between tradi-

tional indemnity insurance plans and HMOs in this regard. See Arizona

v. Maricopa County Medical Soc'y, 457 U.S. 332, 339 n.7 (1982) (“An

alternative to the fee-for-service type of insurance plan is illustrated by

the health maintenance organizations authorized under the Health Main-

tenance Organization Act of 1973 * * * * Under this form of prepaid

health plan, the consumer pays a fixed periodic fee to a functionally inte-

grated group of doctors in exchange for the group’s agreement to provide

any medical treatment that the subscriber might need. The economic risk

is thus borne by the doctors.”) (emphasis added).

24

mandated benefit law at issue in large part on the ground that

it had been historically regarded as a traditional insurance

law. 471 U.S. at 742-43. That is ae ee

respect to prepaid health arrangements, as HMOs.

Royal Drug, the Court recognized that States that regulated

prepaid health-service plans at the time the McCarran-

Ferguson Act was enacted “either exempted them from the

requirements of the state insurance code or provided that they

shall not be construed as being engaged in the ‘business of

insurance’ under state law.” 440 U.S. at 226 (quotation and

citation omitted).!° That fact is significant, for as this Court

recognized in Metropolitan Life, “[t}he saving clause and

McCarran-Ferguson Act serve the same federal policy and

utilize similar language to define what is left to the States.”

471 U.S. at 744 n.21. The contemporary understanding that

prepaid health plans “were not engaged in providing insur-

ance” (Royal Drug, 440 U.S. at 227) is highly significant in

ascertaining whether Congress intended to reserve regulation

of all HMO activities to the States.!!

10 “Advance-payment” health plans such as Blue Cross & Blue Shield,

which contracted with subscribers to arrange for health services and hos-

pital care on a prepaid basis (and which compensated physicians at nego-

tiated rates), were the non-profit precursors to the modern for-profit

HMO. See generally Robert 1. Cunningham et a/., THE BLUES: A

HISTORY OF THE BLUE CROSS AND BLUE SHIELD SYSTEM at 7-21, 210

(1997); Donald R. Levy (ed), 2001 StaTe By STATE GuiDE To

MANAGED CARE (2001) at 1-3 (“A health maintenance organization is

defined as a health plan that offers prepaid, comprehensive health cover-

age for both hospital and physician services.”).

11 Indeed, only one year before it enacted ERISA, the 93d Congress

enacted the Health Maintenance Organization Act of 1973, Pub. L. No.

93-222, codified at 42 U.S.C. §300¢e et seq., to establish requirements for

the administration and management of federally-qualified HMOs—a sub-

that Congress understood the regulation of HMOs to be the type of tradi-

tional regulation of “insurance” that Congress intended to reserve to the

States. As two commentators have observed: “The purpose of the 1973

Act was to prevent state laws from impeding the development of HMOs.

In particular, Congress was concerned that local physicians’ political

25

Finally, the conclusion that external review statutes such

as Section 4-10 are not directed at the business of insurance

is further cemented by examination of the circumstances in

which those statutes have been enacted. As Judge Posner

recognized, external review statutes constitute state legisla-

tive responses “to the recent torrent of criticisms of HMOs.”

Moran, 230 F.3d at 974 (Posner, J., dissenting from denial of

reh’g en banc). Because HMOs are “the service providers

under a great many ERISA medical-benefits plans” (id. at

973), including countless self-funded plans that could not be

reached by the States under any conceivable interpretation of

ERISA, see FMC Corp., 498 U.S. at 63, the problem the

States purported to address was by definition not “grounded

in policy concerns specific to the insurance industry.” Ward,

526 U.S. at 372.

All of these considerations point to the conclusion that

the Illinois external review statute does not regulate insur-

ance from a “common-sense view of the matter.” Ward, 526

U.S. at 367. “A common sense view of the word ‘regulates’

[means] * * * that in order to regulate insurance, a law must

not just have an impact on the insurance industry, but must

be specifically directed toward that industry.” Pilot Life, 481

" [Foomote continued from previous page]

clout with state regulators would prevent HMOs from developing as a

more efficient means of delivering quality health care.” Jeffrey W.

Stempel & Nadia von Magdenko, Doctors, HMOs, ERISA, And The Pub-

lic Interest After Pegram v. Herdrich, 36 Tort & Ins. LJ. 687, 734 n. 96

(2001) (emphasis added). The Senate Report to the bill that was ulti-

mately enacted states unequivocally that “[iJn the committee’s view

HMOs * * * should not be required to submit to regulations as an insurer

of health care services * * * * Such requirements would be unduly

restrictive, onerous, and not within the spirit of this legislation * * * * ”

S. Rep. 93-129 reprinted in 1973 U.S.CA.A.N. 3033, 3058 (1973).

Indeed, the Report identifies “applicable state insurance laws and regula-

tions” as one of the “[p]rincipal state legal barriers * * * to the develop-

ment of HMOs.” See id.; see also Pegram, 530 U.S. at 233 (“The fact is

that for over 27 years the Congress of the United States has promoted the

formation of HMO practices.”).

26

U.S. at 50 (emphasis added). Section 4-10 does not remotely

satisfy that standard. !2

2. At the petition stage, respondent contended that Sec-

tion 4-10 was properly construed as a law regulating insur-

ance under a “common sense review of the issue” because

nothing would prevent an ERISA plan from voluntarily

adopting an identical external review provision itself. See

Br. in Opp. at 7. According to respondent, “if a plan can

voluntarily purchase insurance with an independent review

provision, then a state, via the insurance regulation exception

to ERISA preemption, can require it.” Jd. That theory can

scarcely be used to uphold state external review statutes,

whose distinguishing characteristic is that strangers to the

plan—who are not fiduciaries and who frequently are

shielded from any legal liability for their actions—make

judgments about how plan assets must be spent that are bind-

ing on plan administrators.

12 The court of appeals concluded that Section 4-10 regulates insurance

as a common-sense matter by adverting to a precedent holding that

HMOs “‘are insurance vehicles under Illinois law.” Moran, 230 F.3d at

969 (quoting Anderson v. Humana, Inc., 24 F.3d 889, 892 (7th Cir.

1994)). This Court has on occasion expressed reluctance to “disturb an

appeals court’s judgment * * * heavily dependent on analysis of state

law.” Ward, 526 U.S. at 368 (citing Runyon v. McCrary, 427 U.S. 160,

181-82 (1976)). That principle, however, applies only where the “District

Court and Court of Appeals have concurred” on the state law’s meaning

(Runyon, 427 U.S. at 181; see also Bishop v. Wood, 426 U.S. 341, 346

(1976) (same)), which is not the case here. In any event, whether Section

4-10 is a law that “regulates insurance” under ERISA’s saving clause is

plainly governed by federal law. See 29 U.S.C. § 1144(b)(2)(A). The

subsidiary judgments necessary to interpret that provision also present

federal, not state, questions. See SEC v. Variable Annuity Life Ins. Co. of

Am., 359 U.S. 65, 69 (1959) (“the meaning of ‘insurance’ under * * *

Federal Acts is a federal question”). Indeed, it is far from clear why a

court of appeals’ judgment on a matter of “common sense” is entitled to _

deference, particularly where, as here, that judgment does not depend on

an interpretation of a state’s law, but on an assessment of its effect.

27

Contrary to respondent’s suggestion, there are substan-

tial limits on the authority of a plan administrator to delegate

final claims-processing authority to an outside party not

bound by fiduciary duties. Any such delegation would likely

violate the express terms of Section 503, which requires

every employee benefit plan to “afford a reasonable opportu-

nity to any participant whose claim for benefits has been de-

nied a full and fair review by the appropriate named fiduci-

ary of the decision denying the claim.” 29 U.S.C. § 1133(2)

(emphasis added). In addition, the delegation of claims proc-

essing to a party not bound by fiduciary duties is itself likely

to constitute a breach of fiduciary duty by the plan adminis-

trator. Claims processing is a fiduciary function. See Susan

P. Serota, ERISA FIDUCIARY LAW 152-53 (1995) (collecting

cases). A plan administrator necessarily abdicates its statuto-

rily-mandated fiduciary duty to review claims fully and fairly

when it delegates final claims-processing authority to a non-

fiduciary. Benefit determinations conducted pursuant to such

a delegation are in all likelihood invalid, because “no discre-

tion w[ill have been] exercised by the body given that author-

ity under the terms of the Plan.” Nelson v. EG&G Energy

Meas. Group, Inc., 37 F.3d 1384, 1388 (9th Cir. 1994).!5

13 Although Moran also argued in the court of appeals that external

review statutes might be upheld as a form of permissible “arbitration,”

see Br. of Plaintiff-Appellant Moran at 21-22, her argument ignores that

Congress, by statute, has adopted a strong policy in favor of voluntary

arbitration, and also specified the consequences of such an agreement, the

available methods for enforcement, and the appropriate standards for ju-

dicial review. Under Congress’ scheme, arbitration conducted pursuant

to the Federal Arbitration Act, 9 U.S.C § | ef seq., is not an alternative

enforcement mechanism to Section 502, but a federally-sanctioned substi-

tute for it. See Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc.,

473 U.S. 614, 628 (1985). Given that “[w]ithout the FAA’s strong policy

in favor of arbitration to tip the scales, an ERISA plaintiff might * * *

show that an ERISA-governed plan’s arbitration clause is unenforceable

because it conflicts with statutory provisions or regulations governing the

judicial review of benefits determinations under ERISA” (Chappel v.

Laboratory Corp. of Am., 232 F.3d 719, 725 n.4 (9th Cir. 2000)), it fol-

28

Indeed, even if delegation of claims-processing authority

to a non-fiduciary were proper in some circumstances, the

plan administrator would be required to monitor and super-

vise the delegatee’s conduct, see 29 U.S.C.

§ 1105(c)2)A)iii)—a duty that would be impossible to

execute given that plan administrators have no discretion to

review or set aside an external reviewer’s benefits determina-

tion. Thus, respondent’s claim that Section 4-10 is an insur-

ance law because plan administrators can adopt external re-

view on their own is premised on an erroneous assumption:

ERISA’s fiduciary requirements would prevent the plan ad-

ministrator from abdicating his authority to a third party, not

bound by fiduciary duties, whose decisions about how plan

assets will be spent are binding on the administrator. '4

3. Nor does Section 4-10 satisfy any of the three McCar-

ran-Ferguson Act factors. Section 4-10 does not meet the

first McCarran-Ferguson factor because external review does

not transfer or spread a policyholder’s risk. In Union Labor

[Footnote continued from previous page]

lows a fortiori that state independent review statutes, which lack any fed-

eral mandate, and which are imposed by operation of law on unwilling

parties, cannot evade invalidation as alternative enforcement mechanisms

to Section 502.

14 It is ne-response to suggest that this Court might solve the problem

with respondent’s theory by decreeing that the external reviewers will

become subject to fiduciary duties by operation of law. Virtually all state

independent review laws provide essentially blanket immunity to inde-

pendent reviewers for claims arising out of their independent review ser-

vices. See, e.g., 215 IL Comp. STAT. 134/45(f(6); 28 N.Y. INS. LAW

§ 4914(c); TEXAS INS. CODE Art. 21.58C § 2(g); VA. CODE ANN. § 38.2-

5902(C). If this Court were to mandate that all independent reviewers be

treated as plan fiduciaries, it also would be required to invalidate the pro-

visions that immunize those presumed “fiduciaries” from civil liability, at

least to the extent necessary to subject them to suit under ERISA’s reme-

dial scheme. It hardly needs stating that this Court should not invalidate

____ one state law to save another, especially where neither law might have

passed if the state legislature had labored under a correct apprehension of

federal requirements.

29

Life Ins. Co. v. Pireno, 458 U.S. 119 (1982), this Court held

that a peer review committee’s examination of whether

medical care provided to an insured is reasonably charged

and medically necessary does not “spread{] and underwrit[e]

* * * a policyholder’s risk.” Jd. at 130. As this Court recog-

nized, risk is allocated when the insurance contract is exe-

cuted, not when particular claims are adjusted. Jd. Like the

external review mechanism at issue in Pireno, the independ-

ent review authorized by Section 4-10 is “logically and tem-

porally unconnected to the transfer of risk accomplished by”

its subscriber contracts, even if those contracts otherwise

could be viewed as “insurance.” Jd. The first McCarran-

Ferguson factor therefore is not satisfied.!>

Nor is Section 4-10 an “integral part of the policy

relationship between insurer and insured” (Pireno, 458 U.S.

at 131)}—the second factor. External claims review

procedures do not “so closely affect{] the reliability,

interpretation, and enforcement of the insurance contract

* * * as to fall within the [business of insurance],” because

external review “is a separate arrangement * * * [with] third

parties not engaged in the business of insurance,” even if, as

was true in Pireno, the insurer uses the peer review system

“as an aid in its [claims] decisionmaking.” Jd. at 130-32. As

this Court recognized in Department of Treasury v. Fabe,

508 U.S. 491, 503 (1993), such mechanisms have “nothing to

do with whether the insurance contract [is] performed; [they]

deal only with calculating what flalls] within the scope of the

contract’s coverage”—i.e., precisely what federal courts are

!5 The court of appeals did not address whether Section 4-10 spreads or

transfers a subscriber’s risk, even though that factor constitutes the “one

‘indispensable characteristic of insurance.” Pireno, 458 U.S. at 130

(quoting Royal Drug, 440 U.S. at 212); see also Variable Annuity Life

Ins. Co., 359 U.S. at 71 (“the concept of ‘insurance’ involves some in-

vestment risk-taking on the part of the company”). The Fifth Circuit in

Montemayor recognized that Texas’ independent review provisions

“probably do not * * * reallocat[e} the risk between the insured and in-

surer.” 215 F.3d at 538.

30

called upon to decide under ERISA § 502(a). The second

McCarran-Ferguson factor therefore is not satisfied.

Finally, Section 4-10 is not aimed directly at the insur-

ance industry. The statute applies to HMOs, including those

that perform purely administrative functions for self-funded

plans. Because on its face Section 4-10 is not “limited to en-

tities within the insurance industry” and is not “a law govern-

ing the insurance relationship distinctively” (Ward, 526 U.S.

at 375), the third McCarran-Ferguson factor is not satisfied.

D. Summary Judgment For Respondent Was

Improper.

Thus, the court of appeals erred in granting summary

judgment to Moran. Section 4-10 constitutes an alternative

enforcement mechanism to Section 502 and in any event

does not “regulate insurance” from a common-sense view of

the matter or satisfy any of the three McCarran-Ferguson fac-

tors. Accordingly, it is preempted by Section 502(a) and

514(a) and is not saved from preemption under the saving -

clause. Rush therefore was not obliged to comply with the

independent reviewer’s determination that Dr. Terzis’ sur-

gery was “medically necessary,” and its rejection of Moran’s

benefits claim was not otherwise an abuse of discretion. See

Firestone Tire & Rubber Co., 489 U.S. at 107.

CONCLUSION

For the foregoing reasons, the judgment of the court of

appeals should be reversed.

Respectfully submitted.

September 10, 2001