Amicus Curiae Brief — Kentucky Assn. of Health Plans, Inc. v. Miller

No. 00-1471

—

i

NOV 7 200) |

Jn the Supreme Court of the Chuited States

mates —

KENTUCKY ASSOCIATION OF HEALTH PLANS, INC.,

ET AL., PETITIONERS

JANIE A. MILLER, COMMISSIONER, KENTUCKY

DEPARTMENT OF INSURANCE

ON PETITION FOR A WRIT OF CERTIORARI!

TO THE UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

BRIEF FOR THE UNITED STATES

AS AMICUS CURIAE

HOWARD M. RADZELY

Acting Solicitor of Labor

ALLEN HH. FELDMAN

Associater Solicitor

NATHANIEL I. SPILLER

Deputy Associate Solicitor

GARY K. STEARMAN

Attorney

Department of Labor

Washington, D.C. 20210

PAUL D. CLEMENT

Acting Solicitor General

Counsel of Record

EDWIN S. KNEEDLER

Deputy Solicitor General

JAMES A. FELDMAN

Assistant to the Solicitor

General

Department of Justice

Washington, D.C. 20530-0001

(202) 514-2217

QUESTION PRESENTED

Whether Kentucky’s “any willing provider” law, which

requires each health maintenance organization (HMO) in the

State to make available to its subscribers the services of any

medical provider in its geographical region that agrees to the

terms and conditions offered by the HMO, is saved from pre-

emption as a law that “regulates insurance” under ERISA

Section 514(b)(2)(A), 29 U.S.C. 1144(b)(2)(A).

(I)

TABLE OF CONTENTS

Page

EEE ES ee ee 1

EEE LT RR 5

EE eT 20

TABLE OF AUTHORITIES

Cases:

Blue Cross & Blue Shield v. Bell, 798 F.2d 1331

Ee 13

CIGNA Healthplan of La., Inc. v. Louisiana,

82 F.3d 642 (5th Cir.), cert. denied, 519 U.S.

California Div. of Labor Standards Enforcement v.

Dillingham Constr., N.A., Inc., 519 U.S. 316

CRIED accaceasessscssossnsnsssnsensessssesesssnsssesessnssncssesnssnsssssesecscossasereees 6,7,8

Cisneros v. UNUM Life Ins. Co. of Am., 134 F 3d

939 (9th Cir. 1998), cert. denied, 526 U.S. 1086

ID ererrtenectnsenctnsnsensnsnesnennensscsnnensesessnensssesenscscnesenesscsnscesecessesee 13

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

Insurance, 215 F 3d 526 (5th Cir. 2000) .............. 9, 10, 18, 19

De Buono v. NYSA-ILA Med. & Clinical Serv.

ce 8

Department of Treasury v. Fabe, 508 U.S. 491

SEED cxcuscenseccansensnsunssnsnsesnnssuscsennsnsnsnssecnsssnsansessensensscsasecseenceee 13, 16

District of Columbia v. Greater Washington Bd. of

EE 6

Egethoff v. Egethoff, 121 S. Ct. 1822 (2001) ........cccccc. 6

Express Scripts, Inc. v. Wenzel, 262 F.3d 829

SIO cenepcecassensesninssenscnmnencncennenconsensesssene 9, 13, 15, 17, 18

FMC Corp. v. Holliday, 498 U.S. 52 (19990) .............. 7, 10, 16

General Elec. Co. v. Gilbert, 429 U.S. 125

a susateminetines 10

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

Re OD etencetenetnichchsctensnercscenscnsimneensemnecssanse 12, 14, 15

(III)

IV

Cases—Continued: Page

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

486 U.S. 825 (1988) 6, 8

Metropolitan Life Ins. Co. v. Massachusetts, 471

ee 7,11, 13, 15, 16

New York State Conference of Blue Cross & Blue

Shield Plans v. Travelers Ins. Co., 514 U.S. 645

GEES excmessensiniiasiaieannnienrreretasinaitiinsiaiaieninsnnintemtinninns 7,8

Pegram v. Herdrich, 530 U.S. 211 (2000) «00.0... 9, 17,19

Pilot Life Ins. Co. v. Dedeaux, 481 US. 41

CD cxceneesnitiiiiliiitiaieinnnninntintiniiaicdiiitaiidliasninies 8, 20

Prudential Ins. Co. of Am. v. National Park Med.

Ctr., Inc., 154 F.3d 812 (8th Cir. 1998) - 9,18

Shaw v. Delta Air Lines, Inc., 463 US. 85 (1983) ............ 7,8

Stuart Circle Hosp. Corp. v. Aetna Health Mgmt.,

995 F.2d 500 (4th Cir.), cert. denied, 510 U.S. 1003

(1993) .. - 1,9

Texas Pharmacy Ass'n v. Prudential Ins. Co. of

Am., 105 F.3d 1035 (5th Cir.), cert. denied, 522

U.S. 820 (1997) . 911,

13, 15, 17

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

CRIDD occccccencacecszscesassnssssveasenencessansnsessneansnanensstanensenensassneusenes passim

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

ee 14, 15, 16

Statutes:

Employee Retirement Income Security Act of 1974,

29 U.S.C. 1001 et seg.:

§ 4(b), 29 U.S.C. 1008(b) (1994 & Supp. V 1999) ......... 4, 10

§ 514(a), 29 U.S.C. 1144(a) 2, 3,6

§ 514(b\X2/A), 29 U.S.C. 1144(6K2K(A) «on... 2,8, 9, 12, 16

§ 514(b\( 2B), 29 U.S.C. 1144(bK 2B) ............ 2,4,6,9, 10

McCarran-Ferguson Act, 15 U.S.C. 1012(b) ............ 4, 12, 14, 16

Ky. Rev. Stat. Ann. § 304.17A-110(3) (Banks-Baldwin

1995) 1

Vv

Statutes—Continued: Page

Ky. Rev. Stat. Ann. (Michie 2001):

PD cennernennspssesnecesessensmsensmmnneapesnsesssests 2, 3,6, 9,18

ee 1

Miscellaneous:

Wilham J. Bahr, Comments, Although Offering More

Freedom to Choose, “Any Willing Provider”

Legislation is the Wrong Choice, 45 U. Kan. L. Rev.

a a a 19

In the Supreme Court of the Gnited States

No. 00-1471

KENTUCKY ASSOCIATION OF HEALTH PLANS, INC.,

ET AL., PETITIONERS

v.

JANIE A. MILLER, COMMISSIONER, KENTUCKY

DEPARTMENT OF INSURANCE

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

BRIEF FOR THE UNITED STATES

AS AMICUS CURIAE

This brief is submitted in response to the Court’s invita-

tion to the Solicitor General to express the views of the

United States.

STATEMENT

1. Kentucky's “any willing provider” (AWP) law provides:

A health insurer shal] not discriminate against any pro-

vider 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.

Ky. Rev. Stat. Ann. § 304.17A-270 (Michie 2001).’ Under the

AWP law, a “health insurer” must make available to its

1 When this suit was commenced, the AWP law applied to “health

benefit plan{s),” Ky. Rev. Stat. Ann. § 304.17A-110(3) (Banks-Baldwin

1995); but in 1998, the Kentucky legislature revised the law to apply to

“health insurer{s),” as quoted above. Pet. App. 5a-6a. The court of ap-

peals addressed the validity of the law in its “present form.” Pet. App. 6a.

(1)

2

subscribers the services of any medical provider in its geo-

graphical area that agrees to the terms and conditions

offered by the HMO to providers. An “insurer” is defined as

any insurance company; health maintenance organiza-

~ tion; self-insurer or multiple employer welfare arrange-

ment not exenpt from state regulation by ERISA;

provider-sponsored integrated health delivery network;

self-insured employer-organized association, or nonprofit

hospital, medical-surgical, dental, or health service

corporation authorized to transact health insurance

business in Kentucky.

Ky. Rev. Stat. Ann. § 304.17A-005(23) (Michie 2001). Sup-

porters of AWP laws argue that the laws make it easier for

patients to have access to providers of their choice, while

opponents argue that they lead to increased costs by limiting

the ability of insurers to guarantee a high volume of patients

to providers in return for lower charges. See Pet. App. 34a

n.18.

The issue in this case is whether ERISA preempts the

Kentucky AWP law. Three ERISA provisions are relevant.

First, ERISA’s general preemption provision, Section

514(a), 29 U.S.C. 1144(a), states that ERISA “shall super-

sede any and al] State laws insofar as they may now or here-

after relate to any employee benefit plan.” Second, ERISA’s

insurance saving clause, Section 514(b)(2A), 29 U.S.C.

1144(b)(2)(A), provides that “nothing in this subchapter shall

be construed to exempt or relieve any person from any law

of any State which regulates insurance, banking, or securi-

ties.” Third, ERISA’s deemer clause, Section 514(b)(2)(B),

29 U.S.C. 1144(b\(2(B), which qualifies the insurance saving

clause, provides that “[nJeither an employee benefit olan

* * * nor any trust established under such a plan, shall be

deemed to be an insurance company or other insurer * * *

for purposes of any law of any State purporting to regulate

insurance companies, [and] insurance contracts.”

3

2. Contending that ERISA preempts Kentucky’s AWP

law, petitioners—five health maintenance organizations

(HMOs) licensed under the laws of Kentucky and a Ken-

tucky-based non-profit associatior of HMOs—filed suit

against the Insurance Commissioner of Kentucky in federal

district court to enjoin enforcement of the law. Pet. App.

64a-65a. The district court upheld the law, ruling ‘sat,

although the AWP law “relate[s} to” ERISA plans, it “regu-

lates insurance” and is therefore saved from preemption

under the insurance saving clause. /d. at 78a-82a.

3. A divided panel of the Sixth Circuit affirmed. Pet.

App. la-38a. The court unanimously ruled that Kentucky’s

AWP law “relate[s] to” employee benefit plans under 29

U.S.C. 1144(a), because it has both a “reference to” and a

“connection with” ERISA plans. The panel concluded that,

because the AWP law applies to a “self-insured plan * * *

to the extent permitted by ERISA,” Ky. Rev. Stat. Ann.

§ 304.17A-005(23) (Michie 2001) (emphasis added), it refers

to ERISA plans. See Pet. App. 10a-lla. The court further

held that AWP laws have a “connection with” ERISA plans,

because they “affect the benefits available by increasing the

potential providers, [and] they directly affect the administra-

tion of the plans,” id. at 19a.

Like the district court, however, the panel majority ruled

that the AWP law is saved from preemption as a law that

“regulates insurance.” Applying the analytical framework,

of UNUM Life Ins. Co. of Am. v. Ward, 526 U.S. 358, 367-

368, 373 (1999), the court first found that the AWP law is

specifically directed at the insurance industry, thus satisfy-

ing the common-sense test for insurance regulation. Pet.

App. 22a-24a. The court observed that “(t}he fact that it

includes within its reach HMOs as well as traditional insur-

ance companies does not take it out of the realm of insurance

regulation,” because “[{iJn the end, HMOs function the same

way as a traditional health insurer: The policyholder pays a

fee for a promise of medical services in the event that he

4

should need them.” Jd. at 22a-23a. The court similarly held

that the law’s coverage of certain self-insured government

and church plans (which are exempt from ERISA, see 29

U.S.C. 1003(b) (1994 & Supp. V 1999) and thus not protected

from state insurance regulation by the “deemer clause,” 29

U.S.C. 1144(b)(2)(B)) does not preclude a finding that the law

“regulate[s] insurance,” because “it is * * * within the

authority of a state in enacting laws dealing with insurance

to include within such laws entities that act as self-insurers.”

Pet. App. 24a; see id. at 24a-29a. Observing that the AWP

law increases benefits by giving the insured more freedom to

choose and is part of “a comprehensive subtitle of Ken-

tucky’s insurance code regulating health benefit plans,” the

court concluded that the law “clearly” satisfies the common-

sense test. Jd. at 30a. The court also held that the Kentucky

law does not apply to non-insurers engaged solely in plan

administration, observing that the Kentucky law “elimi-

nate[s] any ambiguity as to whether administrators under

contracts with benefit plans are included within the scope of

the statutes. They obviously are not.” /d. at 28a n.14.

The court also followed UNUM in considering the three

factors utilized in determining whether a particular practice

constitutes the “business of insurance” for purposes of the

McCarran-Ferguson Act, 15 U.S.C. 1012(b). See UNUM,

526 U.S. at 373-375. First, the court concluded that the

AWP law “spreads the cost component of the policyholder’s

risk among all the insureds, instead of requiring the policy-

holder to shoulder all or part of this cost when seeking care

or treatment from an excluded doctor or hospital of his or

her choice.” Pet. App. 3la. The court also found that the

AWP laws “directly impact the insurer-insured relationship

because they affect restrictions on the network of providers

available for treatment under the plan and they directly

affect the administration of the plan * * * by expanding

covered treatment from a closed pool of providers to an open

pool of providers.” Jd. at 36a. Finally, the court reiterated

5

that, because the Kentucky law does not apply to entities

outside the insurance business, it is directed at insurance

and thus satisfies the third factor. Jd. at 36a-37a.

Judge Kennedy dissented from the court’s holding that

the AWP law “regulates insurance” and is therefore saved

from preemption. Pet. App. 39a-63a. In her view, the AWP

law fails the common-sense test and the three McCarran-

Ferguson Act factors. With respect to the common-sense

test, she stated that the law “clearly target[s] more than just

members of the insurance industry,” because in her view it

“appllies}] to non-ERISA covered self-insured plans,” id. at

40a-41la, and to “third parties that a self-insured ERISA plan

hires to administer its plan benefits,” id. at 42a, which she

viewed as outside the insurance industry. As to the three

McCarran-Ferguson factors, Judge Kennedy concluded that

the AWP law does not spread risk because “(t]he risk as-

sumed by the benefit plan under its policy, that the policy-

holder will require medical treatment, remains unaltered” by

the AWP law. Jd. at 50a. She concluded that the AWP law

neither changes the relationship between the insurer and the

insured nor is integral to it, because it “center[s] on the

insurer-provider relationship,” id. at 58a, and “leave[s] the

contract terms between the insurer and insured, unaltered,”

id. at 59a. Finally, she concluded that the AWP law is not

“limited to entities within the insurance industry” because

the AWP law “not only regulates entities that fall outside

the traditional definition of insurer,” but also “extends to

include entities in no way involved in underwriting risks,”

such as HMOs that administer ERISA-exempt self-insured

plans. /d. at 59a.

DISCUSSION

The court of appeals correctly held that ERISA does not

preempt Kentucky’s AWP law. The law “relates to” em-

ployee benefits plans by indirectly but substantially affecting

their content, but is saved from preemption because it is a

6

law that regulates insurance. Nonetheless, further review is

warranted because the case presents an important and

recurring issue that has caused substantial confusion and

widely varying results in the courts of appeals. The issue in

this case is, however, related to the issue pending before the

Court in Rush Prudential HMO v. Moran, No. 00-1021. We

therefore suggest that the Court hold the petition in this

case and then dispose of it as appropriate in light of its

decision in’ Rush.

A. Any Willing Provider Laws “Relate To” ERISA Plans

Under Section 514(a) of ERISA, 29 U.S.C. 1144(a), the

provisions of ERISA “shall supersede any and all State laws

insofar as they may now or hereafter relate to any employee

benefit plan.” This provision is “clearly expansive.” Egel-

hoff v. Egelhoff, 121 S. Ct. 1322, 1327 (2001). It “yield[{s] a

two-part inquiry: A law ‘relate[s] to’ a covered employee

benefit plan for purposes of § 514(a) ‘if it [1] has a connection

with or [2] reference to such a plan.” California Div. of

Labor Standards Enforcement v. Dillingham Constr., N.A.,

Inc., 519 U.S. 316, 324 (1997) (citation and internal quotation

marks omitted).

1. Although the Kentucky AWP law makes a literal ref-

erence to the ERISA statute, the court of appeals erred in

holding that the law makes a forbidden “reference to”

ERISA plans, as this Court has used that phrase. By its

terms the AWP law applies to any “insurer,” including any

“self-insurer or multiple employer welfare arrangement not

exempt from state regulation by ERISA.” Ky. Rev. Stat.

Ann. § 304.17A-005(23) (Michie 2001) (emphasis added).

That reference to the ERISA statute neither singles out

ERISA plans for differing treatment, Mackey v. Lanier

Collection Agency & Serv., Inc., 486 U.S. 825, 830 (1988), nor

is dependent on such plans for its operation, District of

Columbia v. Greater Washington Board of Trade, 506 U.S.

125, 130-131 (1992). Rather, it simply acknowledges the

7

limits on the scope of state laws imposed by the “deemer

clause” of ERISA, Section 514(b)(2)(B), 29 U.S.C.

1144(b)(2)(B), which prevents the States from regulating

self-insured plans under the guise of regulating insurance.

FMC Corp. v. Holliday, 498 U.S. 52, 61 (1990). The

Kentucky AWP law thus treats all insurers and all plans

(ERISA and non-ERISA) alike, to the extent permitted by

federal law. If such a citation to ERISA itself were suffi-

cient to warrant preemption, it would create the perverse

result that a state law’s express recognition of the limits

imposed by federal law would render the state law pre-

empted, not only to the extent acknowledged by that refer-

ence, but in other areas that the States concededly may

regulate consistent with ERISA.

2. The court of appeals was correct, however, in holding

that the AWP law falls within the scope of ERISA’s express

preemption provision because it has a “connection with”

ERISA plans. A state law has such a connection if it “man-

date[s] employee benefit structures or their administration.”

New York State Conference of Blue Cross & Blue Shield

Plans v. Travelers Ins. Co., 514 U.S. 645, 658 (1995); see

Dillingham, 519 U.S. at 328. The AWP law requires that

insurers offer to all who purchase their policies, including

ERISA plans and their participants and beneficiaries, open-

panel provider networks (i.e., those in which the insurer may

not limit the universe of available providers) rather than

closed, exclusive networks. Participants and beneficiaries of

ERISA plans therefore have a wider choice of providers

than they would have without the law.” Accordingly, the

AWP law “relates to” ERISA plans for the same reasons

that other mandated-benefits laws do. See Metropolitan

Life Ins. Co. v. Massachusetts, 471 U.S. 724, 739 (1985) (as-

suming that law requiring minimum mental health benefits

relates to ERISA plans); Travelers, 514 U.S. at 663-664

(discussing Metropolitan Life); Shaw v. Delta Air Lines,

8

Inc., 463 U.S. 85, 97 (1983) (law requiring pregnancy benefits

relates to ERISA plans).

B. AWP Laws Are Saved By ERISA’s Insurance Saving

Clause

The court of appeals correctly held that Kentucky’s AWP

law is saved from preemption as a law that “regulates in-

surance” under 29 U.S.C. 1144(b)(2)(A). In deciding whether

a state law is saved under that clause, the Court first asks

“whether, from a ‘common-sense view of the matter,’ the

contested prescription regulates insurance.” UNUM, 526

U.S. at 367-368. To satisfy the common-sense test, a “law

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

must be specifically directed toward that industry.” Pilot

Life Ins. Co. v. Dedeaux, 481 U.S. 41, 50 (1987); see UNUM,

526 U.S. at 368. Thus, a general state tort or contract law

that includes the insurance industry within its reach, but is

not specifically directed at it, does not “regulate insurance”

and therefore is not within the saving clause. Pilot Life, 48i

U.S. at 50, 57. Here, as the court below concluded, the AWP

law makes clear on its face that it is targeted at the insur-

ance industry. In reviewing that determination, this Court

does not “normally disturb an appeals court’s judgment on

an issue so heavily dependent on analysis of state law.”

UNUM, 526 U.S. at 368.

1. The court below correctly ruled that the AWP law

satisfies the common-sense test because it is specifically

directed at insurance. By its terms, the AWP law applies to

“health insurer[{s].” Pet. App. 89a. It defines health insurers

2 The direct impact of the AWP law’s mandatory open-panel provider

networks on plans’ benefit structures and the ability of plans to operate

uniformly across state lines contrasts with the incidental economic impact

of state laws of general applicability that are not sufficiently connected to

ERISA plans to meet the “relates to” requirement. See Travelers, 514

U.S. at 668; see also De Buono v. NYSA-ILA Med. & Clinical Serv. Fund,

520 U.S. 806, 815-816 (1997); Dillingham, 519 U.S. at 334; Mackey, 486

US. at 831-836.

9

to include not only traditional health insurers, but also

entities that take more innovative approzches to insurance

and the provision of health care, such as a “health main-

tenance organization” or a provider-sponsored “health ser-

vice corporation.” Ky. Rev. Stat. Ann. § 304.17A-005(23)

(Michie 2001). HMOs may play several roles in relation to a

health benefit plan, but one role—and the one covered by the

Kentucky law—is that of insurer. As this Court has recog-

nized, such organizations are “risk-bearing organizations,”

because they generally “assume[] the financial risk of

providing the benefits promised.” Pegram v. Herdrich, 530

U.S. 211, 218-219 (2000); see also Pet. App. 22a-23a; U.S.

Amicus Br. at 13-16, Rush Prudential, No. 00-1021.* Indeed,

millions of employees in the United States are offered the

choice between indemnity health insurance plans and HMO

membership as similar ways to obtain health insurance

coverage. Accordingly, the application of the Kentucky law

to HMOs as well as traditional insurers does not detract

3 Like the dissent below, some courts of appeals have suggested that

HMOs are not engaged in insurance for purposes of ERISA’s insurance

saving clause. Pet. App. 41a n.3. See also Prudential Ins. Co. of Am. v.

National Park Med. Ctr., Inc., 154 F.3d 812, 829 (8th Cir. 1998); Texas

Pharmacy Ass’n v. Prudential Ins. Co. of Am., 105 F.3d 1035, 1038-1039

(5th Cir.), cert. denied, 522 U.S. 820 (1997). The continued validity of

those decisions, however, was undermined by this Court’s discussion in

Pegram. More recent decisions from those same courts recognize that

HMOs may be classified as insurers for ERISA purposes. See Corporate

Health Ins., Inc. v. Texas Dep't of Ins., 215 F.3d 526, 538 (5th Cir. 2000)

(“A statute may regulate insurance if it applies to insurers, health care

service contractors, and HMOs.”), petition for cert. pending, No. 00-665;

Express Scripts, Inc. v. Wenzel, 262 F.3d 829, 836 (8th Cir. 2001) (“The

language of the statutes was specifically directed at HMOs and we

conclude that the provisions regulate insurance under the common sense

test.”); see also 29 U.S.C. 1144(b)(2)(B) (protecting self-insured plans from

application of state insurance laws saved by 29 U.S.C. 1144(b)(2)(A) by

barring plans from being deemed to be “an insurance company or other

insurer” for purposes of such state laws) (emphasis added).

10

from the law’s basic character as one that regulates

“insurance.”

Nor does the inclusion of self-insured plans, including gov-

ernmental or church plans, take the AWP law outside the

insurance saving clause. Governmental and church plans are

exempt from ERISA, 29 U.S.C. 1003(b) (1994 & Supp. V

1999), regardless of whether they are self-insured. More-

over, a State may reasonably conclude that “a party who has

not purchased insurance, effectively act[s] as its own

insurer,” and States may therefore regulate self-insuring

entities as part of their regulation of insurance. Pet. App.

24a; see General Elec. Co. v. Gilbert, 429 U.S. 125, 138 n.16

(1976) (“That General Electric self-insures does not change

the fact that it is, in effect, acting as an insurer.”). Indeed,

ERISA’s deemer clause, 29 U.S.C. 1144(b)(2)(B), necessarily

presumes that self-insured entities are subject to state

insurance regulations. The precise function of the clause is

to exempt self-insured plans from state laws that would

otherwise apply to them through operation of ERISA’s

insurance saving clause. See FMC, 498 U.S. at 61 (“We read

the deemer clause to exempt self-funded ERISA plans from

state laws that ‘regulat[e] insurance’ within the meaning of

the saving clause.”). UNUM, 526 U.S. at 367 n.2 (deemer

clause is a “limitation on state regulatory authority”). That

exemption would be unnecessary—and the deemer clause

4 Judge Kennedy observed that such entities may in some instances

merely “handle paperwork and plan administration for a self-funded [7.e.,

self-insured) ERISA plan.” Pet. App. 43a. She noted that in such cases,

“({t}he only risk underwritten is that accepted by the ERISA self-insured

plan, which under the ‘deemer clause’ of ERISA * * * cannot be treated

as an insurance company for the purposes of state regulation.” Jd. at 44a.

The majority, however, expressly addressed whether HMOs and similar

entities acting solely as plan administrators for self-insured plans “are

included within the scope of the” AWP law and concluded that they

“obviously are not.” Jd. at 28a n.14. Cf. Corporate Health Ins., Inc., 215

F.3d at 538 (administrators function as insurers in making benefit

determinations).

1]

superfluous—if the fact that a state law regulates self-

insurance meant that the state law does not “regulate[]

insurance.”

This Court recognized as much in Metropolitan Life.

There, the Court held that the state mandated-benefits law

was a law that regulated “insurance” within the meaning of

the saving clause, even though it included self-insured plans

among the insurers within its scope. See 471 U.S. at 735-736

n.14, 740-747. Notwithstanding that intended scope, the

Court simply held that, because of the “deemer clause,” the

mandated-benefits law did not apply to self-insured plans

covered by ERISA. See id. at 735-736 n.14. The Court did

not hold that the inclusion of self-insured plans made the law

one that does not regulate insurance.

2. Consideration of the three McCarran-Ferguson fac-

tors, insofar as they bear on the ERISA analysis, confirms

the conclusion that the Kentucky AWP law “regulates insur-

ance.” At least the last two of those factors are satisfied

here. As the court below correctly concluded (Pet. App. 35a-

36a), the AWP law “serves as ‘an integral part of the policy

relationship between the insurer and the insured.”” UNUM,

526 U.S. at 374; Stwart Circle Hosp. Corp. v. Aetna Health

Mgmt., 995 F.2d 500, 503 (4th Cir.) (regulations governing

treatment and cost are integral parts of insurer-insured rela-

tionship), cert. denied, 510 U.S. 1003 (1993). Like other

mandated-benefit provisions, the AWP law’s mandate of

open networks fundamentally changes the underlying insur-

ance promise between the insurer and insured. See Metro-

politan Life, 471 U.S. at 744 (state regulation affecting “the

type of policy which could be issued” is part of “the core of

the ‘business vi insurance’”); see also UNUM, 526 U.S. at

374 (notice-prejudice rule integral to relationship by chang-

ing bargain between insurer and insured); Texas Pharmacy,

105 F.3d at 1041. The AWP law, although not mandating

coverage of specific conditions like the mandated coverage of

mental illnesses in Metropolitan Life nevertheless defines

12

the scope of the benefits provided and mandates the type of

policy that may be issued.

Likewise, for essentially the same reasons that the AWP

law regulates insurance as a matter of common-sense, see

pp. 8-11, supra, the court of appeals correctly held that the

law satisfies the third McCarran-Ferguson factor in this

context because the law is properly construed as limited to

regulating insurers and entities acting as insurers.’ This

Court does not “normally disturb an appeals court’s judg-

ment on an issue so heavily dependent on analysis of state

law,” UNUM, 526 U.S. at 368. As in UNUM, the Court

“lack[s] cause” to do so here, because the court of appeals’

construction is reasonable. See Pet. App. 23a-29a.°

5 Neither petitioners, the court of appeals, nor any of the appellate

decisions cited by petitioners, see Pet. 15-16, have asserted that AWP

laws fail to satisfy the third factor because those laws regulate relations

between insurers and other entities (health care providers) that are not

insurers. See Group Life & Health Ins. Co. v. Royal Drug Co., 440 US.

205, 231 (1979). In applying the ERISA saving clause, that point is more

appropriately considered here under the second factor, as discussed in the

text, because the fact that the AWP law regulates the .elationship

between the insurer and providers does not detract from the fact that it

also regulates the relationship between the insurer and the insured, and

therefore “regulates insurance.” That does not mean, however, that the

relationship between an insurer and a provider is itself the “business of

insurance” for purposes of the McCarran-Ferguson Act’s exemption from

the antitrust laws. See pp. 15-16 & n.8, infra.

® The application of the third factor to laws that regulate self-insurers

in the ERISA context may also differ from the application of that factor to

the practice of self-insurers in the antitrust context. See note 8, injra.

The ultimate statutory test for whether a state law is saved under ERISA

is whether it “regulates insurance.” 29 U.S.C. 1144(b)(2)(A). The ultimate

statutory test in the antitrust context is different. There, the McCarran-

Ferguson Act exempts a practice from the federal antitrust laws if it con-

stitutes “the business of insurance.” 15 U.S.C. 1012(b) (emphasis added).

A self-insurer may reasonably be viewed as engaged in “insurance,” and

therefore a law regulating self-insurers “regulates insurance” under the

ERISA saving clause. But a self-insurer would not appear to be involved

in “the business of insurance” within the meaning of the McCarran-

Ferguson Act.

13

Thus, at least two of the three McCarran-Ferguson Act

factors, plus the common-sense test, are satisfied. That is

sufficient to support the court of appeals’ holding that Ken-

tucky’s AWP law is not preempted. See UNUM, 526 US. at

374. The court of appeals ruled that the AWP law also

satisfies the first, risk-spreading factor because it has the

effect of spreading the insureds’ risk by providing them with

more physicians to choose from and thereby reducing the

likelihood that they will receive medical care outside the

network and personally shoulder the cost of treatment. Pet.

App. 3la; accord Stwart Circle, 995 F.2d at 503; see also

Express Scripts, 262 F.3d at 838 (law preventing HMOs from

making mail-order pharmacies exclusive providers trans-

ferred risk by enabling insured to avoid paying higher price

at retail pharmacy when mail-order pharmacy delays filling

prescription); Texas Pharmacy, 105 F.3d at 1041-1042; Blue

Cross & Blue Shield v. Bell, 798 F.2d 1331, 1334-1335 (10th

Cir. 1986).’ But even if that conclusion is based on too broad

a view of the risk-spreading factor, the McCarran-Ferguson

factors are nct necessary conditions for determining whether

a law regulates insurance under ERISA’s insurance saving

clause. See UNUM, 526 U.S. at 373-374; see p. 16, infra.

Thus, the court of appeals’ ultimate conclusion that the

7 Petitioners correctly note (Pet. 17-19) that the courts of appeals on

occasion have narrowly interpreted the McCarran-Ferguson “risk-spread-

ing” criterion as “refer{ring]} to the risk of injury for which the insurance

company contractually agreed to compensate the insured.” Cisneros v.

UNUM Life Ins. Co. of Am., 134 F.3d 939, 945-946 (Sth Cir. 1998), cert.

denied, 526 U.S. 1086 (1999); see Pet. App. 48a-57a (Kennedy, J., dis-

senting). That narrow view of risk-spreading under ERISA is incorrect.

See UNUM, 526 U.S. at 374 (describing criterion as “whether the rule at

issue ‘has the effect of transferring or spreading a policyholder’s risk’”)

(quoting Metropelitan Life, 471 U.S. at 743) (emphasis added); cf

Department of Treasury v. Fabe, 508 U.S. 491, 502-504 (1993) (under first

clause of § 2(b) of McCarran-Ferguson Act, Ohio creditor-priority scheme

met risk-transfer criterion by ensuring payment of policyholders’ claims

and performance of insurance contract).

14

Kentucky AWP law comes within the insurance saving

clause is correct.

3. Contrary to petitioners’ contention (Pet. 19-23), the

decision of the court of appeals does not conflict with this

Court’s decision in Group Life & Health Ins. Co. v. Royal

Urug Co., 440 U.S. 205 (1979), which held that an arrange-

ment between insurers and pharmacists was not exempt

from the federal antitrust laws under Section 2(b) of the

McCarran-Ferguson Act, 15 U.S.C. 1012(b). The insurer in

Royal Drug entered into agreements with participating

pharmacies, whereby policyholders could purchase drugs

from the pharmacy for two dollars and the insurer would

reimburse the pharmacy for the actual costs of the drugs

purchased. Although the insurer offered that arrangement

to all pharmacies, not all pharmacies chose to participate on

those terms. 440 U.S. at 209. The Court held that the

agreements satisfied none of the McCarran-Ferguson Act

factors, and that they therefore were not exempt from the

federal antitrust laws. The Court reasoned that the in-

surer’s policyolders were “basically unconcerned with

arrangements made between [the insurer] and participating

pharmacies.” Jd. at 214. Characterizing the agreements as

“merely arrangements for the purchase of goods and ser-

vices by [the insurer],” ibid., the Court held that they did not

spread risk, were not central to the insurer-insured

relationship, and extended to entities outside the insurance

industry, id. at 214, 216, 231-233.

In contrast to the private agreements at issue in Royal

Drug, state AWP laws do not merely set the rate at which an

insurer will reimburse a provider who already is part of the

provider network—a matter with which the policyholders in

Royal Drug were “basically unconcerned.” See also Union

Labor Life Ins. Co. v. Pireno, 458 U.S. 119, 132 (1982)

(policyholder’s “only concern is whether his claim is paid”)

(emphasis added). AWP laws regulate who may be included

in that network to begin with. Pet. App. 32a. Thus,

15

although such laws affect persons other than the insurer and

the insured, they do so by inviting them into the provider

network that the insurer makes available to the insured. In

that respect, AWP and similar laws affect the nature of the

insurer’s underlying promise to the insured by changing the

network of providers available to the insured from a limited,

closed one to an open one. See UNUM, 526 U.S. at 374; see

also Pet. App. 3la; Express Scripts, 262 F.3d at 837-838;

Texas Pharmacy, 105 F.3d at 1041. Although policyholders

are likely not to be directly concerned with the insurer’s

costs of providing benefits (as in Royal Drug), they are likely

to be very concerned with the range of providers available to

them under the plan (and therefore the likelihood that the

“family doctor” is covered by the plan). Access to health

care is a key element of the relationship between insurer and

insured. AWP laws therefore “regulate insurance” within

the meaning of ERISA’s insurance saving clause. Pet. App.

33a-34a; Texas Pharmacy, 105 F.3d at 1041.

More generally, although Royal Drug is informative in the

ERISA context, it was not itself an ERISA case and does

not control the ERISA analysis. Royal Drug involved the

application of the second clause of Section 2(b) of the

McCarran Ferguson Act, which is an exemption to the fed-

eral antitrust laws and, as such, must be construed narrowly.

See Pireno, 458 U.S. at 126; Royal Drug, 440 U.S. at 231.

ERISA’s saving clause, by contrast, is not an exemption

subject to a narrow construction, but a preservation of state

authority. Cf. Metropolitan Life, 471 U.S. at 741 (“(t]he

8 Although the Kentucky AWP law’s effect on the insurer-insured

relationship is sufficient to bring that law within the scope of ERISA’s

insurance saving clause, which is designed to preserve the broad authority

of the States over insurance, it does not follow that private conduct by an

insurer affecting a provider's ability to participate in the insurer’s pro-

vider network would be protected by the McCarran-Ferguson Act’s

narrow exemption from the antitrust laws simply because that conduct

might also have an effect on the insurer-insured relationship.

16

presumption is against pre-emption”). In that regard, the

saving clause bears a greater resemblance to the first clause

of Section 2(b), which preserves state laws “enacted * * *

for the purpose of regulating the business of insurance,” 15

U.S.C. 1012(b), and “was intended to further Congress’s pri-

mary directive of granting the States broad regulatory

authority over the business of insurance.” Department of

Treasury v. Fabe, 508 U.S. 491, 505 (1993). The ERISA

saving clause thus has a broader scope thas the narrow

exemption from the antitrust laws at issue in Royal Drug.

See ibid.

Furthermore, the language of the ERISA insurance sav-

ing clause, which saves “any law of any State which regu-

lates insurance,” 29 U.S.C. 1144(b)(2)(A) (emphasis added),

is broader than the language of the first clause of Section

2(b) of the McCarran-Ferguson Act, which applies to state

laws enacted for the purpose of regulating “the business of

insurance.” 15 U.S.C. 1012(b) (emphasis added). Although

the Court simply applies the three McCarran-Ferguson Act

factors in determining the scope of the second clause (the

antitrust exemption) in Section 2(b) of that Act, see Pireno,

458 U.S. at 129-134, and likewise applies those same factors

(albeit perhaps more flexibly) under the first clause of Sec-

tion 2(b) (the preservation of state authority) at issue in

Fabe, see 508 U.S. at 502-504, the Court has adopted a differ-

ent analysis under the ERISA insurance saving clause. In

the ERISA analysis, the Court first and foremost applies a

“common-sense view of the matter,” UNUM, 526 U.S. at

367, and only then considers the McCarran-Ferguson factors,

which in any event are merely “relevant” but not “required”

in assessing whether a state law “regulates insurance” under

ERISA. Id. at 373. See also id. at 374 (factors are “guide-

posts”); FMC, 498 U.S. at 60-61 (finding that a law “regu-

lates insurance” under ERISA without mention of McCarran-

Ferguson factors). See also note 6, supra. Thus, even if the

Kentucky AWP law would fail Royal Drug scrutiny under

17

the McCarran-Ferguson Act, the court of appeals’ decision

that the AWP law satisfies the ERISA insurance saving

clause would remain sound.

-C. The Issue Of Whether ERISA Preempts AWP Laws

Merits Further Review, Although The Court May Wish

To Hold This Case Pending Its Decision In Rush

Prudential HMO v. Moran

1. The decision in this case appears to conflict with

decisions of two other courts of appeals holding similar state

AWP statutes to be preempted. The Eighth and Fifth

Circuits have held that AWP-type laws are not preempted if

they apply only to traditional insurance companies, see

Texas Pharmacy, 105 F.3d at 1040 (ruling on pre-1995 state

law), and HMOs, see Express Scripts, 262 F.3d at 836-837,

but that such laws are preempted if their definitions of

covered entities also include self-insured plans (and, perhaps,

third-party administrators for such plans, though that is

unclear from the decisions). See Prudential, 154 F.3d at 829;

Texas Pharmacy Ass'n, 105 F.3d at 1038-1040 (ruling on

state law enacted in 1995); CIGNA Healthplan of La., Inc. v.

Louisiana, 82 F.3d 642, 650 (5th Cir.), cert. denied, 519 U.S.

964 (1996). Although the Fifth Circuit’s decisions holding

such laws to be preempted have rested at least in part on

misconceptions of the law that have since been clarified, the

Fifth Cireuit appears to adhere to those decisions.’ See

9 For instance, in Texas Pharmacy, the Fifth Circuit rested its

decision in part on the proposition that HMOs and similar entities are not

part of the insurance industry, 105 F.3d at 1038-1039, but this Court has

determined otherwise. Pegram, 530 U.S. at 218-223. Following Pegram,

the Fifth Circuit broadened its view. See note 3, supra. Furthermore, in

Texas Pharmacy and CIGNA Healthplan, 82 F 3d at 650, the Fifth Cir-

cuit required the laws to satisfy both the common-sense test and all three

McCarran-Ferguson factors to be saved as an insurance regulation. 105

F.3d 1088. This Court, however, has expressly rejected that requirement,

holding that the McCarran-Ferguson factors are merely “guideposts” in

the analysis and that a law may “regulate insurance” under ERISA

without satisfying all three factors. UNUM, 526 U.S. at 373-374. In

18

generally Corporate Health., 215 F.3d at 538 (attempting to

harmonize Fifth Circuit case law).

Under the Eighth and Fifth Circuit decisions, the Ken-

tucky law at issue in this case would have been held to be

preempted. It has a broad coverage provision that extends

to a number of self-insured entities, such as “any self-insurer

or multiple eiaployer welfare arrangement not exempt from

state regulation by ERISA; provider-sponsored integrated

health delivery network; self-insured employer-organized

association or nonprofit hospital, medical-surgical, dental, or

health service corporation.” Ky. Rev. Stat. Ann. § 304.17A-

005(23) (Michie 2001). To be sure, the Kentucky law ex-

cludes self-insured plans that are covered by ERISA and

protected from state insurance regulation by ERISA’s

“deemer clause,” because it covers only self-insured plans

“not exempt from state regulation by ERISA.” But that

feature could not save the Kentucky law under the Eighth

Circuit’s analysis. Although the Arkansas AWP law at issue

in Prudential similarly excluded such plans, see 154 F.3d at

816 (reciting Arkansas AWP provision stating that AWP law

“shall not apply to self-funded or other health benefit plans

that are exempt from state regulations by virtue of

[ERISA]”), the Eighth Circuit’s holding in Prudential that

the Arkansas law was preempted rested on the premise that

the Arkansas AWP law covered some self-insured entities.

See Express Scripts, 262 F.3d at 836-837 (distinguishing

Prudential). Because the Kentucky law likewise appears to

cover the same self-insured entities—i.e., those, like church

and government plans, that are not covered by ERISA—it

would thus be preempted under the Eighth Circuit’s

analysis. It likewise would be preempted under Fifth Cir-

Corporate Health, the Fifth Circuit acknowledged that clarification, but

reaffirmed the basic holding that AWP laws are preempted to the extent

they regulate entities other than traditional insurers and HMOs. 215 F.3d

at 537.

19

cuit precedent. See Corporate Health, 215 F.3d at 538 &

n.51; compare Stuart Circle (holding that Virginia law that

apparently applied to self-insured entities is saved by

insurance saving clause)... )

2. The issue that has caused the conflict in the circuits, as

well as the accompanying difficulty the courts have had in

analyzing AWP laws, is important. The wisdom of AWP

legislation can certainly be debated. Pet. App. 34a n.18; see

also Pegram, 530 U.S. at 221 (structure of HMOs involves

“complicated factfinding and such a debatable social judg-

ment” not usually left to courts). But whatever its wisdom,

approximately twenty-five States have enacted some form of

AWP law. William J. Bahr, Comments, Although Offering

More Freedom to Choose, “Any Willing Provider” Legisla-

tion is the Wrong Choice, 45 U. Kan. L. Rev. 557, 568 n.112

(1997). Managed-care entities subject to the strictures of

those laws deliver a substantial portion of health services

nationwide. It is important that the permissible scope and

limits of state authority in this area be defined. Further

review is therefore warranted.

3. The question presented by this case is related to the

question in Rush Prudential HMO, Inc. v. Moran, No. 00-

1021, cert. granted (June 29, 2001). The question there is

whether ERISA preempts an Illinois law requiring HMOs to

provide independent review by an outside physician in the

event of a disagreement regarding whether a particular

treatment is medically necessary and therefore included in

the insurance coverage provided by the HMO. The court of

appeals in Rush Prudential held that the state independent

review law is saved from preemption by ERISA’s insurance

saving clause. Citing the Eighth Circuit’s decision in Pru-

dential and the Fifth Circuit’s decision in Texas Pharmacy,

the petitioner in Rush Prudential argues that the Illinois

law does not “regulate[{] insurance” because it is directed at

HMOs, which in the petitioner’s view do not necessarily offer

insurance products and “do not always bear the risk for the

20

health plans with which they contract.” 00-1021 Pet. Br. at

37, 39-40."° If the court addresses that question, its analysis

may well affect the issue in this case. If so, this case should

then be remanded to the court of appeals for further

consideration in light of the Court’s decision in Rush

Prudential. If the decision in Rush Prudential does not

address the insurance saving clause in a way that sheds light

on this case, the Court should grant plenary review in this

case at that time.

CONCLUSION

The Court should hold the petition for a writ of certiorari

in this case pending its decision in Rush Prudential HMO,

Inc. v. Moran, No. 00-1021, cert. granted (June 29, 2001), and

then dispose of it accordingly.

Respectfully submitted.

PAUL D. CLEMENT

» — Acting Solicitor General *

WARD Bi. RADSSLY EDWIN S. KNEEDLER

Prresn-- « oe of Labor Deputy Solicitor General

LLEN H. FELDMAN

S “ae JAMES A. FELDMAN

Associater Solicitor Assistant to the Solicitor

NATHANIEL I. SPILLER Generel

Deputy Associate Solicitor

GARY K. STEARMAN

Attorney

Department of Labor

NOVEMBER 2001

10 The petitioner also argues that, under the Court’s decision in Pilot

Life, 481 U.S. at 53-57, the Illinois law conflicts with the provision in

Section 502(a) of ERISA for bringing civil actions to recover benefits or

enforce the terms of the plan. See 00-1021 Pet. Br. at 19-32, Rush

Prudential, supra.

* The Solicitor General is recused in this case.