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

No. 00-1471

™

IN THE

Supreme Court of the United States

KENTUCKY ASSOCIATION OF

HEALTH PLANS, INC., et ail.,

Petitioners,

V.

JANIE MILLER, COMMISSIONER OF THE

KENTUCKY DEPARTMENT OF INSURANCE,

Respondent.

On Writ OF CERTIORARI TO THE

UNitep States Court OF APPEALS

FOR THE SIXTH CIRCUIT

~-- + - ———-- —

— —

BRIEF OF AMICI CURIAE AMERICAN ASSOCIATION OF

HEALTH PLANS, INC., HEALTH INSURANCE ASSOCIA-

TION OF AMERICA, NATIONAL ASSOCIATION OF

MANUFACTURERS AND BLUE CROSS BLUE SHIELD

ASSOCIATION IN SUPPORT OF PETITIONERS

— ———

— ——— -_—__—

Daty D.E. TEMCHINE

Counsel of Record

EPSTEIN BECKER & GREEN, P.C.

1227 25th Street, NW

Suite 700

Washington, D.C. 20037

(202) 861-0900

Attorneys for Amici Curiae

(Additional Counsel Listed On Inside Cover)

STEPHANIE W. KANWIT

General Counsel

AMERICAN ASSOCIATION

OF HEALTH PLANS

1129 Twentieth Street, N.W.

Suite 600

Washington, D.C. 20036-3421

(202) 778-3200

Jan S. AMUNDSON

General Counsel

QUENTIN RIEGEL

Deputy General Counsel

NATIONAL ASSOCIATION

OF MANUFACTURERS

1331 Pennsylvania Ave., N.W.

Washington, D.C. 20004-1790

(202) 637-3000

ANGELA J. FRANKLIN

Legislative Director

and Counsel

HEALTH INSURANCE ASSOCIATION

OF AMERICA

1201 “F” Street, N.W.

Suite 500

Washington, D.C. 20004

(202) 824-1667

ALAN Jay Lipsitz

Executive Director

BLUE PLAN LEGAL DEPARTMENT

COOPERATIVE

BiueCross BLUESHIELD

ASSOCIATION

1310 G Street, N.W.

Washington, D.C. 20005

(202) 942-1278

Attorneys for Amici Curiae

i

TABLE OF CONTENTS

Page

Teibe o6 Cite AmAUES 5 ko cc cc ccceseveceouns 2° Ca

PRN CE IGE occ cccctccsecccsateeuses |

Summary of the Argument in Support of Petitioners’

PED ccc cecccsecancceaudeesens 4

I eer er er rere 7

A. AWP Statutes Confer No Benefits Upon

PP, vob cccadccdaesecussesas 7

1. Only Providers Have Rights Under AWP

DN 60% 654 060440000404400000% 7

2. AWP Laws Are Not Akin to State

Mandated Benefit Laws. ............ 9

3. AWP Laws Offer No Quality of Care

Advantages to MCO Members. ...... 10

B. The Sole Effects of AWP Laws Are

To Empower Providers to Resist Price

Competition and to Impair the Growth of

DE ghd oWub hens oee0es bAS45 00'S 008% 13

C. AWP Laws Do Not Benefit the Purchasers of

MCO Products and Services. ............ 17

Contents

Page

D. AWP Laws are Preempted Because They

Interfere With The Right and Ability of

Employers and Plan Fiduciaries to Design

ERISA Plan Benefits, and to Administer

ERISA Plans Without Interference by

PP, cncduceesedscbeceéusenéncese 20

E. Kentucky’s AWP Law is Not Saved from

Preemption by ERISA’S Insurance Savings

EE, Weecccececsscaccucéecéoesseses 22

SE ee ee ee eae hae 23

ul

TABLE OF CITED AUTHORITIES

Page

FEDERAL CASES

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

DE neansdus 6666000046000 00000cR0neeORe 20

Arcudi v. Stone & Webster Eng’g Corp., 463 U.S.

DTD Sacacaseneusbauchsucheauens ues 20

Blue Cross and Blue Shield of Kansas City v. Bell,

798 F.2d 1331 (10th Cir. 1986) .............. 9

Blue Cross Blue Shield of Ala. v. Nielsen, 917

F. Supp. 1532 (N.D. Ala. 1996) .............. 10

Curtiss-Wright Corp. v. Schoonejongen, 514 U.S. 73

+i veddaee bédeCdebececeedcotecencens 20

Delta Dental Plan of Cal. v. Mendoza, 1996 U.S.

Dist. LEXIS 2106 (N.D. Cal. 1996) ........... 10

FMC Corp. v. Holliday, 498 U.S. 52 (1990) ...... 20

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

OL I rr 8, 22, 23

Hlinka v. Bethlehem Steel Corp., 863 F.2d 279

DEE DEE wendsdécadessvesicdndeediaies 20

Kentucky Ass'n of Health Plans, Inc., v. Nichols, 227

Sede SEs GUE Ge ED cccccccccecesccscoes 3

iv

Cited Authorities

Page

Lockheed Corp. v. Spink, 517 U.S. 882 (1996) .... 20

Maez v. Mountain States Telegraph and Tel. , 54 F.3d

PE CGE GED dtedesntudnanessdunune 20

McGann v. H & H Music Co., 946 F.2d 401 (Sth Cir.

SE 6unnnedss cedenuesdéduweséwenssteenes 20

Med. Mut. of Ohio v. DeSoto, 245 F.3d 561 (6th Cir.

DEE. std dndedeetSucodweaveandskareneuste 20

Metro. Life Ins. v. Massachusetts, 471 U.S. 724

SE Gnbéneed 6eonnndancdedsendnassoobens 9, 22

N.Y. State Conference of Blue Cross & Blue Shield

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

ietvivennehdasdwhsdednwaenee eesadeaeebes 15, 20

Prudential Ins. Co. of Am. v. Nat'l Park Med. Ctr,

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

Rush Prudential HMO, Inc. v. Moran, 536 U.S. __

SPE GED ndcctcnesccvsacesccessesees 22

Shaw v. Delta Air Lines, Inc., 463 U.S. 85 (1983) ... 20

Stone & Webster Eng'g Corp. v. Ilsley, 690 F.2d 323

SE MED dndacecdcbeedesndsvceesesede 20

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

995 F.2d 500 (4th Cir. 1993) ...........0005. 7

Vv

Cited Authorities -

Page

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

105 F.3d 1035 (Sth Cir. 1997) ............... 20

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

DE £4:n Obi ndee besideneebuceuceessens 9

Washington Physicians’ Service Ass'n v. Gregoire,

147 F.3d 1039 (9th Cir. 1998) ............... 9,10

FEDERALSTATUTES

SPREE SKGivududebbbekinannkvns cases 17

29 U.S.C. §§ 186(c)(4) and (5) ..............0,. 17

PRD kndetascacvhnstcdsdecksvecs 1, 3, 20

PE ED 445 bcdwédeend beeduesdiasetos 18

Fe 4, 7, 20, 21

PEE bc cbeddncdsedndnsendeeacacas 4

STATE STATUTES

Ky. Rev. Stat. § 304.17A-005(23) .............. 21

Ky. Rev. Stat. § 304.17A-270 ............ ce. 4,5,12

vi

Cited Authorities

MISCELLANEOUS

American College of Cardiology Website.

www.acc.org/clinical/competence/coronary/

SUP EUEUUEEED ccc cccvccccvessesssencese

Bureau of Economics, Federal Trade Commission, Staff

Report on the Health Maintenance Organization and

its Effects on Competition (1977) ............

Can Managed Care Competition Solve Problems of

Market Failure, Health Aff. Supp. 1993, at 216,

Pree rer ere rrr TT rere rr eT Terr

Paul Fronstin, Number of Americans with Job-Based

Health Benefits Increased in 2000 While

Uninsured Declined, EmpLoYee BENEFIT RESEARCH

INSTITUTE NEWSLETTER, Vol. 22, No. 11 (Nov. 2001)

GUE coctacevecessoseccsecucssccssesess

Thomas L. Greaney, Competitive Reform in Health

Care: The Vulnerable Revolution, 5 Yale L.J. ...

Health Insurance Prognosis is Poor, THE

WASHINGTON Post, September 6, 2002, Section E

DA DEES cc cwrdcevederncessesesessacaes

Fred. J. Hellinger, HEALTH Arr., Vol. 14, No. 4 at 299;

“Any Willing Provider Legislation: Who's Pro,

Who s Con, Who's on the Fence and Why,” HEALTH

TECHNOLOGY ASSESSMENT News (September-

SE BOE. Rideubcecsudeccocssicetéeeten

Page

11

16

16

16

vil

Cited Authorities

Page

Andrew L. Jiranek & Susan Baker, Any Willing

Provider Laws, 28 MD. B.J. 27 (1995) ........ 16

Jensen & Morrissey, Employer-Sponsored Health

Insurance and Mandated Benefit Laws, Tue

MILBANK QUARTERLY, Vol. 77, No. 4, 425, 436

Peer rr TT ere ere TTT TTT TTT ee 13

Karen A. Jordan, Managed Competition And Limited

Choice Of Providers: Countering Negative

Perceptions Through A Responsibility To Select

Quality Network Physicians, 27 Ariz. St. L.J. 875,

ES eee Tere ee ee ee 11, 13,19

Kaiser Family Foundation Annual National Survey

of Employer Health Benefit Plans. Spring 2001-

Oe Gace elenthusted nbs 6660dcseesabeeeseses 7

Kaiser Family Foundation and Health Research and

Educational Trust, Employer Health Benefits 2002

Summary of Findings 2002, www.kff.org ...... 7

Mark A. Kadjielski, ef al., Peer Review Potpourri:

New Developments In Credentialing And

Privileging, 15 Whittier L. Rev. 51, 53 (1994) .. 11

Marsteller, Bovbjerg, et al.; The Resurgence of

Selective Contracting Restrictions, THE JOURNAL

oF HEALTH Po .itics, PoLicy AND Law, 22:1133-89

DP Cciseeeeaichheecuiecectskeonenécshes 13

vill

Cited Authorities

John Miles, HEALTH CARE & ANTITRUST LAw:

PRINCIPLES AND Practice (Vol. 3, 2002) ........

National Anti-Managed Care Laws Would Raise

Health Care Costs, Study Says, 3 Health Care

Policy Rep., (BNA) No. 26, at D-53 (June 26,

SD ick Gudcaasuewssnateddeesuunenedess

The Resurgence of Selective Contracting Restrictions,

THE JOURNAL OF HEALTH Po .itics, PoLicy AND Law,

I et Lecce is Jeeeieewad

The Robert Wood Johnson Foundation Website,

National Program Reports, Research on the

Effects of Any-Willing-Provider Laws. http://

www.rwjf.org/reports/grr/029014.htm .........

Weiner & de Lissovy, Razing a Tower of Babel: A

Taxonomy for Managed Care and Health

NO ie hr ek ee cede e

Page

16

13

13

16

!

STATEMENT OF INTEREST'

The American Association of Health Plans, Inc. (“AAHP”’)

is the national association for the managed care community.

Its membership includes health maintenance organizations,

preferred provider organizations, third-party health plan

administrators, health care utilization review organizations,

prepaid limited health service plans, and other integrated

health care delivery systems. AAHP represents more than

1,000 managed health care organizations serving nearly

160 million Americans, the majority of whom are participants

or beneficiaries of employee benefit plans under the Employee

Retirement Income Security Act of 1974 (“ERISA”),

29 U.S.C. § 1001, et seg. AAHP’s mission is to advance

health care quality and affordability through leadership in

the health care community, advocacy and the provision of

services to member health plans.

The Health Insurance Association of America (“HIAA”’)

is the nation’s most prominent trade association representing

the private health care system. Its nearly 300 members

provide health, long-term care, dental, disability, and

supplemental coverage to more than 100 million Americans.

HIAA develops and advocates federal and state policies that

build upon the health care system’s quality, affordability,

accessibility and responsiveness. It is the nation’s premier

provider of self-study courses on health insurance and

managed care.

1. The parties have consented to the filing of this brief.

Their letters of consent are on file with the Clerk of the Court.

This brief has been authored in its entirety by undersigned counsel

for the amici curiae. No person or entity, other than the named

amici curiae and their counsel, made any monetary contribution to

the preparation and submission of this brief.

2

The National Association of Manufacturers (“NAM”) —

18 million people who make things in America — is the

nation’s largest industrial trade association. The NAM

represents 14,000 members (including 10,000 small and mid-

sized companies) and 350 member associations serving

manufacturers and employees in every industrial sector and

all 50 states.

The Blue Cross Blue Shield Association (““BCBSA”)

comprises 42 independent, locally operated Blue Cross and

Blue Shield Plans. The Blue Cross and Blue Shield companies

provide, through relationships with employers, employee

benefits plans, and direct contracts with subscribers, health

insurance to private and public employees and ind*viduals,

including fee-for-service programs, health maintenance

organizations, preferred provider organizations, and a

variety of other offerings. They also provide third-party

administrative services to private and public employee

benefits plans. Collectively, the Blue Cross and Blue Shield

companies furnish health care coverage to 84.5 million —

or one in four — Americans, making them (as a group) the

largest U.S. entity offering health insurance and benefits.

As members of the health plan, health insurance and

business communities, Amici AAHP, HIAA, NAM and

BCBSA have vital interests in the federal questions presented

by this case under the ERISA statute. The member

organizations of amici AAHP, HIAA, NAM and BCBSA

fund, provide, arrange for, insure or administer, on behalf

of employers with self-funded ERISA health benefit plans,

the provision of covered health services to participants and

beneficiaries (“Ps&Bs”) of employee benefit plans regulated

3

by the Employee Retirement Income Security act of 1974

(“ERISA”). 29 U.S.C. § 1001, et seg. (as amended). The

members of amicus NAM, are employers, and “employment

is the source of health care coverage for two-thirds (67%) of

this country’s population.” Paul Fronstin, Number of

Americans with Job-Based Health Benefits Increased in 2000

While Uninsured Declined, EmpLovee BENEFIT RESEARCH

INSTITUTE NEWSLETTER, Vol. 22, No. 11 (Nov. 2001) pp. 1-2.

Amici have joined together to file this brief in support

of Petitioners’ Brief on the Merits because the Sixth Circuit

Court of Appeals’ decision in Kentucky Association of Health

Plans, Inc. v. Nichols, 227 F.3d 352 (6th Cir. 2000) is

unsupported by ERISA and by decisions of this Court that

are directly on point, and because of the extraordinarily

destabilizing effects of the holding upon both: (a) providers

of health care benefit coverages and benefit administration

services; and (b) the purchasers and payors of such services.

The Sixth Circuit’s decision which holds that Kentucky’s

“Any Willing Provider” statutes (“AWP”) are saved from

preemption under ERISA will have a significantly adverse

effect on the ability of both managed care organizations

(“MCOs”), such as the members of AAHP, HIAA and

BCBSA, and employers, such as the members of NAM, to

control the increasing rate of inflation in the cost of health

care and health care coverage. As the lower court recognized,

its decision allows states to interfere with ERISA benefit plan

design and administration. /d. at 358-63, 372-73. Critically,

the decision rests on the wholly mistaken premise that AWP

laws benefit Ps&Bs of either insured or self-funded ERISA

plans. To the contrary, the only persons and entities whose

interests are advanced and protected by AWP statutes are

health care providers, not their patients.

4

SUMMARY OF THE ARGUMENT IN SUPPORT OF

PETITIONERS’ BRIEF ON THE MERITS

The holding of the Sixth Circuit Court of Appeals

threatens the financial ability of the Nation’s employers to

provide comprehensive health benefits to their employees

who depend upon their employment for health care coverage

for themselves and their dependents. That holding, if allowed

to stand, eliminates long-standing and effective means of cost

control utilized by HMOs and other MCOs. It effectively

nullifies the determination of Congress, when it enacted

the Federal Health Maintenance Organization Act of 1973,

Pub. L. 93-222 (as amended), 42 U.S.C. §§ 300e, et seq.,

that entities with controlled and limited provider networks

constitute an effective and beneficial approach to the

containment of health care costs.

The lower court’s decision rests on two indefensible

assumptions. The first is that AWP laws constitute a benefit

to plan participants. That assumption might be valid if AWP

laws granted to MCO members any capacity to compel

providers to participate in the provider network created by

their MCO, on the terms offered by the MCO. Neither

Kentucky’s AWP law nor those of any other state, grant any

such ability to MCO members. In sum, the decision whether

or not to participate in a network is left solely to the discretion

of providers. Ky. Rev. Stat. § 304.17A-270.

AWP statutes, therefore, cannot reasonably be understood

to confer an insurance benefit, indeed a benefit of any kind,

to insureds, including MCO members, the risk of which is

borne by MCOs. This fact alone precludes any possibility

that the insurance Savings Clause’ (the “Savings Clause’”’)

2. 29 U.S.C. § 1144(b)(2)(A).

5

exception to ERISA’s preemption provisions can apply to

Kentucky’s AWP law. The only risk to which Kentucky’s

AWP statute exposes MCOs is the risk that a provider may

choose to participate in their network when the financial

calculus works in the provider’s favor. Providers, however,

are not insureds. The risk that a provider may find it

economically advantageous to force its entry into a network

cannot be characterized as an insurance risk under any

reasonable meaning of that term.

The second untenable assumption is that the provision

of Kentucky’s AWP statute which states that any provider

who elects to join the network must accept the terms of

participation offered by the network actually can operate to

prevent the MCOs’ costs of providing care from increasing.

Ky. Rev. Stat. § 304.17A-270. As a simple matter of

economic common sense and reality, however, it is plain that

ihe inability of MCOs to control the number of} _viders in

their network deprives them of the ability to negotiate rates

on the basis of volume discounts. Under an AWP statute

regime, an MCO cannot tender an assurance of any kind to

providers that their direct competitors will be excluded from

the MCO’s network and from having access to the MCO’s

members. Consequently, providers have little, or no, incentive

to agree to charge the MCO materially discounted rates for

their services to the MCO’s members.

There are other forms of adverse economic effects caused

by AWP statutes that the Sixth Circuit’s decision permits,

none of which confer additional benefits to MCO members

or transfer risk to MCOs. The addition of providers to a

network is not a cost free exercise for the MCO. For example,

there are the provider applications to be processed. This includes

provider credentialing, the costs of educating the provider, or

6

its billing staff, on how to submit claims in compliance with

the MCO’s criteria, and supervising the compliance of additional

providers with the MCO’s quality and utilization criteria.

All of these costs are passed to MCO members and employers,

and not a penny’s worth of those costs is spent on the provision

of additional health care to MCO members.

Remarkably, the lower court ignores the complete absence

of any evidence in the record that the AWP law addresses or

rectifies any alleged or documented coverage or health care

quality gaps that adversely affect Kentucky’s MCO members.

Nothing in the record documents that either the quality or

the quantity of the care received by MCO members was

deficient, much less deficient in any manner that is addressed

or ameliorated by the provisions of the AWP statute.

Indeed, AWP laws may have the effect of diminishing

the average quality and competence of the providers in an

MCO’s network, particularly with respect to certain

specialties. As amici hereafter demonstrate, AWP statutes

impair the capacity of MCOs to: (a) control the quality of

the providers they allow in their networks; and (b) periodically

evaluate the quality and efficiency of the care network

providers deliver to their patients who are MCO members.

In addition to the public health implications of these

impairments, the forcible inclusion of providers in an MCO’s

network has adverse liability implications for MCOs which,

under a number of legal theories, have been held accountable

for the negligent acts of the providers in their networks. AWP

statutes such as Kentucky’s law here at issue create quality

control and liability burdens and exposures for MCOs,

without improving the quality of care available to or received

by their members. They also fail to provide MCOs with any

means with which to manage those additional burdens other

;

than, of course, incurring additional costs that will increase

the current double digit rate of inflation for health care

coverage.’

ARGUMENT

A. AWP Statutes Confer No Benefits Upon MCO

Members.

1. Only Providers Have Rights Under AWP Statutes.

There is no advantage to the Court for the amici to present

what would be a redundant demonstration of the clear errors

of law in the Sixth Circuit’s ERISA Insurance Savings Clause

(the “Savings Clause’’), 29 U.S.C. § 1144(b)(2)(A), analysis.

The Petitioners Opening Brief addresses that issue

comprehensively. Amici will focus upon a critical misunder-

standing by the lower court of the purpose and effects of

AWP laws.

Amici submit that the Sixth Circuit Court of Appeals,

as well as the Fourth Circuit Court of Appeals in its decision

in Stuart Circle Hosp. Corp. v. Aetna Health Management,

995 F.2d 500 (4th Cir. 1993), erred because they failed to

acknowledge a fundamental characteristic of AWP statutes.

AWP statutes provide no rights, benefits, entitlements or

3. According to the Kaiser Family Foundation annual national

survey of employer health benefit plans, “Between Spring of 2001

and Spring of 2002, monthly premiums for employer-sponsored

health insurance rose 12.7%. ...” Kaiser Family Foundation and

Health Research and Educational Trust, “Employer Health Benefits

2002 Summary of Findings” 2002, www.kff.org. See also, Health

Insurance Prognosis is Poor, Tit WASHINGTON Post, September 6,

2002, Section E at pp. | and 4.

8

privileges to MCO members. This is so even if such members’

coverage is through insurance rather than through a self-

funded ERISA plan administered by an MCO. Under an AWP

statute, an MCO member has no individual capacity to either:

(a) compel an MCO plan to include a provider in its network

or; (b) to compel a provider to participate in such a network.

If that provider does not choose to seek admission to the

network, the MCO member is utterly powerless under AWP

statutes to do anything about that circumstance.

There is no provision under the AWP statutes of either

Kentucky or Virginia (Virginia Code 38.2-3407) which enable

MCO members to compel a provider to agree to the

compensation terms of an MCO. If, as a hypothetical matter,

AWP statutes empowered MCO members to compel providers

to participate in an MCO’s network upon terms generally

offered to similarly situated providers by the MCO, there

arguably would exist some benefit that was conferred upon

the MCO member. That circumstance would justify an

argument whether the benefit involved a transfer of risk that

qualified as the “business of insurance” under the Savings

Clause. Amici submit that, in any event, even this “benefit”

would not qualify as a transfer of risk within the meaning of

the term “business of insurance.” The ability of an MCO

member to compel a provider to join an MCO’s network can

have no impact on the actuarial or statistical probability that

the member will experience a covered health event. It can

only impact upon the identity of the vendor who will be paid

by the MCO. This result fits squarely within the Court’s ruling

in Group Life & Health Ins. Co. v Royal Drug Co., 440 U.S.

205, 231 (1979), that the relationship between an insurer and

its vendors is not a part of the “business of insurance.”

9

That circumstance, however, is purely a hypothetical one

and does not exist. There was no objective basis for either

the Sixth Circuit or the Fourth Circuit Courts of Appeal to

even venture into an analysis of whether AWP laws could be

saved from preemption under the Savings Clause because

those laws do not confer any benefit of any kind on insureds.

2. AWP Laws Are Not Akin to State Mandated

Benefit Laws.

AWP laws cannot be analogized to state laws that

mandate insurers and MCQOs to cover certain diseases, mental

illness for example, or to include certain categories of providers

in their networks, such as osteopaths. See Metropolitan Life

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

statute requiring insurers to cover mental health benefits

saved from preemption under Savings Clause.); Blue Cross

and Blue Shield of Kansas City v. Bell, 798 F.2d 1331

(10th Cir. 1986) (State law mandating that insurers cover

services by podiatrists and dentists among other specialties

was not preempted). In those instances, there is a transfer of

risk from insured MCO members to their MCOs, as such

laws compelled the MCOs to pay for categories and types of

medical services they did not previously cover, i.e., to assume

new risks. Cf. Union Labor Life Ins. Co. v. Pireno, 458 U.S.

119, 127 (1982). Kentucky’s AWP law is not comparable to

the State law at issue in Washington Physicians Service Ass'n

v. Gregoire, 147 F.3d 1039 (9th Cir. 1998). There, the statute

at issue required that the services of every type of licensed

health care provider be covered. /d. at 1042-43. It did not,

as is the case with Kentucky’s AWP law, empower providers

to force MCQOs to accept their participation in the MCO’s

10

networks. /d. Under the statute at issue in Gregoire, an MCO

might be obligated to include at least one acupuncturist

in its network, but could not be compelled to admit all

acupuncturists who desired to participate. /d.

In contrast, AWP laws such as Kentucky’s do not shift

or transfer any new risks, nor do they allow MCOs to limit

the number of providers in their network. AWP laws do

nothing more than dictate to ERISA plans which choose to

have their benefits administered or provided by MCOs the

identity of the providers entitled to be paid for services to

plan participants. The Sixth Circuit erred in failing to

recognize that state AWP laws, such as Kentucky’s, that

dictate to ERISA plan claim administrators who they must

pay for covered benefits are preempted by ERISA. See, e.g.,

Blue Cross Blue Shield of Alabama vy. Nielsen, 917 F. Supp.

1532 (N.D. Ala. 1996); Delta Dental Plan of California v.

Mendoza, 1996 U.S. Dist. Lexis 2106 (N.D. Cal. 1996).

3. AWP Laws Offer No Quality of Care Advantages

to MCO Members.

Theoretically, the argument might be advanced that AWP

laws somehow improve the quality of the care available to

MCO members. However, nothing in the record of this case

offers any factual support for that argument. There is no

evidence that the care provided to MCO members who only

have access to limited provider networks compares

unfavorably in any respect or degree to the care received by

persons whose coverage permits them to receive care from

—

1]

any provider of their choice. Indeed, a compelling argument

can be made for the proposition that AWP laws adversely

affect the ability of MCOs to take steps to develop networks

populated by superior providers.

“[A]ny-willing-provider laws greatly hinder quality

assurance.” Karen A. Jordan, Managed Competition And Limited

Choice Of Providers: Countering Negative Perceptions Through

A Responsibility To Select Quality Network Physicians, 27 Ariz.

St. L.J. 875, 918 (1995) (hereafter referred to as “Jordan’”’).

This is so because a proper network should have the right mix

of providers and the right providers. /d. at 919. For example, it

has been suggested that heart surgeons should perform some

200 heart surgeries a year to “develop and maintain the skills

necessary to do high-quality work.” Mark A. Kadjielski, et ai.,

Peer Review Potpourri: New Developments In Credentialing

And Privileging, 15 Wuirtter L. Rev. 51, 53 (1994).4 MCOs,

therefore, in order to best serve their members, should have the

ability to exercise selectivity in order to provide network

physicians, specialists in particular, an adequate patient base so

that their expertise and level of competence will not be diluted.

Jordan, at 919.

4. The American College of Cardiology also has identified and

recommended minimum numbers of procedures which should be

performed on an annual basis in order to maintain competency. These

standards apply to both cardiologists and institutions that provide

cardiology services. See http://www.acc.org/clinical/competence/

coronary/jac5492Flalb.htm.

12

It may be argued that because AWP laws require a

provider to accept an MCO’s network participation criteria,

a provider who does not satisfy the MCO’s credentialing

criteria does not have to be allowed into the network. That

simplistic argument overlooks, actually evades, a number of

objective realities. For example, MCOs’ credentialing criteria

typically set qualification standards such as licensure,

acceptable medical malpractice history, medical malpractice

coverage at specified levels, possession of staff privileges in

accessible network hospitals, board certification or board

eligibility. These criteria, however, have to be flexible in

application. MCOs’ service areas may include medically

underserved areas that have shortages of specialists, tertiary

hospitals, and even primary care physicians. MCOs must be

able to include in their networks for their members located

in such underserved areas accessible providers whose

qualifications are not on a par with those of network providers

in medically better served regions of the MCOs’ service area.°

That circumstantial need, however, should not prevent MCOs

from being more selective, both in terms of cost and quality,

in those parts of their service area where there is a plentiful

supply of providers in competition with each other. AWP laws

prevent MCOs from exercising any such judgments and

5. AWP laws also create a bias towards increasing provider

incomes and the cost of health care services by skewing the law of

supply and demand. In a medically underserved area, the scarcity of

supply, i.e., of available providers, will drive the price, or cost, of

the suppliers’ services upwards. Where the supply of providers is

plentiful, the price of their services shou id move to lower levels.

AWP laws interfere with that dynamic. They empower providers in a

high supply market to demand inclusion in an MCO’s market at the

prices paid by the MCO to providers in the low supply areas on the

argument that such higher prices are the “terms and conditions” of

participation in their network offered by MCOs. Ky. Rev. Star.

§ 304.17A-270.

13

choices. There is no sensible argument to be made for the

proposition that this inability benefits MCO members in any

manner.

ao

B. Theo Sole Effects of AWP Laws Are To Empower

Providers to Resist Price Competition and to Impair

the Growth of MCOs.

The only beneficiaries of AWP laws are providers who

are opposed to managed health care and seek to eliminate

the ability of MCOs to negotiate discounted payments

through their ability to deliver patient volumes and through

the achievement of economies of scale. Jensen & Morrissey,

Employer-Sponsored Health Insurance and Mandated Benefit

Laws, THE MILBANK QuarTeRLy, Vol. 77, No.4, 425, 436

(1999); Marsteller, Bovbjerg, et al.; The Resurgence of

Selective Contracting Restrictions, THE JOURNAL OF HEALTH

Po.itics, POLICY AND Law, 22:1133-89 (1997). A study by the

University of Alabama funded by the Robert Wood

Johnson Foundation (“RWJF Study”) concluded that AWP

laws “are not necessarily Cesigned to protect quality, but

instead are often conceived as efforts to protect providers

from the effects of competition.” The Robert Wood Johnson

Foundation, National Program Reports, Research on the

Effects of Any-Willing-Provider Laws, available at http://

www.rw)jf.org/reports/grr/029014.htm (updated January

2001). It is not coincidence that “The proponents of any-

willing-provider laws are ... often groups of health care

specialists or allied health professionals who are suddenly

finding it difficult to market themselves.” Jordan, 27 Ariz.

St. L. J. at 919.

The Federal Trade Commission (“FTC”) was requested

by the Attorney General of Montana and the Senates of the

14

States of California and New Hampshire to provide them

with its opinion on the issue whether AWP laws impair

competition.® In every instance, the FTC concluded that

impairment of competition was the inevitable result of those

statutes, as their effect was to empower providers to compel

MCOs to pay providers more for their services than if

providers were forced to compete for the business of MCOs.

John Miles, HrattH Care & ANTITRUST LAW: PRINCIPLES AND

Practice (Vol. 3, 2002) (“Miles”) at App. D36-7; App. D33-8;

and App. D32-7.

In each of the cited letters, the FTC emphasizes that AWP

laws have anti-competitive effects that increase costs,

specifically citing to economic studies which demonstrate

that selective contracting practices by MCOs moderate health

care cost increases. Jd. at App. D36-4. In an important

conclusion, the FTC emphasizes that:

To the extent that opening programs to all providers

reduces the portion of subscribers’ business that

each provider can expect to obtain, these providers

may be less willing to enter agreements that

contemplate lower prices or additional services.

Moreover, since any provider would be entitled

to contract on the same terms as other providers,

there would be little incentive for providers to

compete in developing attractive or innovative

proposals. Because all providers can ‘free ride’

6. FTC Staff Letter to the Attorney General of Montana

Regarding “Any Willing Provider” Laws, February 4, 1993 (all

providers); FTC Letter to the California State Senate Regarding

“Any Willing Provider” Laws; June 26, 1992 (pharmacy providers);

FTC Letter to the New Hampshire Senate Regarding “Any Willing

Provider” Laws, March 17, 1992 (pharmacy providers).

15

on a successful formulation, innovative providers

may be unwilling to bear the cost of developing a

proposal. Thus ‘any willing provider’ requirements

may substantially reduce provider competition for

this segment of their business.

Id. at D36-6. In an observation relevant to the always pertinent

question, “Cui bono?” (who benefits?), the FTC points out that

AWP laws limit consumer choice in the marketplace. /d. at

D36-7. See note 5, supra. They have that effect because they

deprive consumers of access to the less costly coverage option

of a limited provider panel or network, with its lower costs of

administration and greater ability to obtain volume discounts

on fees and rates from providers. Jd. MCOs certainly do not

benefit from the impairment of their ability to contain costs.

That leaves only the providers who gain anything from AWP

laws. The protection of the income and financial well-being of

health care providers by sheltering them from marketplace

competition is not, and never has been, an aspect of the states’

regulation of the business of insurance.

Nor can such protection of the economic interests of

providers be justified on the basis of the state’s interest in the

regulation of health care policy. Cf New York State Conference

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

U.S. 645, 656-662 (1995). There is no evidence in either the

record of this case, or in documented peer reviewed studies,

that the existence of closed panel health care coverage options

in the marketplace has caused, or is likely to cause, a shortage

of providers of any kind constituting a threat to the public

welfare. As the FTC has pointed out:

Indeed, by reducing their competitiveness with other

kinds of third-party payment programs, requiring

16

PPOs (preferred provider organizations

constituting MCO selected and limited provider

panels) to grant open participation may reduce the

number, variety, and quality of prepayment

programs available to consumers without

providing any additional consumer benefit.

Miles at App. D36-7 (emphasis added). The term “PPO” is

an acronym for “Preferred Provider Organization,” a form

of MCO network structure. See Weiner & de Lissovy, Razing

a Tower of Babel: A Taxonomy for Managed Care and Health

Insurance Plans, 18 J. Health Politics, 75, 99 (1993). For the

past twenty-five years, the FTC has supported the marketplace

availability of selective MCO controlled provider panel health

care coverage options. See Bureau of Economics, Federal

Trade Commission, Staff Report on the Health Maintenance

Organization and its Effects on Competition (1977). The FTC

has brought enforcement actions against providers and

provider associations when they have attempted to eliminate

from the marketplace MCOs that utilize selective contracting

and closed provider panels. Miles at App. at D-33-2.’

7. The FTC hardly stands alone in its position that AWP laws

are anti-competitive and anti-consumer. See generally, Fred J.

Hellinger, Any-Willing-Provider Laws and Freedom of Choice Laws:

An Economic Analysis, HeattH ArrF., Vol.14, Number 4 (1995);

National Anti-Managed Care Laws Would Raise Health Care Costs,

Study Says, 3 HeattH Care Pouicy Rep., (BNA) No. 26, at D-53

(June 26, 1995); see Andrew L. Jiranek & Susan Baker, Any Willing

Provider Laws, 28 MD. B.J. 27, (1995); Jonathan E. Fielding &

Thomas Rice, Can Managed Competition Solve the Problems of

Market Failure, Heactu Arr., Supp. 1993, at 216, 221; Cf Thomas

L. Greaney, Competitive Reform in Health Care: The Vulnerable

Revolution, 5 Yate L.J. on Rec. 179, 187-88 (1988).

ee =

17

C. AWP Laws Do Not Benefit the Purchasers of MCO

Products and Services.

There is no documentation for the proposition that AWP

laws provide any benefit or advantage to the actual recipients

of the health care services covered by ERISA plans —

i.e. Participants of such plans. AWP laws do not: (a) require

coverage of additional benefits; (b) reduce co-payments or

deductibles; (c) lower employees’ share of premiums,

or contributions in the case of self-funded plans, nor;

(d) critically, create any authority or capacity the Participants

may exercise to compel providers to join an MCO network.

It also is the case that AWP laws confer no benefit or

advantage upon the entities which bear the primary cost

burden of funding ERISA health and welfare plans —

employers.

In the context of ERISA plans, the purchasers of coverage

(or benefit plan administration services in the case of self-

funded plans) from MCOs normally are employers who

provide health care coverage benefits to their employees and

the employees’ eligible dependents as well. Fronstin, pp. 1-2.

The sole exception consists of the so-called “Taft-Hartley

Trust” plans. 29 U.S.C. §-141, et seq. These trusts are jointly

trusteed by management and labor and sponsor ERISA plans.

29 U.S.C. § 186(c)(5)(B). The funding for such trusts derives

from employer contributions required by the terms of

collective bargaining agreements between them and labor

organizations. 29 U.S.C. §§ 186(c)(4) and (5). Both labor

and management are united in their opposition to AWP laws

as damaging to the interests of the Participants that they serve

as fiduciaries.

18

In Prudential Ins. Co. of America v. National Park Medical

Center, Inc., 154 F.3d 812 (8th Cir. 1998), for example, labor

unions (the AFL-CIO of Arkansas and the United Paperworkers

International Union) joined with the largest private employer

in Arkansas, which sponsored a self-funded ERISA health and

welfare plan for its employees (Tyson Foods, Inc.), and MCOs

(Prudential entities) to challenge Arkansas’ AWP statute. Under

Section 404 of ERISA, 29 U.S.C. § 1104, ERISA fiduciaries

are subject to a duty to act solely and exclusively in the interests

of the Participants of the plans they serve. If AWP laws conferred

any benefit upon ERISA plan Participants that was not clearly

outweighed by such laws’ detrimental effects upon the interests

of the Participants, ERISA plan fiduciaries would be obligated

to support, not oppose, AWP laws. 29 U.S.C. § 1104(a)(1). There

is no case to be found, however, to which an ERISA plan

fiduciary is a party, where that fiduciary supported a state’s AWP

law.

The researchers who conducted the RWJF Study cited

earlier® attempted to determine whether there was a discernable

pattern among the states that enacted AWP laws and those states

which were unlikely to enact such laws. See supra, National

Program Reports, Research on the Effects of Any-Willing

Provider Laws. The researchers “determined that states with

greater numbers of health care providers were more likely to

enact AWP laws ..., while states with greater numbers of

large employers were less likely to enact the laws.” /d. at p. 2 of

4. In an intriguing finding, the researchers concluded that AWP

laws are more likely to be enacted in states that have not

experienced substantial MCO penetration. Jd. AWP statutes thus

are “preemptive” strikes by providers to prevent MCOs from

bringing managed care practices into the state that would require

providers to engage in price competition. /d.

8. See p. 14, supra.

TR me

19

Consistent with the conclusions of the RWJF Study

researchers, the enactment of AWP legislation has been

attributed to “state legislators’ desires to placate ‘a vocal and

respected constituency’ of health providers.” Jordan, 27 Ariz.

L.J. at 916. State executives, however, who are responsible

for meeting the healthcare cost burdens of Medicaid programs

and benefits for public employees, are not at all enthusiastic

about AWP laws. In July 1994, the National Governors’

Association unanimously approved a policy to resist AWP

legislation. Hellinger, HEALTH Arr., Vol. 14, No. 4 at 299;

“Any Willing Provider Legislation: Who's Pro, Who’s Con,

Who's on the Fence and Why,” HEALTH TECHNOLOGY

ASSESSMENT News (September-October 1994): 3.

The alignment of the political and economic interests in

favor of and opposed to AWP laws is consistent with the

unavoidable conclusion that such laws have nothing at all to

do with the business of insurance. Their sole purpose and

utility is to permit providers to engage in concerted activities

that preclude to MCOs the ability to bargain with providers

who have been evaluated and selected for inclusion in their

networks for reasons of quality, acceptability to members,

and reduced cost. AWP laws promote the very type of activity

that the FTC has found to be anti-competitive, and for which

it has successfully pursued remedial actions against providers

and provider associations. See Miles, App. D36-4, 6-7.

20

D. AWP Laws are Preempted Because They Interfere With

The Right and Ability of Employers and Plan

Fiduciaries to Design ERISA Plan Benefits, and to

Administer ERISA Plans Without Interference by

the States.

When Congress enacted ERISA, it clearly intended to

provide employers with wide latitude in deciding: (a) which

health care coverage benefits they would provide to their

employees;’ and (b) how they would fund those benefits.'°

ERISA also was expressly designed to prevent the states from

interfering with the administration of ERISA plans directly, or

on a pretense that they constitute “insurance” subject to state

supervision. 29 U.S.C. § 1144(b)(2)(B); see, e.g., FMC Corp.

v. Holliday, 498 U.S. 52, 60-65 (1990); Medical Mutual of Ohio

v. DeSoto, 245 F.3d 561, 572-574 (6th Cir. 2001). The Sixth

Circuit’s decision disregards the clear intent of Congress in all

of these respects.

9. See, e.g.,29 U.S.C. § 1001; ERISA leaves to private employers the

authority to decide what health care benefits they will cover. Lockheed Corp.

v. Spink, 517 U.S. 882, 887 (1996); Curtiss-Wright Corp. v. Schoonejongen,

514 U.S. 73, 77-80, (1995) (“. . . we are mindful that ERISA does not create

any substantive entitlement to employer-provided health benefits or

any other kind of welfare benefits . . .”); Shaw v. Delta Air Lines, Inc.,

463 U.S. 85, 90-91 (1983); Alessi v. Raybestos-Manhatian, Inc., 451 U.S.

504, 511 (1981); Maez v. Mountain States Tel. and Tel., 54 F.3d 1488

(10th Cir. 1995); McGann v. H & H Music Co., 946 F.2d 401 (Sth Cir.

1991); Hlinka v. Bethlehem Steel Corp., 863 F.2d 279 (3d Cir. 1988).

10. ERISA preemnts state laws that mandate employee benefit

structures or their administration. See. e.g., New York State Conference

of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645

(1995); Texas Pharmacy Ass'n v. Prudential Ins. Co. of America, 105

F.3d 1035 (Sth Cir. 1997), cert. denied 522 U.S. 820 (1997); Stone &

Webster Engineering Corp. v. llsley, 690 F.2d 323, 329 (2d Cir. 1982),

aff'd sub nom; Arcudi v. Stone & Webster Engineering Corp., 463 U.S.

1220 (1983).

21

First, the decision simply ignores the reality that Kentucky’s

AWP statute is applicable to self-insured ERISA plans that are

administered by MCOs. Ky. Rev. Stat. § 304.17A-005(23).

The statute is applicable without exception to all the activities

and functions of MCOs. It thus sweeps into its scope ERISA

self-funded plans whose only connection to an MCO is that

they have retained the MCO to administer claims for which the

plans alone, not the MCO, bear the risk of payment. As the

MCO is not an insurer in that setting, the only basis on which it

can be argued that there is a risk-shifting transaction that would

constitute the “business of insurance” is if the transaction

between the self-funded ERISA plan and its Participants is

treated as the insurance transaction. That determination,

however, is expressly proscribed to the states by ERISA’s

“Deemer Clause.” 29 U.S.C. § 1144(b)(2)(B).

Second, Kentucky’s AWP law effectively prevents self-

funded ERISA plans from offering a health care coverage benefit

that involves a limited, or selective, provider network, unless

the plan itself undertakes to both create and to administer that

network. The pragmatic reality, however, is that only the largest

and most sophisticated employers and plans could undertake to

create such a network, particularly on a multi-state basis.

The circumstance that Kentucky’s AWP law denies to self-

funded ERISA plans the right or ability to access MCO networks,

even when the MCO is not an insurer to the plan, without more

and irrespective of the plan’s ability to create its own provider

network, is an interference with the plan’s ability to decide how

it wants to deliver covered benefits to its Participants.

That constitutes proscribed state interference with ERISA plan

design and administration. See notes 8 and 9, supra.

22

E. Kentucky’s AWP Law is Not Saved from Preemption

by ERISA’S Insurance Savings Clause.

The Court in its recent decision in Rush Prudential HMO,

Inc. v. Moran, 536 __, No. 00-1021, slip op. (2002), (“Rush

Prudential”) affirmed the long-standing principle that

ERISA’s Insurance Savings Clause, 29 U.S.C. Sec.

1144(b)(2)(a), saves from ERISA’s preemptive scope only a

limited category of state laws. Such laws must satisfy, as a

threshold test, the requirement that, as a “common-sense view

of the matter,” the state law regulates insurance. /d., slip op.

at 8 citing Metropolitan Life Ins. v. Massachusetts, 471 U.S.

724, 740 (1985). The Court, citing to its decision in Group

Life & Health Ins. Co. v. Royal Drug Co., 440 U.S. at 211,

confirmed that “the business of insurance” that is saved from

ERISA preemption by the Savings Clause is “not coextensive

with the ‘business of insurers.” ”

The first inquiry under the “common-s-nse” test focuses

on “ ‘primary elements of an insurance contract [, which]

are the spreading and underwriting of a policyholder’s risk’.

Id. at 211.” Kentucky’s AWP statute has absolutely no

relationship or connection to any health care risk to which a

policyholder may be exposed, which risk has been transferred

to an MCO. The ability of a provider to force itself into an

MCO’s network does not result in creating new health risks

to which the MCO’s members are exposed, the liability for

which has been transferred to the MCO. Thus, the core and

indispensable characteristic of a state law that may be saved

from preemption under the Savings Clause, that it effectuate

the transfer of a risk from an insured to an insurer, simply

does not exist in Kentucky’s AWP statute.

23

The relationship affected by Kentucky’s AWP statute,

and all similar state statutes, is identical in every relevant

respect to the relationship between the insurer and its

pharmacy vendors in Royal Drug. The issues of “who” an

insurer compensates for covered goods and, services, and

“how much” the insurer may be obiigated to compensate such

vendors only involves the “business of insurers,” and is not

“the business of insurance.” As a result, Kentucky’s AWP

statute is not a state law covered by ERISA’s Savings Clause,

and it is not saved from preemption.

CONCLUSION

For the foregoing reasons, Amici AAHP, HIAA, NAM

and BCBSA respectfully submit that the decision of the Sixth

Circuit Court of Appeals should be reversed.

Respectfully submitted,

Day D.E. TeMcHINE

Counsel of Record

Epstein Becker & Green, P.C.

1227 25th Street, NW

Suite 700

Washington, D.C. 20037

(202) 861-0900

24

STEPHANIE W. KANWIT

General Counsel

AMERICAN ASSOCIATION OF HEALTH PLANS

1129 Twentieth Street, N.W.

Suite 600

Washington, D.C. 20036-3421

(202) 778-3200

Jan S. AMUNDSON

General Counsel

QUENTIN RIEGEL

Deputy General Counsel

NATIONAL ASSOCIATION OF MANUFACTURERS

1331 Pennsylvania Ave., N.W.

Washington, D.C. 20004-1790

(202) 637-3000

ANGELA J. FRANKLIN

Legislative Director and Counsel

HEALTH INSURANCE ASSOCIATION OF AMERICA

1201 “F” Street, N.W.

Suite 500

Washington, D.C. 20004

(202) 824-1667

ALAN Jay Lipsitz

Executive Director

BLUE PLAN LEGAL DEPARTMENT COOPLA2ATIVE

B.iueCross BLUESHIELD ASSOCIATION

1310 G Street, N.W.

Washington, D.C. 20005

(202) 942-1278

Attorneys for Amici Curiae