Amicus Curiae Brief — Aetna Health Inc. v. Davila

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hit (is) FILED

Nos. 02-1845 & 03-83 DEC 18 2003

IN THE ! OFFICE OF THE CLERK !

— : Supreme Court of the United States

AETNA HEALTH, INC.

Petitioner,

JUAN DAVILA

Respondent.

CIGNA HEALTHCARE OF TEXAS, INC., AND

CIGNA CORPORATION

Petitioner,

RuBY R. CALAD, et al.

Respondent.

ON WRITS OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

BRIEF FOR AAHP-HIAA,

THE BLUE CROSS BLUE SHIELD ASSOCIATION,

AND THE AMERICAN BENEFITS COUNCIL

AS AMICI CURIAE SUPPORTING PETITIONERS

STEPHANIE W. KANWIT SETH P. WAXMAN

CHRISTINA S. YEHLE Counsel of Record

AAHP-HIAA EDWARD C. DUMONT

1129 20th Street, N.W. KENNETH A. BAMBERGER

Washington, D.C. 20036 WILMER, CUTLER & PICKERING

(202) 778-3202 2445 M Street, N.W.

Washington, D.C. 20037

(202) 663-6000

Counsel for Amicus Curiae AAHP-HIAA

—

ADDITIONAL COUNSEL LISTED ON INSIDE COVER

ALAN JAY LIPSITZ

BLUECROSS BLUESHIELD

ASSOCIATION

1310 G Street, N.\’.

Washington, D.C. 20005

(202) 942-1278

Counsel for BlueCross

BlueShield Association

SUSAN RELLAND

LYNN DUDLEY

AMERICAN BENEFITS COUNCIL

1212 New York Ave., N.W.

Washington, D.C. 20005

(202) 289-6700

Counsel for American

Benefits Council

TABLE OF AUTHORITIES

INTERESTS OF AMICI

SUMMARY OF ARGUMENT..

TABLE OF CONTENTS

ARGU MENT....

lL.

Il.

Ill.

VOLUNTARY EMPLOYEE HEALTH BENEFIT

PLANS, SPONSORED BY EMPLOYERS AND

SUBJECT TO UNIFORM FEDERAL REGULA-

TION UNDER ERISA, ARE THE FOUNDATION

OF THE NATION’S HEALTH COVERAGE

COST-EFFECTIVENESS MEASURES ARE ES-

SENTIAL TO PROMOTE BOTH QUALITY AND

COST-EFFICIENCY IN A_ -VOLUNTARY

EMPLOYMENT-BASED HEALTH’ BENEFITS

SYSTEM .. eececvccscsceccoseconccenessosconccooesooees

A. Health Care Economics Pose Acute Chal-

lenges To Providing Broad, Affordable

SI cecereennneeeescnnesee

B. Cost-Effectiveness Measures Permit Plan

Sponsors To Offer The Broadest Access To

High-Quality Health Benefits At The

TT ins acialimsiateateereneaeniitarernnenennens

C. The Quality Of Care Delivered Through

MCO Plans Equals Or Exceeds The

Quality Of Care Delivered Through Fee-

For-Service Plans

ALLOWING STATE TORT SUITS CHALLENGING

PLAN COVERAGE DECISIONS WOULD UNNEC-

ESSARILY INCREASE COSTS AND REDUCE

COVERAGE : ecoveccceccseess

IU IS cncsnzscsneczsczscecssssesssscnsensssenmanensesnscavesees

TABLE OF AUTHORITIES

CASES

Page(s)

Egelhoff v. Egelhoff, 532 U.S. 141 (2001) 7

Fort Halifax Packing Co. v. Coyne, 482 US. 1

(1987) : 7

Lockheed Corp. v. Spink, 517 U.S. 882 (1996) : 6

Pegram v. Herdrich, 530 U.S. 211 (2000).........ccccccceeeeeeeees 10, 11

Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41 (1987)......ccccccccee 8

Rush Prudential HMO vy. Moran, 536 U.S. 355

(2002) —

UNUM Life Insurance Co. v. Ward, 526 U.S. 358

| ee supstastesnemnensusensunenenenemummnmemeusmnemsenepente 7

STATUTES AND REGULATIONS

Employee Retirement Income Security Act of 1974,

SP : OF Gee ONO cntrieneermnnimaiinneemnummainnness 2

i 8, 24

Se Inns OP STITT arsaseciticsennsbiettepiinsnnansniamiteiniaaeseatimaaatinatad 23

Ee 23

a ie i re ctercinncesmenertainiinminieinrinasiniaantimiesinarinnsaiianicatae 8

Federal Health Maintenance Organization Act of

es a ees 1 NE Ol hastcrnisnrncesserinpenstnienpeenenaeneeenesmnianes 18

Social Security Act, 42 U.S.C. § 1395mm(i)(8) .............eee 18

eee Oe See el hicicierinerceeinesnnnniitinnaiseenansinnatenmnnaidesitinieas 18

ET 18

Omnibus Budget Reconciliation Act of 1990, Pub. L.

a Se hcsisineincsinrerriterraretentinemtenenanensdaneesinninteinia 18

29 C.F .R. § 2560.508-1(g).........cecceceseessscessereseereeees 24

a Re 23

29 C.F.R. § 2560.503-1(h)(2 iv) «0... gumareemenmnnenne 23

29 C.F. § SGGD.GOB- 2a MSGi). ..ocececcecececcecccccsescesessecesssesneees 23

Ne 23

29 C.F.R. § 2560.503-1(j)(1)........ queen 24

I 24

TABLE OF AUTHORITIES—Continued

LEGISLATIVE MATERIALS

H.R. Rep. No. 93-533 (1974), reprinted in 1974

US.C.C.A.N. 4639

Page(s)

BOOKS, ARTICLES AND TREATISES

AAHP, Highlights of 2002 AAHP Annual Survey

of Health Plans (2003)

AAHP, Independent Medical Review of Health

Plan Coverage decisions: Empowering Con-

sumers With Solutions (2001)

AAHP, Portrait of a Changing HMO Industry

(2001)

Ashton, Carol M. et al., Hospital Use and Survival

among Veterans Affairs Beneficiaries, 349

New Eng. J. Med. 1637 (2003)

17, 18

Binette, Matthew J., Comment, Patients’ Bill of

Rights: Legislative Cure-All or Prescription

for Disaster? , 81 N.C. L. Rev. 653 (2003)

Business Council of New York State, Inc., Compen-

sation Data New York 2003 (2003)

Department of Defense, TRICARE Stakeholders’

Report (2003), available at http://www.tricare

.osd.mil/stakeholders/downloads/stakeholders_

2003. pdf

Editorial, The Deeper Problem, Wash. Post, June

29, 2003, at B6

Employee Benefit Research Institute, Special Re-

port and Issue Brief, EBRI Research High-

lights: Health Benefits (May 2003)

Every, Nathan R. et al., Jnfluence of Insurance

Type on the Use of Procedures, Medications,

and Hospital Outcome in Patients with Unsta-

ble Angina: Results From the GUARANTEE

Registry, 32 J. of Am. Coll. of Cardiology 387

(1998)

TABLE OF AUTHORITIES—Continued

Page(s)

Freudeinheimm, Milt, Employees Paying Ever-

Bigger Share for Health Care, N.Y. Times,

Sept. 10, 2003, at Al suememenmeueenemans 21

Gresenz, Carole Roan et al., A Flood of Litigation?

Predicting the Consequences of Changing Le-

gal Remedies Available to ERISA Beneficiar-

ies (1999), available at http://www.rand.org/

publications/I P/IP184/ ....... peipestmeanesnanmneenanensnnensees 22, 24

Gresenz, Carole Roan et al., Patients in Conflict

With Managed Care: A Profile of Appeals in

Two HMOs, Health Affairs, July/Aug. 2002, at

Hunter, Derek, Health Care Choice and Patient

Satisfaction (2003), available at http://www.

heritage.org/Research/HealthCare/wm259.cfm ............ 18

Kaiser Family Foundation & Health Research and

Educational Trust, Employer Health Benefits

2003 Annual Survey 71 (2008).......ccccccceeceeeees 12, 21, 22, 26

Kaiser Family Foundation, Prescription Drug

Trends (May 2003), available at http://www.kff.

org/rxdrugs/loader.cfm?url=/commonspot/secur

ity/getfile.cfm& Page] D=14267 ...........cccccccsesseseeeeeeesseeeeceee 20

Kilberg, William J. & Inman, Paul D., Preemption

of State Laws Relating to Employee Benefit

Plans: An Analysis of ERISA Section 514, 62

es ithe Ss, eI scciicinintitieiniinaiinrnnastanstiatinainanamptancenaats 7

Levinson, Arik & Ullman, Frank, Medicaid Man-

aged Care and Infant Health, 17 J. Health

Econ. 351 (1998) 16

Levit, Katharine et al., Trends in U.S. Health Care

Spending, 2001, Health Affairs, Jan/Feb. 2003,

I Til ccessseestresicctindesiennanneieterincnncesipenaniinassnasdatansiastanstasstassamsans 19

MacEachern, Lillian, Health Policy Tracking Ser-

vice, Issue Brief: Consumer Grievance Proce-

dures: Internal & Independent Appeals (Year-

End Report - 2002) (2002) ........ccececerererereeees 24

TABLE OF AUTHORITIES—Continued

Page(s)

Madden, Jeanne M. et al., Effects Of A Law Against

Early Postpartum Discharge On Newborn

Follow-Up, Adverse Events, And HMO Ex-

penditures, 347 New Eng. J. Med. 2031 (2002)...........00. 18

McGlynn, Elizabeth A. et al., The Quality of Health

Care Delivered to Adults in the United States,

348 New Eng. J. Med. 2635 (2003) 9, 16

Mercer Human Resource Consulting, Surprise

Slow-Down In US Health Benefit Cost In-

crease: Employers Shift Costs To Employees,

Take Steps To Improve Workforce Health (Dec.

8, 2003), available at http://www.mercerhr

.com/pressrelease/details.jhtml/dynamic/idCont

ent/1121535;jsessionid=N EIHSHTIOUOQEGAA

SAAC Bie crcenccnscsssscsssscsnsseamesereeneemececses 21

Midwest Business Group on Health, Reducing the

Costs of Poor-Quality Health Care Through

Responsible Purchasing Leadership (2003) 20

National Committee for Quality Assurance, The

State of Health Care Quality: 2002 (2002) ... 16

National Conference of State Legislatures, Man-

aged Care Insurer Liability (2003), available at

http://www.ncsl.org/programs/health/liable.htm

(updated Nov. 3, 2003) 24

Oleske, Denise M. et al., A Comparison of Capi-

tated and Fee-for-Service Medicaid Reim-

bursement Methods on Pregnancy Outcomes,

33 Health Servs. Res. 55 (1998) 16

Oleske, Denise M. et al., Effect of Medicaid Man-

aged Care on Pregnancy Complications, 95

Obstetrics & Gynecology 6 (2000) 16

Paramore, L. Clark & Clixhauser, Anne, Assess-

ments of Quality of Care for Managed Care

and Fee-for-Service Patients Based on Analy-

sis of Avoidable Hospitalizations, 2 Value in

Health 258 (1999) 14

TABLE OF AUTHORITIES—Continued

Page(s)

Philbin, Edward F. et al., Managed Care for Con-

gestive Heart Failure: Influence of Payer

Status on Process of Care, Resource Utiliza-

tion, and Short-term Outcomes, Am. Heart J.,

UG, Ty GB GE crcensnesensssnsssssesensesctsnscemencsenmnssnmsesenscessets 15

Potosky, Arnold L. et al., Breast Cancer Survival

and Treatment in Health Maintenance Or-

ganization and Fee-for-Service Settings, 89 J.

Nat'l] Cancer Inst. 1683 (1999) ...........-0-scsrsssssssercerssesseses 16

Potosky, Arnold L. et al., Prostate Cancer Treat-

ment and Ten-Year Survival Among

Group/Staff HMO and Fee-for-Service Medi-

care Patients, 34 Health Servs. Res. 525 (1999) ............ 16

Riley, Gerald F. et al., Stage at Diagnosis and

Treatment Patterns Among Older Women with

Breast Cancer: An HMO and Fee-for-Service

Comparison, 281 JAMA 720 (1999) .....cseseserseneenereeneenees 15

Smith, Dean G., The Effects of Preferred Provider

Organizations on Health Care Use and Costs,

Inquiry, Winter 1997/1998, at 278 .........ccscssceeeseseeereees 14

Soumerai, Stephen B. et al., Timeliness and Qual-

ity of Care for Elderly Patients with Acute

Myocardial Infarction Under HMO vs. Fee-

for-Service Insurance, 159 Archives Internal

i SEI GED cnnnsctnsenermosmnmmenssmmentionemmenemmememeennen 15

Stafford, Randall S., Chronic Disease Medication

Use in Managed Care and Indemnity Insur-

ance Plans, 38 Health Servs. Res. 595 (2003) ............... 17

Strunk, Bradley C. & Ginsburg, Paul B., Tracking

Health Care Costs: Trends Stabilize but Re-

main High in 2002, Health Affairs, June 11,

ey 8 SD cerenseeneemmes 19, 20, 22

Strunk, Bradley C. et al., Tracking Health Care

Costs: Hospital Care Surpasses Drugs as the

Key Cost Driver, Health Affairs, Sept. 26, 2001,

8 BD censseemeersenemeneemeneeees MassenasennsnsenannsemeseaNsesesaeeeseeenenaaeaen 20

vii

TABLE OF AUTHORITIES—Continued

VHA General Information, at http://www1. patted

Page(s)

Health_Benefits/page.cfm?pg=1 .

In the Supreme Court of the United States

Nos. 02-1845 & 03-83

AETNA HEALTH, INC.

Petitioner,

JUAN DAVILA

Respondent.

CIGNA HEALTHCARE OF TEXAS, INC., AND

CIGNA CORPORATION

Petitioner,

RUBY R. CALAD, et al.

Respondent.

ON WRITS OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

BRIEF FOR AAHP-HIAA,

THE BLUE CROSS BLUE SHIELD ASSOCIATION,

AND THE AMERICAN BENEFITS COUNCIL

AS AMICI CURIAE SUPPORTING PETITIONERS

The American Association Of Health Plans-Health In-

surance Association Of America, Inc., The BlueCross Blue-

Shield Association, and The American Benefits Council re-

spectfully submit this brief as amici curiae- supporting peti-

tioners. |

‘This brief was prepared in its entirety by amici and their counsel.

No monetary contribution toward the preparation or submission of this

brief was made by any person other than amici, their members, and their

counsel. Petitioners and respondents have consented to the filing of this

brief in letters filed with the Clerk.

event, and a doctor, hospital, or pharmacy is free to provide

it-—just as would be true under a traditional, fee-for-service

plan. The pre-approval process, however, protects both

beneficiaries and providers from incurring expenses based

on an unjustified expectation that a third-party payor will

agree that those expenses fall within its reimbursement

obligations.

C. The Quality Of Care Delivered Through MCO

Plans Equals Or Exceeds The Quality Of Care

Delivered Through Fee-For-Service Plans

As should be evident, there is no reason to expect that

benefits-management techniques of the sort at issue here

would adversely affect the quality of care received by plan

beneficiaries, as compared to traditional indemnity plans.

And, indeed, a large body of empirical evidence demon-

strates that although managed-care organizations cover care

at significantly lower cost than more traditional plans,'’ that

care is of the same, or even higher, quality. In fact, health

plans have been measuring and publicly reporting results on

select quality measures for nearly a decade.

One recent study, for example, examined the occurrence

of preventable hospitalizations in popu'ations enrolled in

managed-care and fee-for-service plans. By that measure,

the quality of care delivered to enrollees of MCOs equaled

or exceeded that of the care delivered to enrollees of fee-for-

service plans with respect to four of the five medical condi-

tions studied.'’ Other studies have concluded that, for ex-

ample:

'? Dean G. Smith, The Effects of Preferred Provider Organizations

on Health Care Use and Costs, Inquiry, Winter 1997/1998, at 278, 282 (U.

Mich. School of Public Health study funded by the Robert Wood Johnson

Foundation) (PPOs saved 12% per covered life per year when compared to

a traditional indemnity plan with utilization review).

| 3 ‘ sy. . . .

L. Clark Paramore & Anne Clixhauser, Assessments of Quality of

Care for Managed Care and Fee-for-Service Patients Based on Analysis

of Avoidable Hospitalizations, 2 Value in Health 258 (1999).

e All indicators of timeliness and quality of care for

Medicare heart attack patients were similar or

higher for patients enrolled in HMOs compared to

patients receiving FFS coverage. Patients enrolled

in HMOs were significantly more likely than patients

receiving FFS coverage to receive aspirin and beta-

blocker therapy after heart attacks."

e Angina patients enrolled in MCOs were likely to re-

ceive similar or better care, and were much more

likely to be released from the hospital on guideline-

recommended medications, than patients in FFS

plans."

e Patients enrolled in commercial HMOs who were

hospitalized with congestive heart failure had the

same or better quality of care as, and lower mortality

rates than, those enrolled in commercial FFS plans."°

e Medicare HMO enrollees were more likely to have

breast cancer diagnosed before the later stages of the

disease, to receive breast-conserving surgery, and to

obtain recommended radiation therapy than Medi-

care FFS enrollees.'’ Breast-cancer patients had at

'’ Stephen B. Soumerai et al., Timeliness and Quality of Care for

Elderly Patients with Acute Myocardial Infarction Under HMO vs. Fee-

for-Service Insurance, 159 Archives Internal Med. 2013, 2017-2018 & fig.

(1999).

'’ Nathan R. Every et al., Influence of Insurance Type on the Use of

Procedures, Medications, and Hospital Outcome in Patients with Unsta-

ble Angina: Results From the GUARANTEE Registry, 32 J. of Am. Coll.

of Cardiology 387 (1998).

‘© Edward F. Philbin et al., Managed Care for Congestive Heart

Failure: Influence of Payer Status on Process of Care, Resource Utiliza-

tion, and Short-term Outcomes, Am. Heart J., Sept. 1998, at 553.

'’ Gerald F. Riley et al., Stage at Diagnosis and Treatment Patterns

Among Older Women with Breast Cancer: An HMO and Fee-for-Service

Comparison, 281 JAMA 720 (1999).

INTERESTS OF AMICI

The American Association Of Health Plans-Health In-

surance Association Of America, Inc. (AAHP-HIAA) is the

national association representing the private health plan and

insurer community. AAHP-HIAA’s mission is to advance

health care quality and affordability through leadership in

the health care community, advocacy, and the provision of

services to its members. AAHP-HIAA represents nearly

1,300 member companies that administer or insure benefits,

including health, pharmaceutical, long-term care, disability,

and supplemental coverage, to more than 200 million Ameri-

cans, the majority of whom are participants in or beneficiar-

ies of employee benefit plans under the Employee Retire-

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

§ 1001 et seq.

The BlueCross BlueShield Association comprises 41 in-

dependent, locally operated BlueCross and BlueShield Plans.

The BlueCross and BlueShield companies provide, through

relationships with employers, employee benefits plans, and

direct contracts with subscribers, health insurance to pri-

vate and public employees and individuals, including fee-for-

service programs, health maintenance organizations, pre-

ferred provider organizations, and a variety of other offer-

ings. They also provide third-party administrative services

to private and public employee benefits plans. Collectively,

the BlueCross and BlueShield companies furnish health care

coverage to 88.6 million—or one in four—Americans, making

them (as a group) the largest U.S. entity offering health in-

surance and benefits.

The American Benefits Council is a broad-based, non-

profit trade association founded in 1967 to protect and foster

the growth of this nation’s privately sponsored employee

benefit plans. The Council’s members include both small and

large employer-sponsors of employee benefit plans, includ-

ing many Fortune 500 companies. Its members also include

employee benefit plan support organizations, such as actuar-

ial and consulting firms, insurers, banks, investment firms,

and other professional benefit organizations. Collectively,

its more than 250 members sponsor and administer plans

covering more than 100 million plan participants and benefi-

ciaries.

SUMMARY OF ARGUMENT

Since 1974, ERISA’s establishment of a uniform system

for regulating employee benefit plans has fostered the

development of widespread, voluntary, employment-based

health care coverage. Under that system, employers and

unions have taken up the challenge of sponsoring health

benefit plans to provide employees and other beneficiaries

with substantial financial protection from the high cost of

health care. This private benefits system, in which specific

terms of coverage are chosen by particular sponsors, as

appropriate for their resources and the needs of a given

group, has allowed the development of a wide variety of spe-

cific benefit plans. Voluntary, employment-based plans now

provide coverage for many health care costs for over 130

million individuals in the United States.

All such plans ultimately reflect the sponsors’ and par-

ticipants’ shared interest in obtaining the best possible cov-

erage that can be provided at a sustainable cost. The cost

portion of this equation presents particular challenges, be-

cause of the special features of the health-care marketplace.

Responding to economic challenges such as steep increases

in the cost of hospital care and prescription drugs, both pub-

lic and private health benefit administrators have developed

an array of techniques for ensuring the cost-effectiveness of

the benefits they provide. These techniques, generally

grouped under the term “managed care,” are not concerned

with what care a beneficiary may or may not choose and be

able to procure with individual resources. They address in-

stead what measures the party that is administering the

group plan will recognize (and, indeed, sometimes encour-

age) as cost-justified. Such determinations go to the heart of

the administrator’s obligation to manage limited funds pru-

dently on behalf of all the beneficiaries who will need to

draw on its resources, in accordance with the contractually

specified terms of the plan.

It is important to recognize that evidence-based cover-

age guidelines and similar benefit-management techniques

may promote, as well as restrain, the use of benefits to pay

for care that is medically appropriate—and the need for

which might or might not be recognized or pursued under

traditional, fee-for-service coverage. This reflects the fact

that the interests of plan sponsors, beneficiaries, and admin-

istrators are all well served when evidence-based techniques

ensure that a plan’s resources are used to pay justified

amounts for care that is likely to be genuinely beneficial. To

‘hat end, as well, plans provide internal mechanisms for es-

tablishing exceptions to general guidelines, and for the rapid

review of initial coverage-management decisions. There are

also options for external review, including appeal to the

courts under ERISA. Finally, in important respects the sort

of decisions made under coverage-management provisions

do not differ in kind from the “medical necessity” determina-

tions that have always been required for insurance coverage

under any sort of plan: They are simply more structured,

and better timed. Pre-utilization review of coverage pro-

tects both beneficiaries and health-care providers from in-

curring expenses based on an unjustified expectation that a

third-party payor will agree that those expenses fall within

its reimbursement obligations.

For these reasons, one would not expect coverage-man-

agement techniques of the sort at issue in these cases to ad-

versely affect the quality of care provided to plan beneficiar-

ies, as compared to traditional indemnity insurance plans.

Indeed, empirical studies confirm that although managed-

care organizations (MCOs) administer medical benefits at

significantly lower cost than more traditional insurance,

beneficiaries covered by MCOs receive care of the same or

even higher quality.

Although it has succeeded in providing high-quality

health coverage for millions of Americans, the employment-

based coverage system fostered by ERISA is under severe

strain from rapidly increasing health care costs—in particu-

lar, the sorts of prescription drug and hospitalization costs

that are implicated in these cases. Particularly in light of

these pressures, the Fifth Circuit was wrong to adopt an in-

terpretation of federal law that would permit state tort suits

based on plans’ coverage decisions. There is no reason to

believe that such suits are necessary to protect plan benefi-

ciaries, or in particular to supplement the carefully selected,

nationally uniform remedies already provided by Congress

in ERISA. To the contrary, allowing state suits would be

affirmatively harmful. By increasing complexity, reducing

predictability, and otherwise increasing costs, such suits

would undermine precisely the uniformity and efficiency

that Congress sought to foster in ERISA. The response of

plan sponsors is not hard to predict: Some will restrict

benefits, including replacing discretionary decisions with

categorical exclusions, or further increase direct employee

costs. Others may simply discontinue, or decline to institute,

health benefits. Either way, allowing state suits would

significantly undermine Congress’s goal of encouraging

employment-based health coverage, without promising any

counter-balancing increase in protection for those

individuals who remain covered by ERISA plans.

ARGUMENT

I. VOLUNTARY EMPLOYEE HEALTH BENEFIT PLANS,

SPONSORED By EMPLOYERS AND SUBJECT TO UNI-

FORM FEDERAL REGULATION UNDER ERISA, ARE THE

FOUNDATION OF THE NATION’S HEALTH COVERAGE

SYSTEM

One significant challenge for contemporary societies is

providing widespread access to high-quality health care, at a

sustainable cost. In the United States this goal has been

pursued largely—and very successfully—through the mech-

anism of voluntary health benefit plans that are sponsored

by employers (including federal and state governments) or

unions, and provide coverage to groups of employees.

This system takes advantage of private interests and

mechanisms to produce a system that is both robust and

flexible. Plan sponsors have a strong interest in providing

employees with high-quality health coverage, both as a form

of compensation and because such coverage leads to higher

productivity. Employees have a strong interest in obtaining

coverage, and in benefiting from the efficiencies made possi-

ble by group plans. Sponsors and employees together bear

the cost of coverage, and thus have a mutual interest in the

availability of plans that provide the mixture of comprehen-

siveness and affordability that is most appropriate for their

particular circumstances. Finally, health insurers and bene-

fit administrators have strong incentives to satisfy these

demands by providing sponsors and employees with a wide

variety of potential plans, all of which will seek to provide

covered individuals with the most attractive possible combi-

nations of coverage and price.

For 30 years, ERISA has encouraged and protected the

development of this privately-ordered approach to health

care coverage. “Nothing in ERISA requires employers to

establish employee benefits plans. Nor does ERISA man-

date what kind of benefits employers must provide if they

choose to have such a plan.” Lockheed Corp. v. Spink, 517

U.S. 882, 887 (1996). Rather, the Act enables and facilitates

the voluntary establishment of plans, on whatever terms are

chosen by particular sponsors and groups of employees.

One principal way it does this is by protecting plan

sponsors, which frequently have employees and operations

in many States, from the burdens of having to comply with

multiple regulatory regimes. In framing ERISA, Congress

recognized that while some regulation was necessary, the.

overall costs of compliance would inevitably affect whether

plans would be established, and what level of actual benefits

they could provide. Because inefficiency in regulation would

ultimately hurt actual or prospective plan participants,

Congress concluded that “employee benefit plans would

prosper best if regulated by the federal government without

state involvement.” Accordingly, “[oJne of the principal

goals of ERISA is to enable employers to establish a uniform

administrative scheme, which provides a set of standard

procedures to guide processing of claims and disbursement

of benefits.” Egelhoff v. Egelhoff, 532 U.S. 141, 148 (2001)

(internal quotation marks and citation omitted). “Uniform-

ity is impossible, however, if plans are subject to different

legal obligations in different States.” Jd. The exclusive

remedy provisions at issue in these cases, which protect plan

administrators against state-law challenges to their indi-

vidual coverage determinations outside the carefully bal-

anced remedial framework provided by ERISA itself, are of

central importance in maintaining the efficiency and predict-

ability that the Act was intended to ensure.’

* William J. Kilberg & Paul D. Inman, Preemption of State Laws

Relating to Employee Benefit Plans: An Analysis of ERISA Section 514,

62 Tex. L. Rev. 1313, 1313-14 (1984); see H.R. Rep. No. 93-533, at 12

(1974), reprinted in 1974 U.S.C.C.A.N. 4639, 4650 (“The uniformity of

decision which the act is designed to foster will help administrators,

fiduciaries and participants to predict the legality of the proposed actions

without the necessity of reference to varying state laws.”).

As this Court has recognized:

An employer that makes a commitment systematically to pay

certain benefits undertakes a host of obligations, such as

determining the eligibility of claimants ... {|and| making dis-

bursements .... The most efficient way to meet these respon-

sibilities is to establish a uniform administrative scheme, which

provides a set of standard procedures to guide processing of

claims and disbursement of benefits. Such a system is difficult

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

regulatory requirements in differing States. [If that were the

case a] plan would be required to... process claims in a certain

way in some States but not in others ....

Fort Halifax Packing Co. v. Coyne, 482 U.S. 1, 9 (1987).

‘Sponsors of ERISA benefit plans may fund benefits directly, or

provide them by purchasing insurance. Self-funded plans are regulated

entirely by federal law, see, ¢.g., 29 U.S.C. § 1135 (giving Secretary of La-

bor general authority to prescribe regulations under ERISA), while in-

surance purchased by a plan remains subject to state regulation in impor-

tant respects, see generally UNUM Life Ins. Co. v. Ward, 526 U.S. 358,

Under the federal oversight provided by ERISA, the

voluntary approach to employee health coverage has been a

remarkable success. Employer and union sponsors, in con-

junction with employees themselves, have committed huge

resources to health benefit plans. Employment-based health

plans are the most common type of health coverage in the

United States, and ERISA-covered group health plans cover

more than 130 million Americans.’ Indeed, such plans are

the cornerstone of the country’s health care financing

system.

Il. COST-EFFECTIVENESS MEASURES ARE ESSENTIAL TO

PROMOTE BOTH QUALITY AND COST-EFFICIENCY IN A

VOLUNTARY EMPLOYMENT-BASED HEALTH BENEFITS

SYSTEM

The success of the voluntary employment-based health

benefits system is due not only to the relatively uniform

regulatory regime established -by ERISA, but also to the

way that plan administrators and health insurers have been

able to modify and adapt the traditional fee-for-service

model of health insurance to address the special challenges

posed by modern American health care economics. As a le-

gal matter, the adaptations of “managed care,” such as the

step-therapy drug formulary and the hospital utilization re-

view requirement at issue in these cases, do not differ fun-

damentally from the sort of “medical necessity” or “reason-

367 n. 2 (1999). In either event, the remedies available for allegedly im-

proper denials of coverage by a plan administrator in individual cases are

defined carefully, and exclusively, by federal law. ERISA § 502(a1)(B)

authorizes participants and beneficiaries to bring a civil action “to recover

benefits due to him under the terms of his plan, to enforce his rights under

the terms of the plan, or to clarify his rights to future benefits under the

terms of the plan.” 29 U.S.C. § 1132(a)(1)B). ERISA’s civil enforcement

remedies constitute the “exclusive vehicle for actions by ERISA-plan

participants and beneficiaries asserting improper processing of a claim for

benefits.” Pilot Life Ins. Co. v. Dedeau., 481 U.S. 41, 52 (1987).

* See Employee Benefit Research Institute, Special Report and

Issue Brief, EBRI Research Highlights: Health Benefits 5 (May 2003).

able and necessary costs” limitations that have always been

a feature of the coverage provided by traditional indemnity

insurance. They have, however, evolved dynamically in

ways that allow intelligent management of scarce plan cov-

erage dollars, while preserving, or even enhancing, the

availability and application of financial resources to pay for

high-quality, truly effective patient care.

A. Health Care Economics Pose Acute Chal-

lenges To Providing Broad, Affordable Cov-

erage

Health care is a good for which demand is both acute

and, in practical terms, inexhaustible. Moreover, notions of

what is encompassed within standard “health care” coverage

(as opposed to, for example, cosmetic or otherwise elective

procedures) are prone to rapid expansion in a modern and

relatively wealthy consumer economy. Given these robust

and expanding demands, the American healthcare industry

is continually generating new treatments, techniques, de-

vices, and drugs that offer (or seem to offer) consumers of

health care tremendous potential benefits—at, quite often,

tremendous potential cost.

The trouble with this market dynamic lies in the way

that individual health care “consumption” decisions typically

get made. At a moment of need an insured patient, while the

ultimate “consumer” of the care, typically lacks both the ex-

pertise to make informed decisions for himself, and any ma-

terial sensitivity to price. The treating physician is guided

by professional judgment and her pattern of practice, but

may, as a practical matter, lack complete or fully up-to-date

information about the risks and benefits (or relative costs) of

all available options.’ The physician is also likely subject to

* A comprehensive national study of health care quality by research-

ers from the RAND Foundation found a substantial gap, for a wide range

of illnesses, between what practicing physicians recommend to their pa-

tients and what medical scientists would describe as appropriate treat-

ment. Elizabeth A. McGlynn et al., The Quality of Health Care Delivered

her own set of time constraints, patient-relations concerns,

and financial incentives." Meanwhile, a health insurer or

benefit plan administrator may have the ability to centralize

and take account of large amounts of relevant information on

cost as well as efficacy of a particular treatment or proce-

dure. Under the traditional fee-for-service insurance model,

however, an insurer or administrator lacks effective mecha-

nisms for factoring that information into the decision

whether the plan will pay for particular proposed treat-

ments—at least, before the costs have already been in-

curred.

B. Cost-Effectiveness Measures Permit Plan

Sponsors To Offer The Broadest Access To

High-Quality Health Benefits At The Lowest

Cost ‘

_ These conditions make it difficult for conventional mar-

ket forces to generate health care consumption choices that

make economic sense from the point of view of an employee

benefit plan (and its group of beneficiaries) as a whole. Of

course, a plan administrator making individual coverage de-

cisions, or an insurer that has contracted to provide specified

benefits at an agreed price, is not interested in precluding an

individual beneficiary from pursuing any particular course of

treatment, whatever its cost or likely effectiveness, with the

beneficiary’s own resources. Such an administrator or in-

surer is, however, centrally concerned with determining

to Adults in the United States, 348 New Eng. J. Med. 2635 (2003). Prac-

tioners failed to provide appropriate care about 46% of the time, while

about 11% of the time they provided care that was not indicated or was

even potentially harmful. /d. at 1641. The lead author concluded that

“|w je need to fundamentally re-engineer the way that health care is deliv-

ered” by relying on information technology systems, rather than individ-

ual practitioners, as the key to higher quality care. Editorial, The Deeper

Problem, Wash. Post, June 29, 2003, at B6 (quoting Dr. McGlynn).

* See Pegram v. Herdrich, 530 U.S. 211, 218 (2000) (“In a fee-for-

service system, a physician’s financial incentive is to provide more care,

not less, so long as payment is forthcoming.”).

what specific costs the plan has or has not promised to bear.

That question goes to the heart of the administrator’s or in-

surer’s obligation to manage the plan’s funds prudently, on

behalf of all the beneficiaries who are entitled, and will need,

to draw on its limited resources.’

These concerns are critical to the ERISA model of vol-

untary employment-based coverage. The resources avail-

able to a plan are determined by what the sponsor and cov-

ered employees are willing to contribute. For that level of

resources, the highly competitive market for group insur-

ance or plan administration services will offer a variety of

plans, adapted to the different situations or preferences of a

given sponsor and employee group. The common theme of

both demand and offerings, however, will be to achieve the

most effective, highest quality coverage possible for the en-

tire group, at the lowest possible cost.

In pursuing that goal, insurers and health plans—along

with, and sometimes led by, public-sector care-delivery sys-

tems, such as Medicare and the Veterans Administration

health system—have developed the array of cost- and qual-

ity-management techniques that are generally grouped un-

der the heading “managed care.” Like a traditional indem-

nity insurer, a managed-care organization (MCO) typically

determines whether it will pay for particular services, pre-

scription drugs, or other care based on whether the care

received or desired was or is medically necessary and appro-

priately priced under given circumstances. The MCO, how-

ever, will typically use active techniques to promote the effi-

cient use of plan funds. These may include, for example, the

’ A plan sponsor is free to design its plan to provide any type and

level of benefits it chooses. That choice does not implicate any fiduciary

duty. See, e.g., Pegram, 530 U.S. at 226-27. Once the terms of the plan

have been set, determinations concerning whether an individual situation

is or is not covered by those terms may have a medical aspect, but in the

end they are acts of plan administration that reflect, and affect, the eco-

nomics of the entire plan. They involve what care a plan has promised to

pay for, not what care a doctor may recommend, or the patient may

choose to receive.

sort of utilization-review procedures involved in these cases.

In Davila, Aetna employed a standardized, evidence-based

“step therapy” guideline in determining that it would not

pay for an expensive new prescription drug in the absence of

some documented reason not to use a clinically similar and

less expensive medication. Likewise, in Calad, Cigna re-

fused to promise payment for a hospital stay that exceeded

the standard period its guidelines recognized as reasonable

for a particular procedure, in the absence of specife evidence

that Calad’s circumstances justified a longer stay. These

sorts of determinations concerning what a given plan will

and will not pay for, absent evidence about a particular

beneficiary’s specific circumstances, are core features of

contemporary health-benefit management.*

For present purposes, there are at least three important

points to be made about such benefit-management tech-

niques. First, these and similar evidence-based coverage

guidelines can promote, as well as constrain, use of benefits.

Plans almost uniformly have, for example, established

programs to promote the use of treatments that have been

proven effective (such as prescribing beta blockers for heart-

attack patients); to encourage preventive care, such as

immunizations and diagnostic screening tests for cancer; and

to promote proactive treatment-management for patients

with chronic conditions such as asthma, diabetes, and heart

disease.’ The point is that insurers and plan administrators,

* Voluntary plans have almost universally adopted managed care

techniques. In 1988, 16% of covered workers were enrolled in HMOs,

whereas 73% were still enrolled in traditional indemnity insurance plans.

Kaiser Family Foundation & Health Research and Educational Trust,

Employer Health Benefits 2003 Annual Survey 71 Ex. 5.1 (2003) (“Kaiser

Foundation 2003 Survey”), available at http://www.kff.org/insurance/

employer.cfm. By 1996, 27% of empleyees were enrolled in traditional

indemnity plans, while 73% were enrolled in some form of MCO plan. This

year, 95% of covered employees are enrolled in some type of MCO

plan. /d. .

” See AAHP, Highlights of 2002 AAHP Annual Survey of Health

Plans (2003).

who compete for the business of plan sponsors and their

employees, have no incentive to design systems that deny

coverage for no good reason—particularly when, as is

typically alleged by plaintiffs, the denial of some relatively

inexpensive item or service would likely lead to a bad

medical outcome that would then require additional, much

more expensive, care. Rather, the interests of plan

sponsors, beneficiaries, and plan administrators are all well

served when evidence-based techniques are brought to bear

to help ensure that the plan’s resources are being used to

pay as much as is necessary for care that is likely to work—

but nothing extra for care that is not likely to improve either

safety or outcomes.

Second, an initial decision to pre-approve payment for a

particular procedure or drug is subject to rapid appeal and

review within the plan structure, and then often by inde-

pendent outside reviewers.” This sort of review is neither

uncommon nor unrealistic: some 250,000 initial coverage

denials are appealed annually, and many of the appeals are

successful.'' So far as appears, however, the respondents in

these cases made no effort to pursue such an appeal.

Third, in important respects, the sort of coverage

decisions that are made under plan pre-approval provisions

are not different in kind from the “medical necessity”

determinations that have always been required for coverage

under any health insurance plan. The principal difference

between the two is not the nature of the decision, but its

structure and timing. Under a managed-care arrangement,

it is clear what sorts of care require special authorization for

coverage, and exactly what supporting evidence will be

required. A beneficiary whose request for coverage is

denied is, of course, free to seek the care at issue in any

” See infra, pp. 23-24.

'! See C. Roan Gresenz et al., Patients in Conflict With Managed

Care: A Profile of Appeals in Two HMOs, Health Affairs, July/Aug. 2002,

at 189, 191.

least equal, and possibly better, survival outcomes."*

And patients enrolled in HMOs were more likely to

receive aggressive therapy for prostate cancer."

e The likelihood of low-birth-rate deliveries in the Cali-

fornia Medicaid program was lower in managed care

arrangements than in the FFS payment group.”

e Managed care enrollees in the Wisconsin Medicaid

program were more likely to receive superior prena-

tal care than patients enrolled in FFS plans.”' Cali-

fornia and Florida Medicaid maternal delivery out-

comes were the same.”

e Asa general measure of quality, 93% of patients en-

rolled in MCOs received recommended beta-blocker

care after heart attacks, compared to 45% in the gen-

eral population. Similarly, 81% of diabetes patients

had their blood sugar measured regularly, compared

to 24%; and 85% of pregnant women received rec-

ommended prenatal care, as opposed to 73%.”

The quality of care provided in a managed care setting

compares equally well in the two contexts in which cost

'S Arnold L. Potosky et al., Breast Cancer Survival and Treatment

in Health Maintenance Organization and Fee-for-Service Settings, 89 J.

Nat'l Cancer Inst. 1683 (1999).

Arnold L. Potosky et al., Prostate Cancer Treatment and Ten-

Year Survival Among Group/Staff HMO and Fee-for-Service Medicare

Patients, 34 Health Servs. Res. 525 (1999).

*’ Denise M. Oleske et al., A Comparison of Capitated and Fee-for-

Service Medicaid Reimbursement Methods on Pregnancy Outcomes, 33

Health Servs. Res. 55 (1998).

*' Arik Levinson & Frank Ullman, Medicaid Managed Care and In-

fant Health, 173. Health Econ. 351 (1998).

> Denise M. Oleske et al., Effect of Medicaid Managed Care on

Pregnancy Complications, 95 Obstetries & Gynecology 6 (2000).

- Compare National Comm. for Quality Assurance, The State of

Health Care Quality: 2002 10 (2002) (using the “HEDIS”—Health Plan

Employer Data and Information Set—measures for health plans) with

McGlynn, supra, at 2642, 2643 tab. 5.

pressures are greatest, and out of which the present cases

arise: prescription drug management and hospital utiliza-

tion. As to drugs, a new study conducted by medical schools

across the country considered patients with diabetes, con-

gestive heart failure, and asthma, and concluded that (1)

“managed care patients were more likely to use chronic dis-

ease medications than indemnity patients”; (2) “chronic dis-

ease patients in these managed care plans are more likely to

receive both inexpensive and expensive medications”; (3)

MCO health plans had a “markedly increased probability of

using newer [drug] therapies” than indemnity plans; and (4)

the differences among the two insurance groups could be

explained by the fact that patients in indemnity plans “face

higher out-of-pocket costs and managed care plans promote

more aggressive medication use.” Noting that these find-

ings may be “contrary to public perception,” the authors

point out that study results confirm previous research show-

ing increased drug prescription patterns in health plans us-

ing disease-management techniques, which are not offered

through traditional indemnity coverage.”

Similarly, as to hospitalization management, two new

studies published in the New England Journal of Medicine

find no adverse health impact resulting from reductions in

hospital usage. By adopting a managed-care model, the

Veterans Administration reduced acute-care hospital bed

use by 55%. That marked decline in hospital use “did not

curtail access to needed services and was not associated with

serious consequences for chronically ill” beneficiaries.”

Moreover, it did not result in a rise in non-hospital care. An

earlier study, conducted by the Harvard Medical School, de-

termined that early hospital discharge programs for mothers

4 Randall S. Stafford, Chronic Disease Medication Use in Managed

Care and Indemnity Insurance Plans, 38 Health Servs. Res. 595, 595

(2003).

** Td. at 606.

6 Carol M. Ashton et al., Hospital Use and Survival among Veter-

ans Affairs Beneficiaries, 349 New Eng. J. Med. 1637, 1637 (2003).

and newborns had no effect on the health outcomes of the

newborns. Shorter stays were, moreover, correlated with

newborn examinations on the third or fourth day after dis-

charge, a procedure that results in better health outcomes,

and is therefore recommended by treatment guidelines.”’

This evidence that managed-care techniques preserve

or even enhance quality, while significantly restraining

costs, soundly refutes any suggestion that ERISA has failed

plan beneficiaries by precluding them from challenging plan

administrators’ coverage decisions under state law. It also

helps explain why federal law has long actively encouraged

the development and use of managed-care techniques;* and

why public-sector health-care systems, ranging from the

Veterans Administration” to the Federal Employees Health

Benefits Program” and the Department of Defense’s TRI-

CARE program" (the latter two of which are run by private

7 Jeanne M. Madden et al., Effects Of A Law Against Early Post-

partum Discharge On Newborn Follow-Up, Adverse Events, And HMO

Expenditures, 347 New Eng. J. Med. 2031 (2002).

** See Federal Health Maintenance Organization Act of 1973, 42

U.S.C. § 300e-9 (requiring employers with at least 25 employees to offer a

federally qualified HMO as an option to their employees); Omnibus

Budget Reconciliation Act of 1990, Pub. L. No. 101-508, §§ 4204(a) (1990)

(repealing prohibition on physician-incentive plans in Medicare and Medi-

caid HMOs); Social Security Act, 42 U.S.C. § 1395mm(i)(8) (Medicare

managed care); id. § 1396b(m) (Medicaid managed care); id. § 1395w-21

(Medicare+Choice).

” The Veterans Health Administration runs the largest health care

system in the United States. See Ashton et al., supra, at 1638; VHA Gen-

eral Information, at http://www1.va.gov/Health_Benefits/page.cfm?pg=1.

The Federal Employees Health Benefits Program covers 8.3 mil-

lion federal employees and retirees and their families. See Derek Hunter,

Health Care Choice and Patient Satisfaction (2003), available at

http://www. heritage.org/Research/HealthCare/wm259.cfm.

‘' TRICARE, the Department of Defense’s health care program for

non-active-duty military beneficiaries—retired personnel and family

members of personnel—covers some 8.7 million people with a budget of

$22 billion; the program processes 1.8 million claims weekly. See Dep't of

Defense, TRICARE Stakeholders’ Report (2003), available at

http://www.tricare.osd.mil/stakeholders/downloads/stakeholders_2003. pdf.

administrators under contract with the government), have

embraced such techniques in their own operations. Benefit-

management programs are not about increasing profits, or

reducing care. They are about the prudent management of

scarce joint resources, to ensure the ability to provide the

right care to each member with a covered need.

III. ALLOWING STATE TORT SUITS CHALLENGING PLAN

COVERAGE DECISIONS WOULD UNNECESSARILY IN-

CREASE Costs AND REDUCE COVERAGE

Although it has succeeded in providing high-quality

coverage for millions of Americans, the employment-based

coverage system is under severe strain. Despite the ad-

vances in cost-containment made possible by managed-care

techniques, national spending on health care surpassed 14%

of GDP by 2001. The next year, spending per privately-

insured person rose 9.6% —well over three times the rate of

increase in the Nation’s gross domestic product.”

The greatest increases in health costs arise from pre-

cisely the sources highlighted by these cases: prescription

drugs and hospitalization. The cost of prescription drugs

tripled in the decade after 1990, reaching $140 billion in

2001." It rose almost 16% in that final year alone and over

13% last year.’ These figures reflect an increase in usage

(the number of prescriptions increased 74% from 1992 to

2002, while the U.S. population grew only 12%); increases in

retail prescription prices; and a shift toward newer, higher-

2 See Katharine Levit et al., Trends in U.S. Health Care Spending,

2001, Health Affairs, Jan./Feb. 2003, at 154, 154, 156 Ex. 2.

’ Bradley C. Strunk & Paul B. Ginsburg, Tracking Health Care

Costs: Trends Stabilize but Remain High in 2002, Health Affairs, June 11,

2003, at 266, 268 & Ex.1.

“ See Levit et al., supra, at 158 Ex.5.

S Id. at 156 Ex.2; Strunk & Ginsburg, supra, at 268 Ex. 1.

20)

18)

priced name-brand drugs.” In light of changing age demo-

graphics and usage trends, “U.S. spending for prescription

drugs is expected to continue to rise rapidly, reaching $445.9

billion (17% of personal health care spending) by 2012.””

Overuse of antibiotics alone results in as much as $5 billion

in unnecessary expenditures each year.”

Growth in hospitalization costs moderated in the

1990s—due in large part to strict utilization review.” By

2000, however, hospitalization again surpassed medication as

the key cost driver,” and hospital costs “continue[] to drive

overall health care spending trends.”’' Moreover, as with

drug costs, overuse of inpatient care for medical treatments

that can be performed safely in an outpatient setting unnec-

essarily raises both the financial and the human costs of

care. According to one study, for example, preventable hos-

pital-acquired infections claim at least 20,000, and perhaps

more than 60,000, lives each year, and result in up to $18 bil-

lion in unnecessary expenditures.”

Rta) ° " P - P . .

* The Kaiser Family Foundation, Prescription Drug Trends 2 (May

2003) (citing www.imshealth.com), available at http://www.kff.org/rx

drugs/loader.cfm?url=/commonspot/securit y/get file.cfm& PageI D=14267.

” Id. (citing Health Spending Projections for 2002-2012, Health Af-

fairs (Feb. 7, 2003)).

8 Midwest Business Group on Health, Reducing the Costs of Poor-

Quality Health Care Through Responsible Purchasing Leadership iii

(2003) (“MBGH Report”).

” Bradley C. Strunk et al., Tracking Health Care Costs: Hospital

Care Surpasses Drugs as the Key Cost Driver, Health Affairs, Sept. 26,

2001, at 39, 44-45.

” Strunk et al., supra, at 39.

*' Strunk & Ginsburg, supra, at 266.

* See MBGH Report at iii. At the other extreme, underdiagnosis

and inadequate treatment of diabetes results in direct and indirect costs of

$132 billion annually, as well as tens ot thousands of cases of premature

death, amputations, kidney disease, and blindness. Underdiagnosis and

the failure to use pharmacy and outpatient services to treat depression

results in costs of $80 billion per year, while poor management of asthma

costs $18 billion. Underuse of influenza and pneumococcal vaccinations

Whichever driver leads at any given moment, radically

increasing costs in these two sectors pose a serious challenge

to the continued vitality of employment-based health cover-

age.’ Between spring 2002 and spring 2003, monthly premi-

ums for employer-sponsored health insurance rose 13.9%—

over six times the rate of inflation, and the third consecutive

year of double digit premium increases.“ At the same time,

employees are paying an increasing percentage of plan costs,

as well as larger deductibles and co-payments.” In turn,

results in the death of between 10,000 and 20,000 individuals each year,

while inadequate care after a heart attack results in 18,000 unnecessary

deaths. In all, this survey concludes that $420 billion is spent each year as

a direct result of care diverging from objective quality standards (not in-

cluding indirect costs, such as reduced productivity from absenteeism,

which the study estimates costs an additional $105 to $210 billion). Pri-

vate purchasers absorb about one-third of these costs, which is estimated

to cost the typical employer between $1,900 and $2,250 per covered em-

ployee per year. As discussed above, one of the salient promises of man-

aged-care techniques is the potential to reduce the costs of both over- and

under-utilization of care.

* See Kaiser Foundation 20083 Survey at 2 (“When employers were

asked which factors contributed ‘a lot’ to increases in health insurance ~

premiums, firms were most likely to point to higher spending for prescrip-

tion drugs (61%) and hospital services (55%).”).

* See id. at 1.

*S See Mercer Human Resource Consulting, Surprise Slow-Down In

US Health Benefit Cost Increase: Employers Shift Costs To Employees,

Take Steps To Improve Workforce Health (Dec. 8, 2003) (summarizing

Mercer’s National Survey of Employer-Sponsored Health Plans 2003),

available at http://www.mercerhr.con/pressrele ase/details.jhtml/dynamic/

idContent/1121535;jsessionid= NEIHSHTIOUODEGAAJ AADQOCAKMZSI

412C; Milt Freudeinheim, Employees Paying Ever-Bigger Share for

Health Care, N.Y. Times, Sept. 10, 2003, at Al (reporting on Kaiser

Foundation 2003 Study showing that almost 2/3 of large employers that

sponsored health plans raised the amounts that employees are

contributing to the cost of their health plans this year, and 79% say they

will do so again in 2004); The Business Council of New York State, Inc.,

Compensation Data New York 2003 (2003) (survey of New York

employers reflects that, in a 12-month period ending in April 2003, more

than 1/3 of employers increased the employee portion of health insurance

premiums, and nearly 1/3 increased deductible levels). The Kaiser Foun-

dation reports that recently there has been “a greater levei of interest”

rising health insurance premiums have been “clearly linked”

to rising rates of the uninsured.”

Particularly in light of these existing pressures on vol-

untary employer health plans, the Fifth Circuit was wrong

to adopt an interpretation of federal law that would permit

state tort suits based on plan coverage decisions. To begin

with, of course, that interpretation is untenable in light of

ERISA itself and this Court’s cases, as the petitioners’

briefs amply demonstrate. Even if the statute and prece-

dents were less clear, however, allowing such suits would be

deeply misguided.

1. First, there is no need to permit state tort suits in

order to protect ERISA beneficiaries. Despite what one

might infer from the stories included by plaintiffs’ lawyers in

their complaints (and perforce accepted by judges as though

true for purposes of ruling on motions to dismiss), there is no

reason to think that there is a widespread problem of plan

participants wrongly denied coverage for necessary care,

and then subjected to bad medical outcomes that would have

been prevented had the desired drug or service been pro-

vided. To the contrary, as discussed above, the incentives of

sponsors, employees, and plan administrators in this regard

are aligned, not antagonistic. MCOs deny only a small per-

centage of coverage claims, and only a few of those denials

are based on a failure to meet pre-authorization criteria.”

among very large employers in insurance featuring very high deductibles

(over $1000). See Kaiser Foundation 2003 Study at 2-3. Because such

employers “historically have been innovators in the market, [this| may

portend future growth of this option.” Id.

* Strunk & Ginsburg, supra, at 266.

*” Of the less than 2% of plan enrollees who are initially denied cov-

erage, see Carole Roan Gresenz et al., A Flood of Litigation? Predicting

the Consequences of Changing Legal Remedies Available to ERISA

Beneficiaries (1999), available at http://www.rand.org/publications/

IP/IP184/, only 6% of denials resulted from failure to meet pre-

authorization criteria, compared to denials because of: filing of duplicate

claims (18%); prior payment of a capitated rate (10%); failure to adhere to

plan procedures (including failure to request pre-authorization) (18%);

ae — ——_

Moreover, as discussed above, health outcomes under man-

aged-care arrangements typically equal or surpass those un-

der traditional fee-for-service plans.” Plan coverage guide-

lines are designed to provide, not withhold, payment for

care—if the objective medical evidence suggests that that

care is likely to produce a better outcome than some other

alternative.

Moreover, all plans have mechanisms available for the

fast internal review, and often for independent outside re-

view, of coverage denials. ERISA itself requires procedural

protections such as effective notice of coverage denials and a

reasonable opportunity for review of such decisions,” and

the Secretary of Labor has issued comprehensive regula-

tions governing the appeal process that include requiring,

when appropriate, review in consultation with a medical pro-

fessional,” and initial and final decisions that provide specifi¢

reasons for denial, and references to pertinent plan provi-

submission of incomplete or inaccurate information (14%); or the fact that

the patient is not a plan member (7%). See AAHP, Portrait of a Changing

HMO Industry 3 & fig. 2 (2001).

* See supra, pp. 14-19.

* See 29 U.S.C. § 1133(1) (“In accordance with regulations of the

Secretary, every employee benefit plan shall ... provide adequate notice

in writing to any participant or beneficiary whose claim for benefits under

the plan has been denied, setting forth the specific reasons for such denial,

written in a manner calculated to be understood by the participant . . . .”);

id. § 1133(2) (plans must “afford a reasonable opportunity to any partici-

pant whose claim for benefits has been denied for a full and fair review by

the appropriate named fiduciary of the decision denying the claim”).

maintain a procedure “under which there will be a full and fair review of

the claim”); id.§ 2560.503-1(h\(2\iv) (plan must “|pjrovide for a review

that takes into account all comments, documents, records, and other in-

formation submitted by the claimant relating to the claim”); id. § 2560.503-

1(h\(3)iii), (4) (“11 )n deciding an appeal of any adverse benefit determina-

tion that is based in whole or in part on a medical judgment,” the adminis-

trator “shall consult with a health care professional who has i

training and experience in the field of medicine involved in the medical

judgment.”).

sions.”' Every state also requires MCOs to establish con-

sumer grievance and appeals processes for their insured

plans,” and 42 states and the District of Columbia accord

beneficiaries the right to appeal denials of insurance cover-

age to an independent medical review entity.”

The resulting appeals structure offers plan beneficiaries

effective review. Indeed, initial coverage denials are re-

versed about half the time, even when appeals arise after a

beneficiary has undergone treatment, without first securing

plan authorization.™

Finally, there is the familiar remedy that Congress

chose to provide in ERISA: A suit “to recover benefits due

to [a beneficiary] under the terms of his plan, to enforce his

rights under the terms of the plan, or to clarify his rights to

future benefits under the terms of the plan.” 29 U.S.C.

§ 1132(a)(1)(B). Importantly, that remedy is as practical and

effective today as it was 30 years ago to a plan beneficiary

who had a dispute with a plan or insurer about the coverage

of a given treatment, drug, or service under the terms of a

wholly traditional, indemnity-style health insurance plan.

" See 29 C.F.R. § 2560.503-1(g) (initial decision); id. § 2560.503-

1(j1), (2) (final decision).

* See Lillian MacEachern, Health Policy Tracking Service, Issne

- ef: Consumer Grievance Procedures: Internal & Independent Appeals

(Year-End Report - 2002) (2002).

** See National Conference of State Legislatures, Managed Care In-

surer Liability (2003), available at http://www.ncsl.org/programs/health/

liable.htm (updated Nov. 3, 2003); see also Rush Prudential HMO v.

Moran, 536 U.S. 355 (2002) (Illinois statute requiring HMOs to provide

independent review was not preempted by ERISA, where HMO was

properly treated as an insurer).

™ See AAHP, Independent Medical Review of Health Plan Coverage

decisions: Empowering Consumers With Solutions 1 (2001) (concluding

that 49% of cases decided by independent review are reversed); see a/so

Gresenz et al., A Flood of Litigation?, supra, at 189 (enrolles won 36% of

prospective appeals and 89% of retrospective appeals in one large HMO

studied, and 70% of prospective and 78% of retrospective appeals in the

other).

There is, accordingly, no reason to think that simply because

coverage determinations are now often made earlier and in a

more organized manner, the remedy that Congress origi-

nally provided for coverage disputes has somehow become

inadequate or in need of supplementation.

2. Second, allowing state suits regarding coverage deci-

sions would be affirmatively harmful. The prospect of such

litigation would significantly complicate plan design,

funding, and administration. Contract-based costs of ex-

pected care, relatively predictable over groups of ben-

eficiaries, will be subject to unpredictable, but quite possibly

significant, potential tort liabilities. That sort of uncertainty

will make it difficult for sponsors and administrators to

budget, including setting appropriate employee premiums,

deductibles, or co-payment amounts. Moreover, differing

state standards will hinder the implementation of nation-

wide, evidence-based coverage guidelines and care initia-

tives (such as disease-management plans), and the uniform

administration of both benefits and review mechanisms for

initial coverage decisions. At a minimum, these new

complications would materially increase the cost of pro-

viding coverage through a voluntary plan, and thus under-

mine a core purpose of ERISA’s uniform regulatory scheme.

As one commentator has put the point:

Removal of ERISA preemption and adoption of

more state liability laws could lead to an envi-

- ronment where HMOs and managed care plans are

defending a number of lawsuits against a number of

different plaintiffs in a number of different states

arising under a number of different types of causes

of action. This is exactly the environment from

which Congress was trying to protect employee

benefit plans generally when it enacted ERISA in

1974.”

‘S Matthew J. Binette, Comment, Patients’ Bill of Rights: Legislative

Cure-All or Prescription for Disaster?, 81 N.C. L. Rev. 653, 693-94 (2003).

The response of plan sponsors and administrators is not

hard to predict. Some will restrict benefits, and/or increase

required employee contributions, to counter-balance the

higher costs of running their plans. Others will seek to avoid

litigation over individual coverage determinations by

removing any discretionary element from their coverage

categories—thus contracting, not expanding, the availability

of benefits in cases where the cost-effectiveness of treat-

ment is debatable. Still others may discontinue, or decline to

adopt, health care co\ erage entirely, rather than face the

uncertainty, litigation exposure, and certainly higher costs

that would accompany the new regime.” In any event, the

decision below will significantly undermine Congress’ goal of

encouraging employment-based health coverage, without

promising any commensurate increase in protection for

those individuals who do remain covered by ERISA plans.

*° While nearly all large employers (those with 200 or more workers)

presently offer health benefits, the figure for smaller companies is only

65%. Kaiser Foundation 2003 Survey at 3x.

CONCLUSION

The decisions of the court of appeals should be reversed.

Respectfully submitted,

STEPHANIE W. KANWIT SETH P. WAXMAN

CHRISTINA S. YEHLE Counsel of Record

AAHP-HIAA EDWARD C, DUMONT

1129 20th Street, N.W. KENNETH A. BAMBERGER

Washington, D.C. 20036 WILMER, CUTLER & PICKERING

(202) 778-3202 2445 M Street, N.W.

Washington, D.C. 20037

(202) 663-6000

Counsel for Amicus Curiae AAHP-HIAA

ALAN JAY LIPSITZ SUSAN RELLAND

BLUECROSS BLUESHIELD LYNN DUDLEY

ASSOCIATION AMERICAN BENEFITS COUNCIL

1310 G Street, N.W. 1212 New York Ave., N.W.

Washington, D.C. 20005 Washington, D.C. 20005

(202) 942-1278 (202) 289-6700

Counsel for BlueCross Counsel for American

BlueShield Association Benefits Council

DECEMBER 2003

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.