Amicus Curiae Brief — Louisiana ex rel. Ieyoub v. CIGNA Healthplan of Louisiana, Inc.

Supreme Court, U.S

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SEP 30 1996

CLERK

No. 96-316 ™

IN THE

Supreme Court of the United States

OCTOBER TERM, 1996

State of Louisiana ex rel. RICHARD P. IEYOUB,

Attorney General,

Petitioner,

Vv.

CIGNA HEALTHPLAN OF LOUISIANA, INC., and

CONNECTICUT GENERAL LIFE INSURANCE CO.,

Respondents.

On Petition For A Writ of Certiorari

To The United States Court of Appeals

For The Fifth Circuit

BRIEF AMICI CURIAE OF THE NATIONAL

ASSOCIATION OF MANUFACTURERS

AND AETNA INC,

Of Counsel: William J. Kilberg

Jan S. Amundson Counsel of Record

Quentin Riegel Paul Blankenstein

NATIONAL ASSOCIATION OF Thomas G. Hungar

MANUFACTURERS Mark Snyderman

1331 Pennsylvania Ave., N.W. GIBSON, DUNN & CRUTCHER LLP

Suite 1500 1050 Connecticut Avenue, N.W.

a ON. See Washington, D.C. 20036

Stephanie W. Kanwit (202) 955-8500

AETNA INC. Stephen Ostrach

151 Farmington Avenue NEW ENGLAND LEGAL

Hartford, Conn. 06156 FOUNDATION

150 Lincoln Street

Boston, Massachusetts 02111

Counsel for Amici Curiae

i

TABLE OF CONTENTS

BARES GE ALI ERIRAEIID ceseccccsscvcceconccntessceceence li

ENTEREST OF AMICT CURIAE .....cscccsccscsscocccccceces 1

CRA tascbvdnuanhstbionsbinnsucsccantesesennsessccsnashe 2

I. THIS CASE PRESENTS AN IMPORT-

ANT FEDERAL QUESTION THAT

SHOULD BE RESOLVED BY THIS

II. THE COURT OF APPEALS' DECISION

IS INCONSISTENT WITH THE DECI-

SIONS OF OTHER STATE AND FED-

ERAL APPELLATE COURTG..................000. 12

CIN sinc cnkcnddnntiminpeicebindttuattnaneniqnentines 17

TABLE OF AUTHORITIES

Cases

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

(EDRT) .nesccccrcvescsccusssnsvenaeesutececadeusctedsuuns

American Medical Association, 94 F.T.C. 701

(1979), aff'd as modified, 638 F.2d 443 (2d

Cir. 1980), aff'd by an equally divided Court,

4SS U.S. GPO (1GEZ) ascncscccrcccccvessasnosenssseses

Ball Memorial Hospital, Inc. v. Mutual Hospital

Ins., Inc., 784 F.2d 1325 (7th Cir. 1986)........

Blue Cross Hosp. Serv., Inc. v. Frappier, 698

S.W.28 SEO CEO. IFES) .cacccccvusexcenesenesenwnns

Blue Cross & Blue Shield of Va. v. St. Mary's

Hosp. of Richmond, Inc., 426 S.E.2d 117 (Va.

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

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

Eugene M. Addison, M.D., 111 F.T.C. 339 (1988)

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

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

HCA Health Services of Virginia, Inc. v. Aetna

Life Ins. Co., No. 92-574-A (E.D. Va. June

RG, EDDS) .cccccsesnssncscauessosccsatenccaseaccesetenss

HCA Health Services of Virginia, Inc. v. Metro-

politan Life Ins. Co., 752 F. Supp. 202 (E.D.

Va. 1990), appeal dismissed, 957 F.2d 120

(46a Cle, BGG) a ecncasscncstscncnsasvcessenssseswivete

Medical Service Corp. of Spokane County, 88

FT... FUG CIF TG) ccorsoscncesscansecesentvidéeanvents

Metropolitan Life Ins. Co. v. Massachusetts, 471

ccs nddetabbdpscdabassicdsevecece 15

Moore v. Metropolitan Life Ins. Co. , 856 F.2d 488

rid ilnds ccdentncecinebecseeveceasecees 5

Moore v. Reynolds Metals Co. Retirement Pro-

gram, 740 F.2d 454 (6th Cir. 1984), cert.

denied, 469 U.S. 1109 (1985) ............cccececceee es 5-6

Napoletano v. CIGNA Healthcare of Conn., Inc.,

680 A.2d 127 (Conn. 1996) ................ccccccccceces 13

New York State Conf. of Blue Cross & Blue Shield

Plans v. Travelers Ins. Co., 115 S. Ct. 1671

SR hhinchsonheanghekdnbvisiectessnecsss 4,5,13-14

Seminole Tribe of Fla. v. Florida, 116 S. Ct. 1114

RTC AhNintbathattbinccendipensinchayénseaccarecss 4

Shaw v. Delta Air Lines, Inc., 463 U.S. 85 (1983) .....4,5

Stuart Circle Hosp. Corp. y. Aetna Health Man-

agement, 995 F.2d 500 (4th Cir.), cert.

denied, 510 U.S. 1003 (1993)............cccccceecee. 14

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

Am., 907 F. Supp. 1019 (W.D. Tex. 1995) .......... 15

Statutes

oc cicddecduatecnsceccice 2

isis cd sen cccnchabcbaceoicvscisce like 5

EERE Ta en 5

a sca sunsences 12

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BP Rs © URGEIR AI) nnn. cccccccccccccscccsccsscccccess 13

SET ne 12

iv

GA, CORR ARE, & IABIIG wvvcccccsnascnsisvnsecticuwcsties 11

BEAMIO COE § GETS ciccncscsncnevencetieseskstcctasctesem 12

215 ILL. CoMP. STAT. ANN. § 5/370h...............0.000 12

BUG. COGUIR AG. B BE Ee vennnnancnyscataccdecaninsnseses 11

Alt. BEAT. RIOR. G GO Fee ses ichascsccasavacsicrenseniens 12

ait. Dead. AU. © GOO IGE scscscsthcsccevcsiscomicne 12

La. REV. STAT. § 40:2202(5)(c)............2.0000: 2,3,10,12

DOD. TRG. DRE.. B Fe ciscnseccdnsccrcesayicvaceediscess 12

Mo. REV. STAT. GSTS. SSGLIND) ....ccesscecscesescscssess 12

DOM. TRY. BEAT. S GOAL ES ccacncccecevecccssceccasviscscece 12

NEV. REV. STAT. ANN. § 695C.177 ...........ccccsccecees 12

NEV. REV. STAT. ANN. § 695.178 ................ceeeees 12

S.D. CODIFIED LAWS ANN. § 58-18-37...............ee0es 12

Se, SD, SI, GE, Baca tevin neicn santa cennesnncicinsions 12

UTAH CODE ANN. § 31A-22-617...............csscesseeeeees 11

Wd; CO Be vaenviceticnerecstnncdccncecécbusiebinss 11

FA, CORE & Te chicncsnvcesescncstctnciccnssssbesibinn 11

W.VA, COS © BPG E bindeccdesisetiscnesensiastinicinds 12

Wt, BORE, BED cen kvcncscenvictsctaghavacsustecteks 11

Other Authorities

Ark. Ins. Comm. Bulletin 9-85 & 9-85A (1985) ......... 12

Congressional Budget Office, THE ECONOMIC AND

BUDGET OUTLOOK: AN UPDATE (1995) ................ 8

David C. Stapleton, NEW EVIDENCE ON SAVINGS

FROM NETWORK MODELS OF MANAGED CARE

v

Elizabeth S. Rolph, Paul B. Ginsburg & Susan D.

Hosek, The Regulation of Preferred Provider

Organizations, 6 HEALTH AFFAIRS 32 (Fall,

WTR tctidusndncpaundettdieiinsedaeo Ra ctecs oasis o-. ... 8

G.A. Melnick, et al., The Effects of Market Struc-

ture and Bargaining Position on Hospital

Prices, 11 J. HEALTH ECON. 217 (1992)............... 6

John F. Sheils, David C. Stapleton & Randall A.

Haught, THE Cost OF LEGISLATIVE RESTRIC-

TIONS ON CONTRACTING PRACTICES:

THE Cost To GOVERNMENTS, EMPLOYERS

AND FAMILIES (Lewin- VHI RRA RR 7,8,11

Lori A. Tobias, Cost v. Quality in the Regulation

of Preferred Provider Arrangements: A "Green

Light to the Gold Rush"?, 41 Sw. L.J. 1155

Sa, Ne RRO GA Ae A Se sc re oe NR 6

IN THE

Supreme Court of the United States

OCTOBER TERM, 1996

No. 96-316

State of Louisiana ex rel. RICHARD P. IEYOUB,

Attorney General,

Petitioner,

v.

CIGNA HEALTHPLAN OF LOUISIANA, INC., and

CONNECTICUT GENERAL LIFE INSURANCE CO.,

Respondents.

On Petition For A Writ of Certiorari

To The United States Court of Appeals

For The Fifth Circuit

BRIEF AMICI CURIAE OF THE NATIONAL

ASSOCIATION OF MANUFACTURERS

AND AETNA INC.

INTEREST OF AMICI CURIAE

Amicus the National Association of Manufacturers

("NAM") is the nation's oldest and largest broad-based

industrial trade association. Its more than 14,000

member companies and subsidiaries, including approx-

imately 10,000 small manufacturers, are located in

every State and produce roughly 85 percent of U.S.

manufactured goods. Through its member companies

and affiliated associations, NAM represents every in-

dustrial sector, 185,000 businesses and more than 18

million employees. The overwhelming majority of

NAM member companies sponsor health benefit pro-

grams for their employees, and most of these programs

use some form of managed care.

Aetna Inc., through its health-related subsidiaries, is

one of the Nation's largest administrators of managed

health care programs. Aetna has created and maintains

managed care networks, including preferred provider

organizations ("PPOs") and health maintenance organi-

zations ("HMOs"), in Louisiana and throughout the

country. Aetna provides structured health care pro-

grams and administrative services to thousands of em-

ployers, representing approximately 16 million man-

aged care members nationwide. In Louisiana, more

than 100,000 individuals receive treatment through an

Aetna-administered managed care program, including

more than 40,000 in Aetna PPOs and almost 35,000 in

HMOs.

As employee benefit plan sponsors and administra-

tors, amici have a vital interest in maintaining cost-ef-

fective quality health care for plan participants. Man-

aged care is critical to achieving this goal. Statutes

like LA. REV. STAT. § 40:2202(5)(c), the Louisiana

any willing provider law at issue in this case, under-

mine the fundamental principles of managed care by

constricting the ability of plan administrators to control

managed-care networks. As a result, enforcement of

such laws in other States imposes damaging constraints

on employee benefit plans, directly contrary to the pur-

pose of ERISA, which was intended to free employee

benefit plans from the often stifling and costly restric-

tions imposed by widely varying and inconsistent state

regulation. The parties have consented to the filing of

this amicus brief.

DISCUSSION

This case presents the question whether the

Employee Retirement Income Security Act of 1974

("ERISA"), 29 U.S.C. §§ 1001 et seg., preempts so-

called “any willing provider" laws that prevent pre-

ferred provider organizations ("PPOs") and similar

3

managed-care networks from limiting the number of

health care providers that are members of such organi-

zations. That question has divided the State and federal

appellate courts, with the result that ERISA plan pro-

viders and administrators are being subjected to con-

flicting requirements and inconsistent degrees of fede-

ral protection in different jurisdictions across the

country.

Moreover, the question presented in this case is of

extraordinary importance for the economically efficient

delivery of health care to employee benefit plan partici-

pants across the Nation. The Louisiana any willing

provider law at issue in this case (LA. REV. Start.

§ 40:2202(5)(c)), like similar statutes in other States

across the country, severely restricts the ability of em-

ployee benefit plan administrators to control provider

membership in managed-care networks. In so doing,

these statutes undermine the fundamental economic

logic of managed-care arrangements and threaten to

destroy the promise of managed health care to achieve

widely available cost-effective medical treatment. In

short, these statutes subject employee benefit plans to

precisely the kind of inconsistent and inefficient regula-

tion that ERISA was intended to preempt.

Absent plenary review by this Court, low-cost and

innovative health care options will continue to be

stifled on a haphazard basis in many States as the

lower courts continue to reach inconsistent results on

the question whether ERISA preempts any willing pro-

vider laws. Amici urge the Court to grant plenary re-

view of the petition's first question in order to ensure a

consistent nationwide solution ‘9 this important and

pressing question. !

1 The second question presented in the petition is not

worthy of review. Petitioner does not and cannot contend that

I. THIS CASE PRESENTS AN IMPORTANT

FEDERAL QUESTION THAT SHOULD

BE RESOLVED BY THIS COURT

The efficient delivery of health care is an intractable

problem; solutions will require ingenuity, experimenta-

tion, and flexibility. ERISA encourages these solutions

through its broad preemption provision, which is in-

tended to relieve employee benefit plans of the burden

of compliance with state regulation. E.g., New York

State Conf. of Blue Cross & Blue Shield Plans v.

Travelers Ins. Co., 115 S. Ct. 1671, 1677 (1995); Fort

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

Among other things, ERISA precludes any state regu-

lation that interferes with attempts to provide efficient

delivery of health care to employee benefit plan partici-

pants. Any willing provider laws fall squarely into this

category.

ERISA preemption establishes employee benefit

plan regulation “as an area of exclusive federal con-

the second question involves a circuit conflict, and the court of

appeals’ ruling on that issue is wholly consistent with, and

indeed compelled by, binding precedent of this Court. E.g.,

Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 96 n.14 (1983).

This Court's decision in Seminole Tribe of Fla. v. Florida,

116 S. Ct. 1114 (1996), is not to the contrary. That decision

holds only that injunctive relief is inappropriate “where Cong-

ress has prescribed a detailed remedial scheme for the enforce-

ment against a State of a statwiorily created right." 116 S. Ct.

at 1132 (emphasis added). No such detailed scheme exists

here, and respondents sought enforcement of the Supremacy

Clause, not merely a statutory right. Moreover, Seminole

Tribe expressly reaffirms that litigants “may obtain injunctive

relief under Ex parte Young in order to remedy a state offi-

cer's ongoing violation of federal law." Jd. at 1131 n.16; see

also id. at 1133 n.17.

cern." FMC Corp. v. Holliday, 498 U.S. 52, 58

(1990). ERISA preempts not only state laws on sub-

ject matters covered by ERISA, but also all state laws

that have any “connection with or reference to" an em-

ployee benefit plan. Shaw v. Delta Air Lines, Inc.,

463 U.S. 85, 96-97 (1983); Travelers, 115 S. Ct. at

1677. ERISA occupies the field; where ERISA does

not regulate a certain aspect of employee benefits, the

area is to be free from regulation under both ERISA

and state law. Shaw, 463 U.S. at 98-99. The resulting

“regulatory void" in certain areas evinces congression-

al intent to leave those subjects to the discretion of

benefit plan designers and labor-management negotia-

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

504, 525 (1981).

Health care is one such area. ERISA places few

restrictions on the delivery of employee welfare bene-

fits, like health care, allowing instead for broad-

ranging innovation and ready adaptation to changing

circumstances. See 29 "J.S.C. § 1051(1) (exempting

welfare plans from participation and vesting require-

ments applicable to pension plans); 29 U.S.C.

§ 1081(1) (exempting welfare plans from funding

requirements applicable to pension plans). “[MlJedical

insurance must take account of inflation, changes in

medical practice technology, and increases in the cost

of treatment independent of inflation." Moore v.

Metropolitan Life Ins. Co., 856 F.2d 488, 492 (2d Cir.

1988). ERISA leaves health care plan administrators

free to do just that.

Any willing provider laws like the statute at issue in

this case effectively tie the hands of plan administrators

and threaten to preclude employee benefit plans from

offering health benefits through PPOs. These man-

aged-care arrangements are precisely the type of mar-

ket-driven innovation that Congress intended to en-

courage through enactment of ERISA. See Moore v.

Reynolds Metals Co. Retirement Program, 740 F.2d

454, 456 (6th Cir. 1984) ("decisions [concerning plan

benefits] are more appropriately influenced by forces

in the marketplace and, when appropriate, by federal

legislation"), cert. denied, 469 U.S. 1109 (1985). The

destructive effects of any willing provider laws on

PPOs underscore the extraordinary importance of this

case to the efficient delivery of health care.

The PPO is a mechanism by which employee benefit

plans deliver health care to plan participants at reduced

cost. The cost savings afforded by a PPO are made

possible by ensuring increased patient volume for pre-

ferred providers. PPO administrators customarily con-

tract with a limited network of "preferred" health care

providers for the provision of health care services to

employee benefit plan participants. Employee benefit

plan participants who choose PPOs are given financial

incentives to use preferred rather than nonpreferred

providers; participants typically are reimbursed for a

greater percentage of the cost of treatment by a pre-

ferred provider. This practice results in a relatively

greater number of patients for preferred providers. In-

creased patient volume allows the preferred providers

to lower their per-patient costs, which, in turn, permits

the providers to discount their fees. The promise of

increased patient volume also creates price competition

among providers, to the benefit of plan participants.

See, e.g., Lori A. Tobias, Cost v. Quality in the Regu-

lation of Preferred Provider Arrangements: A "Green

Light to the Gold Rush"?, 41 Sw. L.J. 1155, 1187-

1190 (1988); G.A. Melnick, et al., The Effects of Mar-

ket Structure and Bargaining Position on Hospital

Prices, 11 J. HEALTH ECON. 217 (1992).

Some limitation on PPO provider membership is

thus necessary to enable the preferred providers to re-

ceive an increase in patient volume sufficient to war-

rant the reduction in fees. HCA Health Services of

Pee

Virginia, Inc. v. Metropolitan Life Ins. Co., 752

F. Supp. 202, 204 (E.D.Va. 1990) ("The exclusion of

some providers is a necessary prerequisite of a limited

provider network. It is by limiting the number and

types of providers included in a PPO that a [PPO ad-

ministrator] is able to implement cost reductions in ser-

vices for health beneficiaries."), appeal dismissed, 957

F.2d 120 (4th Cir. 1992). The broader the PPO net-

work, the less likely it is that the preferred providers

will each experience the increase in patient volume

necessary to permit cost reductions.

Limited provider networks are beneficial in other

ways as well. PPO administrators can lower costs and

improve the quality of medical care by eliminating un-

necessary treatment. Pre-utilization review, monitor-

ing of provider practices, and provider education all

make health care utilization more effective and effi-

cient. But it becomes more difficult and expensive for

plan administrators to provide such service to plan par-

ticipants as the number of providers in the network in-

creases. General administrative expenses associated

with the processing and payment of claims also in-

crease as plan administrators must deal with more pro-

viders. See John F. Sheils, David C. Stapleton &

Randall A. Haught, THE COST OF LEGISLATIVE RE-

STRICTIONS ON CONTRACTING PRACTICES: THE COST

TO GOVERNMENTS, EMPLOYERS AND FAMILIES 3-4,

14-15 (Lewin-VHI 1995). A limited PPO network

means more savings and better health care for plan

participants.

The cost savings made possible by the PPO option

are substantial. A recent study of employee health

plan data found that health spending for participants in

PPO plans was about 11 percent less than in traditional

fee-for-service plans due to a combination of price dis-

counts and utilization controls. David C. Stapleton,

NEW EVIDENCE ON SAVINGS FROM NETWORK MODELS

OF MANAGED CARE 4 (Lewin-VHI 1994). The Con-

gressional Budget Office has reported that national

spending for health care grew about 6 percent in 1994,

the slowest rate in 30 years, in part due to a dramatic

increase in managed care programs, including PPOs

and health maintenance organizations ("HMOs").

Congressional Budget Office, THE ECONOMIC AND

BUDGET OUTLOOK: AN UPDATE 82-83 (1995).

Any willing provider laws undermine these salutary

effects by mandating the unlimited expansion of PPO

provider membership. These laws therefore increase

dramatically both the cost of administration and the

cost of claims made by employee benefit plan parti-

cipants. One recent study concluded that if a national

any willing provider law had been enacted in 1995, it

would have increased private sector health spending by

almost $75 billion through the year 2002. THE CosT

OF LEGISLATIVE RESTRICTIONS ON CONTRACTING

PRACTICES at 25. It is not surprising that a 1986 sur-

vey of PPO sponsors found that mandatory provider

statutes -- a variant of any willing provider laws --

posed the most serious of all possible regulatory threats

to the effective operation of PPOs. Elizabeth S.

Rolph, Paul B. Ginsburg & Susan D. Hosek, The

Regulation of Preferred Provider Organizations, 6

HEALTH AFFAIRS 32, 40 (Fall, 1987).2

2 Any willing provider laws pose the same threat to

HMOs, another form of managed care. HMOs contract with

participating health care providers in a number of ways --

including independent contracting with individual physicians,

contracting with medical group practices or associations of

physicians, or direct employment of physicians — but the

fundamental economic logic of the HMO, and the basis for the

substantial savings it generates, are the same as those of a

PPO: each benefits from a limited provider network. To

varying extents, HMOs differ from PPOs in that the purchaser

of medical services from an HMO, typically a benefit plan

These increased costs will be felt by plan partici-

pants in the form of higher deductibles and copay-

ments, and by plan sponsors who foot most of the bill

for employee health care. This burden only adds to the

strain that escalating employee health care liability al-

ready imposes on employers. By exacerbating the

health care crisis, any willing provider legislation im-

poses a significant drag on the economy.

The federal government has recognized that any

willing provider laws also impair competition among

health care providers, to the detriment of consumers.

The Federal Trade Commission has for over a decade

objected to mandatory provider laws as anticompetitive

and anticonsumer. Attached (App., infra, la-10a) is a

1993 letter from the Acting Director of the FTC's

Office of Consumer and Competition Advocacy to the

Attorney General of the State of Montana. The letter

details the FTC's objections to Montana's any willing

provider statute, reaffirming all of the cost and compe-

tition effects discussed above. The Acting Director ex-

plains the competitive importance of limited-provider

sponsor, generally pays on a capitated basis (i.e., the sponsor

pays a fixed fee to the HMO for each participant in the plan),

rather than on the discounted fee-for-service basis that is the

norm for PPOs. Another important distinction is that the

HMO network is usually exclusive: plan participants enrolled

in an HMO must use an in-network provider if they are to

receive any benefits at all. This obviously creates powerful

incentives for all participants to use HMO providers, and in-

creases the HMO administrator's ability to extract price dis-

counts from competing health care providers seeking the

HMO business. In addition, all of the utilization control and

administrative cost savings associated with limited PPO net-

‘orks apply to limited HMO networks as well. To the extent

ay willing provider laws can be read to apply to HMOs, their

destructive effects are multiplied.

10

panels and the anticompetitive, anticonsumer effect of

any willing provider requirements. The letter also

describes the FTC's long-standing public objection --

expressed through congressional testimony, comment

letters to state legislators and agencies, and litigation?

-- to efforts to suppress selective contracting with a

limited panel of health care providers. The FTC's

opposition to any willing provider laws underscores the

importance of the issue in this case to health care con-

sumers.

Any willing provider laws unduly restrict the ability

of employee benefit plan administrators to construct

health care arrangements for the benefit of plan parti-

cipants. The Louisiana statute at issue in this case, for

example, precludes flexibility in plan structure and

instead imposes a particular mechanism for provider

selection, whereby a plan administrator first must

establish-a-set of "terms and conditions" for network

participation. LA. REV. STAT. § 40:2202(5)(c). Left

to its own judgment, however, a managed care plan

might choose not to establish a uniform set of terms

and conditions for network participation. Indeed, it is

probably more efficient not to do so. A plan adminis-

trator often can achieve better service and lower cost

by negotiating with providers or groups of providers

on an ad hoc basis. By pitting health care providers

3 The FTC has instituted a series of law enforcement

actions to prevent private anti-competitive arrangements that

suppress or eliminate selective contracting. See, e.g., Medical

Service Corp. of Spokane County, 88 F.T.C. 906 (1976);

American Medical Association, 94 F.T.C. 701 (1979), aff'd as

modified, 638 F.2d 443 (2d Cir. 1980), aff'd by an equally

divided Court, 455 U.S. 676 (1982); Eugene M. Addison,

M.D., 111 F.T.C. 339 (1988). See generally App., infra, 2a-

3a. These private arrangements have the same deleterious

effects as any willing provider laws.

FR eee.

1]

against one another in market-driven competition for

plan business, a plan administrator can often extract

price discounts. See Ball Memorial Hospital, Inc. v.

Mutual Hospital Ins., Inc., 784 F.2d 1325, 1343 (7th

Cir. 1986) (requiring plans to offer the same price to

all providers “would make hash of the idea of a

PPO.... The requirement that [providers] bid in

order to get the plan's business is the principal source

of the incentive to cut costs, and the prospect of getting

more business by becoming a ‘preferred' provider is

the principal benefit to the [provider].").

Moreover, providers differ widely in the package of

goods they can offer plan participants, including range

of services, quality of care, geographic access, and

general availability. A prudent plan administrator will

consider all these factors in deciding whether, and

under what conditions, to include a provider or group

of providers in a PPO network. See THE COST OF

LEGISLATIVE RESTRICTIONS ON CONTRACTING PRAC-

TICES at 18.

While the decision below properly holds that any

willing provider laws are preempted, and thereby

avoids the deleterious effects discussed above, the Fifth

Circuit's ruling is binding in only three States. Unfor-

tunately, any willing provider laws and analogous sta-

tutes have been adopted in numerous States across the

country.* Absent review by this Court, many of those

4 The Louisiana any willing provider law is part of an

alarming recent trend toward mandatory-provider legislation.

Several States impose a requirement that any provide: willing

to meet the terms and conditions of a PPO must be allowed

into the network. E.g., GA. CoDE ANN. § 33-20-16; 215 ILL.

Comp. STaT. ANN. § 5/370h; IND. Cope ANN. § 27-8-11-3;

Va. CopDE §§ 38.2-3407, 38.2-4209; Wyo. Stat. § 26-22-

503; see also UTAH CoDE ANN. § 31A-22-617. The any will-

ing provider requirements in some States apply to all health

12

laws will continue to hinder the ability of ERISA plan

administrators to offer low-cost managed health care

options to plan beneficiaries and will thwart Congress's

intent to foster innovation and flexibility in the provi-

sion of employee benefits. Accordingly, the question

presented in this case is one of exceptional importance,

and review by this Court is necessary.

Il. THE COURT OF APPEALS' DECISION IS

INCONSISTENT WITH THE DECISIONS

OF OTHER STATE AND FEDERAL AP-

PELLATE COURTS

Section 514(a) of ERISA preempts “any and all

State laws insofar as they .. . relate to any employee

benefit plan." 29 U.S.C. § 1144(a). Under ERISA

Section 514(b)(2)(A), however, “any law of any State

which regulates insurance" is saved from preemption.

29 U.S.C. § 1144(b)(2)(A). For purposes of applying

this insurance savings clause, the statute makes clear

care providers, while in other States the law excludes insti-

tutional providers. £.g., 215 ILL. Comp. STAT. ANN.

5/370h; La. REV. STAT. ANN. § 40:2202(5)(c). In still other

States, the law applies only to pharmacy arrangements. E.g.,

ALA. CODE § 27-45-3; IDAHO Cope § 41-1844; S.D.

CopIFIED LAws ANN. § 58-18-37; Tex. INS. CODE, art.

21.52B. And numerous States mandate inclusion of certain

types of providers (e.g., chiropractors or podiatrists). E.g.,

KAN. STAT. ANN. §§ 40-2,100, 40-2,101; Mo. Rev. STAT.

§§ 354.027, 375.936(11)(b); Nes. Rev. Stat. § 44-4112;

Nev. Rev. STAT. ANN. §§ 695C.177, 695C.178; W.VA.

Cope § 33-25A-31. Overlaid on these disparate statutory

requirements are regulations in the various States that may

impose additional requirements or otherwise give specific

meaning to the often indeterminate language of statutes. E.g.,

Ark. Ins. Comm. Bulletin 9-85 & 9-85A (1985) (interpreting

Arkansas statute as an any willing provider law).

13

that no employee benefit plan “shall be deemed to be

an insurance company or other insurer ... or to be

engaged in the business of insurance." ERISA

§514(b)(2)(B), 29 U.S.C. § 1144(b)(2)B).

In this case, the court of appeals correctly held that

a State's attempt to impose an any willing provider re-

quirement on entities establishing or offering PPO net-

works "relate[s] to" employee benefit plans and is not

saved from preemption by the insurance exception. By

contrast, a number of other appellate courts have

reached the opposite result in the same or similar con-

texts. As the law currently stands, therefore, benefit

plan administrators face burdensome any willing pro-

vider requirements in some jurisdictions, yet are im-

mune from precisely those same requirements in other

jurisdictions. This clear conflict in the scope of

ERISA preemption merits plenary review.

At least one appellate court has issued a decision

that conflicts with the court of appeals' correct deter-

mination that statutes regulating PPO membership

"relate to" employee benefit plans for purposes of

ERISA preemption. In Napoletano v. CIGNA Health-

care of Conn., Inc., 680 A.2d 127 (Conn. 1996), the

Supreme Court of Connecticut held that the State's

managed care statute did not "relate to" employee

benefit plans and was therefore not subject to ERISA

preemption. Jd. at 136-45. The court reached this

conclusion despite the fact that the Connecticut statute

requires PPO networks to file with the State their crite-

ria for selecting health care providers, and then grants

health care providers and ERISA plan participants the

right to sue over the exclusion of providers from the

networks. /d. at 130 n.3, 144-45, 146.

This holding, and the reasoning supporting it, are

directly inconsistent with the decision of the court of

appeals in this case. The Napoletano court based its

narrow reading of the "relate to" clause on New York

i-t

State Conference of Blue Cross & Blue Shield Plans v.

Travelers Ins. Co., 115 S. Ct. 1671 (1996), which

(according to the Napoletano court) mandates a "re-

treat[] from" this Court's previously expansive view of

ERISA preemption. 680 A.2d at 140. The court be-

low, by contrast, relied on "the limited nature of [the]

holding" in Travelers to conclude that statutes regulat-

ing the membership of ERISA plans' PPO networks

necessarily "relate to" those plans within the meaning

of ERISA's preemption provision. Pet. App. 13a.

As a result of this disagreement over the scope of

the Travelers decision, these courts reached diammetri-

cally opposed results on the question whether a state

law "relate[s] to" ERISA plans if it purports to regulate

the ability of PPOs offered by ERISA plans to exclude

health care providers from their networks. See also

Stuart Circle Hosp. Corp. v. Aetna Health Manage-

ment, 995 F.2d 500, 502 (4th Cir.) (holding that an

any willing provider law "relate[s] to" employee bene-

fit plans), cert. denied, 510 U.S. 1003 (1993). This

conflict over the meaning of "relate to" and the impact

of this Court's Travelers decision by itself warrants

certiorari review.

In addition, several appellate courts have incorrectly

held (in contrast to the decision below) that any willing

provider statutes or analogous state laws are saved

from ERISA preemption by virtue of ERISA's insur-

ance savings clause. In Stuart Circle Hosp. Corp.,

supra, for example, the Fourth Circuit upheld a Vir-

ginia statute that requires insurers (including insurers

acting as third-party administrators of employee benefit

plans rather than as providers of traditional health in-

surance) to admit all willing providers to their PPO

networks. 995 F.2d at 502-04. The court conceded

that this any willing provider statute "relates to" em-

ployee benefit plans and that "facially the statute only

directly affects providers" rather than insureds, but

| 15

nonetheless held that the statute was saved from pre-

emption as "a law regulating the business of insur-

ance." 995 F.2d at 502, 504.

Similarly, the Tenth Circuit in Blue Cross & Blue

Shield of Kansas City v. Bell, 798 F.2d 1331 (10th Cir.

1986), rejected an ERISA preemption challenge to a

Kansas "mandated-provider" statute. The Kansas stat-

ute required employee benefit plans offering health in-

surance benefits to cover services provided by all

members of a specified class of health care providers.

Id. at 1333. The court held that the mandated-provider

law regulated “the business of insurance" and was

therefore not preempted (id. at 1334-36), even though

the effect of the statute was to expand the ability of

health care providers (who are plainly not engaged in

"the business of insurance") to receive reimbursement

from employee benefit plans.

In Blue Cross & Blue Shield of Va. v. St. Mary's

Hosp. of Richmond, Inc., 426 S.E.2d 117 (Va. 1993),

the Virginia Supreme Court addressed an ERISA pre-

emption challenge to an any willing provider statute

that applied to PPOs offered by nonstock corporations.

Id. at 118. Applying what it characterized as the

"common-sense" approach articulated by this Court in

Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S.

724 (1985), the Virginia court concluded that this any

willing provider law “'regulates insurance’ within the

meaning of ERISA's exception to its preemption

clause." 426 S.E.2d at 122. Accordingly, the court

held that the statute was not preempted by ERISA. Id.

Other cases are to the same effect. See, e.g., Blue

Cross Hosp. Serv., Inc. v. Frappier, 698 S.W.2d 326,

327 (Mo. 1985) (rejecting ERISA preemption chal-

lenge to mandated-provider statute based on the insur-

ance savings clause); Texas Pharmacy Ass'n v. Pru-

dential Ins. Co. of Am., 907 F. Supp. 1019 (W.D.

16

Tex. 1995) (holding that any willing provider statute is

covered by ERISA's insurance savings clause).

Absent review by this Court, therefore, ERISA plan

sponsors and administrators such as respondents and

amici will continue to be faced with a patchwork of

inconsistent state and federal law. In some States,

ERISA's broad preemption provision will preclude en-

forcement of any willing provider statutes against man-

aged-care networks serving employee benefit plans. In

other States, by contrast, laws that impose precisely

the same regulatory burden on managed-care networks

will be immunized from challenge under ERISA, and

benefit-plan administrators will therefore be unable to

obtain the full benefits of managed care for their plan

participants. This Court's review is necessary to elimi-

nate these conflicts and achieve nationwide consistency

in the scope of ERISA preemption.

weeks —

17

CONCLUSION

With respect to the first question presented, the peti-

tion for a writ of certiorari should be granted. In all

other respects, the petition should be denied.

Respectfully submitted.

Of Counsel:

Jan S. Amundson

Quentin Riegel

NATIONAL ASSOCIATION

OF MANUFACTURERS

1331 Penn. Ave., N.W.

Suite 1500

Washington, D.C. 20004

Stephanie W. Kanwit

AETNA INC.

151 Farmington Avenue

Hartford, Conn. 06156

September 30, 1996

William J. Kilberg

Counsel of Record

Paul Blankenstein

Thomas G. Hungar

Mark Snyderman

GIBSON, DUNN &

U7TCHER LLP

1050 Connecticut Ave., N.W.

Washington, D.C. 20036

(202) 955-8500

Stephen Ostrach

NEW ENGLAND LEGAL

FOUNDATION

150 Lincoln Street

Boston, Massachusetts 02111

Counsel for Amici Curiae

APPENDIX

APPENDIX

UNITED STATES OF AMERICA

FEDERAL TRADE COMMISSION

WASHINGTON, D.C. 20580

February 4, 1993

The Honorable Joseph P. Mazurek

Attorney General of the State of Montana

Justice Building

Helena, Montana 59620

Dear Mr. Attorney General:

The staff of the Federal Trade Commission! is

pleased to submit this response to your request for

view on the possible competitive effects of maintaining

in place the recently-enacted “any willing provider"

law, which is set to sunset in July 1993. This law lim-

its the ability of preferred provider organizations

("PPOs") to arrange for services through contracts

with health care providers, by requiring a PPO to enter

a contract with any provider willing to meet the terms

the PPO sets. By preventing PPOs from limiting the

panel of providers, the law discourages contracts with

providers in which lower prices are offered in ex-

change for the assurance of higher volume. Although

the law may be intended to assure consumers greater

1 These comments are the views of the staff of the Fed-

eral Trade Commission, and do not necessarily represent the

views of the Commission or any individual Commissioner.

2a

freedom to choose where they obtain services, it ap-

pears likely to have the unintended effect of denying

consumers the advantages of cost-reducing arrange-

ments and limiting their choices in the provision of

health care services.

I. Interest and experience of the Federal Trade

C ervey

The Federal Trade Commission is empowered to

prevent unfair methods of competition and unfair or

deceptive acts or practices in or affecting commerce.2

Pursuant to this statutory mandate, the Commission

encourages competition in the licensed professions,

including the health care professions, to the maximum

extent compatible with other state and federal goals.

For several years, the Commission and its staff have

investigated the competitive effects of restrictions on

the business practices of hospitals and state-licensed

health care professionals.

The Commission has observed that competition

among third-party payors and health care providers can

enhance the choice and availability of services for con-

sumers and can reduce health care costs. In particular,

the Commission has noted that the use by prepaid

health care programs of limited panels of health care

providers is an effective means of promoting competi-

tion among such providers. The Commission has

2 15 U.S.C. § 41 ef seq.

3 Federal Trade Commission, Statement of Enforcement

Policy With Respect to Physician Agreements to Control

Medical Prepayment Plans, 46 Fed. Reg. 48982, 48984

(October 5, 1981); Statement of George W. Douglas, Com-

missioner, On Behalf of the Federal Trade Commission, Be-

fore the Subcommittee on Health and the Environment of the

Committee on Energy and Commerce, United States House of

Representatives, on H.R. 2956: The Preferred Provider

—

3a

taken law enforcement action against anti-competitive

efforts to suppress or eliminate health care programs,

such as health maintenance organizations ("HMOs"),

that use selective contracting with a limited panel of

health care providers.4 The staff of the Commission

has submitted, on request, comments to federal and

State government bodies about the effects of various

regulatory schemes on the competitive operation of

such arrangements.> Several of these comments have

Health Care Act of 1983 at 2-3 (October 24, 1983); Health

Care Management Associates, 101 F.T.C. 1014, 1016 (1983)

(advisory opinion). See also Bureau of Economics, Federal

Trade Commission, Staff Report on the Health Maintenance

Organization and Its Effect on Competition (1977).

4 See, e.g., Medical Service Corp. of Spokane County,

88 F.T.C. 906 (1976); American Medical Association, 94

F.T.C. 701 (1979), aff'd as modified, 638 F.2d. 443 (2d Cir.

1980), aff'd by an equally divided court, 455 U.S. 676 (1982);

Forbes Health System Medical Staff, 94 F.T.C. 1042 (1979):

Medical Staff of Doctors’ Hospital of Prince George's County,

110 F.T.C. 476 (1988); Eugene M. Addison, M.D., 1i1

F.T.C. 339 (1988); Medical Staff of Holy Cross Hospital, No.

C-3345 (consent order, Sept. 10, 1991); Medical Staff of

Broward General Medical Center, No. C-3344 (consent order,

Sept. 10, 1991); see also American Society of Anesthesiolo-

gists, 93 F.T.C. 101 (1979); Sherman A. Hope, M.D., 98

F.T.C. 58 (1981).

5 The staff of the Commission has commented on a

prohibition of exclusive provider contracts between HMOs and

physicians, noting that the prohibition could be expected to

hamper pro-competitive and beneficial activities of HMOs and

deny consumers the improved services that such competition

would stimulate. See e.g., Letter from Bureau of Competition

to David A. Gates, Commissioner of Insurance, State of Ne-

vada (November 5, 1986).

4a

addressed “any willing provider" requirements for

health care service contracts.®

II. Description of Moatana's "Any Willing Pro-

vider" Law.

Montana law permits “preferred provider" agree-

ments between providers of health care services and

health care insurers relating to the amounts charged

and the payments to the providers.? The law appar-

ently extends to agreements with all kinds of health

care providers: hospitals, professional practitioners,

pharmacies, and other providers of health care serv-

ices.

The “any willing provider" requirement is a tempo-

rary provision, which was adopted in 1991. It requires

that an insurer establish terms and conditions to be met

6 The staff submitted comments to the Massachusetts

House of Representatives concerning legislation that would

have required prepaid health care programs to contract with all

pharmacy suppliers on the same terms (or offer subscribers

the alternative of using any pharmacy they might choose),

noting that the bill might reduce competition in both pharma-

ceutical services and prepaid health care programs, raise costs

to consumers, and restrict consumers' freedom to choose

health care programs. Letter from Bureau of Competition to

Representative John C. Bartley (May 30, 1989, commenting

on §.B. 526). The staff has submitted similar comments on

similar legislation in Pennsylvania, New Hampshire, and Cali-

fornia. Letter from Cleveland Regional Office to Senator H.

Craig Lewis (June 29, 1990, commenting on S.B. 675); letter

from Office of Consumer and Competition Advocacy to Paul

J. Alfano (March 17, 1992, commenting on H.B. 470); letter

from Office of Consumer and Competition Advocacy to The

0" Patrick Johnston (June 26, 1992, commenting on

S.B. 1986).

7 Mont. Code Ann., Title 33, Ch. 22, Part 17 (1991).

5a

by providers wishing to enter such agreements.8 Any

provider willing to meet those terms and conditions

must be permitted to enter an agreement with the in-

surer that set them. This “any willing provider" re-

quirement is set to terminate July 1, 1993. At that

time, unless the requirement is extended by legislative

action, the PPO law will explicitly deny that an insurer

must negotiate or enter into agreements with any spe-

cific provider or class of providers.9

This comment will focus on how “any willing pro-

vider" requirements limit contracting between provid-

ers and third-party payors, and on how this limitation

is likely to affect competition and consumers. The ac-

tual effects of Montana's law may be difficult to

gauge, because it has been in effect only for a short

time. The expectation that the requirement would end

soon may have affected how providers and PPOs have

dealt with each other. Thus, this comment is based on

general principles, rather than Montana's particular

experience.

Ill. Competitive importance of programs using

limited-provider panels.

Over the last twenty years, financing and delivery

programs that provide health care services through a

limited panel of health care providers have prolifer-

ated, in response to increasing demand for ways to

moderate the rising costs associated with traditional

fee-for-service health care. These programs may pro-

8 Mont. Code Ann., § 33-22-1704 (Temporary). These

terms and conditions may not be discriminatory; however, the

law permits differences among geographic regions or special-

ties, or differences among institutional providers, such as

hospitals, that result from individual negotiation.

9 Mont. Code Ann. § 33-22-1704(3).

6a

vide services directly or arrange for others to provide

them. The programs, which include HMOs and PPOs,

typically involve contractual agreements between the

payor and the participating health care providers.

Many sources now offer limited-panel programs. Even

commercial insurers, which in the past did not usually

contract with providers, and Blue Cross or Blue Shield

plans, which do not usually limit severely the number

of providers who participate in their programs, now

frequently also offer programs that do limit provider

participation.

The popular success of programs that limit provider

participation appears to be due largely to their per-

ceived ability to help control costs. Economic studies

have confirmed that, under health care arrangements

that permit selective contracting, competition helps to

moderate cost increases.!° In addition, subscribers

may benefit from broader product coverage and lower

out-of-pocket payments that these cost savings may

make possible. Competition among different kinds of

third-party payor arrangements, including those that

limit provider participation and those that do not,

10 Studies have examined the competitive effects of se-

lective contracting, in particular California's experience with

permitting hospitals to contract selectively. See, e.g., J.C.

Robinson and C.S. Phibbs, An Evaluation of Medicaid Selec-

tive Contracting in California, 8 J. Health Econ. 437 (1989).

This study found that shifting from cost-reimbursement to

permitting selective contracting moderated increases in hospi-

tal costs, particularly in more competitive local markets. This

study concentrated on Medicaid experience; however, further

studies based on private health insurance experiences conf irm

these findings. See e.g., D. Dranove et al., Js hospital com-

petition wasteful? Rand J. Econ., Summer 1992; see also G.

Melnick et al., The Effects of Market Structure and Bargain-

ing Position on Hospital Prices, 11 J. of Health Economics

217 (Oct. 1992).

Ta

should ensure that cost savings are passed on to con-

sumers. This principle would apply to all types of

health care payment programs and health care provid-

ers.

Hospitals compete, ultimately, for the business of

patients. A hospital may pursue the business of sub-

scribers to PPO or HMO programs by seeking access

to those subscribers on a preferential, or even an ex-

clusive, basis. The hospital may perceive several ad-

vantages to such arrangements. A preferential or ex-

clusive arrangement may assure the hospital of enough

patients to make possible savings from economies of

scale, for example, by spreading fixed costs over a

larger volume of sales. At a minimum, it could facili-

tate business planning by making sales volumes more

predictable. The arrangement may reduce transaction

costs by reducing the number of third-party payors

with whom the hospital deals, and may reduce market-

ing costs that would otherwise be incurred to generate

the same business. To get access to the business and

the advantages represented by these programs, hospi-

tals compete with each other, offering lower prices and

additional services, to get the payors’ contracts.

Third-party find such arrangements attractive be-

cause they benefit from the providers' competition.

Lower prices paid to providers could mean lower costs

for a third-party payor. Not only might the amounts

paid out for services be lower, but in addition adminis-

trative costs might be lower for a limited-panel pro-

gram than for one requiring the payor to deal with, and

make payments to, all or most of the providers doing

business in a program's service area. A payor might

find it easier to implement cost-control strategies, such

as Claims audits and utilization review, if the number

of providers whose records must be reviewed is lim-

ited. And lower prices and additional services would

8a

help make the payor's programs more attractive in the

prepaid health care market.

Consumers too may prefer limited-provider pro-

grams if the competition among providers leads to

lower premiums, lower deductibles, or other advan-

tages. Consumer preference for limited-panel pro-

grams would presumably mean that, in the consumers'

view, these advantages would outweigh the disadvan-

tages of limiting the choice of providers, such as re-

duced convenience or the occasional need to use a

provider that is not part of the payor's contracted

service. Limitations on choice are unlikely to be so

severe that consumers’ access to providers is inade-

quate. For just as competitive forces encourage pro-

viders to offer their best price and service to a payor in

order to gain access to its subscribers, competition

would also encourage payors to establish service ar-

rangements that offer the level of accessibility that sub-

scribers want. Consumers’ ability to change programs

or payors if they are dissatisfied with service availabil-

ity would give payors an incentive to assure that the

arrangements they make for delivery of covered health

care services satisfy consumers.

IV. Effects of “any willing provider" require-

ments on limited-panel programs.

"Any willing provider" requirements may limit

firms' ability to reduce the cost of delivering health

care without providing any substantial public benefit.

They may make it more difficult for third-party pay-

ors, including PPOs, to offer programs that have the

cost savings and other advantages discussed above.

Requiring that programs be open to all providers

wishing to participate on the same terms may affect

both cost and coverage. To the extent that opening

programs to all providers reduces the portion of sub-

scribers' business that each contracting provider can

9a

expect to obtain, these providers may be less willing to

enter agreements that contemplate lower prices or ad-

ditional services. Moreover, since any provider would

be entitled to contract on the same terms as other pro-

viders, there would be little incentive for providers to

compete in developing attractive or innovative propos-

als. Because all other providers can "free ride” on a

successful proposal formulation, innovative providers

may be unwilling to bear the costs of developing a

proposal. Thus “any willing provider" requirements

may substantially reduce provider competition for this

segment of their business.

Reduced competition among providers for PPO

business can result in higher prices for services

through PPOs. The higher prices for covered services,

as well as the increased administrative costs associated

with having to deal with many more providers, may

raise the prices to subscribers for prepaid health care

programs, or may force those programs to reduce

benefits to avoid raising those prices.

Moreover, requiring programs to be open to more

providers may not give the consumer benefits from

greater choice. Subscribers may already choose other

types of prepayment programs with fewer limits on the

providers from which they may obtain covered serv-

ices. Indeed, by reducing their competitiveness with

other kinds of third-party payment programs, requiring

PPOs to grant open participation may reduce the num-

ber, variety, and quality of prepayment programs

available to consumers without provided any additional

consumer benefit.

V. Conclusion.

In summary, we believe that "any willing provider"

requirement may discourage competition among pro-

viders, in turn raising prices to consumers and unnec-

essarily restricting consumer choice in prepaid health

10a

care programs, without providing any substantial pub-

lic benefit. We hope these comments are of assistance.

Sincerely,

/s/ Michael O. Wise

Michael O. Wise

Acting Director