Amicus Curiae Brief — Aetna Life Insurance Co. v. Stuart Circle Hospital Corp

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FILE VU

co OCT 79 19953

No. 93-510

ME Crcath

IN THE

Supreme Court of the United States

OCTOBER TERM, 1993

AETNA LIFE INSURANCE COMPANY and

AETNA HEALTH MANAGEMENT.

Petitioners,

STUART CIRCLE HOSPITAL CORPORATION.

Respondent.

On Petition for a Writ of Certiorari to the

United States Court of Appeals

for the Fourth Circuit

MOTION FOR LEAVE TO FILE BRIEF AM//CUS CURIAE

AND BRIEF AWICUS CURIAE OF THE

ASSOCIATION OF PRIVATE PENSION

AND WELFARE BENEFIT PLANS

IN SUPPORT OF PETITIONERS

PAUL J. ONDRASIK, JR.

(Counsel of Record)

THEODORE E. RHODES

STEPTOE & JOHNSON

1330 Connecticut Avenue, N.W.

Washington, D.C. 20036

(202) 429-3000

Attorneys for Amicus Curiae

WILSON - EPES PRINTING Co INC. - 789-0096 - WASHINGTON. D.C. 20001

IN THE

Supreme Court of the United States

OCTOBER TERM, 1993

No. 93-510

AETNA LIFE INSURANCE COMPANY and

AETNA HEALTH MANAGEMENT,

. Petitioners,

STUART CIRCLE HosPITAL CORPORATION,

Respondent.

On Petition for a Writ of Certiorari to the

United States Court of Appeals

for the Fourth Circuit

MOTION FOR LEAVE TO FILE BRIEF AMICUS CURIAE

The Association of Private Pension and Welfare Bene-

fit Plans (“APPWP”) respectfully moves this Court, pur-

suant to Rule 36.3, for leave to file the attached brief

amicus curiae in support of the petition for certiorari in

this case. The consent of attorney for the petitioner has

been obtained. The consent of attorney for the respond-

ent was requested but refused.

The APPWP is a non-profit organization founded in

1967 to protect and foster the growth of this Nation’s

private employer-sponsored employee benefit plan system.

The members of the APPWP include both small and large

employer sponsors (including approximately 90 Fortune

500 companies) of employee benefit plans, as well as

numerous plan support organizations, such as consulting

and actuarial firms, investment firms, banks, insurers and

other professional benefit organizations. Collectively, its

more than 400 members sponsor or administer plans

covering more than 100 million plan participants. This

broad-based membership provides the APPWP with sub-

stantial expertise and experience in the entire spectrum of

issues relating to all types of benefit plans and the APPWP

has filed amicus curiae briefs in numerous cases involving

important issues for the employee benefit plan community.

This case raises an extraordinarily important ERISA

preemption issue for employer plan sponsors as they strug-

gle with the continued escalation in medical costs that has

threatened the viability of the voluntary, private sector

employee health plan system. Faced with this escalation,

plan sponsors increasingly have turned to a variety of cost

containment techniques in an effort to avoid benefit de-

creases or plan terminations. The preferred provider or-

ganization (“PPO”), under which plans can offer health

care to plan participants at a reduced cost through a

select panel of medical providers, has become an impor-

tant weapon in this war on costs.

The decision below, if allowed to stand, can only serve

to remove this innovative and effective cost-containment

technique from a plan sponsor’s already limited arsenal.

The PPO, at bottom, is a contractual arrangement be-

tween the PPO and a select group of medical providers,

under which the latter agree to provide services and or

goods to the PPO’s subscribers on a discounted basis.

By requiring PPOs to include “any willing” medical pro-

vider in the panel, the Virginia statute at issue effectively

“guts” the PPO concept as a cost-saving device. If par-

ticipation in the provider panel cannot be limited, medical

providers will have no incentive to offer meaningful dis-

counts to plans for one plain fact—plans will be in no

position to offer providers the increased patient volume

that is the quid pro quo for the provider discount. The

net effect of this state effort to regulate the makeup of

PPOs will be the demise of the preferred provider concept

aS a cost-containment tool, to the ultimate detriment of

Em

plan sponsors, plans themselves, and their millions of

participants.

This type of costly state interference into employee

benefit plan affairs is precisely what Congress sought to

eliminate in including in ERISA itself an express preemp-

tion provision that is “conspicuous for its breadth.” FMC

Corp. v. Holliday, 498 U.S. 52, 58 (1990). Nor is the

Virginia statute “saved” from preemption as a law “which

regulates insurance” as the Fourth Circuit erroneously

concluded. The state law at issue does not address the

“business of insurance,” but rather, the contractual rela-

tionship between medical care providers and the party

establishing the PPO which, in this-case,happens to be

an insurance carrier. There is nothing “insurance-unique”

about the creation of a PPO; indeed, numerous non-

insurance companies have established PPO networks and

marketed them to employee benefit plans. Moreover, in

a remarkably analogous context, this Court has held that

an insurance company’s creation of a pharmacy network

which provided prescription drugs to policy holders at

discounted rates did not constitute the “business of insur-

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

440 U.S. 205 (1979). Accordingly, the mere fact that

the state law in question addresses PPOs established by

insurance companies in no way takes it outside the scope

of ERISA’s broad preemptive sweep.

The APPWP submits that the decision below is wrong

and, unless reversed, threatens the delicate balance struck

by Congress between protecting participants’ rights and

confining plan costs in fashioning a federal scheme to

govern this area. Virginia’s efforts, if successful, can only

encourage other states to intrude upon employee benefit

plan administration and design matters under the guise of

State insurance regulation. Indeed, as noted in the peti-

tion for certiorari, numerous other states already have

adopted similar laws which, in a variety of fashions, limit

the exclusion of medical providers from PPO networks.*

Given the medical care crisis that already exists, it is im-

perative that this Court act now to protect the employee

benefit plan community from this type of costly state

interference.

The APPWP therefore urges this Court to grant the

petition for certiorari in this case and to accept the

attached brief to assist the Court in its resolution of this

matter.

Respectfully submitted,

PAUL J. ONDRASIK, JR.

(Counsel of Record)

THEODORE E. RHODES

STEPTOE & JOHNSON

1330 Connecticut Avenue, N.W.

Washington, D.C. 20036

(202) 429-3000

October 29, 1993 Attorneys for Amicus Curiae

* See Petition for Certiorari at 10 n.2. See also BlueCross

Blue Shield Association, State Barriers to Managed Care: Results

of a National Survey of Blue Cross and Blue Shield Plans (2d ed.

1992), at 6-8.

TABLE OF CONTENTS

Page

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ii

TABLE OF AUTHORITIES

CASES Page

E-Systems, Inc. v. Pogue, 929 F.2d 1100 (5th

Cir.), cert. denied, 112 S. Ct. 585 (1991) 7

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

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

(1987) x

General Motors Corp. v. California State Bd. of

Equalization, 815 F.2d 1305 (9th Cir. 1987),

cert. denied, 485 U.S. 941 (1988) 7

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

440 U.S. 205 (1979) 3,11, 12

Insurance Bd, v. Muir, 819 F.2d 408 (3d Cir.

1987) 9

Metropolitan Life Ins. Co. v. Massachusetts, 471

U.S. 724 (1985) 9

Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41 (1987) 8,9

Powell v. Chesapeake & Potomac Tel. Co., 780 F.2d

419 (4th Cir. 1985), cert. denied, 476 U.S. 1170

(1986) aa 9

SEC v. National Sec., Inc., 393 U.S. 453 (1969) 10

STATUTES

ERISA § 514 (a), 29 U.S.C. § 1144 (a) ao. x

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

(A) 9

LEGISLATIVE MATERIALS

H.R. Rep. No. 807, 938d Cong., 2d Sess. 15 (1974) 3,8

MISCELLANEOUS

BlueCross BlueShield Association, State Barriers

to Managed Care: Results of a National Survey

of Blue Cross and Blue Shield Plans (2d ed.

+ | RNR UI A lela E cL orn ees eich nweo = ak 6

KPMG Peat Marwick, Health Benefits in 1992, in

Benefits Spectrum (Oct. 1992)...... 5

National Health Lawyers Association, The In-

sider’s Guide to Managed Care: A Legal and

Operational Roadmap (1990) ....................... 10

iii

TABLE OF AUTHORITIES—Continued

The Wyatt Co., Report to Health Insurance Asso-

ciation of America: Cost Analysis of State

Legislative Mandates on Six Managed Health

Care Practices (1991)

U.S. General Accounting Office, Employer-Based

Health Insurance ‘ High Costs, Wide Variation

Threaten System (GAO/HRD-92-125) (1992). 2,

Page

6

4,5,7

IN THE

Siprenw Cot of the United States

OCTOBER TERM, 1993

No. 93-510

AETNA LIFE INSURANCE COMPANY and

AETNA HEALTH MANAGEMENT,

‘ Petitioners,

STUART CIRCLE HosPITAL CORPORATION,

Respondent.

On Petition for a Writ of Certiorari to the

United States Court of Appeals

for the Fourth Circuit

BRIEF AMICUS CURIAE OF THE

ASSOCIATION OF PRIVATE PENSION

AND WELFARE BENEFIT PLANS

IN SUPPORT OF PETITIONERS

INTEREST OF AMICUS CURIAE

The interest of the amicus curiae is set forth in the

motion accompanying this brief.

SUMMARY OF ARGUMENT

This case raises an extraordinarily important ERISA

preemption question for employer plan sponsors already

Struggling with the continued escalation in health care

costs. It is no secret that the continued rise in health

care costs has placed enormous pressures on the Nation’s

private employee benefit plan system. Indeed, a recent

General Accounting Office study indicates that in 1990

>

alone, American businesses spent 186 billion dollars in

providing medical benefits to their employees.’ The enor-

mous cost of medical care threatens not only the contin-

ued existence of many employer-sponsored health plans,

but also the economic competitiveness of many plan spon-

sors themselves.

Faced with expenditures of this magnitude, plan spon-

sors increasingly have turned te—innovative cost-contain-

ment mechanisms in an effort to avoid massive bencfit

cuts or, in some cases, the termination of medical cover-

age entirely. The decision below, however, threatens the

continued vitality of a major cost-saving option utilized

by plan sponsors and plans today—the preferred provider

organization (“PPO”).

The PPO enables plans to offer participants access to a

select group of medical providers who have agreed to pro-

vide their services on a discounted basis. The PPO’s

ability to contain or reduce a plan’s medical expenditures

is integrally tied to the PPO’s ability to limit the number

of preferred medical providers available to plan partici-

pants under the program. Only if the number of pre-

ferred providers is limited can a PPO offer the increased

patient volume necessary to secure meaningful discounts

from the providers. By upholding a state law requiring

insurance company-sponsored PPOs to extend “preferred”

status to “any willing” medical provider, the decision

below effectively strips these PPOs of the ability to offer

this essential guid pro quo. The inevitable result of this

holding will be the demise of the PPO as a cost-saving

mechanism, at least where sponsored by insurance com-

panies, to the ultimate detriment of plan sponsors, plans

themselves, and their participants.

1U.S. General Accounting Office, Employer-Based Health Insur-

ance: Tigh Costs, Wide Variation Threaten System (GAO HRD-

92-125) (1992) (hereinafter “GAO Study”), at 3.

~

Not only is the decision below bad policy given the

current crisis in medical care costs, it is bad law. While

Congress’ primary goal in enacting ERISA was the pro-

tection of participants’ interests in their plans, it also

recognized the voluntary nature of the employee benefit

plan system. Accordingly, in crafting its comprehensive

federal regulatory scheme for this area, Congress took

steps to insure that employers would not respond “by

decreasing benefits under existing plans or slowing the

rate of formation of new plans.” H.R. Rep. No. 807,

93d Cong., 2d Sess. 15 (1974). Among these steps was

the elimination of the conflicting and costly maze of state

regulation that had burdened plans in the past through an

express preemption clause that this Court repeatedly has

recognized as “conspicuous for its breadth.”

The Fourth Circuit’s conclusion that the state law in

question is “saved” from ERISA preemption as a law

“regulating insurance” is plainly wrong. The creation of

a PPO simply is not transformed into the “business of

insurance” whenever an insurance carrier engages in that

activity. There is nothing “insurance unique” about the

creation of a PPO network of providers; numerous non-

insurers have created such networks and marketed them

to employee benefit plans. Moreover, the inclusion of a

particular provider in the PPO network in no way involves

the relationship between the insurer and an insured: rather,

it involves the contractual relationship between the pro-

vider and the PPO and the terms upon which the provider

will make its services available. Not surprisingly then,

in a closely analogous context, this Court has held that

an insurance company’s creation of a network of phar-

macies which provided prescription drugs to insureds on

a discounted basis did not constitute the business of in-

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

Co., 440 U.S. 205 (1979). This Court’s analysis in

Royal Drug is controlling here and requires reversal of

the decision below.

—

4

In sum, the delicate balance struck by Congress in

ERISA between protecting participant rights and con-

fining plan costs so as not to undermine the private em-

ployee benefit plan system requires preemption of the

Virginia law here involved. This Court therefore should

grant the petition and reverse the decision below.

ARGUMENT

1. The continued escalation in heaith care costs and

the enormous burdens it has placed both on American

businesses and the Nation’s private employee benefit plan

system are matters of public record. A recent General

Accounting Office study indicates that in 1990 alone,

American businesses spent approximately 186 billion dol-

lars in providing health care benefits to their employees.

GAO Study at 3. This same study pointed out the dev-

astating impact these costs have on many American

businesses:

Rapidly increasing business outlays for group health

insurance are a serious problem for all firms, but

some firms have experienced severe hardships as their

costs have escalated to levels that threaten the com-

petitiveness of the firm. Firms in declining indus-

tries with aging work forces are faced with health

insurance premiums that exacerbate their competi-

tive problems. Such firms not only have to deal with

the general rise in health care costs, but also are hit

by further increases which reflect the poor health

experience of their aging work force. Small firms

are even more vulnerable since poor health experi-

ences of one or two workers can threaten their

capacity to obtain affordable health insurance cover-

age.

Id. at 12.

Faced with these dramatic costs, employer plan spon-

sors have few alternatives. Some firms, particularly small

firms, have had little choice but to reduce benefits sig-

5

nificantly or eliminate coverage for their employees en-

tirely. /d. at 12 n.16. Indeed, in 1990;-nearly 50%

of the Nation’s uninsured were employed on either a

full or part-time basis, while approximately an additional

33% of the uninsured were non-working dependents of

such employees. /d. at 23. Such actions only heighten

the problems faced by those employers who have con-

tinued to provide medical benefits to their employees since

generally “health costs associated with uninsured or under-

insured small firm employees are passed on to larger

firms.” /d. at 12 n.16.

Other firms have responded to the crisis through a

variety of innovative cost-containment and savings meas-

ures largely designed to permit them to continue provid-

ing meaningful coverage to their employees. Managed

care programs, such as PPOs and Health Maintenance

Organizations (“HMOs”) which impose limitations on a

participant’s choice of provider, have proven to be popular

and cost-effective alternatives for plan sponsors in their

efforts to combat medical costs. A recent study indi-

cates that in 1991, a majority of Americans with health

coverage were enrolled in such managed care-type pro-

grams.- Moreover, during 1991 alone, PPOs and similar

point of service plans increased their market share by

over 40%.°

A PPO is able to reduce plan costs by extending plan

participants access to a select panel or network of medica!

providers who have agreed to provide medical services on

a discounted or other non-traditional fee-for-service basis.

‘\ PPO’s ability to offer such savings to plans and plan

sponsors in large part is dependent on the PPO’s ability

“KPMG Peat Marwick, Health Benefits in 1992, in Benefits.

Spectrum (Oct. 1992), at 2.

’ 7d. (indicating that the market share of such plans increased

from 24% to 34% in 1991).

6

to limit the number of providers who are “preferred” or

included within the network. This is because the PPO

can offer providers the increased patient volume that is the

essential guid pro quo tor the negotiated discount arrange-

ments only if the number of providers is limited. “Any

willing provider” statutes such as that upheld by the

court below effectively “gut” the preferred provider con-

cept by eliminating the PPO’s bargaining power in this

key area. Not surprisingly then, a recent study estimated

that such laws would reduce a plan’s savings on benefit

claims anywhere from 8c to over 14% .*

Nor are the lost savings limited’ to benefit claims. Such

legislation also increases the PPO’s costs both in establish-

ing and administering the provider network. For example,

if it must deal with all providers, rather than a select few,

the PPO will incur increased expenses in credentialing

providers, negotiating, executing, and administering pro-

vider agreements, and monitoring provider performance.”

The same study which found a reduction in benefit sav-

ings estimated that “any willing provider” legislation in-

creases a PPO’s administrative costs anywhere from 34%

to 52%.° These additional costs obviously would be

passed on to plans, thereby further undermining the PPO’s

effectiveness as a cost-containment measure.

The net losers if such state legislation is upheld ob-

viously will be plan sponsors, their plans, and ultimately

plan participants themselves, all of whom will be deprived

*The Wyatt Co., Report to Health Insurance Association of

America: Cost Analysis of State Legislative Mandates on Sir

Managed Health Care Practices (1991), at 19-20 (hereinafter

“Wyatt Study”). See also BlueCross BlueShield Association, State

Barriers to Managed Care: Results of a National Survey of Blue

Cross and Blue Shield Plans (2d ed. 1992), at 5 (hereinafter

“BlueCross Study’’).

5 BiueCross Study at 6.

6 Wyatt Study at 15-16.

7

of a significant cost-saving opportunity at the very time

that medical cost escalation has threatened the viability

of the voluntary, private sector employee benefit plan

system. Nor is this potential harm mitigated by the fact

that Virginia statute addresses only insurance company-

sponsored PPOs. If the creation of a PPO is viewed as

the “business of insurance” subject to permissible state

regulation, state efforts to regulate the makeup of PPOs

established by non-insurance companies can be antici-

pated.’ Moreover, even if such laws are limited to in-

surance company-sponsored PPOs, the elimination § of

insurers from the PPO market will have a negative impact

on the availability of PPO-type arrangements to many

plans, and small plans in particular. Unlike insurance

carriers, many plans simply do not possess “enough nego-

tiating power in geographic health care markets” to “ob-

tain[] discounted fees with providers.” * Thus, if allowed

to stand, the decision will greatly undermine, if not elim-

inate, the PPO as a meaningful cost-saving alternative.

2. The decision below is consistent with ERISA’s pur-

poses and incompatible with its broad preemption of state

law. While Congress’ “primary goal” in enacting ERISA

was the protection of the interests of plan participants,

it also was keenly aware of the voluntary nature of our

employee benefit plan system and “the public interest in

encouraging the formation of employee benefit plans.”

‘For example, in General Motors Corp. v. California State Bd.

of Equalization, 815 F.2d 1305 (9th Cir. 1987), cert. denied, 485

U.S. 941 (1988), a state insurance “premium tax” calculated by

reference to benefits paid by plans which had purchased “excess-

risk” insurance and passed on by insurers to such plans was upheld

against preemption challenge as a law regulating insurance. This

ruling undoubtedly encouraged state efforts to impose a similar tax

on plan administrators. See E-Systems, Inc. v. Pogue, 929 F.2d

1100 (5th Cir.), cert. denied, 112 S. Ct. 585 (1991) (finding such

law preempted by ERISA).

* GAO Study at 24.

8

Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 54 (1987).

Indeed, ERISA’s legislative history makes clear that Con-

gress was concerned not to burden plans so heavily by

ERISA’s requirements that “employers respond... by

decreasing benefits under existing plans or slowing the

rate of formation of new plans.” H.R. Rep. No. 807

at 15.

Not only did Congress seek to minimize the regulatory

burdens imposed by ERISA itself, it also relieved plan

sponsors and plans from the costly, conficting and ineffi-

cient maze of state regulation that had ,».«gued them in

the past. It did so through the inclusion of an express

preemption provision—ERISA §514(a), 29 U.S.C.

$ 1144(a)—which is “conspicuous for its breadth” and

“establishes as an area of exclusive federal concern the

subject of every state law that ‘relate[s] to’ an employee

benefit plan governed by ERISA.” FMC Corp. v. Holli-

day, 498 U.S. 52, 58 (1990). The reason for its inclusion

is clear:

ERISA’s pre-emption provision was prompted by

recognition that employers establishing and miain-

taining employee benefit plans are faced with the

task of coordinating complex administrative activities.

A patchwork scheme of [state] regulation would

introduce considerab'e inefficiencies in benefit -pro-

gram operation, which might lead those employers

with existing plans to reduce benefits, and those with-

out such plans to refrain from adopting them.

Fort Halifax Packing Co. v. Coyne, 482 U.S. 1, 11 (1987)

(emphasis added ).

The court below correctly determined that the Virginia

statute here involved “relates to” employee benefit plans,

and thus falls squarely within the scope of ERISA’s pre-

emption provision. Indeed, this relationship is beyond

dispute since the primary market for PPOs is employee

benefit plans and any state regulation of the PPO’s makeup

9

directly impacts a plan’s benefit structure, administration

and costs. See Metropolitan Life Ins. Co. v. Massachu-

setts, 471 U.S. 724 (1985) (state mandated benefit law

requiring inclusion of minimum mental health coverage

in group health insurance policies “relates to” employee

benefit plans within meaning of ERISA’s preemption

provisions ).

However, the court’s ultimate conclusion that this stat-

ute was “saved” from preemption under ERISA § 514

(b)(2)(A), 29 U.S.C. § 1144(b)(2)(A), as a law “reg-

ulating insurance” constitutes plain and dangerous error.

This court’s prior teachings demonstrate that this savings

clause was not intended to allow state regulation of all

aspects of an insurance company’s plan-related activities.

See Pilot Life Ins. Co. v. Dedeaux, supra; Metropolitan

Life Ins. Co. v. Massachusetts, supra. Rather, like the

similarly worded McCarran-Ferguson Act, the savings

clause “appears to have been designed to preserve the . . .

reservation of the business of insurance to the States.”

Metropolitan Life, 471 U.S. at 744 n.21 (emphasis

added). Thus, only state laws which regulate the “busi-

ness of insurance,” as opposed to the business of insurance

companies, properly can fall within its ambit. And, in-

deed, the lower courts have held that an insurance com-

pany’s plan-related activities are outside the saving clause’s

scope where they do not constitute the “business of in-

surance.” See, e.g., Powell v. Chesapeake & Potomac Tel.

Co., 780 F.2d 419 (4th Cir. 1985), cert. denied, 476

U.S. 1170 (1986) (insurance company’s provision of ad-

ministrative services to plan is not the business of insur-

ance); Insurance Bd. v. Muir, 819 F.2d 408 (3d Cir.

1987) (to same effect as Powell).

The decision below blurs and confuses this basic dis-

tinction between the “business of insurance” which is

within the savings clause, and the “business of insurance

companies,” which is without. As a threshold matter, the

10

business activity here at issue does not even qualify as the

“business of insurance companies.” While insurance com-

panies have become increasingly active in establishing

PPO networks and marketing them to plans on both an

insured and self-funded basis, there is nothing insurance

company “unique” or “specific” about the creation and

administration of a PPO network of medical providers.

Many PPOs in operation today are sponsored, developed

and promoted by groups of medical providers themselves

or by HMOs.” In addition to this “provider sponsored

plan” model, others are developed by third party entre-

preneurs who are neither providers or insurance cafriers.””

These “broker model” plans incur the expenses associated

with establishing a network of providers, e.g., soliciting

and negotiating contracts with multiple providers and ad-

ministering the program, and “sell access to these networks

to insurance companies and self insured employers.” "

Thus, the creation and administration of a PPO is not

even the “business of insurance companies,” but rather,

a business activity engaged in by insurance companies and

many other non-insurers.

More importantly, the activity: regulated by the Vir-

ginia statute does not constitute the “business of insur-

ance” under any proper definition of that term. The pre-

cise activity regulated by the Virginia statute—a PPO’s

inclusion or exclusion of medical providers—simply does

not involve the “relationship between insurer and _in-

sured” which this Court has recognized repeatedly as the

“focus” of the business of insurance. F.g., SEC v. Na-

tional Sec., Inc., 393 U.S. 453, 460 (1969). Nor does

it involve the underwriting or spreading of a policyholder’s

9 National Health Lawyers Association, The Insider’s. Guide to

Managed Care: A Legal and Operational Roadmap (1990), at 20-

21, 53.

10 Td.

11 Jd. at 21.

11

risk which is an “indispensable characte ’ of insurance.”

Royal Drug, 440 U.S. at 212.

Rather, the statute is directed at the contractual rela-

tionship between the PPO and medical providers and the

terms upon which those providers will make their services

available under the PPO program. While this contractual

relationship impacts an insurer’s costs in meeting its obli-

gations under any contract of insurance it might offer

allowing access to its PPO, the PPO-provider relationship

is entirely separate and distinct from that between the

insurer and the insured and any underlying policy of in-

surance. Indeed, the best evidence that the contractual

relationship between a PPO and its medical providers does

not constitue the “business of insurance” is that such re-

lationship is part and parcel of every PPO, including those

established by non-insurers and those which provide access

to plans on a non-insured, fee-for-service basis.” If this

relationship is not the “business of insurance” in these

latter situations—and it is not—there is no reasoned basis

for concluding that it becomes such whenever a PPO

is sponsored by an insurance company and made available

to employee benefit plans on an insured basis.

Not surprisingly then, in a remarkably analogous con-

text, this Court already has concluded that an insurance

carrier's contractual relationship with a provider of goods

and services to its policyholders is not the “business of

insurance.” In Group Life & Health Ins. Co. v. Royal

Drug Co., supra, an insurance carrier entered into agree-

ments with pharmacies, under which the pharmacies

agreed to provide prescription drugs to policyholders on

a discounted basis. In holding that this insurer-created

pharmacy “network” did not constitute the business of

12 Of course, even insurance company-sponsored PPOs, including

the petitioner in this case, offer their services to plans on a non-

insured basis, 7.e., self-funded plans pay a fee for access to the

network. See District Court Op., Petition at 15a,

12

insurance, the Court emphasized two facts. First, the par-

ticipating pharmacy agreements were “not ‘between in-

surer and insured’ ”, but rather, were “separate contractual

arrangements between [the insurer] and pharmacies en-

gaged jn the sale and distribution of goods and services

other than insurance.” 440 U.S. at 216. Second, the

agreements did not involve the underwriting of risk, but

the terms upon which the insurer would pay for goods

and services in meeting its contractual commitments to

policyholders. As the Court explained:

The fallacy of petitioners’ position is that they

confuse the obligations of Blue Shield under its in-

surance policies, which insure against the risk that

policyholders will be unable to pay for prescription

drugs during the period of coverage, and the agree-

ments between Blue Shield and the participating phar-

macies, which serve only to minimize the costs Blue

Shield incurs in fulfilling its underwriting obligations.

Id. at 213. This same analysis applies here and requires

reversal of the decision below.”®

In short, Virginia’s attempt to impose an “any willing

provider” requirement on insurance company-sponsored

13 Nor can the Royal Drug decision be distinguished on the

ground suggested by the court below—that participation in the

pharmacy network is available to “any pharmacy which agreed to

the insurance company’s terms.” Fourth Circuit Op., Petition at

12a. This feature played no part in this Court’s conclusion that

the activity there involved did not constitute the business of in-

surance. Indeed, this Court made clear that the insurer’s con-

tractual relationship with pharmacies would not constitute the

business of insurance even if it had chosen to deal with a single

vendor through the following example:

Suppose, for example, that an insurance company entered into

a contract with a large retail drug chain whereby its policy-

holders could obtain drugs under their policies only from stores

operated by this chain.

Royal Drug, 440 U.S. at 215. Thus, an insurer’s ability to exclude

providers from a PPO is totally irrelevant to the “business of in-

surance” equation.

EEE

PPOs does not regulate the “business of insurance.” and

thus falls outside the scope of the insurance savings clause.

This Court therefore should give ful! effect to ERISA’s

broad preemption provision to relieve plans and plan

sponsors from this form of costly and inefficient state

interference. Moreover, this Court should do so now

so as to assure the employee benefit plan community that

it will not be deprived of this increasingly important

weapon in combating the current crisis in medical care

costs.

CONCLUSION

For the reasons stated above, this Court should grant

the petition for certiorari and reverse the decision below.

Respectfully submitted,

PAUL J. ONDRASIK, JR.

(Counsel of Record)

THEODORE E. RHODES

STEPTOE & JOHNSON

1330 Connecticut Avenue, N.W.

Washington, D.C. 20036

(202) 429-3000

October 29, 1993 Attorneys for Amicus Curiae