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

No. 93-510

IN THE

Supreme Cort 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 AMICUS CURIAE

AND BRIEF AMICUS CURIAE FOR THE

AMERICAN COUNCIL OF LIFE INSURANCE

IN SUPPORT OF THE PETITION

Of Counsel: ERWIN N. GRISWOLD

RICHARD FE. BARNSBACK

PHILLIP E. STANO

AMERICAN COUNCIL OF LIFE

INSURANCE

1001 Pennsylvania Ave., N.W.

Washington, D.C. 20004-2559

(202) 624-2183

Counsel of Record

PATRICIA A. DUNN

SHELBY J. HOOVER

JONES, DAY, REAVIS & POGUE

Metropolitan Square

1450 G Street, N.W.

Washington, D.C. 20005-2088

(202) 879-3939

Counsel for the Amicus

N - 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,

ae 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

FOR THE AMERICAN COUNCIL OF LIFE INSURANCE

IN SUPPORT OF THE PETITION

The American Council of Life Insurance (“ACLI’)

hereby moves, pursuant to Rule 37.2 of the Rules of this

Court, for leave to file the attached brief as amicus curiae.

Consent to the filing of this brief has been obtained from

counsel for the petitioners, Aetna Life Insurance Com-

pany and Aetna Health Management. Counsel for the

respondent, Stuart Circle Hospital Corporation, has re-

fused consent.

The ACLI is the largest life insurance trade association

in the United States, representing the interests of 616

member life insurance companies. The ACLI’s members

currently hold 95 percent of the life insurance in force in

legal reserve life insurance companies in the United States.

Most of its members also provide health insurance.

The insurance industry plays a critical role in provid-

ing welfare benefits to members of the nation’s workforce

through benefit plans governed by the Employee Retire-

ment Income Security Act of 1974, as amended, 29 U.S.C.

S$ 1001-1461 (“ERISA”). As of 1979, insurance com-

panies—including many members of the ACLI—funded

through group policies approximately 99 percent of the

benefit plans in the United States that covered fewer than

100 participants. See “Employee Welfare Benefit Plans

and Plan Sponsors in the Private Non-farm Sector in the

United “States, 1978-79,” Health and Population Study

Center, Battelle Human Affairs Research Centers, Vol.

IV (1980), at 43-45. Approximately 92 percent of the

plans in this country covering greater than 100 partici-

pants were also funded in this way. 7d. Many members

of the ACLI offer or administer preferred provider organi-

zations (“PPOs”) that provide significant cost savings to

employee welfare benefit plans subject to ERISA.

Because of its nationwide constituency, the ACLI is

peculiarly able to present to this Court the views of the

life and health insurance industries concerning the issue

presented in this case: whether ERISA preempts a state

law that mandates that any health care providers “will-

ing’ to meet the terms of an insurer-offered or insurer-

administered PPO used by an employee benefit plan to

deliver health care services must be included in the PPO.

Those views are particularly important where, as_ here,

resolution of this case requires interpretation of ERISA’s

“insurance saving clause” and turns in part on the mean-

ing of “regulating the business of insurance” under the

McCarran-Ferguson Act, 15 U.S.C. $$ 1011-1015. They

are also important because, if the decision below stands,

it will greatly increase the costs to employers of providing

health care benefits to their employees and their depend-

ents by, in effect, eliminating the PPO as an innovative and

———— EE

extremely popular means of providing cost-efficient health

care in states with “any willing provider” laws.

In other ERISA cases, the ACLI has submitted amicus

briefs to this Court. See, e.g., Massachusetts Mutual Life

Ins. Co. v. Russell, 473 U.S. 134 (1985); Pilot Life Ins.

Co. v. Dedeaux, 481 U.S. 41 (1987): Firestone Tire &

Rubber Co. v. Bruch, 489 U.S. 101 (1989). For these

reasons. the motion for leave to file the attached brief

amicus curiae in support of the Petition should be granted.

Respectfully submitted,

Of Counsel:

RICHARD E. BARNSBACK

PHILLIP E. STANO

AMERICAN COUNCIL OF LIFE

INSURANCE

1001 Pennsylvania Ave., N.W.

Washington, D.C. 20004-2559

(202) 624-2183

October 1993

ERWIN N. GRiSWOLD

Counsel of Record

PATRICIA A. DUNN

SHELBY J. HOOVER

JONES, DAY, REAVIS & POGUE

Metropolitan Square

1450 G Street, N.W.

Washington, D.C. 20005-2088

(202) 879-3939

Counsel for the Amicus

QUESTION PRESENTED

Whether a state law that mandates only the health care

providers to be included in a preferred provider organiza-

tion used by an employee benefit plan to deliver health

Care services, rather than restricts the services that such

providers must provide participants in such plans, is pre-

empted under the Employee Retirement Income Security

Act of 1974, as amended (“ERISA”).

(i)

TABLE OF CONTENTS

Page

TABLE OF AUTHORITIES lV

INTERESTS OF THE AMICUS 1

TATUTES INVOLVED 2

LSONS FOR GRANTING THE WRIT 7

l. THe COURT BELOW DECIDED AN IM

PORTANT ISSUE OF FEDERAL LAW IN A

MANNER INCONSISTENT WITH THE DE

CISIONS OF THIS COURT 7

il. The DECISION BELOW WILL CREATE A

SIGNIFICANT DISRUPTION IN THE EM-

PLOYEE BENEFIT COMMUNITY AND

THREATENS TO ELIMINATE AN IMPOR-

TANT MEANS FOR REDUCING THE NA-

TION’S HEALTH CARE COSTS 13

CONCLUSION 17

iv

TABLE OF AUTHORITIES

Cases Page

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

(1981) 15

Anschultz v. Connecticut General Life Ins. Co.,

850 F.2d 1467 (11th Cir. 1988) %

DeBruyne v. Equitable Life, 920 F.2d 457 (7th Cir.

1990) Q

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

(1987) 15

Gahn v. Allstate Life Ins. Co., 926 F.2d 1449 (5th

Cir. 1991) 8

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

440 U.S. 205 (1979) 6, 7, 8, 12, 13

Howard v. Gleason, 901 F.2d 1154 (2d Cir. 1990) 8

Metropolitan Life Ins. Co. v. Massachusetts, 471

U.S. 724 (1985) 7, 8, 12,13

Pilot Life Ins. Co. v. Dedeaurx, 481 U.S. 41

(1987) 7

SEC v. Variable Annuity Life Ins. Co., 359 U.S.

65 (1959) .... ; 8

Shaw v. Delta Air Lines, Inc., 463 U.S. 85 (1983) 15

Standard Oil Co. of Calif. v. Agsalud, 442 F. Supp.

695 (N.D. Cal. 1977), aff'd, 633 F.2d 760 (9th

Cir. 1980), aff'd, 454 U.S. 801 (1981) 15

The Insurance Board Under the Social Ins. Plan

of Bethlehem Steel Corp., 819 F.2d 408 (3d Cir.

1987) 8

United States Dept. of Treasury v. Fabe, 113 S.Ct.

2202 (1993) 8, 11

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

(1982) 7

Virginia Academy of Clinical Psychologists v.

Blue Shield of Virginia, 624 F.2d 476 (4th Cir.

1980), cert. denied, 450 U.S. 916 (1981) 11

Statutes

Employee Retirement Income Security Act of 1974,

29 U.S.C. $§ 1001-1461 2

29 U.S.C. § 1144 (a) 2,6

TABLE OF AUTHORITIES—Conrtinued

29 U.S.C.

29 U.S.C.

1144 (b) 3,

1144(c)

McCarran-Ferguson Act, 15 U.S.C. §§ 1011-1015

15 U.S.C. § 1012

Ga. Code Ann. § 33-20-16 (1990)

215 Ill. Comp. Stat. Ann. 5/370h (1993)

Idaho Code § 41-1844 (1991)

Ind. Code Ann. § 27-8-11-3 (Burns 1992)

La. Rev. Stat. Ann. § 40:2202 (West 1992)

Neb. Rev. Stat. § 44-4112 (1988)

Utah Code Ann. § 31A-22-617 (1991)

Va. Code § 38.2-3407 (1993)

Wvo. Stat. § 26-22-5038 (1977)

x

P|

.

s

Leqgislative Materials

S. Rep. No. 127, 93d Cong., Ist Sess. (1973

printed in 1 Legislative History of the Employee

Retirement Income Security Act of 1974

(1976)

120 Cong. Rec. 29,197 (1974)

120 Cong. Rec. 29,933 (1974)

120 Cong. Rec. 29,942 (1974)

re-

Miscellaneous Authorities

American Association of Preferred Provider Or-

ganizations, “PPO Growth” (1993)

Report to Health Insurance Association of Amer-

ica: Cost Analysis of State Legislative Man-

dates on Six Managed Care Practices (Wyatt

‘0. 1991)

IN THE

Sayre Court of the United States

OCTOBER TERM, 1993

No. 93-510

AETNA LIFE INSURANCE COMPANY and

AETNA HEALTH MANAGEMENT,

ui 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 FOR THE

AMERICAN COUNCIL OF LIFE INSURANCE

IN SUPPORT OF THE PETITION

This brief is filed on behalf of the American Council

of Lite Insurance (“ACLI”), as amicus curiae, in support

of the petition for certiorari.'

INTEREST OF THE AMICUS

As explained in more detail in the accompanying Mo-

tion, the ACLI is the largest life insurance trade associa-

tion in the United States, representing the interests of

‘Consent from counsel for Aetna Life Insurance Company and

Aetna Health Management has been filed with the Clerk of this

Court. Because counsel for Stuart Circle Hospital Corporation

refused to give consent, this brief is accompanied by a motion for

leave to file this amicus brief.

P

616 member life insurance companies. The ACLI’s mem-

bers currently hold 95 percent of the life insurance in

force in legal reserve life insurance companies in the

United States. Its members also play a critical role in

providing welfare benefits to members of the nation’s

workforce by insuring and or administering benefit plans

governed by the Employee Retirement Income Security

Act of 1974, as amended, 29 U.S.C. §§ 1001-1461

(“ERISA”).

The legal and practical consequences of the Fourth

Circuit’s decision below are matters of grave concern to

the members of the ACL!. That decision—that ERISA

does not preempt a state law that mandates the inclusion

of “any willing provider” in a preferred provider organi-

zation (“PPO”) offered or administered by an insurance

company—greatly increases the costs to employers of

providing health care benefits to their employees and

their dependents. In effect, it threatens to eliminate an

innovative and extremely popular means of providing

cost-efficient health care. Because of this impact, the

ACLI seeks to file this brief to provide the Court with

the unique perspective of its broad-based constituency on

this important federal question.

STATUTES INVOLVED

1. Section 514(a) of ERISA provides, in pertinent

part, that:

Except as provided in subsection (b) of this section,

the provisions of this subchapter and subchapter I!

of this chapter shall supersede any and all State laws

insofar as they may now or hereafter relate to any

employee benefit plan described in section 1003(a)

of this title and not exempt under section 1003(b)

of this title.

29 U.S.C. § 1144(a).

2. Section 514(b) of ERISA provides, in pertinent

part, that:

3

(2)(A) Except as provided in subparagraph (B),

nothing in this subchapter shall be construed to ex-

empt or relieve any person from any law of any

State which regulates insurance, banking, or securi-

ties.

[2](B) Neither an employee benefit plan described

in section 1003(a) of this title, which is not exempt

under section 1003(b) of this title . . . nor any trust

established under such plan, shall be deemed to be

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

engaged in the business of insurance . . . for purposes

of any law of any State purporting to regulate insur-

ance companies, [or] insurance contracts ....

29 U.S.C. § 1144(b).

3. Section 514(c) of ERISA provides, in pertinent

part, that:

(1) The term “State law” includes all laws, deci-

sions, rules, regulations, or other State action having

the effect of law, of any State....

(2) The term “State” includes a State, any political

subdivisions thereof, or any agency or instrumen-

tality of either, which purports to regulate, directly

or indirectly, the terms and conditions of employee

benefit plans covered by this subchapter.

29 U.S.C. § 1144(c).

4. Section 2 of the McCarran-Ferguson Act provides,

in pertinent part, that:

(a) The business of insurance, and every person

engaged therein, shall be subject to the laws of the

several States which relate to the regulation or tax-

ation of such business.

(b) No Act of Congress shall be construed to in-

validate, impair, or supersede any law enacted by a

State for the purpose of regulating the business of

insurance, or which imposes a fee or tax upon such

business, unless such Act specifically relates to the

4

business of insurance: Provided, That after June 30,

1948, the Act of July 2, 1890, as amended, known

as the Sherman Act, and the Act of October 15,

1914, known as the Clayton Act, and the Act of

September 26, 1914, known as the Federal Trade

Commission Act, as amended, shall be applicable

to the business of insurance to the extent that such

business is not regulated by State law.

15 U.S.C. § 1012.

5. Section 38.2-3407 of the Virginia Code provides,

in relevant part, that:

A. One or more insurers may offer or administer

a health benefit program under which the insurer or

insurers may Offer preferred provider policies or con-

tracts that limit the numbers and types of providers

of health care services eligible for payment as pre-

ferred providers.

B. Any such insurer shall establish terms and con-

ditions that shall be met by a hospital, physician or

type of provider listed in § 38.2-3408 in order to

qualify for payment as a preferred provider under the

policies or contracts. These terms and conditions

shall not discriminate unreasonably against or among

such health care providers. No hospital, physician or

type of provider listed in § 38.2-3408 willing to meet

the terms and conditions offered to it or him shall

be excluded. Neither differences in prices among

hospitals or other institutional providers produced

by a process of individual negotiations with providers

or based on market conditions, or price differences

among providers in different geographical areas, shall

be deemed unreasonable discrimination. The Com-

mission shall have no jurisdiction to adjudicate con-

troversies growing out of this subsection.

Virginia Code § 38.2-3407.

5

STATEMENT

Like a number of other states, Virginia has enacted,

as part of its state insurance code, what is commonly

referred to as an “any willing provider” statute. This

“any willing provider” law requires a PPO, offered or

administered by an insurer, to include in its organization

any health care provider willing to meet the terms and

conditions of the organization. As enacted, the mandate

embodied in Virginia Code § 38.2-3407 is not limited to

situations where an insurance company insures, through

the issuance of insurance to the subscriber plan, the pay-

ment of the services offered by the PPO. It also applies

when the insurance company does no more than admin-

ister a PPO for the benefit of self-insured employee benefit

plans.

Aetna Life Insurance Company (“Aetna”) both ad-

ministers and insures employee benefit plans providing

benefits in Virginia. Pet. 4. Aetna Health Manage-

ment (“Aetna Health”) maintains and manages the PPO

that Aetna established to serve the Richmond, Virginia

area. Jd. Both insured and self-insured emplovee benefit

plans subscribe to Aetna’s Richmond PPO; for those

plans that are self-insured, Aetna merely provides ad-

ministrative services. /d.

Stuart Circle Hospital Corporation (“Stuart Circle” )

owns and operates a hospital in Richmond. Pet. 4.

In structuring and establishing its Richmond PPO, Aetna

did not include Stuart Circle as a provider. Jd. Stuart

Circle responded by suing Aetna and Aetna Health in

Vireinia state court, alleging a violation of Virginia Code

S$ 38.2.3407. Id. Aetna and Aetna Health removed the

case, on diversity grounds, to the United States District

Court for the Eastern District of Virginia. /d.

The Proceedings Below

The district court granted Aetna’s motion for summary

judgment, holding that ERISA preempted Section 38.2-

6

3407 of the Virginia Code. Pet. App. !4a-32a. The court

concluded that the Virginia law “relates to” employee

benefit plans. as contemplated in the preemption §provi-

sions of ERISA § 514(a) (id. at iS8a-24a), and is not

“saved” from preemption as a law that “reguiate[s] in-

surance’, as contemplated in ERISA § 514(b)(2)(A).

Id. at 24a-32a. !n holding that the Virginia law is not

“saved” from preemption, the district court relied on the

criteria used in determining whether a state law “regulates

insurance” under the McCarran-Ferguson Act. /d.

Specifically, the district court relied on this Court's

decision in Group Life & Health Ins. Co. v. Roval Drug

Co., 440 U.S. 205 (1979). that a service arrangement

between an insurance company and a group of pharma-

cies, which restricted the pharmacies available to the in-

sured participants of employee benefit plans, was not an

arrangement that involved the “business of insurance.”

By analogy, the district court held that state-mandated

inclusions of willing providers into PPOs do not involve

the type of transfer of risk between an insurer and an

insured that is essential to the “business of insurance.”

Pet. App. 27a-28a. Rather, according to the court, a

PPO is merely a contractual relationship among health

care providers permitting an insurance company, through

its Management or administration of the PPO, to aid in

providing cost-efficient health care to the participants of

subscribing employee benefit plans. /d.

On appeal, the Fourth Circuit reversed, holding that

the Virginia statute is not preempted because that law

regulates the “business of insurance” as contemplated in

FRISA’s “savings” clause. Pet. App. 3a-l13a. The Fourth

Circuit based its holding on two grounds. First. it con-

cluded that the Virginia “any willing provider” law regu-

lates the “business of insurance” because it indirectly

recvlates the relationship between the insurer and the in-

sured. as well as the type of policy that may be issued.

Id. at 9a. Second. it concluded that the Virginia law

Meets ali three prongs of the test for the “business of

eae a nnn emcee anna are eanaeene eames

7

insurance” traditionally used in the context of the Mc-

Carran-Ferguson Act. /d. at 9a-lla. In the court’s view,

the law (1) transferred the risk that the service will not

be provided by the health provider of the policyholder’s

choice, (2) affected an integral part of the policy rela-

tionship between the insured and the insurer, and (3)

applied solely to entities within the insurance industry. J/d.

REASONS FOR GRANTING THE WRIT

I. THE COURT BELOW DECIDED AN IMPORTANT

ISSUE OF FEDERAL LAW IN A MANNER IN.

CONSISTENT WITH THE DECISIONS OF THIS

COURT.

Section 514(b)(2)(A) of ERISA saves from preemp-

tion any state law that “regulates insurance.” 29 U.S.C.

S$ 1144(b)(2)(A). In Metropolitan Life Ins. Co. v.

Massachusetts, 471 U.S. 724, 740 (1985), this Court

stated that the “business of insurance” for purposes of

ERISA’s “savings” clause is coextensive with those activi-

ties that are reserved to state regulation under the Mc-

Carran-Ferguson Act. Thus, this Court has applied the

criteria for evaluating the “business of insurance” under

the McCarran-Ferguson Act in deciding the applicability

of ERISA’s “savings” clause to state laws. See Pilot Life

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

In so doing, this Court has used the three-prong test

articulated in Union Lahor Life Ins. Co. v. Pireno, 458

U.S. 119, 129 (1982), and Group Life & Health Ins.

Co. v. Royal Drug Co., 440 U.S. 205 (1979). to define

the scope of the phrase “any law of any State which

regulates insurance” in ERISA’s “savings” clause. That

test, applied to ERISA in Metropolitan Life, means that

a state law will be deemed to “regulate insurance” if it

(1) effects the transfer or spreading of risk between the

insurer and the policyholder: (2) is limited to entities

within the insurance industry; and (3) affects an integral

part of the insured and insurer relationship. Pireno, 458

8

U.S. at 129; Roval Drag, 440 U.S. at 214-224; Metro

politan Life, 471 U.S. at 743.

By holding that the Virginia “any willing provider”

law is a law regulating the “business of insurance” under

this test—thus saving it trom ERISA’s broad preemptive

reach—the Fourth Circuit both misconstrued and = mis-

applied the well-established three-prong test of Pireno and

Royal Drug. In the process, it has threatened widespread

disruption of a widely-accepted method of providing cost-

efficient health care——at a time when health care costs are

spiraling—that only this Court can promptly avert.”

A. The Virginia Law Does Not Effectuate The Trans-

fer Of Risk. The decision below that Virginia’s “any

willing provider” law effectuates the transfer of risk plainly

misapplies this Court’s well-settled insurance law princi-

ples: the Virginia law does not involve the true “under-

writing” of risks—‘“the one earmark of insurance” (SEC

v. Variable Annuity Life Ins. Co., 359 U.S. 65, 73

(1959) )—much less the transfer of risk from an insured

to the insurer that defines the contract of insurance.

Insurance companies that offer or administer PPOs are

not engaged in the “underwriting” of insurance or the

spreading of risk through a contract with one or more

insured individuals or groups. See Group Life & Health

Ins. Co. v. Royal Drug Co., 440 U.S. at 211 (“The pri-

mary elements of an insurance contract are the spreading

“In United States Dept. of Treasury v. Fabe, a non-ERISA case,

this Court recently reiterated the validity of the three-prong test

of Pireno and Royal Drug in determining what constitutes the

“business of insurance” for purposes of the McCarran-Ferguson

Act. 113 S.Ct. 2202 (1992). Moreover, most circuits have expressly

adopted the three-prong test in determining the scope of ERISA’s

savings clause. See, e.g., Gahn v. Allstate Life Ins. Co., 926 F.2d

1449, 1458 (Sth Cir. 1991); DeBruyne v. Equitable Life, 920 F.2d

457, 469 (7th Cir. 1990); Howard v. Gleason Corp., 901 F.2d 1154,

1158 (2d Cir. 1990); Ansehultz v. Connecticut General Life Ins. Co.,

850 F.2d 1467, 1468 (11th Cir. 1988); The Insurance Board Under

the Social Ins. Plan of Bethlehem Steel Corp., 819 F.2d 408, 411

(3d Cir. 1987).

_

9

and underwriting of a policyholder’s risk. ‘It is charac-

teristic of insurance that a number of risks are accepted,

some of which involve losses, and that such losses are

spread over all the risks so as to enable the insurer to

accept each sisk at a slight fraction of the possible liability

upon it”), Rather, such insurance companies are merely

providing a service to employers sponsoring employee

benefit plans by aiding those sponsors in implementing

their particular health plans in the most. cost-efficient

manner.

The absence of a risk transfer, in the insurance sense,

is clearly evident from the basic structure of a PPO. A

PPO is nothing more than a mechanism for an employer

to provide health care benelits to its employees. through

an employee welfare benefit plan, at a reduced cost. The

creator of a PPO enters into contracts with a limited

number of health care providers, i.e., “preferred provid-

ers,” for the purpose of providing health care services to

employee benefit plans. Cost savings result from the

chosen health care providers’ willingness to provide their

services at substantial discounts due to various reasons,

including the assured increase in patient volume that the

PPO network of subscribers can guarantee.

Generally, this increase in patient volume is achieved

through financial incentives given to participating plan

participants. For example, an employee benefit plan that

subscribes to the PPO may offer to pay participants a

greater percentage of any cost of treatment rendered to

them by preferred providers. The resulting increase in

patient volume, in turn, yields a lower per patient cost

to the preferred providers by spreading the fixed cost

of the PPO. This enables the providers to lower the

charges per incidence of service.

Thus, a PPO is merely a contractual relationship be-

tween the PPO creator, or administrator, and the various

preferred health care providers. The PPO contract does

not specify what health care services will be covered by

any particular subscribing employee benefit plan; it does

not, by its terms, provide insurance coverage to any sub-

10

scribing plan or require any plan to be insured in order

to subscribe. Indeed, in many instances, the PPO creator

or administrator may not even be an insurance company.

Thus, whether a subscribing plan is fully-insured, partially-

insured, or self-insured is a separate contractual matter

totally outside the PPO contract. The PPO contract does

nothing more than specify the discounted fees for which

the various preferred providers within its network will

provide their services to subscribers.

To the extent that providing services through a PPO

network has a cost impact, this impact redounds to the

plan and its participants—not to the insurer—in a manner

that would constitute the “underwriting” of risk. For

example, an insurer administrator of a PPO that is also

providing the insurance coverage for a subscriber plan

can easily cap its costs based on a predetermined benefit-

by-benefit payment schedule. Therefore, to the extent that

more costly providers are added to the PPO network, the

insurer gua insurer would need to pay no more than the

scheduled amount. while either the plan sponsor or the

participant would pay the monetary difference for the

particular provision of service. Thus, in this instance,

insofar as any shifting of cost occurs, it would consist

of the mere shifting of cost for providing a defined list

of services between the plan and its participants and the

PPO itself. Such a risk shifting would, if anything, indi-

cate that insurer status should apply either directly or

indirectly to the plan. Clearly, however, the “deemer”

clause would preclude any attempt to apply state insur-

ance law directly to the plan or its participants or

sponsor.”

Even where the employee benefit plan is fully insured

through an insurance contract that specifically limits pay-

3 Section 514(b)(2)(B) of ERISA is known as the “deemer’

clause because it states, in effect, that no employee benefit plan

may be deemed to be an insurance company or other insurer for

purposes of any law of any State purporting to regulate insurance

companies or contracts.

1]

ments of benefits to services rendered by members of a

particular PPO, that contractual restriction does not result

in an underwriting of risk in the insurance sense. This is

due to the fact that such a policy does not in any way

restrict the type of illness or injury covered, i.e., the type

of benefit provided. Rather, such a provision restricts only

who will provide the services. Such a restriction does not

affect the risk that any individual participant will or will

not be reimbursed for the treatment of any particular ill-

ness or injury. And it is this risk—that of being reim-

bursed for the treatment of any particular illness or in-

jury—that is the generally-accepted relevant risk for pur-

poses of determining insurance status. See, e.¢., United

States Dept. of Treasury v. Fabe, 113 U.S. 2202. 2209

(1993): Virginia Academy of Clinical Psychologists. vy.

Blue Shield of Virginia, 624 F.2d 476 (4th Cir. 1980).

cert. denied, 450 U.S. 916 (1981).

B. The Law Affects Entities Other Than Insurance

Companies. The second prong of the three- prong test for

determining whether a particular law regulates an activity

involving the “business of insurance” involves determining

Whether the law applies so/e/y to entities in the insurance

industry. There is no legal or practical reason why the

gp oe of composing PPO networks is, or indeed should

, limited to insurance companies. In fact, m: iny PPOs

are created and administered by groups of medical service

providers themselves—without any involvement of an in-

surance company. In addition, many benefit consulting

groups structure such networks of health care service pro-

viders for their plan sponsor clients. In neither of these

two fact patterns does the entity creating the PPO net-

work assume any type of risk relating to benefits being

provided to the subscriber plans. Therefore, it is plain

that the function of creating or administering a PPO

network, in and of itself, has nothing to do with an as-

sumption of risk. Because that function is not limited to

entities in the insurance industry, the activity that the

Virginia law attempts to regulate fails to meet the second

12

prong of the Pireno and Royal Drug test for the type of

activity that may be deemed the “business of insurance.”

In reality, the creation or selection of a PPO is nothing

more than a service to a plan sponsor or the plan and, as

such, is a function separate and distinct from the provision

Ss of insurance. See Group Life & Health Ins. Co. v. Royal

Drug Co., 440 U.S. 205 (1979). The facts of this case

make that point clear: in many instances, Aetna did not

provide insurance coverage to the subscribing plans, but

merely provided administrative services relating to their

subscriptions to the PPO.

Moreover, if the participant population of a plan spon-

sor were large enough, any such sponsor could command

the attention of significant numbers of health care provid-

ers and thus create its own PPO network through its own

Selection process. In such a case, there would be no

doubt that the “deemer” clause of ERISA §$ 514 would

preclude the characterization of such a plan as an in-

surer and, hence, the application of any state insurance

laws to such a plan. See Metropolitan Life, supra.

Clearly. the hiring of an insurance company by the plan

sponsor, either directly or indirectly, to create or provide

a PPO network should not change the legal analysis that

the “deemer” clause protects this activity. Indeed, such a

service provider, whether an insurance company or an-

other entity, is nothing more than an extension of the

plan and its sponsor and, as such, shares in the “deemer”

clause protection given the plan.

If Virginia’s law is allowed to stand, it will have the

adverse impact of denying small plans the advantages of

the mega-plans. Unlike large plans, small plans and their

sponsors do not have the economic clout or the numbers

of potential paticnts necessary to attract and form inde:

pendently cost-efficient PPO networks. Denying small

plans the aid of insurance companies in the formation

of cost-efficient PPO networks has the effect of denying

them the easiest and least costly means of participating

———————————_—__O_O_O_O_O_O_OOOOee

13

in a PPO network. That, in turn, clearly has a direct

impact on the design, operation and economics of those

small plans.

C. The Law Does Not Affect The Relationship Be-

tween The Insurer and The Insured. Because the rela-

tionship between the entity that creates or administers a

PPO network and any particular subscriber plan is purely

and simply one of a service provider to such plan—and

not one in which any type of risk is shifted—the activity

that Virginia’s “any willing provider” law attempts to reg-

ulate is not an activity that affects the relationship be-

tween an insurer and an insured. The activity being reg-

ulated by Virginia law is an activity that any entity, in-

cluding the plan or its sponsor, could perform and in-

volves no shifting of risk necessary to an insurance

relationship. Although the Virginia law is Strictly limited

in application to insurance companies engaged in offer-

ing or administering PPO networks, it does not so regulate

any insurer in its capacity as an insurer. Hence. the Vir-

ginia “any willing provider” law does not affect the re-

lationship between an insurer and an insured, and thereby

fails to meet the third and final prong of the Pireno and

Royal Drug test.

The Fourth Circuit’s contrary conclusion warrants this

Court’s review. That decision is inconsistent with this

Court's established principles of ERISA preemption. See

Metropolitan Life, 471 U.S. at740. And it is irreconcila-

ble with basic notions of risk in the insurance context.

See Group Life & Health Ins. Co. vy. Royal Drug Co., 440

U.S. at 211-12.

If. THE DECISION BELOW WILL CREATE A SIG-

NIFICANT DISRUPTION IN THE EMPLOYEE

BENEFIT COMMUNITY AND THREATENS TO

ELIMINATE AN IMPORTANT MEANS FOR RE-

DUCING THE NATION’S HEALTH CARE COSTS.

If the Fourth Circuit’s decision is allowed to stand. an

important weapon in the fight to control and. indeed.

reduce this nation’s health care costs will be eroded. This

14

is evidenced by the faci that. as of 1992, nearly 40 per-

cent of all employers in the United States offered their

employees some form of PPO, and nearly 58 million em-

ployees and dependents accepted these offers by participat-

ing in PPOs. American Association of Preferred Provider

Organizations, “PPO Growth” (1993). The application

of Virginia’s “any willing provider” law will result in an

increase in administrative costs while decreasing claims

savings. Moreover, and more importantly, depending on

the number of providers using the law to gain admittance

to any particular PPO, the law will actually devalue the

PPO as a cost-saving mechanism by eliminating its ability

to provide any marginal savings as compared to other

non-PPO providers. Report to Health Insurance Associa-

tion of America: Cost Analysis of State Legislative Man-

dates on Six Managed Health Care Practices, at 1-5

(Wyatt Co. 1991).

Cost efliciency is a legally permissible goal for plan

sponsors. It should not be impermissible for plan spon-

sors to hire independent experts to aid them in their

selection of plan service providers. Indeed, to the extent

that any particular employee welfare benefit plan receives

monies from plan participants for the purpose of defray-

ing the costs of its offered benefits or the premiums sup-

porting the insurance coverage for such benefits, the plan’s

fiduciaries have a dufy under ERISA’s fiduciary responsi-

bility provisions to expend those assets as prudently as

possible. The Virginia law would impede plan fiduciaries

from fulfilling this responsibility and obligation to the

best of their ability by eliminating a source of cost-

eflicient medical services. This is particularly true for

smaller employers that do not have the economic power

to negotiate successfully with individual health care pro-

viders to create their own PPO networks.

Not only do such results have a negative impact on the

nation’s health care costs, they are also entirely at odds

with the words and intent of ERISA. Although ERISA

15

does not provide specific substantive design requirements

for welfare plans, the resulting “regulatory void” merely

evidences Congressional intent to leave those subjects to

the discretion of plan sponsors. Alessi v. Raybestos-Man-

hatian, Inc., 451 U.S. 504, 525 (1981): Standard Oil of

Calif. v. Agsalud, 442 F. Supp. 695, 705 (N.D. Cal. 1977),

affd, 633 F.2d 760 (9th Cir. 1980), aff'd, 454 U.S. 801

(1981). Lack of specific ERISA regulation does not give

States the authority to fill in the “regulatory void.” Shaw

v. Delta Air Lines, Inc., 463 U.S. 85, 98-99 (1983).

Indeed, if states like Virginia are permitted to interfere

with sponsor discretion, plan sponsors will be required

to conform to a patchwork of state-mandated require-

ments concerning the offering of a PPO network or to

eliminate the PPO option altogether.‘

It is just such a result that ERISA’s preemption provi-

sions were meant to avoid. As this Court stated in Fort

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

A patchwork scheme of regulation would introduce

considerable inefficiencies in benefit program opera-

tion, which might lead those employers with existing

plans to reduce benefits.

The Court explained in Shaw v. Delta Air Lines, Inc., 463

U.S. at 105 & n.25:

ERISA’s comprehensive preemption of state law was

meant to minimize this sort of interference with the

administration of employee benefit plans, . . . [so

* Currently, several States have various types of “willing pro-

vider” laws. A number of states have laws similar to Virginia,

e.g., Georgia (Ga. Code Ann, § 33-20-16 (1990)); Illinois (215 II.

Comp. Stat. Ann. 5 270h (1993)); Indiana (Ind. Code Ann. § 27-

8-11-38 (Burns 1992)); Louisiana (La. Rev. Stat. Ann. § 40:2202

(West 1992),; Utah (Utah Code Ann. § 31A-22-617 (1991)); and

Wyoming (Wyo. Stat. § 26-22-503 (1977)). Some states have laws

that apply only to certain types of providers or only to certain types

of arrangements. See, e.g., Nebraska (Neb. Rev. Stat. § 44-4112

(1988) ) and Idaho (Idaho Code § 41-1844 (1991)) respectively.

16

that employers would not have] to administer their

plans differently in each State in which they have

employees.”

Allowing the lower court decision to stand will create

the type of patchwork regulation that is directly contrary

to the maintenance of nationwide employee benefit plans

and that Congress intended to preclude through federal

preemption.

This case is of nationwide importance. Certiorari should

be granted to eliminate the “patchwork” diversity that will

result from the Fourth Circuit’s decision below.

5 The legislative history of ERISA is replete with support for

this principle. See, e.g., S. Rep. No. 127, 93d Cong., Ist Sess. 35

(1973), reprinted in 1 Legislative History of the Employee Retire-

ment Income Security Act of 1974 (1976) (‘Legislative History”),

at 621 (“Except ... in certain . . . enumerated circumstances,

state law is preempted. Because of the interstate character of

employee benefit plans, the Committee believes it essential to pro-

vide for a uniform source of law... .”); 120 Cong. Rec. 29,197

(1974) (Representative Dent) (broad federal preemption was de-

signed to eliminate “the threat of conflicting and inconsistent State

and local regulations”) ; 120 Cong. Rec. 29,933 (Senator Williams)

(“the substantive and enforcement provisions ... are intended to

preempt the field for Federal regulations, thus eliminating the

threat of conflicting or inconsistent State and local regulation of

employee benefit plans”); 120 Cong. Rec. 29,942 (1974) (Senator

Javits) (“the emergence of a comprehensive and pervasive Federal

interest and the interests of uniformity with respect to interstate

plans required—-but for certain exceptions--the displacement of

State action in the field of private employee benefit plans’’).

17

CONCLUSION

For the reasons set forth above and for the additional

reasons advanced in the Petition, the writ of certiorari

should be granted.

Of Counsel:

RICHARD E. BARNSBACK

PHILLIP E. STANO

AMERICAN COUNCIL OF LIFE

INSURANCE

1001 Pennsylvania Ave., N.W.

Washington, D.C. 20004-2559

(202) 624-2183

October 1993

Respectfully submitted,

ERWIN N. GRISWOLD

Counsel of Record

PATRICIA A. DUNN

SHELBY J. HOOVER

JONES, DAY, REAVIS & POGUE

Metropolitan Square

1450 G Street, N.W.

Washington, D.C. 20005-2088

(202) 879-3939

Counsel for the Amicus