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

MOTION FILED

OCT 29 1353 No. 93-510

IN THI

Suprene Court of the Wuited States

}(

OcTOBER TERM, 1993

AETNA LIFE INSURANCE COMPANY and

VE TNA HEALTH MANAGEMI

7.

STUART CIRCLE HOSPITAL CORPORATION

On Petition for Writ of Certiorari to the

United States Court of Appeals

for the Fourth Circuit

MOTION FOR LEAVE TO FILE BRIEF AW/C7 CURTAE

AND BRIEF AVICT CURTIAE O|}

THE TRAVELERS INSURANCE COMPANY AND

BLUE CROSS AND BLUE SHIELD

OF THE NATIONAL CAPITAL AREA

IN SUPPORT OF PETITPIONERS

DANIEL Ec. TROY

JOHN C. YANG

WILEY, REIN & FIELDING

1776 kK Street, N.W

Washineton, D.C. 20006

(202) 429-7000

Attorneys for Amici Curia

The Tia ele / SHIrAaANCE

Compa i # ("ros

i

Deliv ae ‘ I] ort hig

Nationa (Capita Lrea

October 29, 1993 Counsel ol Record

WILSON - EPES PRINTING CO IN

IN THI

Siuymrruw 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 Writ of Certiorari to the

United States Court of Appeals

for the Fourth Circuit

The Travelers Insurance Company and Blue Cross and

Blue Shield of the National Capital Area, a division of

Group Hospitalization and Medical Services, Inc., a Mem-

ber of the Blue Cross and Blue Shield Association, an

association of independent Blue Cross and Blue Shield

plans, by its undersigned attorneys, hereby move the Court

lor leave, pursuant to Rule 37 of the Rules of the Supreme

Court of the United States, to appear as amici curiae in

the above-captioned proceeding in support of the Petition

for Writ of Certiorari of Petitioners Aetna Life Insurance

Company and Aetna Health Management. This motion

and the accompanying conditionally filed brief is made

within the time specified by Rule 37.2. The written con-

sent of Petitioners Aetna Life Insurance Company and

Aetna Health Management accompanies this motion nd

the proposed brief. Stuart Circle Hospital Corporation

has refused to consent to the filing of this brief.

The Travelers Insurance Company and Blue Cross

and Blue Shield of the National Capital Area * (col-

lectively the “amici curiae’) are health insurance com-

panies that also administer preferred provider organi-

zations (“PPOs”). Together. these companies manage

over 50 PPOs, which cover more than 2 million individ-

uals acros’ the United States. The amici curiae currently

manage F**?, subject to the Employee Retirement Income

Security Act of 1974 (“ERISA”) in Virginia and through

out the nation. Certain of these PPOs may also be sub-

ject to the “any willing provider” statute interpreted by

the Fourth Circuit in this case, as well as similar statutes

in at least fourteen other states. The amici curiae are

therefore vitally interested in the judicial interpretation

of these statutes.

The amici curiae believe that the proper interpretation

of ERISA and _any-willing-provider- statutes, particularly

by the United States Supreme Court, is important to the

public interest, as well as to PPOs, subscribers, and pro-

viders. Improper expansion of state statutes into an area

regulated by ERISA can significantly raise the costs of

health insurance to all Americans. In the view of the

amici curiae, their experience in PPO administration and

health insurance will be helpful to this Court’s examina-

tion of this important issue.

Through their proposed submission, the amici seek to

provide a broad perspective on the statutory interpreta-

tion questions by highlighting to this Court the critical

and substantial issues at stake. The amicis brief does

not duplicate arguments raised by the parties. Rather, it

explains the important economic and policy reasons for

applving ERISA preemption to any-willing-provider stat-

* Blue Cross and Blue Shield of the National Capital Area pro-

vides coverage as a not-for-profit health services plan.

_ —

utes. In particular, the proffered brief demonstrates the

benefits conferred upon society by PPOs and the threat

posed by any-willing-provider statutes to PPOs.

More generally, as commentators have stressed, an

amicus 1s olten In a superior position “to focus the court's

ittention on the broad implications of various possible

rulings.” Bruce Ennis, Effective Amicus Briefs, 33 Cath.

U.L. Rev. 603, 608 (1984), quoted in Robert L. Stern

‘tt al., Supreme Court Practice 570-71 (1986).

Phe amici curiae’s request for leave to participate will

not disrupt the briefing schedule. undermine the orderly

presentation of argument, delay in any way the resolution

of this action, or inject new or unrelated questions into

this litigation. The accompanying proposed brief is sub

mitted conditionally at this time.

WHEREFORE, The Travelers Insurance Company and

Blue Cross and Blue Shield of the National Capital Area

respectfully request that this Court grant their motion

for leave to file an amici curiae bricf in support of the

Petition for Writ of Certiorari of Petitioners Aetna Life

Insurance Company and Aetna Health Management.

Respectfully submitted,

THOMAS W. BRUNNER *

DANIEL E. TROY

JOHN C. YANG

WILEY, REIN & FIELDING

1776 K Street, N.W.

Washington, D.C. 20006

(202) 429-7000

\ttorneys for Amici Curiae

The Travelers Insurane

Company and Blue Cross and

Blue Shield of the

National Canital A read

* Counsel of Record

TABLE OF CONTENTS

TABLE OF AUTHORITIES

INTEREST OF THE AMICI CURIAE ecccsmeaeame

INTRODUCTION Scsquneadendaned leas enccpeiaiaaa

REASONS FOR GRANTING THE WRIT .....000000000......

I,

IT.

ANY-WILLING-PROVIDER STATUTES

DESTROY THE ABILITY OF PREFERRED

PROVIDER ORGANIZATIONS TO CONTROL

HEALTH CARE COSTS RE NRE LA AA AAT eK een

A. PPOs Have Increased Rapidly in Popularity

3ecause They Have Helped To Control

Health Care Costs in the United States...

B. By Eliminating the Ability of Preferred

Provider Organizations To Choose Providers

in Their Plans, Any-Willing-Provider Stat-

utes Destroy the Ability of PPOs To Control

Health Care Costs ..................... pon eR POOR

INSURANCE COMPANY ADMINISTRATION

OF A PREFERRED PROVIDER ORGANIZA-

TION DOES NOT CONVERT A PPO INTO

THE “BUSINESS OF INSURANCE”

CURRENT CONSIDERATION BY CON-

GRESS OF HEALTH CARE REFORM DOES

OT ELIMINATE THE NEED FOR THE

COURT TO REVIEW THIS CASE .....00000000002....

CONCLUSION binenhadad fembensaastaaigcambaaddaauabbiads -

(i)

Page

il

TABLE OF AUTHORITIES

lyse} iit . Co nectic it General Life Ins. Co.., RAO

F.2d 1467 (11th Cir. 1988) 17, 18

FMC Corp. v. Holliday, 498 U.S. 52 (1990) 9, 13, 14

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

(1987) 9,15

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

140 U.S. 205 (1979) 14. 16,17

Hansen v. Continental Ins. Co., 940 F.2d 971 (5th

Cir. 1991) 17

Hartford Fire Ins. Co. v. California, 113 S. Ct.

2891 (1993) 14

Vetropolitan Life Ins. Co. v. Massachusetts, 471

U.S. 724 (1985) ; 13, 15, 16, 17

Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41 (1987) 3

Ramirez v. Inter-Continental Hotels, 890 F.2d 766

(5th Cir. 1989) 17

Shaw v. Delta Air Lines, Inc., 463 U.S. 85 (1983) 13

Ticor Title Ins. Co. v. FTC, 998 F.2d 1129 (3d Cir.

1993) 17

Tingle v. Pacific Mut. Ins. Co., 996 F.2d 105 (5th

Cir. 1993) 17

Travelers Ins. Co. v. Cuomo, No. 938-7132L (2d

Cir. Oct. 25, 1993) 15

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

(1982) 15. 16

V agin Ti Leads rig of Cli ical Psicholoag ists .

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

1980), cert. denied, 450 U.S. 916 (1981) 17

Statute 8S

120 Cone. Rec. 29197 (1974) 13,14

Emplovee Retirement Income Security Act of 1974,

29 U.S.C. §$ 1144 (1988) 13

H.R. Rep. No. 1785, 94th Cong., 2d Sess. (1977) 14

McCarran-Ferguson Act, 15 U.S.C. § 1011 (1988) 3

Va. Code Ann. § 38.2-3407 (Michie 1993) 9

Misce llay COUS

American Association of Preferred Provider Or-

ganizations, PPO Growth (1984-1992) (June

1993 iodcndiiaetabicamaenabaiaate is os ae D

iii

TABLE OF AUTHORITIES—Continued

( tr {¢)mi) tration Dese ption of President’s

Health Care Reform Plan, “American Health

) Act of 1993”, Health L. Rep. (BNA)

S-24 (Sept. 16, 1995) 19

David Dranove et al., The Effect of Injecting Price

Competition Into the Hospital Market: The

i

Case of Preferred Provider Oraanizations, 28

Ne Cli f

Inquiry 419 (1986) 1,5, 6,8, 12

Feonomic Report of the President (January

1993 ) 7

Ezekiel J. Emanuel & Alan S. Brett, Managed

Competition and the Patient-Phiusician Relation-

ship, 329 New Eng-J. Med. 879 (1993) 12

M: re] A, Firfer, dD rect Emplo /¢ r-Pro "vder Con

tracting and ERISA Preemption: A Regulatory

Loopnhole?, 40 Fed’n Ins. & Corp. Couns. Q. 195

(1990) 5.16

H.E. Frech IT] & Paul B. Ginsburg, Competition

{mong Health Insurers, Revisited, 13 J. Health

Pol. Pol’'v & L. 279 (1988) 5.6. 7.9.15. 17

Paul B. Ginsburg & Glenn T. Hammons, Competi-

tion and the Quality of Care : The Imnorta) Ce

of Information, 25 Inquiry 108 (1988) 7.12

Thomas L. Greaney & Jody L. Sindelar, An Assess-

ment of the Anticompetitive Effects of Preferred

Provider Organizations, 24 Inauirv 884 (1987) 5 6.7

Health Care Clinton’s Plan and the Alternati es.

N.Y. Times, Oct. 17, 1993, at 22 19

Luev Johns, Se lective Contracting 1 California:

An Update, 26 Inquiry 345 (1989) ~

Robert E. Keeton & Alan I. Widiss, /nsurance Law

(1988) 16

Marion Merrel! Dow, Managed Care Digest: PPO

Edition (1992) 1,6, 8,17

Glenn A. Melnick et al., The Effects of Market

Structure and Raraqaining Position on Hospital

Prices, 11 J. Health Econ. 217 (1992) 10

Glenn A. Melnick et al., The Growth and Effects

of Hospital Selective Contracting, 14 Health

Care Mgmt. Rev. 57 (1989)

iv

TABLE OF AUTHORITIES—Continued

Dana Priest, Insurance Curbs Asked for Interim,

Wash. Post, Sept. 27, 1993, at Al

Shouting Matches: Six Areas of Dispute, News-

week, Oct. 4, 1993, at 49

‘i "Oo Plans and Whe ye The / Might Lead, Wall St.

J., Sept. 23, 1993, at A&

The White-House, Health Security Preliminary

Plan Summary (1993)

Wyatt Company, Report to Health Insurance Asso-

ciation of America (June 7, 1991) 10.

Page

20

19

BRIEF AMICI CURIAE OF

THE TRAVELERS INSURANCE COMPANY AND

BLUE CROSS AND BLUE SHIELD

OF THE NATIONAL CAPITAL AREA

IN SUPPORT OF PETITIONERS

Imici Curiae The Travelers Insurance Company and

Blue Cross and Blue Shield of the National Capital Area,

division of Group Hospitalization and Medical Services,

Inc., a Member of the Blue Cross and Blue Shield Asso-

clation, an association of independent Blue Cross and

Blue Shield plans, hereby support the petition for writ

of certiorari of Aetna Life Insurance Company and

\etna Health Masagement (“Aetna”) to review the judg-

ment in this case of the United States Court of Appeals

for the Fourth Circuit.

INTEREST OF THE AMICI CURIAE

The Travelers Insurance Company and Blue Cross

and Blue Shield of the Nationa! Capital Area (col-

lectively the “amici curiae’) are health insurance com-

panies that also administer preferred provider organi-

vations (“PPOs”). Together, these companies manage

over 50 PPOs, which cover more than 2 million individ-

uals across the United States. The amici curiae currently

manage PPOs subject to the Employee Retirement Income

Security Act of 1974 (“ERISA”) in Virginia and through

out the nation. Certain of these PPOs may also be sub-

ject to the “any willing provider” statute interpreted by

the Fourth Circuit in this case_as well as similar statutes

in at least fourteen other states. The @mici curiae are

therefore vitally interested in the judicial interpretation

of these statutes.

INTRODUCTION

The Fourth Circuit’s erroneous decision in this case

threatens the viability of insurer-administered PPOs, a

vital and efficient form of delivering health care services.

PPOs directed by insurance companies currently cover

over 30 million- individuals. Since PPOs were introduced

in the early 1980s, their popularity has rapidly increased

5

because they have proven effectiv: in controlling runaway

health care costs while still providing consumer choice.

PPOs accomplish these twin goals by using the bargaining

power derived from a large subscriber base to negotiate

lower prices for their subscribers. These lower prices, in

turn. ensure a higher patient volume for the PPO’s net-

work of health care providers by creating financial incen-

tives for the subscribers to use the participating providers.

In so doing, PPOs benefit all segments of society.

The Virginia any-willing-provider statute undermines

the ability of an insurer-administered PPO to operate

effectively. Shorn of the right to select and limit the

number of participating providers, such PPOs are unable

to guarantee a higher patient volume. Consequently, they

are unable to obtain lower prices for their subscribers.

By depriving insurer-administered PPOs of the right to

choose the health care providers in their PPOs, and by forc-

ing such PPOs to make their subscribers available to any

willing provider, the Virginia statute at issue destroys the

economic incentives for either subscribers or providers to

join these PPOs. The Fourth Circuit’s conclusion that such

a Statute is not preempted thus thwarts ERISA’s goal of

facilitating efficient, nation-wide employee benefit pro-

grams. :

The Fourth Circuit arrived at its erroneous conclusion

by miscenstruing the phrase “business of insurance” and

determining that the Virginia statute was “saved” from

preemption. In fact. Virginia’s any-willing-provider stat-

ute does not satisfy any of the three requirements estab-

lished by this Court for determining whether a regulation

governs the “business of insurance.” The Virginia law

does not affect the spreading of a policyholder’s risk: it

-y not an integral part of the policy relationship between

the insurer and the insured: and it is not limited to en

tities within the insurance industry. The Virginia statute

regulates the business of insurance companies. not. the

“business of insurance.” It is” therefore preempted b\

ERISA.

3

Congress’s present consideration of health care reform

proposals, most notably that of President Clinton, under-

scores the need for the Court to review this case. Almosi

all of the health care plans under review would rely

heavily on PPOs. Thus. the question as to whether state

laws such as any-willing-provider statutes are preempted

will remain, especia ly because none of the primary pro-

posals currently under consideration would modify the

scope of ERISA preemption and the insurance savings

clause. In any event. health care reform legislation prob-

ably would not be effective for many years. During that

extended interim period. any hope that health insurers

will be able to control their premium increases must rest

on their ability to create efficient and competitive health

care programs such as PPOs. Thus, in light of the im-

portant social value of PPOs and the critical questions of

law presented here. this Court should grant certiorari.

REASONS FOR GRANTING THE WRIT

I. ANY-WILLING-PROVIDER STATUTES DESTROY

THE ABILITY OF PREFERRED PROVIDER OR-

GANIZATIONS TO CONTROL HEALTH CARE

COSTS.

This case presents an issue of true national significance,

Preferred provider organizations (“PPOs”) are an_ in-

creasingly popular and cost-effective mode of managed

health care that has developed recently in response to the

severe national problem of escalating health care costs.

PPOs are more frequently organized by a non-insurance

entity--onlv 36 percent of PPOs are administered by

insurers. The organizing entity enters into contracts with

selected hospitals. physicians. and other health care pro-

viders. These providers agree to supply services to the

PPO'S subscribers in accordance with certain standards

established by the PPO. most notably relating to price

and quality of care. In exchange for furnishing health

care to these subscribers on the PPO’s terms, the providers

obiain either a higher or more secure flow of patients.

4

The Fourth Circuit’s erroneous determination that any-

willing-provider statutes are not preempted undercuts the

rights of an insurer-administered PPO to select the health

care providers it believes can meet its standards. as well

as its ability to attract health care providers into its PPOs.

Thus, at best. the Fourth Circuit’s decision would effec-

tively bar insurance companies from organizing PPOs:

at worst. it will eventually frustrate the recognized social

utility of PPOs. Eliminating insurer-administered PPOs

would cripple the PPO market and disrupt the lives of

many PPO participants. In the United States. 54 percent

of all PPO subscribers are in PPOs administered by health

insurance companies. Marion Merrell Dow. Managed

Care Digest: PPO Edition, at 7 (1992) [hereinafter

“Managed Care Digest’). These several million individ-

uals would be forced to find alternative health benefit

plans if insurer-administered PPOs were effectively barred.

This Court should grant the writ of certiorari to resolve

this issue of profound national importance.’

A. PPOs Have Increased Rapidly in Popularity Be-

cause They Have Helped To Control Health Care

Costs in the United States.

All PPOs share certain characteristics. In its simplest

form, a PPO is an intermediary between two groups: sub

scriber health care recipients and selected health care

providers. The PPO organizes health care recipients—

usually through large employers—and contracts with the

recipients for the payment of premiums. The PPO

also selects health care providers that are able to meet its

desired terms and restrictions in providing care. The

PPO sets a range of discounted rates at which the partict-

pating providers must supply their medical services. In

return for these lower prices offered by the providers. the

PPO guarantees higher patient volume to the providers.

'In addition, amicr curiae adopt by reference the arguments for

grantiny the writ of certiorari set forth in the Petition for Writ of

Certiorari filed by Aetna

- See, ¢.4., David Dranove et al.. The Effect of Injecting Price

Competition Into the Hospital Market: The Case of Preferred

~

)

The PPO covers entirely the costs of PPO subscribers

in need of medical services who seek care from a PPO-

participating provider, except for a small subscriber co-

payment (or deductible). If, however, the subscriber

wishes to use a non-PPO participating provider, the PPO

pays for a lower percentage of the medical expenses in-

stead of the entire amount. See, e.g., David Dranove

et al.. The Effect of Injecting Price Competition Into the

Health Market: The Case of Preferred Provider Organ-

izations, 23 Inquiry 419, 421 (1986); H.E. Frech III &

Paul B. Ginsburg, Competition Among Health Insurers,

Revisited, 13 J. Health Pol. Pol'y & L. 279, 284 (1988).

Thus, the PPO creates a financial incentive for its sub-

scribers to use PPO-selected providers, although they re-

tain a free choice of providers. Many individuals, when

choosing a new doctor or getting a referral, select one

from the list of providers designated by the PPO, leading

to increased patient volume for the PPO-participating

providers.

The popularity of PPOs has continually increased since

their introduction in the early 1980s.°. The number of

PPOs in the United States has grown almost ten-fold, from

115 in 1984 to 1036 in 1992. American Association of

Preferred Provider Organizations, PPO Growth (1984-

1992), at 1 (June 1993). Similarly, in the five years

between 1987 and 1992, the numbers of Americans par-

ticipating in PPOs has risen from 12 million subscribers

-rovider Organizations, 23 Inquiry 419, 420-21 (1986); H.E. Frech

lll & Paul B. Ginsburg, Competition Among Health Insurers

Re ied. 13 J. Health Pol. Pol'y & L. 279, 284 (1988); Thomas

L. Greanev & Jody I Sindelar, A? | essment of the intice mpet

Effects of Preferred P ler Organizetions, 24 Inquiry 384,

x {85 ]}4s

Notabl PPOs were not initially created by insurance com

panies. but rather bv sma ndependent firms. See Frech & Gins

ry ra, at 289 ef Marci A. Firfer, Direct Employer

} er | react nd BRISA P mpl 1 Regulatory Loo

10 Fed’n Ins. & Corp. Couns. Q. 195, 208-04 (1990) (noting

rapid inci PPO their nventior n the ear

‘

1480s

6

to 58 million. /d. Insurer-administered PPOs cover over

30 million individuals nationwide—54 percent of all cur-

rent PPO subscribers. Managed Care Digest, supra, at 7.

The growth of PPOs is directly attributable to the ben-

efits that PPOs provide to all participants and society as

a whole. See, e.g., Frech & Ginsburg, supra, at 284;

Thomas L. Greaney & Jody L. Sindelar, An Assessment

of the Anticompetitive Effects of Preferred Provider Or-

ganizations, 24 Inquiry 384, 384 (1987). In particular,

PPOs have helped control overall health care costs by

promoting price competition among providers. Because

PPOs represent numerous health care recipients, they have

substantial negotiating power. As a result, PPOs nego-

tiate discounts in physician fees by a national average of

20 percent, and discounts in hospital costs averaging 17

percent nationally. Managed Care Digest, supra, at 36;

Glenn A. Melnick et al.. The Growth and Effects of Hos-

pital Selective Contracting, 14 Health Care Mgmt. Rev.

57, 60 (1989).

PPOs thus benefit patients greatly. PPO participants

have lower out-of-pocket costs, yet they retain the free-

dom to choose physicians outside of the PPO network as

well as providers within the network. See, e.¢g., Dranove

et al., supra, at 421; Greaney & Sindelar. supra, at 384-

85.° Furthermore. because a PPO has greater resources

than individual consumers, PPOs supply more informa-

tion about providers and costs than is generally accessible

‘PPOs promote the efficient use of medical resources through

“utilization review,” a mechanism whereby the PPO reviews the

use of medical resources by hospitals and doctors to determine

whether a procedure was necessary. Through utilization reviews,

PPOs inhibit “moral hazards” /.¢.. overconsumption and unneces-

sary use of medical resources -that mav occur because a health

”

care recipient has a low “out-of-pocket” expense,

*The freedom to choose non-participating providers does not

exist with most health maintenance organizations (“HMOs”). Un

like the case with PPOs, HMO subscribers whe seek services from

% non-participating provider must pay the full cost fer those

services.

7

to individuals. Where an individual consumer may not

have the time or resources to investigate the quality or

reputation of particular doctors, a PPO—through its se-

lection of providers—can essentially serve as a “Good

Housekeeping Seal of Approval” with respect to the com-

petence of the health care provider. Thus, many PPO

subscribers rely on the PPO’s inclusion of a doctor in the

network as an indication of that doctor’s capabilities.

More generally, the increased information PPOs pro-

vide allows individual consumers to make more educated

decisions about their particular health care needs. Greater

consumer knowledge increases the competitiveness of the

market, as providers are forced to respond to consumer

needs. See, e.g., Economic Report of the President 139-

40 (January 1993); Paul B. Ginsburg & Glenn T. Ham-

mons, Competition and the Quality of Care: The Im-

portance of Information, 25 Inquiry 108, 110-13 (1988).

Claims to PPOs also involve far less paperwork than “tra-

ditional” health insurance.

PPOs benefit not only consumers, but also providers.

For providers, participation in a PPO network guaran-

tees a steady patient volume. Providers also have an in-

centive to strive for efficiency and quality care in order to

compete with other providers and to meet the standards

established by the PPO. Unlike the case with HMOs,

however, PPO-participating providers need not reorganize

their practice. Services are still provided on a “fee-for-

service” basis, and providers do not assume the financial

risk involved with HMO membership. See, e.¢., Gins-

burg & Hammons, supra, at 109; Greaney & Sindelar,

supra, at 385." In addition, the turnaround time for

claims ts decreased because participating providers gen

erally deal with fewer payor organizations.

" Because the payment an HMO makes to a provider is fixed, the

risk that a particular patient or group may need more medical

ittertion than usual, and thereby consume the doctor’s resources,

shifts to the doctors. See, e.g... Frech & Ginsburg, supra, at 284;

(;reaney & Sindelar, supra, at 585-86.

8

PPOs also benefit society at large. PPOs have led to

a reduction in the average hospital stay, the use of more

Outpatient procedures, a reduction in the inefficient and

costly surplus of hospital beds, and an overall reduction

in the number of unnecessary procedures. See, @.g.,

Dranove et al., supra, at 420-21, 427-28; Lucy Johns,

Selective Contracting in California: An Update, 26 In-

quiry 345, 346-49 (1989). In the most comprehensive

study of the effects of PPOs, which was conducted in

California, researchers found that examination of different

factors “all show that the [selective contracting] policy

produced measurable cost containment.” Johns, supra,

at 345. For example, the average length of hospital stay

for patients dropped by 2.9 percent in five years, and

the rates of growth in gross medical expenses decreased

significantly as well. /d. at 346-47. Furthermore, a num-

ber of services that can be conducted either on an in-

patient or outpatient basis are increasingly performed

without hospitalization. Jd. Since the introduction of

PPOs, the overall hospital expense per admission in Cal-

ifornia, the state with the largest number of PPOs in the

nation.’ has been consistently lower than that of the rest

of the nation. Melnick et al., supra, 14 Health Care

Memt. Rev. at 62. In 1986, the percent of per capita

income spent on hospital services declined in California,

while increasing in the rest of the nation. /d. Perhaps

Most importantly, Commentators estimate that the in-

crease in the number of PPOs” has resulted in a 24-

percent discount in medical services for PPO participants.

See Dranove et al., supra, at 421.

Almost all health care commentators agree that results

like those exhibited in California can be expected nation-

wide as PPOs increase. “[B]ecause PPOs can promote

7 California has a total of 104 PPOs. Marion Merrell Dow,

Managed Care Digest: PPO Edition, at 10 (1992).

“From 1984 to 1988, the number of PPOs in California in-

creased from 37 to 72, and the number of enrollees increased from

150,000 to 16.8 million. Lucy Johns, Selective Contracting in Cali-

fornia: An Update, 26 Inquiry 345, 351 (1989).

9

cost containment, improve market competitiveness, and

produce positive externalities, public policies should pro-

mote the development of PPOs.” Greaney & Sindelar,

supra, at 389; see also Frech & Ginsburg, supra, at 289

(“public officials have generally applauded the degree of

innovation in the private financing of health care”). The

social utility of PPOs as effective health care delivery

systems is therefore both quantifiable and substantial._

B. By Eliminating the Ability of Preferred Provider

Organizations To Choose Providers in Their Plans,

Any-Willing-Provider Statutes Destroy the Ability

of PPOs To Control Health Care Costs.

Virginia’s any-willing-provider statute, and similar laws

of other states, prevent insurer-administered PPOs from

selecting the provider-members of their PPO—the funda-

mental principle necessary for a PPO to operate effec-

tively.” The application of the Virginia statute to insurer-

administered PPOs creates “considerable inefficiencies in

benefit program operation,” Fort Halifax Packing Co. vy.

Coyne, 482 U.S. 1, 11 (1987). thereby thwarting Con-

eress’s purpose in enacting ERISA to preempt employee

benefit plans from state regulations. See FMC Corp. y.

Holliday, 498 U.S. 52, 60 (1990) (“To require p'an

providers to design their programs in an environment of

differing state regulations would complicate the admin-

’ The Virginia statute states, in relevant part:

Any ... insurer [forming a PPO} shall establish terms and

conditions that shall be met by a hospital, physician or type

of provider listed in § 38.2-8408 in order to qualify for pay-

ment as a preferred provider under the policies or contracts.

These terms and conditions shall not discriminate unreason-

ably 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 individ-

ual negotiations with providers or based on market conditions,

or price differences among providers in different geographical

areas, shall be deemed unreasonable discrimination. .. .

Va. Code Ann. § 38.2-3407 (Michie 1993 >.

10

istration of nationwide plans, producing inefficiencies that

employers might offset with decreased benefits.” ).

Opening PPOs to all providers that evince a willingness

to meet the PPO’s established terms and conditions dimin-

ishes the cost savings associated with such arrangements

to the point where the economic incentives for both pro-

viders and subscribers io join a PPO are entirely dissi-

pated. Too many health care providers in a PPO renders

it incapable of guaranteeing a narrower group of chosen

providers higher patient volume. Without any concrete

benefit, hospitals and doctors are unable and unwilling to

offer discounted rates. In the absence of lower rates, sub-

scribers would not join a PPO.

Stated differently, limiting the number of providers in

a PPO is essential to the PPO’s ability to remain cost-

effective. Studies show that there is an optimal number

of providers for any given PPO in a geographical loca-

tion. See, e.g., Wyatt Company, Report to Health Insur-

ance Association of America, at 15 (June 7, 1991) [here-

inafter “Wyatt Report’|. Up to that number, a PPO will

enjoy the economies of scale, and the increased negotiat-

ing power associated with size. These benefits will out-

weigh any administrative inefficiencies created by size,

and would result in lower prices for consumers. Beyond

that point, however, the marginal benefit of an additional

provider exceeds the cost associated with increased mem-

bership. /d.; see also Glenn A. Melnick et al., The Ef-

fects of Market Structure and Bargaining Position on

Hospital Prices, 11 J. Health Econ. 217, 229-30 (1992)."°

In a 1991 study, researchers concluded that any-willing-

provider statutes could increase administrative costs be-

tween 34 and 52 percent, and increase the cost of claims

from 8.8 to 14.2 percent. Wyatt Report, at 4-5. These

increased costs more than consume the hospital discounts

19Tn addition, without a competitive health care market, PPOs

lack the incentives to ensure high-quality and low-cost service, or

to previde accurate information to subscribers for use in making

educated choices concerning health care.

1]

of 17 percent and physician discounts of 20 percent that

PPOs are able to derive on average. Thus, any-willing-

provider statutes plainly destroy the ability of PPOs to

contain health care costs.

Furthermore, the study noted that “reasonable” state-

wide provider selection criteria, such as those mandated

by the Virginia statute, probably could not eliminate

enough providers from the PPO to allow efficient utiliza-

tion of selective contracting. Jd. at 5. Rather. so many

doctors and hospitals would have a “right” under the state

Statute to participate in the PPO that the costs Savings

necessary to justify entering into PPO agreements could

not be attained. Thus, the existence of any-willing-

provider statutes is fundamentally incompatible with that

of insurer-administered PPOs.

The imposition of “reasonable” provider selection pro-

Visions impairs the effectiveness of PPOs because the

criteria used by PPOs to screen providers is by necessity

highly flexible and includes more than just so-called “ob-

jective” criteria.'’ PPOs must be free to make “arbitrary”

judgments in selecting providers if they are to reach the

optimal number of providers. For example, even if two

providers are identical in quality and conventional price,

a PPO that has reached its limit cannot be forced to

allow both to participate. Mandating that both providers

be allowed to join the PPO expands provider participa-

tion beyond the point of economic efficiency. Rather, a

PPO must be allowed to choose between the two provid-

ers, even if on an “arbitrary” basis such as competitive

bidding

PPOs must also consider subjective factors as well as

objective ones. These subjective criteria, such as percep-

Such objective criteria include, in the case of hospitals, finan-

cial factors such as per diem rates, comparison to cost and charges

at other hospitals in the service area. Quality selection criteria

will often also include professional Staif-to-patient ratio, malprac-

tice history, percentage of staff physicians who are board certified,

and accreditation status.

he

L &

tions in the community, customers’ relationships with hos-

pital staff, financial stability and viability (including the

cushion from charitab'e donations and tax base). and

willingness to abide by rules of the managed care agree-

ment, are not easily defined in the terms and conditions

of a contract between the PPO and participating providers.

Yet these factors are critical in determining which pro-

viders fit into the profile and philosophy of an individual

PPO. See, e.g., Ginsburg & Hammons, supra, at 110-

13 (consumer opinions about a provider's quality of care

in comparison to cost and its community reputation sig-

nificantly affect individual decisions with respect to health

care); Ezekiel J. Emanuel & Allan S. Brett, Managed

Competition and the Patient-Physician Relationship, 329

New Eng. J. Med. 879, 880-82 (1993) (individual

patient-physician relationships and continuity of care may

affect health care choices even in managed competition ).

Any-willing-provider statutes severely constrain the ability

of insurer-administered PPOs to select providers on the

basis of these critical criteria, and to ensure that the pro-

viders continue to supply the type of care the PPOs seck

to deliver.’

Not surprisingly, commentators and researchers unt-

formly criticize the application of any-willing-provider

Statutes to PPOs. See, e.g., Greaney & Sindelar, supra, at

389 (“A primary blockade has been and continues to be

State laws that prohibit selective contracting and that limit

efficient contracting. We suggest that such laws be elim-

inated to allow for the growth of PPOs.”); Wyatt Re-

port, supra, at 5 (“thfe] legislative mandate [in any-

willing-provider statutes] would eliminate the value of that

PPO to the community”). Indeed, the purpose of these

Statutes is directly contrary to the principles of selective

12 The quality of care maintained by a provider after the pro-

vider enters the network is important and cannot be defined in

terms of the contract. Aithough the PPO may terminate its con-

tract with a provider if the quality diminishes, a PPO would rather

exclude providers it deems unacceptable from participation in the

PPO in the first place. Dranove et al., supra, at 428.

13 sc

contracting which underlie the effectiveness of PPOs.

Thus, any-willing-provider statutes frustrate the deveclop-

ment Of PPOs as a mechanism for combatting escalating

health care costs.

Il. INSURANCE COMPANY ADMINISTRATION OF A

PREFERRED PROVIDER ORGANIZATION DOES

NOT CONVERT A PPO INTO THE “BUSINESS OF

INSURANCE”.

Notwithstanding the social value of PPOs and the

dangers presented by any-willing-provider statutes, the

Fourth Circuit erroneously held that insurer-administered

PPOs must comply with the Virginia statute because it is

not preempted by ERISA. That decision misinterpreted

the meaning of the phrase “business of insurance” and. in

the process, created several conflicts with this Court's

prior decisions and with decisions from other circuits

ERISA preempts all state laws that “relate to any cm-

ployee benefit plan.” 29 U.S.C. $ 1144(a) (1988). Any

State statute that “regulates insurance.” however. is saved

Irom preemption. /d. § 1144(b)(2)(A). This Court has

stated that whether a statute “regulates insurance” is

guided by the same criteria used to determine whether an

entity 1s engaged in the “business of insurance.” as that

phrase is used in the McCarran-Ferguson Act. 15 U.S.C.

lOll (1988). See, e.g., Pilot Life Ins. Co. v. Dedeaux.

+81 U.S. 41, 48-49 (1987): Metropolitan Life Ins. Co. y.

Massachusetts, 471 U.S. 724, 740 (1985). In Interpret

ing these terms, the Court has recognized that Congress

intended ERISA preemption to be very broad. See. ¢

kMC Corp. v. Holliday, 498 U.S. 52. 59 ¢ 1990): Metro

politan Life, 471 U.S. at 739; Shaw v. Delta Air Lines

Inc., 463 U.S. 85, 97-98 (1983)

The legislative history confirms ERISA’s wide scope of pre

emption As stated by one Representative during the House

dehates

[ wish to make note of what is to many the rowning achieve

ment of this legislation, the reservation to Federal auth rity

the sole power ti reg ila he

14

Selective contracting by PPOs is part of the “business

of insurance companies,” not the “business of insurance.”

See, e.g., Hartford Fire Ins. Co. v. California, 113 S. Ct.

2891, 2902 (1993): Group Life & Health Ins. Co. v.

Roval Drug Co., 440 U.S. 205, 233 (1979). It is the

mechanism by which the PPO controls administrative

costs and procures the efficient delivery of health care

Just as agreements made with retail pharmacists are un

related to the “business of insurance” because pharmacists

are “parties wholly outside the insurance tndustry.” agree

ments made with hospitals, doctors, and other health care

providers likewise should not be considered the “business

of insurance.” See Roval Drug, 440 U.S. at 231-33: se

also Hartford Fire Insurance Co., 113 8S. Ct. at 2902.

A recent decision by this Court highlights the Fourth

Circuit's error. As was recognized in Hartford Fire In

surance Co., “ ‘the business of insurance’ should be read

to single out one activity from others. not to distinguish

one entity from another.” /d. at 2901 (emphasis added)

In contravention of this mandate. the Fourth Circuit

relied on Aetna’s status as an insurance entity rather than

focusing on the pertinent activity. The Fourth Circuit

thus “draws a broad and illogical distinction between bene

fit plans that are funded bv [non-insurance companies|

and those that are insured bv regulated insurance com

panies * FMC Corp., 498 U.S. ac 65 (Stevens. J.. dis

senting). The disparate treatment of insurer-adiministered

PPOs is further evidence of the “patchwork scheme of

regulation” sought to be avoided under ERISA to prevent

“considerable inefficiencies in benefit program operation.”

With the pre¢ pt rn of he ar } WA y ] + thes nrotect ’

iff raed } rt pant t I nating the nreat t ’ ting

and inconsistent State and local regulat

120 Cong. Ree. 29197 (1974 remarks of Rep. Dent

t 299 remarks of Sen. W i ERISA preemptior

tended t pp n its broadest se1 t t f State !

( y rnments H.R. Rep. > 1785, 4th ¢ 2d § i

1977 I ne Fede? il nterest na tne eed r +

formity are so great that enforcement of state regulat !

be precluded.”

Fort Halifax Packine Co. \ Coyne, 482 U.S. 1. 1]

(1987).*4

Moreover, in considering whether a statute regulates

the “business of insurance,” this Court has said that the

activity regulated must satisfy three requirements:

first, whether the practice has the effect of transfer-

ring or spreading a_ policyholder’s risk: second.

whether the practice is an integral part of the policy

relationship between the insurer and the insured: and

third, whether the practice is limited to entities within

the insurance industry.

U/nion Labor Life Ins. Co. v. Pireno. 458 US. 119, 129

(1982), quoted in Metropolitan Life Ins. Co. v. Massa

chusetts, 471 U.S. 724, 743 (1985). All three factors

must be satisfied for a reeul ited activity to be considered

the “business of insurance.” The Fourth Circuit’s deci-

sion, however, contorts these three factors in order avoid

ERISA preemption. In so doing, the lower court has

impermissibly re-written the meaning of the “business of

insurance.”

(nlike insurance contracts, PPO agreements with health

Vi ransier|! or spread! ] a policyhold

r’s risk.” Pireno, 458 U.S. at 129: accord Metropolita

Lit 171 U.S. at 743. A health insurer contracts to nay

for an insured’s medical services in return for a fixed

mium. That premium is calculated by equalizing thy

Known, but unpredictably distributed. medical costs i)

rred by the consumers (policvholders) within the risk

pool, See, e.¢., Frech & Ginsburg, supra, at 279. Thu

rough actuarial scien health insurers are able to re

pond to the random catastrophes of individual life pre

Iv because, on a large scale, the frequency of such

1 Se Travelers Ins. ( Cuomo, No. 93-7182L, slip op

dd Cir. Oct. 25, 1993 Congress intended that ERISA’s

ir the field of any state law inter

th benefit plat he more expansively the saving

re deeply it cuts into the preemption, a result

ire scheme unworkable.’’).

16

events becomes reasonably predictable. See generally

Robert E. Keeton & Alan I. Widiss, Insurance Law 12-13

(1988).

A PPO’s dealings with health providers do not serve

the role of “risk pooling.” In their interactions with pro-

viders, PPOs do not categorize risks, predict their fre-

quency, or determine coverage for certain risks. The

choice of providers for participation in a PPO is wholly

unrelated to the calculation of risk. Similarly, neither the

number of providers participating in a PPO nor the terms

and conditions imposed on participating providers will

affect the probability of a health care claim for which

the PPO must pay. See Marci A. Firfer, Direct Employer-

Provider Contracting and ERISA Preemption: A Regula-

tory Loophole?, 40 Fed'’n Ins. & Corp. Couns. Q. 195.

216 (1990) (“a PPO is not a traditional indemnity tn-

surance plan” (emphasis in original) ); id. at 235 (“[T]he

concept of insurance typically includes both the accumu-

ation and distribuiton of a fund, and the transfer of risk.

A PPO does neither.”). Rather. these dealings are be-

tween the PPO and providers, not the PPO and individual

health care recipients or their pavers.

Thus. the Fourth Circuit's overly expansive definition

of a “policvholder’s risk” is in clear error. App. 9a-10a.

Treating all statutes relating to the type and cost of treat-

ment available to a subscriber as within the defiintion of

a “nolicyholder’s risk” would subject almost all business

decisions made by insurer-administered PPOs to state law.

Accordingly, the Virginia statute does not satisfy the first

criteria set forth by this Court because selective contract-

ing does not have “the effect of transferring or spreading

a policvholder’s risk.” Pireno, 458 U.S. at 129: accord

Metropolitan Life. 471 U.S. at 743.

The statute also fails the second prong of the Pirero

test. because it is not “an integral part of the policy

relationship.” Pireno, 458 U.S. at 129. In Roval Drug,

this Court recognized that only agreements between the

insurer and the insured were a part of the policy relation-

17

ship. Royal Drug, 440 U.S. at 215-16. “So long as th[e]

promise [made between the subscriber and the intermedi-

ary] is kept, policyholders are basically unconcerned with

arrangements made between [the intermediary] and par-

ticipating [providers].” /d. at 214.

Finally, the Virginia statute fails the third prong of the

Pireno test. As noted, the practice of organizing and

administering PPOs was initially undertaken by third-

party administrators and small investment companies, not

insurance companies, see Frech & Ginsburg, supra, at

289, and the “insurance industry” owns only 36 percent

of the existing PPOs nationwide. See Managed Care

Digest, supra, at 7. As such, it is plainly meritless to

contend that “the [PPO] practice is limited to entities

within the insurance industry.” Metropolitan Life, 471

U.S. at 743. Accordingly, because PPOs meet none of

the Court’s cirteria for determining what constitutes the

“business of insurance.” the Fourth Circuit incorrectly

held that the any-willing-provider statute was “saved” from

ERISA preemption.

The Fourth Circuit’s reasoning that the statute regu-

lated the business of insurance simply because “[ijt is part

of a comprehensive code regulating accident and sickness

insurance,” App. 9a, directly conflicts with the Fifth Cir-

cuit’s decision in Tingle v. Pacific Mutual Insurance Co.,

996 F.2d 105 (Sth Cir. 1993). In Tingle, the Fifth

Circuit stated that “the mere fact that a statute is part

of a comprehensive state insurance code will not exempt

it from preemption.” /d. at 109.° In this respect as well,

15In addition to Tingle, the Fourth Circuit’s decision conflicts

with Ticor Title Insurance Co. v. FTC, 998 F.2d 1129 (3d Cir.

1993), as well as a decision from its own circuit, Virginia Academy

of Clinical Psychologists v. Blue Shield of Virginia, 624 F.2d 476

(4th Cir. 1980), cert. denied, 450 U.S. 916 (1981). See Petition

for Writ of Certiorari filed by Aetna at 22-24, 25-26.

16 See also Hansen v. Continental Ins. Co., 940 F.2d 971 (5th

Cir. 1991) (ERISA preemption of statute included in the Texas

Insurance Code); Ramirez v. Inter-Continental Hotels, 890 F.2d

760, 763-64 (5th Cir. 1989) (same); Anschultz v. Connecticut

18

the Fourth Circuit erred and created an intercircuit con-

flict that can only be resolved by this Court.

Il. CURRENT CONSIDERATION BY CONGRESS OF

HEALTH CARE REFORM DOES NOT ELIMINATE

THE NEED FOR THE COURT TO REVIEW THIS

CASE.

The present consideration by Congress of health care

reform is not a basis for denying certiorari. Indeed, that

circumstance militates in favor of granting the writ o!

certiorari so that the important issues of state-federal rela-

tions posed can be clarified as new health care arrange

ments are considered and potentially implemented. Even

if President Clinton’s health care reform proposal were

adopted foday, the ill effects of the Fourth Circuit's

erroneous decision would remain. Accordingly, resolution

of this case by the Court is necessary because: (1) PPOs

would continue to exist under most of the proposed plans,

and the question as to whether federal law preempts state

regulations such as any-willing-urovider statutes will re-

main; (2) even if adopted this year, none of the current

health care plans under consideration would take effect

for quite a long time. and calls for interim measures to

control health care costs during the transition will exacer-

bate the need to vest insurance companies with the ability

to choose providers; and (3) the Fourth Circuit decision

creates unnecessary confusion as to this Court’s jurispru-

dence concerning the “business of insurance.”

First. and foremost, President Clinton’s proposal. like

many others, calls for the establishment of regional and

corporate health alliances. whereby “fe]ach alliance offers

a menu of plans, including a traditional fee-for-service

arrangement. preferred provider organizations and health

maintenance organizations.” The White House, Health

Security Preliminary Plan Summary 19 (1993) (empha-

sis added): accord id. at 23. Furthermore, none of the

major proposals currently under consideration contemplate

General Life Ins. Co., 850 F.2d 1467 (11th Cir. 1988) (ERISA

preemption of statute included in the Florida Insurance Code).

——————————

19

amending ERISA’s insurance savings clause in a manner

which would affect the question presented by this case.

See, e.g., Clinton Administration Description of Presi-

dents Health Care Reform Plan, “American Health Secu-

rity Act of 1993”, Health L. Rep. (BNA) S-24, at 71-72

(Sept. 16, 1993).’" Thus, PPOs would still compete in

any new health care plan, but whether they would be

subject to state insurance laws would, it seems, still be

governed by the ERISA provisions at issue here. Accord-

ingly, the importance of resolving this issue extends be-

yond the passage of any health care reform package."

In addition, health care reform, even if adopted by

Congress immediately, will not be implemented until at

least 1997. In fact, most commentators doubt that any

health care plan will be implemented much before the

turn of the millennium. See, e.g., Two Plans and Where

They Might Lead, Wall St. J., Sept. 23, 1993, at A&;

Shouting Matches: Six Areas of Dispute, Newsweek, Oct.

4, 1993, at 49. And, for any transition period, the Presi-

17 See also, e.g., Health Care: Clinton’s Plan and the Alterna-

tives, N.Y. Times, Oct. 17, 1993, at 22; Two Plans and Where

They Might Lead, Wall St. J., Sept. 23, 1993, at A8; Shouting

Matches: Six Areas of Dispute, Newsweek, Oct. 4, 1993, at 49

(describing the main alternative proposals to the Clinton plan).

The only bill that would affect state regulation of PPOs is H.R.

3222, introduced by Representative Cooper. Recognizing the prob-

lems posed by any-willing-provider statutes, the Cooper bill pro-

vides that “|a| State may not prohibit or limit a network plan

from limiting the number of participating providers.” H.R. 3222,

§ 1222(a) (4). This bill, however, is generally considered unlikely

to pass, and none of the other proposals contemplate a similar

amendment.

18 Jn addition, the Clinton proposal, and the main alternatives,

all rely on managed competition to drive down costs. “The Health

Security plan controls rising costs and improves the quality of

health care by enlisting the power of a competitive market and

empowering consumers to make choices that suit their needs.” The

White House, Health Security Preliminary Plan Summary 14

(1993). Because any-willing-provider statutes interfere with mar-

ket competition, these plans further support the view that PPOs

and selective contracting programs constitute sound public policy.

20

dent has proposed controlling escalating health care costs

by tightly regulating insurance premium increases. See

Dana Priest. /nsurance Curbs Asked for Interim, Wash.

Post. Sept. 27, 1993, at Al. To maintain proper financial

stability during this time, insurance companies must be

able to administer programs like PPOs in a manner which

would contain costs.

Finally, the Fourth Circuit's decision misapplies and

unnecessarily confuses the jurisprudence defining the “busi-

ness of insurance.” This definition applies to ERISA

preemption independent of the health care proposal, and

is also employed in the McCarran-Ferguson Act. Thus,

cases such as this. distinguishing between the “business

of insurance” and the “business of insurance companies,”

are important regardless of their relation to health care

reform legislation.

CONCLUSION

For all of the foregoing reasons, the Court should grant

the petition of Aetna Life Insurance Company and Aetna

Health Management, and set the case for plenary review.

Respectfully submitted.

THOMAS W. BRUNNER *

DANIEL E. Troy

JOHN C. YANG

WILEY, REIN & FIELDING

1776 K Street, N.W.

Washington, D.C. 20006

(202) 429-7000

Attorneys for Amici Curiae

The Travelers Insurance

Company and Blue Cress and

Blue Shield of the

National Capital Area

Octol.cr 29, 1993 * Counsel of Record