Patient Protection and Managed Care: Legislation in the 107th Congress

Congressional research reportSep 16, 2002

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Order Code IB98017

Issue Brief for Congress

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Patient Protection and Managed Care:

Legislation in the 107th Congress

Updated September 16, 2002

Jean P. Hearne and Hinda Ripps Chaikind

Domestic Social Policy Division

Congressional Research Service ˜ The Library of Congress

CONTENTS

SUMMARY

MOST RECENT DEVELOPMENTS

BACKGROUND AND ANALYSIS

Regulation of Managed Health Care

The Role of ERISA

The Bills

Major Issues

Scope of Application

Access and Choice of Providers

Grievance and Appeals Processes and Remedies

Internal Appeals Process

External Appeals

Remedies and Access to Courts

Association Health Plans and Qualified Health Benefit Purchasing Coalitions

AHPs

HBPCs

LEGISLATION

FOR ADDITIONAL READING

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Patient Protection and Managed Care:

Legislation in the 107th Congress

SUMMARY

Most Americans have health insurance

plans that provide services through some kind

of managed care arrangement. While financial incentives under fee-for-service insurance

can lead to wasteful and possibly harmful

excess services, incentives under managed

care plans could lead to underutilization of

necessary services. Congress is responding to

this concern by proposing to regulate, at the

federal level, various aspects of managed care

and other types of health insurance. During

the 106th Congress, the House and Senate

passed comprehensive patient protection bills

but were unable to reconcile the differences

and send a bill to the President. (H.R. 2990

passed on October 7th, 1999 and S. 1344,

passed on July 15, 1999.) The 107th Congress

is revisiting the patients rights debate. The

Senate and the House have each passed a bill

(S. 1052 and H.R. 2563, respectively) that

would establish federal standards mirroring

various state laws as well as recommendations

in the 1997 Consumer Bill of Rights as developed by former President Clinton’s Advisory

Commission on Consumer Rights and Quality

in HealthCare. This document provides background information on the issues surrounding

patient protection and reviews the major

differences between the Senate-passed and

House-passed bills. For more detailed descriptions of the provisions included in S.

1052 and H.R. 2563 see CRS Report

RL30978: Patient Protection During the 107th

Congress: Side-by-Side Comparison of House

and Senate Bills.

Traditionally, the regulation of health

insurance largely has been left to the states.

They have passed numerous managed care and

patient protection laws. However, the federal

Employee Retirement Income Security Act of

1974 (ERISA) preempts the application of

Congressional Research Service

such laws for about 56 million persons enrolled in “self-insured” group health plans

through private employers. These are plans in

which the employer takes some or all of the

risk of paying for covered items and services.

For enrollees of self-insured plans, federal law

applies, but few protections currently exist in

the federal statutes. As a result, there is a

patchwork of federal and state regulation

leading many to seek federal standards that

would apply broadly to all health plan enrollees, regardless of who sponsors their

health plan or whether they self-insure.

Both of the bills under consideration

would apply federal patient protections to all

insured Americans. The most significant

differences between these bills are in the

provisions expanding patients’ legal remedies

against their health plan providers when medical care is unjustly denied and the denial

results in harm. Other differences include

provisions applying the protections to federal

health programs, prohibiting discrimination on

the basis of genetic information, and encouraging health insurance coverage expansions.

The health insurance industry and many

employer groups are strongly opposed to

increased federal regulation of managed health

care. They argue that it is unnecessary because the market is responding to consumer

concerns, and that more regulation will raise

health care costs, increasing the number of

uninsured Americans. On the other hand,

supporters of increased federal regulation,

including many provider and consumer advocacy groups, believe that such regulation is

needed to restrain market excesses that could

jeopardize health care quality and access and

that such regulation would result in only small

additional costs.

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MOST RECENT DEVELOPMENTS

A conference committee has not been appointed to negotiate between House and

Senate-passed versions of patient protection bills. The President and the Senate Leadership,

however, have suggested that continued negotiations on patient protection is a priority for

the 107th Congress and occasional press reports suggest that informal discussions about this

issue continue to take place.

BACKGROUND AND ANALYSIS

Managed care generally refers to a payment system or delivery arrangement in which

a health plan attempts to control or coordinate the use of health services by its enrollees in

order to control spending and promote health. Like fee-for-service insurers, managed care

organizations (MCOs) accept financial responsibility for a set of benefits in return for a

premium paid by or on behalf of each enrollee. Unlike fee-for-service insurers, many MCOs

directly provide or arrange for health care services, through affiliated physicians, hospitals

and other providers, instead of simply paying bills.

MCOs try to control hospital admissions, diagnostic tests, or specialty referrals, either

through programs to review the use of services or by giving participating physicians a

financial stake in the cost of the services they order. They may also select low-cost providers

of services or negotiate discounted rates from providers. (For more detail, see CRS Report

97-482, CRS Report 97-913 and CRS Report 98-117.)

At one time, the only type of arrangement that offered managed care was a health

maintenance organization (HMO). Today, managed care is provided by an array of entities,

such as preferred provider organizations (PPOs) and provider sponsored organizations

(PSOs), many of which offer more open-ended access to providers than do traditional HMOs.

Like traditional HMOs, these arrangements provide covered services through provider

networks. Enrollees are given financial incentives to use services within the plan’s provider

network, but still receive some coverage even if they decide to obtain care from outside

providers.

Almost 93% of insured employees were covered by some form of managed care in

2001: Over 23% of covered employees were enrolled in HMOs, twice as many workers,

48%, were enrolled in PPO plans and 23% were in point-of-service plans. Point of service

plans are defined as being similar to HMOs but they allow patients to use non-network

providers at a higher cost than for network providers. Since the early 1990s, insured

workers’ enrollment in traditional fee-for-service plans dropped from about 50% to only 7%,

reflecting the addition of managed care features to many of the former fee-for-service plans.

The broad shift to managed care has been driven, largely, by cost concerns. Among all size

employers in 2001, average fee-for-service premiums were almost 20% higher than HMO

premiums and about between 4% and 7% higher than PPO premiums, according to the

Employer Health Benefits 2001, Annual Survey by the Kaiser Family Foundation and Health

Research and Educational Trust.

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Regulation of Managed Health Care

Employers’ benefit plans, which often include health insurance (or health benefits

through managed care), are regulated by the federal government under the Employee

Retirement Income Security Act (ERISA). Such “ERISA plans” are subject to standards for

reporting and disclosure, fiduciary conduct, enforcement of rights, and protections against

discrimination whether the employer purchases health insurance for employees or selfinsures by accepting some or all of the risk for the cost of services. Consequently, managed

care entities that provide benefits under an employer benefit plan must include those ERISA

protections in their products. (Employer benefit plans sponsored by governmental employers

and churches are not subject to ERISA.)

States, too, regulate many health insurance products. States have traditionally had

regulatory authority over the business of insurance and most have exercised that authority

in areas where ERISA standards are largely absent or viewed to be inadequate. For example,

reporting and disclosure rules under ERISA may not be particularly timely, procedures for

claims denial leave great room for variation among plans, and court remedies available under

ERISA do not allow for money damages. As a result, many states have stepped in to establish

stronger protections for health plan beneficiaries. Since many managed care products are

considered insurance, managed care entities must include those protections in the products

they sell.

States, on the other hand, are not permitted under ERISA to regulate employers’ benefit

plans (this is known as the ERISA preemption clause, discussed in greater detail below).

ERISA frees employer benefit plans from state regulation but many employers offer benefit

plans that include health insurance products. In this case the employer purchases health

insurance from a traditional insurer (or MCO) and the insurer bears the risk of covering the

cost of the benefits. Despite ERISA’s preemption on employer benefit plans, these insurance

products have already met state requirements for insurance. Other employers offer “selfinsured” health plans – where the employer bears some or all of the risk of paying for the

plan’s covered services. Such self-insured (or self-funded) plans are not generally considered

insurance and therefore, are not subject to many of the states’ insurance and patient

protection laws.

This division of regulation between the states and the federal government is further

complicated by the Health Insurance Portability and Accountability Act of 1996 (HIPAA,

P.L. 104-191), as amended. Prior to HIPAA, the states regulated such aspects of health

insurance and managed care as licensure, solvency, benefits, and rating. HIPAA, however,

imposes federal requirements relating to portability of health insurance on state-regulated

insurers and MCOs. It also applies such requirements to ERISA plans. (The term

“portability” as used in HIPAA means, for example, the ability to change health plans

without experiencing preexisting condition exclusions.)

Whether more federal regulation of health insurance is desirable or needed is hotly

debated. HIPAA regulates only certain aspects of eligibility and coverage. It does not

regulate broader aspects of health care delivery, such as choice of providers, grievance

procedures, and quality assurance. States have been passing managed care laws, but these

do not apply to the enrollees in self-insured ERISA plans. This means that roughly 30% of

a state’s privately insured population is not covered by these laws. State laws also are widely

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variable, with some providing for comprehensive protections, and others providing for

narrowly targeted measures.

It is partly because of this patchwork of regulation that some are seeking federal

standards for managed health care that would apply to all enrollees, regardless of whether the

plan is sponsored by an employer or by an MCO. Proponents of federal action are divided,

however, over the scope of federal regulation, how it should interact with ERISA, and its

relationship to state laws. Should standards govern the entire range of plan-provider and

plan-enrollee relationships or should they be more targeted? Should standards apply to feefor-service insurance as well as managed care? Should there be uniform national standards

or should there be flexibility for state laws similar to or more protective of consumer and

provider rights?

MCOs and employer groups tend to oppose federal regulation of managed care. They

argue that a market unimpeded by federal interference is the most efficient way to ensure that

health plans meet consumer demands for affordable, accessible, and high quality health care.

In their view, government regulation is not only unnecessary because the market is already

responding to consumer concerns but also would add significantly to the cost of health

insurance. This, in turn, would lead to greater numbers of uninsured. Moreover, they assert

that national standards are inflexible and would impede cost-effective innovations in the

design of health insurance coverage.

The Role of ERISA. One concern during the patient protection debate is whether to

apply such standards only to self-insured plans or to all group health plans and health

insurance issuers (“health insurance issuers” is defined in HIPAA to include insurance

companies, insurance services, or insurance organizations including HMOs licensed to

engage in the business of insurance). As mentioned above, ERISA already imposes

minimum standards for plans sponsored by private-sector employers, including fiduciary

standards, reporting and disclosure requirements, nondiscrimination, and grievance

procedures. It also requires such plans to comply with federal portability, maternity stay,

coverage for reconstructive surgery following mastectomy (discussed below), and mental

health requirements as a result of HIPAA, P.L. 104-204, and P.L. 105-277) .

The ERISA preemption clause impedes states from implementing laws that “relate to”

employer benefit plans. In practice, this frees self-insured plans from state laws regulating

insurance because they are not considered to be insurance. (See CRS Report 97-938 and

CRS Report 98-286.) This preemption provision was designed to ensure uniform national

requirements for multi-state employer plans, and protects self-insured health plans from

potentially costly state regulation, such as state mandated benefit laws, risk pool assessments,

premium taxes, and consumer protection managed care laws. Continuation of ERISA

preemption is viewed as critical by the self-insured, employer community. Other

stakeholders, in contrast, such as governors, state insurance regulators, and consumer groups,

see ERISA as a major impediment to state insurance reform. In their view, it is largely

because of ERISA’s regulatory limitations and its preemption of state insurance law that

Congress needs to act.

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The Bills

The two patient protection bills under consideration are S. 1052: the “Bipartisan Patient

Protection Act”, passed by the Senate on June 29th, 2001, and H.R. 2563, the “Bipartisan

Patient Protection Act”, passed by the House on August 2nd, 2001. S. 1052 was introduced

in the Senate by Senators McCain, Edwards and Kennedy on June 14th, 2001. H.R. 2563,

was introduced on July 19, and incorporated many of the amendments included in the

Senate-passed bill, with several major exceptions: 1) H.R. 2563 includes only a sense of the

Congress, rather than a requirement, that these protections would apply to federal health

programs; and 2) H.R. 2563 does not include provisions expanding the current law

prohibitions on discrimination based on genetic information, and 3) H.R. 2563 includes tax

provisions not found in S. 10521. H.R. 2563 was further modified before passage to include

2 new major amendments. The 2 major amendments resulted in other differences, the most

significant of which are in provisions expanding the right to sue for benefits denied,

increasing health insurance coverage options (Association Health Plans and Medical Savings

Accounts), and defining the ability of states to apply substantially equivalent state laws in

lieu of the federal laws.

Major Issues

Scope of Application

One important distinction among the patient protection bills considered during the 107th

Congress is in their scope of application. The question here is whether the federal

protections should apply to all Americans, only to those who are covered under employerbased plans, or only to those with employer-based coverage who do not have access to

similar protections from their states. The reach of the proposed protections is the subject of

the first of the President Bush’s principles: that federal protections should apply to all health

plan enrollees while giving deference to existing state protections. Both of the bills under

consideration in the 107th Congress would apply their standards to all (insured) Americans,

but each also include provisions allowing state laws to apply under certain circumstances to

those plans that are subject to state laws. Both bills allow for the substitution of state law, if

it meets criteria for substantial compliance to federal standards with two exceptions. The

first exception is that the House-passed bill does not allow state laws defining internal and

external appeals processes to apply in lieu of the federal laws. The second exception is

related to state laws limiting damages in health care-related lawsuits. S. 1052 would allow

a state to determine non-economic damage amounts in state court, while H.R. 2563 allows

states to apply their own damage limits, but only up to the federally established maximum

amounts.

The bills would apply to individually-purchased plans as well as employer-sponsored

plans, and to state and local government-sponsored plans. S. 1052 was amended before

passage so that its provisions, including the expanded right to sue, would apply to all

federally sponsored health plans including the Federal Employees Health Benefits Program,

For a discussion of the tax provisions, see CRS Issue Brief IB98037, Tax Benefits for Health

Insurance: Current Legislation, by Bob Lyke and Christopher Sroka.

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Medicare, Medicaid, the State Child Health Insurance Program, Veterans, Department of

Defense and all other federal programs providing health care or coverage. H.R. 2563 does

not specifically apply its provisions to federal government-sponsored plans, but since the

Federal Employee Health Benefit (FEHB) program plans are offered by insurers and HMOs

which are subject to the group plan provisions, FEHB plans would be expected to comply

with patient protection legislation, if passed. Other federally sponsored health plans or

programs, such as Medicare and Medicaid, would not be covered by the provisions of H.R.

2563, although this bill includes a provision expressing the sense of the Congress that the

President should issue an Executive Order requiring Federal officials take feasible steps to

apply patients rights to federal health programs.

Both bills include provisions that exempt fee-for-service plans from many of the

protections in the bill, including a requirement for a consumer choice option, choice of health

care professional, access to emergency care, specialists, OB/GYN and pediatric care, and

continuity of care. S. 1052 does not apply its exemption to federal health plans and

programs. Fee-for-service plans are defined in the bills as those that reimburse providers on

a fee-for-service basis without placing them at financial risk, do not vary providers’

reimbursement based on contract terms or use of health care services, allow access to any

provider legally authorized to provide covered services (and are willing to accept the

payment terms) and do not require prior authorization.

Access and Choice of Providers

S. 1052 and H.R. 2563 include a number of identical provisions ensuring that health

plan enrollees have access to certain types of services and providers without such barriers as

prior authorization and increased copayments. The provisions in common include:

Access to Emergency Services. Some MCOs require prior authorization for

emergency department services. Without it, consumers who go directly to

the emergency room, and for whom the plan later determines that emergency

care was not medically necessary, may be responsible for the entire bill. The

bills addressed this issue by establishing a “prudent layperson” standard for

plans that cover emergency services. This standard would require plans that

cover emergency care to cover such care for the treatment of any condition

for which a prudent layperson would reasonably believe puts them at serious

risk of injury or death. The bills also prohibit plans or issuers from

charging patients more for using a non- network provider than would have

been charged if the services were provided in-network. The bills include a

provision requiring that emergency ambulance services be subject to the

same type of standard.

Access to Physicians Specializing in Ob/Gyn and Pediatric Care and other

Specialty Services. Some MCOs restrict access to specialty care and

specialists by requiring referrals from primary care or “gatekeeper”

physicians. Although gatekeeping has enabled plans to reduce costs, its use

has led to consumer complaints about difficulties in gaining access to

medical services. The bills passed in the 107th Congress include provisions

1) requiring plans that cover obstetrical and gynecological care to allow

enrollees to visit physician and non-physician specialists without first

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receiving a referral and prohibiting prior authorization for the OB/GYN

services that they order, 2) requiring that pediatricians be considered as

primary care providers for plans that require such a designation, and 3)

requiring plans that cover the services of specialists to ensure enrollees have

timely access to those specialists.

Continuity of Care A patient undergoing a course of treatment in the care

of a health care provider whose contract with an MCO is terminated would

be at risk of losing access to their established providers. The bills would

require plans to cover some continued care with terminated providers for

certain plan enrollees undergoing a course of treatment during a transition

period of at least 90 days.

Point-of-Service Option. Point-of-service options allow enrollees of closednetwork plans to have access to non-participating providers, though typically

at a higher cost and on a fee-for-service basis. By 1996, over 80% of HMOs

reported having a POS option of some kind. The bills would require group

health plans that have closed panels to provide point-of-service options. S.

1052 and H.R. 2563 do not require point-of-service coverage for those

individuals given a choice of non-network coverage through another plan or

issuer in the group market.

Information Disclosure. Economists maintain that access to information

and the ability to choose among competing options are the hallmarks of an

efficiently functioning market. They reason that informed consumers and

purchasers can help maximize value if cost and quality data are readily

available and understandable. Although the health care system in total may

diverge in significant ways from a free market model, many observers

nevertheless believe that the disclosure of useful health care information is

an important goal. Each of the bills requires extensive information to be

provided to individuals at time of enrollment and annually thereafter.

Medical Communications. The phrase “gag rules” refers to clauses in

provider contracts that prohibit or limit provider-patient communications

about: 1) medical conditions, care, and treatment; and 2) compensation

arrangements that produce financial incentives to under-provide care.

Although some recent studies suggest that gag clauses are not prevalent in

today’s contracts, other observers point to some of the more subtle ways

plans may discourage certain forms of medical communications between

health care professionals and patients. The bills include prohibitions on

such contract clauses.

Access to Prescription Drugs and Clinical Trials. The current bills include

provisions requiring plans that limit coverage of drugs to those on a list,

sometimes referred to as a formulary, to develop those formularies with

physicians and pharmacists and to allow exceptions from the formulary

when a non-listed drug is medically necessary and appropriate. S. 1052 and

H.R. 2563 would limit additional cost-sharing for non-formulary drugs.

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The bills also include provisions requiring plans to cover routine patient

costs incurred through participation in an approved clinical trial.

Discrimination Protection for Providers. Both bills include a provision that

would prohibit discrimination with respect to participation or

indemnification against any provider who is acting in accordance with

license or certification under state law.

One significant set of protections included in the Senate bill are provisions that expand

upon the current law prohibition on discriminating against individuals based on genetic

information. The Senate bill would prohibit plans or issuers, in both group and individual

markets, from: 1) establishing rules for eligibility (including continued eligibility) for any

individual based on genetic information of that individual or their dependent, 2) denying

eligibility or adjusting premium or contribution rates on the basis of predictive genetic

information for an individual or their family member, and 3) requesting or requiring that an

individual or their family members provide predictive genetic information. It would also

require plans to provide notice of confidentiality safeguards when requesting such

information, to post or provide notice of confidentiality practices and to have safeguards in

place with respect to predictive genetic information.

Grievance and Appeals Processes and Remedies

Most MCOs have internal procedures to address enrollee complaints about waiting

times, unresponsive staff, and other quality of service issues. While such grievances may or

may not be resolved to an enrollee’s satisfaction, often they are not appealable. (Enrollees

in state-regulated MCOs can complain to the state’s department of insurance.)

In addition, many health plans have procedures to deal with complaints about

reimbursement for, and coverage of, medical care. Under the traditional fee-for-service

system where the insurer is separate from the health care provider, such complaints usually

relate to a health plan issuer refusing to pay for care already received. In certain MCOs, on

the other hand, where the entity managing care is also providing care, patients may be denied

certain services or treatments in the first place — a practice which has led many to complain

that they are not receiving sufficient medical care to retain or regain their health.

The House- and Senate-passed patient protections bills under consideration in the 107th

Congress include provisions requiring and defining the internal review procedures for

coverage denials. The timeframes for reviews are reflected in Table 2.

Internal Appeals Process. An enrollee in an ERISA plan has a right to reasonable

opportunity for a full and fair review by the plan of a decision denying a claim. The

Department of Labor has established procedures for such reviews (see 29 CFR Part 2560,

11/21/2000 for the final rule). Plans must conform with those requirements for all claims

filed on or after January 1, 2002. Until the rules are in effect, there is little uniformity of

internal appeals procedures. At present, if the internal review determination is in the

enrollee’s favor, then the plan provides the service and/or pays the claim. If it is not in the

enrollee’s favor, he or she may sue under ERISA for the benefit that has been denied (see

below). As an intermediate step, some employers provide for an independent external review

of the benefit denial (see below).

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For an enrollee who is not in an ERISA plan (such as a managed care plan bought in the

individual market or one that covers state and local governmental employees), the internal

appeals process is different. State laws require that HMOs have a procedure in which they

reconsider initial denials of payment or coverage. Upon being notified that an HMO has

denied approval of a service or benefit, an enrollee (or an enrollee’s provider) has a right to

appeal a decision to an individual or panel within the HMO.

Table 2. Timeframes for Appeals: 107th Congress

Patient Protection Proposals

S. 1052 and H.R. 2563

Initial decision

ASAP - “As soon as possible” in accordance with the medical exigencies

of the case, but no later than:

Routine: 14 days after receiving information but no later than 28 days;

Expedited: 72 hours;

Ongoing: ASAP with sufficient time for appeal;

Previously provided services: 30 days after receiving necessary

information but no later than 60 days

Internal review

ASAP - “As soon as possible” in accordance with the medical exigencies

of the case, but no later than:

Routine: 14 days after receiving information but no later than 28 days;

Expedited: 72 hours after request;

Previously Provided Services: 30 days after receiving necessary

information, but no later than 60 days.

External review

ASAP - “As soon as possible” in accordance with the medical exigencies

of the case, but no later than:

Routine: 14 days after receiving necessary information (but no longer than

21 days after request);

Expedited: 72 hours after request;

Ongoing: 24 hours after request;

Previously Provided Services: 30 days after receiving information (but no

later than 60 days after request).

The 107th Congressional bills broadly allow for denied claims for benefits or coverage

or disputes over cost sharing amounts to proceed to internal review. The bills would require

that internal review be conducted by an individual with appropriate expertise so long as that

person was not involved in the initial determination, and also require that a physician with

appropriate expertise conduct the review if the appeal is based on a denial of a claim for a

lack of medical necessity, is experimental or investigation or requires evaluating medical

facts. The only difference between the two bills on internal review is that S. 1052 would

allow state internal review statutes that are determined to be substantially similar to those

described in the bill, to apply in lieu of the federal provisions while H.R. 2563 would not.

External Appeals. Under current law, ERISA does not require plans and issuers to

provide for external review of coverage determinations, although some private employers

voluntarily provide such a process. Enrollees in these plans, whether the plans are fullyinsured or not, can appeal adverse coverage decisions to an external appeals entity if one

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exists. On the other hand, enrollees in non-ERISA plans may have external appeal rights if

they reside in states that have enacted laws requiring MCOs to provide for an external

appeals process.

The debate on codifying a definition of “medical necessity” most often comes up with

respect to establishing a standard of review for external appeals, although such a definition

could also impact initial coverage decisions. Today, physicians and their patients sometimes

complain that their treatment decisions and referrals are determined by the plan not to be

“medically necessary”. As a result, insurers refuse to pay for such services or MCOs refuse

to provide the services. Some states have responded to such complaints by establishing a

definition of medical necessity in state law— thereby legislating a standard for medical

decision making. Such a definition could provide enrollees who are appealing adverse

coverage decisions with an objective standard to claim that a service is needed — a standard

that is not set by the plan itself. Some advocates, including providers, argue for a standard

of care for medical necessity that is the “generally accepted standard of practice.” Opponents

believe that a federal definition of medical necessity will be overly bureaucratic and will

result in defensive and costly medical practices. Others propose that a federal definition of

medical necessity is unnecessary if strong, valid, and scientific standards for external

reviewers are defined and if those standards make clear that the review cannot be limited by

insurers’ contract clauses that define medical necessity in a restrictive way.

The external review provisions have evolved significantly since the 106th Congress

where there were major differences between the bills especially with respect to the

characteristics of the external review entities, standards for review (including the

consideration of plans’ medical necessity definitions), whether the decisions of the reviewers

are binding, and whether other types of dispute resolution are allowed. Today the bills are

mostly alike in those areas, with a few remaining differences. H.R. 2563 would not allow

state external review laws to apply in lieu of the federal provisions, and further specifies that

the external review panel 1) would consist of 3 individuals, and 2) in a case involving a

physician, all three reviewers would be physicians.

The two bills are the same with respect to the types of adverse coverage decisions that

may enter into external review. They would require a system for the external review for

benefits denied because they are determined by the plan to not be medically necessary, are

investigational or experimental, or involve medical judgement. The bills would also allow

insurers to require payment of a refundable filing fee of no more than $25. They would

allow plans to condition the external review on the completion of an internal review except

when internal review decisions do not meet specified time lines, and to waive the internal

review process allowing claims to proceed directly to external review.

The bills include selection criteria for external reviewers designed to ensure adequate

expertise of panel members, independence from the plan or issuer, as well as fairness. Both

bills would also require the “applicable authority” to implement procedures to assure that the

process of selecting the external review entity will not create incentives to bias the decisions

of the entity. In addition, they would prohibit participants, beneficiaries, enrollees or the plan

or issuer from determining or influencing the selection of the external review entity.

The bills would require the reviewing entities to screen the claim to determine if it

meets the criteria to proceed to external review and require reviews to be consistent with

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standards developed by the appropriate Secretary. Reviewers would be directed to take into

account whether the plan or issuer’s decision is in accordance with the medical needs of the

patient; the medical condition and personal medical information of the patient; the opinion

of treating physicians or health care professionals; the plans’ definition of medical necessity

and experimental coverage, although the reviewers would not be bound by such definitions;

and the decisions of internal reviewers. Other information, such as valid scientific and

clinical evidence, treatment guidelines, and community standards of care may also be

considered. The bills would require a de novo determination. The decision of the external

reviewer would be considered to be binding.

S. 1052 and H.R. 2563 would authorize civil penalties of up to $1,000 a day if the

determination of the external reviewers was not followed and additional penalties for cases

in which the relevant Secretary determines that there is a pattern or practice of repeated

refusals to authorize benefits following external review. This penalty could not exceed the

lesser of 25% of the value of benefits not provided or $500,000. In addition, both bills would

allow the Secretary to assess a civil penalty against any plan of up to $10,000 for the plan’s

failure to comply with deadlines, to be paid to the participant or beneficiary if the

determination of the external reviewers is not followed.

Remedies and Access to Courts. ERISA plans. Under ERISA, enrollees in

employer-sponsored plans can only sue an ERISA plan for benefits due under the plan. State

law causes of action, which include consequential and punitive damages, are not available

and ERISA does not provide for such damages. This is the case whether the employersponsored health benefits are insured or self-insured. It is also an exception to the usual

interpretation of ERISA preemption – that is, that ERISA overrides state laws regulating

employer benefit plans but not those regulating the business of insurance. This unusual

interpretation results from a 1987 Supreme Court decision (Pilot Life Insurance Co. vs.

Dedeaux, 481 U.S. 41).

It is less clear whether or not enrollees in ERISA plans can sue for negligence, wrongful

death, or medical malpractice. Some courts have found that MCOs or other entities that

contract with an ERISA plan can be held liable for the quality of the medical care, including

substandard care and negligent or faulty delivery of services. In this case, an enrollee would

be able to sue under state law. If, however, an enrollee sues the ERISA plan itself for

malpractice, wrongful death, or negligence, the court could dismiss the suit because no such

cause of action exists under ERISA and any state laws relating to the plan could be

preempted.

Further complicating the question of liability is that for many self-insured employer

plans, the line between the administrative functions of the plan and the medical decisions of

the plan can be blurred. The courts have been clear that state laws that relate to

administrative functions of ERISA plans are preempted. On the other hand, the courts have

spoken equivocally on the question of where an administrative (i.e., quantitative) decision

ends and a medical or qualitative decision begins. If, for example, a plan denies urgently

needed medical care that a patient cannot afford to pay on his or her own, or promised

coverage is delayed until it is too late to do any good, then is that a benefit decision or a

medical decision? Because the federal circuit courts are divided on this issue, some legal

experts predict the Supreme Court will take it up. Against this backdrop, however, are

proposals to resolve the ERISA plan liability issue through legislation.

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Non-ERISA plans. If an enrollee in an individually purchased plan or other nonERISA plan receives an adverse coverage determination at the external review stage, then

he or she can attempt to sue the MCO in state court. Remedies vary by state. Typically, they

include the cost of the denied service as well as consequential costs (such as lost wages) and

non-economic costs (such as pain and suffering). An enrollee may also be able to sue for

punitive damages.

State laws also vary as to whether they allow enrollees in non-ERISA plans to sue

MCOs (as opposed to doctors or other providers) for medical malpractice. In many states,

such suits never get to trial because the organization is protected by the anti-corporate

practice of medicine laws. Simply stated, those laws hold that an HMO cannot make medical

decisions because the HMO is not a health care professional. Since it cannot make medical

decisions, it cannot be held responsible for medical malpractice. Many would like to see this

shield against HMO liability removed. In their view, the organization should be legally

responsible for withholding care or delivering poor quality care because it influences

providers’ actions through financial incentives or more direct controls over medical practice.

In May 1997, Texas became the first state to explicitly override its corporate practice of

medicine law with a new law that holds MCOs liable for medical decisions affecting a

patient’s health. This law was challenged in federal court by Aetna Health Plans, which

argued that the law is preempted by ERISA because it improperly interferes with

administration of employee benefit plans (see below). The court upheld the states’

provisions subjecting MCOs to liability for such decisions. (For more information on this

issue, see CRS Report 98-286.)

Remedies and access to courts: The bills. Provisions involving judicial

remedies and access to courts have proved to be the most difficult to resolve during the

debates in both of the chambers. While both the House- and Senate- passed bills allow some

lawsuits to proceed at the state level and expand both the causes of action and the damages

available at the federal level, the approaches approved by the House and Senate are

significantly different. Compromise during conference negotiations will require addressing

the two different approaches.

S. 1052 would allow state causes of action involving medically reviewable decisions

and would expand federal law causes of action for denials of benefits that are not based on

medical decisions. This approach is based on the traditional authority of ERISA over the

administrative duties of the plan’s fiduciary. S. 1052 would create a federal cause of action

for personal injury or wrongful death but only when a state cause of action is pre-empted by

ERISA. It would also expand the remedies available under ERISA to include economic and

non-economic damages in cases of personal injury or death but would not allow for

exemplary or punitive damages. For state law claims, S. 1052 would not allow for punitive

or exemplary damages when plans meet the requirements for the review and appeals process,

with a two exceptions: 1) when state law allows only for punitive or exemplary damages in

cases of wrongful death, or 2) when the defendant can prove the plan’s willful or wanton

disregard for the rights or safety of others. Finally, S. 1052 would allow a civil assessment

in any action of up to $5 million payable to the claimant if he can establish the bad faith and

flagrant disregard on the part of the plan for the rights of its participants or beneficiaries.

H.R. 2563 would amend ERISA to create a federal cause of action if a designated

decision makers fails to exercise ordinary care in making a determination for either an initial

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claim or for internal review, or fails to comply with the external review decision; if that

failure is the proximate cause of personal injury or death. State courts would have concurrent

jurisdiction over claims under this new federal cause of action, which means that state courts

could hear those claims, the federal law would apply, but the state courts’ procedural rules

could be used to process those claims. The designated decision maker would be liable for

economic and noneconomic damages. Noneconomic damages would be limited to $1.5

million and punitive damages of up to $1.5 million could only be awarded when benefits

were not provided following an independent reviewer’s determination that they should be

provided. States may further limit those damages for federal law claims heard in state courts.

Economic damages are uncapped.

Both bills include provisions intended to protect employers, by limiting federal or state

causes of action against a group health plan, employer or plan sponsor unless such person or

persons directly participated in the consideration of a claim for benefits and in doing so,

failed to exercise ordinary care. The bills would shield employers from liability when those

employers have “designated decision makers”. Designated decision makers would assume

all liability of the employer or plan sponsor. Finally, S. 1052 would prohibit any federal

cause of action against a group health plan that is self-insured and self-administered by an

employer or a multi-employer plan, for the performance of, or the failure to perform any nonmedically reviewable duty under the plan.

Both bills generally require administrative processes (internal and external review) to

be completed before a cause of action may be brought against any individual in connection

with a denial of a claim for benefits. The bills allow, in federal causes of action, for a

participant or beneficiary to seek injunctive relief before finishing internal and/or external

review if he can demonstrate that completing the processes would result in irreparable harm.

In state causes of action, S. 1052 and H.R. 2563 allows an exception to the exhaustion rule

in cases where the external review entity fails to make a determination within the defined

timelines. Finally, both bills would limit certain class action lawsuits and S. 1052 would

limit attorneys’ contingency fees.

MCOs, employers and the health insurance industry are strongly opposed to changes in

the ERISA preemption enjoyed by private employer-sponsored plans. These and other critics

argue that increasing access to such remedies as compensatory and punitive damages would

significantly inflate health care costs. They assume that patients, attorneys and even

providers would much more readily pursue state law causes of action against health plans and

plan sponsors for medical negligence and malpractice. The result, critics predict, would be

defensive medicine, higher liability insurance and thus premiums, and perhaps even

reductions in covered benefits or a higher number of uninsured individuals. Conversely,

many of those who support the modification of ERISA consider the likely cost effects to be

far more modest. To support this view, they cite the absence of runaway medical cost

inflation in those sectors — non-ERISA employer sponsored plans and the individual

insurance market — that do not now enjoy preemption from state causes of action. In June

1998, CBO estimated the cost of ending the ERISA preemption as 1.2% of the premiums of

all employer sponsored plans. However, it should be noted that CBO cautioned that this

estimate “depends on assumptions for which the supporting data are extremely limited or

nonexistent.” Recent CBO cost estimates for S. 1052 conclude the liability provisions would

increase premiums by .8 percent.

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Association Health Plans and Qualified Health Benefit Purchasing

Coalitions

The House bill identifies two types of employer purchasing arrangements; Association

Health Plans (AHPs) and Qualified Health Benefit Purchasing Coalitions (HBPCs). The

purpose of such groups is to provide a mechanism for employers to band together to purchase

insurance coverage for their employees. The concept of employers grouping together to

purchase insurance is not new. A number of different styles of employer-based health

insurance purchasing groups exist today. There are both public purchasing groups and

private purchasing groups; some that self-insure and others that bargain with carriers to offer

a single or multiple insured products. There are a number of possible advantages for

employers that purchase insurance through a well-designed group. By pooling their

insurance risks together, the employers in the group may be able to increase their bargaining

power with carriers and share administrative functions resulting in lower premium costs.

Employees of those firms may be able to select from a larger number of plans than if their

employers were to obtain insurance independently. Multiple employer welfare arrangements

(MEWAs), a broad category of employer purchasing groups, have traditionally been

established by trade or business associations to provide insurance to a particular group of

employers. While the primary purpose of MEWAs is to enjoy the economies of scale of

banding together, a secondary purpose, for those groups with below-average risk, is to buy

lower-priced coverage reflecting their lower risk.

AHPs. The House-passed bill establishes AHPs as certified group health plans

sponsored by associations. The primary differences between AHPs and existing MEWAs

is that AHPs would not be subject to most state insurance laws including benefit mandates

(except that they must comply with any federal or state laws that require coverage of specific

diseases, maternal and newborn hospitalization, and mental health), solvency standards, and

pricing rules. Those AHPs with at least one self-insured offering would be required to meet

the bill’s reserve requirements and provisions for solvency.

Other major requirements include the following:

AHPs must offer at least one insured health coverage option unless the selfinsured plan existed on the date of enactment of the Bipartisan Patient

Protection Act, or it does not restrict membership to one or more trades but

whose eligible participating employers represent a broad cross section of

trades and businesses or industries, or the plan covers eligible participating

employees in one or more high risk trades that are listed in the bill.

! The association sponsoring the plan must have been in existence for at least

3 years and must be operated by a board of trustees with complete fiscal

control and responsibility for all operations.

! Self-insured AHPs must meet reserve requirements and provisions for

solvency, they must have at least 1,000 participants and beneficiaries, and

have offered coverage on the date of enactment or represent a broad crosssection of trades, or represent one or more trades with average or above

average health insurance risk.

! All employers who are members must be eligible to enroll, all

geographically available coverage options must be made available upon

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request to eligible employers, and eligible individuals cannot be excluded

because of health status.

! Premiums for any particular small employer are prohibited from being based

on the health status or claims experience of its plan participants or on the

type of business or industry in which the employer is engaged.

The bill also establishes an “Association Health Plan Fund” from which the Secretary

of Labor (or applicable authority) would make (or authorize to the Secretary of Labor)

payments to ensure continued benefits on behalf of AHPs in distress. The AHPF would be

funded by annual payments made by AHPs. In addition, the Secretary of Labor would be

required to report to Congress no later than January 1, 2006, on the effect of AHPs on

reducing the number of uninsured individuals.

Advocates of purchasing groups look to them as a mechanism to extend coverage

among the working uninsured by reducing the barriers that small employers face in providing

coverage for their employees. AHP proponents argue that state consumer protections,

benefits mandates, and solvency standards raise the price of health insurance and that the

resulting inflated cost of insurance is a major barrier that prevents small employers from

sponsoring health benefits. Under current law, large employers that self-insure their

employees are exempt from such state laws while small employers are not. The advocates

say that by exempting association-sponsored plans from state laws, the playing field will be

made more level between small and large employers.

Opponents of the AHP provisions as they appear in the House bill, on the other hand,

raise the concern that the provisions create increased opportunities for risk segmentation that AHPs will be able to offer plans to healthy groups at better prices leaving relatively more

unhealthy people in the insured market and subject to states’ laws. Opponents in the

insurance industry as well as those representing consumers, are concerned that the additional

risk segmentation could actually increase the number of uninsured by undermining the

traditional insurance industry while substituting a market without the many protections that

states have put into place over the last several decades. Some health policy analysts have

staked out a middle ground arguing that association health plans are not likely to have a

significant the impact on the number of uninsured, but raise fears that establishing

association plans as entities exempt from state consumer protections will bring back the

fraudulent health insurance schemes and insecure entities that have plagued association