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Managed Care

A Quiet Revolution: Law As An Agent Of Health System Change

Abstract

 
This paper considers law’s impact on health system change. Federal courts and state regulators have remade the rules of the medical marketplace, restricting the methods available to managed care organizations to control costs. Legal conflict, however, has had a larger effect through its influence on market actors’ perceptions and expectations. In anticipation of adverse legal outcomes and in response to consumers’ and investors’ anxiety, health plans changed business strategies, backing away from aggressive cost management. We conclude with four lessons about law’s role in the health sphere—lessons that stress the power of legal conflict to shape perceptions and to thereby change behavior before legal change occurs.

Three years later a federal court dismissed the Humana suit, along with similar class actions against other health plans.² In formal legal terms, therefore, the action against Humana was a failure. Yet it had a huge real-world impact: Investors’ perceptions created capital market reality; press coverage fed consumers’ anxiety about managed care; and health plan executives heard reassuring words from their lawyers but worrisome news from their investment bankers and sales teams.

The lawyers who brought the class actions against Humana and other plans spoke openly of their hope that market pressures would push the industry to settle.³ This hope went unrealized. But during the two years after the suit against Humana was filed, much of the managed care industry moved away from the practices targeted by the suit. Today the conventional contents of the managed care "toolbox"—most notably, aggressive utilization management, selective contracting with caregivers, and financial incentives to physicians to limit care—play much less prominent roles in health insurance business strategy than they did in the mid-1990s.⁴ Americans with health insurance have more freedom to choose among doctors and hospitals and to obtain costly tests and treatments.

But despite many eulogies, the managed care industry is hardly dead. To the contrary, its stock values have soared in the past year. The industry has prospered by adapting, forgoing the methods that once brought it success. Managed care is giving insured consumers more of what they want and charging accordingly. Although some employers are moving toward greater employee cost sharing (or dropping medical coverage altogether), most are paying the annual rate hikes that health plans now command.

In this paper we consider the law’s role in bringing about this dramatic change. We do not suggest that law, by itself, brought about health plans’ retreat from tightly managed care. Market pressures from angry and anxious consumers have been the main force behind this transformation. Investors’ fears and health care providers’ resurgent bargaining power have also been important factors. But the law’s role is vastly underestimated. Since the mid-1990s courts and regulators have remade the rules of the medical marketplace. Beyond this, health plan managers’ expectations of legal change—and their expectations of other market actors’ responses to change—have shaped business strategies and market behavior.

We tell two intertwined stories about the law’s part in managed care’s quick fade: the collapse of the industry’s once sweeping immunity from tort liability and other regulatory constraints, and the influence of legal conflict on market actors’ perceptions and expectations. We conclude with four lessons about law’s role in the medical marketplace.

Managed Care’s Loss Of Immunity

Top Managed Care’s Loss Of... Legal Conflict And Market... Conclusion: Lessons For... Editor's Notes NOTES

 
ERISA preemption and the free market for fringe benefits. The immunity of employer-sponsored health plans from state law was not the product of legislative design. When, in 1974, Congress passed a comprehensive statute governing pension plans and other fringe benefits, almost no one imagined a medical marketplace dominated by managed care. The statute, the Employee Retirement Income Security Act (ERISA), was meant to achieve transparency and trustworthiness in the administration of pension benefits.⁵ ERISA’s animating principle was that benefit terms should be left to well-functioning markets.

To keep states from interfering with the market for fringe benefits and to ensure a nationally uniform set of administrative requirements, ERISA’s authors included the preemption provision that became a subject of bitter controversy. This provision nullifies state laws that "relate to any" fringe benefit plan but makes an exception for state law that "regulates insurance."⁶

Until the rise of managed care, ERISA preemption was a nonissue for health care provision. Payers were generally unquestioning, deferring to doctors’ clinical decisions. Thus, fringe benefit plans didn’t risk running afoul of medical malpractice or other state law governing health care provision, and ERISA’s safe harbor from state regulation didn’t come into play. But the rise of managed care put payers potentially within reach of state laws governing medical care provision, and the ERISA safe harbor emerged as a central health policy concern. ERISA does not address the question of whether and to what degree this safe harbor shields managed care’s methods from state law. Thus, the advent of managed care created a dilemma for the courts: Should its methods be subject to state authority over medical care, or should they be treated as matters of fringe benefit design and administration, subject to ERISA and therefore shielded from state interference?

At stake was not just which level of government would make the rules for managed care, but whether, since ERISA imposes few limits on fringe benefit design, the industry would be subject to more than minimal regulation. For conservative judges, this quandary was acute. Conservatives tend to favor both deregulation and heightened protection for state sovereignty vis-à-vis federal power. But in the ERISA context, these preferences are at war with one another, since ERISA preemption achieves deregulation at the price of diminished state authority.

In the early 1990s federal courts resolved this quandary decisively, against state authority and in favor of a deregulatory approach to managed care. Taking their cue from a 1987 Supreme Court decision involving employer-provided disability insurance, several lower courts held that ERISA immunized workplace-based health plans against tort and contract actions for wrongly withholding or delaying authorization for care.⁷ Since ERISA lacks an alternative federal cause of action for consequential damages, preemption left patients without a legal remedy for wrongful withholding of treatment.⁸

These and other decisions characterized ERISA preemption in sweeping terms, encompassing much that health plans might do to influence medical spending. By the mid-1990s standard wisdom held that managed care’s ERISA shield would remain impregnable without congressional action. Through the late 1990s this premise animated the struggle over a federal patients’ bill of rights. A strange-bedfellows coalition of consumer advocates, physician groups, and the plaintiff’s bar campaigned unsuccessfully to roll back ERISA preemption.

Preemption erodes. By 1995 the legal bedrock was shifting. In an opinion involving hospital rate setting, the Supreme Court signaled a retreat from expansive ERISA preemption in health.⁹ Nothing in ERISA’s "language" or "the context of its passage," Justice David Souter wrote, "indicates that Congress chose to displace general health care regulation, which historically has been a matter of local concern."¹⁰

Lower courts took the cue. Several months later the U.S. Court of Appeals for the Third Circuit allowed a medical malpractice suit against a health maintenance organization (HMO) to proceed—and rejected the HMO’s ERISA preemption claim—on the grounds that the suit targeted the "quality" of the health care the plaintiffs received rather than alleging that the HMO wrongly "withheld benefits due."¹¹ At issue in the case was the HMO’s responsibility for a participating physician’s malpractice.¹² But over the next few years, other courts extended this approach to utilization management. The courts’ strategy was to distinguish between providing health care and administering benefits, apply ERISA preemption only to the latter, and subject cost management methods to liability by fitting them within the former.¹³

This strategy made the presence or absence of ERISA preemption into a matter of case-by-case judicial discretion. The law’s characterization of cost management methods as either medical care or benefit administration was strained and arbitrary, since these methods typically combined elements of both.¹⁴ Not surprisingly, similar facts yielded opposite outcomes on the preemption issue in different jurisdictions.¹⁵ To explain their decisions, judges invented further distinctions (for example, care delayed versus care denied) that papered over the unrealism of the line between medical care and plan administration.¹⁶ Confusing appellate opinions proliferated. Meanwhile, interest-group gridlock on Capitol Hill prevented a legislative solution.

The Pegram revolution. Then, in June 2000, the Supreme Court intervened. In a case portrayed by the press as a victory for managed care, the Justices declined to read ERISA to restrict health plans’ use of financial incentives to physicians to limit tests and treatments.¹⁷ But the doctrinal route the Court took to reach this result portended the demise of managed care’s malpractice immunity.

To keep ERISA itself from becoming a tool of attack on health plans’ financial incentives for physicians, the defendant HMO in Pegram v. Herdrich tried to characterize clinical caretakers’ decisions about plan resource use as purely medical judgments, not plan administration. This would have put such decisions beyond ERISA’s regulatory reach, leaving them subject instead to state tort liability. It would also have left intact the lower courts’ distinction between medical care and plan administration—a distinction that, however problematic, gave managed care a fighting chance to preserve utilization reviewers’ malpractice immunity. Had the Supreme Court wanted to safeguard this immunity, this was the obvious doctrinal path. Instead, the Justices adopted an approach urged in an amicus brief by a group of health law and policy scholars critical of this immunity.¹⁸ The Court said that when health plans manage costs by giving incentives to treating physicians to limit care, these doctors play dual roles, as clinical caretakers and benefit administrators. They thus make "mixed" treatment and eligibility decisions that are beyond ERISA’s scope and therefore subject to state malpractice liability.¹⁹

Moreover, the Justices drew no distinction between treating physicians’ "mixed" decisions and the combined clinical and plan administration decisions made by utilization managers. Did this mean that utilization reviewers’ mixed decisions were now subject to state malpractice suits? A week after deciding Pegram, the Court spoke to this question in Delphic fashion, instructing Pennsylvania’s supreme court to reconsider the preemption issue in a preauthorization review case, taking Pegram into account.²⁰ The Pennsylvania case involved a classic allegation of negligent utilization review—the type of suit that only a few years before would have been preempted without question. But the Pennsylvania court allowed the case to proceed, pointing to Pegram as proof that the U.S. Supreme Court had reversed field on ERISA preemption.²¹ Over the next few years other courts, including the influential Second Circuit Court of Appeals, issued similar rulings.²²

Some judges, though, were reluctant to go this far without a clearer signal from the U.S. Supreme Court. In 2002 a Fifth Circuit panel noted the Justices’ reversal but said that it lacked authority to allow a suit for negligent denial of coverage because a ten-year-old Fifth Circuit decision barring such a suit had not been overturned.²³ In November 2002 the Supreme Court announced that it would review this decision, setting the stage for a ruling that could confirm the demise of managed care’s immunity from suit for negligent preauthorization review.

An "all-clear" for state regulation. The case pending before the Justices involves a new Texas statute empowering patients to sue managed care organizations (MCOs) for negligent denial of coverage. Since the mid-1990s many state legislatures have imposed new mandates on MCOs. These vary greatly, but recurring themes include mandatory benefits, procedural and substantive constraints on preauthorization review, independent review of coverage denials, limits on financial rewards to physicians for frugal practice, any-willing-provider laws, and protections for doctors who appeal coverage denials on their patients’ behalf. The industry’s efforts to use ERISA as a shield against these mandates have mostly failed.

In two decisions over the past year and a half, the Supreme Court empowered the states to take the lead in regulating the medical marketplace. By a 5–4 majority in June 2002, the Court rejected a preemption challenge to a law mandating independent review for enrollees who are denied coverage of services on "medical necessity" grounds. The decision, in Rush Prudential HMO v. Moran, was dismaying news for the industry on two fronts.²⁴ Most troublesome was the Court’s embrace of state regulation’s central premise—that ERISA’s "savings" clause preserved statutes specifically directed at managed care. The Court conceded that managed care laws "relate to" employee benefit plans, the threshold test for preemption, but it held that MCO risk bearing triggers the "savings" clause, even when providers or self-insuring employers bear most of the risk. The Justices thereby cleared a wide path for state regulation.

The Court’s reading of the independent review statute at issue in Rush Prudential struck another blow against the industry. Independent review posed an additional preemption question, one arising from the fact that ERISA provides a remedy in federal court for the value of benefits wrongly denied. This federal remedy preempts (and thus nullifies) overlapping state remedies. The HMO in Rush Prudential said that independent review is such a remedy and is therefore preempted. Had the industry prevailed on this point, review procedures now in place in most states would have been a dead letter for Americans who obtain medical coverage through private employers.²⁵

The Justices not only rejected this position, but they did so in a manner that undermined health plans’ ability to use preauthorization review as a cost control tool. The Court characterized independent review not as a legal remedy but as a constraint on health insurance policies. Such review, said the Court, is "akin" to a mandatory (and binding) second medical opinion.²⁶ The immediate import of this characterization was to distinguish independent review from ERISA’s remedy for denial of benefits and thus to avoid preemption. Beyond this, by privileging professional standards of care over health plans’ efforts to interpret medical necessity in frugal fashion, the Court’s approach rendered utilization management less effective as a cost control tool. A brief overview of coverage decision making by health plans helps to show why.

Although some well-publicized coverage disputes have involved potentially lifesaving care, the vast majority occur in less dramatic circumstances.²⁷ Coverage denials typically occur when clinical practice varies widely and the efficacy of treatment options is uncertain. In such situations, health plans have tended to decline coverage. In practice, utilization review has been an ill-defined blend of imperfect science, professional norms, and cost considerations.²⁸

By making independent review into a matter of professional judgment, Rush Prudential undermined utilization management’s cost control potential in two ways. First, it pushed cost-consciousness to the periphery of coverage concerns. Second, it made independent review less predictable, rendering utilization management more risky. Since professional practice varies widely, independent review that defers to it is a chancy matter. These effects are likely to discourage vigorous, cost-conscious utilization management, since they make it more likely that independent reviewers’ decisions will diverge from coverage decisions made by health plans. Plan administrators would prefer not to pour resources into coverage disputes, lose frequently, and suffer harsh reputational consequences. They are more likely to avoid disputes by paying for prescribed tests and treatments—and allowing costs to rise accordingly.

Less than a year after the Court ruled in Rush Prudential, it rejected an ERISA preemption challenge to state laws requiring health plans to include all qualified providers willing to accept plan payment rates and other conditions.²⁹ More than laws mandating independent review, these so-called any-willing-provider statutes strike at the heart of managed care’s cost control capability. It is widely believed that managed care achieved a measure of cost stability in the mid-1990s primarily because of its ability to obtain price discounts from doctors and hospitals in exchange for the promise of large numbers of patients. The ability of health plans to contract with a subset of the providers in a geographic area meant that plans could channel high volumes of patients to these providers in return for rate concessions. Any-willing-provider laws foreclose this strategy.³⁰

Beyond clearing the way for any-willing-provider laws, the Court’s opinion in Kentucky Ass’n of Health Plans v. Miller further narrowed the scope of ERISA preemption. Justice Antonin Scalia’s opinion for a unanimous Court went beyond even Rush Prudential in this regard, by explicitly discarding precedent that based application of ERISA’s "savings" clause on the conclusion that a state law regulates practices constituting the "business of insurance."³¹ Instead, Scalia wrote, it suffices that the state law (1) "be specifically directed" toward firms that provide insurance, and (2) "substantially affect" insurers’ risk-pooling arrangements.³²

This seemingly arcane doctrinal move has large implications. It lifts the threat of preemption from potential regulatory initiatives that do not directly target insurance practices—that is, spreading risk from policyholders to a common pool—but that affect risk-pooling arrangements, however tangentially. And since Rush Prudential held that even low levels of risk bearing by health plans or their providers constitute risk pooling for "savings" clause purposes, plans are now fair game for such regulation. Potential initiatives include (in addition to independent review and any-willing-provider statutes) restrictions on financial incentives to doctors to limit care; protections for providers who protest coverage denials or other plan practices; and regulation of internal appeal procedures, network composition, and referral mechanisms. In short, the Supreme Court has sounded an ERISA "all-clear" for state regulation of plans’ management practices.

Summing up: a legal environment transformed. For managed care, the upshot of these developments is a drastically changed legal environment since the freewheeling mid-1990s. In the wake of Pegram and its lower-court progeny, health plans are now subject to tort liability for their utilization review practices, something that once seemed unimaginable without congressional intervention. After Rush Prudential, coverage denials could be overruled by independent reviewers based on professional conceptions of medical necessity, without regard for contract language or cost management concerns. Together, these developments made preauthorization review much less appealing to plans as a cost control strategy. Moreover, after Kentucky Ass’n of Health Plans, states could bar plans from concentrating their buying power on fewer providers through selective contracting. And, after both Rush Prudential and Kentucky Ass’n of Health Plans, states were free to take the regulatory initiative in response to popular (and interest group) concerns about health plans’ behavior.

Legal Conflict And Market Actors’ Expectations

Top Managed Care’s Loss Of... Legal Conflict And Market... Conclusion: Lessons For... Editor's Notes NOTES

 
Commentary on the law as an agent of change typically examines the impact of concrete legal developments: court decisions, legislation, or agency action. This has been our approach in the discussion above. We have pointed to ways by which the law governing managed care became less hospitable to common cost control practices, especially preauthorization review and selective contracting with providers. However, we do not posit a simple cause and effect. The managed care industry’s retreat from these practices predates the legal changes we have chronicled. By the end of the 1990s, before the Supreme Court addressed managed care, health plans were already moving away from aggressive preauthorization review and highly restrictive provider networks.³³

A striking feature of health system change in recent years is that the industry has kept a step ahead of the law.³⁴ Market pressures are part of the reason why. As others have noted, consumer demand pushed health plans away from tight management of spending and tight constraints on patient choice.³⁵ Employers made health plan purchasing decisions in response. Wall Street favored insurers that adapted quickly to this market shift. But what set this shift in motion, and why did it occur so suddenly? We hypothesize that legal conflict played a significant role, through its influence on market actors’ perceptions and expectations. Too often, the effects of law and market forces are considered in isolation from each other. In American health care over the past decade, the effects of legal and market mechanisms have been inseparable.³⁶

Legal conflict shaped health plan executives’ perceptions of business risk, stoked consumers’ anxieties, and influenced investors’ expectations. Consumers’ and investors’ concerns, in turn, fed back into health plan executives’ strategic thinking. Thus, the law’s influence on health system change cannot adequately be understood by looking only at litigation outcomes or at statutes and regulations enacted. Legal conflict itself has been a catalyst, shaping events by affecting market behavior.

Legal conflict as business risk. Legal conflict enters the calculations of corporate leaders, including health plan executives, as a form of business risk. From the mid-1990s until 11 September 2001, the prospect of a federal patients’ bill of rights loomed over the managed care industry.³⁷ Proposals with a chance of passing at various points included expansion of patients’ opportunities to sue over coverage denials, procedural requirements for coverage decision making, constraints on selective contracting with providers, and limits on financial rewards to caregivers for containing costs.³⁸ The industry prevailed year after year against these proposals, but health plan leaders took the risk of congressional action into account.

Fear of class-action liability also weighed on health plan executives, as we observed at the outset. Subscriber class-action suits filed in fall 1999 against seven large plans challenged the same cost control practices targeted by proponents of a congressional patients’ bill of rights. Defeat, although unlikely, would have been catastrophic for the industry had it stuck with the practices these lawsuits challenged. More tangible were the many state statutes targeting managed care. Fourteen states passed laws imposing tort liability on MCOs.³⁹ Whether ERISA would preempt lawsuits brought under these statutes was uncertain, but health plan executives had little inclination to test the waters. At the least, the regulatory uniformity that ERISA preemption had once afforded health plans with operations in multiple states was no more. Risk of legal exposure was part of the strategic picture for industry leaders as they mulled over their next moves.

Legal conflict and consumers’ anxiety. Most health plan subscribers lack personal experience with dire illness or seemingly uncaring plan bureaucrats. Some have watched the suffering of loved ones with serious illnesses and assisted them in negotiating insurers’ red tape. Yet in the 1990s HMO horror stories—accounts of lifesaving care denied and loved ones lost—became part of American pop culture. These accounts spread through news media, entertainment, and political channels. Legal conflict was both a source of such stories and a vehicle for their dissemination.⁴⁰ Reports of stingy utilization reviewers, "gag rules" barring doctors from telling patients about costly treatments, and sundry other abuses aroused popular concern. The HMO class-action suits fed consumers’ fears by presenting managed care’s misconduct as a danger on a mass scale. The debate over a patients’ bill of rights, with its congressional hearings and political advertising, fed popular impressions of the HMO bureaucrat as an icon of greed and indifference.

Accurate or otherwise, these popular impressions shaped consumers’ preferences and choices. Patients perceived a disconnect between promises to meet medical need and covert cost-consciousness. Americans who could afford to do so avoided tightly managed HMOs in favor of plans that gave patients more choice and doctors more latitude. Employers got the message and conveyed it clearly to MCO marketers. Some employers also worried about their own downstream legal risk, arising from their health plans’ purchasing decisions.⁴¹

Legal conflict and investors’ expectations. Capital markets abhor legal risk. As investors’ reactions to the HMO class-action suits illustrate, capital markets can be irrationally pessimistic about the law’s hazards. Poor information about likely judicial and legislative outcomes may be part of the explanation. Two information problems play a role here: inaccurate information about outcome probabilities, and high levels of uncertainty concerning likely outcomes. The latter depress markets through the psychology of risk aversion. All else equal, greater uncertainty about the probability of a future loss leads risk-averse actors to behave as though the probability were higher.

Another part of the explanation lies in the psychological interplay between investors. When legal or other risks emerge, investors respond not only to their own risk perceptions, but also to their expectations about other investors’ reactions. This can create a downward cascade of interacting expectations and responses.⁴² Irrational undervaluation can ensue—irrational because investors’ attention to each other’s expectations pushes share prices below long-term business value.

Uncertainty over the fate of class-action litigation, tort liability for coverage denials, proposed state and federal regulation, and ERISA preemption has worried capital markets since the mid-1990s. Investors’ concerns were another reason for health plan leaders to take legal risk seriously, perhaps more seriously than sober assessment of this risk justified.

Keeping a step ahead of the law. Consumers’ and investors’ concerns arising from legal conflict thus increased pressure on health plans to move away from aggressive cost management. Legal conflict focused attention, framed issues, and shaped market actors’ perceptions of risk. It is beyond our scope here to try to disentangle these market-mediated influences from other market pressures on MCOs. We doubt that such disentangling is possible. What is clear is that the legal revolution brought about by the Supreme Court’s trilogy of Pegram, Rush Prudential, and Kentucky Ass’n of Health Plans—and by the passage of managed care legislation in nearly every state—postdated the start of health plans’ retreat from managed care.

Law likely had its largest impact through its effects on market actors’ perceptions and expectations, rather than through its tangible proscriptions. On the other hand, the revolution that the Supreme Court and state legislators brought about has ongoing importance. There can be no easy return to the practices that defined managed care in the 1990s. The actual legal obstacles are now too high.

Conclusion: Lessons For Law’s Role In The Medical Marketplace

Top Managed Care’s Loss Of... Legal Conflict And Market... Conclusion: Lessons For... Editor's Notes NOTES

 
We end with four generalizations about law’s influence on health system change. First, markets are more agile than law. The ritual of pretrial maneuver, discovery, and framing of issues in civil litigation takes years to unfold. Preexisting legal doctrines introduce further rigidity, even when policy arguments for legal change are compelling. Legislative proposals meet opposition that stops or transmutes them as interest groups resist change or try to redirect it to meet their needs. But when large numbers of paying customers share the concerns that give life to lawsuits or legislative initiatives, market-driven institutions adapt quickly, constrained only by information problems, access to capital, and limits on their organizational flexibility.

Second, law responds, albeit slowly, to sustained popular discontent. Judges are constrained by their own professional norms. Their regard for precedent and their professional commitment to doctrinal consistency bias them against large change. The high value that legal culture puts on such consistency discourages custom tailoring of the law to the unique characteristics of different human endeavors.⁴³ Yet ambiguities are inevitable when courts apply rules and precedent to new circumstances. These ambiguities empower judges to accommodate the law to changed conditions. The dissolution of managed care’s ERISA-based immunity from state regulation and tort liability is a striking example.

Third, law’s larger impact on health system change is indirect, through the effects of legal controversy on market actors’ concerns and expectations. The failed patients’ class actions against HMOs were an effort to take strategic advantage of these effects, by triggering strong enough responses by investors and consumers to create pressure to settle. Plans and providers, employers, public-interest groups, and others would do well to anticipate these effects rather than to see the law only in terms of its ultimate outcomes. The most "successful" strategic use of these effects was probably unintended. The (as yet) unsuccessful campaign for a federal patients’ bill of rights focused national attention on managed care practices, troubling consumers and worrying investors—and putting pressure on health plans to change.

Fourth, law creates incentives to search for gaps between promises and actions.⁴⁴ Many tort, contract, and other remedies reward plaintiffs (and their lawyers) for exposing shortfalls between word and deed. Legislators can reap political rewards for doing so in hearings and public debate. Health care offers ample opportunity in this regard. Insurers treat talk about cost-benefit trade-offs as taboo, promising in their contracts all "medically necessary" care but saying little about how they put this commitment into practice. It is ironic that the highest-profile statement about the centrality of rationing to the managed care mission came from the U.S. Supreme Court, in an opinion that cleared the way for states to hold health plans liable for coverage denials.⁴⁵

As even ardent market advocates acknowledge, the industry’s failure to be up-front about what it did left it open to legal attack.⁴⁶ Attacks came in class-action filings, malpractice suits, breach-of-contract and bad-faith claims, and debate over consumer protection legislation. These fed the groundswell of hostility toward managed care. The industry found itself caught between Americans’ reluctance to pay for all potentially beneficial care, unwillingness to openly countenance the withholding of such care, and anger over reports that health plans did so covertly. If the industry turns to new forms of sub rosa rationing, law will again offer rewards for revealing gaps between words and actions.

For example, disease management programs risk such exposure if they sacrifice clinical gains to suppress cost without clearly stating their intention to do so. Consumer-directed health plans face similar risk absent clarity about the cost-benefit trade-offs that undergird alternative benefit designs.

Fearful of such risk but equally afraid to be up-front with their workers about these trade-offs, some employers are looking to cut their losses by shifting costs to workers. Higher deductibles, copayments, and employee contributions toward premiums are now a trend—and a growing source of consumer anxiety. For employers, this strategy appeals as an escape from responsibility for either making or hiding trade-offs. But it risks a larger disconnect between promise and delivery. To the extent that cost sharing makes essential care painful for families to afford, it belies the promise of employment-based coverage, inviting a new consumer backlash. Talk of consumer "empowerment" cannot preempt this response.

Until Americans make peace with rising costs or overt setting of limits, the cycle of stopgap hypocrisy, revelation, and popular ire will continue. Law catalyzes the sequence of revelation and social response, but it cannot by itself reconcile Americans’ contradictory demands for bounded spending and unbounded benefit in the health sphere.

Editor's Notes

Top Managed Care’s Loss Of... Legal Conflict And Market... Conclusion: Lessons For... Editor's Notes NOTES

 
This paper was supported in part by a Robert Wood Johnson Foundation Investigator Award in Health Policy Research (Bloche) and by Grant no. K02HS11285 from the Agency for Healthcare Research and Quality (Studdert).

Gregg Bloche (bloche{at}law.georgetown.edu) is a professor of law at Georgetown University in Washington, D.C., and an adjunct professor at the Johns Hopkins Bloomberg School of Public Health in Baltimore. David Studdert is an associate professor in the Department of Health Policy and Management, Harvard School of Public Health, in Boston, Massachusetts.

NOTES

Top Managed Care’s Loss Of... Legal Conflict And Market... Conclusion: Lessons For... Editor's Notes NOTES

 

1. Shares of UnitedHealthcare were off 7.6 percent for the day; CIGNA, nearly 5 percent; and Oxford Health Plans, more than 11 percent.M. Kauffman and A. Julien, "HMO Is Sued in First Big Test: Case against Humana Targets Managed Care," Hartford Courant, 5 October 1999. Humana, which had lost more than half its value during the previous year, fell by 6.25 cents, to $7.M. Freudenheim, "Humana Sued in Federal Court over Incentives for Doctors," New York Times, 5 October 1999.
2. In In re Managed Care Litigation 209 FRD 678 (2002). Similar class-action suits were filed in June 2000 against Aetna, CIGNA, UnitedHealthcare, Prudential Health Care, Foundation Health Systems, and PacifiCare Health Systems. M. Freudenheim, "More Suits Filed against Health Insurers," New York Times, 27 June 2000. Judge Moreno’s ruling dismissed these as well.
3. O. Ullmann, "Wall Street May Play Part in HMO Lawsuits," USA Today, 20 October 1999.
4. J.C. Robinson, "The End of Managed Care," Journal of the American Medical Association 285, no. 20 (2001): 2622–2628; [Abstract/Free Full Text]C.S. Lesser, P.B. Ginsburg, and K.J. Devers, "The End of an Era: What Became of the ‘Managed Care Revolution’ in 2001?" Health Services Research 38, no. 1, Part 2 (2003): 337–355; and [CrossRef][ISI][Medline]G.P. Mays, R.E. Hurley, and J.M. Grossman, "An Empty Toolbox? Changes in Health Plans’ Approaches for Managing Costs and Care," Health Services Research 38, no. 1, Part 2 (2003): 375–393.[CrossRef][ISI][Medline]
5. Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S. Code sec. 1001 et seq.
6. 29 U.S. Code, sec. 1144(a). The "savings" clause is at sec. 1144(b)(2)(A). An exception to this exception, the so-called deemer clause, holds that an "employee welfare benefit plan"—that is, a fringe benefit plan—is not an insurer. Sec. 1144(b)(2)(B). The "deemer" clause enables employers to escape the reach of state insurance regulation by self-insuring.
7. Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41 (1987). For examples of these lower-court decisions, see Kuhl v. Lincoln Nat’l Health Plan of Kansas City, Inc., 999 F.2d 298 (8th Cir. 1993); and Corcoran v. United HealthCare, Inc., 965 F.2d 1321 (5th Cir. 1992) (ruling that state tort and contract law: (1) "relate[s] to" employment-based health plans, since it significantly affects them; and (2) does not "regulate insurance," traditionally the province of the states, because it does not specifically target insurance plans).
8. ERISA includes a federal cause of action for benefits due under employee benefit plans, but courts have uniformly construed this cause of action to exclude damages for adverse health consequences that result from denial of benefits due.
9. New York State Conference of Blue Cross and Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645 (1995); and R. Briffault and S. Glied, "Federalism and the Future of Health Care Reform," in The Privatization of Health Care Reform: Legal and Regulatory Perspectives, ed. M.G. Bloche (New York: Oxford University Press, 2003), 49–81.
10. Travelers, 514 U.S. at 661–662.
11. Dukes v. U.S. Healthcare, Inc., 57 F.3d 350, 356 (1995).
12. Ibid. Plaintiffs contended that the HMO was (1) negligent in its selection and oversight of medical personnel; and (2) vicariously liable for the participating physician’s malpractice, since it held out the physician as a competent practitioner.
13. P.D. Jacobson and S.D. Pomfret, "Form, Function, and Managed Care Torts: Achieving Fairness and Equity in ERISA Jurisprudence," Houston Law Review 35, no. 4 (1998): 985–1078.
14. Bedrick v. Travelers Insurance Co., 92 F.3d 149 (4th Cir. 1996); McGraw v. Prudential Insurance Co. of America, 137 F.3d 1253 (10th Cir. 1998); and D.M. Studdert and C.R. Gresenz, "Consumer Protection in Managed Care: Enrollee Appeals of Pre-Service Coverage Denials at Two HMOs," Journal of the American Medical Association 289, no. 7 (2003): 864–870.[Abstract/Free Full Text]
15. For examples of somewhat tortured attempts to resolve the preemption issue in coverage disputes using the Dukes quality-quantity distinction, see Pryzbowski v. U.S. Healthcare, Inc., 64 F. Supp. 2d 361 (D.N.J. 1999); Bauman v. US Healthcare, Inc., 193 F.3d 151 (3d Cir. 1999); and Lazorko v. Pennsylvania Hospital, 237 F.3d 242 (3d Cir. 2000). For a discussion of how courts can come to opposite results on similar facts, see P.M. Ochmann, "Managed Care Organizations Manage to Escape Liability: Why Issues of Quantity versus Quality Lead to ERISA’s Inequitable Preemption of Claims," Akron Law Review 34, no. 2 (2001): 571–612.
16. Pryzbowski v. U.S. Healthcare, Inc.
17. Pegram v. Herdrich, 530 U.S. 211 (2000).
18. 1998 U.S. Briefs 1949 (20 December 1999).
19. Pegram, 530 U.S. at 230–232, 237.
20. U.S. Healthcare Sys. of Pa., Inc. v. Pennsylvania Hosp. Ins. Co., 120 S. Ct. 2686 (2000), vacating Pappas v. Asbel, 724 A.2d 889 (Pa. 1998).
21. Pappas v. Asbel, 564 Pa. 407, 768 A.2d 1089, 1095–1096 (Pa. 2001), cert. denied 536 U.S. 938 (2002).
22. Cicio v. Does, 321 F.3d 83 (2d Cir. 2003). See also DiFelice v. Aetna U.S. Healthcare, 3d Cir., No. 02-3381 (Oct. 15, 2003) (rejecting HMO’s claim that ERISA preempted lawsuit against HMO for causing patient to be prematurely discharged from hospital but upholding preemption of suit against HMO for refusal to classify a specially designed tracheostomy tube as "medically necessary").
23. Roark v. Humana, Inc., 307 F.3d 298 (5th Cir. 2002).
24. 536 U.S. 355 (2002).
25. K. Pollitz et al., "Assessing State External Review Programs and the Effects of Pending Federal Patients’ Rights Legislation," March 2002, www.kff.org/insurance/externalreviewpart2rev.pdf (3 December 2003).
26. Rush Prudential HMO v. Moran, 536 U.S. at 383.
27. Studdert and Gresenz, "Consumer Protection in Managed Care"; C.R. Gresenz et al., "Patients in Conflict with Managed Care: A Profile of Appeals in Two HMOs," Health Affairs (July/Aug 2002): 189–196; and K. Kapur, C.R. Gresenz, and D.M. Studdert, "Managing Care: Utilization Review in Action at Two Capitated Medical Groups," Health Affairs, 18 June 2003, content.healthaffairs.org/cgi/content/abstract/hlthaff.w3.275 (3 December 2003).
28. Systematic cost-benefit analysis has had little role in either coverage decision making or its oversight. M.G. Bloche, "The Invention of Health Law," California Law Review 91, no. 2 (2003): 247–322. The fact that medical necessity decisions are typically the province of health plan medical directors (almost always physicians) ensures a role for professional norms.[Medline]
29. Kentucky Ass’n of Health Plans, Inc. v. Miller, 123 S. Ct. 1471, 1478 (2003).
30. By 2003, twenty-one states had enacted any-willing-provider laws. National Conference of State Legislatures, Health Policy Tracking Service, "Any Willing Provider," www.ncsl.org/statefed/health/AWP.htm (September 2003). Most of these laws are limited to pharmacies or pharmacists.
31. Prior Supreme Court opinions on ERISA’s "savings" clause (including Rush Prudential) had looked to the so-called McCarran-Ferguson factors for guidance. These three factors, drawn from cases construing the McCarran-Ferguson Act (which shields state insurance regulation from preemption by federal antitrust law) are (1) whether the regulated practice "has the effect of transferring or spreading a policyholder’s risk," (2) whether the practice "is an integral part of the policy relationship between the insurer and the insured," and (3) whether it "is limited to entities within the insurance industry." Kentucky Ass’n of Health Plans, at 1474, citing Union Labor Life Ins. v. Pireno, 458 U.S. 119, 129 (1982).
32. Kentucky Ass’n of Health Plans, at 1479.
33. J.C. Robinson, The Corporate Practice of Medicine: Competition and Innovation in Health Care (Berkeley: University of California Press, 1999).
34. M.G. Bloche, "One Step Ahead of the Law: Market Pressures and the Evolution of Managed Care," in The Privatization of Health Care Reform, ed. Bloche, 22–48.
35. Robinson, "The End of Managed Care"; and Lesser et al., "The End of an Era."
36. Bloche, "One Step Ahead of the Law."
37. K.M. Boozang, "The Class Action Suit as a Method of Empowerment in Managed Care," American Journal of Law and Medicine 24, no. 1 (1998): 7–58.
38. Although federal legislation did not pass, a rule governing utilization review and appeals of coverage denials for employer-sponsored health plans was issued by the U.S. Department of Labor. U.S. Department of Labor, "Employee Retirement Income Security Act of 1974; Rules and Regulations for Administration and Enforcement; Claims Procedure," Federal Register 65, no. 225 (November 2000): 70245–70271.
39. F.A. Sloan and M.A. Hall, "Market Failures and the Evolution of State Regulation of Managed Care," Law and Contemporary Problems (Fall 2002): 169–206.
40. Bloche, "One Step Ahead of the Law."
41. D.M. Studdert et al. "Expanding Managed Care Liability: What Impact on Employer Coverage?" Health Affairs (Nov/Dec 1999): 7–27
42. K.D. Daniel, D.A. Hirschleifer, and A. Subrahmanyam, "Investor Psychology and Security Markets Under-and Overreacting," Journal of Finance 53, no. 5 (1998): 1839–1886.[CrossRef]
43. Bloche, "The Invention of Health Law."
44. M.G. Bloche, "Trust and Betrayal in the Medical Marketplace," Stanford Law Review 55, no. 3 (2002): 919–954.[Medline]
45. Pegram v. Herdrich. In interviews conducted by one of us (Bloche) with senior executives at four leading health plans during summer 2003, officials with roles in coverage policy acknowledged (on condition of anonymity) that they ration care but said that they see this topic as too sensitive to discuss in public.
46. C.C. Havighurst, "Consumers versus Managed Care: The New Class Actions," Health Affairs (July/Aug 2001): 8–27.

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