High Court ruling on ERISA is another blow to HMOs.

States can force HMOs to open their net works of medical providers, the U.S. Supreme Court has ruled. The April decision represents a victory for advocates of patient choice and a loss for the managed care industry, because when insurers can limit the number of providers in their networks, they can negotiate discounted rates by promising the providers higher patient volume.

In the unanimous opinion, the Court held that Kentucky's "any willing provider" (AWP) laws--which require managed care companies to accept into their networks any provider willing to abide by the network's terms--constitute regulation of insurance, and therefore are not pre-empted by the federal Employee Retirement Income Security Act (ERISA). (Kentucky Ass'n of Health Plans, Inc. v. Miller, 123 S. Ct. 1471 (2003).)

"This ruling is important because it is another loss for the HMO industry, which has continuously sought to use ERISA as a sword to reign in litigation, instead of as a shield to protect employees, as is the original intent of the statute," said attorney Joshua Spielberg of Cherry Hill, New Jersey, who represents plaintiffs in cases against HMOs.

At least 20 states have some form of AWP laws, most relating to pharmacies and pharmacists. Kentucky and seven other states--Georgia, Idaho, Illinois, Indiana, Minnesota, Virginia, and Wyoming--have AWP laws that apply to doctors.

Kentucky passed its AWP laws in 1994. In 1997, the Kentucky Association of Health Plans and several HMOs sued the state's Department of Insurance, asserting that ERISA [section] 1144(a) preempts the AWP laws because they relate to employee benefit plans. The Eastern District of Kentucky--and later the Sixth Circuit--disagreed, finding that the laws clearly regulate insurance and are therefore saved from preemption, which the Supreme Court affirmed.

The Court considered this primary question: What constitutes a law that regulates insurance under ERISA's savings clause? The circuits are split on whether AWP laws do so. The Fourth and Sixth Circuits have found that the laws do regulate insurance and are saved from ERISA preemption; the Eighth and Fifth Circuits, however, have disagreed, striking down laws in Arkansas and Louisiana.

Writing for the Court, Justice Antonin Scalia acknowledged that prior rulings had created confusion: They relied largely on a three-part test to determine whether certain practices constitute "the business of insurance" under the McCarran-Ferguson Act. That statute provides that if a federal law does not specifically relate to insurance, it cannot supersede a state law regulating "the business of insurance." However, Scalia insisted, the Court has never ruled that the McCarran-Ferguson test is essential to ERISA's savings clause.

Scalia wrote: "Today we make a clean break from the McCarran-Ferguson factors and hold that for a state law to be deemed a 'law ... which regulates insurance' under [section] 1144(b)(2)(A), it must satisfy two requirements. First, the state law must be specifically directed toward entities engaged in insurance. Second, ... the state law must substantially affect the risk-pooling arrangement between the insurer and the insured."

The Court held that state AWP laws meet the first criterion because they govern what a health insurance provider cannot do--in this case, restrict its networks. And they meet the second criterion by expanding the number of providers in a network, altering the bargaining arrangements between insurers and providers. When insurers cannot limit their provider networks, they cannot guarantee increased patient volume and thus lose their leverage to negotiate lower rates. While advocates of open networks emphasize patient choice, HMOs argue that AWP laws will lead to higher health care costs.

Linda Peeno of Louisville, Kentucky, a doctor and managed care consultant, noted that to maintain their profit levels, HMOs will either increase their premiums or decrease payment of claims.

"This translates into tighter 'medical management' that can mean increased denials of care, and certainly increased restrictions," such as limiting, reducing, or substituting medical treatment, she said. Or insurance companies may simply make their network requirements more complex, making it harder for providers to meet the terms.

The ruling is still positive for plaintiffs, said Spielberg: "The Court's willingness to take a flesh look at the savings-clause prong of the preemption test indicates that they may be willing to take a fresh look at the other portions of the statute and possibly interpret them favorably for plaintiffs."