Other Bulletins

August 2002
Health Law Newsletter

States May Impose Requirement that HMOs Provide Mechanism for Independent Review of Medical Necessity Decisions
by J. Michael Scully, Esq.

The United States Supreme Court recently upheld an Illinois law which requires a health maintenance organization (HMO) to provide for an independent review in the event of a dispute between a patient’s primary care physician and the HMO regarding the medical necessity of a covered service proposed by the physician. HMOs are broadly defined in the Illinois law to include many types of managed care organizations. Under the Illinois law, the review must be conducted by a physician who is unaffiliated with the HMO, who holds the same class of license as the primary care physician, and who is jointly selected by the patient, the primary care physician, and the HMO. In the event the independent reviewing physician determines the covered service to be medically necessary, the Illinois law requires the HMO to provide the covered service to the patient. Other states, including Massachusetts, have similar laws requiring independent reviews.

The HMO argued that the Illinois law was preempted by the Employee Retirement Income Security Act of 1974 (ERISA), a federal law intended to safeguard the establishment, operation, and administration of employee benefit plans. The Supreme Court concluded that, although the Illinois law relates to ERISA plans and therefore would otherwise be preempted, it was saved from preemption because the law also "regulates" insurance. When insurers are regulated with respect to their insurance practices, the state law generally survives ERISA preemption. In the Court’s view, HMOs (and other managed care organizations) provide services as an insurer. The Court concluded that the Illinois law, therefore, is directed toward the insurance industry, regulates an integral part of the policy relationship between the insurer and the insured, and is aimed at a practice limited to entities within the insurance industry.

The Court also noted that, although it previously struck down state laws (even ones regulating insurance) that provided additional or alternative remedies that ERISA does not authorize, the Illinois law does not enlarge the claim beyond the benefits that would be available in any action under ERISA. The Court also concluded that the independent review required by the Illinois law is not an adjudicatory proceeding like an arbitration which might be preempted by ERISA, but is more like the practice of obtaining a second opinion. Such an independent review requirement, the Court concluded, is like other types of state regulation of insurance contracts, such as mandated-benefits statutes and statutes prohibiting denial of claims solely on the grounds of untimeliness, which have survived ERISA preemption.