Firms May Cut Ill Workers’ Health Benefits, U.S. Argues : High court: Justice Department contends law permits reduced insurance coverage in catastrophic illness cases.

Lawyers for the Bush Administration argued Friday that federal law permits employers to reduce insurance coverage sharply for workers with catastrophic diseases, such as AIDS or cancer.

In legal arguments prepared at the request of the Supreme Court, the Justice Department supported a lower-court ruling that companies have “an absolute right to alter the terms of medical coverage,” including ending benefits for a gravely ill employee.

The legal brief, filed late Friday, urged the high court to reject an appeal filed by gay-rights lawyers and supported by the American Medical Assn.

Gay-rights leaders called the Administration’s action an “appalling example” of indifference to people suffering from catastrophic illnesses. An AMA official said the government’s decision will only encourage companies to drop health coverage for those who most need it.

Business groups have lobbied the Administration to support the right to curtail coverage for the seriously ill.

The case at the core of the dispute began in July, 1988, after H & H Music Co. of Houston announced it was dropping its insurance carrier and would begin a company insurance plan for employees. The scope of coverage changed in one dramatic way. The maximum lifetime benefit for those with AIDS-related illnesses was slashed from $1 million to $5,000.

The change came just four months after employee Jack McGann told company officials he had AIDS.

By deciding to self-insure, H & H Music was able to avoid state insurance regulations that forbid insurance companies from discriminating. According to business surveys, companies with more than half the nation’s private-sector workers fund their own medical benefits.

McGann challenged his employer in a federal lawsuit under the Employee Retirement Income Security Act of 1974, which forbids discrimination against an employee for “exercising any right to which he is entitled” in a benefit plan.

A federal judge in Houston and the U.S. Court of Appeals in New Orleans dismissed the suit without a trial, ruling that the 1974 law does not give workers “any right” to continued medical coverage. McGann died last year, but his executor, Frank Greenberg, appealed the case to the Supreme Court.

Seven months ago, the Supreme Court asked the U.S. Solicitor Gen. Kenneth W. Starr for the government’s view of the case. Typically, the high court asks for such a brief when a case turns on the meaning of a federal law.

Because this case raised an especially sensitive issue that could potentially affect millions of workers, Starr’s office sought comments from an array of federal agencies.

In the end, the Administration’s lawyers concluded that the 1974 law did not forbid such changes in medical coverage.

“This was not a policy decision. It was a legal conclusion,” said a Justice Department lawyer, who asked not to be identified. Even though the legal brief was sure to provoke sharp political reaction, Starr’s aides said they ignored the coming election and submitted the brief as soon as work on it was complete.

The brief also notes that a new federal law, the Americans with Disabilities Act of 1990, may well forbid such discrimination against persons with AIDS. That law, which came after McGann’s suit was filed, bars discrimination in the “terms, conditions and privileges of employment” for disabled persons.

But other lawyers questioned whether Congress intended that the ADA would cover medical insurance. Judges have yet to rule on that issue, they noted.

Lawyers for Lambda Legal Defense and Education Fund, a gay-rights organization, strongly criticized the Administration for upholding the decision.

This “leaves all workers who receive coverage from self-insured companies vulnerable to being cut out of their benefit plans,” said Lambda staff attorney Suzanne Goldberg.

Dr. Raymond Scalettar, chairman of the AMA’s board, agreed. “This is not just AIDS,” Scalettar said. “It could be cancer, paraplegia. Everybody is vulnerable. It is all illnesses that can occur in self-funded plans.”

The AMA, along with the American Hospital Assn., the American Bar Assn., the U.S. Conference of Mayors, the American Assn. of Retired Persons and the National Commission on AIDS, joined in urging the Administration to seek a Supreme Court review of the McGann case.

The National Commission on AIDS, whose members were appointed by President Bush and Congress, said the Administration’s brief contradicts Bush’s statements.

In a speech on AIDS in 1990, Bush spoke of the need for compassion and caring for people with AIDS and other diseases. “We do not fire them,” he said. “We don’t evict them. We don’t cancel their insurance.”

Arthur Caplan, director of biomedical ethics at the University of Minnesota, said a Bill Clinton Administration would likely take a different view of this issue.

“This puts the positions of Bush and Clinton in stark, telling contrast,” Caplan said. “Clinton is explicit about the need for insurance reform to prevent precisely the kind of case that the Bush Administration is bringing here.”

Times staff writer Marlene Cimons contributed to this story.