Supreme Court Expands Right of States to Regulate HMOs

In a victory for patients and their doctors, the Supreme Court ruled Wednesday that health maintenance organizations can be forced by state law to open their networks to outside doctors and hospitals.

The unanimous decision upholds so-called willing provider laws in half the states, but not California, which does not have such a law.

These pro-consumer statutes permit patients enrolled in an HMO to see a favorite doctor or specialist, even if the physician is not part of the network.

If the medical provider abides by the network’s rules, the HMO may not “discriminate against” the doctor or hospital.

Health insurers have opposed such state measures and contend they will increase costs and lower quality. They say HMOs are able to bargain for low rates from their participating doctors and hospitals by promising them a large volume of business. If the HMO cannot limit its list of providers, it cannot promise a high volume of business to its participating doctors.

“The unavoidable consequences of these laws is to drive up the costs of health-care services,” lawyers for the health insurance industry told the high court. But the justices were not deciding whether the laws were wise. Instead, the key issue was whether these state regulations violated the federal law that governs employee benefits.

While states can regulate insurance, federal law regulates anything that “relates to” a pension or employee benefits. The line between these two is unclear, and has resulted in much litigation.

The difference can be crucial for the rights of patients. Under state law, people who are injured can sue for damages. However, the federal law on employee benefits does not allow general damage suits.

This legal shield for employer-sponsored HMOs has prompted Congress to take up a national “patients’ bill of rights.” The measure would have removed the legal shield for HMOs, but it stalled last year and is not likely to be revived soon.

However, Wednesday’s decision is the second in two years from the Supreme Court that has given states more power to regulate HMOs.

Last year, the court in an Illinois case said states can give patients the right to a second opinion from outside experts if their HMO refuses to pay for a benefit or treatment. If the outside reviewers say it is needed, the HMO must pay for it.

On Wednesday, the court ruled that an “any willing provider” law is a state insurance regulation.

This measure “regulates insurance by imposing conditions on the right to engage in the business of insurance,” said Justice Antonin Scalia in the case of Kentucky Assn. of Health Plans vs. Miller, 00-1471.

“We’re extremely disappointed,” said Dr. Donald Young, president of the Health Insurance Assn. of America. “The requirement for health plans to open their provider networks will result in higher health insurance premiums,” he predicted.

Though California does not have such a law, Jamie Court, executive director of the Foundation for Taxpayer and Consumer Rights in Santa Monica, called the ruling a victory for consumer regulation of the HMO industry.

“This is a big win for states’ rights and a good omen for future patients’ rights laws,” he said. “The court is telling the insurance industry to obey state laws and not seek refuge in federal preemption.”