Key Components of Regulatory Control

The House bill contains more regulatory requirements and would reach more plans than the Senate version of the Patients' Bill of Rights; but both versions would mean sweeping increases in federal regulation.

Consider the main regulatory components of the House bill.

Utilization Review.
Private health plans normally evaluate the utilization of medical services, treatments, and procedures. This process is essential for the cost-effective practice of medicine and helps restrain increases in insurance premiums. Under the House bill, however, managed care and fee-for-service plans would be able to conduct utilization review only as specified by the federal government.⁹

The term "utilization review" is defined more broadly in the bill than one might expect, and includes efforts to monitor or evaluate the "use or coverage, clinical necessity, appropriateness, efficacy, or efficiency of health care services, procedures, or settings...." This would include almost all the normal activities of fee-for-service plans, including determinations of whether a particular service is medically necessary in an individual case or generically.

A plan--including a fee-for-service plan--would be required to have written policies and procedures governing all aspects of its utilization review program, including clinical review criteria developed with input from a "range of appropriate actively practicing health care professionals." These criteria would have to be based on "valid clinical evidence" including "gender-specific criteria." Utilization review can be conducted only by "qualified health care professionals" who would "oversee" review decisions by "personnel who are qualified and have received appropriate training...." Different deadlines would be set for making UR determinations in cases of prior, concurrent, and retrospective review, with special rules for emergency services, maintenance care, and post-stabilization care. The failure to meet any of these deadlines would constitute the denial of a claim.

Internal Appeals.
The House bill requires plans to provide internal appeals of denials of coverage and specifies in precise detail the procedures to be followed.¹⁰ If the issue involves a medical judgment, the review must be made by a physician. In general, an internal appeal must be decided within 14 days, but an expedited appeal process is required where the normal time frame for a decision "could seriously jeopardize the life or health of the [patient or his] ability to regain maximum function."

External Appeals. The bill also requires private plans, including fee-for-service insurance, to provide external appeals of decisions made in the internal appeals process, and it stipulates in detail how those appeals are to be handled:¹¹

• Qualified Review Entities. A plan is required to contract with one or more "qualified external appeal entities" to conduct the appeal. To qualify, an entity dealing with a group health plan must be certified (and periodically re-certified) by the U.S. Department of Labor or a private organization certified by DOL. The entity also must have sufficient legal and other expertise, as well as sufficient staffing, and meet such other requirements as DOL or the U.S. Department of Health and Human Services may set. If the plan is an insurance plan, the external review entity with which it contracts must be certified (and periodically re-certified) by the state insurance commissioner (or other official) or, in the absence of state action, by HHS or a certified private agency. DOL and HHS (or the state agency) must assure that the plan's process for selecting its external appeals entity does not create an incentive for a "decision [to be made] in a biased manner." These agencies also must audit a sample of the entity's review decisions to ensure they have not been made in a "biased" manner.

The external review is conducted by a panel of at least three physicians or health care professionals who are practicing actively, hold a non-restricted license, and are "appropriately credentialed" in the same specialty or subspecialty that typically handles the medical condition or treatment at issue. Since different types of physicians often treat the same condition (e.g., medical oncologists, surgeons, and radiation oncologists treat cancer), it is not clear from the language of the bill which subspecialty would be required.

It also is unclear what the requirement that the health care professional be "appropriately credentialed" means. Physicians are not credentialed in a specialty, although they can earn certification from a specialty board and may have been credentialed by a hospital to use its facilities or, as required by Medicare, by a Medicare+Choice plan to participate in the plan.

• Biased Independence. The appeal entity--and the "peers" it hires to conduct the reviews--must meet standards of independence that are complex as well as confused and one-sided. Compensation received by the entity or the peers it uses must be "reasonable." This means as a practical matter that compensation rates will be fixed by the two federal agencies with primary responsibility--the Department of Health and Human Services and the Department of Labor. Neither the peers nor the entity can have what is considered to be a conflict of interest, or have a "familial, financial, or professional relationship" with the insurer, the health plan, the plan sponsor (or any officer, director, or management employee of the plan or the insurer), the doctor who "provided" the treatment involved, the institution at which care "is provided," or with the manufacturer of a drug or medical supplier involved in the coverage decision. HHS and DOL can add other prohibited interests to the list.

A remarkable feature of the bill, however, is that there is no statutory prohibition against the peer reviewer's having a relationship with the patient involved. Since a coverage decision is likely to have much greater financial and personal impact on the patient than it would on a plan, a provider, or the supplier, this is surprising. The peer reviewer presumably could not own stock in the drug company whose drug was at issue or have privileges at the hospital where the care at issue would be provided, but could, it seems, be married to the claimant.

The bill also requires that there be no "apparent" conflict of interest (as determined by DOL or HHS). This open-ended standard, combined with the authority of HHS to issue regulations to list other prohibited relationships, gives the government extraordinary power to prohibit additional relationships--although the bill apparently contemplates that this would apply only on the provider-supplier side of the equation.

• Appeal Procedures. The external review process must be "fair," but the bill does not specify what that vague term means. It does not specify, for instance, whether witnesses may be called, whether they may be cross-examined, whether parties may conduct "discovery," whether testimony will be taken under oath, and whether transcripts of the proceedings must be made. All of these matters will be dictated by HHS and DOL.

The external review must be de novo. In common legal parlance, this means that the appeal starts from scratch as if the previous proceeding (here the internal review) had not taken place. However, the bill also requires the external review entity to "consider" the decision made by the internal reviewer. It does not say how much weight should be given to that decision. The standard of review is unclear. HHS and DOL will decide how the appeal is to be conducted. One can only imagine the intricacy these regulations may entail: HHS and DOL as lawgivers.

• The Medical Necessity Quandary. The only standard for review is that the external review entity must determine whether a denial of coverage "is in accordance with the medical needs of the patient involved (as determined by the entity)...." In making this determination, the external review body is explicitly authorized to disregard any provisions in the plan defining what is medically necessary: "In making such determination, the external appeal entity shall consider (but not be bound by) any language in the plan or coverage document relating to the definitions of the terms medical necessity, medically necessary or appropriate...."¹²

This constitutes a remarkable intrusion by the federal government into private arrangements. The final determination on what is covered by a plan is to be made by a peer review entity that is certified and regulated by--and answerable to--the federal government. This requirement would subject private health plans (and employers that pay for the plans) to an incalculable contingent obligation.

Moreover, "medical necessity" is a phrase that has no accepted meaning. It may sound like a standard, but it is not. The factors that go into determining what treatment will be provided in a particular case often are too subjective and too variable to be reduced to such a conclusory term.

Many health policy experts think highly of "outcomes" data--studies of the effectiveness of treatments in curing patients or in alleviating the conditions of disease. But while outcomes studies can provide valuable guidance, they are percentages based on the cases included in the study. By definition, the derived averages cannot match the characteristics of a particular patient. And even if the outcomes data were somehow to precisely match the characteristics of the patient, they do not automatically answer what is medically necessary. Is a treatment that has a 5 percent chance of success medically necessary? And what is success? Prolonging life for three months? There is no scientific answer to such questions. But, of course, these are precisely the kinds of questions that doctors, patients, and third-party payers must face.

The legislation would punt these crucial questions to the subjective consideration of external reviewers. The bill will turn the determination of what is covered over to government-controlled external reviewers who are directed to make their decisions regardless of what the private health plan and its enrollees agree upon. As a result, it will be virtually impossible for insurers to develop different products with different coverage at different prices. This development will deprive Americans of the ability to make their own choices on the tradeoff between price and level of coverage.

One-Sided Judicial Review.
Members of a plan who are dissatisfied with the external review body's decision can appeal to court, but the plan may not be able to. The bill provides that the determination of the external review body is "binding on the plan."¹³ It then states that "Nothing in this subtitle shall be construed as altering or eliminating any cause of action or legal rights or remedies of participants, beneficiaries, enrollees, and others under State or Federal law...including the right to file judicial actions to enforce rights."¹⁴ Thus, a decision of the external reviewer is "binding" on the plan, but the protection of rights does not guarantee judicial review for plans (unless the word "others" is interpreted to include the plan or other law is deemed to protect the plan's right to appeal).

Federal Penalties and Purges.
Instead of permitting plans to appeal to court, the bill would penalize them if they do not comply with the decision of the external reviewers.¹⁵ Any person who "causes such refusal" is liable to the patient for up to $1,000 a day. HHS or DOL would be able to assess a civil penalty (a maximum of $500,000) against any plan official who has demonstrated a pattern or practice of refusing to carry out the coverage decisions of the external review entities. And the government could ask the court to remove that official from office and bar him from any other "involvement" with that plan (and perhaps any other plan).¹⁶

Federally Established Grievance Process.
Each plan is required to establish a process for receiving and resolving the grievances of plan enrollees and providers on matters other than claims for benefits. This requirement would apply to fee-for-service plans as well as to managed care plans.¹⁷

Federally Required Point of Service (POS).
The bill attempts to regulate the supply of insurance products. Any insurer who offers a network plan to an employer group also would be required to offer (or arrange for) a plan that covers services that are not furnished through the network, unless some other plan is offering the group such a product.¹⁸ Consequently, an HMO that does not arrange for a POS product could, depending on the actions of others, be barred by law from selling to employer groups.

While the probable congressional intent behind this provision is to increase choice by mandating the supply of more alternatives for employer groups, it could have the opposite effect. For example, an HMO might not be set up to offer POS plans and thus would not be able to sell in markets in which others were not offering a POS plan.

Federally Directed Delivery of Care.
The bill subjects the delivery of care to federal regulation in a number of ways. For instance, if a plan provides for designation of a primary care provider, the member must be able to designate any such provider who is "available to accept" him.¹⁹

The plan also must "permit" each member to "receive medically necessary or appropriate specialty care, pursuant to appropriate referral procedures, from any qualified participating professional who is available."²⁰ Although the bill states that this requirement is subject to limits on the choice of specialists that are made clear to the plan members, the ability of the plan to provide for limits on the choice of specialists is explicitly overridden by another requirement²¹ that the plan provide a referral to a specialist if the patient "has a condition or disease of sufficient seriousness and complexity to require treatment by a specialist."²²

This statutory requirement is entirely circular: Specialists must be provided when they are needed. The bill defines "specialist" as a provider or institution that has "adequate expertise through appropriate training and experience...to provide high quality care in treating the condition."²³ The plan must provide a referral to a non-participating provider (at no extra cost to the patient) if it does not have an "appropriate specialist that is available and accessible" to treat the patient.²⁴

If a patient has an "ongoing special condition" (which includes a "degenerative" or "disabling" condition), he may require the plan to refer him to a specialist to coordinate his care where it "would most appropriately be coordinated by such a specialist." The bill, in addition, imposes specific requirements for standing referrals for patients who require "ongoing care" (it is unclear whether this is a different standard from having an "ongoing special condition").²⁵ It also contains special rules for access to obstetrical, gynecological, and pediatric providers.²⁶

A plan member with an "emergency medical condition," moreover, would be entitled to go to any emergency room (not just one participating in the plan's network).²⁷ If he goes to a non-participating hospital, meaning a hospital that does not have a reimbursement agreement with the plan, he cannot be charged more than if he had gone to a participating hospital, even if the participating hospital is equally convenient. In addition, the patient has the right to receive "maintenance care" and "post-stabilization care" at that or apparently any other non-participating hospital at no extra cost, and the plan must comply with "guidelines" issued by the Medicare bureaucracy.

The bill also requires a plan to provide "continuity of care" for specified periods of time.²⁸ If a physician is treating a plan member who has an "ongoing special condition" and the provider is no longer participating in the plan (for reasons other than fraud or failure to meet the plan's quality standards), the plan must continue to provide coverage as if the physician were still participating. Beyond this, if the contract between a group health plan and an insurer is terminated, the patient can continue to receive coverage for treatment by the provider who had been treating him under the plan. In this circumstance, the insurer will not be receiving premiums on behalf of the patient, but will be obligated to continue to pay for care for the patient.

Federal Prescription for Drugs.
If a plan uses a formulary for prescription drugs, the bill specifies how the plan must develop and apply the formulary.²⁹ The plan must ensure that the participating physicians are involved in developing the formulary and that the formulary provides for exceptions when a non-formulary alternative is "medically indicated."

Federal Requirements for Patient Care in Clinical Trials.
Plans "may not deny" their enrollees' participation in clinical trials and must pay routine patient costs for services performed in connection with the trial.³⁰ This requirement applies to fee-for-service as well as managed care plans. HHS or DOL would determine what costs the sponsor of the trial must pay and what the plan would be responsible for paying. That itself would involve a complex process.

To be eligible for this protection, the patient must have a serious or life-threatening illness "for which no standard treatment is effective." What is "standard" and what is "effective" are not defined. The trial must offer "meaningful potential for significant clinical benefit for the individual." Not only are these terms also undefined, but they also call into question whether the patient could be a member of a control group.

The requirement applies only to clinical trials approved and funded (although the bill does not say to what extent) by the National Institutes of Health (or one of its cooperative groups or centers), the Department of Veterans Affairs, or the Department of Defense. It does not apply to trials sponsored by pharmaceutical companies to test the safety and efficacy of new drugs for approval by the Food and Drug Administration.

Federal Information Requirements.
The House legislation would require plans to give specified types of information to enrollees in the stated circumstances. The requirement applies to fee-for-service plans, but a number of the items may not mesh with the way such plans operate.

The section of the bill detailing these requirements is more than seven pages long.³¹ Among the items a plan must describe are the "service area" of the plan; the "number, mix, and distribution of providers under the plan"; whether a participating provider is available to accept new patients; how the plan "addresses the needs of [members] who do not speak English or who have other special communications needs in accessing providers"; the "appropriate use" of emergency services, including the 911 system; and the insurer's loss ratio (as defined by HHS). Additional items of information must be made available upon request, including a description of the plan's utilization review program, the method of physician compensation it uses, and a description of the "credentials" (the ambiguity and inappropriate use of this term was discussed above) of participating providers.

Federal Control of the Physician-Plan Relationship.
The House bill would allow the federal government to regulate the relationship between the plan (including fee-for-service coverage) and participating physicians in several ways. For instance, it would void any provision of a contract between a plan and a health care provider that restricts the provider's ability to advise a patient about his health status or medical treatment--as long as the professional is acting within the lawful scope of his practice.³² The federal government would be able to review every contract and consider whether any provision has the effect of restricting a doctor's ability to give advice.

The bill would prohibit a plan from discriminating, with respect to participation by providers or payments to them, on the basis of license or certification under state law.³³ It is unclear whether this language would prevent the plan, for example, from making a blanket determination to pay registered nurses more than practical nurses or from paying board-certified physicians more than others. It also is unclear whether it would prohibit plans from requiring that its physicians (or those in certain categories) be board certified. And it is unclear as to what extent the plans would be able to take advantage of the flexibility allowed to establish "any measure designed to maintain quality and control costs consistent with the responsibilities of the plan." HHS and DOL will decide.

The bill would prohibit retaliation by a plan against anyone for participating in a plan's utilization review, grievance, or appeal proceeding.³⁴ It would further prohibit retaliation against a "protected health care professional" for disclosing information about care to an "appropriate" public or private regulatory or private accreditation agency if he acted in "good faith" and followed "reasonable" internal procedures of the plan or provider before making the external disclosure. The requirement of prior internal disclosure would not apply if the disclosure relates to an "imminent hazard of loss of life or serous injury to a patient," is made to an accreditation body, or is in response to a governmental investigative inquiry. On the other hand, the protection for external disclosure would not apply if it would violate law or impair "confidentiality of communications" provided by law.

The bill adopts the Medicare rules on incentive plans for physician compensation.³⁵ Those rules prohibit payments, directly or indirectly, that would be an inducement to reduce or limit medically necessary services. They limit the extent to which the plan can put the physician at financial risk for the cost of care through capitation arrangements, withholds, or bonuses. HHS and DOL would thus have final authority over the validity of many managed care plans' compensation arrangements with their physicians.

An Attack on Fee-For-Service Coverage

Most of the House bill's requirements, as noted above, apply to fee-for-service coverage as well as to managed care plans. But some do not, which makes it necessary to define fee-for-service coverage.

The House bill would create a federal definition of fee-for-service coverage. Under this bill, fee-for-service coverage would (1) reimburse providers "on the basis of a rate that is determined by the plan...on a fee-for-service basis without placing the provider at financial risk"; (2) not vary a provider's reimbursement "based on an agreement to contract terms and conditions or the utilization of health care item or services relating to such
provider"; (3) pay all providers who are lawfully authorized to provide the service and agree to the terms set by the plan; and (4) not require prior authorization before providing coverage. The failure to meet any one of these specified conditions would disqualify a plan as a fee-for-service plan.36

To fall within this statutory definition, a plan could not exclude providers on the basis that they had been prone to over-prescribe treatments. Nor, it seems, could it exclude them on the basis of character or competence, so long as they had a license to practice. And doctors or other providers could not negotiate rates with the plan; hospitals and physicians could only choose between accepting and rejecting rates offered by the plan on a take-it-or-leave it basis.

By defining it, the federal government would be regulating how the fee-for-service sector operates. Plans, doctors, and hospitals may find that the definition unduly restricts their activities, and fee-for-service plans may not continue to qualify as such.

On the other hand, there may not be much advantage in qualifying, and plans may not attempt to meet the definition of fee-for-service. The only benefit of being termed a fee-for-service plan is that the plan would not have to offer a point-of-service option and would not have to meet the access requirements in the bill.³⁷ A plan might find that this exception is not worth very much. Fee-for-service plans by definition would be POS plans. And since they typically do not limit referrals to specialists, they would appear to meet the access provisions without having to change the way they operated. Since a fee-for-service plan already meets the legislative requirements that it would be exempt from, it may not want to give up the flexibility in other areas that would be necessary to qualify.

At the same time, even if it did qualify as a fee-for-service plan, it would be subject to the other requirements of the bill that could make it impossible to operate. The provisions detailing how utilization reviews, as broadly defined by the bill, are to be conducted, the prescriptive requirements for the internal and external review process, the grievance process requirements, and the requirements on information that must be given to enrollees would not fit fee-for-service operations easily.

In short, a complicated congressional scheme intended to restrict the operations of managed care plans and to preserve more of the attitudes and operations of fee-for-service coverage in health care may instead result in the destruction of fee-for-service health care.

Fuzzy Boundaries Between State and Federal Regulation.
The House language exacerbates the confusion over what types of state regulation affecting the different types of employer plans would be preempted. One paragraph says that the regulatory sections of the House bill do not "affect or modify" the current Employment Retirement Income Security Act (ERISA) preemption.³⁸ Yet another paragraph applies a different standard for health insurance companies: States may impose any requirement if it applies "solely" to insurers, "except to the extent that such standard or requirement prevents the application of a requirement of this title [the regulatory portion of the bill]."³⁹ If a state requires plans to conduct utilization reviews in a different manner, the question would be whether this review "prevented" an insurer from complying with the provisions of the House bill. Moreover, the provision introducing the federal standard for insurers would be "subject to" the paragraph providing that the bill does not change the existing ERISA preemption. With respect to insurers, therefore, it is not clear whether the standard for insurers would remain as it is today or change.

Summarizing the Regulatory System

The Patients' Bill of Rights, in either the House or the Senate version, would create a new regulatory platform and impose hundreds of regulatory requirements and conditions on private-sector plans. To summarize the nature of this regulation:

• Policy goals would be turned into regulatory requirements. Both bills would turn laudable goals (such as appropriate access to specialists, good information, and fair coverage decisions) into regulatory requirements. And they would do so without balancing other important considerations, such as the cost of reaching the goals and whether the plans and their enrollees should be free to develop different balances and different ways of reaching the desired result. Freedom, diversity, and flexibility are thus ignored and subordinated to a politically driven and bureaucratically enforced view of what is appropriate.

• The new rules would be rigid. The legislation standardizes the definitions and goals and makes these a matter of governmental direction rather than based on plan and member agreement. Whether a patient should be referred to a specialist, for example, would be determined by government regulation. Referrals would have to comply with a rulebook, which of necessity would be inflexible and incapable of dealing with the variables and ambiguities of real life.

• Statutory ambiguities would expand bureaucratic control. The regulatory nature of the legislation would be worrisome enough if the standards were clear. But they are not. Most of the required conduct is phrased in ambiguous terms, such as "appropriate," "sufficient," "available," "valid," "qualified," "fair," "medically necessary," "medical needs," "professionally recognized standards," and "professional consensus." This means the government will have to issue detailed regulations attempting to define these terms, and plans and providers will have to expend great effort and substantial resources attempting to comply. Then the
  federal agencies will attempt--by directives, instructions, press releases, letters, and other informal mechanisms--to define the undefinable.

This complex regulatory process will increase plan costs. It is also likely to reduce the number of plans willing to participate in the market.

Ironically, while imposing all of this red tape, the House bill piously declares that there is already too much regulation in the health care field:

Congress finds that continually increasing and complex Government regulation of the health care delivery system has proven ineffective in restraining costs and is itself expensive and counterproductive in fulfilling its purposes and detrimental to the care of patients.⁴⁰

More Support for Lawsuits

The House bill encourages the expansion of private litigation against health plans and employers. Each regulatory requirement would create a legal right that could itself be a cause of action,⁴¹ or that could be used as evidence of the applicable standard to support a claim for damages for an adverse outcome.

The House bill provides that "a failure to provide benefits (including items and services) required to be provided under" the regulatory sections of the bill would constitute a denial of a claim.⁴² If a patient suffers an adverse event in the course of receiving health care, he can readily allege some violation of the bill's requirements and argue that the violation of this standard caused his injury. He would be able to sue for damages resulting from the violation (even if the action would not otherwise have been negligence).

For example, a health plan could be sued on the allegation that it did not "make or provide for a referral to a specialist" quickly enough or that the specialist consulted did not have "adequate expertise."⁴³ This of course would be judged in hindsight by a jury deciding between a faceless corporation--an allegedly malodorous insurance company at that--and a sympathetic patient or his family who suffered a bad outcome.

The sponsors of the bill attempted to limit the ability of patients to bring private actions. The provision, however, appears to be self-contradictory.⁴⁴ In any event, it applies only to actions brought "under" ERISA, and not to actions brought under state law. Since the bill would repeal the current ERISA preemption of state law, suits could be brought against plans and employers under state law. Nothing in the bill prevents the use of violations of the obligations it imposes to support lawsuits for damages that result from adverse events in the course of health care.

The Role of ERISA

The federal government traditionally has not regulated health insurance; regulation has been largely confined to the states. In 1974, however, Congress enacted ERISA, which imposed federal regulation on employer benefit plans. Although the focus of ERISA was on pension plans, the Supreme Court has interpreted ERISA to apply to health coverage provided by the employer. Because it provides federal regulation of the operation of employer plans, ERISA preempts conflicting state laws that relate to benefit plans--not only HMOs, but also fee-for-service plans and other types of arrangement. State law encompasses statutes, administrative regulations, and--most important for the purpose of this analysis--common law applied (and in some cases created) by the courts of the state.

ERISA, however, does not preempt non-conflicting state laws that relate to health insurance. If an HMO (or any other type of plan) is considered an insurance plan, it is subject to state law, and it can be sued under state law. Nor does ERISA prevent enrollees of plans from suing their doctor or hospital for malpractice under state law. It does not prevent plans from being held liable for their own negligence in delivering care or for the
malpractice of providers where state law provides vicarious liability, for instance, if the negligent doctor is employed or controlled by the plan.⁴⁵

• Coverage Disputes. The main issue with respect to the effect of the ERISA preemption has arisen in suits brought against employer plans for denial of coverage. The employer, or a third-party administrator managing the plan, may reject coverage because it determines that the service is not medically necessary in the particular circumstance. This in effect raises a contract question: Does the plan that the employer provides to the employee cover the service at issue? The plan may be fee-for-service, a preferred provider organization (PPO), an HMO, or some other form of managed care. If the plan denies coverage, the plan member can pay for the treatment and then sue the plan. Indeed, contract law may require the patient to mitigate damages by doing so.

As a matter of common sense, a patient typically would prefer to get the treatment that he feels is necessary even if he must pay for it and then seek reimbursement from the plan. This would be preferable to forgoing treatment and suing for damages alleged to be caused by the lack of treatment. There are cases, of course, where it is not financially possible for a patient to pay for the disputed treatment. But in other cases, the issue involves a test or an extra day in the hospital; people with employer-provided insurance who by definition are working (the ERISA preemption only applies to employer-provided coverage) are likely to be able to finance the cost of these services while appealing the denial of coverage.

ERISA provides that if a plan denies coverage, the plan member may sue "to recover benefits due to him under the terms of" the plan and for equitable relief. It preempts any action for denial of coverage under state law, not only for self-funded plans, but also for all employer plans.

• No Consequential Damages. When the employee sues for denial of coverage, therefore, he can recover the benefit due him, but he cannot sue for the kinds of consequential damages that could be awarded in a tort case (like a claim for malpractice against a doctor). In tort cases, state laws provide awards for non-economic consequences of the injury, such as pain and suffering, mental distress, and hedonic damages (loss of the pleasure of life). In addition, state law may permit the plaintiff to recover punitive damages for the express purpose of punishing a provider whose conduct is found by the jury to be outrageous. ERISA prevents the courts from awarding these kinds of damages for denial of coverage. ERISA prevents contract-like disputes over the terms of coverage from being turned into tort-like suits for recovery not merely of the benefit, but of non-economic consequential damages and punitive damages as well.

Eliminating the ERISA Preemption

The House bill would remove the preemption that has required coverage disputes to be resolved under ERISA rather than under state law. It would not itself create law that provides for non-economic damages in coverage disputes, but would defer to whatever the state law is. It would permit, but not require, state legislatures and state courts to turn coverage disputes into malpractice-like lawsuits.

Although on its face this appears to be simply a matter of letting state law apply, in reality enactment of the House bill would set in motion a dynamic and mutually iterative process. If Congress enacts and the President signs this legislation, it would send a signal to plaintiffs' lawyers, state legislatures, and state courts that the federal government is sympathetic to the approach of treating coverage disputes as torts.⁴⁶ It will encourage the legislatures to enact, and the state courts to discover, such laws.

The Enormous Risk Employers Would Face.
The House bill gives the states maximum discretion by providing that ERISA will not affect any action that can be brought under state law against "any person" for personal injury or wrongful death "in connection with" the provision of--or that "arises out of the arrangement for" the provision of--"insurance, administrative services, or medical services" by that person or others.⁴⁷ Thus, the employer himself, as well as the plan, could be sued for damages resulting from denial of coverage.

The bill, however, purports to protect the employer from suit. It provides that the repeal of the ERISA preemption does not authorize a claim against a plan or an employer sponsoring the plan unless the lawsuit is based on its "exercise...of discretionary authority to make a decision on a claim for benefits...in the case at issue."⁴⁸ Thus, the employer ostensibly can avoid litigation by turning over administration of the plan to a third party and playing no role in its management.

But even if employers were willing to take this hands-off approach to their plans, they are likely not to be protected by this provision. It will be interpreted and applied by the courts, and courts that have been most receptive to causes of action for non-economic damages will be the most aggressive in finding ways around the protection provided by the bill. Employers simply cannot count on the courts to protect them from suit.

It is impossible to predict what interpretative gloss the courts will put on this provision, but one can foresee possible avenues they might take. They could, for instance, hold that if an employer exercised discretionary authority in one instance, he could be liable even where he did not make a coverage decision in the case at issue; the failure to become involved where he could have acted to direct that the service be covered, under this line of thinking, would itself be an exercise of discretionary authority. Or a court might find that the exercise of discretionary authority by a third-party plan administrator was attributable to the employer on the theory that the administrator was the employer's agent and that the employer could be held directly liable for the actions of his agent.

Employers who sponsor plans for their employees, therefore, would put all their assets (not merely those in the plan) at risk. They would be subject to liability for punitive and other non-economic damages, depending on state law and the courts' interpretation of the scope and meaning of the reservation of ERISA preemption in the Patients' Bill of Rights.

The employer's risk, however, is not limited to being held liable. Even if an employer ultimately avoids liability by demonstrating that he did not exercise discretionary authority, he will be embroiled in litigation. He must prove this defense. The bill states that it does not authorize suits in the stated circumstances, but that does not mean that employers will not be sued. Employers will have to establish that they qualify for the continued preemption against state law because they did not exercise discretionary authority--as that phrase is ultimately (and no doubt variously) interpreted by the courts. They will have to undergo the expense, distraction, and harassment of litigation in order to do so.

This process will include intrusive and expensive "discovery" about the employer's operations in connection with the plan. The plaintiff could obtain the employer's and the plan administrator's documents and ask questions at deposition concerning communications between them. He could conduct this discovery in an effort to prove the exercise of discretion or the existence of an agency relationship or to establish whatever other theory is invoked to avoid the protection included in the bill. This means that employee records maintained by the employer and the plan administrator would be examined. They are likely to be exposed publicly.