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Seventh Circuit Upholds Illinois Law Requiring HMOs to Provide Independent Review of Coverage Denial Decisions


HLD, v. 29, n. 1 (January 2001)

Seventh Circuit Upholds Illinois Law Requiring HMOs to Provide Independent Review of Coverage Denial Decisions

Beginning in 1996, Debra C. Moran began experiencing pain, numbness, loss of function, and decreased mobility in her right shoulder. Moran, an insured of Rush Prudential HMO, Inc. ("Rush"), sought treatment for these symptoms from her health maintenance organization ("HMO") primary care physician. A non-network specialist diagnosed plaintiff with thoracic outlet syndrome and recommended surgery. Rush denied coverage for the microneurolysis surgery recommended by the specialist but offered to cover a less expensive surgery to be performed by a Rush-affiliated physician. Moran appealed the administrator's decision and underwent the out-of-network microneurolysis surgery, paying for the surgery herself.

A month before the surgery, Moran made a written demand to Rush to comply with the Illinois Health Maintenance Organization Act ("HMO Act"), 215 Ill. Comp. Stat. Ann. 125/4-10, which requires HMOs to provide a mechanism for review by an independent physician when the patient's primary care physician and HMO disagree about the medical necessity of a treatment proposed by the primary care physician. When Rush failed to comply, Moran sued Rush in state trial court, seeking a court order requiring the appointment of an independent physician. Rush removed the claim to federal court, arguing that the Employee Retirement Income Security Act ("ERISA") pre-empted her claim. After additional proceedings, including a remand to state court and another removal to federal court, the federal district court granted summary judgment to Rush, holding that ERISA pre-empted HMO Act � 4-10 and plaintiff's claims based on that section. The court also concluded that Rush's decision to deny coverage was not improper. Plaintiff appealed.

The Seventh Circuit first held that removal of Moran's state court claims based on HMO Act � 4-10 was proper and agreed with the federal district court that Moran's state law claims were properly recharacterized as claims for benefits under ERISA � 502(a)(1)(B) and, consequently, were completely pre-empted. The Seventh Circuit found that Moran's claims satisfied the first two Jass factors to determine whether ERISA completely pre-empts them. First, she was a plan participant and was, therefore, eligible to bring an action under � 502(a)(1)(B). Second, she was seeking to enforce her right to a benefit under her plan, in this instance, payment for the surgery. In addition, Moran's claims also met the third Jass factor because they required an interpretation of the insurance contract governing Moran's right to the independent review. The Seventh Circuit stated that because Illinois laws were automatically incorporated into all contracts of insurance in that state, the provisions of � 4-10 of the HMO Act were incorporated into Moran's insurance contract. As a result, the extent and enforceability of Moran's right to an independent review necessarily required an examination of the contract. Consequently, Moran's claims properly were recharacterized as claims for benefits under ERISA's civil enforcement provision, � 502(a)(1)(B), and removal had been proper.

With respect to Rush's pre-emption defense, the Seventh Circuit held: (1) that Moran's claim for reimbursement was actually a claim for benefits under � 502(a)(1)(B) to obtain enforcement under the plan, (2) that � 4-10 of the HMO Act, incorporated into the plan by operation of law, entitled Moran to independent review, and (3) that Moran was entitled to summary judgment in her favor because the independent reviewer determined, in accord with Moran's primary care physician, that the surgery performed on Moran was "medically necessary."

The Seventh Circuit determined that � 4-10 of the HMO Act avoided pre-emption within the saving clause because it regulated insurance "under a common sense understanding" and because it met at least two of the McCarren-Ferguson factors. Under � 514 of the statute, ERISA pre-empts some state laws. For example, � 514(a), notes that state laws are pre-empted "to the extent that those laws 'relate to any employee benefit plan.' " However, ERISA's saving clause, � 514(b)(2)(A), qualifies � 514(a) by excepting state laws from pre-emption that "regulate [ ] insurance." The court agreed with the parties that � 4-10 of the HMO Act "relates to" ERISA plans because its provisions were connected with such plans. The court held that the HMO Act did not make "reference to" an ERISA-governed employee benefit plan and that the HMO Act applied to HMOs regardless of whether a patient's coverage was through an ERISA plan and that the law applied to HMOs regardless of whether a patient's coverage was through an ERISA plan. The Seventh Circuit found that � 4-10 of the HMO Act required HMOs, including those that are service providers for ERISA plans, to provide an independent review mechanism and, should the independent reviewer agree with the primary care physician, to pay claims that otherwise might not have been paid under the plan. As a result, the appeals court found that � 4-10 of the HMO Act had an effect on how benefit determinations were made and, therefore, squarely fell within ERISA's pre-emption clause.

The appellate court went on to find that � 4-10 of the HMO Act fell within the savings clause because it regulated insurance "under a common sense understanding." The panel noted that � 4-10 of the HMO Act was directed at the HMO industry as insurers and that the Act's provisions went to the core of the relationship between the insurer and the insured by mandating a contract term between parties, whether that term were to be characterized as creating a "procedural" or "substantive" right, the court found that the HMO Act was "integral" to the insurer/insured relationship. The Seventh Circuit also determined that � 4-10 satisfied the second McCarran-Ferguson factor because � 4-10 created a mandatory term in the insurance contract and, thus, "change[d] the bargain between insurer and insured." It satisfied the third McCarran-Ferguson factor because that section applied only to HMOs that acted as insurers. As a result, the law was limited to entities within the insurance industry. The Seventh Circuit also determined that the "deemer clause," � 514 (b)(2), an exception to the savings clause exception, was inapplicable to the case because the HMO plan was not self-funded.

Next, the Seventh Circuit determined that � 4-10 of the HMO Act might not be pre-empted because that section of the HMO Act could not be characterized as creating an alternative remedy scheme that conflicted with � 502(a). First, the Seventh Circuit noted that the independent review scheme created by the Illinois statute was not tantamount to the relief offered under � 502(a)(1)(B) of ERISA. As opposed to recovering benefits, � 4-10 of the HMO Act simply established an additional internal mechanism for making decisions about medical necessity and identified who would make that decision in those instances when the HMO and the patient's primary care physician disagreed about the medical necessity of a particular course of treatment. The appeals panel stated that rather than eliminating the review procedures established by the plan, � 4-10 simply added to the contract, by operation of law, an additional dispute resolving mechanism, and it concluded that the addition of the statutorily mandated provision in the contract failed to impermissibly alter the deferential standard of review required by the language of the plan. The court held that the statutorily required provision of the plan required that the decision of the independent review physician be followed, and that it would be an abuse of discretion on the part of the administrator not to observe the command of that provision. As a result, the Seventh Circuit reversed the district court's judgment.

Three judges dissented from the Seventh Circuit's decision to deny hearing en banc, noting that the ruling created a square conflict with the Fifth Circuit's decision in Corporate Health Ins., Inc. v. Texas Dep't of Ins., 215 F.3d 526 (5th Cir. 2000), see HLD, v. 28, n. 8, at p. 27.

Moran v. Rush Prudential HMO, Inc., 230 F.3d 959 (7th Cir. Oct. 19, 2000) (20 pages).

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