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State vs. federal rules at issue in regulation of HMOs

Mark Reutter, Business & Law Editor
217-333-0568; mreutter@illinois.edu

12/1/2005

Robert F. Rich
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University of Illinois Photo
In an empirical examination of federal and state court cases arising from disputes over HMO regulation, the Illinois team, led by Robert F. Rich, a professor of law and of political science, concluded that “our judicial institutions cannot make up their minds about whether to support or restrain managed care.”

CHAMPAIGN, Ill. — The rise of managed health care has brought into focus a clash between federal and state jurisdiction over the regulation of health maintenance organizations, legal scholars at the University of Illinois at Urbana-Champaign conclude.

The dispute centers on two provisions of the 1974 Employee Retirement Income Security Act (ERISA), which regulates health and disability benefits covering more than 75 million Americans with employer-based health insurance.

The first provision says that federal regulation shall “supersede any and all state laws insofar as they may now or hereafter relate to any employee benefit plan.” But another section provides that nothing in ERISA “shall be construed to exempt or relieve any person from any law of any state which regulates insurance.”

In an empirical examination of federal and state court cases arising from disputes over HMO regulation, the Illinois team, led by Robert F. Rich, a professor of law and of political science, concluded that “our judicial institutions cannot make up their minds about whether to support or restrain managed care.”

Because nearly all Americans with employer-based health insurance are now enrolled in some form of managed care, the lack of clarity over who regulates HMOs has made protection of consumers a confusing area of the law.

“As a consequence of ERISA’s structure and the record of judicial interpretation over the last 20-plus years, states interested in strict health-care regulation or health-care reform must either design their health-care reform efforts within the framework of ‘general legislation’ having indirect effects on ERISA entities or operate within the ‘insurance’ regulation framework provided by the Act,” Rich and colleagues wrote.

The team’s findings were reported in the Elder Law Journal, published by the Illinois College of Law.

The jurisdictional issue has stymied attempts by states to regulate HMOs and has left unresolved such questions as whether HMOs are liable for malpractice claims and punitive damages.

Critics charge that the broad immunity given to HMOs and insurance companies through ERISA encourages arbitrary denial of medical treatments to patients based on cost considerations alone.

“The increased litigation involving managed care organizations is part of the backlash from the general public, physicians and the media against managed care,” the authors wrote.

The confusing array of legislation and regulation, as well as the clashing decisions of state and federal courts, point to “a disjointed national health policy,” the authors conclude.

Either Congress or the Supreme Court “needs to develop a more just, consistent and fair system for the administration and regulation of health insurance and health-care benefits,” according to the article.

Rich is the director the Illinois Institute of Government and Public Affairs. The article, co-written by Christopher T. Erb and Louis J. Gale, both Illinois students, is titled “Judicial Interpretation of Managed Care Policy.”