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A Quiet Revolution: Law as an Agent of Health Systems Change. M. Gregg Bloche, M.D., J.D. Professor of Law, Georgetown University Adjunct Professor, Bloomberg.

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Presentation on theme: "A Quiet Revolution: Law as an Agent of Health Systems Change. M. Gregg Bloche, M.D., J.D. Professor of Law, Georgetown University Adjunct Professor, Bloomberg."— Presentation transcript:

1 A Quiet Revolution: Law as an Agent of Health Systems Change. M. Gregg Bloche, M.D., J.D. Professor of Law, Georgetown University Adjunct Professor, Bloomberg School of Public Health, Johns Hopkins University

2 How Do Law & Politics Shape Health Systems Change? The Standard Wisdom: Law & regulation influence market actors conduct in 3 ways Command-&-Control: Law requires some behaviors & prohibits others. Incentives: Law rewards & discourages conduct by borrowing tools from the marketplace (examples: tax incentives & Medicare payment rules). Levels of Enforcement: Law does these things only to the extent that legal actors (public officials & private litigants) monitor compliance & punish violators.

3 It Follows that … You win legal & regulatory disputes by persuading legal decisionmakers to do things your way. If the judge throws out the plaintiffs case against you, or if you prevail on appeal, youve won. If a bill you dislike fails to become law, youve won.

4 Im going to tell you a different story: Yes, winning & losing matter – the laws rules & incentives influence actors behavior. But the influence of legal conflict on market actors perceptions matters more. The fate of managed care is a dramatic example.

5 A Case in Point: Oct. 4, 1999: A legal dream team led by David Boies files a consumer class action suit against Humana, demanding billions of dollars in damages for failure to honor contractual promises to provide medically necessary care. Within weeks, similar suits are filed against other large MCOs Legal observers predict these suits failure. 3 years later, a federal court dismisses the suits, and the dream team decides not to appeal.

6 But … Within hours of the filing of the complaint against Humana, managed care share prices plunged by as much as 10 percent, as investors panicked. Press coverage fed consumer anxiety about managed care. Health plans heard reassuring news from their lawyers but worrisome news from their investment bankers and marketing strategists.

7 The Managed Care Backlash Consumer class action suits were part of a broader legal assault on MCOs through the late 1990s. Highly-publicized lawsuits for the consequences of care denied Campaign to get Congress to pass a Patients Bill of Rights, expanding MCOs liability and limiting their ability to withhold coverage Similar campaigns at the state level

8 Winning the Battles Through the 1990s, MCOs successfully resisted this legal & political onslaught: Consumer class actions failed. MCOs mostly preserved their immunity, under ERISA, from suits for damages for coverage denials. Federal Patients Bill of Rights proposals repeatedly failed. Many statehouses enacted MCO regulation, but in such weakened form that it had little impact on health plans business practices.

9 Losing the War? Yet by the end of the 1990s, MCOs were rapidly retreating from aggressive cost-control: Pre-authorization review & frequent coverage denial. Selective contracting with low-cost providers. Financial rewards to caregivers for ordering fewer tests & treatments. Through the mid-1990s, these methods held medical cost increases to little more than the overall rate of inflation. MCOs prevailed, for the most part, against legal and legislative challenges to these methods. But victories in court, Congress, & statehouses werent enough.

10 What Happened? The Market & the Law: MCOs won their legal battles, but remote HMO bureaucrats & horrific consequences of care denied became the stuff of popular culture. Dramatic news accounts of MCO misdeeds. TV & film, political stump speeches, Leno & Letterman. Consumer rebellion, in the marketplace, against tightly- managed care. Fear of regulatory backlash led Wall St. to discount the value of MCO shares. To survive, MCOs abandoned the tactics they had successfully defended in Congress & in court.

11 Why? How did health care consumers come to fear & loath managed care? The average MCO subscriber was highly unlikely to have had a horrific managed care experience. But legal conflict produced a stream of press reports of MCO misdeeds. Legal conflict was the main source of such stories, & it was a vehicle for their spread.

12 A Market for Exposure Plaintiffs lawyers, public officials, health care providers, and journalists had varied & strong incentives to expose gaps between what managed care promised & delivered. Promises of high-quality, medically necessary care contrasted unpleasantly with accounts of lifesaving care denied, gag rules, and rewards to physicians for withholding care. The Patients Bill of Rights debate, with its associated Congressional hearings and political advertising, fed popular impressions of the HMO bureaucrat as an icon of greed and indifference.

13 Perception & Reality: Consumers Consumers reacted with fear & anxiety, perhaps out of proportion to MCOs actual sins. In the full-employment economy of the late 1990s, this translated into pressure on employers to abandon tightly-managed care.

14 Perception & Reality: Investors Investors saw legal conflict as business risk. Although MCOs prevailed year after year over federal Patients Bill of Rights proposals, investors took the risk of Congressional action into account. Investors took the threat of class action & other liability into account, perhaps out of proportion to actual risk. The novelty and uncertainty of these risks made their overvaluation more likely. Investors responsiveness to each others negative expectations amplified the downward pressure on MCO share prices.

15 Perception & Reality: MCO Executives In response to these converging pressures – and to their own concerns about legal risk, health plan executives profoundly changed the way they did business. Some industry observers today speak of the death of managed care. Thats not quite right: the health insurance industry is now thriving. But it is thriving in part because it is no longer managing care – certainly not to the degree that it did 8 to 10 years ago.

16 The U.S. Supreme Court & Health Systems Change A bit after-the-fact, the Justices have entered the fray. Theyre re-writing the law of ERISA pre-emption – and redefining the scope of state regulatory authority over health plans. Upwards of 160 million Americans obtain health coverage through the workplace and are thus affected by ERISA. ERISAs drafters didnt anticipate the rise of managed care, but the statute they wrote has become a virtual constitution for the medical marketplace.

17 Some Black-Letter Basics ERISA defines the boundaries between state and federal regulatory authority It does so by pre-empting some state statutes, regulations, and common law But ERISA imposes few substantive regulatory requirements on health plans (or employers) So, in practice, ERISA pre-emption means deregulation

18 Some Political Irony Conservative judges who disfavor regulation of medical and other markets tend to favor greater state sovereignty and reduced federal authority Justice Scalia is the leading example But in the ERISA context, federal pre- emption means deregulation, so conservative judicial goals are at war with each other

19 Back to Black Letter Basics: ERISA Pre-emption As a Defense ERISA Section 514 pre-empts all state laws that relate to an employee welfare benefit plan. BUT: Section 514s so-called insurance savings clause makes an exception: it saves (from pre- emption) state law that regulates insurance. BUT: Theres an exception to this exception: The so-called deemer clause says that employee welfare benefit plans cant be deemed insurers; thus employers can escape the insurance savings clause by self-insuring.

20 But Its Not So Simple In practice, of course, the courts make the rules ERISAs language is vague, to the point of meaninglessness, about: –What it means to relate to an employee welfare benefit plan –What it means to regulate insurance

21 It Gets Even Messier The Other ERISA Pre-emption: ERISA Section 502(a) provides a federal remedy for the value of benefits denied. Section 502 (a) therefore completely pre-empts state law remedies for denial of benefits. This means that defendant health plans can remove state lawsuits to federal courts on 502(a) grounds and ask that plaintiffs be allowed to pursue only their 502(a) remedies. The Catch: Courts have uniformly construed 502(a) to exclude claims for consequential damages (e.g. lost wages, pain & suffering). Thus, for example, a plaintiff who claims that her HMOs refusal to authorize a $1000 MRI scan resulted in failure to diagnosis a tumor in time to save her life can recover – under 502(a) – only the $1000.

22 Summing Up: The Pre-2000 Story State tort & contract remedies for MCOs denials of care relate to employer welfare benefit plans and are therefore pre-empted. The key distinction: MCOs denials of care are plan administration, not medical care, decisions. You could sue doctors & hospitals in state court for negligent provision of medical care. But you couldnt sue your HMO in state court for denying you care. You could sue in federal court, under ERISA, but only for the cost of the care denied. You couldnt recover damages in state or federal court for the consequences of care denied.

23 The Pegram Revolution June 2000: For the first time, the U.S. Supreme Court decides a case, Pegram v. Herdrich, involving MCO cost containment policy The Issue: Does ERISA limit MCOs ability to offer financial rewards to physicians who practice frugally? MCOs won, or so they thought: The Court held that MCOs incentives to physicians to withhold care are not subject to ERISA regulation BUT to get to this holding, the Court put mixed medical and plan administration decisions (involving both patient care and use of MCO resources) out of ERISAs pre- emptive reach

24 The Pegram Revolution, Cont. And, the Court declared its intention to henceforth read ERISAs pre- emptive provisions more narrowly in the managed care context. A week after the Court decided Pegram, it remanded another case, involving allegations of negligent pre-authorization review by a health insurer, to a lower court for reconsideration in light of Pegram. The strong suggestion – Pegram applies to utilization review. Preauthorization decisions by health plans are mixed medical and administrative decisions; thus they fall outside ERISAs pre-emptive scope. Cost-conscious medical judgments – at the bedside and in the utilization management suite – were put squarely in the sight of state tort lawyers.

25 Independent Review of Coverage Denials State laws requiring independent review of coverage denials posed a distinct legal question. By 2002, 40 states had enacted such laws. MCOs argued independent review is a legal remedy & is therefore pre- empted by 502(a). June 2002: A divided Supreme Court rejected this argument in Rush-Prudential HMO v. Moran (decided 5- 4). The Courts stated reasoning: Independent review involves medical judgment, not adjudication. It is akin to a 2 nd opinion and thus doesnt overlap with ERISA 502(a) remedies.

26 The Upshot: Victory for State Oversight of Coverage Decisions Coverage decisions can be overruled by independent medical reviewers, applying professional standards of care to interpret medical necessity provisions in health insurance contracts. Looming prospect of tort liability for negligent denials of coverage.

27 Or so it seemed … Since Pegram, most lower courts have construed ERISA to allow state actions against MCOs for negligently withholding care. Since the late 1990s, 10 states, including Texas, have enacted statutes authorizing such suits – and thereby strengthening the case against Section 514 pre-emption. Oct. 2000: Candidate Bush, in debate with Al Gore, boasted that Texas was "one of the first states that said you can sue an HMO for denying you proper coverage."

28 The Return of ERISA Pre-emption? Aetna, Cigna, & other MCOs challenged the Texas statute Argument: The Texas law and ERISA 502(a) create overlapping remedies, so the Texas law is pre-empted. 5 th Circuit Court of Appeals rejected this argument (consistent with post-Pegram caselaw) Aetna & Cigna appealed to the Supreme Court, which granted cert.: (Aetna v. Davila) In a brief last Dec. and in oral arguments 2 months ago, Bush administration lawyers asked the Justices to reject the bulk of recent caselaw and to strike down the statute candidate Bush boasted about. At oral argument, the Justices seemed inclined to oblige.

29 Summing Up: Health Care Policy Implications Independent review of MCO coverage decisions will survive. Review will be based on professional standards of care, limiting MCOs ability to economize by offering lower levels of care. Within a few weeks, the Supreme Court is likely to resurrect MCO immunity from state suits for negligent denial of coverage – a stunning reversal of recent trends. Possible fallout: Re-appearance of MCO immunity & Patients Bill of Rights as national political issues this summer and fall.

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