Introduction

    Debra Moran is covered by a health insurance plan funded by her husband’s employer.[1]  The plan is governed by the Employee Retirement Income Security Act of 1974 (ERISA)[2] and is managed by Rush Prudential, a Health Maintenance Organization (HMO) provider.[3]  Moran’s plan does not cover services that are not “medically necessary.”[4] 

    Rush Prudential (Rush) denied Moran coverage for surgery recommended by her primary care physician on grounds that the particular surgery was not “medically necessary.”[5]  At her own expense, Moran had the surgery recommended by her physician, and then sued in state court under Section 4-10 of the Illinois Health Maintenance Organization Act (HMO Act)[6], which requires HMOs to provide an independent physician review of the patient's claim for treatment when the patient’s primary care physician and HMO disagree about whether a treatment is medically necessary.[7]  If the independent reviewing physician determines that the patient's treatment is medically necessary, the HMO Act requires the HMO to provide the treatment.[8] 

    The district court held that ERISA preempted Moran’s state law claim under the Illinois HMO Act, leaving as her only means of recourse the civil enforcement provisions contained in ERISA.[9]  However, the Court of Appeals for the Seventh Circuit disagreed, holding that Moran’s claim was not subject to ERISA preemption.[10]  The United States Supreme Court affirmed the Seventh Circuit's holding that ERISA does not preempt the Illinois HMO Act.[11]

    Currently, forty-two states and the District of Columbia have enacted similar laws to the Illinois’ HMO Act which require HMOs to submit to an independent physician review when there is a disagreement between a patient’s primary care physician and the HMO over whether a course of treatment is medically necessary.[12]  The states enacted these laws in an attempt to protect patients from “perceived abuses of managed care plans.”[13]  HMOs and Managed Care Organizations (MCOs) argue that these state mandated independent external review provisions are preempted by ERISA.[14]

    The Supreme Court’s decision in Moran resolved a split between the courts of appeals for the Fifth Circuit and the Seventh Circuit.[15]  Before the Seventh Circuit held that the Illinois HMO Act independent review provision was not preempted by ERISA in Moran, the United States Court of Appeals for the Fifth Circuit reached the opposite result in Corporate Health Insurance, Inc. v. Texas Department of Insurance.[16]  In Corporate Health Insurance, Inc., the Fifth Circuit ruled that a Texas statute providing for independent review of whether patient services were medically necessary was preempted by ERISA because the statute created an impermissible alternative mechanism through which plan members could gain benefits.[17]  In Moran, The Supreme Court sided with the Seventh Circuit and held that ERISA does not preempt the independent review provision of the Illinois HMO Act.[18]

    Congress enacted ERISA to provide a uniform system of federal regulation for employee benefit plans in order to eliminate “the need for interstate employers to administer their plan differently in each State in which they have employees.”[19]  Congress’s goal was to make the regulation of employee benefit plans “exclusively a federal concern.”[20]  However, when ERISA was enacted in 1974, most employees were covered by traditional fee-for-service plans that were generally managed in-house.[21]  Today, MCOs perform the same risk-bearing functions traditionally provided by health insurers in an attempt to reduce the price and quantity of health care services provided.[22] 

    The conversion from fee-for-service plans to managed care plans introduced new types of arrangements, relationships, and risk allocation not contemplated in 1974 when ERISA was conceived.[23]  As a result, states have taken steps to regulate managed care entities in an effort “to curb real and perceived abuses of managed care plans,” including “denying patient’s access to treatment, restricting unlimited access to providers, . . . and providing financial incentives for providers to limit care.”[24]  In response, providers have quickly moved to challenge these state laws on ERISA preemption grounds.[25]

    For over twenty years, courts have struggled with ERISA’s complex preemption scheme in trying to determine when a state law “relates to” an employee benefit plan.[26]  Before the Moran decision, the Supreme Court’s interpretation of ERISA preemption was “confusing;” the Court “[did] not have an established, controlling doctrine that guide[d] its interpretation of ERISA — a statute that governs the lives of millions of employees and their dependents.”[27]

    This Comment reviews the issues presented in the Moran case regarding ERISA preemption of state laws requiring independent review of HMO medical necessity decisions.  Part I gives an overview of the ERISA preemption doctrine and examines the historical development of ERISA preemption from its early broad interpretation by the courts to recent decisions that appear to narrow its scope.  Part II reviews the factual and procedural history of the Moran case.  Part III expounds the preemption arguments made by Moran and Rush Prudential, and how the Supreme Court decided each issue presented by the parties.  Part IV discusses the Court’s development of a complete framework for continued ERISA preemption analysis and explores the possible impact of potential federal legislation on current ERISA preemption.     

I. Historical Development of ERISA Preemption

    More than 100 million Americans are covered by over 2.5 million group health plans.[28]  Most of these individuals are covered under group health plans subject to ERISA.[29]  ERISA regulates employee benefit, pension, and welfare plans, and extends to group health plans that provide coverage through the purchase of insurance.[30]  ERISA governs a plan, fund, or program “established or maintained” by an employer or employee organization for the purpose of providing employees with benefits.[31]  ERISA does not govern the sixty million individuals covered by self-insured employers.[32]

    Thirty years ago, many employee pension plans were insufficiently funded and some employers found ways to avoid paying pensions to employees who had loyally completed their service.[33]  Congress intended for ERISA “to protect employees from administrative and funding abuses while establishing fair vesting requirements for pensions.”[34]  Additionally, the language of ERISA’s preemption clause suggests that Congress intended to retain broad federal authority over all employee benefit plans covered by ERISA.[35]

A. Overview of ERISA Preemption

    Section 514(a) of ERISA provides that ERISA “shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan.”[36]  The purpose of the preemption clause is to avoid “multiple and conflicting state laws” that regulate ERISA plans.[37]  However, ERISA contains a “savings” clause that functions as an exception to the preemption clause.[38]  Section 514(b)(2)(A) provides that “nothing in this subchapter shall be construed to exempt or relieve any person from any law of any State which regulates insurance, banking, or securities.”[39]

    There are three distinct forms of ERISA preemption:  ordinary (complete) preemption, field preemption, and conflict preemption.[40]  Complete preemption is based on ERISA section 502, and is actually a rule of federal jurisdiction that acts as an exception to the well-pleaded complaint rule.[41]  Under section 502, federal jurisdiction is permitted when Congress has exercised such broad preemption of an area of law that any claim in that area falls under federal law and is removable to federal court.[42]  Thus, claims brought in state court under state laws might be properly removed to federal court if it is clear that Congress intended the law to fall within ERISA’s provisions.[43]  Section 502 also provides civil enforcement remedies under ERISA, which goes to the heart of the preemption controversy.  Under ERISA’s exclusive scheme, a plan participant or beneficiary may bring a civil action “to recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan” and for a breach of fiduciary duty.[44]  A plan participant may also bring a civil action “to enjoin any act or practice which violates any provision of this subchapter or the terms of the plan,” for a violation of the information disclosure provision, “to obtain other appropriate equitable relief,” or “to collect any civil penalty” authorized by the civil enforcement provision.[45]  These six exclusive ERISA remedies do not provide for compensatory or punitive damages.[46] 

    Section 502(a) also encompasses field preemption, which is Congressional intent to “preempt comprehensively the ‘field’ of judicial oversight of employee benefits plans.”[47]  Field preemption expels state claims and remedies that would take the place of ERISA’s exclusive section 502 claims.[48]  

    Finally, conflict preemption is invoked under ERISA’s section 514(a) preemption clause, which provides that ERISA “supersede[s] any and all state laws insofar as they . . . relate to an employee benefit plan.”[49]  Section 514(a) preemption is based on a conflict between federal ERISA regulations and competing state laws.[50]  Normally, a direct conflict between state law and ERISA results in ERISA preemption of the state law.[51]  However, the most difficult conflict preemption situations arise when a state law purports to regulate insurance and falls under ERISA’s savings clause.[52]

B. A Broad Interpretation of ERISA Preemption

    The Supreme Court’s treatment of the “relates to” language in the section 514(a) preemption clause has been a major issue in ERISA preemption cases.  In 1983, in Shaw v. Delta Air Lines, Inc.,[53] the Supreme Court announced a broad interpretation of section 514(a), holding that a state law “relates to” an ERISA plan “in the normal sense of the phrase if it has connection with or reference to such a plan.”[54] 

    In Pilot Life Insurance Co. v. Dedeaux,[55] the Supreme Court held that ERISA preempts state common law tort and contract causes of action arising out of improper processing of claims.[56]  In Pilot Life Insurance Co., a plan participant claimed that Pilot Life in bad faith refused to pay permanent disability benefits after an accident.[57]  The Supreme Court held that ERISA section 514(a) preempted the plaintiff’s state law claim of bad faith because the claim was premised on improper processing of benefits and therefore related to an employee benefit plan under section 514(a).[58]  The Court continued its analysis by giving the phrase “relates to” a “broad common-sense meaning.”[59]  Additionally, the Court held that the state bad faith law was not a law regulating insurance so it did not fall under ERISA’s savings clause.[60]   

    Further, in Ingersoll-Rand Co. v. McClendon,[61] the Court announced perhaps its most expansive interpretation of section 514(a) yet.  Specifically, the Court held that the language of section 514 was designed “to establish pension plan regulation as exclusively a federal concern.”[62]  

B. Narrowing the ERISA Preemption Analysis

    Ten years after Shaw, the Court began to narrow the scope of ERISA preemption with its decision in John Hancock Mutual Life Insurance Co. v. Harris Trust & Savings Bank.[63]  There, the Supreme Court concluded that there is  “no solid basis for believing that Congress, when it designed ERISA, intended fundamentally to alter traditional preemption analysis.”[64]  The standard federal preemption doctrine focuses on whether Congress intended the federal statute to preempt traditional areas of state regulation.[65] 

    The Supreme Court continued using the traditional ERISA preemption doctrine in New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Insurance Co.[66]  In Travelers, a New York statute imposed surcharges on hospital rates for patients whose insurance coverage was purchased by ERISA-governed health care plans and on HMO’s whose fees are paid by ERISA plans.[67]  Commercial insurers sued on a theory of conflict preemption, claiming that the state statute related to an employee benefit plan.[68]  The Supreme Court held that the state law did not relate to an employee benefit plan because the law only had an indirect economic influence that does not “bind plan administrators to any particular choice and thus function as a regulation of an ERISA plan itself.”[69]  The Court emphasized that preemption claims must be based on a presumption against preemption in situations where federal law would be overriding state action in a field of traditional state regulation.[70]  Further, the Court noted that within areas of traditional state regulation, the Supreme Court works “on the ‘assumption that the historic police powers of the States were not to be superseded by the Federal Act unless that was the clear and manifest purpose of Congress.’”[71] 

    The decision in Travelers has been construed as supporting the view that Congress did “not intend for ERISA to preempt state laws regulating the quality of health care.”[72]  In Travelers, the Court cautioned against applying the “relates to” language too broadly, deciding instead to “go beyond the unhelpful text and the frustrating difficulty of defining its key term and look instead to the objectives of the ERISA statute as a guide to the scope of state law that Congress understood would survive.”[73] 

C. The Savings Clause Analysis

In Travelers, the Court held that the state law did not relate to an employee benefit plan, therefore, an analysis of ERISA’s savings clause was not required.[74]  However, a number of cases consider whether state laws are exempt from ERISA preemption under the insurance savings clause.  In Metropolitan Life Insurance Co. v. Massachusetts,[75] the Supreme Court developed a test for determining whether a state law is saved from preemption under the section 514(b) savings clause.[76]  First, a state law falls under the savings clause if it “regulates insurance” within a common sense view of the word “regulate.”[77]  Further, a law is not preempted if it regulates the business of insurance as interpreted within the scope of the McCarran-Ferguson Act, which provides that federal laws should not invalidate state laws that regulate the business of insurance.[78] Three criteria taken from cases under the McCarran-Ferguson Act help determine whether a law regulates the business of insurance.  These criteria include: (1) whether the law has the effect of transferring or spreading a policyholder’s risk; (2) whether the law impacts an integral part of the policy relationship between the insurer and the insured; and (3) whether the law is directed only at entities within the insurance industry.[79] 

    In Metropolitan Life, the Court determined that a Massachusetts mandated benefit law was not subject to ERISA preemption.[80]  Although the law “related to” an employee benefit plan and was thus preempted under section 514(a), it fell within ERISA’s section 514(b) savings clause because it regulated insurance.[81]  The Court determined that the state law regulated insurance within a common-sense view because the plain language of the statute regulated the terms of insurance contracts.[82]  Further, the Court held that all three of the McCarran-Ferguson factors were met.  First, the state law had the effect of spreading a policyholder’s risk because it was “intended to effectuate the legislative judgment that the risk of mental-health care should be shared.”[83]  Second, the mandated benefit law was an integral part of the policy relationship between the insurer and the insured because the law “limit[ed] the type of insurance that an insurer may sell to the policyholder.”[84]  Third, the law was limited to entities within the insurance industry because it mandated requirements only on insurers.[85]

    However, a plaintiff does not have to meet all three McCarran-Ferguson factors to fall within the savings clause.[86]  In UNUM Life Insurance Co. v. Ward,[87] the Supreme Court noted that the McCarran-Ferguson factors are to be used only as “guideposts” and that even if a state law fails one of the factors, it may still fall within the savings clause.[88]  The factors are merely “considerations [to be] weighed,” and no single factor is conclusive.[89]   

II. Moran v. Rush Prudential HMO, Inc.[90]

    Debra Moran sought treatment from her primary care physician for pain, numbness, and decreased mobility in her right shoulder.[91]  Her physician treated her through physical therapy, but Moran’s symptoms did not improve.[92]  Therefore, Moran wished to consult with Dr. Terzis, an out-of-network specialist, about an unconventional micro-reconstructive surgery, but Rush denied her request.[93]  Moran decided to see the specialist anyway, and Dr. Terzis diagnosed her with “brachial plexopathy and thoracic outlet syndrome (TOS).”[94]  Dr. Terzis recommended that Moran undergo a surgery that was more complicated than the usual procedure to repair TOS.[95]  After her consultation with Dr. Terzis, Moran asked Rush to approve the micro-reconstructive surgery.[96]  Rush referred Moran to two “Rush-affiliated thoracic surgeons” who confirmed the TOS diagnosis but recommended the standard, less invasive TOS surgery.[97]  At Moran’s request, her Rush primary care physician recommended the out-of-network procedure, stating that Moran would be “best served” by Dr. Terzis’s surgery.[98]  Rush denied the request for out-of-network micro-neurolysis surgery.[99]  Moran appealed, but Rush affirmed its decision based on the conclusion that the surgery was not “medically necessary,” and instead approved the standard, less invasive surgery normally performed on patients with Moran’s condition.[100] 

    Moran demanded that Rush comply with the Illinois HMO Act, which requires HMOs to submit to a review by an independent physician when there is a disagreement between the insured's primary care physician and HMO on whether a course of treatment is medically necessary.[101]  Rush refused to consent to an independent review, and Moran filed a complaint seeking a court order that would require Rush to comply with the statute.[102]  Before the suit was resolved, Moran had the out-of-network micro-reconstructive surgery at her own expense and submitted the $94,841.27 bill to Rush for reimbursement.[103]  Rush renewed its investigation and relied on the opinions of Rush affiliated experts in deciding that Moran's microneurolysis was not medically necessary.[104] 

    Meanwhile, Rush removed Moran’s state court suit to federal district court under ERISA section 502(a) complete preemption.[105]  However, the district court remanded the case to state court after determining Moran’s claim for specific performance did not fall under the umbrella of complete preemption because it did not fall under ERISA’s civil enforcement provisions.[106]  On remand, the Illinois state court ordered Rush to comply with the HMO Act by providing an independent review.[107]  The physician who conducted the independent review determined that Moran's micro-reconstructive surgery was medically necessary, but noted that he would have used a different, less invasive procedure.[108]  Nonetheless, Rush again decided that Moran’s surgery was not medically necessary, and denied her claim for benefits.[109]   

    Moran returned to state court, seeking reimbursement for medically necessary surgery under the Illinois HMO Act.[110]  Rush again removed the suit to federal court.[111]  This time, the district court agreed that Moran’s suit was “a claim for ERISA benefits and was thus completely preempted by ERISA’s civil enforcement provisions.”[112]  The district court found that ERISA preempted Moran’s claims under the Illinois statute and that the savings clause did not apply because none of the McCarran-Ferguson factors were met.[113]  However, on appeal the Seventh Circuit Court of Appeals reversed and found that the state law fell within the savings clause of ERISA because it regulates insurance under a “common sense understanding,” and because the independent review scheme was not tantamount to the relief offered under ERISA.[114] 

    First, the Seventh Circuit determined that the Illinois Act did “relate to” employee benefit plans under ERISA section 514(a) because “its provisions have a connection with such plans.”[115]  The state law requires HMOs to provide mechanisms for independent review.[116]  According to Travelers, “state laws that ‘mandate employee benefit structures or their administration’ fall within the ambit of ERISA’s preemption clause.”[117]  The Seventh Circuit decided that because the state law had an “effect on how benefit determinations are made,” it fell under ERISA section 514(a) preemption.[118]

    Next, the Seventh Circuit analyzed whether the HMO Act fell under ERISA’s section 514(b) savings clause.[119]  In its “common-sense view,” the court concluded that the state law is “directed at the HMO industry as insurers,” the law is “aimed exclusively at members of the insurance industry,” and the law’s provisions go to the “core of the relationship between the insurer and the insured.”[120]  The Seventh Circuit then moved to the McCarran-Ferguson factors analysis, concluding that the second factor, whether state law limits the type of insurance the insurer may sell to the policyholder, was met because the HMO Act created “a mandatory term in the insurance contract” and “change[d] the bargain between the insurer and insured.”[121]  The third McCarran-Ferguson factor, whether the practice is limited to entities within the insurance industry, was met because the state law applies "only to HMOs acting as insurers."[122]  Therefore, the Seventh Circuit held that the state law fell under the savings clause and was not preempted by ERISA.[123]

    In a dissenting opinion, Judge Richard Posner stressed that the Illinois HMO Act did not fit under ERISA’s savings clause because it “is not a general regulation of insurance,” but of HMOs.[124]  Judge Posner further suggested that allowing suits under state law medical necessity provisions would raise health care costs so much that some employers will not be able to offer health insurance at all.[125]  Moreover, Posner suggested that the two propositions of the majority opinion are incompatible with one another.[126]

III. Arguments Surrounding ERISA Preemption

    With its decision in Moran, the Supreme Court expanded the traditional ERISA preemption clause analysis and outlined a complete framework for evaluating potential ERISA preemption claims.[127]  The Court applied the preemption clause analysis used in Metropolitan Life, Pilot Life, and Travelers, but added an additional prong to the framework allowing it to determine if a state law creates an impermissible “alternative remedy.”[128]  Perhaps most important, the Court’s preemption doctrine analysis in Moran negated its past “confusing” ERISA decisions by providing an “established, controlling doctrine that guides its interpretation of ERISA.”[129]   

A.  Complete Preemption

    ERISA section 502(a) is an exception to the well-pleaded complaint rule as it authorizes removal to federal court even though the complaint does not mention a federal basis for jurisdiction.[130]  Furthermore, ERISA section 502(a) is a civil enforcement provision that “completely preempts state law causes of action that fall within [its] scope.”[131] 

    Rush Prudential first argued that Moran’s claim was preempted by ERISA because it conflicts with ERISA’s section 502(a) civil enforcement provisions.[132]  However, Rush mischaracterized this argument.  The section 502 complete preemption analysis is simply to decide whether Moran’s claim is completely preempted such that it must be brought in federal court.[133]  Just because her claim conflicts with ERISA’s civil enforcement provisions does not mean that her entire claim cannot be pursued in state court.[134] 

    The Seventh Circuit agreed with Rush that Moran’s state law claim under the HMO Act was really a claim for benefits under ERISA section 502(a), and upheld removal to federal court.[135]  After determining that Moran’s claim should be enforced under section 502(a), the Seventh Circuit then correctly moved to analyze Rush’s preemption defense under section 514(a).[136]

    Rush continued to argue that “[a]ny suit attempting to set forth a state law cause of action seeking to recover benefits under an ERISA plan is preempted, and becomes ‘purely a creature of federal law.’”[137]  The Supreme Court did not specifically address the section 502(a) complete preemption issue, but indicated that the Seventh Circuit was correct in deciding Moran’s claims were properly removed under section 502(a).[138] 

    However, in the same section of its brief, Rush argued that Moran’s action under the Illinois HMO Act constituted an alternative enforcement remedy that “impermissibly conflicts with ERISA’s exclusive remedial scheme.”[139]  Although a valid argument, Rush did not properly raise it in the court's initial section 502(a) complete preemption analysis, which solely determines in which court the action should be brought.[140]  Therefore, the Supreme Court analyzed Rush’s argument in its proper context—after it proceeded through the traditional section 514(a) preemption clause and the section 514(b) savings clause analysis.[141]  As such, Rush’s argument fell under the last step of the court's expanded framework, which is whether the state law conflicts with a substantive portion of ERISA.[142]  The Court's three preemption analyses conducted in Moran are reviewed in detail in the following sections.

B.  Section 514(a) Conflict Preemption

    ERISA section 514(a) preempts any state law that “relates to” an employee benefit plan.[143]  The first step of the “relates to” analysis involves a determination of whether the state law has either a “reference to” or a “connection with” an employee benefit plan.[144]  The Illinois HMO Act does not specifically refer to an employee benefit plan, so the “connection with” framework is used.[145]  The Seventh Circuit correctly determined that “[s]tate laws that ‘risk subjecting [ERISA] plan administrators to conflicting state regulations’ undoubtedly have a ‘connection with’ ERISA plans within the meaning of § 514(a).”[146]  The Supreme Court affirmed the Seventh Circuit’s determination of section 514(a) preemption, noting that “it is beyond serious dispute” that the HMO Act relates to employee benefit plans.[147]

C. Section 514(b) Savings Clause Analysis

    A state law that “relates to” an ERISA plan may still avoid preemption if it “regulates insurance.”[148]  Rush, relying on the Court's holding in Pilot Life, argued that “a law which conflicts with ERISA’s exclusive remedies is . . . preempted regardless of whether the law might otherwise fall within the scope of the saving[s] clause.”[149]  Once again, Rush made its alternative enforcement mechanism argument in the wrong context.[150]  The HMO Act is first analyzed under the savings clause framework, then, if it is determined that the state law falls under the savings clause, it is analyzed in terms of whether the law is nevertheless preempted because it creates an alternative enforcement mechanism.[151]  Moreover, Rush’s reliance on Pilot Life was misplaced because section 502(a) complete preemption was not at issue in Pilot Life.[152]  Unlike the plaintiff in Pilot Life, Moran’s suit under state law was re-characterized as a claim for benefits under ERISA section 502(a).[153]  In Pilot Life, after applying the common-sense test and the McCarran-Ferguson factors, the court determined that the state law claim did not fall within the savings clause.[154]  However, in Moran, the Seventh Circuit held that the Illinois HMO Act did fall within the shelter of the savings clause.[155]  In expanding its traditional preemption analysis, the Supreme Court viewed Rush’s alternative enforcement mechanism argument in its proper context, after determining that the HMO Act fell under ERISA’s savings clause.[156] 

    1. The Common Sense Test

    The first step in analyzing whether a state law “regulates insurance” within the savings clause is determining whether the contested law regulates insurance from a “common-sense view of the matter.”[157]  Rush argued that the HMO Act does not regulate insurance from a common-sense view.[158]  Rush contended that to meet the common-sense test, the state law must be directed specifically at the insurance industry.[159]  Rush argued that the HMO Act does not regulate insurance but instead regulates the administrative practices of HMOs, and is directed only towards HMO’s, which are the service providers under many ERISA plans.[160]

    However, the Supreme Court rejected Rush’s arguments and concluded that the HMO Act met the common-sense inquiry.[161]  The Court noted that although HMOs provide both health care and insurance and are not traditional insurers, they have taken over “much business formerly performed by traditional indemnity insurers” and are “almost universally regulated as insurers under state law.”[162]  Moreover, the Court concluded that a finding that the HMO Act does not regulate insurance would contravene the entire purpose of the HMO entity.[163] 

    2. The McCarran-Ferguson Factors

    Next, the Court analyzed the HMO Act in terms of the McCarran-Ferguson factors.[164]  Rush argued that the HMO Act does not have the effect of transferring or spreading risk because it “enforces the risk already negotiated.”[165]  Moran argued that the first factor was met because risk spreading occurs when a law “changes the substantive terms of the insurance contract by mandating certain benefits.”[166]  However, the Supreme Court did not decide whether the first McCarran-Ferguson factor was met.[167]  After noting that a state law does not have to meet all three factors to fall under ERISA’s savings clause, the Court simply moved on to the second and third factors.[168]   

    Rush argued that the second McCarran-Ferguson factor was not met because the HMO Act is not an “'integral' part of the policy relationship . . . because it does not ‘define the terms of th[at] relationship.’”[169]  Further, Rush contended that the HMO Act does not alter the terms of the relationship because the HMO Act “simply offers a different avenue by which a beneficiary can enforce those terms.”[170]  However, the HMO Act mandates that the insurance company must create a mechanism for independent review and must abide by the reviewers determination.[171]  The Supreme Court concluded that the second McCarran-Ferguson factor was met because the HMO Act provisions for third party review provide the policyholder a legal and enforceable right against the HMO, and thus regulates “the ‘core’ of the business of insurance.”[172]

    Rush argued that the HMO Act does not meet the third McCarran-Ferguson factor because the law is not limited to the insurance industry.[173]  Rush contended that the HMO Act applies to HMOs “regardless of whether they act as insurers or third-party administrators.”[174]  However, the Supreme Court again sided with Moran and determined that HMO contracts are contracts for health insurance rather than for medical care, concluding “it is clear that §4-10 does not apply to entities outside the insurance industry.”[175]

    In sum, after applying the traditional savings clause analysis, the Supreme Court concluded that the Illinois HMO Act falls within the protection of the ERISA’s section 514(b) savings clause because it meets both the common-sense test and at least two of the McCarran-Ferguson factors.[176]

D. Does the Illinois HMO Act Conflict With a Substantive Provision of ERISA? 

    Until recently, the ERISA preemption determination ended once a state law was found to fall under ERISA’s section 514(b) savings clause.[177]  Both the Fifth and Seventh Circuits concluded that even if a state law falls within ERISA’s savings clause, it may still be preempted if it conflicts with a substantive provision of ERISA.[178]   

    Rush urged the Supreme Court to adopt its view that the HMO Act seeks “to supplant or add to the exclusive remedies set forth in Section 502(a) of ERISA,. . . [and is] preempted because [the] law[] conflict[s] with Congress’ overriding intent to create a uniform national system . . . for enforcing rights under ERISA plans.”[179]  According to Rush, Moran is seeking benefits that “she believes are ‘medically necessary’ and, therefore covered under the terms of the plan as written.”[180]  Rush contended that Moran invoked a state law remedy to state her claim for benefits, when her exclusive remedy was available under ERISA.[181]  Rush relied on the Fifth Circuit’s opinion in Corporate Health Insurance, Inc. v. Texas Department of Insurance,[182] where the court held that the Texas independent review provision conflicted with ERISA’s exclusive enforcement scheme.[183]  In Corporate Health, the Fifth Circuit determined that the Texas statute “establish[ed] a quasi-administrative procedure for . . . review . . . [and] create[d] an alternative mechanism through which plan members may seek benefits due them under the terms of the plan – the identical relief offered under [ERISA section 502(a)].”[184]

    However, in Moran, the Seventh Circuit determined that the HMO Act is not an alternative remedy because the independent review procedure created by the HMO Act is not “tantamount to the relief offered under [ERISA section 502(a)].”[185]  The Seventh Circuit determined that the terms of the HMO Act were incorporated into Moran’s insurance contract.[186]  According to Moran, the suit to enforce the HMO Act independent review provisions was “simply a suit to enforce the terms of the plan – precisely the sort of suit that is contemplated by [ERISA section 502(a)] ‘to enforce rights’ and ‘to recover benefits’ under the plan.”[187]

    The Supreme Court affirmed the Seventh Circuit’s holding that the Illinois HMO Act does not create an alternative remedy in direct conflict with ERISA’s exclusive enforcement provisions.[188]  The Court acknowledged the “extraordinar[y] preemptive power” of ERISA’s six enforcement provisions and noted that in Pilot Life the state law was preempted when it enabled patients “to obtain remedies . . . that Congress rejected in ERISA.”[189] 

    The Court ultimately determined that the Illinois HMO Act does not create a “new cause of action under state law” and does not authorize a “new form of ultimate relief.”[190]  Moreover, the Court concluded that the relief available under the HMO Act is the same relief that would be available under ERISA, and declined to impose additional limits on state insurance regulation.[191]

IV. Implications

    In Moran, the Supreme Court resolved the split between the Fifth and Seventh Circuits and held that state laws requiring independent review of disputes between physicians and HMOs over whether a procedure is medically necessary are not preempted by ERISA.[192]  In doing so, the Court added a new phase to the traditional ERISA preemption analysis and articulated a step-by-step approach for lower courts to follow.[193]  However, the Court also escalated the growing conflict between patients’ rights activists and insurance companies and perhaps laid the groundwork for a federal legislative solution.[194]     

A. An Expanded Framework for Preemption Analysis

    The ERISA preemption analysis begins with a determination of whether a case is properly in federal court, under ERISA section 502(a) complete preemption.[195]  The Supreme Court accepted without discussion the Seventh Circuit’s holding that Moran’s claims must be brought in federal court.[196]  

    After acknowledging that a state law claim is properly brought in federal court, the Supreme Court turned to ERISA section 514(a) to determine whether the law “relates to” employee benefit plans.[197]  In Moran, the Supreme Court returned to a broad application of the relates to clause, noting that “it is beyond serious dispute” that the HMO Act “relates to employee benefit plans.”[198]  This somewhat conclusary finding aside, a court typically must determine whether the state law has a “connection with” or a “reference to” an employee benefit plan.[199]  In Travelers, the Court looked to both the objectives of the ERISA statute and whether it had a direct or “indirect economic effect on choices made by insurance buyers, including ERISA plans.”[200]  “[P]reemption does not occur . . . if the state law has only a tenuous, remote, or peripheral connection with covered plans.”[201] 

    After determining that the HMO Act related to employee benefit plans under ERISA section 514(a), the Supreme Court moved to a savings clause analysis.[202]  The savings clause analysis encompasses both a determination of whether the state law regulates insurance from a common-sense view and an analysis of the law in light of the three McCarran-Ferguson factors.[203]  Generally, when a law regulates insurance such that it falls within the savings clause, it avoids ERISA preemption.[204]  However, the Courts of Appeal for the Seventh and Fifth Circuits added a step to the framework that the Supreme Court adopted.[205]

    Even if a state law falls within the savings clause, it may still be preempted if it conflicts with a substantive portion of ERISA, namely the six exclusive remedies provided for in section 502.[206]  To determine whether a state law creates an alternative enforcement mechanism, the Court looks to the legislative intent and the policies behind ERISA and the preemption doctrine.[207]  In Moran, the Supreme Court ultimately determined that the HMO Act is not preempted because its remedies are the same as the remedies available under ERISA.[208]  However, Congress's intent to “eliminat[e] the threat of conflicting and inconsistent State and local regulation” should have superseded the states' desire to provide an independent review process.[209] 

    Indeed, lower courts have already used the alternative mechanism approach adopted by the Supreme Court in Rush Prudential.[210]  In Bell v. UnumProvident Corporation,[211] the United States District Court for the Eastern District of Pennsylvania considered whether ERISA preempted the state’s bad faith statute.[212]  Although the court held that the statute was preempted because it did not regulate insurance under ERISA’s savings clause, the court went on to analyze whether the statute provided remedies not authorized by ERISA.[213]  Specifically, the court determined that the bad faith statute authorized punitive damages and interest in addition to remedies provided under ERISA’s civil enforcement provision.[214]  Therefore, even if the statute had fallen under the savings clause, it would still have been preempted because it conflicted with ERISA’s civil enforcement provision by authorizing alternative remedies.[215] 

    In another post-Rush Prudential decision, a court used the “alternative remedy” analysis and called it “categorical preemption.”[216]  In Sprecher v. AETNA U.S. Healthcare, Inc.,[217] the court determined that a state bad faith law does not fall under ERISA’s savings clause.[218]  However, the court went on to note that even if the law fell under the savings clause, it may nonetheless be preempted “categorically” if it conflicts with ERISA’s civil enforcement provisions.[219]  Perhaps the Supreme Court’s adoption of the alternative remedy analysis will resolve some of the former confusion concerning ERISA preemption analysis.[220]

B. A Legislative Solution? 

    Notwithstanding the Supreme Court’s decision in Moran, the legislative intent and the public policies behind ERISA support a determination that state laws requiring independent review of medical necessity decisions are ultimately preempted by ERISA.[221]  ERISA was enacted to “avoid a multiplicity of regulation in order to permit the nationally uniform administration of employee benefit plans.”[222]  The Court’s decision in Moran potentially frustrates Congress’s intended goal.[223]  Because ERISA does not preempt the Illinois HMO Act and others like it, benefit plan administrators will be required to make benefits determinations under varying and potentially inconsistent state laws.[224] 

    Although it is evident that the vast majority of states support independent review provisions, the policies behind ERISA point to preemption.[225]  According to the dissent in Moran, the decision in Moran “eviscerates the uniformity of ERISA remedies.”[226]  Further, the dissent predicts that subjecting plan providers to fifty different state independent review provisions could result in inefficiencies, leading to increased cost and decreased benefits.[227]  Indeed, the majority opinion even hints at the possibility that insurers will not offer certain benefits as a result of the decision.[228]  A footnote in the opinion explains that Rush chose to provide all medically necessary treatments, which results in an independent reviewer making the final determination of whether a treatment is necessary.[229]  The Court then explains that insurers are not required to guarantee all medically necessary procedures, and could include language in contracts “excluding experimental procedures from coverage.”[230]  Should this occur, procedures like the one Debra Moran had would almost certainly be excluded as “experimental.”[231] 

    The scope of ERISA preemption has long generated attention in Congress.[232]  In June 2001 the Senate passed the Bipartisan Patients’ Bill of Rights Act of 2001 (Kennedy-Edwards-McCain).[233]  "The bill will establish hundreds of new federal statutory requirements for activities now provided for by contract" and will require each state to meet federal minimum health care standards.[234]  Additionally, the White House endorsed a proposal (House GOP Proposal) containing many of the same provisions.[235]  Both bills set new federal rules requiring health plans to provide access to independent external review of claims decisions.[236] 

    Both bills provide that the independent reviewer is not bound by the health plan definitions of “medical necessity,” and permit an independent physician to use a different standard for each review.[237]  These provisions could result in inconsistent decisions and increased legislation over the definition of “medical necessity.”[238] 

    However, these attempts to pass comprehensive patients’ rights legislation languished in the aftermath of the September 11th terrorist attacks.  The decision in Moran could serve to re-ignite the debate over the proposed legislation.[239]  Most major insurers insist that they are not opposed to independent review provisions.[240]  They only fear being exposed to fifty different state regulations that will result in increased cost and decreased efficiency.[241]  While advocates of the Moran ruling hope that Congress will enact legislation that will apply the ruling to the millions of plan participants not covered by ERISA, insurance companies long for a statute that would provide for a “single, uniform national standard.”[242] 

    However, there is a strong consensus among many consumer advocates that Congress should not pass patients’ rights legislation at all.[243]  If states are permitted significant latitude in regulating HMO health care conduct, legislation may no longer be a priority.[244]  Cases like Travelers further the court's trend moving away from the broad preemption interpretation of the 1980s and early 1990s.[245]  Currently, negligence of medical professionals is actionable under state law and both compensatory and punitive damages are available.[246]  “Only where the HMO makes a pure coverage or plan administration assessment does ERISA preemption . . .  of state claims” prevail.[247]  Even then, the HMO may be liable under a fiduciary duty cause of action.[248]  

    However, HMOs argue that without legislation limiting state law claims, health insurance will become so costly as to perhaps force many employers to stop providing benefits.[249]  It remains to be seen whether a continued loosening of ERISA preemption will bring increased costs or will serve to protect more patients from faulty medical decisions.[250] 

Conclusion

    Illinois, along with forty-one other states, passed a law requiring independent review of HMO medical necessity decisions.[251]  Debra Moran sued under the Illinois HMO Act when Rush Prudential HMO refused to pay for a surgical procedure that an independent reviewer deemed medically necessary.[252]  In its defense, Rush claimed that ERISA preempted the state law because it created an alternative enforcement mechanism to the exclusive remedies provided in ERISA.[253]

    By granting certiorari, the Supreme Court resolved a circuit court split between the Seventh and Fifth Circuits on whether state independent review laws are preempted by ERISA.[254]  The Court ultimately affirmed the Seventh Circuit, holding that ERISA does not preempt state laws that provide independent review mechanisms.[255]  The Court held that the HMO Act was subject to ERISA preemption because it “relates to” an employee benefit plan, but, because it fell within the protection of ERISA’s “savings clause,” it was not preempted.[256]  The Court then adopted a new analysis used by the Seventh Circuit to determine if the HMO Act was still subject to preemption because it creates an alternative remedy contrary to ERISA’s exclusive remedies.[257]  The Supreme Court held that the HMO Act provided no additional remedies to those outlined in ERISA, and is thus not subject to preemption.[258]  By clarifying and expanding the ERISA preemption framework, the Court illuminated and simplified the process that so many lower courts have struggled with.[259] 

    Patients’ rights advocates applaud the Court’s ruling as a victory for patients and a consumer protection device.[260]  However, the Court’s decision opens the door for each state to pass its own independent review law.[261]  Large, multi-state HMOs would be forced to administer plans according to numerous different and conflicting provisions.[262]  This could result in higher healthcare costs and possibly reduced benefits for consumers.[263]

    Patients’ rights legislation pending in Congress provides for an independent review mechanism to resolve disputes between HMOs and primary care physicians on whether a treatment is medically necessary.[264]  Insurers and HMOs are not opposed to independent review procedures, as long as there is a uniform, national standard.[265]  Legislation providing a national standard for independent review of medical necessity decisions would be a victory not only for patients and insurers, but also for the millions of Americans not covered by ERISA.[266]

Lindsey Gastright Churchill[267]