Missouri Court Limits HMO Ability to Control Costs

Published June 1, 2002

There has always been tension among competing interests affected by managed care: for example, those interested in controlling health care costs, and those interested in providing easy access to health care services.

In recent years, increased access to health care services has received the attention of state legislatures, and many states have passed laws to provide greater enrollee access to care, such as access to specialists without referrals from primary care physicians.

In response to constituents’ wishes, politicians have passed laws that erode the ability of Managed Care Organizations (MCOs) to accomplish their fundamental purpose: controlling health care costs. Some of those laws have not withstood legal challenge because they were preempted by the Employee Retirement Income Security Act (ERISA).

Other laws, however, have been “saved” from preemption by the “savings clause” under ERISA. Two such laws were challenged in Missouri, and their enforcement was recently affirmed by the U.S. Court of Appeals for the Eighth Circuit.

Missouri Laws

In 1997, Missouri passed two laws affecting how HMOs manage their pharmacy benefits. One law requires HMOs to charge the same copayment for prescription drugs filled by any network pharmacy if the pharmacy meets its HMO contract’s explicit product cost determination.

The other law prohibits HMOs from limiting the quantity of drugs an enrollee may obtain at one time, unless the limit applies to all pharmacy providers.

Before the enactment of these laws, an HMO could limit the quantity of a medication an enrollee could obtain from a retail pharmacy to a 30-day supply, while allowing the enrollee to obtain a 90-day supply from a mail-order pharmacy. HMOs could also charge enrollees a higher co-payment to fill a prescription at a retail pharmacy than at a mail-order pharmacy. Both of these practices have become commonplace in managed care.

The two laws were challenged by Express Scripts Inc., the Missouri Chamber of Commerce, and the St. Louis Area Business Health Coalition. The parties sued the Missouri Department of Insurance (DOI), arguing that the statutes and related regulations were preempted by ERISA and, therefore, not enforceable.

In other words, the parties wanted HMOs to be able to charge differential co-payments depending on which provider filled the prescriptions, and also wanted HMOs to be able to restrict the quantity of drugs an enrollee could receive from certain pharmacy providers.

The Court of Appeals affirmed the lower court’s decision that the laws were not preempted by ERISA because of the savings clause. The prohibitions in the statutes are therefore enforceable.

ERISA and the Savings Clause

ERISA challenges are not uncommon these days when laws are passed that affect an employee’s health care benefits. ERISA is a federal law that establishes minimum requirements with which employers must comply when offering employee benefit plans.

At the time ERISA was enacted, Congress was mainly concerned with protecting employees from losing their retirement benefits. However, ERISA has had a much wider and unanticipated effect on health care benefit plans offered by employers.

ERISA contains a broad preemption provision. Under this provision, ERISA “supersedes any and all state laws insofar as they may now or hereafter relate to any employee benefit plan.” In other words, any state law that “relates to” an employee benefit plan will not be enforceable.

The intent of the preemption provision was to prevent states from interfering with ERISA’s intended protection of employees by passing legislation or regulations that were inconsistent with ERISA.

A state law relates to an employee benefit plan “if it has a connection with or a reference to such a plan.” A state law does not have to act directly on the plan to be preempted. If the state law indirectly forces the plan administrator to make a particular decision or to take a particular action, it may be found to “relate to” an employee benefit plan.

ERISA also contains what is known as the “savings clause,” which prevents certain state laws from being preempted. These laws include, among other things, any law that regulates insurance. The Court of Appeals focused its analysis on whether the two Missouri laws were protected against preemption by the savings clause.

Court’s Analysis

Express Scripts argued the Missouri laws did not regulate insurance because HMOs are not in the business of insurance. HMOs provide health care on a prepaid basis, rather than indemnifying their customers, and they are licensed under statutory provisions different from those governing insurance companies.

The DOI countered that HMOs spread and shift risk just like insurance companies do. HMOs, according to the DOI, are “an innovative form” of insurance that are regulated in ways that are similar to insurance companies.

The Court of Appeals agreed with the DOI and held that HMOs are insurers. The court noted HMOs are included in the definition of “insurer” under the state’s insurance laws. HMOs and insurance companies are regulated similarly “in degree and substance”: They are both supervised by the DOI; they are both subject to minimum standards for customer contracts, financial reporting requirements, maintenance of minimum statutory net worth, periodic examination by the DOI, and use of actuarial analysis to determine health care rates. In the event of financial failure, both HMOs and insurance companies are liquidated or conserved by the DOI.

Moreover, HMOs both spread and underwrite risk, just like insurance companies. Thus, the court held, HMOs are insurers for the purpose of this analysis.

Next, the Court of Appeals analyzed whether the statutes regulated the business of insurance. The court looked at certain factors under the McCarren-Ferguson Act, commonly used to determine whether the actions engaged in by an entity are considered the business of insurance.

The court held that the statutes satisfied the McCarren-Ferguson factors: The statutes transferred or spread the risk of higher prescription costs back to the HMOs; they altered an integral part of the policy relationship between the HMO and the enrollee because they required enrollees to be allowed to obtain maintenance prescriptions at retail pharmacies without penalty; and they related only to the insurance industry because they expressly obligated only the HMOs to comply with the requirements of the statutes.

The court held that because the Missouri statutes regulated the business of insurance by satisfying the McCarren-Ferguson factors, the statutes fell within the ERISA savings clause and were not preempted.

Thus, the prohibitions set forth in the statute remain enforceable. According to the court, these statutes benefit enrollees by removing contractual restrictions imposed by the HMOs that impeded timely and convenient access to prescription drugs and to personal contact with local pharmacists. Thus, at least for now and at least in Missouri, patient access has trumped measures instituted by HMOs to control pharmacy costs.

Paula C. Ohliger is a partner in the San Francisco office of Foley & Lardner, the nation’s tenth largest law firm, which has a nationally recognized health care practice. This essay was originally published in Drug Benefit Trends, October 2001 by Cliggott Publishing Co., a division of SCP/Cliggott Communications.