"Court, 5-4, Upholds Authority of States to Protect Patients".

By Linda Greenhouse

WASHINGTON, June 20 — The Supreme Court today upheld the states' authority to protect the rights of patients in disputes with managed care companies over denial of recommended treatments.

Such protections, guaranteeing outside review of a health plan's refusal to pay for a procedure that a patient's doctor has authorized, are a centerpiece of the federal patients' rights bill that has passed both houses of Congress in different versions but remains stalled there.

Patients' advocates said the 5-to-4 decision, while a step in the right direction, did not eliminate the need for Congressional action because the state laws excluded millions of people who could be protected only through federal legislation.

The Illinois law the court upheld today, and the 41 other state laws like it, apply only to people who receive their medical coverage under an employer-sponsored benefits plan that contracts with an outside medical provider.

While that group, about 73 million people, accounts for a majority of Americans with heath insurance, an additional 56 million receive their coverage through employers that insure themselves. The state regulations do not apply to these self-insured plans, which are offered by many of the country's biggest employers.

Under the Illinois law, health maintenance organizations must have an independent review procedure available to resolve disputes over the medical necessity of treatments that a patient's primary care physician has recommended. An unaffiliated doctor, chosen jointly by the patient, primary doctor and H.M.O., reviews the case, and if the independent doctor decides that the service is medically necessary, the H.M.O. "shall provide" it.

In this case, Rush Prudential H.M.O. Inc. v. Moran, No. 00-1021, a patient's doctor recommended an expensive and rather unusual surgical procedure for a shoulder injury. Rush Prudential, an Illinois affiliate of Wellpoint Health Networks, refused to approve the operation and failed to provide the patient, Debra Moran, with an independent review of that decision. Rush Prudential, which covered Ms. Moran through her husband's employer, argued that the state law was pre-empted by federal law and was unenforceable.

Ms. Moran sued, and while the suit was pending had the 14-hour operation, paying the $95,000 cost in part by taking out a second mortgage on her house in Winfield, Ill. Meanwhile, the case bounced between federal and state courts in Illinois, one of a number of such cases working their way through the legal system as courts have struggled to reconcile the state independent review laws with the Federal Employee Retirement Income Security Act of 1974, usually known as Erisa.

Erisa broadly pre-empts state laws that "relate to any employee benefit plan," with one main exception for state regulation of insurance. The essence of the legal dispute was therefore whether the Illinois law was an aspect of state insurance regulation and whether the health maintenance organization should be seen primarily as a medical provider or an insurer.

Justice David H. Souter wrote the majority opinion, concluding that H.M.O.'s "have taken over much business formerly performed by traditional indemnity insurers, and they are almost universally regulated as insurers under state law." He said the Illinois law "is a law directed toward the insurance industry, and an insurance regulation under a `common-sense' view."

The decision upheld a ruling in 2000 by the United States Court of Appeals for the Seventh Circuit in Chicago, which found the state law to be a regulation of insurance.

Justice Souter, who wrote a major managed care decision for the court two years ago, has become something of an expert in this area and, to judge by the tone of his opinion, a somewhat unwilling one. Unraveling the Erisa statute "occupies a substantial share of this court's time," he said, listing several recent cases and adding that the law's terminology "seems simultaneously to pre-empt everything and hardly anything." His decision was joined by Justices John Paul Stevens, Sandra Day O'Connor, Ruth Bader Ginsburg and Stephen G. Breyer.

Rush Prudential argued that even if the state law was seen as a regulation of insurance, it was an impermissible form of regulation because it amounted to binding arbitration, a type of remedy that the Erisa statute does not provide. But the state law was "significantly different from common arbitration" and "provides no new form of ultimate relief," Justice Souter said. Rather, he said, the state law is analogous to other types of state insurance regulation that the court has held are not pre-empted, such as state laws requiring particular benefits to be included in insurance contracts.

Although there are exceptions, the managed care industry has generally supported a broad view of federal pre-emption under Erisa for the purpose of nationwide uniformity. Justice Clarence Thomas's dissenting opinion picked up that theme today. The Illinois law "cannot be characterized as anything other than an alternative state-law remedy or vehicle for seeking benefits," he said, adding, "Allowing disparate state laws that provide inconsistent external review requirements to govern a participant's or beneficiary's claim to benefits under an employee benefit plan is wholly destructive of Congress's expressly stated goal of uniformity in this area.

Joined by Chief Justice William H. Rehnquist and by Justices Antonin Scalia and Anthony M. Kennedy, Justice Thomas said that the prevalence of these laws would "undermine the ability of H.M.O.'s to control costs, which, in turn, undermines the ability of employers to provide health care coverage for employees." Employers are free to drop medical coverage and might choose to do so in growing numbers, Justice Thomas said.

The majority opinion suggested that in order to enforce their state-law rights against recalcitrant H.M.O.'s, patients in Ms. Moran's position would still have to go to federal court, a substantial burden that patients' rights advocates said today underscored the need for the federal legislation. The Court of Appeals in Chicago had earlier ordered Rush Prudential to pay for Ms. Moran's surgery.

The eight states that have not enacted independent-review laws are Arkansas, Idaho, Mississippi, Nebraska, Nevada, North Dakota, South Dakota and Wyoming.

The Bush administration argued in support of the Illinois law, as did the American Medical Association and a coalition of 32 states.