SUPREME COURT WATCH

By David T. ButleRitchie

David ButleRitchie is an assistant professor of law at the Appalachian School of Law in Grundy, Virginia.

Since the health care crisis in the late eighties and early nineties, state government officials have attempted to design and implement legislative responses to the rising costs of health care. In a nation of great wealth and power, millions of Americans are unable to afford quality healthcare and prescription medications. Pushed by their constituents, and receiving no guidance or leadership from the federal government, state officials have weighed in with a variety of programs and enactments designed to assist low- and moderate-income individuals to gain access to quality and affordable health care. Two such programs are currently under consideration by the Supreme Court.

The first case1 involves a Kentucky statute2 that restricts health insurers from discriminating against "any willing provider" that provides services to covered individuals, regardless of whether the provider is a member of the insurer's panel of providers.3 The second case4 takes up the issue of whether a prescription drug program in the State of Maine runs afoul of either the Constitution or the federal Medicaid program by requiring drug companies to participate in Maine Rx,5 a program designed to lower the cost of prescription drugs in the state.6 Both cases involve concerted efforts by states "to regulate health care industries widely blamed by the public for exploding costs and declining quality."7 Government officials in a growing number of states are attempting to deal with this perception, often resorting to regulatory schemes designed to protect consumers against various sectors of the health care industry.

In Kentucky Ass'n of Health Plans, Inc. v. Miller, several Kentucky health maintenance organizations (HMOs) challenged the right of the State of Kentucky to require HMOs to pay for the out-of-plan expenses incurred by HMOs' patient members. The state, through the its Department of Insurance, maintains that the statute gives patients greater options and more freedom to choose doctors.8 Kentucky does this by requiring that insurers deal with "any willing provider" (AWP). These AWP statutes, which have cropped up in several states, expand access for health care consumers.

At stake is the ability of the state to use its regulatory powers to try to control escalating health care costs by requiring insurers-a classification that includes HMOs under the statute in question9-to allow participation (and hence competition) by "any provider who is located within the geographic coverage area of the health benefit plan and who is willing to meet the terms and conditions for participation established by the health insurer . . . ."10 This measure was a response, according to lawyers for the state, to several problems: "(a) lack of insurance and inadequate access to health care; (b) financial barriers to access; (c) insurance marketplace practices; (d) administrative costs in private insurance policies; (e) market fragmentation and purchaser confusion; and (f) poor allocation of health care providers in the state."11 While lawyers for Kentucky recognize that the AWP statute may increase costs for HMOs, they maintain that "the need for and benefits of an AWP law for insureds outweigh[s] the possibility of increased costs for insurers."12

The HMOs challenged the AWP provisions, claiming that the statute violates the Employee Retirement Income Security Act of 1974 (ERISA).13 Under ERISA, state enactments that relate to employee benefit plans are preempted by the federal statutory scheme.14 ERISA contains a "savings" provision, however, that exempts state laws that deal with "insurance" from the preemption.15 The Sixth Circuit found that the Kentucky statute clearly implicates ERISA and could therefore be preempted unless the "savings" clause could be invoked.16 Looking at the statute from several different perspectives, the Sixth Circuit held that the Kentucky AWP statute was saved from preemption because of the fact that it was designed to deal with an insurance issue.17 Judge John Holschuh wrote for the majority, saying that the "Kentucky Act meets the common sense test in that it clearly does regulate insurance. The fact that it includes within its reach HMOs as well as traditional insurance companies does not take it out of the realm of insurance regulation."18

The HMOs argue that the AWP statute essentially undermines the ability of an HMO to contract with third-party providers to furnish services at advantageous prices. Relying on the Supreme Court's opinion in Group Life & Health Ins. Co. v. Royal Drug Co., Inc.,19 the HMOs maintain that the contracting relationship between themselves and providers, which is implicated by the AWP statute, is not part of the HMOs "business of insurance."20 As such, then, the scope of the statute is too broad. If this is the case, the "savings" clause in ERISA does not operate and the AWP statute is preempted. Variations of this reasoning have been employed by both the Fifth and the Eighth Circuits, which have struck down similar AWP statutes.21

The Bush Administration has sided with the State of Kentucky,22 and Solicitor General Theodore Olson has argued that the Sixth Circuit's reasoning is sound. If the Kentucky AWP statute is upheld, several states seem poised to enact similar legislation in an attempt to give consumers greater choice when making health-care decisions.23 On the other hand, if the Supreme Court decides that the AWP scheme employed here is preempted by ERISA, state legislators will have to return to the drawing board in an attempt to deal with the ongoing health care crisis. Legislators in Maine may face a similar challenge, depending on how the Court rules in the case involving Maine Rx.

On January 22, 2003, the Supreme Court heard arguments in Pharmaceutical Research & Manufacturers of America v. Concannon. Pharmaceutical Research & Manufacturers of America (PhRMA) appealed a First Circuit opinion24 that held that the State of Maine did not violate the Interstate Commerce Clause or the federal Medicaid statute25 in designing a program to lower the state's prescription drug costs. Under the program, the state would purchase drugs from participating pharmaceutical manufacturers at a volume discount (called "rebates"). Maine residents enroll in the program and have the savings passed on to them as members of the statewide plan. Manufacturers who give such volume discounts would have increased access to Maine residents by getting preferential treatment from pharmacies that participate in the state's scheme, especially when the patient is a Medicaid recipient. Pharmaceutical manufacturers that do not give the state a volume discount, however, would not receive the preference.26

"More importantly, the drugs of all noncompliant manufacturers are required to be subject, 'as permitted by law,' to the 'prior authorization requirements' in the state Medicaid program. … When subjected to prior authorization, a drug may not be dispensed to a Medicaid beneficiary without the approval of the State Medicaid administrator."27 PhRMA challenged the Maine program, saying that the statute was an impermissible restraint on interstate commerce and that the provisions that deal with Medicaid contradict the federal mandates that govern administration of Medicaid funds by the states.28 The First Circuit disagreed, saying that the Rx program does not offend the dormant Commerce Clause. The court held that the program "is not an extraterritorial regulation on interstate commerce because it does not regulate conduct occurring outside the state, but only regulates in-state activities."29 Addressing the claim that the statute violates the federal Medicaid program requirements, the First Circuit said that the Maine program "sets forth prior authorization procedures that are consistent with those explicitly permitted by Medicaid."30

PhRMA appealed these holdings to the Supreme Court, claiming that the scope of the program extends to national drug pricing strategies. PhRMA also complains that officials administering the Maine program have not sought requisite approval from the Department of Health and Human Services (HHS) for its prior authorization "sanctions."31 Summing up both of these points during oral argument before the Court, PhRMA attorney Carter Phillips suggested that the Maine program "reach[es] out and hold[s] the recipients of Medicaid as hostages in order to extract money from out-of-state manufacturers."32 Phillips argues that this subverts the purpose of Medicaid and tramples upon interstate commerce.

The Maine Rx program was never actually implemented because PhRMA filed suit before the effective date of the Act. As a result, the claims of PhRMA's attorneys are factually untested. The Court noted this during oral argument, with several Justices suggesting that the case was not yet ripe.33 Solicitor General Olson suggested that HHS Secretary Tommy Thompson be given more time to make a judgment regarding the permissibility of this type of incentive program.34 Andrew Hagler, an assistant attorney general for the State of Maine, responded that the Court should decide the case now, however, because Secretary Thompson has yet to formulate any real response.35 Mr. Hagler's position is undoubtedly motivated by the fact that the Bush Administration has sided with the drug makers.

A great deal is riding on the Court's decision in the PhRMA case, as twenty-nine states and Puerto Rico have indicated their support for this type of incentive program.36 Secretary Thompson has previously said that this sort of experimentation by states is permissible if they advance Medicaid's purpose.37 As the program goes beyond the scope of Medicaid, however, the implications are potentially more far-reaching. States could, depending on the outcome in this case, have much more power to combat the drug companies in an attempt to curb health care spending by both public and private actors. This could, as the First Circuit said, in quoting Justice Brandeis, lead to "one of the happy incidents of the federal system [when] a single courageous state may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country."38

These state laboratories are vital if the problems with our health care system are to be addressed. Americans have long toiled against decreased access to quality and affordable health care. Health care delivery options have dwindled in recent decades, and costs to both consumers and governments have skyrocketed. Unfortunately, the federal government has failed to provide any leadership in this arena. President Clinton attempted to foster comprehensive health-care reform in 1993, but since that failed the federal government has shown a decided lack of enthusiasm for combating the huge lobbing interests of the insurance companies and drug manufacturers. If state legislators have the motivation and fortitude to do what Congress and the President do not, they should be applauded. Perhaps the Supreme Court, which so often says that the right of states to act should be protected, will agree.

Endnotes
1. Kentucky Ass'n of Health Plans, Inc. v. Miller, Case No. 00-1471.
2. At issue is the "Kentucky Health Care Reform Act," KY. REV. STAT. ANN. § 304.17A-100(4)(a) (Banks Balwin 1995).
3. KY. REV. STAT. ANN. § 304.17A-270 (Banks Baldwin 1995).
4. Pharmaceutical Research & Mfrs. of Am. v. Concannon, Case No. 01-188.
5. 2000 Me. Legis. Serv. ch. 786 (S.P. 1026) (L.D. 2599).
6. Pharmaceutical Research & Mfrs. of Am. v. Concannon, 249 F.3d 66, 71 (1st Cir. 2001).
7. Charles Lane, Court Hears Arguments on Kentucky HMO Law, WASH. POST A06 (Jan. 15, 2003).
8. Id.
9. KY. REV. STAT. ANN. § 304.17A-005(22).
10. KY. REV. STAT. ANN. § 304.17A-270.
11. Brief of Res., at 2, Kentucky Ass'n of Health Plans, Inc. v. Miller, Case No. 00-1471.
12. Id. at 4.
13. Brief of Pet., at 12, Kentucky Ass'n of Health Plans, Inc. v. Miller, Case No. 00-1471.
14. 29 U.S.C. § 1144 (a)-(b); Kentucky Ass'n of Health Plans, Inc. v. Nichols, 227 F.3d 352, 357 (6th Cir. 2000).
15. 29 U.S.C. § 1144 (b)(2)(A).
16. Nichols, 227 F.3d at 363.
17. Id. at 364.
18. Id.
19. 440 U.S. 205 (1979).
20. Brief of Pet., at 9, Kentucky Ass'n. of Health Plans, Inc. v. Miller, Case No. 00-1471.
21. Texas Pharmacy Ass'n v. Prudential Ins. Co. of Am., 105 F.3d 1035 (5th Cir. 1997); Prudential Ins. Co. of Am. v. National Park Med. Ctr., Inc., 154 F.3d 812 (8th Cir. 1998).
22. Court Hears Arguments on Kentucky HMO Law, supra note 7, at A06.
23. Id.
24. Concannon, 249 F.3d at 66.
25. 42 U.S.C. § 1396 et seq.
26. Concannon, 249 F.3d at 71-72.
27. Id. at 72.
28. See id. at 66.
29. Id. at 85.
30. Id.
31. Brief of Pet., at 10, Pharmaceutical Research & Mfrs. of Am. v. Concannon, Case No. 01-188.
32. Oral Argument Transcript, at 4 (lines 20-23).
33. Charles Lane, High Court Considers Cost of Prescriptions, WASH. POST A02 (Jan. 23, 2003).
34. Id.
35. Oral Argument Transcript, at 37 (lines 13-16) and 38 (line 7).
36. High Court Considers Cost of Prescriptions, supra note 33.
37. Id.
38. Concannon, 249 F.3d at 85, quoting New State Ice Co. v. Liebmann, 285 U.S. 262, 310 (1932) (Brandeis dissent).