```

[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]

 SMARTER HEALTH CARE PARTNERSHIP FOR AMERICAN FAMILIES: MAKING FEDERAL 
   AND STATE ROLES IN MANAGED CARE REGULATION AND LIABILITY WORK FOR 
            ACCOUNTABLE AND AFFORDABLE HEALTH CARE COVERAGE

=======================================================================

                                HEARING

                               before the

                         SUBCOMMITTEE ON HEALTH

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 15, 2001

                               __________

                            Serial No. 107-9

                               __________

       Printed for the use of the Committee on Energy and Commerce

 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 house

                               __________

                   U.S. GOVERNMENT PRINTING OFFICE
71-493                     WASHINGTON : 2001

_______________________________________________________________________
 For sale by the Superintendent of Documents, U.S. Government Printing 
                                 Office
Internet: bookstore.gpo.gov  Phone: (202) 512-1800  Fax: (202) 512-2250
               Mail: Stop SSOP, Washington, DC 20402-0001

                    ------------------------------  

                    COMMITTEE ON ENERGY AND COMMERCE

               W.J. ``BILLY'' TAUZIN, Louisiana, Chairman

MICHAEL BILIRAKIS, Florida           JOHN D. DINGELL, Michigan
JOE BARTON, Texas                    HENRY A. WAXMAN, California
FRED UPTON, Michigan                 EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida               RALPH M. HALL, Texas
PAUL E. GILLMOR, Ohio                RICK BOUCHER, Virginia
JAMES C. GREENWOOD, Pennsylvania     EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California          FRANK PALLONE, Jr., New Jersey
NATHAN DEAL, Georgia                 SHERROD BROWN, Ohio
STEVE LARGENT, Oklahoma              BART GORDON, Tennessee
RICHARD BURR, North Carolina         PETER DEUTSCH, Florida
ED WHITFIELD, Kentucky               BOBBY L. RUSH, Illinois
GREG GANSKE, Iowa                    ANNA G. ESHOO, California
CHARLIE NORWOOD, Georgia             BART STUPAK, Michigan
BARBARA CUBIN, Wyoming               ELIOT L. ENGEL, New York
JOHN SHIMKUS, Illinois               TOM SAWYER, Ohio
HEATHER WILSON, New Mexico           ALBERT R. WYNN, Maryland
JOHN B. SHADEGG, Arizona             GENE GREEN, Texas
CHARLES ``CHIP'' PICKERING,          KAREN McCARTHY, Missouri
Mississippi                          TED STRICKLAND, Ohio
VITO FOSSELLA, New York              DIANA DeGETTE, Colorado
ROY BLUNT, Missouri                  THOMAS M. BARRETT, Wisconsin
TOM DAVIS, Virginia                  BILL LUTHER, Minnesota
ED BRYANT, Tennessee                 LOIS CAPPS, California
ROBERT L. EHRLICH, Jr., Maryland     MICHAEL F. DOYLE, Pennsylvania
STEVE BUYER, Indiana                 CHRISTOPHER JOHN, Louisiana
GEORGE RADANOVICH, California        JANE HARMAN, California
CHARLES F. BASS, New Hampshire
JOSEPH R. PITTS, Pennsylvania
MARY BONO, California
GREG WALDEN, Oregon
LEE TERRY, Nebraska

                  David V. Marventano, Staff Director

                   James D. Barnette, General Counsel

      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

                         Subcommittee on Health

                  MICHAEL BILIRAKIS, Florida, Chairman

JOE BARTON, Texas                    SHERROD BROWN, Ohio
FRED UPTON, Michigan                 HENRY A. WAXMAN, California
JAMES C. GREENWOOD, Pennsylvania     TED STRICKLAND, Ohio
NATHAN DEAL, Georgia                 THOMAS M. BARRETT, Wisconsin
RICHARD BURR, North Carolina         LOIS CAPPS, California
ED WHITFIELD, Kentucky               RALPH M. HALL, Texas
GREG GANSKE, Iowa                    EDOLPHUS TOWNS, New York
CHARLIE NORWOOD, Georgia             FRANK PALLONE, Jr., New Jersey
  Vice Chairman                      PETER DEUTSCH, Florida
BARBARA CUBIN, Wyoming               ANNA G. ESHOO, California
HEATHER WILSON, New Mexico           BART STUPAK, Michigan
JOHN B. SHADEGG, Arizona             ELIOT L. ENGEL, New York
CHARLES ``CHIP'' PICKERING,          ALBERT R. WYNN, Maryland
Mississippi                          GENE GREEN, Texas
ED BRYANT, Tennessee                 JOHN D. DINGELL, Michigan,
ROBERT L. EHRLICH, Jr., Maryland       (Ex Officio)
STEVE BUYER, Indiana
JOSEPH R. PITTS, Pennsylvania
W.J. ``BILLY'' TAUZIN, Louisiana
  (Ex Officio)

                                  (ii)

                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    deMontmollin, Stephen J., Vice President and General Counsel, 
      AVMED Health Plan..........................................    59
    Greenman, Jane F., Deputy General Counsel, Human Resources, 
      Labor and Benefits, Honeywell..............................    65
    Larsen, Hon. Steven B., Insurance Commissioner, Maryland 
      Insurance Administration...................................    22
    Monson, Hon. Angela, Senator, State of Oklahoma..............    29
    Palmisano, Donald J., Member, Board of Trustees, American 
      Medical Association........................................    70
    Pollack, Ronald F., Executive Director, Families USA.........    33
    Rosenbaum, Sara, Director, Center for Health Services 
      Research and Policy........................................    80
Material submitted for the record by:
    deMontmollin, Stephen J., Vice President and General Counsel, 
      AVMED Health Plan, letter dated April 9, 2001, enclosing 
      response for the record....................................   110
    ERISA Industry Committee, The, letter dated April 23, 2001, 
      enclosing response for the record..........................   121
    Larsen, Hon. Steven B., Insurance Commissioner, Maryland 
      Insurance Administration, letter dated April 19, 2001, 
      enclosing response for the record..........................   123
    Monson, Hon. Angela, Senator, State of Oklahoma, letter dated 
      April 11, 2001, enclosing response for the record..........   127
    Rosenbaum, Sara, Director, Center for Health Services 
      Research and Policy, letter dated March 22, 2001, enclosing 
      response for the record....................................   108

                                 (iii)

  

 
 SMARTER HEALTH CARE PARTNERSHIP FOR AMERICAN FAMILIES: MAKING FEDERAL 
   AND STATE ROLES IN MANAGED CARE REGULATION AND LIABILITY WORK FOR 
            ACCOUNTABLE AND AFFORDABLE HEALTH CARE COVERAGE

                              ----------                              

                        THURSDAY, MARCH 15, 2001

             U.S. House of Representatives,
                  Committee on Energy and Commerce,
                                    Subcommittee on Health,
                                                    Washington, DC.
    The subcommittee, pursuant to notice, at 10 a.m., in room 
2322, Rayburn House Office Building, Hon. Michael Bilirakis 
(chairman) presiding.
    Members present: Representatives Bilirakis, Greenwood, 
Burr, Whitfield, Ganske, Wilson, Shadegg, Bryant, Buyer, Pitts, 
Tauzin (ex officio), Brown, Strickland, Barrett, Capps, 
Pallone, Engel, Wynn, Green, and Dingell (ex officio).
    Staff present: Nandan Kenkeremath, majority counsel; Yong 
Choe, legislative clerk; and Bridgett Taylor, minority counsel.
    Mr. Bilirakis. I call the hearing to order.
    As most of you know, many members of this committee and the 
Congress as a whole have been grappling with the issues 
involved in the managed care debate for a number of years now.
    Today I think we are closer than we ever have been to 
finding common ground on several key issues.
    Although some of the players have changed, the goal is the 
same; that is, a piece of legislation that can be passed by 
both the House and the Senate and signed into law by the 
President.
    Managed care is no longer a new method of health care 
delivery. It has become an integral part of our national system 
of health coverage.
    In the public and private sectors, millions of Americans 
participate in managed care plans.
    Clearly, opinions differ on this sensitive subject. Some 
patients are pleased with the type of benefits and treatment 
they have received, while others have had difficulty obtaining 
the type and quality of care they need.
    Most lawmakers are in general agreement on some of the 
basic issues of concern regarding managed care.
    This hearing will focus on two issues which still bedevil 
us: the Federal and State regulatory roles for scope and 
liability.
    Many stakeholders are particularly concerned about new 
causes of action that may increase litigation and uncertainty, 
thereby driving employers away from providing the health 
coverage many Americans depend upon.
    I am hopeful that we can also tackle the difficult issue of 
medical malpractice this year, and we may hear from some of our 
witnesses on that issue.
    I would like to welcome our witnesses and thank you all for 
joining us today. I want to extend a particular welcome to a 
fellow Gator fan, Steve deMontmollin, who is the Vice President 
and General Counsel for AvMed, a managed care organization 
based in Gainesville, Florida, which operates throughout the 
State.
    I greatly appreciate the time and effort of all of our 
witnesses who will share their views on these important issues.
    I look forward to using the information gained today as we 
work with the President and our colleagues in the Energy and 
Commerce Committee to enact responsible managed care 
legislation in this Congress.
    Members of this subcommittee have worked for over 6 years 
to craft and enact responsible managed care reforms that do not 
impede access to health insurance. Our current system utilizes 
a confusing patchwork of Federal and State regulatory and 
enforcement relationships, and we do not want to make that 
situation worse.
    Recognizing that new legislative mandates could add to that 
complexity, we must be informed and precise in all of our 
actions.
    I am pleased that the President has taken a leadership role 
in outlining principles in support of a broad set of patient 
protections to a system that provides deference to State laws 
and the traditional authority of States to regulate health 
insurance.
    The White House principals also State employers should be 
shielded from unnecessary and frivolous lawsuits and should not 
be subject to multiple lawsuits in State court.
    I believe there is a general consensus on this point and we 
should ensure that any legislation accomplishes this result.
    Stakeholders on all sides of this thorny issue have found 
areas of consensus in the President's Principles. As a result 
of his leadership, I am optimistic that we can enact 
responsible legislation this year.
    Of course, before any measure can be presented to the 
President for signature, the House and Senate must first reach 
agreement. The role of Congress is critical in this process and 
we must work together to find bipartisan solutions to the 
Nation's health care problems.
    I now yield to my good friend, the ranking member, Mr. 
Brown.
    Mr. Brown. I thank you, Mr. Chairman. I thank our 
distinguished witnesses, especially my friend Ron Pollack, and 
Sara Rosenbaum and others, thank you all for being here.
    Beyond jurisdiction, there is another good reason for this 
subcommittee to hold a hearing on the Patients' Bill of Rights.
    Our subcommittee is fortunate to include the policymakers 
in this Congress who have led the fight for managed care 
reform.
    Ranking Member Dingell, Charlie Norwood, Greg Ganske, Frank 
Pallone, John Shadegg, all of them. These lawmakers have 
already brought about beneficial changes in the health care 
system and they are poised to finish the job.
    It would be difficult to underestimate their contribution 
and achievement.
    We owe, the Nation owes a particular debt of gratitude to 
Charlie Norwood and John Dingell and Greg Ganske. They 
supported patient protections when the political barriers 
seemed insurmountable. They supported patient protections, 
whether their colleagues stood with them or not.
    They supported patient protections, despite continual 
pressure from powerful and firmly entrenched interest groups in 
Washington. They supported patient protections because health 
insurance is meant to allay worry, not to compound it. And they 
supported patient protections until, finally, a majority in 
Congress saw things their way.
    Their efforts have brought us closer than we have ever been 
to enacting meaningful patient protections. The key word is 
meaningful. If we enact rights that can't actually be 
exercised, they are simply not rights.
    I want to focus on the right to sue. As I see it, the goals 
are, one, to deter irresponsible coverage decisions; two, to 
provide an appropriate judicial forum for settling health plan 
contract disputes; three, to provide genuine resource for 
individuals who have been materially harmed by a health plan's 
medical decision; and, four, to prevent frivolous lawsuits.
    A related goal is to make sure that the right party is 
being sued. In other words, an employer should never be held 
liable unless that employer does something employers don't do; 
that is, he or she takes over the role of medical examiner, 
reviewing individual claims and making explicit medical 
decisions.
    How do we achieve these goals? If we can enact legislation 
that includes a strong independent external appeals mechanism 
and timely bona fide access to the appropriate court system, we 
have knocked off the first four goals. If we write explicit 
language into this legislation that protects employers from 
exposure to liability when a third party is making medical 
decisions, we have accomplished the fifth goal.
    The President believes all suits should go through Federal 
courts. Unfortunately, that approach fails to meet two key 
goals associated with the right to sue, deterring irresponsible 
treatment decisions and providing genuine recourse when 
individuals have been materially harmed by a treatment 
decision.
    Obviously, simply ensuring individuals access to a court, 
even if it is the wrong one, is no real deterrent to reckless 
health plan behavior and it certainly doesn't provide a 
legitimate remedy when health plan decisions cause serious harm 
to enrollees.
    Ranking Member Dingell and Mr. Ganske, along with Senators 
Edwards and McCain, have introduced legislation that bifurcates 
lawsuits into categories that reflect the court system best 
suited to hearing them.
    Contract disputes would and should be resolved in Federal 
courts. Personal injury cases would and should be heard in 
State courts.
    Their bill also includes a specific prohibition on suing 
employers for actions that the health plan takes.
    With these provisions, the bill's authors have done a 
stellar job meeting, I believe, all five goals, and I commend 
them for it.
    This is not a legislative hearing, per se, but it would be 
foolish to ignore good ideas that are already on the table.
    I hope we can continue to look to the members that have led 
on this issue as a source of very good ideas.
    Thank you, Mr. Chairman.
    Mr. Bilirakis. I thank the gentleman. The remaining opening 
statements will be limited, in concert with the rules, to 3 
minutes.
    The Chair recognizes Dr. Ganske.
    Mr. Ganske. Thank you, Mr. Chairman. In today's Roll Call, 
there is a two-page ad, ``Quality Health Care, Not Frivolous 
Lawsuits: President Bush, We Couldn't Agree with You More,'' 
and a long list of companies.
    And you know what? You can put my name on that, too. 
There's a lot of myths out there, and I want to talk a little 
bit about the Ganske-Dingell bill.
    Myth No. 1, that our bill would lead to a flood of 
litigation. The Ganske-Dingell bill's legal liability 
provisions will not create a widespread rush to the courthouse.
    We ensure that the vast majority of disputes between 
managed care plans and patients would be resolved without the 
need for legal intervention, because we have a strong appeals 
process, both internal and external.
    Under the bill, the patients would have to complete the 
internal and external appeals process before proceeding to 
court, unless there is danger of immediate and irreparable 
harm, or death has already occurred.
    The Texas experience shows that over the last 4 years, 
external appeals, internal appeals work. There have only been 
10 lawsuits.
    Myth No. 2, employers can be sued under the Ganske-Dingell 
bill. Fact: employers cannot be held liable unless they have 
directly participated in the actual making of the decisions 
about the patient's care.
    You know what? That is what Van-Hillary was proposing in 
one of the substitutes 2 years ago. We made a good faith effort 
to move toward employers on this and, once again, they have 
stepped away and moved that goalpost.
    The Ganske-Dingell bill provides that an employer only can 
be held legally accountable when it directly participates in 
the actual making of the decision or the actual exercise of 
control in making the decision were in the conduct constituting 
the failure.
    In those rare instances, employers should be held 
accountable, and I will talk about a few cases on that.
    Further, the bill expressly states that employers cannot be 
sued for, A, picking the plan; B, picking the third-party 
administrator; C, conducting a cost-benefit analysis of the 
plan; D, modifying or terminating the plan; E, designing the 
plan benefit; or, F, advocating for coverage, additional 
coverage for an enrollee, and defining medical necessity in a 
certain way also does not constitute direct participation.
    Myth No. 3, with a strong appeals process, there is no need 
for legal accountability with managed care. Well, fact: 
although you need a strong and independent appeals process and 
it is essential, it won't suffice. Let me give one example.
    Mr. Bilirakis. Mr. Ganske, your time has expired.
    Mr. Ganske. Thirty seconds, Mr. Chairman.
    Mr. Bilirakis. Without objection. I don't want that to be 
the start of something here.
    Mr. Ganske. Thank you. A patient sustained injuries to his 
neck and spine from a motorcycle accident, after he was taken 
to the hospital.
    The hospital's physicians recommended immediate surgery, 
but the health plan, the HMO, refused to certify the procedure. 
Soon afterwards, the patient was paralyzed.
    That patient didn't have a chance to go through an internal 
and external appeals process. Are you going to continue with 
ERISA, which says the only liability, the only remedy is the 
cost of care denied? I think that is not justice.
    Thank you, Mr. Chairman.
    Mr. Bilirakis. I thank the gentleman.
    Mr. Dingell, for an opening statement.
    Mr. Dingell. Mr. Chairman, your courtesy is appreciated. I 
commend you and Chairman Tauzin for your interest in this very 
important matter of the Patients' Bill of Rights.
    I want to say that I hope my colleagues and our audience 
were listening to Dr. Ganske, my co-sponsor and good friend, 
and I want to commend him and Mr. Brown and, also, my very 
special friend, Dr. Norwood, for the fine leadership that they 
and so many others have given on this particular piece of 
legislation.
    There are a number of things that need to be addressed. 
First of all, we have to see to it that the rights in the 
Patients' Bill of Rights go to all people who are covered by 
plans of this kind and not just to a portion.
    Second of all, we have to address the problem of liability 
fairly and to see to it that we, in fact, have a liability 
system which assures that the patient gets what he wants and 
what he thinks he is getting under the plan of which he is a 
part.
    I would note that we didn't include such device in the 
Kennedy-Kassebaum bill and, as a result, that bill is largely 
nugatory in its impact.
    I would note that last year Dr. Ganske and I co-sponsored a 
bill with the help and the leadership and participation and 
counsel of Dr. Norwood that provides some middle ground on the 
question of liability.
    It says that traditionally cases which have gone to State 
court, i.e., medically reviewable decisions, will continue to 
go there; that contract cases will, of course, go to Federal 
courts.
    This whole question of lawsuits is a red herring, as has 
been observed, as also is the unfortunate question of the other 
unfortunate questions that are raised.
    I would note that when you are hurt by wrongdoing, you 
ought to have some remedy. Denial of that remedy is clearly 
wrong. ERISA provides shelter for wrongdoing and there are only 
two categories of persons in this Nation who can absolutely 
escape liability for their wrongdoing. One is foreign diplomats 
and the other is HMOs under the ERISA situation.
    I think we have the capacity to get at least one crowd of 
wrongdoers, and I think it would be a splendid idea that we did 
so.
    Having said this, I have a superb opening statement, Mr. 
Chairman, that I know you and the other participants in this 
matter will enjoy reading. I would ask unanimous consent that 
it be inserted in the record, and I believe I have made my 
statement conclude in a timely fashion, and I thank you.
    [The prepared statement of Hon. John D. Dingell follows:]

    PREPARED STATEMENT OF HON. JOHN D. DINGELL, A REPRESENTATIVE IN 
                  CONGRESS FROM THE STATE OF MICHIGAN

    I am pleased Chairman Tauzin has taken an interest in the Patients' 
Bill of Rights, an issue that many of us on this Committee have worked 
on for some time now. I am also pleased that Chairman Bilirakis has 
called this hearing. Today, we are going to hear about scope and 
liability, both critical components of a patient protection bill.
    I am not quite sure why we are even talking about scope. I don't 
think there is anyone here, on this Committee or in the audience, who 
would say that we shouldn't protect all patients. It's the right thing 
to do, and it's what we will do--ensure that all Americans are 
guaranteed basic, minimum protections. Some will propose loopholes and 
escape clauses, but those will not stand public scrutiny.
    But on the question of liability, the differences are significant, 
and the key question remains: will consumers have a real remedy that 
offers them meaningful recourse, or will consumers be left with only an 
illusory solution to their current plight? We have a President who is 
calling for a federal liability scheme, one that would preempt state 
laws currently on the books. But the House passed a bill last year that 
allowed state courts to continue their work without federal 
interference. How can and should these be resolved?
    This year, Dr. Ganske and I co-authored a bill, with the help and 
counsel of Dr. Norwood, that provides a middle ground. We preserve 
ERISA's uniformity for benefit decisions--which is what many employers 
have expressed concern about--yet at the same time, we allow states to 
continue their work without the federal interference of ERISA by 
reinstating the states' traditional purview over personal injury tort 
cases. This approach is balanced, sound, and fair.
    Whether consumers will go to Federal court or state court when they 
are injured, is not just quibbling over which court to go to. It is the 
difference between a workable and meaningful remedy and a remedy so 
riddled with roadblocks, hurdles, and complications that it is of no 
use to anyone. The federal remedies I've seen offered thus far are so 
narrow in scope as to be practically meaningless.
    Moreover, a federal remedy for medical cases ignores the 
traditional role of state courts in addressing personal injury matters. 
Whether you have been hurt by slipping on the floor in Wal-Mart or by a 
doctor or hospital, these are personal injury cases. A federal remedy, 
therefore, duplicates the work of state courts and doubles the number 
of lawsuits--patients would be forced to hold their doctor accountable 
in state court and their HMO accountable in Federal court. And, it 
leaves patients vulnerable to an HMO's ``empty chair'' defense, as HMOs 
in Federal court will always blame the doctor or hospital, who will not 
be there. Finally, it delays patients' ability to get a remedy. Why 
should injured patients have to wait in line behind drug dealers and 
criminals before they can get their case heard? I don't know about you, 
but I put injured patients before criminals any day.
    Not only that, but restricting consumers to a federal remedy is 
worse than an empty promise. The Supreme Court recently ruled that 
medical decisions that cause injury could appropriately be heard in 
state court. To provide an exclusively federal remedy would undo what 
patients have already gained through that Supreme Court decision. It's 
no wonder some health plans and employers are interested in a federal 
remedy--they can escape the current trend in state courts to hold them 
accountable for their actions. We cannot let this Trojan horse within 
the city walls. Our goal is to provide meaningful remedies for 
consumers, not take them away.
    I am pleased this hearing focuses on the important issue of 
liability, and I look forward to hearing our witnesses. I hope this can 
be the year all Americans receive effective and enforceable patient 
protections.

    Mr. Bilirakis. I can't even respond to that. Without 
objection, the opening statements of all members of the 
subcommittee will be made a part of the record.
    The Chair now recognizes Mr. Buyer for an opening 
statement.
    Mr. Buyer. Thank you, Mr. Chairman. I have an opening 
statement I'd like to submit for the record.
    Mr. Bilirakis. Without objection.
    Mr. Buyer. And in response, I would say that the issue over 
the litigation provisions is not a red herring. It is more like 
a whale for trial lawyers.
    I would also say that just the mere allegation of the 
immediate irreparable harm means that it is the access to 
litigation.
    So I am very concerned about that, Dr. Ganske. I respect 
your medicine, but being a trial lawyer myself, I would love 
what you're trying to do. But if you believe in reducing the 
litigation in our society, we are such a litigious society, I 
am stunned that a doctor would advocate that.
    Great praise and gratitude should be offered to Mr. Shadegg 
and Dr. Coburn. Why? Because they sought to find the middle 
ground, and I believe that they found that middle ground, and I 
would like to yield the balance of my time to Mr. Shadegg.
    [The prepared statement of Hon. Steve Buyer follows:]

 PREPARED STATEMENT OF HON. STEVE BUYER, A REPRESENTATIVE IN CONGRESS 
                       FROM THE STATE OF INDIANA

    Mr. Chairman: I thank you for having this hearing which focuses on 
two areas of contention in the debate on protecting patients in managed 
health care settings. Before moving into that, however, I think it is 
important to first mention the areas in which there is a great deal of 
agreement.
    There is really not much dispute that in the event of a medical 
emergency, patients should be able to access the emergency room. If an 
individual thinks a heart attack is occurring, that person should have 
no hesitation in going to the emergency room.
    Patients who need specialized treatment should have access to 
specialists.
    Women should have direct access to obstetricians and gynecologists.
    Parents should have peace of mind and be able to choose a 
pediatrician for their children, if that is their desire.
    Plans should provide clear and concise information to consumers 
about the coverage in the health plan.
    The focus of this hearing is on the areas of disagreement: the 
extent of the federal role into what has traditionally been a State 
regulated environment; and the ability of patients to sue employers for 
decisions related to health benefits.
    This subcommittee and this Congress need to recognize that 
employers have provided access to quality health care to millions of 
Americans. And many of these people like the coverage they get through 
their employer. It is reliable, it is hassle free, and it is 
affordable.
    I agree that those who make medical decisions should be held 
accountable when the patient is harmed by that decision.
    However, we must tread carefully and not simply accuse employers of 
medical malpractice simply because they provide health insurance to 
their employees. Increasing litigation will result in less health care, 
not more.
    Finally, I applaud the President for stepping forward in this 
debate. He has given us a viable set of principles. We need to work 
with the President to turn these principles into legislation that can 
be signed into law.

    Mr. Shadegg. I thank the gentleman for yielding, and I will 
be brief.
    I was going to say in my own opening statement, and I will 
say it now, that this has been an issue characterized by two 
polar extremes.
    On the one hand, you have a position which says that HMOs 
which injure people will enjoy absolute immunity when they do 
so, and I couldn't agree more with my colleague, Mr. Dingell, 
that no one in this society should be absolutely immune for the 
consequences of their conduct.
    The reality of that public policy is that it simply 
encourages bad decisions, and it does not encourage care, and 
at the end of the day, we need a system that encourages care.
    So for my friend, Dr. Ganske, and my friend, Dr. Norwood, 
who have led in this fight, I commend them. The policy of 
allowing an HMO to injure or kill a patient by the result of 
their decision and go without paying any consequence, other 
than the cost of care denied, which is a joke, is, I think, 
clearly wrong.
    But sadly, at the other end of this pendulum is the other 
extreme, and the other extreme says we ought to be able to sue 
any plan anytime over anything, and the sad fact is that that 
kind of a public policy will have consequences.
    And in my opening statement, I will talk about the specific 
provisions of the language that is in the current legislation 
that has been discussed here today, the Edwards-Kennedy 
legislation, Dr. Ganske's legislation, which I don't believe is 
seriously intended, because it will, in fact, open a floodgate 
of lawsuits and enable, for example, employers to be sued and 
held into that lawsuit all the way to the end of the 
litigation, merely because they bought the health insurance and 
offered it to their employees.
    I would urge us as a committee to do what my friend Mr. 
Brown talked about and what the chairman referred to, and that 
is seek to find common ground. Enough of the extremes of this 
debate. Enough of the trial advocates at the one end of the 
spectrum and enough of the pure HMO interests at the other end 
of the spectrum asking for immunity.
    We have to, for the sake of the American people, find 
middle ground on this issue and pass a bill which will, in 
fact, improve health care in America for all Americans.
    And I yield back.
    Mr. Bilirakis. I thank the gentleman. Mr. Pallone.
    Mr. Pallone. Mr. Chairman, let me say, first of all, that I 
think we've found the middle ground, and it disturbs me to hear 
of those who think that we haven't.
    I want to start by commending progressive Republicans like 
Mr. Ganske and Mr. Norwood and in the Senate, Senator McCain, 
because they introduced a bill which I co-sponsored a few weeks 
ago or a month ago that basically is similar to the Patients' 
Bill of Rights that was passed in the State of Texas and that 
is on the books in Texas, and was a very middle ground 
approach.
    It even limited punitive damages a little more than what we 
passed by a majority in the House last year, and I thought that 
we had a bill that we could fly with and all of a sudden to 
hear President Bush saying, ``Oh, that is not good enough, that 
doesn't meet my principles,'' and now those in the Senate, the 
Frist-Breaux people who are now trying to go down a slippery 
slope and say that it is not good enough and whittle away more 
at patients' rights, it is very, very disturbing to me.
    We are simply saying, and I think all of us who are 
progressive agree that the scope of this should be all-
encompassing, everybody should be included, and that you should 
have a legitimate viable right to sue if all else fails.
    And what we are seeing now, I know the hearing isn't a 
legislative hearing today, but what we are seeing now is the 
President and the Republican leadership, who never supported 
the Patients' Bill of Rights, who appointed people who were 
against the Patients' Bill of Rights to the conference last 
year, so we were never able to get a bill out, basically trying 
to whittle down the scope and the liability provisions.
    If you read, although we don't have a bill, what the Frist-
Breaux is basically saying, with regard to the scope, they are 
trying to do something where you can opt out for States, which 
I am very concerned about, basically limits the scope, and they 
are trying to say with regard to the right to sue that it 
should be a Federal, limited Federal right to sue, which, 
again, eliminates options for people who need to sue in State 
courts.
    And I just think that what we are going to see is that the 
people who were against the Patients' Bill of Rights last year 
are now trying to use these two issues and, again, whittle away 
from what we have essentially agreed on.
    We have a consensus. This passed in the House, with almost 
every Democrat, maybe every Democrat and about a third of the 
Republicans.
    President Bush, on the campaign trail, said he supported 
the Texas law. He didn't sign it, but he said he supported it 
and it was doing a good job.
    That is what Dr. Ganske and Mr. Dingell did. They basically 
took the Texas law and they made it into Federal law.
    What's wrong with it? It is working. As Dr. Ganske said, 
what have you had, like 10 suits so far? This is just an effort 
to kill this bill, to wear us all down, to drag out this 
process.
    I am not suggesting, Mr. Chairman, you shouldn't have the 
hearing today. I think the hearing is a good idea. But we need 
to pass the Dingell-Ganske bill. It has got bipartisan support. 
It can pass both houses if it is put up.
    I call upon the Republican leadership to put it up and to 
sign it into law as quickly as possible.
    Thank you, Mr. Chairman.
    Mr. Bilirakis. The Chair recognizes now, for his time, Mr. 
Shadegg.
    Mr. Shadegg. Thank you, Mr. Chairman. It is regrettable 
that this has a tendency to deteriorate into a partisan debate.
    I think it is vitally important that we resist that in 
every way.
    The reality is the American people deserve legislation in 
this area and it is incumbent upon this Congress and upon this 
President to find common ground.
    It is true that the debate has been characterized by the 
extremes to this point in time and it is sad that that is so.
    The chairman said in his opening remarks that our task is 
to find common ground, and he felt we were closer to finding 
common ground than we ever have been.
    I think that is right. Contrary to the comments of my 
colleague just a moment ago, for example, the basic patient 
protections in both the Ganske-Dingell, Kennedy-Edwards 
legislation, and in the alternative legislation that Dr. Coburn 
and I offered last year, those basic patient protections are 
nearly the same and they would extend to patients across 
America the fundamental rights that need to be extended to 
them.
    But there are critical differences and there are certain 
concerns where the two sides have to give up their extremes, 
and I'd like to begin by talking about some of the issues that 
have already been discussed.
    I think and I think it is worth noting that no one, no one 
in this city can plausibly believe that it is realistic to 
propose legislation on this topic which will allow employers to 
be sued, and yet the Edwards-Kennedy legislation clearly allows 
employers to be sued.
    Here is the language of the bill. We have copies of it for 
anybody who wants. It begins with a blanket statement that 
lawsuits against employers are precluded and then there is a 
large exception.
    It says a cause of action may arise, and here is where it 
says it may arise. It may arise if the employer directly 
participated in the final decision to deny care.
    Now, that sounds reasonable. And if the employer did 
participate in the final decision to deny care, they ought to 
be held liable. But the problem with this structure is that it 
creates a fact question--that is, did the employer participate 
in the final decision.
    That fact question goes all the way to the jury, which 
means every employer in America can be sued and can be held in 
that lawsuit all the way through the jury verdict, based on a 
mere allegation that they directly participated.
    There is an alternative structure that is well-known in 
this town called the designated decisionmaker, and that is a 
structure that says every employer could designate a health 
care decisionmaker, which is the entity that will make the 
health care decision and that entity may be sued and only that 
entity, although the employer, if they fail to designate such 
an entity or if they chose to retain the decision to make the 
health care decision, then the employer could be sued.
    That is a structure that protects all employers, and I 
don't think anybody can credibly say that structure isn't 
viable and shouldn't be the preferred alternative.
    Second, let's look at this issue of exhaustion. Exhaustion 
is vitally important right now because today health care plans 
in America today have a structure where they are being told how 
to practice medicine by HMOs.
    Well, HMOs don't have doctor's degrees and they shouldn't 
be telling doctors how to practice medicine.
    The reverse of that should be true. You should have a panel 
that tells the plan how, a panel of doctors that tells the plan 
how to practice medicine and what the standard of care ought to 
be in America.
    Unfortunately, the Kennedy legislation, the Edwards 
legislation creates two large exceptions for that. It is not 
death that is the issue. It creates an exception for late 
manifestation of injury and it creates an exception, as my 
colleague, Mr. Buyer pointed out, for immediate irreparable 
harm.
    But the key is it is a mere allegation of late 
manifestation of injury or a mere allegation of irreparable 
harm.
    Now, all that means is that any trial lawyer who wants to 
go directly to the court can cut out external review and that 
means doctors won't set the standard of care in America. That 
means trial lawyers will.
    You don't have to prove the late manifestation of injury. 
You simply have to allege it.
    Mr. Bilirakis. The gentleman's time has expired.
    Mr. Shadegg. You don't have to prove immediate irreparable 
harm. You merely have to allege it.
    We need to get beyond these points and get to some common 
ground.
    Mr. Bilirakis. Mrs. Capps.
    Mrs. Capps. I want to thank the chairman for holding this 
hearing. It is an important topic and many on this committee 
have worked very hard to address the need for patient 
protection in managed care.
    I particularly tip my hat to Mr. Dingell, Mr. Norwood, Mr. 
Ganske, and Mr. Brown. Their diligence and leadership 
throughout the last Congress led to a reasonable and bipartisan 
piece of legislation to protect patients and these efforts 
should serve as an example to us now, particularly in the area 
of liability components.
    Most managed care organizations want to give their 
beneficiaries adequate care, but they are operating in an 
environment designed to keep costs low. Not a bad thing, unless 
the pressures to cut corners are too severe.
    When this pressure is excessive and leads to bad decisions, 
abuse of patients' rights and quality health care are the 
result, there needs to be a counter force on the side of 
quality care, on the side of the patients, and that counter 
force is the threat of the courts.
    Access to the courts will help restore balance to the 
scales, will prevent the need for efficiency from outweighing 
the need for quality care.
    My constituents don't want to go to court to get their 
health care that they need, but sometimes HMOs don't want to 
provide that care. HMOs don't want to go to the courts either, 
but the threat of appropriate litigation is how average 
Americans will keep the HMOs honest. We need to give patients 
that tool.
    I am so pleased to see that the President has also 
recognized the need for patients to have access to the courts. 
I know there are differences between his position and the 
Ganske-Dingell-Norwood bill, but it seems to me they should be 
resolvable.
    In fact, I think this legislation meets the requirements 
the President laid out in his State of the Union on February 
27, in which he said, ``We will ensure access to the courts for 
those with legitimate claims, but first let's put in place a 
strong independent review so we promote quality health care, 
not frivolous lawsuits.''
    I hope the President will see that this sounds exactly like 
the Ganske-Dingell bill and will sign this legislation when we 
pass it.
    Now, I know the President believes the right to sue should 
be left to the Federal court, but this flies in the face of 
common sense and the advice of leading legal experts, including 
Chief Justice Rehnquist, who has stated that Federal courts 
should be reserved for cases that cannot be adequately handled 
by the State courts.
    For more than 200 years, State courts have been able to 
handle these types of personal injury and wrongful death cases. 
The experience and the precedent that the Federal bench lacks 
on these matters. Even so, the Ganske-Dingell bill includes a 
compromise on this issue in which matters of medical judgment 
are dealt with at the State court level and matters regarding 
benefits are addressed at the Federal level.
    And it is my hope that the President will see the wisdom of 
this compromise and accept it.
    Mr. Chairman, although this committee did not hold hearings 
on the Patients' Bill of Rights last year, its members have 
been very active on it. We know the issues, the background, the 
challenges we face, and we know how to overcome them.
    We know it is the right thing to do and we know it is what 
we will ultimately pass.
    Mr. Chairman, I look forward to working with you to move us 
quickly on these issues for these goals.
    If I have any remaining time, I will yield a few seconds to 
Mr. Brown.
    Mr. Bilirakis. By all means.
    Mr. Brown. I thank my friend from California. I just want 
to emphasize that the employer liability issue that we, on our 
side, and on both sides that support this issue have, we only 
want the employer to be liable when that employer itself, 
himself or herself, denies treatment, and that ends in injury 
or death for the patient.
    We have constructed it very narrowly. We have made repeated 
requests, we on the committee, we supporters of this bill. We 
have negotiated this issue and made repeated requests to 
employers, consumer groups have made repeated requests to 
employers, physician organizations have made repeated requests 
to employer organizations that say give us some language that 
keeps it that narrow.
    Mr. Shadegg. Will the gentleman yield?
    Mr. Bilirakis. The gentleman's time has long expired. The 
chairman of the full committee, Chairman Tauzin.
    Chairman Tauzin. Thank you, Mr. Chairman. Let me commend 
you for holding this important hearing.
    It is no secret that in the years passed, this committee 
was essentially bypassed on this critical issue of managed care 
reform. I hope all the visitors today will know that this 
committee is now meeting this issue head on. That is a marked 
departure from the past and I hope it is well received and well 
respected by all of you who have come here to testify and to 
help educate us on the issue.
    While the names of members of this committee, Mr. Norwood, 
Mr. Dingell, Mr. Ganske, Mr. Shadegg, Mr. Burr, Mr. Bilirakis, 
the chairman of the Health Committee for the past years of this 
Congress, have all been involved in the debate on the floor on 
this issue, this is the first time we will actively engage the 
issue and hopefully process this issue in months ahead at this 
committee level.
    We are moving relatively fast. There were efforts, as you 
know, for us to delay this hearing and not to process, and Mr. 
Bilirakis, the chairman of this committee, has correctly stood 
his ground and is moving forward with these hearings.
    And he has my full support and, by the way, the support of 
the Speaker in these hearings.
    On the other hand, at the request of the White House, we 
have excused a representative who was scheduled to be with us 
reorienting HCFA, who was going to testify on the limited area 
of dual accountability under the 1996 HIPAA Act, accountability 
for enforcement between State and Federal authorities, to give 
us some sense of how those systems currently work.
    At the request of the administration, we have excused that 
witness, because the administration correctly indicates that 
Secretary Tommy Thompson has not yet even announced nor 
received clearance on his designee as head of that agency and 
has asked for some time before his agency testified, and we 
have voluntarily agreed to that request today.
    Nevertheless, we are going to hear some important 
perspectives on either side of this issue today, and I want to 
thank the chairman for moving forward and for involving our 
committee as it is.
    This is an issue that has been around for at least 6 years 
and many of the members that I pointed out of this committee 
have been part and parcel of the debate, and it is one that we 
are anxious to settle this year.
    We want doctors to make medical decisions. We want 
insurance companies to provide useful insurance products, and 
we want health care costs that are reasonable, and we want a 
system of coverage that works for patients and their families, 
and patients are going to always be the focus of our efforts 
here on the health care issues.
    We do not want legislation whose cure is worse than the 
problem. Current regulation of employee benefit plans in health 
insurance is already a confusing patchwork of Federal and State 
regulatory enforcement relationships, which we are going to 
explore somewhat today.
    We have the Department of Health and Human Services, 
Department of Labor, the Internal Revenue Service, State 
Insurance Commissioners, all in a regulatory and enforcement 
mix.
    HHS is still working through many of the provisions of the 
Health Insurance Portability and Accountability Act and State 
children's health insurance programs, how those laws will 
affect the States.
    We are having hearings on some of these problems and we are 
seeing huge problems at HCFA and we are going to, as you know, 
examine the whole operations of that agency over the next 
several months.
    Any version of managed care will likely add to the 
complexity in varying degrees. We need to be very thoughtful 
and careful as we move forward.
    The White House is taking a leadership role, with 
principles that support a broad set of patient protections, 
through a system that provides deference to State patient 
protection laws, and to the traditional authority of States to 
regulate health insurance.
    We need to respect those principles, both because they are 
right and because we need legislation the President will sign 
in the end.
    Neither the Federal Government nor the States can afford 
anymore excessive bureaucracy. We must minimize the potential 
for disruption, complexity and uncertainty for those who 
provide coverage and we must realize that there are few 
resources for Federal agencies to administer and enforce 
regulations where States choose not to do so. We had better 
create a flexible system.
    And when it comes to liability issues, Federal remedies are 
generally the exclusive remedies for wrongful denial of 
benefits under private employee insurance plans.
    The standard of conduct for such administration has been 
for 25 years Federal law. Federal law provides employers 
nationally uniform and cost-effective standards of conduct for 
the administration of plans, including the system for improving 
and denying claims for coverage.
    As stated in the White House Principles, we should not 
disturb this fundamental linkage of Federal stands of conduct 
and Federal remedies for breach of such conduct.
    A contrary approach would allow unlimited and inconsistent 
theories. The law is challenge all aspects of administration of 
benefits and, I think, would create uncertainty and 
inconsistency.
    We do not want to raise the cost of providing health 
insurance benefits. We don't want to increase unnecessary 
legislation. On the other hand, President Bush is providing 
leadership on this subject.
    His principle states that patients should have the right to 
appeal a health care decision, to deny health care through both 
internal and independent binding external review.
    This is an important new innovation upon which there is 
broad agreement. An independent external appeal process will 
really make a difference for patients and their families, and 
we all know that.
    The White House Principles further state that Federal 
remedies should be expanded to hold health plans accountable 
specifically. After an independent review decision is rendered, 
patients should be allowed to hold their health plans liable in 
Federal court if they have been wrongfully denied needed 
medical care.
    That would be a substantial addition to current Federal 
law. At the same time, the White House principles state that 
employers should be shielded from unnecessary and frivolous 
lawsuits and should not be subject to multiple lawsuits in both 
State and Federal courts.
    Now, that should be a bedrock principle. Employees need to 
be protected, but employers, too, from unnecessary and 
frivolous litigation. Damages, likewise, should be subject to 
reasonable caps.
    Mr. Chairman, we are going to make every effort to do this 
right.
    In my own State of Louisiana, the failure to have reform of 
medical malpractice liability is costing the people of my State 
in higher costs, less insurance coverage, and unnecessary 
litigation.
    I have heard from many physicians in my State about the 
need to reform medical malpractice laws, and this is an 
important issue for us to think about and to address.
    When we craft this managed care legislation, I hope we 
don't do anything to compromise our principles on medical 
malpractice reform.
    Mr. Chairman, this is an incredibly important first step. 
There are many steps to follow. I want to commend you for 
taking this first step and all the ones that will come as we go 
forward.
    Thank you, Mr. Chairman.
    Mr. Bilirakis. I thank the chairman. Mr. Green.
    Mr. Green. Thank you, Mr. Chairman. I appreciate you 
holding this hearing on a number of issues which have the 
support not only of our country, but also the constituents I 
represent. We need to reform our country's managed care system.
    More than 161 million Americans are enrolled in some form 
of managed care plan. Unfortunately, many of these Americans 
feel that they have less access than ever before to the health 
care they want and need.
    They often feel powerless under many medical plans, 
believing they have no resource should something go wrong.
    It is time for Congress to take action and I am a proud co-
sponsor of, this year, H.R. 2526, the Bipartisan Patient 
Protection Act.
    This important legislation will do a number of things, such 
as provide access to emergency room care, access to specialty 
care, direct access for women to OB/GYNs, direct access for 
children to pediatricians, and a fair and independent internal 
and external review process, and, also, eliminate of the gag 
orders.
    Most importantly, however, the legislation makes sure that 
HMOs are held accountable for damages if their denials or 
coverage decisions harm patients. I know this is a 
controversial provision and one that we will discuss at great 
length today, but if you can't tell, I represent a district in 
Texas and in the last few years, Texas did pass, in 1997, a 
Patient Protection Act that has an external review, and allows 
patients to go to the courthouse for accountability.
    But we have only had, at least at last count, five lawsuits 
in the last 4 years. The external and internal review system is 
working very well.
    There has not been a flood of lawsuits and, in fact, like I 
said, we had less than five lawsuits filed.
    There are several reasons for so few lawsuits. One, it has 
an independent external appeals process and I believe it takes 
care of the threat of lawsuits.
    People feel like they have an avenue for grievances. In 
most of those cases, the rulings run from the internal and 
external appeals process, fall a little over 50 percent, for 
the patient.
    So I always say we need better than the flip of a coin when 
someone decides on health care for not only us, but our 
constituents, and that is why I think if we model something 
after the Texas plan for managed care reform, it will have 
success. But you have to have accountability and we don't have 
the experience of lawsuit abuse that our chairman fears we 
might get to that point.
    I think it is time Congress follow the States' lead and we 
can enact bipartisan managed care reform.
    I yield back my time, Mr. Chairman.
    Mr. Bilirakis. I thank the gentleman. Mr. Whitfield.
    Mr. Whitfield. Mr. Chairman, thank you very much. I also 
would like to congratulate Dr. Ganske and Mr. Dingell and Dr. 
Norwood and others who have been pursuing a Patients' Bill of 
Rights.
    However, I voted against the bill on the floor last time, 
and the reason I voted against it was because of the liability 
issues.
    Now, everyone says that we don't want frivolous lawsuits 
against employers, and I think all of us are realistic enough 
to know that today trial lawyers are very innovative, and Dr. 
Ganske said that employers are not going to be sued unless they 
directly participated in making a decision about the health 
treatment of a patient.
    And as Mr. Shadegg said, that is an allegation, that is a 
fact situation that a jury will determine. And I think we have 
a responsibility to move slowly on this, as we have, to be sure 
that we address that issue in a comprehensive way.
    Right now, there are more than 30 class action lawsuits 
pending against a number of health plans in a Federal district 
court in Florida about policy issues, about purchasing issues.
    And we want a health care system that does not sap the 
resources available for health care for the benefit of a few 
talented trial lawyers.
    And I think all of us want a health care plan that protects 
patients, but we also have a responsibility to make sure that 
there are not these humongous class action lawsuits, with these 
multi-billion dollar awards in today's marketplace.
    I would also say that I personally would like to see us 
conclude not only a Patients' Bill of Rights, but a citizen's 
right to health insurance, because in the Patients' Bill of 
Rights, we are talking about 139 million people and there are 
about 44 million people or 43 million people who don't have any 
health insurance at all.
    So I would like to see, as a part of this bill, including 
health marts or some pooling arrangements or some incentives to 
help people who can't afford to pay their premiums for their 
health insurance.
    And unlike the people in this factual situation, their 
employers do not provide their health care.
    So with that, Mr. Chairman, I will yield the balance of my 
time to Mr. Shadegg.
    Mr. Shadegg. Mr. Chairman, I will be very brief. I simply 
want to respond to the comments of my colleague, Mr. Brown. He 
said that there had been active efforts to seek language to 
protect employers.
    The question of protecting employers from frivolous 
lawsuits, while still allowing those entities that make 
negligent health care decisions to be sued and to be held 
liable is a critical question and is it at the heart of this 
dispute, because if employers can be sued, we will never pass 
this legislation, if they can be sued for merely buying 
insurance.
    The language that has been offered, Mr. Brown, and I'd be 
happy to give you a copy, is a concept called designated health 
care decisionmaker. It precludes a lawsuit against an employer 
for simply buying an insurance policy.
    The problem with the language proffered in the Ganske, 
Kennedy, and Edwards bill is that that language, as my 
colleague, Mr. Whitfield, has just pointed out, allows an 
employer to be named as a defendant and held in the lawsuit.
    What that means is if Joe Jordan's Mexican Food Restaurant, 
a small Mexican food restaurant in my home town, where my 
family goes to eat, were simply buying insurance, it can be 
named in the lawsuit and because it is a fact question whether 
it directly participated in the decision to deny care, it can 
be held in that lawsuit all the way through a jury trial.
    Imagine the cost to Joe Jordan's Mexican Food Restaurant, 
which only employees about 12 people, to defend that lawsuit.
    Mr. Bilirakis. Mr. Whitfield's time has long expired.
    Mr. Shadegg. Thank you, Mr. Chairman.
    Mr. Bilirakis. Mr. Barrett.
    Mr. Barrett. Thank you very much, Mr. Chairman. I 
appreciate you holding this hearing. I assume everything I was 
going to say has been said.
    I simply want to respond very quickly to the statement Mr. 
Shadegg made.
    I have long thought that there are three legitimate 
issues--or two legitimate issues in terms of this debate. One 
is the liability issue. Second is the ERISA coverage. The third 
issue, which I consider the boogeyman issue, is the issue that 
the previous speaker just spent a considerable amount of time 
on.
    That, to me, is an issue that is just thrown out there to 
throw mud on the wall, and I don't know a single person on this 
side of the aisle or anybody who is moving and pushing this 
legislation who is interested in having employers held liable.
    I think that that is an issue that we can certainly address 
with language, but I don't think it advances the debate at all 
to throw out this boogeyman issue.
    Mr. Bilirakis. I don't want to have a debate now during 
opening statements. It isn't fair to the witnesses, for crying 
out loud, and I've let it go long enough.
    Mr. Ganske. Would the gentleman yield? The gentleman from 
Wisconsin.
    Mr. Barrett. I will certainly abide by the chairman's wish 
and if you want me to stop there, Mr. Chairman, I will stop. If 
you want me to yield to your fellow Republican, I'd be happy to 
do so.
    Mr. Bilirakis. You are welcome to yield to my fellow 
Republican, but I am not at all happy with the way these 
opening statements are going.
    Mr. Barrett. Thank you very much. I would yield to Mr. 
Ganske.
    Mr. Ganske. I appreciate your yielding. I will be very 
brief, Mr. Chairman.
    I would be happy to get the voting records from this 
committee on the number of Republicans who voted for the 
Hillary substitute back in 1999, which used a direct 
participant standard.
    I will yield back.
    Mr. Barrett. And I will yield back to the chairman.
    Mr. Bilirakis. Thank you, sir. Mrs. Wilson.
    Mrs. Wilson. Thank you, Mr. Chairman. I have found these 
opening statements to be interesting for the amount of heat, if 
not light, and I find myself in a situation where I come from a 
State that has a fairly strong patients' protection law and a 
very robust and competitive managed care market.
    I actually have read the legal arguments, and I am not a 
lawyer, and some lawyers are good for writing for people who 
aren't lawyers and some aren't, but I have read the legal 
briefs on both sides, the ones that support Dr. Ganske's view 
and the concerns written by the lawyers for businesses who are 
worried about whether their companies will be able to continue 
to provide health insurance for their employees.
    For me, I am not a lawyer. I am married to one. It always 
ruins my reputation when I mention that, but I don't think this 
is about lawsuits and I think that the attorneys who wrote 
those briefs and the people who are arguing these positions 
firmly believe what they are saying and believe that they will 
have to advise their senior executives in their companies that 
they can no longer afford the risk to provide health insurance.
    I think the last thing we want to do is to pass a law to 
protect patients that results in making it even harder than it 
already is to get health insurance or for a small business to 
just feel as though, golly, I just can't take the risk of 
offering health insurance, and we have an increase in the 
uninsured.
    I don't think that is a red herring. I think it is a 
legitimate issue and a real fear among those who are trying to 
make these decisions on behalf of their companies and their 
employees, and we have to resolve it, while, at the same time, 
recognizing the change in health care.
    That is that insurance companies used to just make one 
decision, does the plan cover it or not cover it. They did not 
involve themselves in, yes, it is covered, but this is the 
preferred method of treatment.
    That is more of a medical decision, and what we are 
struggling with is what to do in that gray area when a doctor 
doesn't use his best medical judgment because an administrator 
with the HMO, who may be a medical doctor, as well, says, no, 
our statistics show that the best course of treatment is this 
one and, oh, by the way, it may also be less expensive to the 
HMO.
    Those are the things we are trying to square here and I 
think it is possible to find a way to do it in a way that gives 
patients protections, gives people access to the care they need 
for themselves and their families, and allows companies to 
continue to offer health insurance for their employees.
    Thank you, Mr. Chairman.
    Mr. Burr [presiding]. The gentlelady's time has expired. 
The Chair would recognize Mr. Pitts for an opening statement.
    Mr. Pitts. Mr. Chairman, I want to thank you for holding 
this important hearing today.
    As a new member of the committee, I look forward to taking 
part in the managed care discussion.
    I believe that you have chosen an appropriate title for 
this hearing, A Smarter Health Care Partnership for American 
Families, and I look forward to examining the Federal and State 
roles and regulation of managed care and how these two can 
become a healthy partnership.
    I realize that many managed care proposals have been 
introduced today. However, I believe that the Health 
Subcommittee, by carefully evaluating the issues that will come 
before us today, can both improve the quality of any final 
legislative product and help come to a fair and reasonable 
compromise.
    Allow me to say for the record, I want to improve the 
quality and reliability of health care services, and I want to 
increase patient access to these services.
    Further, I want to be sure that doctors make medical 
decisions, that health care costs are reasonable, and that our 
health care system works for our patients.
    However, I do not want a legislative solution whose cure is 
worse than the problem. I would like to avoid legislation that 
would create unnecessary bureaucracy and litigation, which, in 
turn, would significantly raise the cost of health care.
    I am gravely concerned about the 42 million Americans who 
currently lack health insurance. Employers in my district have 
told me that if a few of the current managed care reform 
proposals were to become law, they would drop employee coverage 
immediately and provide their employees with a lump sum payment 
for them to shop around for their own insurance.
    This gives me pause. I wonder what percentage of employees 
would actually use that money for health insurance? Not enough, 
I am afraid.
    If we allowed this to happen, it would only drive up the 
number of uninsured in America. That is why it is important 
that we carefully examine these issues today.
    Again, Mr. Chairman, thank you for this hearing. I look 
forward to hearing the testimony today so that I can learn more 
about this important issue.
    I yield back.
    Mr. Burr. The Chair thanks the gentleman. The Chair would 
recognize Mr. Bryant for purposes of an opening statement.
    Mr. Bryant. Thank you, Mr. Chairman. I would be brief by 
associating myself with the remarks of my colleague from 
Arizona, Mr. Shadegg, as well as my colleague from New Mexico, 
Mrs. Wilson.
    I agree with those comments, and I don't think anyone here 
has any less concern for access to health care than I do or I 
think probably everybody on this committee.
    Access is very important, but having come from a practice 
of medical malpractice defense, I think that issue of medical 
malpractice is one of the biggest cost drivers in the health 
care system.
    Of course, the doctors have to purchase medical malpractice 
insurance because they are the ones that see the patients. That 
is because you've got litigation involved in that, and what we 
are doing in some of these bills that Mr. Shadegg has mentioned 
specifically by name is inviting this type of litigation into 
this part of the system, and here the employer has other 
options that the doctors don't have.
    The doctors have to play in that game and buy insurance. 
The employer has additional options, and that is, as has been 
mentioned several times, they don't have to provide the 
insurance. If there is a risk that they are going to be sued, 
if their lawyer tells them you are exposed here, why put up 
with that?
    It is already very expensive and if you can get out of it 
easily and without furnishing that benefit, you will do that. 
And in the end, we are defeating our issue of access by putting 
more and more people off onto the uninsured rolls. So we all 
want access, we all want quality health care, accountability, 
those good things, and my view has been all along that the 
Shadegg-Coburn bill is the best bill that meets all of these 
standards.
    I would, again, thank the chairman for his holding this 
hearing as we talk about insurance and families.
    We have to deal with these kinds of issues, and I suspect 
all these witnesses that are waiting very patiently to testify 
today are imminently qualified to talk about the different 
parts of this.
    With that, I would yield back the balance of my time.
    Mr. Burr. The Chair thanks the gentleman from Tennessee.
    The Chair would recognize himself for the purposes of an 
opening statement at this time.
    Let me just say that as our audience can tell, there is 
tremendous passion on both sides of this issue. The sad part is 
we can't display the same type of passion on other health care 
issues. If we could, we would solve many of the problems that 
patients face today as they are delayed, waiting for technology 
to receive reimbursement codes before they can get treatment or 
whether they are elderly and don't currently have prescription 
drug benefits.
    I must be an exception to the rule. In every debate, there 
is one.
    I am a member of an HMO in North Carolina. My children go 
to a pediatrician. My wife goes to an OB/GYN. Whenever we have 
an emergency, we know exactly what the cost is of the option of 
going to the emergency room versus trying to get in the 
pediatrician's office, and we make a decision in our household 
whether it is urgent enough that we seek that additional cost 
of care or whether, in fact, we go through the burden of a 
possible delay in that pediatrician's office.
    I welcome the opportunity to make that decision. I know 
that all Americans don't want to make tough choices.
    In that case, we get involved where government tries to get 
new rules. Maybe that is what we are here to do as we debate 
this piece of legislation.
    My last two colleagues that spoke talked about a very 
important population in this country. They talked about the 
employers that aren't under a Federal obligation to offer, to 
extend to their employees coverage, health care coverage, one 
of the single most expensive things that we have in society 
today.
    We continue to try to find the balance of the appropriate 
role of Federal mandates, while still maintaining this base of 
employee offered health care.
    Most of the health care debates focus around the 44 or 42, 
depending upon which figure you look at, million people without 
insurance.
    My question at the end of this debate is if we force 
employers, whether they are employers who purchase insurance 
options for their employees, or if it is the large pool of 
self-insured companies out there, both public and private, that 
cannot withstand the pressure from their board of potential 
exposure, exposure that many up here have said we have taken 
care of in the language, none of us know until the courts 
interpret how exposed they are.
    In North Carolina, I can see a self-insured company that 
would be brought up for making coverage determinations because 
they expanded the scope of coverage to take care of one of 
their employees who they value.
    Well, the question is, who are we going to sue when these 
people have no health insurance anymore? Who are we going to 
blame? We should blame ourselves, if we do the wrong thing.
    I want to thank our witnesses for coming. I want to thank 
the members of this panel on both sides for the passion that 
they have on this issue, and my hope is, at the end of the day, 
we will learn just a little bit more about what to do that is 
the right thing.
    At this time, I think all members have had an opportunity 
for opening statements.
    [Additional statements submitted for the record follow:]

PREPARED STATEMENT OF HON. BARBARA CUBIN, A REPRESENTATIVE IN CONGRESS 
                       FROM THE STATE OF WYOMING

    Today's hearing will help guide us in understanding federal and 
state roles in regulating health plans. It will also give us the 
opportunity to learn more about the complexities surrounding the 
federal law known as ERISA that governs employer-sponsored health 
plans.
    Without a thorough understanding of these issues, I believe we will 
have difficulty crafting a universally acceptable liability provision 
within any managed care legislation.
    I always keep in mind one very simple thing as I try to better 
understand the intricacies of regulating health plans--patients want 
good medical care, and they want to know that some remedy is available 
to them if that care is not rendered properly.
    My difficulty with this issue is two fold. I have many individuals 
in my district who have problems with their health plans and they want 
a state cause of action available to them--but ERISA is not permitting 
that.
    On the other hand, I must be very conscious of the small business 
community in my state because it is a driving force in Wyoming's 
economy. These small businesses voluntarily provide health coverage for 
their employees.
    If these employers did not have the liability protections afforded 
them by ERISA, as they currently do, they would drop coverage 
immediately. The number of uninsured in my state would then increase 
dramatically. That is unacceptable to me.
    I am hoping the testimony of our witnesses today will shed some 
light on this particular aspect of the liability debate because I know 
that I am not the only one with such concerns.
    Thank you, Mr. Chairman. I yield back the balance of my time.
                                 ______
                                 
 PREPARED STATEMENT OF HON. ELIOT ENGEL, A REPRESENTATIVE IN CONGRESS 
                       FROM THE STATE OF NEW YORK

    Mr. Chairman, I would like to thank you for having this hearing 
today and providing an opportunity to highlight HR 526, the Ganske/
Dingell Patient's Bill of Rights, of which I am a cosponsor. Patient 
protection is a key issue in this Congress. The American people have 
asked Congress to provide adequate protections and we must respond. We 
will be discussing crucial aspects of patient protection legislation, 
scope and liability. The Ganske/Dingell bill addresses these issues in 
the proper manner.
    Ganske/Dingell leaves no individual behind. Everyone with insurance 
coverage is protected by the bill. To do anything less would be 
irresponsible. Managed care providers should be held to the same 
standards as physicians and hospitals across the country. HR 526 would 
ensure that all Americans enjoy the benefits of a patient's bill of 
rights. I am also pleased the Ganske/Dingell bill includes the 
``substantially equivalent'' provision in determining whether or not 
state laws are adequate, and allows states to prove that its laws meet 
or exceed the federal standard. The process improved upon the HIPAA 
model and should prove to be an efficient method.
    The question of liability has been the subject of much debate. The 
Ganske/Dingell model has evolved to provide a compromise to the 
federal/state jurisdiction question. It has established that state 
courts are the proper venue in instances of medical decisions and 
federal courts are the proper venue for administrative or coverage 
questions. States have traditionally held jurisdiction in tort law and 
medical liability should be no different. Federal courts have neither 
the time nor the resources to handle the case load and injured patients 
should not be left to languish while waiting to have their case heard.
    Mr. Chairman all Americans deserve a strong, enforceable patient's 
bill of rights. I believe the Ganske/Dingell bill is good for the 
American people and I look forward to moving this legislation.

    Mr. Burr. Let me then call up the first panel and welcome 
the Honorable Steven Larsen, Insurance Commissioner, Maryland 
Insurance Administration; the Honorable Angela Monson, Senator, 
State of Oklahoma; Mr. Ron Pollack, the Executive Director, 
Families USA.
    At this time, I would extend to Mr. Larsen the opportunity 
for his opening statement. Welcome.

  STATEMENTS OF HON. STEVEN B. LARSEN, INSURANCE COMMISSIONER, 
MARYLAND INSURANCE ADMINISTRATION; HON. ANGELA MONSON, SENATOR, 
 STATE OF OKLAHOMA; AND RONALD F. POLLACK, EXECUTIVE DIRECTOR, 
                          FAMILIES USA

    Mr. Larsen. Good morning and thank you, Mr. Chairman and 
members of the subcommittee. It is a pleasure to be here.
    I am Steve Larsen, the Insurance Commissioner for the State 
of Maryland, and I am also the Chairman of the NAIC's Health 
Insurance and Managed Care Committee. Again, thank you for 
inviting us to testify.
    As you know and as we have heard, under ERISA's dual 
regulatory structure, State regulators are currently enforcing 
many of the patient protection provisions that are being 
considered by Congress and that have been included in the 
President's Principles, and I have included in my written 
testimony a comprehensive list of some of the things that the 
NAIC has developed and that the States have adopted.
    There are just three particular points that I would like to 
make to the subcommittee.
    First, in considering the patient protection proposals, we 
ask that States be given the greatest amount of flexibility in 
preserving and enforcing the existing State patient protection 
laws.
    I think it was noted in his principles, President Bush says 
that deference should be given to the States as patient 
protection laws and to the traditional authority of the States 
to regulate insurance, and the members of the NAIC also want to 
preserve and enforce these State laws and we prefer a Federal 
approach that gives us the flexibility in how we meet those 
requirements.
    Some of the proposals that have been discussed save the 
State laws by using the HIPAA standard, which prevents the 
application standard, and, under this standard, State laws are 
preempted only if they prevent the application of the Federal 
standard.
    This approach essentially establishes what is a Federal 
floor for patient protections.
    If you are going to use this approach, we ask that language 
be added to clarify specifically that State laws and 
regulations that are stronger than the Federal requirements or 
more protective of the consumer than the Federal requirements 
are not preempted.
    Without this clarifying language, I think disputes will 
arise as to whether stronger State laws still somehow prevent 
the application of what, in some cases, maybe a less 
protective, weaker Federal standard.
    In this regard, we are also supportive of the concepts of 
State certification and substantial equivalents, as these will 
give particular deference to the States and their laws. Under 
this approach, the States would determine whether their patient 
protection laws, as a whole, are substantially equivalent to 
the Federal standards and the State would then certify that the 
State meets the goals of the new Federal requirements.
    This also would prevent disputes over whether the State 
language is exactly the same as the Federal bill, and instead 
the focus would be on whether the intent and the outcome of the 
State and Federal laws were similar.
    The second point I would like to emphasize, and, again, I 
think this point was referred to in a number of the opening 
statements, is that the State internal and external review 
processes are the most fundamental and important patient 
protections, and it is particularly important that these State 
laws are preserved.
    It is through these processes that we enforce all of the 
other State patient protection laws. Almost every State has an 
internal review law and about 38 States and the District of 
Columbia have independent external review laws, and, simply 
stated, we think that these laws work.
    In Maryland, where I am Commissioner, we have what I think 
is one of the most consumer-friendly external review laws in 
the country.
    During the 2000 calendar year, we issued 68 orders to 
health plans, requiring coverage of medically necessary care 
under our external review process, including a tonsillectomy 
for an adult in order to treat obstructive sleep apnea.
    We ordered 24-hour professional in-home care for a 77-year-
old man with ALS, on a ventilator; a foot orthotic for a 15-
year-old competitive cross-country runner who had a stress 
fracture; an inpatient detox and rehab for a woman with a 4-
year addiction to medication for chronic severe back pain.
    All of these had been denied by the health plan and through 
the external review process, we reversed that and ordered the 
health plan to provide the care.
    Recognizing and preserving the State external review laws 
is particularly important, because some Federal courts have 
recently concluded that State external review laws conflict 
with ERISA's exclusive remedy provisions.
    These cases fundamentally threaten the ability of the 
States to regulate the external review process and although not 
all the courts have adopted this construction, the Supreme 
Court is deciding whether to resolve this. The best solution 
here would be for Congress to clarify that State internal and 
external review laws, as well as other complaint or grievance 
processes, are not preempted and we have, in the written 
testimony, offered some suggested language.
    Third and finally, Congress, we hope, will recognize that 
patient protection laws require an infrastructure to enforce 
them.
    State insurance departments currently have established 
regulatory infrastructures and if these State laws were 
preempted, along with the State infrastructure, we think that 
consumers would lose.
    Any Federal standard should be linked to Federal resources 
to enforce the patient protections.
    Thank you very much.
    [The prepared statement of Hon. Stephen B. Larsen follows:]

PREPARED STATEMENT OF HON. STEVEN B. LARSEN, COMMISSIONER OF INSURANCE, 
 STATE OF MARYLAND ON BEHALF OF THE NATIONAL ASSOCIATION OF INSURANCE 
                             COMMISSIONERS

                            I. INTRODUCTION

    Good morning, Mr. Chairman and Members of the Subcommittee. My name 
is Steve Larsen. I am the Insurance Commissioner for the state of 
Maryland. Also, I am the chair of the NAIC's Health Insurance and 
Managed Care (B) Committee. I would like to thank you for providing the 
NAIC 1 with the opportunity to testify about the states' 
role in managed care regulation and the need for state flexibility in 
any federal legislation that is drafted.
---------------------------------------------------------------------------
    \1\ The NAIC, founded in 1871, is the organization of the chief 
insurance regulators from the 50 states, the District of Columbia, and 
four of the U.S. territories. The NAIC's objective is to serve the 
public by assisting state insurance regulators in fulfilling their 
regulatory responsibilities. Protection of consumers is the fundamental 
purpose of insurance regulation.
---------------------------------------------------------------------------
    As state regulators, the members of the NAIC have been regulating 
health insurers and managed care entities and protecting consumers for 
many years. Most states have enacted almost all of the same provisions 
that Congress is currently considering. We believe our experience in 
this area and the infrastructure that has been established in the 
states to ensure these patient protections are critical factors that 
Congress needs to consider carefully when crafting any federal patient 
protection legislation.
    Today, I will focus on four areas that Congress specifically should 
examine should the federal government and the states become partners in 
providing patient protections. These areas are: (1) Congress should 
recognize that the states have already enacted patient protection laws; 
(2) the states should be given the greatest amount of flexibility in 
preserving and enforcing these protections; (3) state internal and 
external review processes, the most fundamental and important patient 
protections, should not be preempted by federal law and should be given 
the same amount of state deference as the other patient protections; 
and (4) Congress should recognize that the states have an extensive 
infrastructure in place to protect consumers, and if federal 
legislation were to preempt state laws, the federal government does not 
have the resources or the infrastructure to enforce these new patient 
protections.

    II. THE STATES' ROLES AND ACTIVITIES IN MANAGED CARE REGULATION

    The enactment of the Employee Retirement Income Security Act of 
1974 (ERISA) created a dual federal-state regulatory structure in this 
country for health insurance and health benefits. Under ERISA, the 
federal government has jurisdiction over all employer-sponsored group 
health plans, but state laws that regulate the business of insurance 
are saved from preemption by virtue of the saving clause (Section 514 
of ERISA). The saving clause was enacted to preserve the states' 
traditional role of regulating insurance, including the regulation of 
insurance policies purchased by ERISA plans (fully insured plans).
    The states have taken this role seriously. They have enacted 
patient protections for consumers in individual and group plans under 
their authority to regulate the business of insurance, and they have an 
established infrastructure to enforce these rights. State regulators 
are presently enforcing many of the patient protection provisions that 
are being considered by the Congress and that are included in the 
President's ``Principles for a Bipartisan Patients' Bill of Rights'' 
(``President's Principles'').
    To assist the states in this work, the NAIC has established a 
comprehensive regulatory structure that includes the following patient 
protections as reflected by the NAIC's Model Acts:

 Using a ``prudent layperson'' standard and prohibiting prior 
        authorization requirements for emergency care. (Managed Care 
        Plan Network Adequacy Model Act; Utilization Review Model Act; 
        Model Regulation to Implement Rules Regarding Contracts and 
        Services of Health Maintenance Organizations.)
 Requiring continuity of care where a provider is terminated 
        from the plan. (Managed Care Plan Network Adequacy Model Act; 
        Health Maintenance Organization Model Act; Model Regulation to 
        Implement Rules Regarding Contracts and Services of Health 
        Maintenance Organizations.)
 Requiring network adequacy. (Managed Care Plan Network 
        Adequacy Model Act.)
 Establishing utilization review requirements. (Utilization 
        Review Model Act.)
 Providing quality improvement and measurement standards. 
        (Quality Assessment and Improvement Model Act.)
 Requiring that plan information be given to patients. 
        (Individual Accident and Sickness Insurance Minimum Standards 
        Model Act; Health Maintenance Organization Model Act; Small 
        Employer Health Insurance Availability Model Act.)
 Establishing privacy requirements for patient medical records. 
        (Insurance Information and Privacy Protection Model Act; Health 
        Information Privacy Model Act; Health Maintenance Organization 
        Model Act; Privacy of Consumer Financial and Health Information 
        Model Regulation.)
 Requiring plans to establish specific procedures for 
        determining enrollee coverage and payment for services, and to 
        meet defined time frames for standard and expedited coverage 
        determinations. (Utilization Review Model Act; Health Carrier 
        Grievance Procedure Model Act; Model Regulation to Implement 
        Rules Regarding Contracts and Services of Health Maintenance 
        Organizations; Health Maintenance Organization Model Act.)
 Requiring and establishing standards for an internal review 
        process, including time frames for routine and expedited cases. 
        (Health Carrier Grievance Procedure Model Act; Utilization 
        Review Model Act; Health Maintenance Organization Model Act.)
 Requiring and establishing standards for an external review 
        process, including time frames for routine and expedited cases. 
        (Health Carrier External Review Model Act.)
 Prohibiting restrictions on physician-patient communications 
        (anti-gag rule). (Managed Care Plan Network Adequacy Model 
        Act.)
    In addition to enacting the specific provisions above, many states 
have enacted additional consumer protections, some of which are 
included in the President's Principles and in Congressional 
legislation, such as requiring access to obstetricians, gynecologists 
and pediatricians without referral from a primary care provider. 
Although not every state has enacted every protection,2 
these protections are just a part of the many services that the state 
insurance departments provide for consumers in their states.
---------------------------------------------------------------------------
    \2\ Not all of the states have enacted all of the above provisions 
for a variety of reasons. Some states have no managed care penetration 
or very limited managed care penetration, although it is important to 
note that many states with limited managed care penetration have 
enacted these reforms for consumers in managed care and other health 
care arrangements. Other states have not had the problems that 
particular provisions are meant to address or have found other 
solutions. To require all states to adopt the same blanket regulation 
for all situations would only result in over-regulation of and unneeded 
expense to the marketplace. State legislatures are sensitive to their 
marketplaces and consumer concerns, and when needed, they have been 
proactive in establishing consumer protections that are tailored to the 
needs of their states' health care markets.
---------------------------------------------------------------------------

        III. PRESERVE STATE LAWS AND ALLOW FOR STATE FLEXIBILITY

    President Bush in his principles says that since ``many states have 
passed patient protection laws that are appropriate for their states, 
deference should be given to these state laws and to the traditional 
authority of states to regulate health insurance.'' The members of the 
NAIC are also interested in preserving the state-enacted consumer 
protections and the states' authority to ensure that consumers have 
their questions, claims and grievances addressed. State systems that 
are working should not be preempted by Congressional action that cannot 
guarantee the enforcement of these protections. Congress should 
recognize the states' efforts and expertise in developing these 
protections and give the states the greatest amount of flexibility in 
preserving and enforcing these protections through the effective and 
user-friendly consumer complaint and appeals systems in place around 
the country.

A. Preserve State Laws and State Authority to Regulate Insurance
    There is an attempt in some current proposals to save many state 
laws by using the ``prevents the application'' standard established in 
the Health Insurance Portability and Accountability Act of 1996 
(HIPAA). This standard provides that federal law ``shall not be 
construed to supersede any provision of State law which establishes, 
implements, or continues in effect any standard or requirement solely 
relating to health insurance issuers (in connection with group health 
insurance coverage or otherwise) except to the extent that such 
standard or requirement prevents the application of a federal 
requirement.'' Basically, this structure establishes what is commonly 
referred to as a ``federal floor'' (federal minimum standard), and it 
only preempts state laws that are weaker than the federal proposal. 
Equal or stronger state laws would continue in effect. If Congress is 
going to establish a federal minimum standard, we offer the following 
suggestions to improve implementation of the legislation and to ensure 
that state consumer protections are not preempted.
    First, Congress should reinforce the saving clause and not preempt 
existing state patient protection laws. Due to the uniqueness of each 
state's marketplace and the effective framework already in place, we 
ask Congress to respect the existing state consumer protections and 
allow states to continue to regulate fully insured plans and enact 
consumer protections based on the needs of the individual states' 
marketplaces. We urge that Congress not preempt state laws that already 
address the patient protections Congress hopes to enact.
    In this effort, we ask that Congress add the following legislative 
language that reinforces the continued state authority to regulate the 
business of insurance under the McCarran-Ferguson Act and ERISA's 
``Saving Clause'': ``This legislation shall preserve and shall not 
interfere with the states' authority granted under 15 U.S.C. sec. 1011 
et seq. (McCarran-Ferguson Act) and under ERISA Section 514 to regulate 
the business of insurance.''
    Second, Congress should include clarifying language in any federal 
patient protection bill that uses the ``prevents the application'' 
standard. From a state's perspective, HIPAA's ``prevents the 
application'' standard is problematic because it is unclear and 
difficult to use in comparing state laws to the relevant federal law. 
If the ``prevents the application'' standard is used, we suggest that 
clarifying language be added to give states more guidance when 
implementing the standard. Therefore, after the usual ``prevents the 
application'' standard language, we offer the following language 
suggestion: ``A State statute or regulation that establishes standards, 
requirements or administrative processes does not prevent the 
application of a requirement of this title if the protection the state 
statute or regulation affords any person is equal to or greater than 
the protection provided under this title and the amendments made by 
this title.''

B. Give Deference to State Laws and Allow for State Flexibility
    Although the current legislative proposals generally attempt to 
save state laws that are equal to or more protective than the proposed 
federal standards, the President's Principles seek to preserve state 
authority beyond the federal floor. The President wants to give 
deference to state laws that are tailored to the state health insurance 
market and to the traditional authority of states to regulate health 
insurance. So far this year, the concepts of ``state certification'' 
and ``substantial equivalence'' have been included in the federal 
legislation that will give greater deference to the states and preserve 
more of their laws.
    Using these concepts, the states would determine whether their 
patient protection laws as a whole meet the goals of the new federal 
requirements. Deference should be given to the states in their analysis 
that their state laws meet the requirements of the federal proposals. 
The states then would certify that their statutory and regulatory 
patient protections taken as a whole are ``substantially equivalent'' 
or are comparable to the federal standards and that the state laws 
should remain in force. This approach would prevent the debate from 
getting bogged down in whether the state language is exactly the same 
as the federal bill, especially if the intent and the outcome are 
similar.
    While this is the prevalent approach that has been introduced so 
far in this year's patient protection debate, other approaches may be 
developed that also would preserve and give deference to state laws. We 
welcome any approach that allows states to continue to enact reforms 
based on their state markets and gives states maximum flexibility in 
how they meet the federal requirements, while ensuring that all 
individuals have a basic level of protection.

                    IV. INTERNAL AND EXTERNAL REVIEW

    Internal and external review processes are the most fundamental and 
important of the patient protections. President Bush stated as one of 
his Principles that patients should have the right to appeal a health 
plan's decision to deny care through internal and independent external 
review. The NAIC and the states could not agree more. We recognize the 
importance of internal and external review as fair and quick processes 
for resolving issues for consumers. The NAIC has model laws on each 
process, almost every state has internal review laws in place, and 38 
states and the District of Columbia have independent external review 
laws in place. There has been a sharp increase in the number of states 
adopting these laws over the last few years.3 As such, we 
believe state internal and external review processes should not be 
preempted by federal law and should be afforded the same level of 
deference as the other state patient protection laws.
---------------------------------------------------------------------------
    \3\ The Kaiser Family Foundation updated its November 1998 study of 
independent review laws in May 2000 documenting a doubling in the 
number of such state laws. Geraldine Dallek and Karen Pollitz, 
Institute for Health Care Research and Policy, Georgetown University 
External Review of Health Plan Decisions: An Update, May 2000, at 1.
---------------------------------------------------------------------------
    While we are supportive of the inclusion of internal and external 
review processes in any federal legislation (so that all individuals 
are afforded this protection, not just those covered by the state 
laws), Congress should keep in mind three points: (1) internal and 
external review are the heart of any patient protection legislation; 
(2) the state external review laws are working; and (3) internal and 
external review is a process, not a remedy.

A. Internal and External Review are the Heart of Patient Protections
    In passing a patients' bill of rights, Congress is setting minimum 
standards in a variety of areas designed to ensure a basic level of 
protection for consumers. However, enforcement of those standards, 
through internal and external review processes, is crucial to ensure 
that the consumer actually benefits from those standards. States 
presently enforce internal and external review laws and thus ensure 
that consumers get the benefits to which they are entitled. Enforcement 
of patient protections by way of internal and external review is what 
makes those protections real, rather than illusory rights on paper. For 
example, letting states maintain their emergency room prudent layperson 
standard, but taking away the state process to ensure that standard is 
used, results in an empty right for patients.
    It is crucial that Congress extend the same deference to state 
internal and external review laws as it does to other state patient 
protections. Internal and external review standards are the heart of 
patient protections; enforcement of those standards is what makes all 
patient protections meaningful. For the federal government to preempt 
state laws in this area would be to preempt state insurance departments 
from responding to consumer complaints by eliminating an effective 
method or process which states use to assure that consumers receive 
basic protections under their health plan. To give states the ability 
and flexibility to keep their other patient protection laws but to take 
away the patient protection process to ensure delivery of these other 
protections at the very time that those protections come into play 
would be a serious mistake.

B. State External Review is Working, So Do Not Disrupt It
    Most of the states have enacted external review laws already and 
the appeals process is working in these states. In fact, President Bush 
praised the Texas independent external review law as a desirable way to 
resolve disputes and for consumers to get the care to which they are 
entitled. He even endorsed the Texas law as a model for any federal 
legislation. This endorsement combined with his desire for deference to 
state law would support the preservation of the Texas law and other 
state external review laws from being preempted by any federal 
legislation.
    Texas is not the only state that has recognized the success and the 
importance of external review as a fair and quick process for resolving 
issues for consumers. For example, in Maryland last year, the Insurance 
Administration reviewed 137 complaints about the denial of health care 
by insurers. The agency upheld the denials 69 times, but reversed or 
modified them 68 times.4 Similar figures have been found in 
other states, with the reviewer finding for the consumer in half of the 
cases and for the insurer in the other half.5 The high 
percentage of reversals by state independent reviewers proves both the 
wisdom and importance of preserving these state laws from federal 
preemption. The states believe this review process has been and 
continues to be very successful; it is a way for people to challenge a 
denial of their claims and a way of holding HMOs accountable.
---------------------------------------------------------------------------
    \4\ The Maryland legislature created the appeals procedure in a 
1998 law, and the Insurance Administration began hearing appeals in 
1999. In 1999, the regulators conducted 91 full reviews, upholding the 
insurer about half the time. In 1999 and in 2000, about half the 
complaints involved patients wanting to get a service, while the rest 
involved patients who have received care but the insurer declined to 
pay. The Insurance Administration can have cases reviewed by 
independent medical specialists to decide whether care is appropriate.
    In 2000, most of the 1,526 complaints received by the Maryland 
Insurance Administration did not result in a full investigation 
(similar to 1999). A large majority of cases drop out of the process 
for various reasons. In 120 cases, the insurer reversed itself during 
the review process. In about a third of the cases, the Insurance 
Administration did not have jurisdiction because the patient was 
covered by Medicare, Medicaid, employer self-insured plans, or state 
and federal employee plans. All these are outside the appeals 
procedure. Nearly half the complaints did not go to investigation 
because the dispute was not about medical necessity, because the 
patient had not first tried the insurer's internal appeals process, or 
because there was not enough information.
    \5\ The 1998 Kaiser Family Foundation Study compiled disposition 
statistics of state independent review laws. The study found that 
independent reviewers reversed nearly as many health plan decisions as 
they upheld, overturning health plan decisions between 32 and 68 
percent of the time. The following is a list of states, their effective 
dates and the percentage of cases that were decided in favor of the 
consumer. Connecticut-January 1998-66%; Florida-1985-60%; Michigan-
1978-39%; Missouri-1994-50%; New Jersey-1997-42%; New Mexico-March 
1997-50%; Pennsylvania-1991-37%; Rhode Island-1997-68%; Texas-November 
1997-48%; Vermont mental health law-November 1996-33%. Karen Pollitz, 
Geraldine Dallek and Nicole Tapay, Institute for Health Care Research 
and Policy, Georgetown University, External Review of Health Plan 
Decisions: An Overview of Key Program Features in the States and 
Medicare, Nov. 1998, note 11, at vii-viii.
---------------------------------------------------------------------------

B. Internal and External Review--A Process not a Remedy
    When drafting any federal patient protection legislation, Congress 
needs to give special consideration to the internal and external review 
processes in terms of their construction and scope and their placement 
within the ERISA statute. The NAIC members are concerned about how 
these provisions are drafted for two reasons.
    Some federal courts have interpreted the remedy provision in ERISA-
-the filing of a civil suit in court--as an ``exclusive remedy'' that 
preempts state laws addressing claims handling by insurers. These cases 
fundamentally threaten the enforcement authority of state insurance 
regulators. Not all courts have adopted this construction, and the 
Supreme Court is deciding whether to resolve this conflict between 
federal courts.
    A related issue is the scope or definition of ``grievance and 
appeals processes.'' Last year the patient protection bills in both 
chambers included grievance and appeals processes that went beyond 
resolving disputes concerning coverage decisions. In fact, the bills 
established grievance and appeals processes to handle any question, 
complaint or concern a consumer may have. If a court were to determine 
that the grievance and appeals section of any new federal law conflicts 
with the so-called ``exclusive remedy'' under ERISA, then state 
insurance departments would be preempted from handling any consumer 
complaints.
    Congress must clarify that it intends for state internal and 
external review laws, as well as other complaint or grievance 
processes, not to be preempted and must amend ERISA accordingly. The 
following suggested language will clarify that internal and external 
review are ``processes'' not ``remedies'' and ensure that states can 
continue answering consumers' questions and complaints. ``Nothing in 
this title shall be construed to supersede any provision of State law 
or regulation which establishes, implements, or continues in effect any 
standard, requirement or administrative process solely relating to 
health insurance issuers (in connection with group health insurance 
coverage or otherwise) except to the extent that such standard, 
requirement or administrative process prevents the application of a 
requirement of this title. State laws or regulations that establish 
standards, requirements or administrative processes comparable to or 
more protective of consumers than federal requirements of this title, 
including those that address the resolution of claim or coverage 
disputes, do not prevent the application of a requirement of this 
title.''

                   V. INFRASTRUCTURE AND ENFORCEMENT

    As Congress drafts legislation, we urge you to consider how 
critical an infrastructure is for enforcing any new patient 
protections. Not only has each state established a statutory framework 
of patient protections, but also each state has a regulatory structure 
in place that is able to handle and quickly respond to consumers' 
complaints and grievances.6 This regulatory structure 
includes: consumer representatives and market conduct reviewers who 
respond, investigate and enforce the patient protection standards; 
toll-free consumer telephone lines and Internet access; and on-site 
representatives to respond to complaints. State insurance departments 
have established their regulatory infrastructures based on their 
markets and have allocated significant resources to respond to 
consumers. Consumers throughout the country have easy access to a 
network of assistance. State systems that are working should not be 
preempted by Congressional action that cannot guarantee the enforcement 
of these protections.
---------------------------------------------------------------------------
    \6\ Just to quantify the level of state resources (time, money and 
people-power) that is necessary to regulate the business of insurance 
and to successfully handle consumer concerns, in 1999 state insurance 
departments responded to more than 3.3 million consumer inquiries and 
followed-up on more than 448,000 consumer complaints or grievances. 
State Departments of Insurance employed 1,045 financial examiners, 345 
market conduct examiners, 384 financial analysts, 786 complaint 
analysts, and 75 consumer advocates. The examiners conducted 1,562 
financial exams, 1,122 market conduct exams, and 554 combined financial 
and market conduct exams.
---------------------------------------------------------------------------
    We are concerned by the potential impact of any federal patient 
protection legislation on consumers. If the federal legislation 
preempts state laws and state infrastructure, the federal government 
does not have the resources (money and staff) or the infrastructure to 
enforce these new protections. The members of Congress should ask 
themselves the following questions as they draft and debate patient 
protection legislation:

(1) Are we ready to eliminate a state system and a structure that is 
        already working?
(2) Do we really want consumers all across the country calling 
        Washington D.C. to ask a question, register a complaint or ask 
        for a review of a denial of their claim?
(3) How long will it take for the federal government to set up an 
        infrastructure that replicates what all 50 states and the 
        District of Columbia have had in place for decades to assist 
        consumers?
(4) Do we really think that legislation that would preempt state laws 
        will protect patients from the managed care abuses that we seek 
        to resolve through a federal patients' bill of rights?
    With all due respect, we do not think consumers benefit from the 
preemption of state law or state infrastructure. As such, we ask 
Congress to recognize the effective state infrastructure already in 
place and to preserve it so that consumers in insured plans continue to 
enjoy the benefits of state oversight.
    Even with state laws and enforcement preserved, there is still the 
question of how these new standards will be enforced against self-
funded plans, which are not regulated by the states. As noted, there is 
no federal infrastructure in place such as there is in the states to 
enforce patient protections. Congress should give the Department of 
Labor (DOL) the authority to contract with those states that want to 
enforce the federal patient protection standards for all group plans, 
including self-funded ERISA plans. This contract arrangement would be 
voluntary on the part of those states that want this enforcement 
authority and would be done on a state-by-state basis. The DOL-state 
contract structure would function like other federal arrangements that 
give federal grants to the states to implement and enforce federal 
programs.

                             VI. CONCLUSION

    ERISA provides for both federal and state regulation of group 
health plans. State insurance regulators are presently shaping and 
upholding state consumer protection laws and enforcing many of the 
protections being considered by Congress, including internal and 
external review. State systems that are working should not be preempted 
by Congressional action that cannot guarantee the enforcement of these 
protections. As such, when drafting federal patient protection 
legislation, we ask Congress to preserve and give deference to state 
laws that are tailored to the state markets and to give states as much 
flexibility as possible in meeting the federal requirements.

    Mr. Bilirakis. Thank you very much, Mr. Larsen.
    Senator from the State of Oklahoma, Angela Monson, is here 
on behalf of the National Conference of State Legislatures.
    Please proceed, ma'am.

                 STATEMENT OF HON. ANGELA MONSON

    Ms. Monson. Thank you, Mr. Chair, members. I am very 
pleased to be with you this morning.
    I am Angela Monson, a member of the Oklahoma State Senate, 
where I serve as Senate Finance Committee Chair.
    Today I have the pleasure of wearing the role as Vice 
President of the National Conference of State Legislatures, and 
it is within that context that I provide these remarks to you 
today.
    Let me express my appreciation again for your hard work and 
your interest given to what is an extremely important issue to 
State legislatures across the country, to our constituents, 
obviously, your constituents, as well.
    NCSL has, over the years, supported various means to expand 
coverage, to increase access to health care services. We have 
also done so in our States and, of course, the utilization of 
managed care, managed care products, has been one of those 
means to further the development of delivery systems, to 
improve access, to increase coverage throughout our States.
    While we use these means to expand coverage, to increase 
access, we also, in our States, have recognized a need to enact 
State laws that protect individuals, to ensure that persons who 
receive their coverage, who receive their care through HMOs, 
through other managed care arrangements are protected.
    NCSL has continuously recognized and supported efforts to 
protect the interests of patients, to protect the quality of 
care being received through managed care entities, and we also 
recognize that there is a need for a national floor.
    However, we quickly hasten to add that we oppose any effort 
to preempt State laws, to expand ERISA preemption, as well. We 
have, through our States, I think, demonstrated the ability to 
provide protections, to establish the means necessary, that 
patients are protected and, of course, we will continue to 
support that those efforts be maintained.
    We believe that the ultimate approach, of course, is the 
appropriate balance between State and Federal law.
    There is a Federal role, though, that we want to emphasize. 
We think that legislation certainly should ensure that 
individuals and federally regulated plans enjoy protections 
similar to those already available in most States. We think it 
is important that you, as Congress, establish a floor of 
protections, so that anyone in any managed care entity would be 
provided the protection that is necessary.
    We think maximum State flexibility, however, is important. 
Preservation of State laws that provide patient protections 
that are equal to, substantially equivalent to, or more 
protective than those established in Federal laws should be 
honored.
    We also want to emphasize that it is necessary to provide 
adequate resources for monitoring and enforcing federally 
regulated provisions.
    So if and when there are provisions that are federally 
regulated provisions, it is important that the resources are 
there to appropriately enforce and monitor that law.
    The Federal bill being proposed, being discussed today is a 
step in the right direction. It is very similar in many 
instances to State law.
    We, again, emphasize the need that there is a recognition 
and a support for State laws that are substantially equivalent 
to those that we have in place.
    We also want to throw another idea out to you today that 
you might consider when there is Federal law that has to be 
administered, monitored at this level, at the Federal level, 
that you consider the utilization of State processes, the 
internal and external review laws that we have in place are 
appropriate mechanisms that might be used to actually enforce, 
to deliver the regulatory level that your laws provide.
    The Department of Labor, your U.S. Department of Labor and 
our State Insurance Commissioner offices and other state-based 
regulatory entities are more than willing to enter into a 
cooperative relationship with you so that we can have the 
appropriate enforcement on all levels.
    We want you also to give State legislatures adequate time 
necessary to implement, to change laws, or to develop 
implementation procedures that might be necessary for new 
Federal law.
    There are clear procedures or there should be clear 
procedures for Federal enforcement. So if mechanisms are put in 
place that continue or expand Federal enforcement of patient 
protection laws, we know that those procedures must be clear.
    That does require some public education, public 
information; therefore, we, again, offer to assist you in that 
opportunity by using certain State mechanisms that are already 
in place.
    Much of your discussion today is focused on HMO liability. 
There are seven States, and I am from one of those States, that 
have passed laws which allow HMOs to be held accountable 
through the court system for decisions made.
    NCSL, however, has not taken a position on that at this 
time.
    Let me just conclude by saying we are more than willing to 
sit with you, to work with you to ensure that appropriate 
balance is maintained between State legislatures and our 
authority, the traditional authority given to our State, to the 
States to enforce these kinds of laws, as well as maintain and 
identify the appropriate role for Federal Government.
    Thank you very much. Be happy to, at the appropriate time, 
answer questions.
    [The prepared statement of Hon. Angela Monson follows:]

 PREPARED STATEMENT OF HON. ANGELA MONSON, OKLAHOMA STATE SENATE, VICE-
    PRESIDENT, NCSL, ON BEHALF OF THE NATIONAL CONFERENCE OF STATE 
                              LEGISLATURES

    Chairman Bilirakis and distinguished members of the subcommittee: 
My name is Angela Monson. I am a state senator in Oklahoma where I 
chair the Senate Finance Committee. I am also the Vice-President of the 
National Conference of State Legislatures (NCSL). It is a pleasure to 
be here today on behalf of NCSL to talk about moving forward on a 
national effort to enact a Patients' Bill of Rights.
    NCSL supports the establishment of consumer protections for 
individuals receiving care through managed care entities. We also 
support the development of public and private purchasing cooperatives 
and other innovative ventures that permit individuals and groups to 
obtain access to affordable health coverage.
    States have taken the lead in providing needed regulation of 
managed care entities and these state initiatives have enjoyed bi-
partisan support and have been successfully implemented. Individuals 
who receive their health care through federally regulated ERISA plans 
have not benefited from the state laws enacted to provide needed 
protections for individuals who receive care through managed care 
entities. It is appropriate and necessary for the Congress to address 
the needs of these individuals. Individuals and families who receive 
health care benefits through federally regulated plans should enjoy the 
same protections as their neighbors who receive care through entities 
subject to state regulation. NCSL strongly supports the efforts here in 
Washington to establish a federal floor that sets a national level of 
protection for everyone who receives care in a managed care 
environment.
    As we move toward this goal, it is important to preserve the 
traditional role of states as insurance regulators. NCSL strongly 
opposes preemption of state insurance laws and efforts to expand the 
ERISA preemption.
    We believe federal legislation should:

 ensure that individuals in federally-regulated plans enjoy 
        protections similar to those already available in most states;
 establish a floor of protections that all individuals who 
        receive care through managed care entities should enjoy;
 preserve state laws that provide patient protections that are 
        equal to, substantially equivalent to, or more protective than 
        those established in federal law; and
 provide adequate resources for monitoring and enforcing 
        federally-regulated provisions.

       THE BI-PARTISAN PATIENT PROTECTION ACT OF 2001 (H.R. 526)

    This bi-partisan bill is moving in the right direction. Most of the 
patient and provider protections included in the bill are similar to 
those that many of the states have already enacted. The bill would 
preserve state laws with patient and provider protections that are 
``substantially equivalent to'' provisions in the bill. This is a very 
important issue for NCSL and state legislators across the country. The 
concept of ``substantial equivalence'' is one we have been pursuing for 
some time. The inclusion of this provision will go far to facilitate a 
more immediate implementation of the protections that we all believe 
are important.
    As you know, federal law supercedes state law unless there is 
legislation that clearly preserves state law. State insurance 
commissioners can only enforce state law. Without the inclusion of the 
substantial equivalence standard, state law that would provide 
essentially the same protections provided for in the federal law would 
be preempted. State legislatures would then have the option of enacting 
state laws that mirror the federal statute or handing over the 
enforcement of those provisions to the U.S. Department of Labor and the 
Health Care Financing Administration.
    There are three issues regarding substantial equivalence that I 
would like to emphasize during my short time with you today. NCSL urges 
you to:

(1) apply the substantial equivalence standard to all of the provisions 
        of Title I, including those related to grievances and internal 
        and external appeals.
(2) provide adequate transition time to permit state implementation.
(3) establish a clear process for enforcement should a state opt not to 
        enact state law to facilitate state enforcement.

Apply the substantial equivalence standard to all of the provisions of 
        Title I, including those related to grievances and internal and 
        external appeals.
    There are currently conflicting court decisions on whether or not 
the ERISA preemption applies to state laws regarding internal and 
external appeals. We would like to work with the members of this 
subcommittee to craft language that would clarify that for the purposes 
of implementing patient protections for individuals receiving care 
through managed care networks, that state laws establishing internal 
and external appeals processes would not be preempted by ERISA.
    The establishment of effective internal and external appeals 
processes is critical to the implementation and effectiveness of 
patient protections. We believe that these functions are best provided 
at the state and local level. NCSL urges you to explore options that 
would permit federally-regulated plans to participate in appeals 
processes established in the states where they are located. This could 
be done through cooperative agreements between the states and the 
Department of Labor.

Provide adequate time for state legislatures to take necessary actions 
        to implement the federal law.
    State legislatures are often out of session when major federal 
legislation is enacted. In cases where state legislative action is 
desired or required, that action is delayed until the legislature 
reconvenes for its next regular session. We believe it is helpful to 
recognize this reality and to make accommodations for it in federal 
legislation. NCSL recommends that states should have at least one 
regular session of the legislature to make changes in state law and 
regulation related to this legislation that may be required to maintain 
state enforcement.

Establish a clear procedure for the establishment of federal 
        enforcement of some or all provisions of the Act in cases where 
        a state opts for federal enforcement of any of the provisions 
        of the Act.
    In the event that sufficient transition time is not provided for or 
that a state opts to have federal enforcement of some of the provisions 
of this legislation, NCSL recommends the Act establish a mechanism for 
notifying patients regarding what enforcement authority is responsible 
for enforcing the various patient protections.

                             HMO LIABILITY

    NCSL has not taken a position on the inclusion of HMO liability 
provisions in Patients' Bill of Rights legislation. I am from one of 
the seven states (Arizona, California, Georgia, Maine, Oklahoma, Texas 
and Washington) that have laws that specifically permit HMO enrollees 
to sue for malpractice. Our law in Oklahoma became effective July 1, 
2000. These laws are all relatively new. The Texas law that became 
effective September 1, 1997 is the oldest and the Washington law does 
not become effective until July 1, 2001. Of the seven states, two 
(Georgia and Maine) do not allow the plaintiff to collect punitive 
damages.

                             IN CONCLUSION

    NCSL looks forward to working with this committee and your 
colleagues in both the House and the Senate to enact Patients' Bill of 
Rights legislation this year. I believe it can be achieved and achieved 
in a way that preserves the traditional role of states in regulating 
insurance and at the same time provides needed protections for all HMO 
enrollees.
    I thank you for this opportunity to discuss these important issues 
with you today and would be happy to answer questions.

    Mr. Bilirakis. Thank you very much, Senator.
    We will see if we can get through Mr. Pollack. We have a 
couple of votes on the floor. So why don't we have you start, 
at least, Mr. Pollack, and see how far we can go.

                 STATEMENT OF RONALD F. POLLACK

    Mr. Pollack. Thank you, Mr. Chairman. Mr. Chairman, members 
of the committee, thank you for holding this hearing and for 
inviting me to it.
    One of the things I think that is missed in terms of the 
debate about Patients' Bill of Rights is the crazy quilt 
pattern that exists today throughout the Nation in terms of 
regulating managed care, and it does not serve consumers well, 
it doesn't serve the managed care industry well.
    When I say there is a crazy quilt pattern, what I mean is 
people have different rules that govern then, depending on what 
State they are in, and even for people in the same State, there 
are very different rules.
    One set of rules for people who purchase coverage 
independently, another set of rules for people who get their 
coverage from an employer who insures, and yet another set of 
rules for those people that get coverage from an employer who 
self-insures.
    For consumers, it is baffling, it is very difficult to 
understand.
    Now, I was asked, as part of this panel, to talk about 
scope of protection. There are three types of variation by 
State in terms of the coverage in protection that people get.
    First, if you look at the chart that is attached to my 
testimony, Chart A, you will see that there is a wide disparity 
in the areas covered by consumer State protections.
    Of the ten areas of consumer protections analyzed in that 
appendix, only one State, the State of Illinois, has adopted 
protections in at least nine of those areas.
    Two of the States, Wyoming and Mississippi, have adopted 
only one such protection. The most common number of protections 
enacted is six out of the ten that we analyzed that are in 
virtually all the Federal bills.
    If I may just take the States of Florida and Ohio, where 
the chairman and the ranking minority member come from. Ohio 
has adopted the prudent layperson standard for emergency care 
and provides access to drugs prescribed by physicians that are 
not on a health plan's formulary.
    Florida does neither of those things. However, Florida 
enables patients with disabling or life-threatening illnesses 
to continue receiving transition care from physicians dropped 
from a health plan. Ohio does not.
    Second, even the States that have adopted specific patient 
protections, those laws are not applicable to many of the 
people in those States.
    With respect to the substantive protections established by 
some of these States, these rules do not apply to people in 
self-insured plans.
    About 43 percent of all employees who get their health 
coverage through their employer are not covered by any of these 
protections, irrespective of what the State has enacted.
    Approximately 56 million people are in that situation. To 
make matters worse, it appears that State laws relating to 
remedial processes ranging from the right to sue to the right 
to independent external appeals may be inapplicable to the vast 
majority of people, approximately 124 million Americans who get 
their coverage from a self-insured or a fully insured ERISA 
plan.
    Third, even in the States that have established specific 
consumer protections, the details of these protections vary 
considerably from one State to the other.
    The laws that provide access to emergency rooms are an 
excellent case in point. In States, some States have enacted a 
provision addressing some aspects of access to emergency 
services, but the provisions are by no means uniform from one 
State to the other.
    This is also true with respect to the independent right of 
appeal.
    In essence, Mr. Chairman, it is fair for the Congress to 
look to the States as laboratories of change. States experiment 
and do provide very good data with respect to what works and 
doesn't work.
    They inform Congress of what works and they frequently help 
Congress adopt ideas for the entire Nation based on what has 
worked at the State level.
    We believe in that laboratory system. We also believe, 
however, that consumers need predictability. They need systems 
that are easily understandable and they need basic rights that 
should not vary based on place of residence or payer of care.
    The best way to reconcile these interests is by 
establishing nationwide standards, a floor, that cannot be 
violated, and States that exceed those standards should be 
allowed to do so.
    We urge you to establish nationwide standards and allow the 
States to exceed them.
    Thank you.
    [The prepared statement of Ronald F. Pollack follows:]

 PREPARED STATEMENT OF RONALD F. POLLACK, EXECUTIVE DIRECTOR, FAMILIES 
                                  USA

    Thank you for the opportunity to testify at this hearing on 
consumer protections. Families USA, the national organization for 
health care consumers, supports nationally enforceable consumer 
protections. These protections must be designed to ensure that health 
plan enrollees receive the care they were promised by their health 
plans. They must include basic protections covering a wide range of 
consumer concerns, and they must apply to all health plans. We support 
H. R. 526, the ``Bipartisan Patient Protection Act of 2001.''
    The public needs federal legislation because the protections that 
do exist today constitute a veritable patchwork quilt that is 
indecipherable and has many holes. Enormous differences exist today in 
the protections that are afforded to people based on the accidental 
happenstance of a consumer's state of residence and the payer and form 
of that consumer's health plan. Enormous differences exist in the 
protections provided by one state versus another. Enormous differences 
also exist among people within the same state, especially between those 
who get their coverage from an employer who is fully insured compared 
to those who get coverage from employers that self-insure and compared 
even further to those who buy their insurance coverage independently.
    Consumers need greater clarity and predictability about the basic 
protections that are guaranteed to them. Such clarity and 
predictability can only be created, without stifling state-by-state 
innovation, by establishing national minimum standards applicable to 
everyone. As with other fundamental principles that Americans believe 
should apply to everyone in the nation--such as civil rights laws and 
environmental laws--consumer protections should apply to everyone. 
National standards should establish a basic foundation that nobody can 
fall through.
    One of the reasons we support H. R. 526 is that it creates such a 
basic foundation that everyone will be able to rely on. Everyone--
irrespective of the state in which they live, and irrespective of what 
type of plan they are in--will be able to count on the fundamental 
protections that consumers need. They will not have to become experts 
about the complex ERISA statute and other arcana to determine whether 
they are subject to patient protections.

                         ANALYSIS OF STATE LAWS

    Families USA has issued a number of reports on consumer protections 
that had been enacted by the states. We named our last report Hit and 
Miss because, as you can easily see from the attached updated chart 
(see Appendix A to this testimony), the protections vary widely from 
state to state. There are three types of variations. First, as the 
chart in Appendix A demonstrates, there is wide disparity in the areas 
covered by state consumer protections. Of the 10 areas of consumer 
protections analyzed in the report, only one state--Illinois--has 
adopted protections in at least 9 of those areas. Two states have 
adopted only one protection. The most common number of protections 
enacted is 6 out of the 10 we reviewed. Ohio adopted the ``prudent 
layperson'' standard for emergency care and provides access to drugs 
prescribed by physicians that are not on a health plan's formulary; 
Florida does neither of these things. Conversely, Florida enables 
patients with disabling or life-threatening illnesses to continue 
receiving transition care from physicians dropped from a health plan; 
Ohio does not.
    Second, even in states that have adopted specific patient 
protections, those laws are not applicable to many of those states' 
residents. With respect to the substantive protections established by 
some of the states--such as the ``prudent layperson'' standard for 
emergency care and the right to receive prescribed drugs not on a 
health plan's formulary--these rules do not apply to people in self-
insured plans. About 43 percent of all employees who get their health 
care coverage through their employer are not covered by any of these 
protections, irrespective of what the state has enacted. Approximately 
56 million people are in this situation. To make matters worse, it 
appears that state laws relating to remedial processes--ranging from 
the right to sue to the right to independent external appeals--may be 
inapplicable to the vast majority of people, approximately 124 million 
Americans, who get their coverage from a self-insured or fully insured 
ERISA plan.
    Third, even in the states that have established specific consumer 
protections, the details of these protections vary significantly from 
state to state. The laws that provide access to emergency rooms are an 
excellent case in point. A majority of states have enacted a provision 
addressing some aspect of access to emergency services, but the 
provisions are by no means uniform from state to state. In fact, the 
very definition of what constitutes an emergency differs depending on 
what state you are in. Some states, for example, do not specify whether 
severe pain may indicate the presence of an emergency situation. In 
some states, plans are prohibited from requiring prior authorizations 
for emergency services but have not adopted a ``prudent layperson'' 
standard as a basis for securing health plan payment for emergency room 
services. Other states have adopted the ``prudent layperson'' standard.
    States deal with emergency post-stabilization care differently. 
States often require plans to pay for emergency services necessary to 
stabilize a patient but require doctors to contact the plan directly to 
gain authorization for post-stabilization care. States may even require 
health plans to provide 24-hour access to plan personnel who can 
authorize continued care following stabilization of the patient. But in 
some of those states, requests for post-stabilization treatment 
approval that receive no response within a specified time period are 
automatically approved. Other states, however, impose no time 
restraints on how long a plan can take to respond to a request for 
post-stabilization care and do not automatically approve care despite 
the plan's failure to respond.
    Another area demonstrating the variability of state consumer 
protection laws is the one relating to external or independent reviews 
of health service denials.
    A majority of states have passed independent review legislation. 
But the breadth and scope of these provisions vary from state to state, 
providing consumers absolutely no consistent protection. Some states 
reserve independent external review for determinations of medical 
necessity. Other states allow independent external reviews to settle 
any consumer grievance not resolved internally by the plan.
    The make-up of the independent review entity can again vary 
depending on the state. In some states reviews are performed by 
physicians or providers who are experts in the treatment of the 
enrollee's conditions. Other state laws preclude members of independent 
review boards from having been involved in the initial denial of care 
or from having a direct financial interest in the outcome of the 
review. Some states require the Director of Insurance to compile a list 
of independent review entities. Others require that a member of the 
health plan sit on the review board.
    Another factor that varies from state to state is whether or not 
the reviewer's decision is binding for the plan or the consumer, 
binding for both, or not binding at all. Most states specify that 
decisions made by external reviewers are binding on the health plan. A 
few states make the decision binding for both the plan and the 
consumer. In New Jersey the decisions are not binding at all.
    Some states require that requests for independent external reviews 
be made within a certain time period after the initial adverse 
decision. These time periods range from a low of 15 days after a 
consumer exhausts the plan's internal grievance system, to a high of 
two years. Several states impose no time limits on consumers to file a 
request for an independent external review.
    In addition, there is significant variability on the length of time 
reviewers can take to rule on appeals. Some, but not all, states 
require external review entities to establish a mechanism so consumers 
can obtain an expedited review in emergency or urgent cases--and, even 
in those instances, there is variability concerning time limits related 
to such expedited reviews.
    The net result is that--even in the states that address specific 
areas of consumer protection (let alone the states that totally fail to 
address such specific areas)--there is enormous variability from state 
to state concerning how the states treat such areas. Hence, one cannot 
assume uniformity--and, hence clarity and predictability--if a state 
happens to address a specific area of consumer protection. This 
enormous variability cries out for a federal floor so that all 
consumers throughout the country have clear, basic rights that do not 
change due to the happenstance of where they live.
    The creation of a federal floor is not a new idea. There are many 
examples of laws that create a federal standard and allow the state 
standard to stay in effect if it is the same or more protective. Some 
examples include parts of the Clean Water Act, the Endangered Species 
Act, the Americans with Disabilities Act and the Medical and Family 
Leave Act. A federal floor to protect all consumers is a crucial and 
necessary element of H. R. 526.
    Before I close my testimony I want to discuss a provision that 
should be added to H. R. 526--the creation of consumer assistance, or 
ombudsman programs--that is crucial to making the external appeals 
process work. The creation of consumer assistance programs is a bill 
that will be introduced next week by Senators Jeffords and Reed 
entitled ``Health Information for Consumers Act of 2001.'' These 
programs are designed to assist consumers in understanding their health 
care choices and rights, and to provide assistance to consumers in non-
litigative appeals processes.
    Two very diverse states--Vermont and Virginia--established such 
consumer assistance programs. These programs are crucial to making 
internal as well as independent external review processes work. Simply 
stated, consumers need help to make meaningful use of internal and 
external appeals processes. At the time consumers wish to appeal a 
plan's denial of important health services, those consumers are likely 
to be sick or frail--and they have limited capacities to pursue their 
appeals alone. It is for this reason that they need someone to help 
navigate the system in order to make the promise of the appeals system 
more effective.
    A Henry J. Kaiser Family Foundation report, entitled External 
Review of Health Plan Decisions: An Overview of Key Program Features in 
the States and Medicare, indicates how important consumer assistance 
programs are in making external appeals systems work. In states where 
external appeals processes have been in existence, the number of people 
who availed themselves of these processes is very low--less than a few 
hundred cases per year in the largest states and fewer in the smaller 
states. The report cites studies indicating that these numbers are low 
because consumers often are unaware of their rights to an external 
review and, when they are sick, they are unable to pursue their appeals 
rights. Consumer assistance programs are needed to make the system work 
properly.
    No matter whether one supports or opposes the right of consumers to 
sue HMOs in court and receive a meaningful remedy, there should be 
universal agreement that we want to solve consumer-health plan problems 
early--thereby reducing the impulse to litigate. That's why the 
creation of consumer assistance programs, so that help can be provided 
on a timely basis for internal and external appeals, is crucial. It is 
a way to provide non-litigative, non-lawyer remedies on a timely basis 
before significant damage is done.
    Consumer assistance programs help to resolve problems at earlier, 
less formal stages and obviate the need for more contentious 
proceedings, such as litigation. Consumers need to have someone to go 
to for help when they think they are not getting the care they need. A 
knowledgeable person who can explain the obligations of the patient and 
the plan may be able to run interference and solve a consumer's problem 
before a formal grievance is necessary. Additionally, providing 
assistance throughout the appeals process could make the system work 
more efficiently and thereby lessen the need for further proceedings, 
such as litigation.
    As a result, any legislative proposal that seeks to deal with 
problems early and uses external review mechanisms to achieve that 
objective should include a provision for the creation of consumer 
assistance programs. We have ample, high-quality precedents in the 
states for these programs, and we should implement them as part of a 
patients' rights system.

                               CONCLUSION

    Congress often looks to the states as the laboratories of change. 
States experiment with various laws. They inform Congress about what 
works, and frequently Congress adopts these ideas for the entire 
nation. We believe in the benefits of such a laboratory system. We also 
believe that consumers need predictability; they need systems that are 
easily understandable; and they need basic rights that should not vary 
due to place of residence or payer of care. The best way to reconcile 
these interests is by establishing nationwide standards--a floor--that 
can't be violated. We urge you to establish nationwide standards and 
allow states to exceed these standards.

                 STATE MANAGED CARE PATIENT PROTECTIONS
                               MARCH 2001

    Families USA has issued two reports on state managed care consumer 
protections. In July 1996, we released HMO Consumers At Risk: States to 
the Rescue and in July 1998, we released Hit and Miss: State Managed 
Care Laws. On the back is an update of the Families USA Hit and Miss 
chart showing 10 consumer protections that have been passed in various 
states. The protections, listed by state, apply to those who are 
covered by state regulated health plans. They do not apply to the one-
third of American workers who are covered by employer-sponsored plans 
and are therefore subject to federal law only. The 10 selected 
protections are:

1. Emergency room services--which states have passed laws setting the 
        ``prudent layperson'' standard. Some states that only prohibit 
        prior authorization are not included.
2. Standing referrals--requiring plans to allow standing referrals to 
        specialists for people with chronic or life-threatening 
        illnesses
3. Ob-Gyn--requiring plans to give women direct access to obstetricians 
        and gynecologists, or to allow ob-gyns to serve as primary care 
        providers. States that require direct access for only one 
        annual visit are not included.
4. Continuity of care--which states have passed laws requiring plans to 
        allow certain patients to continue to see their physician when 
        the provider's contract with the plan is terminated. Some 
        states require plans to provide transitional care for primary 
        care only and not for specialty care; those states are not 
        included in this list.
5. Ability to obtain drugs--which states have passed laws requiring the 
        plan to have a process by which members can obtain non-
        formulary prescription drugs. States that require plans to 
        disclose the procedure for obtaining non-formulary drugs (if 
        the plan uses a formulary)--but that do not require that plans 
        have such a procedure--are not included.
6. External Appeals--which states have passed laws that require a 
        meaningful process for external review of appeals decisions. 
        Some states have set up independent external review processes 
        for limited circumstances--only for experimental and 
        investigational procedures or services, for example; these are 
        not included. States that allow the plan to pick any provider--
        including employees of the managed care plan--to be on the 
        review panels are not included.
7. Gag laws--which states have passed laws prohibiting plans from 
        preventing the disclosure of treatment options.
8. Financial Incentives--which states have passed laws prohibiting 
        plans from offering incentives to physicians for denying or 
        reducing care.
9. Clinical trials--which states have passed laws that require payment 
        of certain routine costs when a patient participates in certain 
        clinical trials.
10. Liability--which states have passed laws that allow consumers to 
        sue health plans for not exercising ordinary care when making 
        benefit decisions.

                                                         State Managed Care Patient Protections
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                             Standing    Ob-Gyn    Contin.  Ability to  External          Financial  Clinical
                       State                           ER    Referrals   Direct    of care   Obtain Rx   Review    Gag    Incentive   Trials   Liability
--------------------------------------------------------------------------------------------------------------------------------------------------------
Alabama............................................  .....     ........  ..........    .....  ..........  ........  .........
Alaska.............................................  .....  ..........  ........    ..........     ........  .........
                                                                                                                     e
Arizona............................................  .....      ........    ..........  
                                                                                                                     e
Arkansas...........................................     ........     ........  
                                                                                                                     e
Colorado...........................................    ..........    ........     ..........     ........  .........
                                                        e                                                            e
District of Columbia...............................    ..........    ..........     ........  .........
                                                                                                                     e
Georgia............................................    ........   
                                                        e                                                            e
Hawaii.............................................     ........  ........  ..........    ........  ..........  ........     ........  .........
                                                        e                                                            e
Illinois...........................................    .........
                                                        e                                                            e
Indiana............................................    ..........     ........    ..........     ........  .........
                                                        e                                                            e
Kentucky...........................................    ..........    ........     .........
                                                        e                                                            e
Maine..............................................     ........     ........  
                                                        e                                                            e
Maryland...........................................     ........  ........     .........
                                                        e                                                            e
Massachusetts......................................    ..........     ........  .........
                                                        e                                                            e
Michigan...........................................     ........  .........
                                                        e                                                            e
Minnesota..........................................    ..........     ........  .........
                                                        e                                                            e
Mississippi........................................  .....  ..........    ........  ..........  ........  .....  ..........  ........  .........
Missouri...........................................     ........     ........  .........
                                                        e                                                            e
Montana............................................  .....  ..........    ........  ..........     ........  .........
                                                                                                                     e
Nebraska...........................................    ........  ..........  ........     ........  .........
                                                        e                                                            e
Nevada.............................................    ........  ..........  ........     ........  .........
                                                        e                                                            e
New Hampshire......................................  .....  ..........    ........     .........
                                                                                                                     e
New Jersey.........................................  .....  ..........    ..........     ........  .........
                                                                                                                     e
New Mexico.........................................    ........  ..........     ........  .........
                                                        e                                                            e
New York...........................................    ..........    ........      ........     ........  .........
                                                        e                                                            e
Ohio...............................................    ........      ........  .........
                                                        e                                                            e
Oklahoma...........................................     ........  
                                                        e                                                            e
Oregon.............................................    ........      ........    ..........     ........  .........
                                                        e                                                            e
Rhode Island.......................................    ..........    .........
                                                        e                                                            e
South Carolina.....................................    ..........     ........     ........  .........
                                                        e                                                            e
Tennessee..........................................  .....     ..........     ........  
                                                        e                                                            e
Utah...............................................     ........  ........  ..........  ........     ........  .........
                                                        e                                                            e
Virginia...........................................    .........
                                                        e                                                            e
Washington.........................................  
                                                        e                                                            e
West Virginia......................................    ........  ..........  ........     ........  .........
                                                        e                                                            e
Wisconsin..........................................  GYN and other provisions, it is hard to make that match-
up. So the substantially equivalent approach, we think, is a 
much more workable approach and, yes, it does provide, I think, 
a fair level of deference.
    Mr. Brown. Thank you, Mr. Chairman.
    Mr. Bilirakis. Who should be the ultimate judge on whether 
a state's laws meets the substantially equivalent definition?
    Mr. Larsen. Of course, I have to answer that the States 
should make that final determination.
    Mr. Bilirakis. The State meaning the Governor, the 
legislature, the Governor.
    Mr. Larsen. I think there should be initial review. The 
initial review should be done by the States. I think they are 
most conversant with their own laws and how they interpret 
their own laws.
    Mr. Bilirakis. But who within the state? Should it be the 
Commissioners, should it be the legislature, should it be the 
Governor, should it be all three?
    Mr. Larsen. I think as a practical matter, it would come 
from the Governor. I think that's the appropriate way, 
especially as someone who is appointed by the Governor of our 
State. I think it should be by the Governor.
    Mr. Bilirakis. Dr. Ganske, to inquire.
    Mr. Ganske. Thank you, Mr. Chairman.
    Mr. Bilirakis. Did Chairman Tauzin wish to inquire?
    Chairman Tauzin. I will, but I will be glad to yield, Mr. 
Chairman.
    Mr. Bilirakis. All right.
    Mr. Ganske. Mr. Larsen, I am glad that you are here today. 
I had a very interesting conversation with a former State 
insurance commissioner, who is now a member of the U.S. Senate, 
on this and he told, me he was very forceful in his feelings, 
that it was inappropriate 25 years ago for Congress to take 
away from State insurance commissioners the liability issue and 
that from his perspective, that we needed to remove the ERISA 
preemption as it related to medical judgment type decisions, 
because I think all of us want to allow national corporations 
that are working in many States to be able to design a uniform 
benefits package.
    That was the reason for the pension reform in the first 
place under ERISA.
    Would you comment on that for a moment?
    Mr. Larsen. Well, I must say that with respect to any of 
the liability provisions, particularly, the national 
association does not have a position on that.
    Notwithstanding our distinguished former colleague's views, 
who I have great respect for, and I think the fact that he is a 
U.S. Senator reflects the views that other people hold of him.
    Mr. Ganske. It shows how high you can rise.
    Mr. Larsen. That's right. You know, I think many 
commissioners view the liability issues as really kind of 
outside the regulatory realm in which we deal.
    It really gets into what I think is tort issues and what 
has been described here. If a corporation is actually found to 
do harm to someone, should they be held accountable for that?
    That really, I think, we view, is not an insurance 
regulatory issue, as we think about it.
    Mr. Ganske. I was very gratified to hear you affirm the 
substantially equivalent standard that we have, which would 
basically be the mechanism, as I see it, for consultation 
between the State insurance commissioners, their Governor, and 
then an application to the Secretary of Health and Human 
Services, who, by the way, is a former Governor and I'm sure 
would give a considerable deference to States on that standard.
    It is just that my understanding of your statement was that 
there could be a benefit from a uniform floor, but that our 
bill would allow States that have gone beyond that to basically 
implement their own clause.
    Mr. Larsen. The most important piece, if I may, just 
briefly, is to preserve the ability of States to go beyond the 
Federal standard, particularly if their markets, I think, 
dictate additional protections.
    Mr. Ganske. Mr. Pollack, would you care to comment on that, 
also?
    Mr. Pollack. Yes, Mr. Ganske. There's a really interesting 
issue about the ERISA statute and I just want to go back in 
history about what happened when the ERISA statute was enacted.
    Those of us who think ERISA should be modified are not 
critical of what was enacted when Congress considered it in the 
1970's.
    In the 1970's, Congress actually was trying to make a 
patient whole when they had a dispute with an insurance 
company. The context of what Congress was dealing with in the 
1970's was a system of fee for service care and the way 
disputes arose between insurance companies and consumers was 
you went to your physician, the physician provided you with 
care, and then you applied to your insurance company to receive 
payment for that, and the dispute arose when the insurance 
company said we are not going to pay for that claim.
    And so when the ERISA statute said we are going to pay just 
for the service that was originally denied, in fact, the ERISA 
statute, in that context, was making the person whole.
    The context has changed today. Today, somebody goes to a 
managed care plan and the managed care plan says, no, we are 
not going to provide you with this service because it is not 
medically necessary, and then you go to a hospital or a 
physician to get the care and they won't provide it because 
they haven't gotten authorization from the managed care plan.
    So it is not inconsistent to say when ERISA was enacted in 
the 1970's, it made sense. It makes no sense today in a totally 
different context.
    Mr. Ganske. I appreciate that. Mr. Larsen, have you had a 
chance to look at our bill? We basically tried to codify the 
Supreme Court's P. Pegram v. Herdrich decision, which was 
contractual benefits continue to stay under ERISA's authority 
while medical judgment type decisions would go to the States, 
where they have always been in States.
    Have you had a chance to look at the language on our bill?
    Mr. Bilirakis. A brief response to that, Mr. Larsen.
    Mr. Larsen. The NAIC has not taken a position on the 
language and hasn't met. We are meeting in 2 weeks to go over 
these issues and I would be happy to respond in writing to your 
request.
    Mr. Ganske. Thank you.
    Mr. Bilirakis. Mr. Pallone, to inquire.
    Mr. Pallone. Thank you, Mr. Chairman. In my opening 
statement, I expressed my concern that this new bill or 
potential bill by Senators Frist and Breaux would be moving us 
in the wrong direction and basically whittling down patient 
protections and slowing down the process perhaps of getting Mr. 
Dingell and Ganske's bill passed.
    The two concerns that have been raised, and I guess I am 
really quoting Congress Daily and other reports, because there 
is no bill at this point, is with regard to scope, not so much 
the floor, but the opt-out for States with low HMO enrollment 
or adverse impact on premiums.
    I think we are told that if the costs went up by 2 percent, 
the States could opt out, or if there was low HMO enrollment.
    Again, I haven't heard from the Senators specifically, but 
that is what we are hearing.
    Then the other thing, of course, is this requirement to go 
to Federal court.
    I just wanted to hear some comments on that. Maybe Mr. 
Pollack could comment on the Federal court requirement. I used 
to be a clerk in the Federal court in my law school days and I 
know they were tremendously backlogged. They didn't necessarily 
have expertise in this area, because so much of this involved 
State law, and my fear would be that it just makes it that much 
more difficult for somebody to be heard.
    But I would like your comment on that.
    Mr. Pollack. I am actually surprised about the debate on 
this issue. I happened to be in St. Louis during the third 
Presidential debate and the very first question asked of the 
President was what would you do with respect to the Patients' 
Bill of Rights.
    What President Bush stated in response to that first 
question was that we have passed patients' rights legislation 
in Texas and I am going to try to see that we get for the 
United States what we achieved in Texas.
    Now, what does Texas have? Texas allows you to sue in State 
court.
    Now, the issue, I think, really is largely a question of 
how much time it takes to litigate. Anybody who litigates in 
the Federal court system, and I used to be the dean of a law 
school, knows that the Federal court system, there is a great 
deal of backlog. It takes considerably more time to get cases 
adjudicated.
    So as a result, the relief that somebody is seeking, 
whatever this body thinks is appropriate in terms of relief, 
comes much later when you go through the Federal court system.
    Mr. Pallone. Even in terms of the expertise, usually these 
personal injury cases are handled in State court and they have 
more of an expertise.
    Mr. Pollack. Absolutely. This is not something that the 
Federal courts generally have jurisdiction over. That is right.
    Mr. Pallone. Now, what about the scope aspect? I guess I 
can ask both of you that. Again, I don't know for sure what the 
Senators have in mind, because we don't have a bill, but we are 
hearing that they might have these opt-outs for States with low 
HMO enrollment or with costs that go up by, say, 2 percent.
    It seems to me you can argue over the floor, but these two 
options are just not acceptable, because that would mean that 
there would be no protection in certain States.
    I just wanted to know your opinion on that.
    Mr. Pollack. I don't even understand how you would 
implement such a provision. Congressional Budget Office has 
given estimates of last year's Norwood-Dingell bill and what 
they said was over the course of 10 years, it would exceed 2 
percent, but over each year, it was really a fraction of that.
    I don't know how a Governor or a State legislature or the 
Secretary of Health and Human Services could administer that. 
It would purely be an allegation that could not be 
substantiated until you have actually seen the regimen actually 
properly implemented.
    I think we can tell from the States, however, that have 
adopted these patients' rights protections that the costs don't 
come close to 2 percent.
    My fear is that offering that kind of an out could offer a 
potential smokescreen for those who do not want to have that 
protection, even though there would be no scientific validation 
that the costs would exceed 2 percent.
    Mr. Pallone. Thank you.
    Mr. Larsen. Briefly, in Maryland, for example, we review 
and approve all health insurance rates and HMO rates. So we 
have a fair amount of experience in looking at rate filings.
    It is sometimes very difficult to attribute rate increases 
to any particular factor. So I don't know exactly what the 
process is, because we haven't seen it either, but I know that 
trying to correlate a particular rate increase to a particular 
law or set of laws can be difficult.
    With respect to the low HMO penetration, obviously, I don't 
know what low is and whether there would be a standard for 
that, and how low is low and where does that leave--if there 
even is some managed care penetration, where are those 
consumers.
    So conceptually, the opt-out for low penetration seems to 
at least make sense, but, again, I don't know how that would be 
implemented.
    Mr. Pallone. Thank you.
    Mr. Bilirakis. Chairman Tauzin, to inquire. The Chair 
thanks the gentleman.
    Chairman Tauzin. Thank you, Mr. Chairman. Let me first, Mr. 
Larsen, talk about the substantial equivalence concept. I have 
read the Frist proposal yesterday and in his proposal, he 
provides for exactly that concept, but he provide that upon the 
certification by the Governor of a State, that the State 
program is in substantial equivalence to the Federal standards, 
that there would be an advisory board judgment on that issue, 
recommendation to the Secretary of HHS, who would then make a 
final determination as to whether it was or was not.
    If it was not, in his opinion, it would be a consultation 
whereby any disagreements over the substantially equivalence 
would be worked out.
    Is that or is that not a workable plan, in your view?
    Mr. Larsen. Again, the NAIC hasn't opined on the specifics 
of it. I will say, generally, that whatever the process is, it 
has to be a relatively simple and timely process.
    Again, our experience with doing these types of things 
under HIPAA and HCFA was fine, but it was just a laborious 
process for a much smaller set of issues.
    So that there needs to be timeframes and not too many steps 
involved so that it can be resolved quickly and then give State 
legislatures time to respond if, for example, it is agreed that 
there is not substantial equivalence.
    Chairman Tauzin. Let me take issue a little bit with the 
notion that the President endorsed a Federal plan that would 
provide for all State lawsuits on these issues.
    I think as I heard his statements, and I have had private 
meetings with him on this subject matter, we look at the 
principles derived from the White House, he certainly expects 
the national plan to give due deference to State plans like 
Texas, but I don't think he ever endorsed the notion that all 
of these issues should be tried in State court.
    I don't think he said that in the debates and I don't think 
he meant that, if you thought he meant that, but that is 
debatable.
    Let me ask you a little bit about why I think we are in 
this fight or this discussion, because you said you were 
surprised by it, Mr. Pollack.
    In discussion of the Frist bill last night, I asked some 
questions that I didn't get some great answers to yet and maybe 
you can help me with.
    You are exactly right about the universe the way it existed 
at one time. We went to get our medicine and our medical 
service and then we applied to the insurance company and found 
out whether we got paid or not. Very often the doctor found out 
whether he got paid or not. If he didn't get paid by the 
insurance company, sometimes he didn't get paid. That was sort 
of the way the world worked.
    Nowadays, we live in a different kind of context, with 
managed care making a decision about whether or not our plan 
covers the type of medicine or services we are looking for.
    But suppose I live in an area where--in a condition where I 
am rich enough I can afford it, that when my HMO tells me we 
don't cover the kind of medicine you want or the kind of 
service you want, I say, well, fine, I will see you in 
litigation, I will see you somewhere; in the meantime, I am 
going to get it. I go to my doctor and I say I want this, do it 
for me.
    What I have then is a fight over a contract, essentially, 
on whether or not I am going to get paid, reimbursed for what I 
already paid for in medical services.
    Let's say I live in a State where I am indigent, but my 
State has a charity hospital system, like Louisiana had, and I 
am not doing well at all and my HMO won't cover my services and 
I have to have it.
    Do I have an affirmative duty to go over to the charity 
hospital and say I have to have this, this is life-threatening, 
do it for me, or under the State plans, as you have seen them, 
do I simply not get my services and can I sit back an sue my 
HMO?
    Mr. Pollack. Well, I don't think any of us who have helped 
work on patients' rights legislation, I served on the 
President's Commission that developed the Patients' Bill of 
Rights. I was on the subcommittee that drafted the first 
Patients' Bill of Rights.
    None of us thought that when we were establishing internal 
and external appeals rights and so on, that what we were doing 
was saying that this was a pretext for changing the coverage in 
a plan.
    Obviously, there is a question of fact as to whether the 
plan does or doesn't cover it.
    Chairman Tauzin. Whether you are covered or not.
    Mr. Pollack. I fully appreciate that. I appreciate what Mr. 
Shadegg said about employers. Clearly, these are questions of 
facts.
    But a true remedial process is not intended to change the 
scope of the coverage that is provided.
    Chairman Tauzin. My time is going to run out. What I am 
asking essentially is do you agree that the plaintiff in any of 
these cases, the patient plaintiff, whether it is in a review 
process or a lawsuit, has an affirmative duty to minimize his 
damages? That is, to take advantage of whatever health care 
services he can get if his HMO won't give them to him.
    Mr. Pollack. I think the common sense response to your 
question, Mr. Chairman, is yes. But it is not because you want 
to avoid litigation. It is because I want to get good health 
care.
    Chairman Tauzin. You want to get good health care, that is 
right, but it has an effect on the litigation.
    Here is the final point I want to make, Mr. Chairman, and I 
know my time is up.
    It seems to me we are in this debate about where a suit is 
tried, because we have migrated from a situation where denial 
of coverage is now considered potential malpractice, potential 
tort.
    What was formerly a contract situation, purely a contract 
situation, are you going to pay me, are you going t pay the 
doctor, are you going to reimburse me for the services, has 
become a question of whether I get the services at all, is it 
really covered or not.
    Traditionally, we have handled the Federal issues of 
coverage as a contract matter under Federal law. The issues of 
malpractice is a tort matter under State law, and that now we 
have a confusion of the two, because under the new delivery of 
health care plans, the initial decision to provide coverage or 
not in some cases means you either get it or you don't.
    That can, in some cases, mean that you have got a potential 
tort problem on your hands, as well as a contract problem. Is 
that right?
    Mr. Pollack. Mr. Chairman, I don't want to complicate 
things further, but if you look at the Texas statute and then 
follow the litigation that arose in terms of Aetna's challenge 
of the statute, it does raise some of the questions that you 
suggested.
    In fact, the Court of Appeals for the Fifth Circuit said 
that--it actually divided this concept into two parts. It said 
if you provide services and you provide them poorly, so you 
have got a situation of the nature of malpractice, then you can 
litigate.
    On the other hand, the Fifth Circuit Court of Appeals said 
if you are denied care because of a medical necessity decision, 
it said if that is what we interpreted this Texas statute to 
cover, we would have invalidated it for violating the ERISA 
statute.
    Now, my concern about this is that these decisions about 
medical necessity really require medical judgments and yet we 
are treating them as if they are administration of a health 
plan rather than medical judgments, and I think that is a 
mistake and I think the most common grievance that an 
individual has that has you all focusing on a Patients' Bill of 
Rights is when people get denied care and they think that 
denial was improper because a decision was made it is not 
medically necessary.
    We have got to stop this--we are really dancing on the head 
of a pin here in terms of trying to create distinctions between 
what is appropriate for the courts to review and what is pure 
administration of a plan.
    Most of the decisions that people want to contest that have 
been determined so far by the Federal courts to be decisions 
relating to administration of plans are really medical 
necessity decisions.
    Chairman Tauzin. Thank you, Mr. Chairman.
    Mr. Bilirakis. Mrs. Capps.
    Mrs. Capps. Thank you. I want to hear from you more on that 
last bit, but I want to just acknowledge that to me, this 
hearing today, which I believe is the first one we have had on 
this particular topic, is further testimony of the fact that we 
have momentum now, both from the President's statements, no 
matter how they are interpreted, and also that we passed 
legislation in the last session, good legislation on this 
topic, which enjoyed bipartisan support.
    In fact, to have this expert testimony from both of you 
now, and the Honorable Monson, as well, it gives us a chance to 
make sure that this time when we do this again, that we do it 
in the best way.
    It is huge and since the bill is based on Texas statute and 
it has been challenged, I would hope that we could use your 
expertise and others to make sure that the bill does the things 
that it should do.
    Now, I am mindful that your last statement, Mr. Pollack, 
sort of put it back square to where it should be, I would like 
to know from each of you what we should hone on to make it 
really work this time and so that it will avoid some of the 
contests that have happened in the past.
    Mr. Pollack. Let me raise a point in response to your 
question that we have not dealt with in the course of this 
hearing.
    I think there is a consensus in this panel that we would 
prefer to see disputes resolved at the earliest moment in the 
least contentious manner.
    There may be significant differences about the litigation 
provision, and I appreciate them and they are strongly felt 
points of view about how to create that litigation right, but I 
think everybody agrees that if we can avoid litigation, if we 
can get things resolved early before there is harm caused, we 
are doing the patient the best thing that we can do for them.
    One of my concerns, I had it in my written testimony, I did 
not talk about it in my oral testimony, is how do we buildup 
this internal and external review mechanism so that no matter 
where you come out on the litigation provision, there is less 
litigation that results.
    One of the things that I would suggest that hopefully is 
part of a compromise that will ultimately get worked out here 
is that in strengthening the internal and external appeals 
system, we have got to make sure that consumers get some help 
in that system.
    I don't mean in litigation. I mean in terms of the internal 
and external appeals mechanisms.
    What happens typically in an internal or external appeals 
system is that the health plan comes in with their medical 
director and/or their attorney, coming on the side of the 
patient who is filing the appeal is the patient, who is 
bewildered about this internal and external appeals mechanism.
    And to make matters worse, that person tends to be sick at 
the time they are making this appeal, because that is why they 
are appealing.
    We need some kind of assistance for the consumer so that 
they can handle this internal and external appeals system in a 
way that produces a satisfactory result, so that nobody resorts 
to litigation in the end, and I hope that this is part of the 
compromise that you all work out that you would not find as 
either a Democratic or a Republican proposal, but something 
that just makes a great deal of common sense.
    Mrs. Capps. Thank you. I have a further question, maybe for 
Mr. Larsen, but I believe my colleague would like to continue.
    Mr. Ganske. If the gentlelady would yield.
    Mrs. Capps. Yes, I will yield.
    Mr. Ganske. I would like to hear from Mr. Larsen on exactly 
Mr. Pollack's point--that state insurance commissioners have 
had ombudsmen and they are a good option for patients. You know 
what we are talking about in this type of situation.
    I have gone in and advocated for patients in their internal 
review and it is a pretty intimidating situation when the 
patient is sitting there on a chair in front of a panel of 
about eight people, including attorneys.
    Do you have any suggestions on this?
    Mr. Larsen. I concur on that point completely. I think that 
the more assistance that can be provided to the consumer, the 
better.
    In Maryland, we have an advocacy unit that assists at the 
internal level and then Maryland is somewhat unique, because 
our external review is done through our department. We retain 
the IROs. It is not the health plan, the independent reviewers.
    So we have complaint investigators that interact with the 
consumer and the consumer, I think, has the comfort of knowing 
there is a State agency involved, and that is why I think ours 
is tremendously effective, because as you probably know and as 
was mentioned, people going through this process are often ill, 
upset, either because they are ill or their children are ill or 
their parents are ill, and it can be intimidating.
    So it is quite important that there be some vehicle for 
assistance to people that go through the process.
    Mr. Ganske. Thank you. Mr. Chairman, I would ask unanimous 
consent that the gentlelady be given an additional minute.
    Mr. Bilirakis. Well, without objection, but----
    Mrs. Capps. I can see my Chairperson sighing, so if you 
would like to move on. Maybe I will just pose it, and if it 
comes out in another way.
    It kind of picks up, Mr. Larsen, on what you just said. We 
have talked about the patchwork of States and the Federal floor 
that we perhaps agree could be there.
    But how about States, and maybe Maryland is one, that go 
further than that?
    Mr. Larsen. Well, we do, and that is why I think it is so 
critical that--and I guess it gets back to your original 
question.
    The most important thing, from our perspective, and I know 
liability is a hugely important issue to many of you, is the 
clarity of the role and the clarity of what is preempted and 
what is not preempted.
    There is so much ERISA litigation because it is such a 
complicated convoluted statute, and if you do nothing else to 
clarify with language exactly who does what and when.
    For example, if something is found not to be substantially 
equivalent, if a State law is not, who fills that void? Does 
that mean the State is enforcing Federal law? Many States can't 
enforce Federal law. Does that mean the resources are there?
    It takes a lot of focus to kind of play through every 
possible scenario and have the statute be very clear, because 
if it is not clear, health plans will use that to litigate, 
well, this is not clear, this is preempted, this isn't 
preempted.
    It is so important and it is often overlooked in some of 
the conceptual issues about right to sue and other issues, who 
is going to be doing it.
    Mrs. Capps. That is good advice. Thank you.
    Mr. Burr [presiding]. Thank you, Mr. Larsen. Mr. Shadegg, 
to inquire.
    Mr. Shadegg. Thank you, Mr. Chairman. Let me first begin, 
Mr. Pollack, by associating myself with your remarks that you 
just made a moment ago. I couldn't agree with you more, that I 
think we are close to a consensus on some key issues.
    And I heard you use the word compromise and as you know, I 
have used that word here repeatedly. I think it is very 
important, as I made clear in my opening statement, that we 
abandon the extremes in this debate.
    I held these charts up before, I am going to take time to 
do it one more time.
    This chart illustrates the point you just made, which is we 
need to assist people in going through internal and external 
review, and the best assistance they can get is by their own 
doctor, who is saying to the HMO ``my patient needs this 
treatment.''
    And the virtue of requiring cases to go through external 
review, in my view, 100 percent of the cases, will change the 
dynamic that currently exists, and that dynamic right now is 
because the plan can tell the doctor how to practice medicine, 
we are getting plans, usually bureaucrats or non-practicing 
doctors telling doctors how to practice medicine, and that 
makes the doctors angry.
    And you know what? If I were one, I would be angry by being 
told by a bureaucrat how to practice.
    I think the point you made that we all want to avoid 
litigation is a critical one. Litigation is not the answer here 
in the vast majority of cases.
    It is the answer, and I am a strong proponent of holding 
HMO's liable when they actually injure somebody or kill 
somebody. I simply prefer that that lawsuit be filed after a 
panel--I prefer a panel of doctors or at least a doctor has 
reviewed the case and told the plan whether they were right or 
wrong.
    One of the concerns I have is that the other structure 
proposed for this legislation avoids that, and the other 
structure is a structure which says you go through internal 
review and then if you've got your lawyer, you don't go through 
external review. You go straight to court, and that is this 
loop down here.
    It is in the bills that have been discussed this morning, 
and it is a loop that simply says if you want to go straight to 
court and if you want to avoid the administrative review 
process where you go through external review and a doctor tells 
the HMO whether they ought to be treating you, you avoid that 
loop.
    The bad part about that is that now you no longer have 
doctors telling HMOs what the standard of care is in America. 
You instead of have patients being diverted into courtrooms, 
and I couldn't agree more with what you said about the 
importance of avoiding litigation.
    Mr. Larsen, I want to turn to your comments. You said that 
you think States have very strong internal and external review 
processes that are working and you urged us very passionately 
not to abandon those State internal and external review 
processes.
    I agree with you. This is a chart that you are probably 
familiar with. In health care in America today, roughly 70 
percent is governed by ERISA. That is, it is an employer-
purchased plan.
    Those are divided, as Mr. Pollack explained earlier, into 
the self-insured plans and the insured plans.
    The remaining 30 percent of health care in America today is 
non-ERISA plans. We are talking about the plan that your State 
of Maryland offers you, that is not governed by ERISA. You are 
talking about a plan that I might go buy as an individual 
purchase myself.
    Right now, as an insurance commissioner, you have 
jurisdiction over a part of ERISA when it is an insured product 
and you have jurisdiction over this totally non-ERISA 
provision.
    My question of you is, in some of the bills that have been 
proposed right now, they propose to extend all the Federal 
patient protections and to preempt your internal and external 
review process to 100 percent of all these.
    They want to say, okay, because the Federal Government is 
going to enter the field and it is going to prescribe an 
internal and external review process, which all of these bills 
are almost identical on, and I think it is a good process and I 
agree with Mr. Pollack it has to be a good process, they want 
to say that the Federal process should extend not just to 
ERISA, which the Federal Government currently has jurisdiction 
over, but they want to say that that internal review process 
dictated by the Federal Government must extend to all State 
governed insurance plans that have no ERISA jurisdiction right 
now, and they do the same with the patient protections.
    Do you know of abuses occurring on the State side, where 
there is a need to extend the Federal patient protections, and, 
on top of that, the Federal procedures, the internal and 
external review, over onto the State side essentially 
preempting the internal and external review process that you 
favor?
    Mr. Larsen. No, I am not aware of abuses. I mean, we handle 
those cases currently.
    I guess the way I would answer that is to say that in 
accordance with, I think, the prior testimony, is that we would 
strongly oppose any effort to preempt what we think is working, 
to varying degrees and depending on markets.
    I recognize that they are not all consistent across the 
States, but to set up a flat across-the-board preemption and 
not allow us to continue on the 30 percent of the individual 
and non-ERISA group plans, as well as the insured group plans, 
we can't support that.
    Mr. Pollack. Mr. Shadegg, would you permit me to comment on 
your question?
    Mr. Shadegg. Sure.
    Mr. Pollack. One of the things that I am concerned that 
gets raised from your question is that the States actually have 
substantial variety in the way that they implement these 
internal and external reviews.
    For example, there is a huge variance in terms of the time 
limits for resolving any of these hearings. Some of them are 
done in a very timely manner, some of them are done in a way 
that I don't think you would consider timely.
    There are different questions about who resolves, who makes 
these decisions, and what the standards are as to who should 
make those decisions.
    There are different questions as to the binding nature of 
these internal and external appeals.
    So the only point I want to make in response to your 
question is that this wide variance, even for the States that 
have adopted internal and external appeals systems, does call 
for some kind of floor here so that people don't have to wait 
for decisions to be rendered in a way that becomes meaningless 
and that it gets done in such a way that they are binding and 
that the people making those decisions are truly objective.
    Mr. Shadegg. My time has expired, but let me just comment 
on this point.
    I think that the point, from my perspective, is, first of 
all, when we start discussing what should be federally 
governed, how far should we extend the patient protections and 
should substantial equivalence, for example, be decided by the 
State or by the Federal Government, how far should we extend 
the FEDERAL internal and external review procedure, I think it 
is absolutely legitimate to say that to the extent the Federal 
Government already governs 70 percent of health care, the 
Federal Government has every right to set the standards and to 
prevail in that area.
    But I have to tell you, I don't understand why the Federal 
Government should preempt States in the regulation of health 
insurance plans that are solely state-based right now.
    But more importantly, you argue for uniformity. I guess my 
response to that is, first, you made the point earlier that you 
thought the experimentation or the fact that the States could 
be different laboratories, you made that point earlier.
    If we preempt everything and set a single Federal standard, 
there will be no laboratory. But more important even than that 
is the point that not a single complaint do I get, either in 
Arizona, where we have passed a Patients' Bill of Rights that 
protects these people in this category or anywhere else, do I 
ever get any complaints about what is happening at the State 
level.
    Where I get complaints is what is happening under ERISA, 
where people get harmed and can't be made whole.
    Mr. Burr. The gentleman's time has expired. Mr. Pollack, 
briefly.
    Mr. Pollack. The only comment I would make to this, Mr. 
Shadegg, is really there are two purposes for establishing this 
on a national basis.
    One is the confusion that exists is very profound for 
consumers in terms of what their rights are and if you continue 
to have many different kinds of systems, it actually 
perpetuates that confusion.
    Second, I would suggest to you that there are some things 
that even in the diversity of this panel, you would probably 
feel are basic kinds of rights that people should have in this 
appellate system.
    There should be certain rights about the objectivity of the 
hearing officer. There should be certain rights about the 
timeliness of this process.
    I don't think that that is an onerous burden and it 
certainly would make it far easier for consumers to get 
complaints resolved in a timely manner.
    Mr. Shadegg. Mr. Larsen, I challenge you to bring me a 
single complaint by a state-based individual from Maryland or 
any other State where we have passed a Patients' Bill of 
Rights, in those States that have done it, where they say, 
well, we are confused by this process and we don't understand 
how we enforce our rights.
    The reality is----
    Mr. Burr. The gentleman's time has expired.
    Mr. Shadegg. The reality is that at the state-based level--
--
    Mr. Burr. I am sure that he has put the challenge.
    Mr. Shadegg. [continuing] they are not being abused. It is 
ERISA that is causing this problem, and I think Mr. Ganske will 
agree with me on that.
    Mr. Burr. The gentleman's time has expired. The Chair would 
recognize the gentleman from New York, Mr. Engel, for purposes 
of questioning.
    Mr. Engel. Thank you, Mr. Chairman. I am of the view, as 
many of our colleagues have expressed, that we need a Federal 
floor for all consumers to ensure basic minimum of protections 
and to ensure that patients have access to new technology.
    We had a hearing last week on Medicare beneficiaries who 
are having difficulty getting access to new technology, and, 
uniformly, members were concerned that Americans should have 
the benefit of access to new devices and other technology 
quickly.
    We are told, and I would like you to comment on that, in 
the private health insurance market, and Tennessee is one 
State, for example, Tennessee has enacted an external appeals 
process that does not let consumers appeal when they have been 
denied a treatment that a health plan has called 
investigational or experimental.
    This is one of the ways, we are told, that health plans 
deny patients access to newer technologies, by calling them 
experimental, even if they are FDA-approved.
    It seems to me that if we don't have a Federal floor, we 
run the risk of a situation where some consumers wouldn't be 
protected for these types of cases and might be denied access 
to the latest technology through health plan chicanery.
    I would like to ask Mr. Pollack, firstly, and then ask Mr. 
Larsen to comment. Would you agree that if we don't set a 
strong minimum Federal floor, we run the risk of having a 
situation of patients being denied access to new technology, 
because some States won't include such basic protections in 
their appeals process?
    Mr. Pollack. The answer is yes, and I think it makes sense, 
as I said earlier in my testimony, to have this floor. I don't 
think that Commissioner Larsen and I disagree about enabling 
the States to experiment and to impose provisions that are more 
protective for people.
    But I think we need to have a floor and I think you are 
giving one illustration as to why it would be useful to have 
that floor.
    Mr. Engel. Mr. Larsen.
    Mr. Larsen. In answer to your particular question, without 
a Federal floor, of course, everyone won't end up with the same 
rights and possibly the same access to treatment. So I don't 
disagree with that.
    I guess the view of the NAIC is that in an ideal world, 
States are given full flexibility to do what they want, but as 
a practical matter, I think we all understand that under that 
scenario, you end up with the somewhat inconsistent laws that 
we have today and some provide greater protection to consumers 
than others.
    So as a consequence, I guess what I am trying to 
communicate is if you go with the Federal floor, and we 
understand why you would do that, the most important thing is 
to make sure that the floor is not a ceiling and that we can go 
even beyond for the States that exceed even what Congress 
determines is the minimum level, because under the laboratory 
theory, some States think that there is more to be done.
    Mr. Engel. I couldn't agree with you more. Uniformly, 
everyone felt that these new technologies were not getting into 
people's hands, even if they were approved, and that is one of 
the major concerns that I have.
    If things are approved and they can help people, we don't 
need layers of bureaucracy preventing people from getting them 
or a denial of newer technologies by health plans.
    Mr. Pollack. And this is a very common dispute that occurs 
between plans and patients. So what you are describing as an 
illustration is actually something that we know occurs a great 
deal among patients and their plans.
    Mr. Engel. And I think we also don't need people going from 
State to State, where if there is no floor, you could have an 
increase in people going from State to State to try to find a 
State that would provide the technologies.
    I think if we have the floor, obviously, there will be less 
of that, because there will be a minimum amount that people can 
know that they have, regardless of what State they are in.
    Mr. Pollack. We are a very mobile society and to change 
such basic rights based on the happenstance that you just 
happen to cross State borders makes no sense.
    Mr. Engel. Thank you. Thank you both for your testimony. I 
yield back the balance of my time, Mr. Chairman.
    Mr. Burr. The gentleman's time has expired. The Chair will 
take the balance of time and recognize himself for purposes of 
questions.
    Mr. Wynn. Mr. Chairman.
    Mr. Burr. Let me recognize the gentleman from Maryland. If 
the gentleman is ready, I'm really not ready.
    Mr. Wynn. I don't know that I'm ready.
    Mr. Burr. I would find it very educational. I will 
recognize the gentleman from Maryland.
    Mr. Wynn. Why don't we just move to the next panel?
    Thank you for your graciousness. I will proceed quickly.
    On the question of increased cost to business, an argument, 
of course, to be made that the right to sue would drive up cost 
of plans, eliminate certain coverages.
    What is the element or elements that result in this alleged 
increase in cost? Is it the frivolous suits? Is it the more 
extensive treatment, or is it compensation awards?
    To the extent that there is an increase in cost directly 
linked to the right to sue, what does it flow from?
    Mr. Pollack. I would suggest to you that in the past, when 
we have had this debate about litigation, it is usually 
occurred in the context of malpractice, and there what most 
people say, the analysts that have looked at this is that in 
terms of the actual money judgments, those really do not 
constitute a very significant cost.
    Where people have been worried about costs is the practice 
of defensive medicine and there you get very different kinds of 
estimates as to what the cost of defensive medicine is.
    In the context of managed care, that problem minimizes 
itself. It is far different than it is in fee for service care, 
because, remember, in fee for service, there is every incentive 
to provide as many services as possible to begin with, because 
that's how a provider makes their money.
    In the managed care context, all of the economics 
incentives are in the opposite direction.
    So I would suggest that the fears that people have raised 
in the context of malpractice litigation do not exist here in 
the context of trying to deal with abuses by managed care 
companies, all of whom really have strong incentives to keep 
costs down and to reduce the number of services that are 
provided.
    Mr. Wynn. Thank you. I just want to make sure I'm correct 
in my understanding. With external abuses, they only deal with 
the medical necessity question and not the compensation 
question, is that correct?
    Mr. Pollack. In a fee for service system, you still could 
have some kind of external review system to challenge a denial 
by an insurance company to pay for a service that's already 
been rendered.
    But typically, you're right. Typically, the issue is 
dealing with a medical necessity decision.
    Mr. Wynn. So in order to get to questions of compensation 
for injury or denial, to get us out of the field of 
malpractice, you would still have to resort to the courts, is 
that correct?
    Mr. Pollack. No. If the internal and external appeals 
system is working properly, then hopefully you can get this 
denial of care resolved at an early stage and have the health 
plan be told, if they have improperly denied care, to provide 
that care so that there is never any resort to litigation.
    I think the resort to litigation is a very, very infrequent 
situation, especially if a managed care plan has failed to 
abide by the decision at an external hearing.
    Mr. Wynn. I would agree. I would just be concerned that 
there are situations in which the denial of care initially or 
timely care results in injury and what recourse the patient has 
except for the court.
    Mr. Pollack. If the injury has occurred, that the denial or 
delay resulted in injury already, then probably they will need 
to have to resort to the court system.
    Mr. Wynn. And I guess the third question I have is, I have 
speculated that there was some deterrent value from having 
either an external review or, to my way of thinking, a greater 
deterrent value from having the availability of litigation, 
which is to say that the prospect that there would be costs 
associated with denial of care or improper diagnosis would have 
a deterrent effect on creating a more careful environment or a 
better environment.
    Mr. Pollack. Absolutely. I think the strongest argument for 
having a right to litigation with a meaningful remedy is 
precisely what you just said, and that is its deterrent value.
    I don't think most of us think there is a great value in 
big money judgments that go to very few people. But what is 
useful is for a health plan to understand that if they 
cavalierly deny care improperly, at the end of that road, they 
may have greater liability than had they provided the service 
as originally they should have.
    And today, under Federal law, there is no such deterrent, 
because the only thing under Federal law you can sue for when 
you go to Federal court is the monetary value of the service 
that was originally denied, and that means you have a remedy 
that comes too little and too late and it really provides an 
incentive to a health plan to continue denying, because they'll 
never have greater liability than if they provided the service 
on a timely basis.
    So this litigation issue we are talking about really needs 
to be looked at as a deterrent issue.
    Mr. Wynn. Thank you, Mr. Chairman. I relinquish my time, 
and thank you, again.
    Mr. Burr. The gentleman fulfilled my wishes that I was 
educated by his line of questions. Thank you.
    The Chair would recognize himself for questions. Mr. 
Pollack, are people denied care in the Medicare system today?
    Mr. Pollack. Sure.
    Mr. Burr. And for what reason?
    Mr. Pollack. A variety of different reasons.
    Mr. Burr. What is the primary reason?
    Mr. Pollack. I'm not sure I can pick one, but it might be 
that in some instances, a physician may say you don't need the 
specific care. It might be, if they are in the Medicare Plus 
Choice plan, that their HMO will say we think it is medically 
unnecessary that you get the service.
    Mr. Burr. Aren't there a host of things----
    Mr. Pollack. Yes, there are.
    Mr. Burr. [continuing] that Medicare does not reimburse 
for?
    Mr. Pollack. Yes. For example, it doesn't reimburse for 
outpatient prescription drugs.
    Mr. Burr. There is a host of procedures that are FDA-
approved that Medicare for years it will take them to make a 
decision as to whether they cover that procedure.
    Mr. Pollack. And if a beneficiary of that program feels 
aggrieved by that process----
    Mr. Burr. There is an appeals process.
    Mr. Pollack. [continuing] there is an appeals process.
    Mr. Burr. The question that I wanted to ask you was given 
that we are in agreement that the appeals process was 
important, should we extend liability to HCFA for the 37 
million seniors that are under Medicare because it is not just 
enough to be able to appeal it, but the question is could they 
have been harmed based upon HCFA's actions not to adequately 
provide an array of services for them?
    Mr. Pollack. There is no question, if a service is 
improperly denied, there ultimately should be a right to 
litigate.
    Mr. Burr. What if it was just in the scope of the defined 
coverage? It just didn't cover that. It may have covered the 
area, but there was a new procedure that was added. That new 
procedure didn't have a reimbursement code. So whoever provided 
the service, the physician, the hospital, wherever, couldn't 
provide that technology for that patient, and the patient was 
damaged?
    Mr. Pollack. That probably is a question of fact which can 
be adjudicated.
    Mr. Burr. So do we need a formal liability extension to the 
Health Care Financing Administration for Medicare if we talk 
about the extension of this?
    Mr. Pollack. Mr. Burr, it is not typically HCFA that makes 
those determinations. No, it does not. These determinations are 
generally delegated to insurance companies which act on behalf 
of HCFA that make these decisions.
    Mr. Burr. And do you, for a minute, believe that if we made 
those insurance companies liable for those decisions, the 
courts wouldn't interpret that, but that's an extension fo 
HCFA. They are a contract company.
    Exactly the argument that so many managed care companies 
have made and so many self-insured companies have made about 
leaving it to the courts to determine the extent of liability.
    I don't think that there is a huge gap, contrary to some of 
the debate that you've heard, about where members of this panel 
are.
    I think where the question is is where we have inserted the 
court for interpretation of what we mean, the court to 
interpret, on somebody's behalf, whether an employer made a 
coverage determination; if they did, are they now liable.
    And I've seen eight different versions of language. I am 
convinced that there are people out there trying to make sure 
that we cap the liability in some way, shape or form so that 
employers are not undressed with this legislation.
    But the reality is that none of us know, if challenged in 
court, exactly what the determination will be about the extent 
of liability.
    If we are going to do it the private sector, then we ought 
to expose government just as heavily, because they make the 
same coverage determinations that private sector companies do 
about the scope of their coverage, and, in many cases, I would 
tell you that the private sector does them a heck of a lot 
better and a heck of a lot faster than the Health Care 
Financing Administration currently does today.
    Mr. Pollack. The dispute that took place earlier this 
morning between members of the panel, I think there clearly was 
a common goal. The common goal was that where employers are not 
involved in decisionmaking concerning the regimen of care, that 
they should be exempted from any liability.
    On the other hand, I also think there is a consensus that 
if it is the employer who is making these decisions that 
redound to the harm of the consumer, then the employer should 
be liable.
    Now, there is a fine question as to how do you implement 
that common goal, but I do believe that if an employer is 
making a decision that results in a person improperly being 
denied care, then in that instance, and I don't think there are 
many such instances, but in that instance, then certainly the 
employer should be held liable.
    Mr. Burr. Certainly the courts would welcome the 
opportunity to define improperly based upon case by case by 
case. I thought it odd that this bill does exclude those of us 
covered FEHBP. There are a number of bills, but I think it 
does.
    I want to thank both of you--Mr. Pitts does not want to be 
recognized. I want to thank you for your testimony. I want to 
thank you for the contribution.
    I am sure that we have still got a lot to learn as we 
prepare for markup of legislation, not only in the 
subcommittee, but in the full committee. But we thank you for 
everything.
    Mr. Larsen. Thank you.
    Mr. Pollack. Thank you.
    Mr. Burr. I will adjourn this panel. At this time, I would 
call up the second panel.
    Mr. Ganske. Would the chairman----
    Mr. Burr. The chairman will as soon as he introduces the 
second panel, please.
    The second panel consists of Mr. Stephen--and I am going to 
make an attempt at this, Steve--deMontmollin.
    Mr. deMontmollin. Yes, sir.
    Mr. Burr. Great. I am not going to say it again, though. 
Vice President and General Counsel, AvMed Health Plan; Mr. 
Donald Palmisano, a member of the AMA Board of Trustees; Ms. 
Jane Greenman, Deputy General Counsel, Human Resources, Labor 
and Benefits, Honeywell Corporation; Ms. Sara Rosenbaum, 
Director, Center for Health Service Research and Policy.
    Welcome to all four of our witnesses for panel two. At this 
time, the Chair would recognize Steve for his opening 
statement.

   STATEMENTS OF STEPHEN J. deMONTMOLLIN, VICE PRESIDENT AND 
 GENERAL COUNSEL, AVMED HEALTH PLAN; JANE F. GREENMAN, DEPUTY 
     GENERAL COUNSEL, HUMAN RESOURCES, LABOR AND BENEFITS, 
  HONEYWELL; DONALD J. PALMISANO, MEMBER, BOARD OF TRUSTEES, 
  AMERICAN MEDICAL ASSOCIATION; AND SARA ROSENBAUM, DIRECTOR, 
         CENTER FOR HEALTH SERVICES RESEARCH AND POLICY

    Mr. deMontmollin. Thank you. Mr. Chairman and members of 
the subcommittee, my name is Steve deMontmollin. I am Vice 
President and General Counsel of AvMed Health Plan, Florida's 
oldest and largest not-for-profit HMO, serving some 300,000 
members, including approximately 30,000 Medicare members, 
Federal employees under FEHBP, and Medicaid members throughout 
the State.
    Today I am testifying on behalf of the American Association 
of Health Plans, which represents approximately a thousand 
HMOs, PPOs, and similar network plans providing coverage to 140 
million Americans.
    My comments will focus on the significant negative impact 
health plan liability expansion will have on quality of care, 
health care costs, and the number of uninsured, as well as AAHP 
support of meaningful and timely dispute resolution through 
independent medical review by physicians, rather than medical 
decisionmaking by trial lawyers, judges and juries.
    But before I speak on these issues, I would like to share 
the results of a national survey just released by AAHP 
yesterday on physicians' attitudes about the current 
malpractice system and their attitudes about the most effective 
ways to resolve coverage disputes.
    The survey found that doctors think the current medical 
liability system is unfair, raises costs, leads to defense 
medicine, hurts patient relationships, reduces reporting of 
medical errors, and does not improve the quality of care.
    Doctors prefer an independent medical review panel over 
extended health plan liability to resolve disputes over 
coverage. Doctors would rather have a patients' bill of rights 
without expanded health plan liability than no bill at all.
    Now, these findings are consistent with the position of the 
American Medical Group Association, which, in a letter dated 
March 2 to Senator McCain, said that they represent 300 medical 
practice groups, employing over 60,000 physicians in 41 States.
    Their members are physician providers for over 30 million 
patients, and they include the Mayo Foundation, the Leahy 
Clinic, Henry Ford Health System, the Cleveland Clinic, and 
Permanente Federation.
    The letter announces that AMGRA opposes, however, waiving 
ERISA preemption to permit participants in employer-provided 
health plans a right to sue health plans.
    Making litigation the first concern of health plans and the 
first concern of a patient upon entering a physician's office 
erodes years of trust and works against successful health 
outcomes for the patient.
    AMGRA favors a strong appeals process and believes a strong 
appeals process is a practical alternative to expanding 
liability. Expedited review of medical decisions is the 
responsible approach to ensuring that patients receive the care 
they need, while holding the health plan and physician 
accountable for ensuring that the proper level of high quality 
care is administered.
    The results of this survey and of the AMGRA findings 
reinforce once and for all the very significant problems with 
the current malpractice system and the very significant dangers 
associated with expanding such a system to health plans.
    First, with respect to quality proponents of expanding 
health plan liability, claimant liability expansion is 
necessary to improve quality of care.
    In fact, we need only to look to the current medical 
malpractice liability system as proof that an expansion of such 
a system will do nothing to improve quality.
    The current malpractice liability system discourages the 
identification and reporting of mistakes, allowing quality 
problems to perpetuate. Numerous interested parties, some of 
which have called for expanded health plan liability, have 
recognized this.
    Last year, the AMA testified that ``The very fear of 
existing legal liability or its misapplication are the greatest 
hurdles to pioneering patient safety efforts. If the fear of 
litigation continues to pervade efforts to improve patient 
safety and quality, our transformation into a culture of safety 
on behalf of our patients may never be fully realized.''
    Members of the subcommittee, there is a poster that is on 
the right side of the dais and it is the third quote on that 
particular poster, and I might say that also up there is a 
quote from President Clinton's Advisory Commission on Consumer 
Protection in which it was stated, ``Perhaps the most 
significant deterrent to the identification and reduction of 
errors, that is, treatment related injuries, is the threat of 
costly adversarial malpractice litigation.'' Expanding health 
plan liability will also lead to reduced quality of care by 
promoting defense utilization. And with respect to Mr. Wynn's 
comments earlier, that is a major problem with the current 
system.
    Just as the current system encourages physicians to 
practice defensive medicine, a system that expands health plan 
liability will force plans to provide coverage for unnecessary 
services that do not benefit patients in order to avoid costly 
litigation.
    With respect to the impact on costs and the uninsured, 
proponents of expanding health plan liability claim that such 
an expansion will result in a minimal cost increase, but the 
reality is that expanding health plan liability will 
significantly increase cost and in doing so will cause millions 
of Americans to join the ranks of the uninsured.
    In an analysis prepared by the Barents Group, it was 
estimated that an expansion of health plan liability would 
result in cost increases of between 2.7 percent and 8.6 percent 
nationally, and, most recently, we are seeing health care 
premiums in Arizona rising between four and 6 percent because 
of a new HMO law that exposes health plans to expanded 
liability.
    Despite the increase in cost of the health care system due 
to the medical liability system, the scope and breadth of 
attack from trial lawyers continue to expand.
    The current class action onslaught by trial lawyers is a 
good example of lawsuits that are a means to squeeze additional 
funds out of the health care system, which ultimately means 
from the pockets of workers and their families who pay premiums 
and employers who subsidize their employees' coverage.
    As an alternative to expanding a flawed liability system, 
AAHP supports a Federal independent medical review process to 
ensure that coverage disputes are resolved up front and 
consumers get the care they need and when they need it.
    With independent medical review, coverage disputes 
regarding medical necessity are resolve by independent doctors 
with appropriate clinical experience, not trial lawyers 
appealing to juries who may or may not compensate them for 
their alleged injuries months or even years later.
    A vast majority of States have chosen to adopt independent 
medical review over liability expansion, as well, and the 
second poster that has been placed before you shows that of 
those States that have considered both liability and 
independent medical review legislation, 32 out of the 39 have 
chosen to adopt independent medical review instead of expanded 
liability.
    Mr. Burr. Mr. deMontmollin, I am going to ask you to 
summarize as quickly as you can.
    Mr. deMontmollin. In conclusion, the well-documented flaws, 
many of which have been identified by physicians of the current 
liability system, should be sufficient evidence that expanding 
health plan liability is an ill conceived policy.
    Such an expansion will only serve to reduce health care 
quality and lead to more uninsured individuals.
    Thank you for your time.
    [The prepared statement of Stephen J. deMontmollin 
follows:]

PREPARED STATEMENT OF STEPHEN DEMONTMOLLIN, VICE PRESIDENT AND GENERAL 
  COUNSEL, AVMED HEALTH PLAN ON BEHALF OF THE AMERICAN ASSOCIATION OF 
                              HEALTH PLANS

    Mr. Chairman and members of the Committee, my name is Steve 
deMontmollin, and I am Vice President and General Counsel of AvMed 
Health Plan. Based in Gainesville, Florida, AvMed is Florida's oldest 
and largest not-for-profit HMO, serving some 300,000 members, including 
approximately 30,000 Medicare members, throughout the state. AvMed 
contracts with close to 7,000 physicians and 126 hospitals, is 
federally qualified under the terms of the federal HMO Act, and is 
privately accredited by the National Committee for Quality Assurance 
(NCQA) and the Joint Commission on Accreditation of Healthcare 
Organizations.
    Today I am testifying on behalf of the American Association of 
Health Plans (AAHP), which represents approximately 1,000 HMOs, PPOs, 
and similar network plans providing coverage to over 140 million 
Americans. AAHP member plans are dedicated to a philosophy of care that 
puts patients first by promoting coordinated, comprehensive health 
care.
    I appreciate the opportunity to participate in today's hearing and 
to express the views of AAHP on the issue of expanding health plan 
liability and its potential impact on the quality and cost of health 
insurance in the United States.
    My comments today will focus on three general areas:

I. The significant negative impact health plan liability expansion will 
        have on quality of care;
II. The significant increases in costs and the number of uninsured that 
        will result from any expansion of health plan liability; and
III. AAHP's support of meaningful dispute resolution through 
        independent medical review by physicians rather than medical 
        decisionmaking by trial lawyers, judges and juries.

    Additionally, I'd like to share the results of a national survey 
just released by AAHP yesterday on physicians' attitudes about the 
current malpractice system and their attitudes about the most effective 
ways to resolve disputes with health plans over coverage issues. I 
believe the results of this survey reinforce once and for all the very 
significant problems with the current malpractice system and the very 
significant dangers associated with expanding such a system to health 
plans.
                          I. IMPACT ON QUALITY

    Proponents of expanding health plan liability claim that liability 
expansion is necessary to improve quality of care. In fact, we need 
only look to the current medical malpractice liability system as proof 
that an expansion of such a system will do nothing to improve quality.
    For instance, the alarming incidence of preventable medical errors 
continues to be a significant problem, due in large part to the 
punitive environment associated with the current medical malpractice 
liability system. In its landmark report, the Institute of Medicine 
(IOM) estimated that between 44,000 and 98,000 Americans die each year 
as a result of medical errors.1 Yet, unfortunately, the 
current malpractice liability system discourages health care 
professionals from identifying and reporting their mistakes, allowing 
quality problems to perpetuate. In fact, the IOM itself stated in its 
report that the ``fear of legal discoverability or involvement in the 
legal process is believed to contribute to underreporting of errors.''
---------------------------------------------------------------------------
    \1\ IOM Committee on Quality of Health Care in America, To Err is 
Human, 1999
---------------------------------------------------------------------------
    In addition, numerous interested parties--some of which have called 
for expanded health plan liability--have recognized the flaws with the 
current malpractice liability system.

 Clinton Commission Report. In its final report, President 
        Clinton's Advisory Commission on Consumer Protection and 
        Quality in the Health Care Industry said of the current 
        malpractice system that ``perhaps the most significant 
        deterrent to the identification and reduction of errors [i.e., 
        treatment-related injuries] is the threat of costly, 
        adversarial malpractice litigation.'' (President's Commission, 
        Final Report, March 1998)
 AMA Statement. In 1997, then AMA President-Elect Nancy Dickey 
        said of the current system, ``The problem is that the climate 
        of blame in this country, fueled by the litigation process 
        where we have to identify someone at fault who will then pay 
        exorbitantly, makes it difficult to walk out and finger 
        yourself [when you make a medical mistake].'' (New York Times, 
        Dec. 9, 1997)
    Expanding health plan liability will also lead to reduced quality 
of care by promoting ``defensive utilization management.'' Just as the 
current system encourages physicians to practice ``defensive 
medicine,'' (i.e., to provide care that is not necessary in order to 
protect themselves from malpractice suits) a system that expands health 
plan liability will force plans to perform ``defensive utilization 
management.'' In other words, plans will be forced to provide coverage 
for unnecessary services that do not benefit patients in order to avoid 
costly litigation. In its cost estimate of the liability provision in 
U.S. Senate Bill 6, the Democrat's ``Patients' Bill of Rights'' 
legislation, the Congressional Budget Office (CBO) recognized this 
implication, stating, ``[expanding health plan liability] would mean 
not only that more plans would be successfully sued but, more 
importantly from a cost perspective, every judicial decision awarding 
damages to a plaintiff for a plan's coverage decision would increase 
the risk of suit for all other plans with similar coverage policies.'' 
2 Thus, instead of making coverage decisions based on the 
best available evidence, plans will be influenced to make such 
decisions based on the latest jury verdict or court decision.
---------------------------------------------------------------------------
    \2\ CBO, June 16, 1999
---------------------------------------------------------------------------
    Therefore, it is hard to believe that expanding this flawed system 
would benefit any patients. To support this statement, let me share 
with you some of the results of the AAHP survey of physicians I 
mentioned earlier.

 The overwhelming majority of doctors (78%) say that the threat 
        of malpractice lawsuits does not make them deliver better 
        quality care.
 Over nine out of ten doctors (92%) think the threat of a 
        liability suit has increased defensive medicine.
 Over half of the physicians surveyed (57%) say that the 
        current medical liability system makes physicians less willing 
        to report medical errors.

                   II. IMPACT ON COST & AFFORDABILITY

    While I believe that the argument against expanding liability can 
be made solely from the quality standpoint, let's talk briefly about 
the impact on cost and the number of uninsured Americans.
    Proponents of expanding health plan liability claim that such an 
expansion will result in a minimal cost increase. But the reality is 
that expanding health plan liability will significantly increase costs 
and, in doing so, will cause millions of Americans to join the ranks of 
the uninsured. In an analysis prepared for AAHP, the Barents Group 
estimated that an expansion of health plan liability would result in 
cost increases of between 2.7 percent and 8.6 percent 
nationally.3 State analyses also reflect similar estimates. 
For example, according to the fiscal note submitted by the Minnesota's 
Department of Employee Relations in response to liability legislation, 
health plan liability requirements would increase premiums by 
5%.4 Similarly, a recent AP news article indicated that 
health care premiums in Arizona will rise between 4 and 6 percent 
because of a new HMO law that exposes health plans to expanded 
liability.5
---------------------------------------------------------------------------
    \3\ Barents Group, "Impacts of Four Legislative Provisions on 
Managed Care Consumers, 1999-2003," April 22, 1998.
    \4\ Minnesota Department of Employee Relations, ``Revised Fiscal 
Note for S.B. 953,'' April 1999.
    \5\ ``Premiums Expected to Rise Further Because of New Law'' The 
Associated Press State and Local Wire, January 27, 2001.
---------------------------------------------------------------------------
    The AMA has long recognized the large cost impact of the current 
medical malpractice system.

 AMA Testimony. In testimony before the U.S. House Ways and 
        Means Subcommittee on Health, the AMA stated, ``Although 
        patients, physicians, and health care providers are most 
        directly harmed by the present liability system, society as a 
        whole is also harmed. The spiraling costs generated by our 
        nation's dysfunctional liability system are borne by everyone 
        [emphasis added].'' (AMA testimony, May 20, 1993)
 AMA/Reform Coalition Statements. Pronouncements from the 
        National Medical Liability Reform Coalition, which includes the 
        signature of the AMA, include the following:
    ``[W]e believe that in resolving medical and product liability 
        claims, the civil justice system currently:
    --costs too much and works much too slowly;
    --adds billions of dollars annually to the national health care 
            bill in medical liability premium costs and by encouraging 
            doctors and other health care providers to practice 
            ``defensive medicine'' as a hedge against potential 
            lawsuits; and
    --adds unnecessarily to the cost of pharmaceuticals and medical 
            devices.'' 6
---------------------------------------------------------------------------
    \6\ National Medical Liability Reform Coalition, Medical Liability: 
Principles for Reform, Feb. 1993
---------------------------------------------------------------------------
 And, in the AAHP survey findings released just yesterday, 
        nearly every doctor surveyed (95%) believes that the current 
        medical liability system has raised costs. Of these, 73% say 
        that the system substantially raises costs.
    Despite the increase in costs to the health care system due to the 
medical liability system, the scope and breadth of attacks from trial 
lawyers continue to expand. To paraphrase remarks made by Pennsylvania 
Medical Society president-elect, Howard A. Richter, MD, just last month 
in testimony before the Pennsylvania House Insurance Committee--abuse 
of the medical liability system is a cancer that is deteriorating life 
and is creating serious problems with the care patients receive.
    I believe there is perhaps no better example that is indicative of 
this abuse of the liability system than the current class action 
onslaught by trial lawyers. Presently there are more than 30 class 
action lawsuits pending against a number of health plans in a federal 
district court in Florida that seek nothing less than the total 
dismantling of this nation's employer-based system of health care 
coverage. These cases have been brought by various groups of well-known 
trial lawyers, some of whom were involved in the tobacco litigation 
settled by the States. The enormous fees they were able to obtain in 
tobacco litigation are now being used to bring these class actions 
against health plans.
    What the trial lawyers in the class actions pending in Florida have 
brought are lawsuits only in the descriptive sense. Rather they are a 
means to squeeze additional funds out of the health care system--which 
ultimately means from the pockets of workers and their families who pay 
premiums and employers who subsidize their employees' coverage--through 
the threat of protracted litigation. The suits question the well-
grounded policy and purchasing decisions of federal and state 
officials, who have enacted laws governing managed care plans and 
contracted with managed care plans to cover tens of millions Americans. 
Such decisions include those made by (1) federal policymakers to create 
the Medicare +Choice program, Medicaid managed care, and the managed 
care options in the Federal Employees Health Benefit Program, (2) state 
policymakers to create a comprehensive regulatory scheme for managed 
care plans and the state insurance and health commissioners who enforce 
that scheme and (3) state purchasers to select managed care plans for 
tens of millions of state employees and Medicaid beneficiaries. Any 
changes in the law that would lend support for these types of efforts 
will accomplish only one thing--the sapping of resources available for 
health care for the benefit of trial lawyers.

   III. INDEPENDENT MEDICAL REVIEW--A BETTER WAY TO RESOLVE COVERAGE 
                                 ISSUES

    AAHP believes that expanding the current flawed liability system 
that is designed to assess damages after consumers allegedly have been 
harmed, does not give consumers what they truly need--a resolution for 
coverage disputes that is expeditious, and based on medical facts.
    Instead, AAHP supports a federal independent medical review 
process, to ensure that coverage disputes are resolved upfront and 
consumers get the care they need when they need it. With an independent 
medical review, coverage disputes regarding medical necessity and 
appropriateness are resolved by independent doctors with appropriate 
clinical experience--not trial lawyers appealing to juries who may or 
may not compensate them for their alleged injuries, months or even 
years later. I cannot over-emphasize the difference. Independent 
medical review--conducted on an expedited basis when necessary--gets 
patients coverage when it is warranted. Lawsuits do not. With 
independent medical review in place, there is no basis for expanded 
liability.
    The vast majority of States have chosen to adopt independent 
medical review over liability expansion as well. Of the states that 
have considered both liability and independent medical review 
legislation, 32 out of 39 have chosen to adopt independent medical 
review instead of expanded liability.
    In my own state of Florida, a bill to expand health plan liability 
was ultimately vetoed by then-Governor Lawton Chiles. In his words, 
``The key to any dispute resolution system for health care claims is 
that it be fast, fair, and efficient. The tort system is often none of 
those.'' Governor Chiles wisely believed that Floridians were much 
better served by independent medical review rather than an expansion of 
liability.
    Similarly, the results of AAHP's national survey of physicians show 
that:

 Three out of four doctors (75%) prefer an independent appeals 
        process over new lawsuits as the way to resolve disputes with 
        health plans over coverage; and
 The overwhelming majority of physicians (73%) would rather 
        Congress enact a Patients' Bill of Rights with an independent 
        appeals process but no new lawsuits than not pass any bill at 
        all.
    A federal system of independent medical review that provides 
consumers with consistency and certainty no matter where they live 
should be allowed to work. Expanding liability and bypassing the 
independent medical review process add nothing to consumer protection. 
To the contrary, they would shift the focus from a system that resolves 
disputes in a reasonable and timely manner to one that is premised on 
high stakes litigation.
    In conclusion, the well-documented flaws, many of which have been 
identified by physicians, of the current malpractice liability system, 
should be sufficient evidence that expanding health plan liability is 
an ill-conceived policy. Such an expansion will serve only to reduce 
health care quality and lead to more uninsured individuals. Independent 
review by physicians is a much more effective and expeditious way to 
achieve the goals of providing quality, affordable care and preventing 
harm to patients.
    I hope that at the end of this hearing you will ask yourself--who 
is it that truly benefits from expanding liability? Let me leave you 
with one final result from AAHP's national survey of physicians:

 Almost three-fourths of physicians (72%) think that trial 
        lawyers would benefit the most if health plans were made 
        subject to new lawsuits.
    Thank you for the opportunity to share our views on this important 
issue.

    Mr. Burr. Thank you. Ms. Greenman, we would recognize you 
for your opening statement.

                  STATEMENT OF JANE F. GREENMAN

    Ms. Greenman. Mr. Chairman, members of the committee, I am 
Jane Greenman, Deputy General Counsel of Honeywell 
International.
    I am appearing here today on behalf of the ERISA Industry 
Committee, also known as ERIC, and I am a member of the Board 
of Directors of ERIC.
    Mr. Chairman, employers voluntarily offer health plan 
benefits to 80 percent of private sector employees to assure a 
healthy and productive workforce and to compete for, 
successfully compete for and retain valued employees.
    Employer-sponsored programs leverage the purchasing power 
of large companies and coalitions of smaller companies and the 
expertise of benefits specialists employed by these companies 
to maximize efficiencies, reduce costs and help employees 
navigate through the complex health insurance system.
    The position of liability on insurers who offer coverage 
creates practical and economic burdens that will be 
unacceptable for a benefit that is not part of a company's core 
business purpose.
    The fundamental objective of patient protection reform as 
it applies to employer-sponsored plans should be to ensure 
timely processing of health claims and fair review of denied 
claims to facilitate the delivery of patient care when it is 
needed.
    ERISA claims procedures have already been adapted by the 
Department of Labor to provide timely and responsive review 
processes that are appropriate to both pre-service and post-
service benefit determinations.
    Legislation is required and desirable to enable the 
department to incorporate reasonable external review procedures 
into these claims rules.
    I might add that these claims rules have not yet had a 
chance to really go in to be implemented and to prove their 
efficacy at this point in time.
    New causes of action and tort damages are neither necessary 
nor desirable to ensure that plan participants have access to 
timely and fair review procedures.
    Indeed, increased litigation is likely to result in reduced 
benefit coverage.
    Under ERISA, plan fiduciaries must ensure full and fair 
review of denied claims. The Department of Labor revised ERISA 
claims procedures clarify full and fair in a managed care 
environment.
    These procedures will facilitate timely access to care. 
Tort liability will do nothing to enable patients to obtain 
care, particularly emergency or urgent care.
    Bills that permit a patient to obtain such care while their 
case is being reviewed will be far more effective than tort 
liability if patient protection is really our true goal.
    None of the flaws in the current system will be fixed by 
attaching the burden of new tort liabilities.
    In the face of even the threat of increased liability, 
employer health plans are likely to downsize and avoid 
liability by adopting strict schedules of covered treatment, 
designating reimbursement amounts, avoiding direct 
participation as an intermediary between plan participants and 
service providers, and abandoning their current role and direct 
claims processing on behalf of participants, as well as direct 
oversight of that process.
    None of these options are desirable to employees or 
employers.
    Mr. Chairman, a number if bills recognize and seek to 
address the serious problem of imposing health care tort 
liability on employers. Regrettably, each of them fails. They 
would insulate employers from liability only if they avoid 
direct participation or are not the designated decisionmaker.
    Determination of an employer's role, however, will be a 
question of fact requiring significant litigation.
    Moreover, if the legislation fails to adequate address what 
the burden of proof would be that would have to be met, and an 
employer may be forced to prove a negative proposition, the 
absence of direct participation or involvement.
    Additionally, plaintiffs may be able to bypass this test 
all together by suing an employer in its roles both as plan 
sponsor and as a plan fiduciary.
    Since employers often represent deep pockets, they would be 
swept along in this tide of litigation. Under all scenarios, 
additional tort litigation will not fix the medical system and 
it will increase medical health costs.
    Mr. Chairman, in today's fiercely competitive global 
markets and in a volatile economy, employers will not accept 
the financial risks of a tort system.
    Many employers are already investigating a means of exiting 
the system or severely curtailing their participation in the 
system.
    The fact is ERISA does not, has not, nor is it likely to 
preempt malpractice liability. No participant is prevented from 
seeking judicial relief from medical malfeasance under State 
malpractice law, nor do we believe that they should be.
    ERISA is neither intended nor should it regulate the 
clinical quality of medical care of medical malpractice.
    The Supreme Court has held, in the Pegram case, that ERISA 
does not regulate medical treatment and does not preempt State 
law malpractice actions.
    Mr. Chairman, members of the committee, the debate over 
patient protection has been conducted as if tort liability is 
the only available means of protecting plan participants.
    The fact is increased liability will not achieve a better 
medical system. It will increase costs, drive employers out of 
the system, drive consumers into inefficient systems, and deny 
health care to those who need it most.
    Thank you for your attention, and I will be pleased to 
respond to any questions.
    [The prepared statement of Jane F. Greenman follows:]

    PREPARED STATEMENT OF JANE F. GREENMAN, DEPUTY GENERAL COUNSEL, 
          HONEYWELL, ON BEHALF OF THE ERISA INDUSTRY COMMITTEE

    Mr. Chairman and members of the Subcommittee: My name is Jane 
Greenman. I am Deputy General Counsel, Honeywell. I submit this 
statement on behalf of The ERISA Industry Committee (``ERIC'').

                      THE ERISA INDUSTRY COMMITTEE

    The ERISA Industry Committee (``ERIC'') is an association 
representing the Nation's largest employer-sponsored benefit plans. As 
the sponsors of health, pension, savings, disability, life insurance, 
and other benefit plans covering tens of millions of participants and 
beneficiaries, ERIC's members share Congress's strong interest in the 
success and expansion of the employee benefit system in the private 
sector.

                    VOLUNTARY EMPLOYEE BENEFIT PLANS

    Employers voluntarily offer health plans to their employees. These 
employer-sponsored plans should be supported, subject to ERISA 
protections for participants, not penalized.
    Major employers provide valuable and important benefits to their 
employees through their voluntary employee benefit plans. Although 
employers are not required to provide benefits to their employees, 
voluntary employee benefit plans have been extraordinarily successful 
in delivering needed health, retirement, and other benefits to tens of 
millions of employees and their families. Today, over 80 percent of 
employees in the private sector receive some form of employee benefit 
plan coverage.
    Employers have a strong interest in providing voluntary employment-
based health care coverage to employees and their families. Employers 
seek to foster a healthy and productive workforce, to respond to 
workers' concerns about economic security and affordable basic health 
care, and to offer health care coverage as part of a competitive 
compensation and benefit package that attracts and retains valued 
workers. Employers' health care coverage arrangements represent an 
investment in quality and productivity. Each arrangement is tailored to 
the specific needs of the employer and its workforce.
    Employer-sponsored benefit plans can offer advantages that 
employees could not obtain if they tried to purchase the same benefits 
on their own. Employers contribute their expertise in plan design and 
the organization of delivery systems to obtain high-quality benefits 
that are delivered timely, efficiently, and cost-effectively relative 
to individually available coverage. Moreover, employer-sponsored plans 
representing groups of employees are in a stronger position than 
individual consumers to bargain to obtain high quality benefits at a 
reasonable price. Plans sponsored by large employers have been very 
successful in exercising bargaining power on behalf of their 
participants and beneficiaries, and an increasing number of small 
employers are able, through voluntary coalitions, to achieve the same 
kind of leverage to the advantage of their employees.
      the best patient protection is good process, not litigation
    ERIC believes the fundamental objective of patient protection 
reform, as applicable to employer-sponsored plans, should be to ensure 
timely processing of health claims and fair review of denied claims to 
facilitate delivery of patient care when needed. ERISA's original 
claims procedure regulation was promulgated with pension plans and 
indemnity-type health plans in mind. However, ERISA claims procedure 
can readily be adopted to provide timely and responsive claims review 
processes appropriate to today's managed care environment, which 
involves both pre-service and post-service benefit determinations.
    Thus, ERIC has repeatedly urged the U.S. Department of Labor to 
issue a revised ERISA claims procedure. The revised claims procedure 
regulation issued by the Department of Labor in November 2000 can fill 
this need, with modifications to correct some of its flaws. The 
Department appears to lack authority to address external review 
procedures in its regulation, however. To incorporate external review 
into its claims procedure regulation, an ERISA amendment authorizing 
the Department to do so would be needed.
     participants can be pretested without resorting to litigation
    It is not necessary to amend ERISA to add new causes of action and 
tort damages in order to ensure that plan participants have access to 
timely and fair claims review procedures. ERISA requires plan 
fiduciaries to ensure that participants receive a full and fair review 
of denied claims. Now that the Department of Labor's revised claims 
procedure regulation has clarified what ``full and fair'' review means 
in a managed care world, plan practice will improve significantly, and 
complaints should decrease accordingly. If a plan fails to meet the 
regulation's new standard, ERISA gives participants the right to seek 
injunctive relief. Fiduciaries who consistently fail to meet the new 
standard can be barred from continuing to acting in a fiduciary 
capacity.
    Tort liability is also not necessary to enforce external review 
decisions. For example, some patient protection bills have included 
provisions that make external review decisions ``self-executing''--that 
is, the external review decision itself would authorize the participant 
to obtain care without further action by the plan.
    The argument that tort liability is necessary to prevent ``undue 
delay'' in claims decisions is also unpersuasive. In addition to 
expedited review procedures, all of the leading patient protection 
bills include provisions authorizing emergency care without 
preauthorization if certain standards are met. Plan participants who 
believe they are in imminent danger while their review is pending can 
avail themselves of this patient protection.
    Admittedly, legislative action may be needed to bridge the gap 
between the Department of Labor's revised claims procedure regulation 
and the need for external review and liberalized emergency care 
procedures. ERIC believes that, working together, we can find 
reasonable ways to bridge any gaps left by current claims procedure 
rules. Giving participants the right to sue for tort damages instead of 
filling those gaps is simply not a reasonable approach to assuring 
procedural fairness for participants.

    TORT LIABILITY IS MORE COSTLY AND LESS EFFECTIVE THAN AVAILABLE 
                              ALTERNATIVES

    There is broad consensus that our medical tort liability system is 
broken. A few victims of medical malpractice may receive large monetary 
awards after they are injured, but such awards do nothing to improve 
the timeliness or quality of health care even for such victims who are 
awarded significant damages. Health care providers respond to this 
dysfunctional liability system by engaging in ``defensive medicine''--
treating patients for the purpose of lowering their liability risk 
rather than improving the quality of care.
    Amending ERISA to include tort liability effectively expands our 
dysfunctional medical liability system to include employers and the 
health plans they sponsor. But expanding tort liability does nothing to 
fix the underlying problems in the liability system itself. Health 
plans can be expected to take steps to minimize or avoid liability, 
such as adopting schedules of covered treatments or medical procedures 
and designated reimbursement amounts, to avoid any ``direct 
participation'' or exercise of discretion. The ultimate losers in such 
a system will be the plan participants. It is irresponsible to subject 
group health plans to a broken and dysfunctional tort system when 
simpler, faster, fairer, and less costly alternatives are available.
    Moreover, in the face of potential tort liability, virtually all 
employers will abandon any direct role in claims processing or 
determination. Employees would be the ones hurt by employers abdication 
of the role they play as employee advocates with insurers or managed 
care entities.
    To further discourage employer-sponsored plans, a number of patient 
protection bills authorize causes of action and tort damages under both 
federal and state laws, without assuring consistency between them or 
precluding simultaneous suits under both federal and state laws. This 
is a serious problem for any employer, but particularly for multi-state 
employers like most ERIC members.
    Although a number of patient protection bills purport to limit 
employers' exposure to lawsuits, under the bills' new cause of action 
provisions, the bills, in fact, fail to protect employers from 
litigation. A number of bills protect employers only if they avoid 
``direct participation,'' or are not the designated ``decision-maker'' 
in plan decisions. However, before a suit against an employer can be 
dismissed, a court will have to find that the employer did not 
``directly participate'' in the plan's decision. Since this will 
require the court to make a factual determination, litigating the issue 
will be time-consuming and costly--even if the employer ultimately 
prevails. The patient protection bills do not expressly address the 
burden of proof. If the burden is on the employer to demonstrate that 
it did not engage in ``direct participation,'' the employer's burden 
could be extremely difficult to meet, since the employer will be 
required to prove a negative: that it did not engage in ``direct 
participation.''
    Since an employer can wear ``two hats'' under ERISA--both as the 
plan sponsor and as a plan fiduciary--the protection that the ``direct 
participation'' provisions appear to offer might be completely 
illusory. Plaintiffs could circumvent the limitations imposed by a 
``direct participation'' provision by suing an employer in its capacity 
as a plan fiduciary and not in its capacity as employer or plan 
sponsor. The pending patient protection bills do not expressly 
foreclose such suits.
    Regardless of who is sued under these new provisions, employers and 
employees will ultimately bear the cost of litigation. Employers and 
employees pay the cost of administering health plans. If the firms that 
administer health plans incur additional litigation costs, the added 
costs will inevitably be passed through to employers and employees 
through higher premium costs, reduced health coverage or benefits, or 
both.

       DON'T UNDERESTIMATE EMPLOYERS' AVERSION TO TORT LIABILITY

    Policy makers should not mislead themselves into thinking that 
employers will not alter their behavior when confronted with health 
plan tort liability for the first time. Some will eliminate coverage 
under their plans for medical procedures that cause frequent disputes. 
Others will move away from managed care plans that feature low 
deductibles and copayments in favor of indemnity-type plans with high 
deductibles and copayments. Still others will reduce the overall scope 
of coverage offered to offset the cost of expected tort litigation. 
Finally, and most seriously, recent surveys show more than half the 
employers sponsoring health plans will consider terminating coverage 
entirely.

    TORT LIABILITY HURTS MORE CONSUMERS AND PROVIDERS THAN IT HELPS

    Inevitably, the burden of employers' retreat from sponsoring 
employment-based health plans in the face of new tort liability will be 
borne by employees and their dependents, especially low-wage employees 
who can not afford high deductibles and copayments, in the form of 
reduced coverage, significantly increased cost-sharing, and higher out-
of-pocket costs. Health care providers are likely to feel the impact as 
well, in the form of lower patient volume and increased uncompensated 
care.

          ERISA DOES NOT PREEMPT MEDICAL MALPRACTICE LIABILITY

    If a participant in an ERISA-governed health plan is the victim of 
medical malpractice, ERISA does not prevent the participant from 
obtaining relief under State malpractice law. ERISA regulates the 
administration of employee benefit plans; it does not regulate the 
practice of medicine.
    In our view, and the view of the courts more recently addressing 
the issue, medical malpractice lawsuits against persons or entities 
responsible for performing medical procedures are not preempted by 
ERISA. The practice of medicine has traditionally been governed by 
State law, including State medical malpractice standards. There is no 
evidence that, when Congress enacted ERISA, it intended to regulate the 
clinical quality of medical care and medical malpractice.
    Recent decisions of the U.S. Supreme Court support our view. For 
example, in 2000, in the Pegram case, the Supreme Court held that ERISA 
does not regulate medical treatment decisions and pointedly observed 
that ERISA does not preempt State-law malpractice actions against 
HMOs.1
---------------------------------------------------------------------------
    \1\ Pegram v. Herdrich, 530 U.S. 211 (2000); see also De Buono v. 
NYSA-ILA Medical & Clinical Service Fund, 520 U.S. 806 (1997); New York 
State Conference of Blue Cross & Blue Shield Plans v. Travelers Inc. 
Co., 514 U.S. 645 (1995).
---------------------------------------------------------------------------
    Recent federal appeals court decisions have followed the same 
approach. For example, in Dukes v. U.S. Healthcare, Inc., the Third 
Circuit Court of Appeals held that claims for injuries arising from 
medical malpractice were not completely preempted by ERISA and 
therefore did not permit removal of the case from a state to a federal 
court: ``There is no allegation here that the HMOs denied anyone any 
benefits that they were due under the plan. Instead, the plaintiffs 
here are attempting to hold the HMOs liable for their role as the 
arrangers of their decedents' medical treatment.'' 2 Other 
circuits have come to a similar conclusion.3 The decisions 
distinguish benefits claim cases (which seek to recover benefits and 
are therefore governed by ERISA) from quality of care cases (which 
challenge the quality of care and are governed by State medical 
malpractice standards). Although there are some conflicting lower-court 
decisions, most of them are older cases, decided before the Supreme 
Court's recent decisions. 4
---------------------------------------------------------------------------
    \2\ 57 F.3d 350, 361 (3d Cir. 1995).
    \3\ See, e.g., Pacificare of Oklahoma, Inc. v. Burrage, 59 F.3d 
151, 155 (10th Cir. 1995) (``The present claim does not involve the 
administration of benefits or the level or quality of benefits promised 
by the plan; the claim alleges negligent care by the doctor and an 
agency relationship between the doctor and the HMO...Just as ERISA does 
not preempt the malpractice claim against the doctor, it should not 
preempt the vicarious liability claim against the HMO if the HMO has 
held out the doctor as its agent.'').
    \4\ See, e.g., Rodriguez v. Pacificare of Texas, Inc., 980 F.2d 
1014 (5th Cir. 1993); Ricci v. Gooberman, 840 F. Supp. 316 (D.N.J. 
1993).
---------------------------------------------------------------------------

                             IN CONCLUSION

    In conclusion, the debate over expended ERISA liability is often 
conducted as though tort liability is the only available means to 
achieve the objective of protecting plan participants. It is not the 
only available means, and it is clearly the least desirable.

    Mr. Burr. Ms. Greenman, I thank you for your testimony.
    At this time, the Chair would recognize Dr. Palmisano for 
an opening statement.

                STATEMENT OF DONALD J. PALMISANO

    Mr. Palmisano. Thank you, Mr. Chairman. Good afternoon. My 
name is Donald Palmisano. I am a board member of the American 
Medical Association and a practicing vascular and general 
surgeon in New Orleans, Louisiana.
    Thank you for inviting me to speak with you today.
    Managed care organizations, like physicians and all other 
health care professionals, must be held accountable for their 
decisions. Accountability is the issue.
    So if a managed care organization makes a negligent medical 
decision that harms or kills a patient, that organization must 
take responsibility.
    This is a critical point to understand. It is about the 
patient. Is it fair to grant a shield of immunity to managed 
care organizations, a shield which is not given to any other 
business entity, except under very limited circumstances?
    We think not, and the vast majority of Americans agree. But 
why is this even a question? ERISA was never intended to apply 
to managed care. There is no sound policy reason why this law, 
this book should leave injured patients with no real remedy 
when they have been injured by a negligent health plan.
    The judiciary agrees with this point. Numerous Federal 
judges have called on Congress to amend ERISA. In one instance, 
a Federal judge had to throw out a case and he complained that 
``The tragic events set forth in this woman's complaint cry out 
for relief. Nevertheless, this court has no choice but to slam 
the courthouse doors in her face and leave her without any 
remedy.'' This is truly an issue of fundamental fairness and I 
think many of us here already would agree that health plans 
need to be held accountable.
    So what is the best solution for this problem? As we 
explain in our written statement, the best solution must 
reflect the relative strengths of the different courts and 
levels of government.
    Under the principle of federalism, the States retain powers 
not delegated to the Federal Government. Historically, the 
States have retained jurisdiction to govern the practice of 
medicine and the delivery of health care.
    We are proposing, therefore, a split cause of action. So if 
a patient is injured by a negligent health plan, the patient 
must have a legal remedy in either the State or Federal court, 
but not both, because States retain jurisdiction to govern the 
practice of medicine. If a case involves a medical judgment, 
the case should go to State court.
    Federal courts, on the other hand, should hear cases they 
have traditionally decided under ERISA. Eligibility of benefits 
claims.
    So an acceptable patient protection bill should, in a 
limited fashion, remove ERISA preemption. This would allow 
State laws to govern the delivery of health care.
    The bill also should provide an adequate Federal remedy for 
patients injured when a plan makes a negligent non-medical 
decision.
    Our proposal is no way arbitrary. The Judicial Conference 
of the United States has expressed support for this view. The 
Judicial Conference, headed by Chief Justice Rehnquist, stated 
in a letter to a conference committee just last year, ``The 
State courts have significant experience with personal injury 
claims and would be an appropriate forum to consider personal 
injury actions pertaining to health care treatment.'' The 
letter also urged Congress ``to provide that in any managed 
care legislation agreed upon, the State courts be the primary 
forum for the resolution of personal injury claims arising from 
the denial if health care benefits.'' This solution also would 
protect the rights of States and their citizens. Every State 
legislature has passed laws governing the delivery of health 
care services.
    In addition to existing common law rights, eight States 
have passed laws granting their citizens a cause of action 
against negligent health plans.
    We urge Congress, therefore, not to pass a Federal only 
cause of action and destroy State law.
    The insurance industry claims to continue that making 
health plans accountable in this targeted way will open 
Pandora's box of evils. Those arguments have already been made 
in many State capitols and have been rejected.
    The doom and gloom predictions by the insurance industry 
have not come about.
    President Bush has stated repeatedly that the patient 
protection laws in Texas are working well. Despite the 
insurance industry's claims, health care costs in those States 
have not skyrocketed. Employers have no suddenly dropped health 
care benefits, and the courts have not been overrun by plan 
participants trying to file frivolous suits.
    In closing, the patient protections we support, including 
accountability, closely reflect President Bush's principles.
    We agree, a Federal Patients' Bill of Rights must ensure 
that every patient enrolled in a health plan enjoys strong 
patient protections, and because many States have passed 
patient protection laws that are appropriate for their States, 
deference should be given to those State laws.
    The AMA believes that these principles are incorporated in 
the framework of the Ganske-Dingell patient protection bill, 
which is why we support that bill.
    Mr. Chairman, the entire committee, Mr. Tauzin, thank you 
again for inviting me to speak today.
    [The prepared statement of Donald J. Palmisano follows:]

    PREPARED STATEMENT OF DONALD J. PALMISANO, MEMBER, AMA BOARD OF 
         TRUSTEES ON BEHALF OF THE AMERICAN MEDICAL ASSOCIATION

    Mr. Chairman and members of the Committee, my name is Donald J. 
Palmisano, MD, JD. I am a member of the Board of Trustees of the 
American Medical Association (AMA), a Board of Directors member of the 
National Patient Safety Foundation (NPSF) and the Chair of the 
Development Committee for the same foundation. I also practice vascular 
and general surgery in New Orleans, Louisiana. On behalf of the three 
hundred thousand physician and medical student members of the AMA, I 
appreciate the opportunity to comment on the issue of state and federal 
roles in health plan accountability.

Identifying the Issue
    The Employee Retirement Income Security Act of 1974 (ERISA) 
established an elaborate regulatory system intended to ensure that 
employees receive the pension benefits which their employers have 
promised them. The statute was enacted in response to widespread 
allegations of pension funds mismanagement and fraud. In addition to 
preventing these abuses, the statute sought to create uniform 
regulatory requirements that would govern the administration of pension 
and benefit plans, thereby encouraging employers to offer employees 
these benefits. The intention of the bill's sponsors therefore was to 
ensure that employers doing business in more than one state could 
design financial benefits plans that could operate nationwide and would 
not face conflicting state requirements. To override then current state 
laws that sought to regulate pension plans, Congress incorporated broad 
preemption language into ERISA.
    Most of the remedies included in ERISA were also geared toward 
protecting plan assets. ERISA's appeals procedures and civil 
enforcement mechanisms were all directed at ensuring that plan 
fiduciaries handled plan funds properly and prudently for the plan 
participants' benefit. The drafters of ERISA never anticipated or 
intended the bill to protect plan participants who sought to access 
services, such as medical care, as part of a health care benefits 
package.
    The drafters of ERISA also could not have anticipated the eventual 
effects of ERISA and its preemption provision because of the dramatic 
changes the health care market itself has undergone. In 1974, the 
health care delivery system was entirely different from today's market. 
Over the last several decades, we have seen a transformation in 
employer-sponsored health care plans from traditionally insured or 
``fee-for-service'' to managed care. This transformation has given rise 
to new types of arrangements and relationships for financing and 
delivering health care that were not foreseen by the framers of ERISA 
in 1974.

A Matter of Fundamental Fairness
    In the era of managed care, health plans increasingly make 
decisions that directly affect the care that patients receive. 
Illustrations of these practices include: inappropriately limiting 
access to physicians through restricted networks (blocking patient 
access to specialists); refusing to cover or delaying needed medical 
services (transplants, transfusions, therapies); drawing treatment 
protocols too narrowly (patients discharged from a hospital 
prematurely); offering payment incentives or creating deterrents to 
care (disciplining physicians who refer patients for necessary medical 
care); and discouraging physicians from fully discussing health plan 
treatment options (gag rules and gag practices).
    These non-financial functions were never intended to be covered or 
regulated by ERISA. Instead, the states typically regulated the 
practice of medicine and, more generally, the delivery of health care. 
Even the federal courts have repeatedly noted that the regulation of 
quality of care has traditionally been a matter of state law, and that 
quality of care standards should be enforced in state courts.
    Nevertheless, under many circumstances, ERISA currently preempts 
state-based causes of action, thereby preventing injured patients from 
recovering against health plans that have acted wrongfully. As a 
result, ERISA's federal preemption of state liability actions leads to 
harsh consequences for many patients harmed by their health plans.
    The federal judiciary has also observed the incongruity and 
inherent unfairness resulting from ERISA preemption, with several 
federal judges calling on Congress to amend ERISA. One case involved a 
41-year-old father of four who went on a drinking binge and committed 
suicide. After his death, his widow said that the health plan had 
refused to approve a detoxification program after an earlier suicide 
attempt. Unable even to look at the merits of the case, the U.S. 
District Judge threw it out of court, saying that ERISA gave the health 
plan a ``shield of immunity.'' The judge went on to say that ``the 
tragic events set forth in Diane Andrews-Clarke's complaint cry out for 
relief . . . Nevertheless, this court has no choice but to . . . slam 
the courthouse doors in her face and leave her without any remedy.'' 
1 According to Judge Young, ``the shield of near absolute 
immunity now provided by ERISA simply cannot be justified . . . Even 
more disturbing to this Court--[he said]--is the failure of Congress to 
amend a statute that, due to the changing realities of the modern 
health care system, has gone conspicuously awry from its original 
intent.'' 2
---------------------------------------------------------------------------
    \1\ Andrews-Clarke v. Travelers Insurance Co., 984 F. Supp. 49, 64-
5 (D. Mass. 1997).
    \2\ Id.
---------------------------------------------------------------------------
    Allowing plans to continue to escape liability for negligent 
decision-making through this statutory loophole leaves patients in 
serious jeopardy. If ERISA plans know they can avoid liability due to 
ERISA preemption of state law, they have no incentive to act 
responsibly and provide needed and contracted for medical care.
    Consider, for example, some evidence presented in a lawsuit against 
one of the nation's largest insurance companies last year. The case 
involved a deputy district attorney, Mr. Goodrich, who died of stomach 
cancer after trying for 2\1/2\ years to get his insurance company to 
approve the cancer treatment that the insurance company's own 
physicians had recommended. During the trial, a training video of the 
insurance company was admitted into evidence. The training film showed 
one of the company's attorneys instructing claims handlers, and telling 
them ``[a]s a practical matter, you really may have to do more on a 
non-ERISA plan to protect against some of the legal exposure we're 
talking about.''
    The bottom line is that patients who receive health benefits 
through ERISA plans are currently denied the same rights and remedies 
as patients in non-ERISA plan. This is a simple question of fairness. 
It is also a matter of the public's will and desire. A vast majority of 
Americans believe that health plans should be legally accountable for 
negligent decisions that injure or kill patients. 3 We 
strongly agree.
---------------------------------------------------------------------------
    \3\ Fifty-three percent (53%) of Americans favor legislation making 
it easier to sue managed care plans that make negligent decisions which 
cause injury or harm to patients. Harris Poll #56, September 29, 1999. 
Henry J. Kaiser Family Foundation, Harvard School of Public Health 
survey conducted on January 25, 2001, found that 75% of Americans 
support patient protection legislation, including the right to sue 
health plans.
---------------------------------------------------------------------------
    While some federal courts continue to view ERISA as preempting all 
state-based causes of action against health plans, many federal courts 
have allowed injured patients' complaints against health plans to 
survive ERISA preemption scrutiny. In fact, most ERISA experts 
acknowledge a definite trend in federal courts whereby the courts are 
deciding that causes of action against health plans based on medical 
decisions or ``mixed'' medical-eligibility decisions are not preempted 
by ERISA. In other words, injured patients or the estates of deceased 
patients may increasingly pursue legal remedies in state courts under 
state law. Legislative ERISA reform, however, is necessary to ensure 
that all patients are protected.

A Developing Trend
    Because of the existing ``preemption'' provision of ERISA, patients 
enrolled in ERISA plans lack the remedies currently available to 
patients participating in non-ERISA plans. Many courts have recognized 
this problem. In Corcoran v. United Healthcare,4 for 
instance, a patient who had a high-risk pregnancy was advised by her 
physician to be hospitalized as she approached her due date. The plan, 
however, denied the request and instead authorized nursing home care. 
When the patient was at the nursing home and the nurse was off-duty, 
the fetus went into distress and died. The woman sued the plan alleging 
that the plan was negligent in not hospitalizing her. The federal 
court, however, decided that because the woman's claim involved a 
decision about the availability of hospitalization it was actually a 
``benefits'' decision, and consequently preempted by ERISA. As a 
result, the woman could only proceed under ERISA, which provides as the 
woman's sole remedy the benefits sought--in this case pre-delivery 
hospitalization. The woman therefore could obtain no real legal remedy 
under either ERISA or state law.
---------------------------------------------------------------------------
    \4\ 965 F.2d 1321 (5th Cir. 1992).
---------------------------------------------------------------------------
    Several other federal courts, however, have taken the position that 
ERISA was never intended to preempt injured patients from suing managed 
care plans for negligence simply because the plans contract with 
private employers or unions. These courts have looked to the preemption 
doctrine as articulated in the Pilot Life Insurance Co. v. Dedeaux 
5 and Metropolitan Life Insurance Co. v. Taylor 6 
cases, and then focused on the Dukes v. U.S. Healthcare, 
Inc.7 case. In Dukes, the Third U.S. Circuit Court of 
Appeals acknowledged a previously identified distinction between 
``quality of care'' decisions and ``quantity of benefits'' claims, and 
found that state law claims addressing the quality of care that the 
enrollees received were outside the scope of ERISA remedies and were 
not preempted.
---------------------------------------------------------------------------
    \5\ 481 U.S. 41 (1987).
    \6\ 481 U.S. 58 (1987).
    \7\ 57 F.3d 350 (3d Cir. 1995), rev'g Visconti v. U.S. Healthcare, 
857 F. Supp. 1097 (E.D. Pa. 1994), and Dukes v. United States 
Healthcare Sys. of Pennsylvania, Inc., 848 F. Supp. 39 (E.D. Pa. 1994), 
cert. denied, 116 S. Ct. 564 (1995).
---------------------------------------------------------------------------
    After the Dukes case, a federal court in Connecticut found in 
Moscovitch v. Danbury Hospital 8 that a claim against an 
ERISA plan in which the enrollee challenged the medical and psychiatric 
decisions of the plan administrator was not preempted by ERISA, despite 
the plan's allegations to the contrary. The enrollee had on two 
occasions attempted suicide and was hospitalized both times. Determined 
to be suicidal on a third occasion, the patient was again hospitalized. 
Deciding that hospitalization was no longer medically necessary, the 
plan administrator on this occasion transferred the enrollee from the 
hospital to a treatment center, where he committed suicide.
---------------------------------------------------------------------------
    \8\ 25 F. Supp. 2d 74 (D. Conn. 1998).
---------------------------------------------------------------------------
    Similarly, federal courts in Pennsylvania, Missouri, and Illinois, 
in the Tiemann v. U.S. Healthcare, Inc.9, Harris v. 
Deaconess Health Services Corp.10, and Crum v. Health 
Alliance-Midwest, Inc.11, respectively, all found that plan 
participants and beneficiaries could bring their negligence claims 
against the health plans in state court--ERISA did not preempt them. In 
Harris, a plan participant had sought authorization for 
hospitalization, for what he thought was appendicitis. The plan denied 
him admission and his appendix ruptured. The participant suffered 
permanent physical injury as a result. In Crum, a plan participant 
believed that he may be suffering a heart attack and sought admission 
to an emergency room. The plan's advisory nurses twice denied him 
permission for emergency room services, and he died of a heart attack.
---------------------------------------------------------------------------
    \9\ 93 F. Supp. 2d 585 (E.D. Pa. 2000).
    \10\ 61 F. Supp. 2d 889 (E.D. Mo. 1999).
    \11\ 47 F. Supp. 2d 1013 (C.D. Ill. 1999).
---------------------------------------------------------------------------
    As we have stated, however, this federal trend remains in its 
nascent stage and without clear leadership from Congress, the court 
rulings will remain inconsistent and unpredictable. Many patients will 
continue to have no legal remedies when their health plans act 
negligently and cause them injury or death.

A Complementary Solution
    Under the principle of federalism, the federal and state 
governments maintain a complementary relationship; the states retain 
all powers not delegated to the federal government. The Tenth Amendment 
of our U.S. Constitution reiterates this principle by assuring that 
``the powers not delegated to the United States'' nor prohibited to the 
states ``are reserved to the states respectively, or to the people.''
    The political theory underlying this judicial philosophy was that 
the local or state governments were best equipped to address the needs 
of their citizens. The Founders were also generally concerned about an 
excessively powerful, excessively centralized national government. As a 
result, many of the Founders sought to ensure that the national 
government would be empowered to legislate only in those areas in which 
the separate states were incompetent.
    Historically, the states have retained jurisdiction to govern the 
practice of medicine and, more generally, the delivery of health care 
for their citizens. The states, for instance, retain virtually sole 
authority to license and regulate health care professionals and 
institutions, as well as to provide remedies to citizens who are harmed 
by the negligent acts of those practicing medicine. When health plans, 
insurance companies, or even employers, make medical treatment 
decisions--and in essence, practice medicine--they should therefore be 
held accountable under state law, in state courts.
    Recent statements by the Judicial Conference of the United States, 
which is headed by Chief Justice Rehnquist, prove instructive on this 
issue. In a March 2000 letter to the Chairman of the conference 
committee on managed care legislation passed in the 106th Congress, the 
Judicial Conference stated that: ``Personal injury claims arising from 
the provision or denial of medical treatment have historically been 
governed by state tort law, and suits on such claims have traditionally 
and satisfactorily been resolved primarily in the state court system . 
. . The state courts have significant experience with personal injury 
claims and would be an appropriate forum to consider personal injury 
actions pertaining to health care treatment.'' (Emphasis added).
    The Judicial Conference urged Congress ``to provide that, in any 
managed care legislation agreed upon, the state courts be the primary 
forum for the resolution of personal injury claims arising from the 
denial of health care benefits.'' (Emphasis added).
    Recent federal case law reflects the Judicial Conference's policy 
favoring state court jurisdiction over cases regarding medical 
judgments. The Supreme Court in last year's Pegram v. Herdrich 
12 case stated that health plan coverage decisions often 
involve medical and administrative components which are ``inextricably 
mixed,'' and the ``eligibility decisions cannot be untangled from 
physicians' judgements about reasonable medical treatment.'' The Court 
expressly declined to find a ``fiduciary malpractice claim'' under 
ERISA, and noted that permitting such a cause of action would create 
the unattractive possibility of ERISA preemption of state medical 
malpractice laws. The Supreme Court's reasoning therefore supports the 
contention that state courts remain the appropriate forum for holding 
health plans accountable. Many lower federal courts have made similar 
statements, acknowledging that states retain ``their traditional police 
powers in regulating the quality of health care.'' 13
---------------------------------------------------------------------------
    \12\ 530 U.S. 211.
    \13\ (Corporate Health Insurance Inc. v. Texas Department of 
Insurance, 5th Cir., June 20, 2000, No. 98-20940, 215 F.3d 526; 2000 
U.S. App. LEXIS 14215).
---------------------------------------------------------------------------
    Not only does the federal judicial branch--including the U.S. 
Supreme Court--recognize the importance of states retaining 
jurisdiction over the practice of medicine, the states also are trying 
to exercise their authority over the regulation of medical care. Every 
state legislature has passed laws governing the delivery of health care 
services to its citizens, whether pertaining to external appeal rights, 
utilization review, access to emergency services, or some other patient 
protection. Eight states have passed laws expressly authorizing 
statutory causes of action against health plans, in addition to the 
state ``common law'' actions already recognized by their courts.
    Texas, for instance, in 1997 passed a statute that creates a new 
state cause of action against health insurance carriers, HMOs, and 
other managed care entities who breach their duty to exercise ordinary 
care when making health care treatment decisions, and the breach causes 
harm to the patient. An additional seven (7) states--Arizona, 
California, Georgia, Louisiana, Maine, Oklahoma, and Washington--have 
passed similar health plan accountability statutes.
    We strongly urge Congress therefore to recognize the legitimate 
authority of states and incorporate a bifurcated cause of action into a 
bipartisan patient protection bill. The bill would need to remove in a 
targeted fashion ERISA preemption, permitting states to pass or retain 
their own legislation which would protect the legitimate interests of 
their citizens. Additionally, removing ERISA preemption in this manner 
would preserve prior federal court decisions that have recognized state 
common law causes of action.
    The ``split'' between the federal and state causes of action must 
be made according to whether the plan exercised medical judgment when 
making its decision. The judiciary has repeatedly relied on that 
criteria, and so should Congress. When a health plan intervenes in the 
medical decision-making process, and imposes its medical judgment on 
the patient, the plan is engaging in the practice of medicine and 
should be held accountable under state law. If the plan has not made a 
medical judgment and has made simply an eligibility decision, the claim 
should be brought in federal court.
    Because of the gross inadequacy of ERISA remedies, an acceptable 
patients' bill of rights must modify ERISA to also permit a meaningful 
federal cause of action when an enrollee has been injured by a health 
plan's decision that did not involve medical judgment. As we mentioned 
above, ERISA was enacted to protect pension plan and other employee 
benefit financial assets. ERISA needs to be updated to reflect the 
current managed care market and protect plan participants and 
beneficiaries when their group health plans act negligently and cause 
them harm.
    Some advocates of plan accountability have suggested that patient 
protection legislation should provide only a federal cause of action. A 
federal cause of action alone however would wipe out those state 
statutes as well as state common law rights which have provided 
citizens with state law remedies against health plans for negligent 
medical decision-making. Additionally it would prevent forty-two (42) 
other state legislatures from passing similar patient protection 
legislation in the future. The AMA firmly believes that Congress should 
not override the will of the states by passing a federal-only cause of 
action.
    Creating solely a federal remedy for health plan and employer 
misconduct would also violate the most basic principles of federalism. 
Chief Justice Rehnquist has warned that ``Congress should commit itself 
to conserving the federal courts as a distinctive judicial forum of 
limited jurisdiction in our system of federalism . . . [M]atters that 
can be adequately handled by states should be left to them . . .'' 
14 (Emphasis added).
---------------------------------------------------------------------------
    \14\ Remarks of Chief Justice William H. Rehnquist at the American 
Law Institute Annual Meeting, May 11, 1998.
---------------------------------------------------------------------------
    To provide all patients with adequate remedies, Congress must enact 
federal legislation permitting patients to seek legal recourse against 
managed care plans under state law when the plans' negligent medical 
decisions result in death or injury.

Controlling Litigation
    A bifurcated cause of action would grant all Americans who receive 
employer-based health benefits an extremely important patient 
protection, which they both need and desire. This protection could, and 
should, be coupled with other critical patient rights that would 
directly benefit patients while both directly and indirectly benefiting 
health plans.
    As we have noted, many federal courts have begun to allow injured 
patients to bring causes of action against health plans in state 
courts. The pleadings and legal theories for these cases will 
increasingly mimic the pleadings and theories of those cases that have 
successfully withstood ERISA preemption scrutiny. As a result, managed 
care organizations will most likely become increasingly subject to 
liability--despite ERISA--for improper claims decisions that result in 
patient injury or death.
    When patients have been successful in bringing legal actions 
against ERISA plans, current law provides few protections for the 
plans. In many jurisdictions, patients would be able to proceed 
directly to court without appealing internally or externally, recover 
potentially unlimited punitive damages, and theoretically, could 
proceed against their employers, as well. Critical to any acceptable 
patient protection bill, therefore, are provisions granting employers 
protection against unwarranted liability, independent external appeals 
provisions that would eliminate unnecessary litigation, and limitations 
on punitive damages. With these provisions, health plans and employers 
would also certainly benefit from the bill.

Restricting Negligence Actions
    Crucial to an acceptable patients' bill of rights are a grievance 
system and an internal and independent external appeals provision. 
Without a grievance system, disgruntled patients with legitimate, 
though perhaps minor, complaints against their health plans would be 
required to go to court to resolve their disputes. And patients who are 
seeking medical care and have serious coverage disputes with their 
health plans, need and want timely coverage determinations and medical 
treatment, not lengthy and expensive litigation.
    We therefore consider it essential that a patient protection bill 
provide patients with access to a grievance system and an internal and 
independent external appeals process, which would effectively eliminate 
any need for litigation.
    An acceptable bill, for instance, could require patients first to 
appeal coverage denials directly to reviewers selected by their plans. 
The plans could control whether an internal review would be conducted, 
but their decision would have to be timely and account for the medical 
exigencies of the specific case. If the plan chose not to waive this 
requirement, the patient would be obligated to complete the internal 
review before proceeding to an external appeal.
    External appeals should be independent, binding on the plan, timely 
and conducted by qualified physicians (MDs/DOs) of the appropriate 
specialty. To ensure that their decisions are truly independent, plan 
definitions of ``medically necessary'' and ``investigational and 
experimental treatment'' must not be binding on the external reviewers. 
An effective independent appeals process would resolve virtually all of 
the egregious cases--like Corcoran--without the need for litigation. We 
firmly believe that with access to efficient, effective, and truly 
independent external appeals entities, patients will rarely need to go 
to court.

Employer Liability
    The insurance industry and some other opponents of patient 
protection legislation have alleged that a patient protection bill 
would place employers in jeopardy. They claim that by holding health 
plans accountable for their own negligence, the legislation would 
somehow expand employers' liability. These concerns, though 
understandable, can easily be addressed and remedied in a bipartisan 
patients' bill of rights.
    A patient protection bill can offer real and meaningful protection 
to employers and other plan sponsors. The bill for example could 
expressly state that it does not authorize a cause of action against an 
employer or other plan sponsor, and only an employer or plan sponsor 
that directly participates in making an incorrect medical determination 
for an individual claim decision could be held accountable. 
Consequently, only if an employer or plan sponsor directly participated 
in making an incorrect medical decision for an individual claim 
decision under its group health plan, and that decision resulted in 
injury or wrongful death, could it be exposed to a state law claim. 
Even then, to recover, the injured patient would have to prove: (1) 
that the employer directly participated in making an incorrect medical 
determination on that particular claim for benefits, (2) that 
individual decision caused the patient's injury or death, and then (3) 
that the employer's conduct also met all elements of an applicable 
state law cause of action.
    Some opponents of patient protection legislation have spuriously 
alleged that employers will be held liable for simply selecting the 
plans, under this scenario. We therefore believe that the bill should 
explicitly state that employers and other plan sponsors cannot be held 
liable for fulfilling their traditional roles as employers and plan 
sponsors. The bill should provide ``safe harbors,'' for instance, for 
the following activities: (I) any participation by the employer or 
other plan sponsor in the selection of the group health plan or health 
insurance coverage involved or the third party administrator or other 
agent; (II) any engagement by the employer or other plan sponsor in any 
cost-benefit analysis undertaken in connection with the selection of, 
or continued maintenance of, the plan or coverage involved; (III) any 
participation by the employer or other plan sponsor in the process of 
creating, continuing, modifying, or terminating the plan or any benefit 
under the plan, if such process was not substantially focused solely on 
the particular situation of the participant or beneficiary; and (IV) 
any participation by the employer or other plan sponsor in the design 
of any benefit under the plan.
    Additionally, because many employers and other plan sponsors seek 
to advocate for their employees during the review and appeals 
processes, an acceptable patient protection bill should explicitly 
protect employers and plan sponsors functioning as patient advocates as 
well.
    Some advocates of patient protection legislation have suggested 
that a federal bill should mirror the Texas ``accountability'' statute. 
In fact, the provisions we have identified would provide employers the 
same if not greater protection than what is offered in the Texas law. 
Both our principles and the Texas statute protect employers, and 
neither specifically excludes from liability employers who ``play 
doctor'' and improperly intervene in medical decisions. We note, 
though, that our proposed principles also expressly protect employers 
functioning as employers.
    We anticipate that some employer advocacy groups will continue to 
allege nevertheless that employers would, despite these employer 
protections, still be exposed to liability under such a bill. 
Interestingly, in our many discussions with many of these 
organizations, we and the sponsors of several patients' rights bills 
have explicitly requested alternative language that the employer groups 
believe would adequately address their concerns. In every instance, 
these organizations have failed even to propose such language. After 
our repeated and diligent efforts to arrive at an agreement, we have 
begun to think that some of the organizations are not genuinely 
interested in solving what they claim is a potential problem.
    We acknowledge that if an employer ``plays doctor'' and directly 
participates in making an incorrect medical determination on a 
particular claim for benefits, the employer could potentially be held 
liable in state court. In such an extraordinarily rare situation of an 
employer directly interfering in a specific medical treatment decision 
and injuring a patient, should it not be exposed to liability? 
President Bush apparently thinks so, since he stated in his Principles 
for a Bipartisan Patients' Bill of Rights that he would hold those 
employers accountable ``who retain responsibility for and make final 
medical decisions.''

Exhaustion of Remedies
    In order to ensure that the external appeals process can 
effectively reduce litigation while encouraging timely coverage 
decisions, patients must be required to utilize the appeals process. 
Patients therefore should have to exhaust all administrative remedies 
before going to court.
    The purpose of the appeals process is to ensure that coverage 
disputes may be resolved in a timely fashion, so that patients may 
obtain the medical treatment to which they are entitled before they 
unnecessarily suffer harm. If, because of the health plan's conduct, 
they suffer serious and irreparable harm or die, they or their estates 
should not be required to exhaust all administrative appeals. At that 
point, the patient is no longer seeking the medical treatment, but 
instead desires and needs court protection. Consequently, the patient 
or the patient's estate should not be required to spend additional time 
and money unnecessarily in an appeals process. To complete the external 
appeals process under those circumstances would be futile. The patient 
should at that time be allowed access to the court system.
    Texas law includes a very similar exception in its appeals process. 
Under Texas law, a person is permitted to bypass the independent review 
if harm has already occurred.

Limiting Punitives
    As we have shown, several federal appellate courts have found that 
patients' claims against their health plans can at times be brought as 
negligence actions and therefore are not preempted by ERISA. Managed 
care organizations consequently are increasingly becoming subject to 
new liability--despite ERISA--for improper claim denials that injure or 
kill patients. For those cases, federal courts are permitting state 
statutory and common law to govern the resolution of these claims, many 
of which also seek punitive damages.
    In the past, for non-ERISA cases, juries have been awarding 
progressively larger punitive damage awards against health plans. In 
1993, a southern California jury awarded $89 million to the estate of 
Nelene Fox, finding that her insurer, HealthNet, improperly denied her 
autologous bone marrow transplant treatment with high-dose chemotherapy 
for her breast cancer. Of the $89 million, 90 percent of the award ($77 
million) was attributed to punitive damages. More recently, a jury 
rendered a $120 million verdict against Aetna U.S. Healthcare for 
improperly delaying treatment for 41-year-old David Goodrich, who had 
been diagnosed with leiomyosarcoma of the stomach. Of the $120 million 
award, $116 million represented punitive damages.
    Presuming that some courts will be favorably disposed--as others 
have been--to new legal theories that plaintiffs' attorneys are 
presenting, this trend can only be arrested through federal 
legislation. An acceptable patient protection bill should, therefore, 
include meaningful and reasonable limits on punitive damage awards.

Cost
    In the past, many opponents of health plan accountability have 
alleged that federal patient protection legislation would cause health 
care premiums to skyrocket. Although no cost reports are presently 
available for pending federal patients" rights legislation, the fact 
remains that if plans were forced to accept responsibility for their 
decisions, costs would not be significantly affected.
    We are aware for instance that in Texas, the first state to adopt 
managed care accountability legislation, this issue was hotly debated. 
Milliman and Robertson completed an actuarial determination of the cost 
of the Texas liability legislation to a Texas-based HMO and set the 
cost at only 34 cents per member per month. A study prepared by William 
M. Mercer, Inc. and the AMA demonstrates that managed care 
accountability legislation would only increase premiums between .5% and 
1.8%.
    In fact, the American Association of Health Plans (AAHP) and the 
Health Insurance Association of America (HIAA) surveyed their HMO 
members in Texas and ``could not find one example'' where the Texas 
patient protection law forced Texas HMOs to raise their premiums or 
provide unneeded and expensive medical services.15
---------------------------------------------------------------------------
    \15\ September 28, 1999, Washington Post.
---------------------------------------------------------------------------
    Other representatives of the insurance industry have also publicly 
admitted that holding plans accountable will not significantly drive up 
health care premiums. Jeff Emerson, the former CEO of NYLCare, stated 
in a July 11, 1999, Washington Post article that he is ``. . . not 
going to make the argument that it's going to be a lot of money.'' 
Aetna/USHealthcare spokesman, Walter Cherniak, stated in the same 
Washington Post article that ``we would charge the same premium to a 
customer with the ability to sue as we do those who do not have the 
ability to sue.'' Why? ``Those judgments to date have been a very small 
component of overall health care costs,'' according to Cherniak.
    In fact, the four-year-old Texas law that allows HMOs to be sued 
for their negligent medical decisions has prompted little litigation--
approximately ten lawsuits out of the 4 million Texans in HMOs. Texas 
State Senator David Sibley, a Republican, stated two years after this 
bill was enacted, that ``those horror stories'' raised by the HMO 
industry ``just did not transpire.'' President George W. Bush, who was 
then the Texas Governor, has repeatedly affirmed that he thinks this 
law has worked well in Texas.
    Some opponents of HMO accountability have alleged that employers 
would drop their health benefits if ERISA preemption is removed. In 
many industries, however, companies provide additional incentives to 
attract and keep quality employees or else lose them to competitors, 
and one of the basic corporate benefits is full or partial health care 
coverage. It is therefore very unlikely that companies will eliminate 
health benefits simply because health plans are held accountable for 
the coverage and medical decisions they make.

Tort Reform
    The issue of liability caps has been raised frequently in recent 
discussions of health plan accountability in patient protection 
legislation. Within the context of medical malpractice, the AMA has 
long supported tort reforms, including reasonable caps on damages. In 
recent years, we sought the passage of tort reform legislation, which 
passed the House of Representatives but has consistently failed in the 
Senate. A number of Senators from both parties have opposed reasonable 
limits on non-economic damages.
    When discussing caps in a patients' bill of rights, several issues 
must be addressed. What would be considered ``reasonable'' caps for 
damages? What type of damages would be capped? Would a federal bill 
permit state tort reform laws to remain intact? Would the caps apply 
only to federal causes of action? Would a disparity between state and 
federal caps create undesirable and unnecessary forum-shopping? Would 
caps applicable to health plans also apply to all other health care 
providers?
    The AMA fully recognizes the complexity of these and various other 
issues associated with tort reform, and we believe that tort reform 
must be addressed. With that said, we question whether adequate support 
exists in the Senate to pass meaningful tort reform in the context of 
patient protection legislation. If sufficient votes are not present, we 
would urge Congress to pass an acceptable patient protection bill at 
this time and then continue to push for meaningful tort reform. The AMA 
remains fully committed to both issues, but recognizes that coupling 
them together, could kill both.

Conclusion
    We appreciate the Committee's interest in addressing the issue of 
health plan accountability and the respective state and federal roles. 
As we have indicated, the AMA strongly believes that ERISA must be 
reformed to permit injured patients or their estates to recover against 
negligent health plans. The most sensible solution to this problem 
parallels the traditional roles of the state and federal governments, 
allowing states and their courts to continue to govern the practice of 
medicine while the federal courts adjudicate strictly benefits 
decisions under ERISA. Without this type of ERISA reform, any patient 
protection or health care quality legislation would not fully ensure 
fairness for all patients.
    The AMA understands that several patient protection bills will be 
or are being considered, and we are committed to working with both 
Congress and the President to reach agreement on a bipartisan patient 
protection bill that can be enacted into law this year. We thank the 
Chairman and this entire Committee for the opportunity to discuss this 
critical issue.

    Mr. Burr. Thank you, Doctor.
    The Chair would recognized Ms. Rosenbaum for a opening 
statement.

                   STATEMENT OF SARA ROSENBAUM

    Ms. Rosenbaum. Thank you very much, Mr. Chairman. My 
testimony addresses two basic issues. The first is an overview 
of the current legal baseline that governs managed care 
liability, and the second is how Congress should approach the 
question of managed care liability in the context of a 
Patients' Bill of Rights.
    With respect to the first question, outside of a shield 
that I believe was unwittingly given to private employers by 
Congress 25 years ago when it created ERISA, there is no area 
of law, with the limited exception of the kind of sovereign 
immunity situation that Mr. Burr asked about, in which a 
defendant is not held accountable for the death or injury of 
another person.
    It is a basic proposition of American law and one that has 
its roots in a thousand years of common law that people should 
have to answer under the law for the injuries they cause.
    Beginning in the 1700's, in England, health professionals 
were recognized as accountable under common liability 
principles.
    In the 1960's, in the United States, the notion of 
liability for medical injury was first extended to 
corporations, to hospitals. Hospitals predicted when the first 
cases came down, the Darling case and other cases that followed 
in its wake, that we would stop having hospitals because of 
medical liability.
    That didn't happen, to put it mildly.
    The notion, furthermore, that Congress is considering for 
the first time extending medical liability to HMOs is simply 
incorrect. For at least 20 years and probably longer, HMOs have 
been recognized as liable for the medical harm they cause.
    Since the landmark case of Dukes v. U.S. Health Care, 
furthermore, it has been recognized that HMOs can be liable for 
the medical injuries they cause to members of ERISA plans.
    The major contribution of the Supreme Court's unanimous 
decision in Pegram v. Herdrich was, in fact, to reframe the 
liability issue for the lower courts, to make clear to the 
lower courts that when a case involving a beneficiary or a 
participant of an ERISA plan comes to the courts, there are 
some claims that are Federal ERISA claims that fall within the 
limited jurisdiction of Federal courts, and those are known as 
fiduciary claims.
    There are other claims that fall outside the scope of 
ERISA, and those are medical claims. The court simply dismissed 
any notion that in the modern health system, we can distinguish 
any longer between something called a coverage claim and 
something called a care claim.
    What we have is medical decisions. So given this baseline 
and given the instructions that a unanimous court has now given 
to the lower courts, what should Congress do?
    Since State law is the source of all law related to medical 
liability for injuries, whether individual or corporate, the 
remedy for persons who are injured belongs with the States, and 
this is true whether the person is injured by an HMO 
administering a benefit plan under ERISA or an HMO 
administering a Medicare Plus Choice plan.
    To create a Federal remedy for medical coverage injuries, 
and I put that in quotes, effectively undoes what a unanimous 
court did last year attempts to resurrect an ERISA shield for 
managed care organizations, while leaving physicians and 
hospitals totally exposed in State court.
    Furthermore, it would relegate families to a continued 
bifurcated obligation where medical injuries are concerned, and 
would cause needless disruption in their ability, in the very, 
very rare instances where medical injury happens, to pursue 
their legal remedies.
    In my view, and this has been said a number of times this 
morning, the external appeals process that you are likely to 
establish under managed care reform will, in fact, take even 
the limited number of medical injury cases we see today and 
reduce the number even further.
    We can probably expect that employers will begin to simply 
certify cases over to the external appeals process rather than 
spending a lot of time on internal appeals. That is an option 
under the Ganske-Dingell bill and one that I presume many 
employers would be happy to take.
    Some of my best friends are ERISA fiduciaries and have to 
make these decisions on a monthly or relatively frequent basis 
and it is very difficult.
    So if there is a good, fair external appeals process, I 
assume that, in fact, a lot of the burden that falls to 
employers today will evaporate or at least be significantly 
reduced.
    Given the very limited role of liability and medical 
liability, I would say that it is a very unwise idea to 
overturn Pegram at this point.
    [The prepared statement of Sara Rosenbaum follows:]

PREPARED STATEMENT OF SARA ROSENBAUM, HAROLD AND JANE HIRSH PROFESSOR, 
   HEALTH LAW AND POLICY, THE GEORGE WASHINGTON UNIVERSITY SCHOOL OF 
                   PUBLIC HEALTH AND HEALTH SERVICES

    Mr. Chairman and Members of this Subcommittee: Thank you for 
extending me this opportunity to testify before you today on one of the 
most important aspects of the managed care patient protection 
legislation now under Congressional consideration--access by families 
enrolled in ERISA plans to legal remedies for medical injuries. I 
commend Congress for its ongoing effort to find a resolution to this 
problem. The task is obviously a difficult one and cannot be resolved 
without addressing ERISA preemption, one of the most complicated areas 
of social welfare law.
    My testimony is based on my work as a health law professor and 
draws extensively on my collaboration with Professors Rand Rosenblatt 
and David Frankford of Rutgers University Law School in Camden, New 
Jersey. Our textbook, Law and the American Health Care 
System,1 was the first health law textbook to extensively 
present health law in an ERISA context and was cited in the Supreme 
Court's opinion in Pegram v Herdrich 2 as a leading textual 
authority regarding the legality of managed care design under ERISA.
---------------------------------------------------------------------------
    \1\ Foundation Press, NY, NY (1997; 2001-2002 Supplement 
[forthcoming, Summer, 2001])
    \2\ 120 S. Ct. 2143, 2149 (2000).
---------------------------------------------------------------------------
    In this testimony I explore two issues. The first is the emerging 
``legal baseline'' regarding the liability of managed care 
organizations for medical injury. The second is the question of whether 
in fashioning this legislation, Congress should adhere to this emerging 
baseline in fashioning remedies for members of ERISA plans who suffer 
medical injuries.

                         1. THE LEGAL BASELINE

    For many years it has been settled law that an HMO or other managed 
care company can be held liable for injuries flowing from substandard 
medical care. Managed care organizations are ``hybrid'' entities that 
provide the medical care they furnish; thus, in the eyes of the law 
they undertake medical treatment and thus are accountable for medical 
acts that injure or kill. Liability can be predicated on theories of 
vicarious or direct negligence.3
---------------------------------------------------------------------------
    \3\ See. e.g., Boyd v Albert Einstein Medical Center 547 A. 2d 1229 
(Pa. Super., 1998); Chase v Independent Practice Asso., 583 N.E. 2d 251 
(Mass. App. 1991); Petrovitch v Share Health Plan of Ill. 719 N.E. 2d 
756 (Ill., 1999); Shannon v McNulty 718 A. 2d 828 (Pa. Super., 1998); 
Jones v Chicago HMO 730 N.E. 2d 1199 (Ill, 2000).
---------------------------------------------------------------------------
    Since the 1995 landmark decision in Dukes v U.S. 
Healthcare,4 federal courts, in deciding questions of 
removal jurisdiction under 28 U.S.C. Sec. 1441, have consistently held 
that where an ERISA participant or beneficiary brings a lawsuit that 
alleges medical injury, the claim arises under state law and thus is 
not a federal claim under ERISA.5 Until this past Supreme 
Court term, the Dukes ``quantity/quality'' distinction supplied the 
analytical framework for distinguishing between ERISA health benefit 
cases that involved state, as opposed to federal law.
---------------------------------------------------------------------------
    \4\ 57 F. 3d 350 (3d Cir., 1995); cert. den. 116 S. Ct. 564 (1995).
    \5\ See, e.g., In re U.S. Healthcare 193 F. 3d 151; cert. den. 120 
S. Ct. 2687; Lazorko v Pennsylvania Hospital 2000 WL 1886619; Corporate 
Health v Texas Department of Insurance 215 F. 3d 526 (5th Cir., 2000); 
and additional cases cited in Law and the American Health Care System, 
Ch. 3(E)
---------------------------------------------------------------------------
    In Pegram v Herdrich a unanimous Supreme Court altered this 
analytic framework by introducing the concept of ``mixed'' and ``pure'' 
eligibility decisions. Pegram is best known for its holding that 
fundamental aspects of managed care design (Pegram concerned the use of 
financial incentives in employer-sponsored health benefit plans) do not 
constitute a breach of fiduciary duty under ERISA. However, the Court's 
opinion did not end here. The Court went on to discuss at length the 
concept of fiduciary decision-making under ERISA.
    ERISA's remedies apply to ``fiduciary'' decisions and activities. 
Claims challenging the legality of ERISA fiduciary decisions thus are 
governed by ERISA remedies.6 But legal claims that do not 
constitute a challenge to an ``ERISA fiduciary'' decision fall outside 
the limits of ERISA and are not subject to ERISA preemption.
---------------------------------------------------------------------------
    \6\ ERISA Sec. 502; 29 U.S.C. Sec. 1132.
---------------------------------------------------------------------------
    In Pegram the Court distinguished between medical decisions and 
fiduciary decisions. Writing for the Court, Justice Souter 
fundamentally restructured the analytic framework for deciding when a 
medical injury case is governed by state law. In the view of the Court, 
state law should govern in any case in which medical injury is alleged 
to have flowed from flawed medical judgement, regardless of the context 
in which that judgement is exercised:
          [P]ure ``eligibility decisions'' turn on the plan's coverage 
        of a particular condition or medical procedure for its 
        treatment. "Treatment decisions," by contrast, are choices 
        about how to go about diagnosing and treating a patent's 
        condition: given a patient's constellation of symptoms, what is 
        the appropriate medical response? These decisions are often 
        practically inextricable from one another * * * * This is so 
        not merely because, under a scheme like Carle's, treatment and 
        eligibility decisions are made by the same person, the treating 
        physician. It is so because a great many and possibly most 
        coverage questions are not simple yesorno questions, like 
        whether appendicitis is a covered condition (when there is no 
        dispute that a patient has appendicitis), or whether 
        acupuncture is a covered procedure for pain relief (when the 
        claim of pain is unchallenged). The more common coverage 
        question is a whenandhow question. * * * 
          The kinds of decisions * * * * claimed to be fiduciary in 
        character are just such mixed eligibility and treatment 
        decisions * * * * .
          [W]e think Congress did not intend * * * * any other HMO to 
        be treated as a fiduciary to the extent that it makes mixed 
        eligibility decisions acting through its physicians. * * * * 
        Our doubt * * * * hardens into conviction when we consider the 
        consequences that would follow * * * * . What would be the 
        value to the plan participant of having this kind of ERISA 
        fiduciary action? It would simply apply the law already 
        available in state courts * * * * . ERISA was not enacted * * * 
        to federalize malpractice litigation in the name of fiduciary 
        duty for any other reason. * * * * .
          The mischief of Herdrich's position would, indeed, go further 
        than mere replication of state malpractice actions with HMO 
        defendants. * * * * The physician who made the mixed 
        administrative decision would be exercising authority in the 
        way described by ERISA and would therefore be deemed to be a 
        fiduciary. * * * * Hence the physician, too, would be subject 
        to suit in federal court * * * * . This * * * * in turn would 
        raise a puzzling issue of preemption. On its face, federal 
        fiduciary law applying a malpractice standard would seem to be 
        a prescription for preemption of state malpractice law, since 
        the new ERISA cause of action would cover the subject of a 
        statelaw malpractice claim.7
---------------------------------------------------------------------------
    \7\ Pegram v Herdrich, 120 S. Ct. 2154-2158.
---------------------------------------------------------------------------
    The Court thus restructured the logic of the Dukes case, moving 
from a world of quality versus quantity into a world of mixed 
eligibility versus pure ERISA coverage decisions unrelated to medical 
coverage. This reframing of the analytic structure that federal courts 
should use in deciding injury claims brought by ERISA plan litigants is 
consistent with the Court's 1995 decision in New York State Conference 
of Blue Cross and Blue Shield Plans versus Travelers Insurance 
Co.8 which held that ``in the field of health care, a 
subject of traditional state regulation, there is no ERISA preemption 
without clear manifestation of Congressional purpose.'' 9
---------------------------------------------------------------------------
    \8\ 514 U.S. 645 (1995)
    \9\ Pegram, 120 S. Ct. at 2158.
---------------------------------------------------------------------------
    Two important cases at the federal appellate level have considered 
Pegram in the nearly one year since it was handed down--certainly not 
enough time to claim a hard trend. But given the subtleties of Pegram, 
these cases provide at least some insight into where the courts may go.
    The first case, Corporate Health v Texas Dept. of 
Insurance,10 considered the legality under ERISA of a multi-
part Texas law which: (a) established a new medical liability cause of 
action for substandard care furnished by managed care organizations; 
established anti-retaliation and anti-indemnification protections for 
physicians; and (c) established independent external review procedures 
of managed care coverage decisions. The court found that the liability 
and anti-indemnification provisions were not-preempted by ERISA; the 
court further held that even if the external review statute was saved 
as a law that regulates insurance, it could not apply to ERISA plan 
decisions because it directly conflicted with the substantive terms of 
ERISA. Following the Pegram decision, this third prong was re-argued 
and the Court reaffirmed its earlier holding.11 Little can 
be gleaned from the decision in a Pegram context, because at its heart 
the Corporate Health case concerned a direct conflict between state and 
federal law on the issue of access to external review, not the type of 
preemption at issue in the liability cases. Furthermore, the Texas law 
itself distinguished between medical torts and review of insurance 
coverage cases; in following the old ``quality/quantity'' distinction 
first drawn in the Dukes case, the statute was not-easily re-filtered 
through a post-Pegram analysis.
---------------------------------------------------------------------------
    \10\ 215 F. 3d 526 (5th Cir., 2000); reh. 2000 WL 1035524.
    \11\ Id.
---------------------------------------------------------------------------
    The far more important case in this context is Lazorko v 
Pennsylvania Hospital 12 decided by the Court of Appeals for 
the Third Circuit, the appellate court that first identified clearly 
the ``quality/quantity'' distinction in the Dukes case. Lazorko was a 
medical injury case brought against a physician and a health plan 
following the death of a plan member from severe and untreated mental 
illness. The plaintiff in the case alleged that the physician's 
decision to cut off her treatment led to the woman's death and that the 
company's practice guidelines were a proximate cause of the physician's 
decision to stop permitting treatment. In holding that neither the 
claims against the physician nor those against the plan were preempted, 
the court specifically considered the impact of Pegram:
---------------------------------------------------------------------------
    \12\ 2000 WL 1886619 (3d Cir.)
---------------------------------------------------------------------------
          U.S. Healthcare counters with two basic arguments, neither of 
        which we find persuasive. First, it argues that Dr. Nicklin's 
        refusal to hospitalize Patricia Norlie-Lazorko amounts to a 
        denial of benefits because hospitalization is a benefit under 
        Jonathan Lazorko's HMO plan. We reject this characterization of 
        the claim. Lazorko is not arguing that his plan is supposed to 
        permit hospitalizations for mental illness and that U.S. 
        Healthcare refused his wife's request for guaranteed service. 
        Instead, he is arguing that, when confronted with his wife's 
        requests for additional treatment, Dr. Nicklin, influenced by 
        U.S. Healthcare's financial incentives that penalized a 
        decision to grant additional hospitalizations, made the medical 
        decision not to readmit her to the hospital. Because Lazorko's 
        claim is one concerning the propriety of care rather than the 
        administration of that care, the claim is not completely 
        preempted. In other words, the claim here is that the denial of 
        Norlie- Lazorko's request for hospitalization occurred in the 
        course of a treatment decision, not in the administration of 
        the Lazorkos' plan. * * * * 
          U.S. Healthcare's second contention is that, in light of the 
        recent Supreme Court decision in [Pegram] subjecting an HMO to 
        liability is improper because Pegram recognized the centrality 
        of financial incentives to the operation of an HMO. Pegram, 
        however, does not alter our analysis. In evaluating the 
        question of the circumstances under which an HMO owes a 
        fiduciary duty to the members of an ERISA plan, the Pegram 
        court held that mixed eligibility decisions by an HMO (i.e., 
        decisions involving not only the coverage of a particular 
        treatment by the plan but the reasonable medical necessity for 
        the treatment) are not fiduciary decisions under 
        ERISA.13
---------------------------------------------------------------------------
    \13\ Id. pp. 6-7.
---------------------------------------------------------------------------
    The bottom line in all of this is that cases involving a challenge 
to the quality of decisions regarding the propriety of a course of 
treatment belong in state court and that pure coverage decisions--i.e., 
where there are no medical facts in dispute and medical judgement is 
not called for--fall within the ambit of ERISA fiduciary decisions and 
remain subject to ERISA's exclusive federal remedies.

                          2. CONGRESS' CHOICES

    Given this legal baseline, I believe that Congress has three 
choices in the area of remedies for medical injuries to persons who 
receive their health care through ERISA plans. First, it can elect to 
do nothing and allow the issue to further develop in the lower courts. 
Second, it can elect to depart from the Supreme Court's framework and 
instead create a federal remedy for medical coverage injuries. Third, 
it can amend ERISA to codify the Supreme Court's interpretation of 
ERISA and allow the application of state remedies for injuries 
involving the faulty exercise of medical judgement.
    For four reasons, the sensible approach is the final one. First, 
this approach parallels the guidance to the lower courts provided by 
the Pegram decision. To now try to fashion new statutory remedy rules 
for the courts to apply will throw the entire matter into chaos. The 
Court drew this line because of states' historic primacy in the 
regulation of medical care; remedies for medical injuries tied either 
to the exercise of substandard professional judgement or the 
substandard operation of medical care corporations are a direct 
extension of this state power. In recasting the issue of remedies in 
this manner, the Court essentially recognized the role that states 
always have played in the oversight of medical care. Its review of the 
history and purpose of ERISA in both the Pegram and Travelers Insurance 
decisions underscores the vital but limited purpose of the law. ERISA 
is intended to allow covered entities the ability to administer 
employee benefit plans free of variable state law; it was not intended 
to create a federal tort for medical malpractice.
    Second, the Court's reasoning flows from the very fabric of managed 
care. In a managed care environment, any attempt to resurrect some 
notion of a ``medical coverage'' decision that can be spliced from the 
medical care itself is simply futile. In the concept of health care 
quality, managed care is an attempt to allocate medical resources in 
the treatment of patients in accordance with sound principles of 
medical care. When this effort goes wrong--either because the deciding 
physician makes a bad call or because the treatment guidelines under 
which the physician is practicing are themselves medically defective--
the case should be viewed as a medical care case. Only those decisions 
that involve neither medical facts nor the exercise of medical 
judgement belong in federal court and covered by ERISA remedies.
    Third, to force the creation of a new federal remedy for something 
called a ``medical coverage injury'' will inevitably as the Supreme 
Court predicted, federalize control over the quality of medical care by 
federalizing remedies for poor medical performance. Were a federal 
remedy to be created, all medical injury cases would get dragged into 
federal court and extensive time would be invested in deciding whether 
each particular claim is a federal one that relates to ``coverage'' or 
a state claim that relates to ``treatment.'' Pegram actually provides 
relatively clear guidance to lower courts: medical injury cases are 
state law cases, while cases with no allegation of substandard medical 
judgement or standards remain federal.
    Resurrecting the concept of ``medical coverage'' for federal tort 
purposes would be worse than simply leaving matters alone. Writing 
federal remedies is extremely difficult, particularly when they get 
grafted onto an already complex jurisprudential picture. In creating a 
new federal remedy, Congress inevitably will introduce new terms, 
concepts, and nuances that will cause the courts to not merely to 
depart from Pegram but even to reconsider whether the new Congressional 
remedy follows the earlier Dukes approach. This task of learning new 
``case sorting rules'' will be added to an already overburdened federal 
system that is supposed to be a system of limited jurisdiction to hear 
uniquely federal claims, not state medical liability claims except in 
diversity situations. Furthermore, by introducing medical quality 
accountability as an express matter of federal law, Congress would 
begin to tip the entire matter of oversight over medical care quality 
into the federal domain.
    Fourth, to federalize medical judgement torts would be anything but 
supportive of families. The best research into the area of medical 
liability claims suggests that these cases are quite rare.14 
States themselves maintain strict controls over medical liability 
claims, frequently requiring exhaustion of preliminary review 
procedures, limiting the types of remedies that can be made available 
for medical injuries, and generally imposing procedural requirements 
that are designed to weed out frivolous litigation. Furthermore, S. 
283, recently introduced by Senator McCain, contains adequate 
protections to shield employers from claims of liability under state 
law.
---------------------------------------------------------------------------
    \14\ Harvard Medical Practice Study Group, Patients, Doctors and 
Lawyers: Medical Injury, Malpractice Litigation, and Patient 
Compensation in New York (1990).
---------------------------------------------------------------------------
    State courts are not the Wild West when it comes to medical 
liability cases. To put medical injury cases in federal courts works an 
extreme hardship on the few families whose need for judicial access is 
the result of death or injury from substandard treatment decisions. 
Federal courts are typically far away geographically, federal practice 
is a specialized area of law practice, and federal courts are actually 
far less experienced in the management of medical injury claims.
    If Congress completes work on a federal patient protection act, the 
final law surely will contain an external appeals system to permit 
access to prospective help before the injury happens. I remain 
confident that a strong external review process will aid considerably 
in heading off medical injury before it occurs and thus reduce 
liability litigation generally in the long run and further, that 
retaining state law authority over medical claims is the correct thing 
to do.

    Mr. Burr. I thank you for your statement, Ms. Rosenbaum.
    At this time, the Chair would recognize the chairman of the 
full committee, Mr. Tauzin, for the purposes of questioning.
    Chairman Tauzin. Thank you, Mr. Chairman. Dr. Palmisano, in 
your statement, you draw a clear bright line between decisions 
of the health plan that impose a medical judgment on the 
patient and decisions that simply make an eligibility decision.
    Ms. Rosenbaum talks about the Pegram case and how it gets 
into the subtleties of that issue.
    You drew a nice bright line. When is eligibility of 
coverage not a medical decision, in your view?
    Mr. Palmisano. Yes, sir. One example would be when there is 
a dispute as to whether the contract would cover some service.
    Whether or not a stepson who comes to live with a family is 
covered under that policy, when it is not clear at the 
beginning that those were the people enrolled in the plan, 
issues like that.
    The State court issue that we talk about, the medical 
decisionmaking would be where the doctor decides whether or not 
a patient has appendicitis and needs an operation.
    An example that I had that I have testified to Congress 
before about, where someone is telling me that a patient who 
has a piece of clot in the carotid artery that breaks off and 
goes to the brain and the patient has a transient stroke, and I 
witness this, because the patient cleared up in a matter of 
minutes, they tell me it is not an emergency and, therefore, 
the patient will have to be worked up as an outpatient. Those 
are medical decisions.
    Chairman Tauzin. I think I understand clearly when 
something looks like a medical decision, but what really eludes 
me, and I think Pegram talks about these mixed eligibility and 
treatment decisions, is how you draw a bright line between 
them.
    I am trying to find a common sense way of doing that. You 
try to say, clearly, when it is a medical decision, this ought 
to be something treated under State law. When it is an 
eligibility decision, you treat it under the Federal ERISA 
preemption statute.
    But when I think about real instances, and I asked you to 
give me a couple of them, I can envision a decision on 
eligibility resulting in denial and a patient not getting the 
medical treatment he needed, being severely harmed and asking 
for a remedy somewhere.
    Why is that less of a medical malpractice case or a 
treatment decision than about whether or not this is an 
emergency?
    Mr. Palmisano. Hopefully, those types of issues will be 
resolved with greater information so that the customer of the 
insurance of the employee would understand better what is 
actually covered under the policy in the plain light of day 
before the emergency comes up, before the need for medical 
services comes up.
    Chairman Tauzin. But you do concede that as the Pegram case 
pointed out, that you get into an awful lot of gray areas, 
where you don't know whether it is an eligibility decision or 
whether it is a medical treatment decision or whether it is 
both.
    Mr. Palmisano. My esteemed colleague here is reminding me 
that one example would be that if there is treatment for a 
condition and the policy clearly states in the policy that we 
don't give certain types of chemotherapy, it is not covered in 
here, and, again, it goes back to what the contract says.
    My view is that if you are informed, like when I operate on 
a patient, I hope my truly informed and gives an informed 
consent, because we spend time explaining what the diagnose and 
treatment options are.
    Chairman Tauzin. But you see, the problem is, as I 
understand it, the difficulty arises not where there is a clear 
statement about whether something is not covered. It is in the 
ambiguities. It is whether this is medically necessary or 
whether this is an emergency or whether the language covers 
this particular circumstance.
    It is not very clear whether it does or not. On the one 
hand, I can look at it and say that is an eligibility decision. 
On the other hand, someone else may look at it say, no, no, no, 
no, if the person doesn't get this treatment, there are serious 
medical consequences, this is a malpractice case if he doesn't 
get the treatment.
    Mr. Palmisano. I think if the policy was clearly written in 
plain English, and some policies are not, as we can all attest 
to, where you have to get several lawyers to understand what 
the words mean, and then we are still not sure, because there 
are different opinions, what we really need to do is understand 
what is covered and what is not covered.
    Chairman Tauzin. Let me ask further. It looks like, in the 
Pegram case, that Justice Souter did acknowledge that there 
were mixed decisions.
    Mr. Palmisano. Yes.
    Chairman Tauzin. Where would you treat those mixed 
decisions under your scheme?
    Ms. Rosenbaum. You are certainly right, Mr. Chairman, to 
note that this is very complicated. The kind of dichotomy that 
the courts are laboring under today or before Pegram were 
laboring under, the quantity versus the quality distinctions, 
raised similar problems.
    In any legal system that is a system driven by federalism, 
whether it is Federal law that applies to some classes of 
action and State law that applies to other classes of action, 
whatever court gets the case at the first blush is always going 
to have to make a threshold decision about where the case 
belongs.
    So I would say it is probably not likely that Congress, no 
matter how hard it works, can draw the kind of bright that line 
that would forever eliminate the need for somebody to make a 
judgment call for a court right at the outset about what 
belongs where.
    The nice thing about Pegram and the reason why it is so 
much better a framing of the issue than the Dukes quality/
quantity distinction is that the court actually sets up a 
pretty simple test.
    What the court is asking lower courts to look to in Pegram 
is whether, in order to resolve the patient's case, somebody 
had to exercise some medical judgment.
    In an example where I want acupuncture to relieve my 
backache, and my plan, no matter how much I might need or 
benefit from acupuncture, simply doesn't cover acupuncture, I 
happen to be a law professor, I could read the contract for a 
managed care company and tell somebody that acupuncture is not 
a covered benefit. There is no medical judgment.
    If, however, the decision is whether a child's cleft palate 
is cosmetic or a medical condition, any court can look at that 
kind of case quickly and know that there was no way that the 
case could have been resolved without somebody with 
professional qualifications deciding the case.
    Now, this will all become a lot easier under a new bill 
because it will be the very cases that went to external review, 
and that is how you will know that there is either State 
jurisdiction or Federal jurisdiction.
    Chairman Tauzin. My time is out, but I want to put a 
question before all the panelists, and you don't have to answer 
it now. I would love for you to do it in writing.
    The court, in Pegram, did specifically note that ERISA 
makes separate provisions for suits to receive particular 
benefits and that the court would not ``discuss the interaction 
of such claim with State law causes of action.'' That's a 
footnote that you don't refer to, Ms. Rosenbaum, in either your 
memorandum last year or in your testimony today.
    The question is, isn't the legislation we are discussing 
today dealing with specific benefits and how can you claim to 
provide an objective legal analysis when you don't address that 
language in your analysis, language of the Pegram court.
    Don't answer it now. I don't have time, I am out. Just give 
me a legal--if you will, an answer in writing. If you will all 
respond, I would appreciate it.
    Mr. Burr. The gentleman's time has expired. The Chair would 
recognize Mr. Brown for questions.
    Mr. Brown. Thank you, Mr. Chairman. Charts seem to be the 
order of the day, so if Courtney would put up just three charts 
that I want you to look at. These are simple, with big print, 
easy to read, even for us.
    The first one is under current law, this is current law, 
doctor orders treatment, HMO denies the medical treatment, 
patient appeals to the HMO, HMO is the judge and jury of the 
case, treatment is denied, the patient is injured or dies, the 
patient or the family go to Federal court under ERISA, and it 
is tough luck, ERISA says HMOs are exempt.
    Patients can only recover the value of the benefit itself 
denied.
    The next chart is the Ganske-Dingell bill. Doctor orders 
treatment, HMO denies medical treatment, patient appeals to 
independent external review, and patients gets treatment, or 
doctor orders treatment, HMO denied medical treatment, the 
patient is injured or dies before the appeal is completed, 
patient goes to State court, the court awards appropriate 
damages, according to State tort limits, if warranted.
    We have seen today and heard certainly since really before 
the Presidential race, but certainly during the race, of the 
law in Texas. We have seen a very similar law to the Ganske-
Dingell proposal, and we have seen that there have been very 
small number of lawsuits, although the discussions, the other 
side often are a high litigious society as in how this will 
bring on a cascading of lawsuits.
    Mr. Wynn and Mr. Pollack today established, I thought, 
pointed out the possibility of lawsuits certainly makes managed 
care plans behave differently if there were not the possibility 
of a lawsuit hanging over them, so that patients are much more 
likely to get appropriate care, what the physician and the 
patient have decided is the best care from that HMO.
    The President now, though, says he wants to keep us out of 
State court and his proposal and some opponents to this bill 
say the same thing.
    Would you, Ms. Rosenbaum, point out to those of us up here 
that are non-lawyers the differences, explore the differences 
for us between what State and Federal court means here in terms 
of access to the courts, the waiting period, the waiting time, 
the expense to the plaintiff and, for that matter, the expense 
to the defense, all of that, so we better understand the 
difference between State and Federal court and what all this 
means.
    Ms. Rosenbaum. Certainly. The first thing to recognized, 
which I know that Congress is well aware of because if your 
authority over the Federal courts, is that Federal courts are 
set up as courts of very limited jurisdiction. They are only 
supposed to hear certain kinds of cases.
    They are not actually the broad backbone judicial system of 
the country. The broad backbone judicial system is the State 
court system. It is the State court system that reflects the 
common law, that decides most of the legal disputes that happen 
in the United States, and certainly when it comes to personal 
injury actions, the kinds of actions that we can trace all the 
way back to a thousand years ago, when courts first got going, 
those are the bread and butter of the State court system.
    Certainly, anybody who has been in the State court knows 
that State courts are hardly perfect, there can be backlogs in 
State courts, but there are many more of them. There are many 
more State courts and State court judges.
    In addition, States supplement their State courts with 
various kinds of preliminary steps they could take to resolve 
disputes.
    State courts are close to home. Most lawyers who practice 
today are familiar with the legal procedures and the rules of 
their State courts.
    Just as Federal courts are courts of limited jurisdiction, 
lawyers who spend their time doing Federal litigation tend to 
be a much rarer breed. They are more specialized, they may be 
less accessible, particularly if you look in a small town or a 
rural area.
    If you look at the travel time that it takes to get to 
Federal court, it can be quite considerable, where a court sits 
only in one part of a State.
    I used to live in Maryland and now live in Virginia. If you 
are in the Cumberland area of Maryland and you have to travel 
to Baltimore, except when the court is riding circuit, it is a 
real burden.
    Federal courts are supposed to hear specified claims. So 
under ERISA, they have a major role to play with those claims, 
when they arise, that are ERISA claims.
    What Pegram makes clear is that there is a big difference 
between an ERISA claim and a claim brought by an ERISA 
participant.
    You can be an ERISA plan participant and have a lawsuit 
that has nothing to do with ERISA, and the whole message from 
the Supreme Court back to its lower courts was you shouldn't be 
involved in medical injury cases.
    We have a perfectly good thousand year old, to put it most 
simply, legal system which has evolved in this country into our 
State court system, supplemented by State legislatures, and 
that is where these cases belong.
    Mr. Greenwood [presiding]. Mr. Shadegg.
    Mr. Shadegg. Thank you, Mr. Chairman. I appreciate the 
testimony of this panel. I did get a chance to read your 
testimony in advance.
    Dr. Palmisano, I want to begin with you. As you might 
guess, I agree with probably the vast majority of your 
testimony. I certainly agree that health care plans should be 
held accountable and that ERISA, as interpreted today, saying 
that they are absolutely immune for consequential damages from 
negligent decisions that incense bad public policy, as I said 
earlier.
    I want to focus on a couple of issues. I think, quite 
frankly, there are perhaps three issues that divide the two 
sides, or three big issues that are dividing the two sides, 
precluding us from reaching a compromise.
    One of those is the State court versus Federal court issue. 
A second issue, also, is the question of employer liability. 
The third is the question of exhaustion of external review.
    And I think everybody here has said external review is very 
important to incenting care, and I am glad there is agreement 
on that point.
    I would like to start with page 15 of your written 
testimony. Your testimony, quite frankly, is very, very well 
written and it clearly is, I think, conformed to the language 
of the Kennedy-Dingell-Edwards legislation.
    But I think it is, in part, mistaken and I want to discuss 
that issue with you.
    On this question of employer liability, I think you 
probably would agree with me that passing legislation that 
will, in fact, allow employers to be sued under circumstances 
when all they did was procure an insurance plan is going to be 
impossible. I don't think we can do that, and I desperately 
want to pass legislation.
    At the bottom of page 15 of your testimony, after having 
said that you think employers should be not able to be sued, 
you say, and this is the last full sentence, ``Consequently, 
only if an employer or plan sponsor directly participated in 
making an incorrect medical decision or an individual claim 
decision under its group health plan and that decision resulted 
in injury or wrongful death, only in that circumstance could it 
be,'' and then turning over to the next page, ``exposed to a 
State law claim.''
    Now, that statement is technically incorrect, is it not, 
Doctor? And the reality is you are exposed to the claim, that 
is, you may be sued by the mere allegation that you directly 
participated, right?
    Mr. Palmisano. Well, what we want to do is set a standard 
in America. Of course, anybody can sue you if they have got 
enough money. In fact, if they don't have the money, they can 
just go get somebody.
    Mr. Shadegg. Precisely the point. But under other language, 
for example, the designated decisionmaker language, you would 
not have that fact question in front of the jury.
    You would designate a health care decisionmaker who was 
responsible for making that decision and could respond in 
damages and in that circumstance, you would not be able to sue 
the employer and raise that fact question and hold the employer 
in all the way into the lawsuit.
    I guess I am wondering why you would not support or if 
indeed you would consider supporting the designated 
decisionmaker language that I have actually spent hours 
discussing with your colleagues at the American Medical 
Association.
    I am trying to find out, is this an in-stone position or 
are you willing to look at language that further protects 
employers when they don't make the medical decision?
    Mr. Palmisano. I think, Mr. Shadegg, we all are on record 
saying that if the employer does not make the medical decision, 
the employer should not be liable. So we agree on that.
    Mr. Shadegg. And you make the statement they shouldn't be 
exposed to a claim. That is what it says.
    Mr. Palmisano. They shouldn't be exposed to liability, but 
wait a minute. We are all exposed to claim. Somebody can sue 
you tomorrow, sue me tomorrow.
    Mr. Shadegg. No, that is not true. That is absolutely not 
true. The reality is HMOs are not exposed to a claim for 
consequential damages today. That is why we are here.
    Mr. Palmisano. Well, that is why we are here, right.
    Mr. Shadegg. That is my whole point.
    Mr. Palmisano. And that is why there is a great injustice 
in the system, and that is why we are trying to fix it.
    Mr. Shadegg. I agree. But I guess my point is there is 
language called the designated decisionmaker language which 
precludes this possibility and does not allow employers to be 
sued.
    You see the exception there that says an employer may be 
sued.
    Mr. Palmisano. May I say one more thing? Another 
possibility is that someone could be designated and that could 
be some sort of sham corporation with no assets.
    Mr. Shadegg. Well, the law actually requires that they be 
responsible for the medical decision and that they be able to 
respond in damages, and indeed in the language that I discussed 
with Mr. Norwood's staff last year, you would say that if it is 
an insured plan, as opposed to a self-insured plan, the 
insurance company is automatically designated.
    So for my little restaurant, Joe Jordan's, Joe Jordan 
doesn't self-insure. He goes out and buys a plan from Aetna. 
Aetna would be automatically on the hook for damages.
    I would like to ask the other two witnesses if they don't 
agree that this language does expose the so-called direct 
participation language.
    Does it not, in fact, expose employers to being sued and to 
be held in the case all the way to the end because it is a fact 
question?
    Ms. Greenman. In my view, there is absolutely no question 
that the language of direct participation would expose 
employers to expensive and ongoing litigation.
    The one issue or question that I would raise, even with the 
designated decisionmaker concept, is that employers, if you 
look at--this really comes up more in self-insured plans as 
opposed to fully insured plans.
    Within self-insured plans, which tend to be maintained by 
larger employers, since they have the wherewithal to do that, 
the claims that--the role that employers typically will play is 
to intercede or to get involved in reviewing a claim after it 
has been denied by the plan administrator, the contract plan 
administrator.
    So that if the claim has already been denied and denied 
again, if it is appealed back to the administrator, the 
employer may be the sort of court of last resort from an 
internal review perspective.
    I was both in private practice and now represent in-house 
with Honeywell. I have never seen an employer step in to 
overturn a grant of a benefit. I have seen employers step in on 
behalf of employees to try and get them the coverage or to make 
a decision overturning the contract administrator.
    It is that benefit, even with a designated decisionmaker 
concept, because employers, you are absolutely correct, 
employers will refuse to play the role of designated 
decisionmaker and exit the decisionmaking process all together.
    Mr. Shadegg. Under designated decisionmaker language, an 
employer could step in and say we think you ought to grant the 
benefit and that would not change that there is still somebody 
who is liable. That is, the designated decisionmaker, whether 
they accept that advice or don't.
    Mr. deMontmollin. I don't know now to pronounce your last 
name.
    Mr. deMontmollin. It is deMontmollin. We believe that the 
bill clearly does bring the employer closer to that litigation.
    Mr. Whitfield made the comment that there are no bounds on 
the innovation or the originality of trial lawyers in this 
area.
    Clearly, already under COBRA and under HIPAA, COBRA for the 
extension of benefits and HIPAA on discrimination, the employer 
is making those decisions, for the most part, and is getting 
closer to this issue.
    So we feel very strongly that as happened in California, 
where a suit was brought under the criminal torture statute 
against the HMO for not extending physical therapy benefits 
beyond the amount that was contained in the contract and an 
effort to made to bring the employer in at the same time, we 
believe an expansion of health plan liability would get us 
closer, a slippery slope closer to that point where employers 
would be included.
    Mr. Shadegg. Could I ask all the witnesses to respond in 
writing to the designated decisionmaker language that is out 
there and has been discussed?
    Thank you.
    Mr. Palmisano. We will be happy to do that.
    Mr. Greenwood. Without objection. The gentleman's time has 
expired. I apologize to the panel for missing the first 3\1/2\ 
hours of his hearing, but the last 12 minutes has been 
fascinating.
    A question that I would like to pose to Mr. deMontmollin. 
We have heard a lot of discussion over the course of the debate 
on this issue about whether or not the Texas statute would give 
us some inclination as to what to expect in terms of the 
frequency of claims and those who argue for State jurisdiction 
argue that Texas demonstrates to us that, see, there weren't a 
lot of suits, there was no flurry of legal activity.
    My understanding is that it is not quite that simple, but, 
in fact, the law was held in abeyance for some time by the 
courts.
    Could you comment on that, please?
    Mr. deMontmollin. I believe that the Fifth District Court 
of Appeal has made it clear and has limited the Aetna decision 
in such a way so that it applies only to a medical malpractice 
action in the State and then vicarious liability for the 
particular health plan.
    So clearly there is no comparison between what is being 
debated by this subcommittee and what happened in the Texas 
scenario.
    However, with respect to Texas, we believe that there is 
clearly a strategy on the part of the trial bar to select only 
those cases that they think are most likely to lead to 
substantial damages and then hopefully to use those particular 
cases for that purpose of setting a precedent and then I think 
that the potential for floodgates opening is very realistic.
    A second issue I think that is very important is one that 
was brought up by the Physician Insurance Association of 
America, PIAA, and their studies reflect that it takes about 54 
months really for a case to get to the court ultimately.
    Of course, the Texas law has only been in effect since 
1997.
    We think that the biggest problem here is the misimpression 
that the Texas law in some way provides aid and comfort to 
those who would expand health plan liability at the Federal 
level, and we would suggest that the clear opinion of the 
Circuit Court of Appeal was that it is a run of the mill 
medical malpractice type of case that, in the opinion of that 
court, the HMO could be held vicariously liable for, which is 
similar to the quality/quantity dichotomy that we have seen in 
other circuits.
    Mr. Greenwood. Did you want to comment?
    Ms. Greenman. Yes, if I may, to add to my colleague's 
comments. I would suggest that the Texas statute cannot be 
looked at as comparable to the proposed legislation, because 
that statute was enacted in the--ERISA protections and ERISA 
preemptions still exist.
    So that there has not been any change to ERISA preemption. 
To the extent that an action is brought that is pure medical 
malpractice, an employer cannot be brought in because of ERISA 
protections and ERISA preemption, and if it is purely a payment 
determination, I think even under the Texas provisions, there 
would be no cause of action.
    So I don't think that you can necessarily analogize, even 
if the course of litigation had run, between the Texas statute 
and proposals now before Congress.
    Mr. Greenwood. Thank you for that.
    Mr. Palmisano. Mr. Greenwood, we would take the position, 
also, that Pegram is not a change in the current law, but that 
rather it is a preservation of what the existing law is.
    Mr. Greenwood. Speaking of pure medical malpractice, let me 
just question Dr. Palmisano.
    Some of us who are advocates of medical malpractice for 
your profession, and I have introduced legislation of my own in 
the past Congress and I will in this one, have been a bit 
dismayed that your association has not supported the notion 
that we ought to marry medical malpractice provision to 
patients' protection legislation.
    I would appreciate it if you could comment on why that is. 
I think it was in your testimony that you felt that such 
legislation would bring down both pieces.
    Particularly, I think you have expressed concern about the 
Senate. Have you actually done the vote counting there? Are 
sure of whereof you speak?
    Mr. Palmisano. I guess the only people that can be of 
things in the future are a higher level than myself.
    Mr. Greenwood. Oh, no, we can do that.
    Mr. Palmisano. But we have looked at the votes and we don't 
have the votes and we think the whole thing would go down. But 
you are absolutely right. The American Medical Association is 
on record as being for tort reform, and we think that ought to 
be a separate bill all by itself.
    And we think a meaningful Patients' Bill of Rights is 
essential, because right as we talk today, people are being 
hurt around the country right now and we think something needs 
to be done.
    So someone talked about being on the head of a pin, some 
reference to that. I think whatever we need to do, we need to 
reason together, look at everyone's ideas, and come up with 
something that will get help for the people out there now, and 
we will support a meaningful tort reform bill and we are on 
record.
    The bill that we support is essentially the California 
bill, which is the MICRA legislation in California, with the 
cap on----
    Mr. Greenwood. But would it be fair to say, and then I will 
yield, that if, in fact, the calculus changed or the calculus 
were determined to be that adding tort reform for medical 
malpractice, in fact, gained us votes for this legislation, 
would the American Medical Association then support the 
marriage?
    Mr. Palmisano. The American Medical Association is not 
going to go against two of its policies, but what we would do 
is make a careful analysis and talk to everyone as best we 
could in the House and Senate to see whether or not it would 
destroy, so that we end up with nothing.
    In other words, what we would like to do is get tort reform 
done separately.
    Mr. Greenwood. None of us wants that. Thank you. The 
gentleman from Texas, Mr. Green, is recognized.
    Mr. Green. Thank you, Mr. Chairman. I have a number of 
questions, but let me follow up on that line of questioning 
first.
    Most medical malpractice lawsuits are filed in State 
courts, from my understanding. The State of Texas has addressed 
medical malpractice.
    Do we really have a national problem, a Federal problem 
with medical malpractice lawsuits, Doctor?
    Mr. Palmisano. Well, the problem with medical malpractice 
lawsuits or suits that are filed against health care 
professionals is a serious problem, it has been a problem in 
the United States, and some States have taken dramatic action 
that has stopped the increase in premiums and allowed patients 
to have access to physicians.
    California is one example, Indiana is another example, and 
our own State of Louisiana is another example.
    Mr. Green. I only have 5 minutes, but let me say that that 
is a State option now and I am sure my Republican colleagues, 
you really wouldn't want to take away that States' rights 
effort.
    Mr. Palmisano. We certainly would not want any Federal law 
to supersede a better State law. So it would basically a floor 
that you all have talked about before. In medical mal, it would 
be a floor.
    We would never want it to preempt a better State law. We 
think Louisiana is head and shoulders above some of the other 
places.
    Mr. Green. Instead of adding to making a bill better, I 
would look at adding that maybe more like a poison pill. Would 
you look at that?
    Mr. Palmisano. Some people have used that term. We have 
deliberately not used that term. What we are saying is that we 
think that everyone wants to do what is in the best interest of 
the American public, both the people that have the opportunity 
to vote, as you all do, and those of us who participate in this 
discussion.
    So what we are trying to do is just reason together and we 
have--according to our count of the votes, this would destroy a 
meaningful Patients' Bill of Rights by doing that.
    Mr. Green. I appreciate that. Mr. deMontmollin, in fact, my 
question was to talk about the Texas experience, and I am sorry 
if you have to repeat, but we have another committee going on 
in Telecom also.
    You said that it takes 54 months for a lawsuit to come to 
fruition, to be filed?
    Mr. deMontmollin. That is a study by the Physicians 
Insurance Association of America.
    Mr. Green. Again, since you are testifying on Texas law, 
and I wasn't there and I came to Congress in 1993, but served 
20 years in the legislature, Texas still has a 2-year statute 
of limitations, if I am correct.
    Mr. deMontmollin. Correct.
    Mr. Green. From the date of discovery or 2 year statute. So 
where do you get 54 months? Because if I discover some problem, 
I have 24 months to file that lawsuit. So there should be 
lawsuits on file right now, shouldn't there be, in the State of 
Texas?
    Mr. deMontmollin. I don't believe that would necessarily be 
the case. For instance in Florida, there is a period----
    Mr. Green. I want you talk about Texas, because I am 
familiar with it and that is the law we are looking at, that we 
are comparing the Dingell-Ganske bill with Florida. Does 
Florida have a 2-year statute of limitations?
    Mr. deMontmollin. Yes.
    Mr. Green. But if I discover some injury by a doctor or by 
denial of coverage, I guess it bothers me that 54 months seems 
pretty long, because do you know how many lawsuits have been 
filed in Texas since 1997 based on the Patient Protection Act 
that was passed in Texas? How many lawsuits?
    Mr. deMontmollin. It may just be one, and the reason for 
that has already been expressed by me in my opinion in my 
strategy.
    Mr. Green. I want you to say it again so I can ask you 
questions about that.
    Mr. deMontmollin. I believe that it is the strategy of the 
trial bar in Texas to allow--to make sure that that process in 
Texas does not impact on the deliberations of both Congress, as 
well as some other States. But clearly those States----
    Mr. Green. Let me say I think you give the trial bar in 
Texas much more organization efforts, because I think the 
biggest complaint mostly is our plaintiff's lawyers are really 
out there doing their own thing instead of that.
    But you are saying that the law has been effective since 
1997 in Texas and there is only one lawsuit filed. I heard 
there were five.
    Mr. deMontmollin. I don't know how many there are, but even 
if there were only one, I believe that it is consistent.
    Mr. Green. But if there was a date of discovery of an 
injury, someone is not filing that lawsuit then in Texas for 
the last 4 years.
    Mr. deMontmollin. And potentially the agreement by Aetna 
and the other carriers in Texas voluntarily to have external 
review would suggest that the external review process is 
working in Texas, or it suggests that most HMOs are providing 
100 percent of all of the necessary and appropriate care and 
simply trying to impact that one-third of all health care that 
is inappropriate and unnecessary.
    Mr. Green. Again, I think what you said is that the review 
process, external review process has been very successful, and 
that is part of the Ganske-Dingell bill, but it is also--I know 
the statistics I looked at a year ago is that just over half of 
decisions by those external review boards were in favor of the 
patient.
    Is that your statistics?
    Mr. deMontmollin. It is not in Florida, but I will accept 
yours in Texas.
    Mr. Green. Which causes me some concern because if we don't 
have an external review process, then half the time, the people 
who make that complaint are not receiving adequate medical are. 
Does that seem reasonable?
    Mr. deMontmollin. No, to this extent. We certainly support 
external review systems and independent review by physicians of 
requests for care under a concurrent review system, which 
explains the difference between the actions of a physician who, 
once he delivers the care and an injury occurs, clearly, the 
only thing that is left is recompense in a medical malpractice 
action.
    On the other hand, if an HMO makes a coverage decision, one 
Mr. Tauzin and others have described today, then clearly there 
is an opportunity in most States to go to an internal and then 
external review system.
    Mr. Green. But that is not a medical decision. That is a 
coverage decision.
    Mr. deMontmollin. It is a mixed coverage----
    Mr. Green. I think we could probably draft it to take care 
of that. Mr. Chairman, since I am the only one on my side, do I 
get any more time to follow up?
    Mr. Greenwood. We will think about that. For the moment, 
the gentleman's time has expired. The Chair recognizes the 
gentleman from Iowa, Mr. Ganske.
    Mr. Ganske. Thank you, Mr. Chairman. Mr. deMontmollin and 
Ms. Greenman, maybe you don't think that anything should be 
changed on liability and ERISA, but do you think that one 
should have to complete a course of the internal and external 
review before that would happen?
    Ms. Greenman. I think we need to give external review and 
the new DOL claims regulations a chance to see whether they 
are, in fact, effective. I don't think tort liability is the 
answer when you are talking about employers, in particular.
    If you look at the mixed----
    Mr. Ganske. I am not talking about employers. I am just 
talking about the health plans.
    Ms. Rosenbaum. I think it might be helpful to define what a 
plan is.
    Mr. Ganske. No. I only have so much time. I just want to 
know. Do you think that before you can go to court, in whatever 
bill comes out of Congress, that the appeals process should be 
exhausted, yes or no?
    Ms. Rosenbaum. Yes.
    Mr. deMontmollin. Yes.
    Mr. Ganske. Okay. I want to talk about one of the anecdotes 
that the HMO industry always says doesn't exist or that we 
shouldn't legislate on.
    Here is a little boy. He's tugging at his sister's shirt. 
Sometime later, his parents found out he had a temperature of 
105. His mother phoned their HMO. This is all documented in a 
book called Health Versus Wealth.
    They phoned the HMO, and were told they could only get 
authorized treatment from one hospital, about 75 miles away, 
even though the kid was really sick, according to the mother.
    So that HMO reviewer didn't say take this baby to the 
nearest hospital, if you want it to be paid for by us, you only 
can take it to one hospital. In route, the kid suffers a 
cardiac arrest, after they have passed three emergency rooms.
    They are lucky, because the nurses and the doctors, when 
they finally get there, are able to revive the kid. They are 
lucky.
    But he ends up with gangrene in both hands and both feet 
and all have to be amputated.
    Now, that was a medical judgment decision on the part of 
that reviewer when they phoned in and it resulted in 
irreparable harm.
    Now, under ERISA, the only remedy allowable to this little 
boy is the cost of care denied.
    Mr. deMontmollin, is that fair?
    Mr. deMontmollin. I would be happy, Mr. Ganske, if you 
would provide me----
    Mr. Ganske. Yes or no, is that fair?
    Mr. deMontmollin. It may very well be fair, depending upon 
the circumstances of that particular case. Let me explain what 
I am talking about.
    Mr. Ganske. The judge reviewed the case.
    Mr. deMontmollin. In Florida, as an example, and, 
certainly, I don't know what year that occurred in, but in 
Florida and in most of the States, first of all, it was 
obviously an emergency condition and the person could have gone 
immediately to the closest emergency room.
    Mr. Ganske. This wasn't a----
    Mr. deMontmollin. We have a system called----
    Mr. Ganske. These parents----
    Mr. deMontmollin. [continuing] admit one to one with 
nurses----
    Mr. Ganske. Excuse me, Mr. deMontmollin.
    Mr. deMontmollin. I'm sorry. Excuse me.
    Mr. Ganske. These parents were not health care 
professionals.
    Mr. deMontmollin. I wouldn't expect them to be.
    Mr. Ganske. You wouldn't expect them to. But they talked to 
somebody at the HMO who made that medical judgment and it 
resulted in this little boy never again being able to hold in 
his hand a basketball, or touch the face of the woman he 
marries with his finger.
    And I will tell you what. If he had a finger and you 
pricked it, it would bleed. And if you are going to tell me 
that that HMO should only be liable for the cost of his 
amputations and that that is justice, let me tell you, this was 
reviewed by a judge and he thought it was atrocious.
    Now, I am going to get to the point on this. Okay. You tell 
me how we can devise language that will provide justice for 
this without having a segment that says you have to complete 
external review unless you have suffered irreparable harm or 
injury or death.
    Provide me with the language, because this is a matter of 
fundamental justice.
    Ms. Greenman. If I may, Mr. Ganske. I believe that if HMOs 
are required, in the situation of urgent care or emergency are, 
which this was, that parents took the child to the nearest 
emergency room, subsequently went through external review, you 
don't have time in that kind of emergency situation to go 
through external review, but getting recompense in court is 
little comfort to that little boy.
    Mr. Ganske. Under our bill, when it passes, these parents, 
because of the emergency, the layperson's definition of 
emergency, would have been able to take him and drop him off at 
the first hospital.
    Ms. Greenman. They would be able to go to the nearest 
hospital and it would be able to go through external review.
    Mr. Ganske. It would have prevented that.
    Ms. Greenman. In order to be reimbursed, if it is 
determined that it was, in fact, an emergency.
    Mr. Ganske. Under external review?
    Ms. Greenman. He would get care first is what I am saying.
    Mr. Ganske. Well, we certainly hope that under our bill, 
that we can prevent cases like this. But let me give you 
another example.
    The patient sustains injuries to his neck and spine from a 
motorcycle accident. He is taken to a hospital. The hospital's 
physicians recommend treatment.
    He is refused that treatment by the HMO. By the time the 
HMO finally gets around to getting an authorization, he is 
paralyzed.
    Ms. Greenman. Well, let me ask. What confused me about 
that----
    Mr. Ganske. I want to just ask something, okay? Under ERISA 
today, that employer plan is liable for nothing other than the 
cost of his treatment denied, isn't that right?
    Mr. deMontmollin. No.
    Ms. Greenman. No.
    Mr. Ganske. Well, you are liable for--yes, you may have 
ongoing medical expenses because he is now quadriplegic or 
paraplegic.
    Ms. Greenman. Let me ask a fundamental question. If this 
person came in with a broken neck and spine, why did the 
hospital refuse to deliver care while they were waiting for 
prior authorization of payment?
    Payment, this is about payment and not the delivery--there 
is a distinction between the payment and the provision of 
urgent care.
    Mr. Ganske. But the fact of the matter is that for most 
people, payment makes the determination; i.e., Mr. Plosicka, in 
Texas, whose HMO, NowCare, told him we are not going to pay for 
your hospitalization anymore, even though your physician says 
that you are suicidal and if you go home, and if the patient 
goes home, he may commit suicide.
    NowCare said, hey, you can stay in the hospital if you want 
to, but we are not going to pay for it, and for most people 
that means they can't.
    So they took him home and he drank half a gallon of 
antifreeze and he died.
    And you know what? Under Texas law, that company is liable, 
and it should be. They are liable. And this is why we need the 
enforcement, because under Texas law----
    Mr. Greenwood. The gentleman's time has expired.
    Mr. Ganske. Under Texas law, they were supposed to get an 
expedited review before they sent him home, and they just 
ignored it.
    Mr. Greenwood. The gentleman from Arizona, Mr. Shadegg, is 
recognized for 5 minutes.
    Mr. Shadegg. Thank you, Mr. Chairman. I think the last 
discussion by my colleague, Mr. Ganske, whose passion on this 
issue I admire and respect, illustrates how sad the situation 
currently is.
    The reality is we are allowing the debate over liability to 
create a situation that just happened, that he just showed you.
    I have discussed with a number of people the prospect of 
passing separately the patient protection provisions of this 
bill and putting aside the liability issues.
    The reality is, as Mr. Ganske knows, the patient 
protections provisions of his bill and of the last bill I 
dropped are virtually identical. They have been signed off by 
the patient advocacy groups and they would have prevented that 
incident.
    They would not have given that family a lawsuit, but they 
would have prevented them from even needing a lawsuit, because 
under those patient protection provisions, the law would have 
said you may go to the first emergency room that is closest to 
you and you may get the care, and that is not an issue, you do 
not have to drive 75 miles.
    And I guess one question I would put to Mr. Ganske and my 
colleagues on the other side of the aisle is if, at the end of 
this session of Congress, or, for that matter, tomorrow, we 
cannot resolve these liability issues, would they be willing to 
join me in passing the patient protection provisions, because 
those are critical.
    I don't expect an answer here today.
    Let me turn to the issue of exhaustion of administrative 
remedies and, again, put out some language.
    Dr. Palmisano, again, I want to focus on this issue, 
because I think it is one of the critical ones. The question of 
exhaustion of administrative remedies really doesn't apply in 
the case that we just heard about, because there were, of 
course, no administrative remedies that could have been 
utilized under that circumstance.
    But under either bill, any bill that is being considered 
here right now, save and except perhaps for the Senate bill 
from last year, this problem would have been solved, because 
the law would have said you get emergency are immediately.
    But your testimony, which, again, I said I agreed with most 
of it, at page 18, says twice, ``Patients must be required to 
utilize the appeals process,'' and then it goes beyond that and 
says ``Patients, therefore, should have to exhaust all,'' and 
you use the word all, ``administrative remedies before going to 
court.''
    I couldn't agree more with that language and that 
statement. I think it is critical. I think it is critical 
because of what we talked about before, and that is if you 
require all cases to go through administrative appeals, then 
you get a decision by a panel of doctors telling the plan what 
is the right care, what should be given under this 
circumstance.
    By the way, in that circumstance that we just heard about, 
if you went through an external appeal after the incident--
actually, under the law, there wouldn't have been any injury in 
that case if we had either bill now, but the panel of doctors 
could have said, yes, the care should have been delivered at 
the closest hospital.
    On the other hand, that panel of doctors could have said, 
you know what, these injuries would have been sustained no 
matter what, they would have been sustained before you got even 
to the first hospital.
    But I guess my question is in the language of the Kennedy-
Edwards bill, there are two very large exceptions. One is 
called late manifestation of injury. That is to say, you wait 
until after the time that appeal, external appeal had to be 
filed, and then you file your lawsuit.
    Now, that is a loophole that allows a trial lawyer to take 
100 percent of all cases and say I am not going through an 
external appeal, I might lose an external appeal, I am just 
going to wait until the deadline passes and I am going to file 
my lawsuit.
    So that exception consumes 100 percent of the rule.
    The second exception is called immediate and irreparable 
harm, and you talk about this in your testimony.
    At the middle of page 18, you say ``If they suffer serious 
and irreparable harm or die, they should not be required to 
exhaust administrative appeals.''
    Of course, if they suffer it, but the exception here is all 
they have to do is--all the lawyer has to do is allege it. You 
see the word there and you have the language before you that 
says if the lawyer doesn't want to go through external appeal, 
if he wants to get straight into court and exact a settlement, 
he simply alleges immediate and irreparable harm.
    My question of you is why, if you understand the importance 
of external appeal, allowing doctors to tell plans how to 
practice medicine and what care Americans ought to get, which 
doctors ought to do, they went to school to do that, why do you 
favor these two exceptions that will create complete loopholes 
to the administrative appeal process?
    Mr. Palmisano. The two exceptions, death and irreparable 
harm----
    Mr. Shadegg. It is not death and irreparable harm. It is 
irreparable----
    Mr. Palmisano. Death is one exception.
    Mr. Shadegg. That is one of them.
    Mr. Palmisano. Irreparable harm is the second exception.
    Mr. Shadegg. But the second one I asked you about is this 
one which simply says late manifestation of injury, which says, 
look, I don't want to go through external appeal because my 
lawyer told me not to, because I might lose, I am just going to 
wait until after the deadline is passed and go ahead and file 
my lawsuit.
    That exception consumes 100 percent of the cases.
    Mr. Palmisano. Certainly the plan has the right under the 
bill, the plan has the right to institute the external appeal.
    Mr. Shadegg. Actually, that language has been taken out of 
this latest version.
    Mr. Palmisano. In the latest version, it has been taken 
out. Well, again, what we are saying, any refinements that need 
to be done, in regard to your other question, we are happy to 
look at any language you have, to work with you, but what we 
want to do is we do not want people--if someone dies, we don't 
want the family to have to say, well, we are going to wait 
until external review, we are going to go forward, and they can 
bring their experts and so on.
    So in other words, would you deny someone, if, after 
external review, would you deny them the right to go to court?
    Mr. Shadegg. Actually, under the legislation I wrote, I 
would not. I would let them go to court even after external 
review, but I would give the external review panel a 
presumption, a rebuttable presumption in the court, because, 
quite frankly, I think we ought to let these decisions be 
driven by medical doctors' advice.
    That is where I come down on this issue.
    What I wouldn't do is what this legislation does, which 
creates two loopholes through which an aggressive trial lawyer, 
and I know good ones and I know bad ones, and the good ones 
would never pursue those loopholes, because they really care 
about the people they are representing and they would say go 
through external review, get the care.
    But there are, sadly, in that profession, like there are 
probably in every profession, some people that work at the 
fringes and they will take those two loopholes that are in the 
current Edwards-Kennedy bill and they will file a lawsuit in 
100 percent of the cases and their goal won't be care and their 
goal won't be a jury verdict, because they know they can't ever 
prove these points.
    Their goal will be to extort money and they extort that 
money and drive up the cost of health care for reasons that 
have nothing to do with caring for patients.
    Mr. Greenwood. The gentleman's time has expired. The Chair, 
sensing the eagerness of the gentleman to inquire again, erred 
and recognized him prematurely and to make up for that, I will 
recognize the gentleman from Texas for a second round, and then 
Mr. Buyer.
    Mr. Buyer. I have not had a first round.
    Mr. Greenwood. Mr. Buyer, would you be willing to let Mr. 
Green go, and then you will close?
    Mr. Buyer. Fine.
    Mr. Greenwood. Thank you.
    Mr. Green. Thank you, Mr. Chairman.
    Mr. Shadegg. Point of order. Mr. Chairman, is there going 
to be a chance for a third round after Mr. Buyer?
    Mr. Greenwood. Perhaps informally, Mr. Shadegg. We will 
consult with the Democrats and see if that is a possibility.
    Mr. Green. Thank you, Mr. Chairman, and I won't take any 
more than my 5 minutes.
    I, again, appreciate my colleague from Arizona's line of 
questioning about certain trial lawyers would file lawsuits. 
That goes against the testimony you heard that it is organized 
in Texas and organizing trial lawyers anywhere is like herding 
cats, I think. None of them fit in there.
    So I think you read a lot into the Texas trial bar that I 
haven't seen in my 25 years.
    But let me ask a question of Ms. Rosenbaum. Ms. Rosenbaum, 
health plans and even employers today and we have heard it 
argued that they aren't making medical decisions, they are 
making coverage decisions, and they argue that they are not 
acting like doctors, but they are administering the plan.
    It seems to me that that may be an artificial distinction 
that plans are using to try to shield themselves from 
liability.
    In your testimony, you discussed how the traditional 
concept of coverage can no longer be separated from decisions 
about care itself in a managed care environment.
    How can managed care blur the line between coverage and 
treatment or care?
    Ms. Rosenbaum. When an employer decides to offer a managed 
care product, and I use that phrase broadly, there are a lot of 
different kinds of managed care products, but what 
distinguishes a managed care product from a traditional or 
conventional insurance product is that if you look at the 
contract, which the center which I direct studies, we have 
studied the contracts for about a decade now, the 
distinguishing feature is that it is the sale of health care 
and, in fact, in the leading case, the leading managed care 
liability case, which was sort of the fundamental building 
block on which most managed care law is built today, a case 
called Boyd v. Albert Einstein, the court made it very clear 
this was not an ERISA case and it was a straight liability 
case.
    And the court made very clear that the reason that an HMO, 
unlike a conventional insurer, can be liable for lapses in 
medical judgment is because it sells health care.
    Now, it is very true that there are--and this is exactly 
what the Supreme Court was trying to drive at in Pegram.
    There are certainly some cases that would still fall on 
what the court calls pure coverage side of the line. There is 
no medical judgment involved at all in deciding the issue.
    But as a unanimous court pointed out, a lot of what an HMO 
does or managed care organization does, because it is a hybrid 
creature, because it is simply a modern version of a health 
care provider, from the law's point of view, it makes treatment 
decision and it allocates health care resources to its members 
based on those decisions.
    If you look at the writings of people like Dr. David Eddy, 
who are leading writers on managed care, they understand that 
what an HMO does is it allocates the resources it has to make 
the best possible care choices it can for its patients.
    Now, I know that the industry would very much like for 
footnote seven, I believe it is, to swallow up the entire main 
holding in the Pegram case.
    There was a footnote, an aside by the court, saying, look, 
we are not passing on whether there are certain kinds of pure 
cases left that fall outside of the reach of ERISA. We know 
there are cases that are still ERISA cases.
    But it is simply contrary to the case to continue to deny 
that what the court did was to say that the old way we have of 
thinking about medical care is gone in managed care, because we 
are buying and selling medical care now and we are ensuring 
what we buy and sell.
    And so that changes the whole way we approach these 
liability questions and that is why the court said there is 
simply no coverage issue left in these medical judgment cases. 
They are professional liability cases.
    The court could have said, and it didn't, that our holding 
today only applies to the personal treating physician of the 
patient.
    It didn't. It simply said that when physicians who work for 
HMOs make medical decisions, what they are doing is making 
decisions about treatment.
    It is inevitably going to take a while for that kind of 
change and thinking to filter down.
    But you saw the first real sign of this, actually, not in 
the Corporate Health Case, but in the LaZorko case, which came 
out of the third circuit a few months ago, in which a physician 
said to a woman, it was very much like the Texas case, ``You 
can't have any more mental health treatment. I am not allowing 
you to have any more treatment,'' and she committed suicide, 
and the court said, citing Pegram, this is a medical judgment 
case. It doesn't belong in Federal court.
    And that is why I think the only answer here is to send the 
cases back to State court and State law.
    Mr. Greenwood. The gentleman's time has expired. The Chair 
thanks the gentleman from Indiana for his forbearance, and 
recognizes him for 5 minutes.
    Mr. Buyer. Thank you. I read the testimony last night and I 
want to associate myself with the comment by the counsel from 
Honeywell, that the best protection for plan participants is a 
strong claims review process, not litigation and tort damages.
    There are a lot of employers who self-insure and the last 
thing we want to do is grow a population in the uninsured.
    There are many corporations in Indiana who self-insure, I 
am very concerned about them.
    And I would like to yield the balance of my time to Mr. 
Shadegg.
    Mr. Shadegg. Thank you, Mr. Buyer. Mr. deMontmollin, let me 
start. Have you had a chance to read the language of the 
Kennedy-Edwards bill?
    Mr. deMontmollin. Yes, I have.
    Mr. Shadegg. Would you agree that the exceptions that I 
have pointed out to exhaustion consume the rule?
    Mr. deMontmollin. There is no question about it.
    Mr. Shadegg. Would you agree with me that they consume it 
200 percent of the time?
    Mr. deMontmollin. Yes. To that end, because I am the 
general counsel of a health plan and because I have done for--
after I was an assistant U.S. Attorney, medical malpractice 
defense work for a long period of time, the problem with this 
kind of language is there is no question but that the thin 
liability case that heretofore would not be filed will be filed 
in this scenario and there won't be an effort to get to the 
right decision from a medical standpoint, but rather it will go 
directly into court.
    Mr. Shadegg. Ms. Greenman, have you read the language of 
the Kennedy bill?
    Ms. Greenman. Yes, I have.
    Mr. Shadegg. And would you agree that the exceptions 
consume the rule?
    Ms. Greenman. I would. I would also suggest that, to Mr. 
Buyer's comment, that the likely result of employers exiting 
their role in self-insured plans would, because of these 
exceptions, swallow up the rule or the intended exclusion, 
would be to have--to revert to the kind of cookbook lists that 
we had 25 years ago, where there is a list of covered 
procedures, there is a list of fees that are reasonable and 
customary in a given location, and you eliminate the exercise 
of medical judgment or discretion in making coverage 
determinations.
    Yes, there are gray areas. Yes, there are knotty problems 
that have to be worked through. But I think a formulaic 
approach, which will avoid liability and is the most likely 
result, is not the right answer for consumers or patients.
    Mr. Shadegg. Ms. Rosenbaum, I would like to ask you kind of 
a final question that I haven't addressed, which is the 
question of the state-Federal court split.
    In his testimony, Dr. Palmisano says, ``When a health plan 
intervenes in the medical decisionmaking process and imposes 
its medical judgment on the patient, the plan is engaging in 
the practice of medicine and should be held accountable under 
State law.''
    I absolutely agree with that in concept. I think when plans 
decide to become doctors, they ought to be held liable.
    I don't necessarily agree with your reading of Pegram. 
There is a split going on here.
    On the one hand, you had the Corporate Health Insurance 
case, which, in your testimony, you say really doesn't analyze 
this issue properly, and that might be a valid point.
    Then you have the LaZorko case, which clearly has decided 
this issue in the third circuit and says, yes, these are state-
based claims.
    I want to ask you a question that is going to require you 
to stop and reflect for a moment.
    The trial lawyers that I have talked to have said with 
regard to this emerging exception for so-called medical 
malpractice, which has been growing, but in LaZorko, 
dramatically following Pegram, one reading of Pegram.
    Trial lawyers that I talked to, I went to and said, look, 
doesn't this solve the problem; can't we now bring these HMOs 
to the bar and get at them when they make medical decisions and 
harm people.
    They have come back to me and said no. All of you make the 
point that this is the trend in the law and that we are going 
there, which raises the question whether we need a bill. But 
the trial lawyers I talk to say, ``Look, Congressman, to prove 
a medical malpractice case, you have to bring in multiple 
expert witnesses. You have to establish that the plan engaged 
in the practice of medicine. You have to establish that there 
is a standard of care. You have to establish that they breached 
that standard of care, and you have to establish that as a 
proximate result of that breach, there has been damage.''
    And they say, ``Congressman, that is an incredibly 
complicated and very expensive lawsuit to bring.''
    And what they say is ``I want a simple lawsuit for breach 
of the duty to provide the care, denial of a benefit. I want 
the same bad faith lawsuit. You promised to insure me. You 
didn't deliver the benefit. I am suing you for bad faith, 
hey.'' And they want that simple, straightforward breach of 
contract lawsuit, not this complicated medical malpractice 
lawsuit.
    And the concern I have is if we allow this to sort itself 
out, at least until the Supreme Court says the fifth circuit is 
right or the third circuit is right, if we allow to sort this 
out and all cases have to be med mal cases, aren't we going to 
drive doctors--one of the problems in these med mal cases is 
that the insurance company, as soon as it has been sued, or the 
HMO, as soon as it has been sued for malpractice, it names as 
the defendant the doctor himself.
    And my trial lawyers say now we have the doctor as a 
defendant in the case when we wanted the doctor as the 
patient's witness, the patient's expert in the case.
    My question to you is have you thought that through and do 
you have the same concern I have of converting all these simple 
breach of contract cases into med mal cases, where only the 
very expenses ones will get compensated and the little ones 
won't?
    Ms. Rosenbaum. If I understand the question, you are asking 
whether in order to aid consumers at this point, it would not 
be better actual to hold on to the Federal tort potentially to 
the concept of a bad faith breach of contract or wrongful 
denial of contractual benefits.
    Actually, I would say, from my reading of the bad faith 
breach of contract cases, that they are very difficult to 
prove, because you have to demonstrate that either the 
defendant acted with flagrant disregard for the terms of the 
contract or with actual knowledge of an intentional withholding 
of a covered benefit.
    Mr. Shadegg. To that point, all of the bills that we have 
been writing use the mere negligence standard. So you really 
don't have to establish bad faith.
    Ms. Rosenbaum. Even if you use a mere negligence standard, 
you are actually, I think, not that far removed from a medical 
tort. That is, you are going to have to demonstrate that 
somebody failed to use due care.
    If you look at the leading case in the field, really, which 
is the Wickline case and you look at the standard that the 
court set for negligent utilization review, or the Bedrick 
case, which is one of the leading cases on medical necessity 
denials of coverage, you look at the proof that a lawyer had to 
mount to win the case for Ethan Bedrick and it was very 
similar.
    Once you are into medical judgment you have got to 
demonstrate a standard, a duty, a breach, and with a--and, 
therefore, I don't know that framing the issue as a contractual 
issue, if the contract is for medical care, gets you out of the 
box you are in.
    So the issue then is whether Congress, in the middle of 
this haziness, wants to try it is hand at a contractual medical 
care standard cause of action, and run the risk of yet sending 
the court's off in another direction as opposed to staying with 
where the Supreme Court set us off now a year ago, seeing where 
this plays out.
    Mr. Greenwood. The gentleman's time has expired. The Chair 
recognizes the gentleman from Kentucky, Mr. Whitfield, for 5 
minutes.
    Mr. Whitfield. Thank you, Mr. Chairman. I'm sorry that I 
was late, and I was particularly interested in the liability 
issue, and because I don't know what questions have been asked, 
I am just going to ask a few simple questions and hope that you 
all bear with me.
    Dr. Palmisano, I just want to make sure that I understand 
what the position is of the AMA at this point.
    It is my understanding that if it is determined to be a 
medical decision under your proposal, the lawsuit would be in 
the State court.
    If it is determined to be a non-medical decision or a 
fiduciary decision, then it would be in Federal court. And that 
you have listed three or four safe harbors that you feel like 
would provide protection for employers.
    Is that basically correct?
    Mr. Palmisano. That is correct, sir.
    Mr. Whitfield. Where are you all on putting a cap on 
punitive damages, non-economic damages, some of those issues?
    Mr. Palmisano. On page 19 of the testimony that we handed 
in, we are saying that an acceptable patient protection bill 
should, therefore, include meaningful and reasonable limits on 
punitive damage awards.
    Mr. Whitfield. So you all are not supporting, at this 
point, any cap on non-economic damages.
    Mr. Palmisano. No, we are not. We are not. But you see, the 
reason I hesitate, if this becomes a State action, then it goes 
to the law of the State.
    In Louisiana, for instance, there is a cap. In Louisiana, 
there are no punitive damages, except for a death caused by 
drunk driving or a toxic tort. In California, there is a cap of 
$250,000 on non-economic.
    But it would go to the State, whatever the State law is on 
a limitation of damages.
    Mr. Whitfield. But on the Federal claim, would you support 
a cap on punitive and non-economic?
    Mr. Palmisano. The American Medical Association supports a 
cap on punitive damages and we are open to discussions on any 
other damages. But we think it is absolutely critical that the 
insurance companies, the managed care companies also be in the 
same position as everyone else in the United States.
    It has to be under the laws and subject to suits. And some 
of the discussion that you did miss about some of the problems 
that some of your colleagues, one of your colleagues has with 
this particular bill that is up on the podium right there, 
remember that the courts have the responsibility under Federal 
law and the Rule 11 and the States have similar laws.
    If something doesn't have merit, it is a frivolous suit, 
then they can award punishment damages for that. Also, you have 
to have a reason to stay in court. So if somebody brings a 
completely frivolous case to court, you have to have an expert 
to sustain. Otherwise, you are going to be sent out on a 
summary judgment that you don't have an expert to support your 
view.
    Mr. Whitfield. And who is it that is from George Washington 
University? I'm not sure I remember the name of the case, but 
the most recent Supreme Court decision, that began with a P.
    Ms. Rosenbaum. Pegram.
    Mr. Whitfield. Pegram. Your understanding of the ruling of 
that case is what?
    Ms. Rosenbaum. My understanding of the Pegram case is that 
it is a clarification of what--Pegram does two things. One is 
make clear that managed care is a perfectly legal form of 
employee benefit to give, and the other is that it makes clear 
what is and is not an ERISA fiduciary decision.
    It is the ERISA fiduciary decisions that fall within the 
remedies that ERISA gives. Those are the Federal cases. And 
what the court said basically is that when HMOs, through their 
physicians, make mixed decisions, those are not fiduciary 
decisions. Those are simple medical judgment decisions and they 
belong under State law.
    Mr. Whitfield. Under that case, would it be possible for 
employers to make mixed decisions?
    Ms. Rosenbaum. Would it be impossible?
    Mr. Whitfield. No. Would it be possible. Well, my 
understanding of the way most employer benefit plans work is 
that an employer generally doesn't hire its own physicians. 
There may be a few employers who literally run the equivalent 
of their own HMO. They literally have physicians on staff or 
under contract and they administer their own plans to a literal 
degree.
    Most employers actually are in a position of, as Mr. 
Greenman pointed out, of reviewing the treatment decisions that 
were made by the HMO who either administers their plan or who 
gives them an insured plan.
    Mr. Whitfield. Well, I spent a number of years with CSX 
Corporation, which is a railroad holding company, and it was 
not my responsibility to deal with managed are plans that were 
available, but I do know that the department responsible was on 
the phone a lot with the company that they had contracted to 
provide the coverage and there were decisions going back and 
forth and discussions and everything else.
    So I am assuming that you would agree that if you wanted to 
protect employers as much as possible, not just because they 
are employers, but because you do not want to do anything that 
would encourage them to drop plans or to change plans and 
create more uninsured.
    Ms. Rosenbaum. Absolutely not.
    Mr. Whitfield. You do agree that this area of trying to 
define specifically what is a medical decision and what is not 
is a difficult issue, I am assuming.
    Ms. Rosenbaum. Yes, although it is in this regard that I 
found Mr. Shadegg's proposal most interesting, because actually 
the effect of directed decisionmaking would be to draw quite a 
bright line between what is the ERISA fiduciary and what is, in 
fact, a medical decision that does not fall within the ambit or 
ERISA.
    I think that that is a very important point that bears 
further analysis because it might, in fact, add the very thing 
that you would need to be able to recognize very quickly when a 
decision is a medical decision and when the decision is simply 
the decision that goes to the administration of the non-medical 
part of the employee benefit plan.
    Mr. Whitfield. But you feel like that his proposal, which I 
didn't hear, is certainly worth exploring.
    Ms. Rosenbaum. Certainly worth exploring.
    Mr. Whitfield. May I just ask one other question? Then I 
will close out.
    On the safe harbor conditions that you all proposed at the 
AMA, were they significantly the same as what was in the 
Ganske-Dingell bill, as far as you know? The safe harbor.
    Mr. Palmisano. The answer is yes.
    Mr. Whitfield. Thank you.
    Mr. Greenwood. The gentleman's time has expired, as has 
this round of questioning. The committee thanks the witnesses 
for their testimony.
    The Chair asks unanimous consent that members may insert 
additional remarks and extraneous materials into the record of 
the hearing.
    The Chair intends to hold the record open for written 
questions to the witnesses and their responses for 30 days.
    The hearing is adjourned.
    [Whereupon, at 2:31 p.m., the subcommittee was adjourned.]
    [Additional material submitted for the record follows:]

                   The George Washington University
                                             Medical Center
                                                     march 22, 2001

The Honorable John B. Shadegg
United States House of Representatives
432 Cannon House Office Building
Washington, D.C. 20515-0304
    Dear Representative Shadegg;
    It was, as always, a pleasure to appear before you at last week's 
hearing. You asked me to respond to you in writing regarding your 
proposal to allow employers and other entities that maintain ERISA 
group benefit plans to enter into agreements with ``directed decision-
makers'' for purposes of liability for injuries under health benefit 
plans.
    Obviously it is difficult to answer you without more information, 
and I would need to study a written proposal closely in order to be 
able to give you a solid response. However, my immediate reaction is 
that I find the idea intriguing and worth pursuing. There may indeed be 
valid reasons where injuries arising from ERISA health benefit plans 
are concerned to permit the use of designated decision-makers.
    I look forward to learning more about your proposal.
            Sincerely,
                                       Sara Rosenbaum, J.D.
           Harold and Jane Hirsh Professor of Health Law and Policy
cc: The Hon. John D. Dingell; The Hon. Mike Bilirakis, Chair, 
Subcommittee on Health; The Hon. Sherrod Brown; The Hon. Joe Barton; 
The Hon. Fred Upton; The Hon. James C. Greenwood; The Hon. Nathan Deal; 
The Hon. Richard Burr; The Hon. Ed Whitfield; The Hon. Greg Ganske; The 
Hon. Charlie Norwood; The Hon. Barbara Cubin; The Hon. Heather Wilson; 
The Hon. John Shadegg; The Hon. Charles W. Pickering; The Hon. Ed. 
Bryant; The Hon. Robert Ehrlich, Jr.; The Hon. Steve Buyer; The Hon. 
Joseph Pitts; The Hon. Henry A. Waxman; The Hon. Ted Strickland; The 
Hon. Tom Barrett; The Hon. Lois Capps; The Hon. Ralph Hall; The Hon. 
Edolphus Towns; The Hon. Frank Pallone, Jr.; The Hon. Peter Deutsch; 
The Hon. Anna G. Eshoo; The Hon. Bart Stupak; The Hon. Eliot Engel; The 
Hon. Albert R. Wynn; The Hon. Gene Green
                                 ______
                                 
                   The George Washington University
                                             Medical Center
                                                     March 22, 2001
The Honorable W. J. ``Billy'' Tauzin
Chairman
Committee on Energy and Commerce
United States House of Representatives
2183 Rayburn House Office Building
Washington, D.C. 20515-1803
    Dear Mr. Chairman;
    It was an honor to have been invited to testify before your 
Committee last week. This letter provides the analysis you requested 
regarding Footnote 9 in Pegram v Herdrich, 120 S. Ct. 2143, 2154.
    Ever since Pegram was decided, the managed care industry has 
invested a great deal of energy touting Footnote 9 as an important 
limit on Pegram's reach. There are indeed rare instances in which a 
footnote in a Supreme Court decision rises to a level of importance 
that literally transcends the decision itself. Perhaps the most famous 
example of this is the Court's ``discrete and insular minorities'' 
footnote in U.S. v Carolene Products Inc. 304 U.S. 144, 154 (fn. 4) 
(1938). This footnote, which was remembered long after the decision, 
presaged much of the Court's later work in the area of civil rights 
law.
    The Pegram footnote in question is hardly the type of note that 
students decades from now will be studying. Indeed, the very wording 
and placement of Footnote 9 in Pegram underscores the Court's view 
regarding the necessity under ERISA of separating claims that arise 
from the exercise of medical judgement by managed care physicians (not 
fiduciary acts) from those that arise from non-medical acts of plan 
administration (fiduciary acts).
    In my written testimony before the Subcommittee, I presented a 
lengthy excerpt from the main text of Pegram itself. In the opinion 
itself, Footnote 9 essentially falls within this excerpt. The excerpt 
concerns the Court's separation of ERISA-governed fiduciary decisions 
from medical decisions that lie beyond the limits of ERISA. As the 
excerpted language underscores, the decision draws a distinction 
between ``pure eligibility'' decisions that fall into the area of non-
medical plan administration from those decisions that are medical and 
relate to the medical operation of managed care. Only the former 
decisions, according to the Court, are subject to ERISA's exclusive 
remedies. There are other ``mixed eligibility'' decisions made by plan 
physicians during the course of treatment, that relate to the standard 
of care that a patient will receive from the managed care company. The 
Court was concerned that these medical decisions not be confused with 
``pure'' decisions and classified as decisions subject to the reach of 
ERISA.
    In attempting to illustrate which types of decisions fall where, 
the Court readily acknowledged (as I likewise did my testimony) that 
there certainly are limits to what can be classified as a ``mixed 
eligibility'' decision. This is all that Footnote 9 says and this is 
why the footnote is placed where it is, i.e., as a general caveat to 
the Court's concept of where ERISA's reach ends.
    No one disputes that at some point a decision becomes ``pure.'' The 
Court even supplies us with an example of a ``pure'' decision. Pegram, 
120 S.Ct. at 2154 (whether in a case of appendicitis, where no medical 
facts or judgement is in play, a certain procedure is covered under the 
terms of the contract.) Furthermore, the placement of footnote 9 
(squarely in the middle of the Court's discussion as to why the Pegram 
case in fact represents just such an example of a mixed decision) 
serves to make the ``mixed eligibility'' analysis stand out even more 
clearly.
    I did indeed consider Footnote 9 carefully when I originally read 
the case and concluded as I have indicated that it simply states the 
obvious. In its wording and its placement, Footnote 9 seems to me to 
constitute no more than a restatement of the fact that when medical 
judgement, medical fact, and medical treatment are not on the line, 
ERISA remedies should apply.
    I thank you for this opportunity to follow up. Please do not 
hesitate to contact me if I can be of further assistance.
            Sincerely,
                                       Sara Rosenbaum, J.D.
           Harold and Jane Hirsh Professor of Health Law and Policy
cc: The Hon. John D. Dingell; The Hon. Mike Bilirakis, Chair, 
SubCommittee on Health; The Hon. Sherrod Brown; The Hon. Joe Barton; 
The Hon. Fred Upton; The Hon. James C. Greenwood; The Hon. Nathan Deal; 
The Hon. Richard Burr; The Hon. Ed Whitfield; The Hon. Greg Ganske; The 
Hon. Charlie Norwood; The Hon. Barbara Cubin; The Hon. Heather Wilson; 
The Hon. John Shadegg; The Hon. Charles W. Pickering; The Hon. Ed. 
Bryant; The Hon. Robert Ehrlich, Jr.; The Hon. Steve Buyer; The Hon. 
Joseph Pitts; The Hon. Henry A. Waxman; The Hon. Ted Strickland; The 
Hon. Tom Barrett; The Hon. Lois Capps; The Hon. Ralph Hall; The Hon. 
Edolphus Towns; The Hon. Frank Pallone, Jr.; The Hon. Peter Deutsch; 
The Hon. Anna G. Eshoo; The Hon.Bart Stupak; The Hon. Eliot Engel; The 
Hon. Albert R. Wynn; The Hon. Gene Green
                                 ______
                                 
                                  AvMed Health Plan
                                       Gainesville, Florida
                                                      April 9, 2001
The Honorable Michael Bilirakis
Chairman, Subcommittee on Health
United States House of Representatives
2269 Rayburn House Office Building
Washington, DC 20515
    Dear Chairman Bilirakis: Thank you for the opportunity to testify 
before the Subcommittee on Health hearing on March 15, 2001 entitled, 
``A Smarter Health Care Partnership for American Families: Making 
Federal and State Roles in Managed Care Regulation and Liability Work 
for Accountable and Affordable Health Care Coverage.'' Per your 
request, I have attached the written responses to your follow-up 
questions from the hearing.
    Again, thank you for the invitation to testify before the 
Subcommittee on Health and please do not hesitate to contact me should 
you need further information on these issues or any other health issue 
that may come before Congress.
            Sincerely,
                                    Stephen J. deMontmollin
              Vice President and General Counsel, AvMed Health Plan
Attachment
                        Responses for the Record
    Question (1) All of the managed care bills involve more Federal 
government regulation. They may raise the cost of health care and will 
allow for more litigation. Many of the patient protections appear to be 
common-sense and the external appeals process, at least, seems to have 
good consensus as an alternative to litigation and consumer 
frustration. A weakening economy increases concerns over new government 
programs and increased costs. What could be the result if we do not 
have carefully-crafted legislation that minimizes these potential 
problems?
    Legislation that increases costs and expands employer and health 
plan liability will produce serious and adverse consequences for 
working families. Cost increases generated by legislation will add to 
the number of uninsured workers. Based on well-documented historical 
patterns, it is evident that this loss of coverage will be concentrated 
among low income workers. (See R. Kronick and T. Gilmer, ``Explaining 
the Decline in Health Insurance Coverage, 1979-1995,'' Health Affairs, 
March/April 1999)
    In some instances, employers will be forced to stop offering 
coverage altogether, due to cost increases and/or the risk of 
multimillion dollar verdicts against them in connection with their 
activities administering the health benefits plans that they 
voluntarily offer. In other instances, employers will pass the cost 
increases through to employees in the form of higher premiums and cost-
sharing or reduced benefits. Already, approximately 10 million 
Americans are offered employer-sponsored health coverage but decline it 
and are left uninsured. These are predominantly lower wage workers who 
find it difficult to pay their share of premiums; with expanded 
liability forcing employers to increase employees' share of premiums, 
many more workers and their family members will decline coverage 
offered to them and be left uninsured. (P. Cooper and B. S. Schone, 
``More Offers, Fewer Takers For Employment-Based Health Insurance: 1987 
and 1996,'' Health Affairs, Nov/Dec 1997)
    Notably, there would be no offsetting benefits to adopting policies 
that increase costs and expand liability. There is no evidence that 
expanded liability would in any way improve the quality of or access to 
care; to the contrary, physicians report that the current liability 
systems produces lower quality care and reduces access to care.
    Question (2) There has been a lot of talk about how some of the 
current bills would really just codify existing court interpretations, 
such as that in the recent Supreme Court decision in Pegram, or 
existing state laws, such as those in Texas. Can you address how 
similar or dissimilar these proposals are to these existing laws?
    Liability under current proposals--such as the Ganske-Dingell 
bill--is very different and much more expansive than liability under 
either the Texas law and the Pegram decision.
    Texas liability does not apply to health plan coverage denials and 
only pertains to medical malpractice--where a physician was negligent 
in delivering medical services and the health plan is vicariously 
liable for this negligence. According to the 5th Circuit Court 
decision,
        [w]hen the liability provisions are read together, they impose 
        liability for a limited universe of events. The provisions do 
        not encompass claims based on a managed care entity's denial of 
        coverage for a medical service recommended by the treating 
        physician: that dispute is one over coverage, specifically 
        excluded by the Act. (emphasis added) Rather, the Act would 
        allow suit for claims that a treating physician was negligent 
        in delivering medical services, and it imposes vicarious 
        liability on managed care entities for that negligence.
    Liability under Pegram pertains only to treating physicians and 
medical malpractice. Specifically, Pegram applies to situations where a 
treating physician makes a treatment decision that was both negligent 
and had implications for ``eligibility.''
    Unlike liability under the Texas law and Pegram, the proposed 
expansion of liability under the Ganske-Dingell bill would allow state 
and federal law claims for a much broader scope of issues, including 
health plan coverage denials and virtually all administrative duties 
under the plan.
    For further discussion on liability under Pegram, see Pegram's 
Significance for Managed Health Care by Louis Saccoccio, General 
Counsel for AAHP at Appendix I.
    Question (3) Can you provide some of the most common reasons why 
health plan coverage decisions sometimes take longer than some of us 
think they should?
    Nearly all coverage decisions are made quite rapidly. It is 
important to recognize that health plans are required to make decisions 
within timeframes specified by federal and state law.
    One reason why some coverage decisions may take longer than 
expected is that plans are not always provided with all the information 
necessary from providers to make coverage decisions. A significant 
problem with the way the Ganske-Dingell bill is structured is it holds 
plans liable for delays that commonly are due to physicians not getting 
plans the information they need. There should be an affirmative 
obligation on physicians to give a plan the information necessary for 
the plan to make a coverage decision. This will protect patients by 
ensuring that plans have the information needed to make decisions as 
quickly as possible.
    This is an issue that is not particular to commercial plans. The 
U.S. Department of Health and Human Services' Office of the Inspector 
General recently found that improper Medicare payments cost the 
government $13.5 billion in 1999. One of the top reasons for improper 
payment was due to providers submitting insufficient documentation or 
no documentation to support the services for which they were billing 
Medicare.
    A second reason why coverage decisions may take longer than 
expected is that sometimes physicians and patients believe the 
patients' medical conditions warrant expedited decisions, yet the 
physicians do not request that decisions be made in accelerated 
timeframes. Virtually all of the state laws relating to appeals provide 
for accelerated timeframes in urgent circumstances, yet physicians do 
not always request that such decisions be made under the accelerated 
timeframes. There should be an obligation on the physicians to let the 
plans know when they believe coverage decisions should be made under 
the expedited timeframes. That will eliminate any potential for delay 
in coverage decisions.
    Question (4) What do you believe the impact of expanded liability 
will have on quality of care?
    Based on the experience with the current liability system that 
applies to physicians, it is clear that expanded health plan liability 
will diminish the quality of medical care. Physicians recognize that 
the current malpractice system does not improve quality of care. In a 
recent national survey of physicians, 78% of doctors say the threat of 
malpractice lawsuits does not make them deliver better quality care. 
(Ayres, McHenry & Associates, Inc., National Survey of Physicians 
Regarding Liability Issues, prepared for AAHP, Feb. 2001)
    Additionally, it is widely agreed that malpractice liability 
inhibits error identification and improvements in patient safety and 
quality. Over half of physicians say that the current medical liability 
system makes physicians less willing to report medical errors, 
according to the same national survey. In 1998, the AMA House of 
Delegates directed the AMA to oppose a reporting system which would 
have required notifying the Joint Commission on Accreditation of Health 
Care Organizations (JCAHO) of all unexpected occurrences that resulted, 
or could have resulted in a patient's death or serious injury. 
According to a headline in the AMA publication, American Medical News, 
on this issue, ``[l]iability concerns override patient safety in house 
[of delegates] debate on new Joint Commission reporting requirements.'' 
Moreover, President Clinton's Advisory Commission on Consumer 
Protection and Quality in the Health Care Industry, referring to the 
current malpractice system, has said that ``perhaps the most 
significant deterrent to the identification and reduction of errors 
[i.e., treatment-related injuries] is the threat of costly, adversarial 
malpractice litigation.'' It is also widely agreed that malpractice 
liability causes physicians to practice defensive medicine.
    These negative influences on quality and patient safety would only 
be compounded by expanded liability for health plans. For instance, 
just as the current system encourages physicians to practice 
``defensive medicine,'' a system that expands health plan liability 
will force plans to conduct ``defensive utilization management'' and 
provide coverage for unnecessary services that do not benefit patients 
in order to avoid costly litigation.
    Question (5) What do you think the impact will be of expanded 
liability on the cost of health insurance?
    Again, looking to the experience with the current medical 
malpractice system, it is clear that expanded health plan liability 
will substantially add to health care costs. Nearly all doctors--95%--
believe that the current medical liability system has raised costs, 
according to the national survey of physicians. Of these doctors, 73% 
said that the system substantially raises costs.
    Additionally, analyses have found that the expansion of health plan 
liability will have a significant cost impact. The Barents Group has 
estimated that expanded liability will result in cost increases of 
between 2.7 and 8.6% nationally. State analyses reflect similar 
estimates. The state of Minnesota estimated that health plan liability 
would increase premiums by 5%. Most recently, in Arizona, health plan 
premiums are increasing 4-6% in response to a new law that expands 
health plan liability.
    The Congressional Budget Office (CBO) estimated the cost of 
expanded health plan liability as part of S. 6, the Patients' Bill of 
Rights Act of 1999, legislation introduced and considered in the 106th 
Congress. However, CBO's cost estimate appears to consider only a 
narrow portion of the liability expansion--coverage denials--
contemplated by the Ganske-Dingell bill. This bill creates liability in 
situations that extend far beyond coverage denials. For example, the 
bill creates a basis for liability caused by an alleged delay in 
approving coverage, even when the plan decision is made within 
specified deadlines. The Ganske-Dingell proposal also creates liability 
for failure to perform any other duty under the plan, which encompasses 
any alleged violation of the bill's scores of new provisions and 
alleged violations of previously enacted statutes, such as COBRA and 
HIPAA.
    Question (6) According to a recently issued report by HCFA (March 
12, 2001), the US spent more than $1.2 trillion dollars on health care 
in 1999, 5.6% more than in 1998. In this environment, we need to 
carefully evaluate enacting legislation that will further add to this 
burden and drive up costs. What concerns do you have with respect to 
additional liability provisions and health care costs?
    See answers to questions 1 and 5 above.
    Question (7) Today, when consumers have problems with their health 
plans, they may call either their state or the Federal Department of 
Labor. Various legislative proposals in Congress have attempted to 
craft changes to this structure which would subject certain health 
plans to dual federal and state regulation. This arrangement would not 
only seem to add to the cost of coverage, but create confusion for 
patients about who to call for help when necessary. Is this a fair 
assumption?
    Dual regulation will cause confusion for consumers, health plans 
and regulators. Some legislative proposals would simultaneously apply 
differing federal and state standards to health plans. Given the 
extraordinary breadth, complexity and detail of the federal proposals 
and the layering of these proposals on top of a large body of state 
statutes and regulation, it often will be difficult to tell which 
standard applies to a given set of circumstances. This confusion will 
apply to consumers seeking help, regulators implementing standards and 
health plans working to adhere to those standards. Moreover, health 
plans required to adhere to differing standards covering the same 
subject matter will be forced to increase resources devoted to 
administrative costs and will find it difficult to adopt consistent 
policies. For instance, some proposals now being considered appear to 
permit both federal and state external reviews of the same claim. Plans 
receiving differing decisions from each review will find it impossible 
to adopt consistent coverage policies.
    Question (8) Have lawsuits been a successful tool in achieving 
health care quality for consumers?
    No. As noted in the answer to question #4, lawsuits have not been a 
successful tool in achieving health care quality for consumers in the 
medical malpractice context. In addition to recognizing that the 
current malpractice system does not improve quality of care, numerous 
interested parties--including physicians--have noted that the current 
malpractice liability system discourages the identification and 
reporting of mistakes, allowing quality problems to perpetuate. For 
example, last year, the AMA testified that ``the very fear of existing 
legal liability or its misapplication are the greatest hurdles to 
pioneering patient safety efforts . . . If the fear of litigation 
continues to pervade efforts to improve patient safety and quality, our 
transformation into a culture of safety on behalf of our patients may 
never be fully realized.''
    As noted before, according to a recent national study, 92% of 
physicians think the threat of a liability suit has increased defensive 
medicine. Expanding health plan liability will only lead to reduced 
quality of care by promoting ``defensive utilization management'' by 
health plans in an effort to avoid lawsuits.
    Question (9) What other mechanisms are available that serves to 
measure health plan quality?
    Currently, there are numerous mechanisms which serve to measure 
health plan quality, including state and federal quality assurance 
requirements, accreditation, and quality measure reporting, such as 
HEDIS reporting.
    State laws: States generally require an HMO to file a description 
of its internal quality assurance (QA) program and activities before 
obtaining a state license. Regulators review the description and, 
during site reviews, interview staff and check records to assure that 
the description is accurate. Some states, such as Pennsylvania, Iowa, 
and Kansas, even require HMOs to obtain periodic accreditation by an 
independent external accrediting body.
    Under the NAIC HMO Model Act, which has served as the basis for 
many state laws, HMOs are required to establish procedures to assure 
that services meet reasonable standards of quality of care consistent 
with prevailing professionally recognized standards of medical 
practice. These procedures must include an internal program to monitor 
and evaluate the quality of care provided. At a minimum, this program 
must include a written statement of goals and objectives, a written 
quality assurance plan specifying who within the HMO is responsible for 
implementing the plan, systems for ongoing and focused evaluations, a 
system for credentialing and peer review of providers, and processes to 
initiate corrective action when deficiencies are identified. In 
addition, HMOs are required to record formal QA activities, develop an 
adequate patient record system, make clinical records available to 
determine compliance with QA standards, and report QA program 
activities to the HMO's board, providers, and staff periodically.
    Reflecting growing state interest in quality-related issues, the 
NAIC also has adopted three new model acts dealing in greater 
specificity with standards for quality assurance, utilization review, 
and credentialing activities for all types of health plans.
    Federal HMO Act: ``Federally qualified'' HMOs are required to have 
an ongoing QA program that: stresses health outcomes to the extent 
consistent with the state of the art; provides review by physicians and 
other health professionals of the process followed in the provision of 
services; uses systematic data collection to evaluate performance and 
patient outcomes, provides interpretations of these data to 
participating providers, and institutes needed changes; and includes 
written procedures for taking corrective action whenever the QA program 
determines that care has not been provided when it should have been or 
that care that is unnecessary or does not meet quality standards has 
been provided.
    Other Standards: Plans that participate in Medicare, Medicaid, and 
FEHBP must also comply with additional standards relating to quality 
assurance.
    Accreditation and HEDIS reporting: Accreditation is an evaluative 
process in which a healthcare organization undergoes an examination of 
its operating procedures to determine whether the procedures meet 
designated criteria as defined by the accrediting body, and to ensure 
that the organization meets a specified level of quality. Given that 
employers and other purchasers are using this data to determine whether 
plans meet certain standards of care quality, health plans are 
increasingly being accredited by bodies such as the National Committee 
for Quality Assurance, the Joint Commission on Accreditation of 
Healthcare Organizations and the American Accreditation HealthCare 
Commission/URAC.
    Similarly, plans are increasingly participating in the Health Plan 
Employer Data and Information Set (HEDIS)--a performance-measurement 
tool designed to help healthcare purchasers and consumers compare the 
quality offered by different managed care organizations--since many 
public and private healthcare purchasers now require HEDIS reporting. 
Beginning in 1999, HEDIS reporting was also integrated into the 
accreditation process by NCQA.
    To better comprehend how health plans promote health care quality 
through accreditation and/or compliance with applicable laws, see the 
chart attached at Appendix II, ``Summary of Health Plan Quality 
Oversight Reporting Requirements.''
    Question (10) The standards of conduct for processing claims for 
coverage for employee benefits plans are under Federal law. There are 
Federal remedies for breaches of such conduct. There are federal 
processes for appeals and we are talking about expanding the federal 
requirements. All of ERISA case law for the past 25 years is in federal 
court. All of the regulations are set out by the Department of Labor. 
Why should we now have 50 state courts create new and inconsistent 
standards of conduct for the processing of claims for benefits? What 
experience do state courts have in interpreting ERISA and do we want 50 
different interpretations of what are now federal standards of conduct?
    State courts have very little experience in interpreting ERISA. 
Virtually all ERISA actions are required to be brought in Federal 
court. The sole exception is an action under 502(a)(1)(B) to recover 
benefits or enforce rights under the terms of the plan. There is 
concurrent Federal and state jurisdiction for this type of action. 
Nevertheless, a state court must always apply Federal ERISA law when 
deciding this type of case. Additionally, only ERISA remedies are 
available. As a result, even in the rare circumstance where an action 
is brought in state court, the Federal law is applied.
    Under the Ganske-Dingell bill, benefit decisions involving medical 
necessity are carved out of federal law and allowed to be the subject 
of lawsuits in state court under state law. Therefore, this is a 
significant departure from current ERISA practice. For the first time, 
state law and state causes of action with state remedies would be 
applicable to ERISA benefit decisions. Therefore, what may be a basis 
for liability in one state may not be a basis for liability in a second 
state. ERISA plans would be subject to having to comply with 50 
different state concepts of what is or is not an acceptable benefit 
determination, including what remedies may apply.
    Additionally, utilization management often involves the use of 
guidelines or criteria developed through national panels, national 
societies, the Agency for Health Care Research and Quality, etc. These 
guidelines are evidence-based and promote an alignment between evidence 
and practice as recommended in a recent Institute of Medicine (IoM) 
report. (IoM, Crossing the Quality Chasm, March 2001) Having 50 
different state standards would interfere with meeting the challenge 
recently posed by the IoM and closing the gap between scientific 
evidence and how medicine is actually practiced.
    Question (11) Under the bifurcated Federal-State liability approach 
in H.R. 526, what is there to prevent a plaintiff from suing 
simultaneously in state and federal court on the same denial--alleging 
failures in both the medical and non-medical areas? Why would a 
plaintiff's attorney ever not sue in both venues simultaneously?
    The Ganske-Dingell bill creates a bifurcated process, which 
includes no barrier to allowing patients to file suits in both state 
and federal court based on the same set of facts and circumstances. For 
example:

 An individual could file a claim in state court for a claims 
        denial based on medical necessity. He/she could also bring suit 
        in federal court for the same harm based on a plan's alleged 
        failure to disclose its utilization review procedures.
 An individual could file a claim in federal court based on a 
        decision concerning a contract exclusion for cosmetic 
        procedures. He/she could also bring suit in state court for the 
        same harm for a claims denial based on the allegation that the 
        decision required an evaluation of medical facts and thus is a 
        medically reviewable decision eligible for state court.
 An individual could file a claim in state court for a claims 
        denial alleging failure to cover a medically necessary 
        prescription drug. He/she could also file a claim in federal 
        court for the same harm alleging (1) improper application of 
        cost-sharing under a tiered formulary or (2) failure to perform 
        a duty under the terms of the plan when making a formulary 
        exception decision under Section 118 of the Ganske-Dingell 
        bill.
    As a result, it is entirely possible that plaintiffs' attorneys 
will file suits in both venues. In many cases, trial lawyers would more 
actively pursue the forum which allows them to circumvent lower limits 
on damages by having a case tried in the court with higher limits 
(forum shopping). For example, trial lawyers could pursue the suit in 
state court, rather than federal court, because the $5 million punitive 
damages (civil assessment) cap contained in the Ganske proposal would 
only apply in federal suits. Alternatively, trial lawyers could pursue 
whatever forum had a more favorable judge or had more favorable 
demographics for selecting potential jurors. In the alternative, trial 
lawyers could pursue the suit in federal court, rather than state 
court, if a state has enacted strong tort reform.
    Question (12) Since employers voluntarily provide health care 
benefits, do you agree that if we increase the uncertainty from the 
threat of litigation or the cost of providing coverage that some 
employers will stop providing coverage?
    Yes. According to a recent poll conducted by Harris Interactive, if 
the cost of health insurance increased by an average of about four 
percent, seventy-six percent of employers say their companies would 
``pass most of the costs through to their employees with either reduced 
benefits or increased premiums.'' Under this same scenario, the poll 
reported that a ``sizable number of employers say they would reduce the 
number of retirees covered (45%), the number of dependents covered 
(17%) and the number of employed covered (17%).'' (Harris Interactive, 
``Unintended Consequences: How the ``Patients Bill of Rights' Could 
Greatly Increase the 44 Million Without Health Insurance,'' February 
16, 2000)
    Moreover, the Lewin Group LLC has estimated that every 1% real 
increase in premiums would result in an additional 300,000 uninsured 
Americans. This relationship disproportionately affects low-income 
workers. A recent study found that low-income workers are 
disproportionately affected by increases in health care spending. 
(Kronick and Gilmer, ``Explaining the Decline in Health Insurance 
Coverage, 1979-1995,'' Health Affairs, Vol. 18, March/April 1999)
    Question (13) The White House principles state that after an 
independent review decision is rendered, patients should be allowed to 
hold their health plans liable in federal court if they have been 
wrongly denied needed medical care.
    I want to ask questions about what it means to be denied medical 
care, because it seems to me all a plan can do is deny coverage. I want 
to know what is broken and what is not broken in terms of remedies for 
wrongful denial of claims for coverage.
    First, if coverage is agreed to but a doctor provides poor quality 
care or is alleged to have committed malpractice that is addressed by 
state common law. In other words, the ERISA preemption applies to the 
denial of coverage not to malfeasance in the performance of a medical 
service. Do you agree on this point?
    Yes. Under the bill, ERISA preemption does not affect physician 
medical malpractice. Physician medical malpractice would continue to be 
addressed by state law in state court.
    Question (14) Second, if the patient does get the care but the 
issue is later reimbursement of the cost of care, current Federal law 
has a full remedy for that under ERISA. If the patient got the care 
there is no harm to the patient due to a coverage decision--only the 
need to get reimbursed. Is this correct?
    This is correct--retrospective denials do not implicate patient 
care, and thus, there would be no harm to the patient due to a coverage 
decision. In such situations, there is a remedy under ERISA available 
in which the patient can recover the benefits due under the plan. The 
Ganske-Dingell bill, however, would expose health plans to expanded 
liability even for retrospective denials where the patient has already 
received the care and the only dispute is over payment.
    Question (15) Third, if a plan follows the rules on expedited 
appeals and fully complies with whatever decision the external appeals 
board has made--they have done everything right in terms of the 
independent entity--why should they be subject to further action for 
damages in court?
    External review is an alternative to expanded liability; there is 
no rationale for adding expanded liability to external review. 
Unfortunately, the Ganske-Dingell bill permits health plans to be sued 
for uncapped damages when they follow the bill's rules relating to 
appeals and comply with the external review decision. In fact, the 
Ganske-Dingell bill permits health plans to be sued even if the plan 
decision is upheld by independent medical review. Additionally, it 
permits lawsuits in federal court against plans even if a plan approved 
rather than denied coverage and acted within the bill's timeframes for 
making coverage decisions, if the plaintiff alleges the decision should 
have been made more rapidly. Thus, under this bill, health plans can be 
sued even if they follow the rules and make correct coverage decisions. 
It is difficult to fathom what purposes such lawsuits serve.
    Question (16) If the plan makes a final decision denying a claim 
and follows all the time lines in the law and the new law requires an 
expedited external appeals process where there is an emergency, why 
should the plan be liable for what may or may not be an erroneously 
denied claim?
    Nearly all states have emergency care rules which prohibit prior 
authorizations in emergency situations. As a result, the alleged claims 
denials referred to in the question will only arise in non-emergency 
situations. For such non-emergency situations, an expedited external 
appeals process is available and can get consumers coverage on an 
expedited basis when warranted.
    As stated in the previous answer, there is no basis for adding 
expanded liability when an external appeals process--which can be 
conducted on an expedited basis when necessary--is available. This 
appeals process ensures that coverage disputes are resolved upfront and 
consumers get the care they need when they need it. With an independent 
review, coverage disputes regarding medical necessity and 
appropriateness are resolved by independent doctors with appropriate 
clinical experience. Plans should have the opportunity to address 
coverage disputes through external appeals before harm occurs, rather 
than having to pay for damages that could easily have been avoided 
through such appeals.
    Question (17) Please address this fact pattern. A plan makes an 
initial denial of claim because the patient or the doctor has not 
provided enough information for coverage to be granted. Later during 
the appeals process the patient or doctor does provide the information 
and coverage is awarded. As a result, there was a week delay in the 
doctor performing a treatment. Should the plan be held liable where the 
right information was not provided to them by the patient or doctor?
    No. As noted in the answer to question #3, a significant problem 
with the way the Ganske-Dingell bill is structured is that it holds 
plans liable for delays that are due to providers and patients not 
providing plans with the information they need to make coverage 
decisions. An affirmative obligation on the part of physicians to give 
the plan the information necessary for the plan to make a coverage 
decision will protect patients by ensuring that plans have the 
information needed to make decisions as quickly as possible.
    Question (18) A plan makes an initial denial of coverage on an 
item. The patient does not pursue any appeals but later it is clear 
that the item should have been covered and would have helped the 
patient. Should the plan be liable where the patient did not even seek 
an appeal?
    First, plans have an obligation to notify their members when they 
have the right to file an appeal and how to file an appeal. Plans 
should not be held liable when the patient has not appealed a coverage 
decision. The patient, in consultation with his or her physician--not 
the health plan--is in the best position to know if there is a need to 
file an appeal. Effective appeals systems--both internal and external--
are an opportunity to avoid harm. Plan can not be held liable for harm 
alleged to result from a coverage denial where no appeal was filed.
    Similarly, as noted in the answer to question #3, a health plan 
should not be held liable for delays when physicians and patients 
believe their medical conditions warrants and expedited decision, yet 
there is no request that a decision be made in an accelerated 
timeframe.
                                 ______
                                 
                                  AvMed Health Plan
                                       Gainesville, Florida
                                                      April 9, 2001
The Honorable W.J. Tauzin
Chairman, Energy and Commerce Committee
United States House of Representatives
2183 Rayburn House Office Building
Washington, DC 20515
    Dear Chairman Tauzin: Thank you for the opportunity to testify 
before the Subcommittee on Health hearing on March 15, 2001 entitled, 
``A Smarter Health Care Partnership for American Families: Making 
Federal and State Roles in Managed Care Regulation and Liability Work 
for Accountable and Affordable Health Care Coverage.'' Per your 
request, enclosed is a written response to your question posed at the 
hearing.
    To paraphrase your question: The court in Pegram specifically 
noted, in footnote 9, that ERISA makes separate provisions for suits to 
receive particular benefits and that the court would not discuss the 
interaction of such claim with state law causes of action. How does 
liability under Pegram relate to liability under the Ganske-Dingell 
proposal? Doesn't the Ganske-Dingell bill deal with specific benefits? 
Can you address the language in this footnote?
    Answer: Liability under current proposals--such as the Ganske-
Dingell bill--is very different and much more expansive than liability 
under the Pegram decision. Liability under Pegram pertains only to 
treating physicians and medical malpractice. Unlike liability under 
Pegram, the proposed expansion of liability under the Ganske-Dingell 
bill would allow state and federal law claims for a much broader scope 
of issues, including health plan coverage denials and virtually all 
administrative duties under the plan.
    Footnote 9 in the Pegram opinion further emphasizes the point that 
the Court's decision is not directed at coverage decisions made by 
health plans, even if the decision involves an evaluation of medical 
necessity (like the emergency care example addressed by the footnote). 
Instead, Pegram deals with the treatment decisions of treating 
physicians that have implications for eligibility. In Pegram, the 
physician's failure to correctly diagnosis an urgent care situation 
(appendicitis) meant that the plan would not cover urgent care. A 
correct diagnosis by the physician would have resulted in coverage for 
urgent care. The Court decided that these treatment decisions made by a 
patient's doctor should not be turned into ERISA fiduciary decisions. 
In contrast, coverage decisions made by the plan fall within the 
purview of ERISA plan administration.
    To further supplement my answer, I have enclosed a paper prepared 
at the request of the Yale Journal on Health Policy, Law and Ethics, by 
Louis Saccoccio, General Counsel at the American Association of Health 
Plans, entitled: ``Pegram's Significance for Managed Health Care.''
    Again, thank you for the invitation to testify before the 
Subcommittee on Health and please do not hesitate to contact me should 
you need further information on this issue or any other health issue 
that may come before Congress.
            Sincerely,
                                    Stephen J. deMontmollin
              Vice President and General Counsel, AvMed Health Plan
Attachment
             Pegram's Significance for Managed Health Care
                           By Louis Saccoccio
    On June 12, 2000, in an unanimous opinion written by Justice 
Souter, the U.S. Supreme Court, reversing a decision of the U.S. Court 
of Appeals for the Seventh Circuit, held in Pegram v. Herdrich 
1 that ``mixed eligibility'' decisions made by HMO 
physicians are not fiduciary decisions under the (``ERISA'') 
2. In so ruling, the Court upheld the concept that the 
reasonable sharing of financial risk with HMO 3 network 
physicians for providing health care to a given patient population does 
not run afoul of ERISA's fiduciary requirements. This result is a 
significant victory for managed health care plans, their network 
physicians, and their members.
---------------------------------------------------------------------------
    \1\ 530 U.S. 211, 120 S.Ct. 2143 (2000).
    \2\ 29 U.S.C. Sec. 1001 et seq. (1994).
    \3\ Although the form of managed health care plan in Pegram was a 
health maintenance organization, or HMO, the analysis in this paper 
equally applies to other managed health care plans to the extent they 
share the financial risk for the delivery of health care services with 
their network providers.
---------------------------------------------------------------------------
    Although the decision's impact on the viability of physician risk 
sharing is clearly positive, the decision's impact on the question of 
HMO liability under ERISA remains less clear. Some, including the U.S. 
Department of Labor, argue that this case represents a shift in ERISA 
preemption law. They argue that Pegram would now preclude ERISA 
preemption of state law causes of action aimed at HMO coverage 
determinations that involve questions of medical necessity or 
experimental or investigational treatments. A more reasonable reading 
of the case consistent with its facts, however, leads to the conclusion 
that Pegram represents nothing more than a common sense answer to a 
simple question. What law should apply when a treating physician makes 
a treatment decision that may arguably raise issues of eligibility for 
coverage? Pegram's answer does not represent a shift in the law 
regarding ERISA preemption of HMO coverage decisions.
    The importance of Pegram does not end, however, with its resolution 
of the question of the scope of ERISA's fiduciary requirements in the 
realm of a physician's practice of medicine. The greater impact of the 
Pegram decision may lie in its language addressing the proper role of 
the courts in addressing the social and policy questions that arise 
from managed health care. In this regard, the Court in Pegram 
unambiguously stated that the debate about managed care belongs not in 
the courts, but in the legislature. This clear message already is 
having an impact in class action litigation filed against health plans 
where broad allegations under ERISA and the Racketeer Influenced and 
Corrupt Organizations Act (RICO) 4 seek to challenge (some 
would say destroy) managed health care practices.
---------------------------------------------------------------------------
    \4\ The Racketeer Influenced and Corrupt Organizations Act, 18 
U.S.C. Sec. Sec. 1961-1968 (1994).
---------------------------------------------------------------------------

Pegram Background
    Mrs. Herdrich originally brought medical negligence claims against 
Dr. Pegram, and state law fraud claims against Carle, and the HMO owned 
by Carle in Illinois state court.5 The medical negligence 
counts went to trial in state court resulting in a $35,000 verdict for 
Herdrich. Additionally, the defendants removed the state fraud claims 
to federal court alleging they were preempted by ERISA. The federal 
district court dismissed the state fraud claims, but allowed Herdrich 
to amend her claims to state a claim under ERISA. Herdrich then amended 
her claim alleging a breach of ERISA fiduciary duty on the part of the 
defendants. The claim was premised on the fact that the physician/
owners of the HMO potentially were entitled to year-end bonuses based 
on the difference between the cost of providing medical care and HMO 
revenues. Herdrich argued that this created an improper incentive to 
limit treatment. The federal district court subsequently granted 
defendants' motion to dismiss the amended ERISA claim for a failure to 
state a proper claim, and Herdrich appealed.
---------------------------------------------------------------------------
    \5\ For a summary of the procedural background of Pegram in the 
lower courts, see Herdrich v. Pegram, 154 F.3d 362, 365-367 (7th Cir. 
1998).
---------------------------------------------------------------------------
    The U.S. Court of Appeals for the Seventh Circuit reversed the 
decision, finding that Herdrich had alleged sufficient facts to make 
out a claim for breach of fiduciary duty under ERISA.6
---------------------------------------------------------------------------
    \6\ Herdrich v. Pegram, 154 F.3d 362 (7th Cir. 1998).
---------------------------------------------------------------------------
Pegram, Medical Malpractice, and ERISA Preemption
    The issue before the Court in Pegram was the application of ERISA's 
fiduciary duty principles to HMO treating physicians who make ``mixed 
eligibility decisions''.7 The Court had no occasion to 
address the issue of whether HMO coverage decisions involving medical 
necessity issues fall outside the scope of ERISA's preemption of state 
law. Nevertheless, the issues are closely enough related to pose the 
question of whether Pegram has brought a shift in the law that narrows 
the application of ERISA preemption with respect to HMO coverage 
decisions involving medical necessity.
---------------------------------------------------------------------------
    \7\ The term ``mixed eligibility decision'' is one created by the 
Court. It arises from the Court's view that Dr. Pegram's treatment 
decision that Herdrich's condition did not warrant immediate attention 
resulted in the HMO's not covering immediate care, while it would have 
done so had Dr. Pegram made the proper diagnosis and judgment to treat. 
120 S.Ct. at 2154. The Court's use of the term ``eligibility'' appears 
to be interchangeable with the concept of coverage.
---------------------------------------------------------------------------
    Any application of the Pegram decision to the question of ERISA 
preemption of state law for liability arising from HMO coverage 
determinations must be made in light of the facts before the Court. The 
heart of the case before the Supreme Court was simply a treating 
physician's misdiagnosis of appendicitis. As a result, Herdrich was 
able to convince an Illinois state court jury that Dr. Pegram failed to 
properly and timely diagnose her condition, and was awarded $35,000 in 
damages for her injuries. However, because it was alleged that Dr. 
Pegram's year-end compensation in part was based on the financial 
health of the HMO, Herdrich argued that Dr. Pegram's misdiagnosis, 
coupled with her ostensible interest in the financial health of the 
HMO, raised the issue of breach of fiduciary duty under ERISA.
    The Court rejected Herdrich's claim that the HMO, acting through 
its physician owners, breached its duty to act solely in the interest 
of beneficiaries by making decisions affecting medical treatment while 
allegedly being influenced by the terms of the HMO physician 
compensation structure. In doing so, the Court expressed doubt that 
Congress intended physicians to be treated as ERISA fiduciaries to the 
extent that they make mixed eligibility decisions during the course of 
treating their patients.8
---------------------------------------------------------------------------
    \8\ 120 S.CT at 2158.
---------------------------------------------------------------------------
    The Court correctly recognized that when examining the question of 
whether a treating physician acted for good medical cause as opposed to 
his or her own financial interest, the answer to that question ``would 
require reference to standards of reasonable and customary medical 
practice in like circumstances.'' 9 But, the Court pointed 
out, this is the very standard used in medical malpractice cases: 
``[F]or all practical purposes, every claim of fiduciary breach by an 
HMO physician making a mixed decision would boil down to a malpractice 
claim, and the fiduciary standard would be nothing but the malpractice 
standard traditionally applied to physicians.'' 10 As a 
result, the Court saw no reason to turn traditional medical malpractice 
cases into ERISA fiduciary cases simply because the treating physician 
assumed some of the financial risk for the treatment of the patient.
---------------------------------------------------------------------------
    \9\ 120 S.Ct at 2157.
    \10\ Id.
---------------------------------------------------------------------------
    Thus, Pegram is a case about treating physicians, medical 
malpractice, and the ERISA fiduciary implications of malpractice in 
light of physician risk sharing. The Court rightly recognized that it 
would be folly to convert run of the mill malpractice actions involving 
treating physicians that take place within the HMO context into ERISA 
fiduciary actions. However, this conclusion is a far cry from the 
position taken by some in the trial bar and by the Department of Labor 
(see below) that Pegram stands for the proposition that HMO coverage 
decisions involving questions of medical necessity are now subject to 
state tort actions.

The Department of Labor Interprets Pegram
    In September, 2000, the Department of Labor (``DoL'') filed an 
amicus curiae brief before the Supreme Court of Pennsylvania in Pappas 
v. Asbel.11 This case is again before the Pennsylvania 
Supreme Court after the United States Supreme Court, on June 19, 2000, 
vacated the Pennsylvania court's earlier decision and remanded the case 
for reconsideration in light of Pegram.12 The DoL's brief in 
Pappas sets out its interpretation of how it believes Pegram narrows 
ERISA preemption of state tort claims for negligence. As discussed 
below, the DoL interpretation ranges far beyond the holding in Pegram.
---------------------------------------------------------------------------
    \11\ The amicus curiae brief was filed in the Supreme Court of 
Pennsylvania No. 00098 E.D. Appeal Docket 1996, Pappas v. Asbel. Copies 
of DoL briefs are available on DoL's website at www.dol.gov.
    \12\ United States Healthcare Systems of PA, Inc. v. Pennsylvania 
Hospital Insurance Co., 120 S.Ct. 2686 (2000).
---------------------------------------------------------------------------
    The issue before the Pennsylvania Supreme Court in its initial 
decision in Pappas was whether state law negligence claims against an 
HMO, U.S. Healthcare, were preempted by ERISA.13 The claim 
arose from an alleged delay in the HMO's authorization to transfer the 
plaintiff to a hospital capable of treating his condition. The 
Pennsylvania Supreme Court held in this initial decision that 
negligence claims against an HMO do not ``relate to'' an ERISA plan, 
and are therefore not preempted.14
---------------------------------------------------------------------------
    \13\ Pappas v. Asbel, 555 Pa. 342, 344; 724 A.2d 889, 890 (1998).
    \14\ 555 Pa. At 351-52; 724 A.2d at 893-94.
---------------------------------------------------------------------------
    Interestingly, DoL previously had filed an amicus curiae brief with 
the U.S. Supreme Court supporting U.S. Healthcare's petition for 
certiorari in Pappas.15 In that earlier brief, DoL argued 
that the Supreme Court of Pennsylvania's decision was overbroad and 
incorrect. DoL stated that ERISA's fiduciary standards preempt state 
law because an HMO's coverage decision is considered an act of plan 
administration even when medical judgment about how to treat a patient 
is involved.16
---------------------------------------------------------------------------
    \15\ The DoL brief in the U.S. Supreme Court was filed in December 
1999 in docket No. 98-1836, United States Healthcare Systems of PA, 
Inc. v. Pennsylvania Hospital Insurance Co.
    \16\ DoL amicus curiae brief before the U.S. Supreme Court at 6-10, 
docket No. 98-1836, United States Healthcare Systems of PA, Inc. v. 
Pennsylvania Hospital Insurance Co.
---------------------------------------------------------------------------
    In the brief filed before the Supreme Court of Pennsylvania in 
Pappas on remand from the U.S. Supreme Court, DoL now argues that the 
case should be remanded to the Court of Common Pleas to decide whether 
U.S. Healthcare made a ``mixed eligibility decision''.17 DoL 
claims that ``Pegram holds that treatment decisions and mixed treatment 
and eligibility decisions by physician employees of an HMO are governed 
by state malpractice standards and not by ERISA fiduciary standards.'' 
18 According to DoL, if the Court of Common Pleas finds that 
U.S. Healthcare made a ``mixed eligibility decision'', as the U.S. 
Supreme Court in Pegram used that term, then there is no preemption and 
the state law claims may proceed against U.S. Healthcare.19
---------------------------------------------------------------------------
    \17\ DoL amicus curiae brief before the Supreme Court of 
Pennsylvania at 17, No. 00098 E.D. Appeal Docket 1996, Pappas v. Asbel.
    \18\ Id. at 10-11.
    \19\ Id. at 11-12.
---------------------------------------------------------------------------
    DoL's interpretation of Pegram as set out in its recent amicus 
brief attempts to expand the holding of the case far beyond what the 
plain language of the decision supports. It extends the concept of 
mixed eligibility decisions beyond the HMO treating physician addressed 
in Pegram to the HMO itself with no support or basis.
    The foundation for the Pegram decision was a clear reluctance by 
the Court to expand the concept of ERISA fiduciary principles to 
physicians treating patients with its resulting interference with 
traditional state medical malpractice law. In contrast, HMO coverage 
decisions within the context of ERISA employee benefit plans, even when 
involving medical necessity, have traditionally been recognized as 
benefit determinations within the purview of ERISA 
preemption.20 Contrary to the position taken by the DoL, 
Pegram, dealing as it does with the decisions of treating physicians, 
does little to change the landscape of ERISA preemption for HMO 
coverage decisions.
---------------------------------------------------------------------------
    \20\ See, e.g., Cannon v. Group Health Service of Oklahoma, Inc., 
77 F.3d 1270 (10th Cir. 1996); Kuhl v. Lincoln National Health Plan of 
Kansas City, Inc., 999 F.2d 298 (8th Cir. 1993); Corcoran v. United 
Healthcare, Inc., 965 F.2d 1321 (5th Cir.), cert. denied 506 U.S. 1033 
(1992).
---------------------------------------------------------------------------

Pegram and the Role of the Federal Courts in Health Care Policy
    Maybe more significant than the holding of Pegram is Justice 
Souter's discussion of managed care and the respective roles of the 
federal judiciary and Congress when it comes to addressing the debate 
over managed care. After all, the holding that mixed eligibility 
decisions made by HMO treating physicians should be left to state 
medical malpractice law does little more than confirm what is probably 
already common practice. As a direct example, Herdrich proceeded with 
and won a judgment in a state malpractice action in her case. However, 
with the filing in the last eighteen months of multiple class action 
lawsuits against several large health plans alleging general violations 
of ERISA and RICO,21 Pegram gives the lower federal courts 
clear direction as to how they should go about dealing with these cases 
and their attempts to set health care policy through litigation.
---------------------------------------------------------------------------
    \21\ MDL-1334, MDL-1364, MDL-1366, and MDL-1367 pending before the 
U.S. District Court for the Southern District of Florida.
---------------------------------------------------------------------------
    The Court recognized that for over 27 years, Congress has promoted 
the formation of HMO practices, and stated that ``[i]f Congress wishes 
to restrict its approval of HMO practice to certain preferred forms, is 
may choose to do so. But the Federal Judiciary would be acting contrary 
to the congressional policy of allowing HMO if it were to entertain an 
ERISA fiduciary claim portending wholesale attacks on existing HMOs 
solely because of their structure, untethered to claims of concrete 
harm.'' 22
---------------------------------------------------------------------------
    \22\ 120 S.Ct. at 2157.
---------------------------------------------------------------------------

Maio--Pegram's Message on Class Actions
    The impact of this message already has been felt in a recent 
decision that should directly influence the outcome in the numerous 
class action lawsuits mentioned above. The case, Maio v. Aetna, was 
decided by the U.S. Court of Appeals for the Third Circuit on August 
11, 2000.23 It affirmed the dismissal of a class action 
lawsuit filed against Aetna and its regional subsidiaries that was 
based on alleged violations of RICO. Significantly, the Third Circuit 
relied in part upon the Supreme Court's analysis in Pegram when finding 
that plaintiffs failed to state a claim under RICO.
---------------------------------------------------------------------------
    \23\ 221 F.3d 472 (3rd Cir. 2000).
---------------------------------------------------------------------------
    In its opinion, the Third Circuit examined the plaintiffs' damage 
theory in light of Pegram. The court indicated that absent specific 
allegations by plaintiffs that the quality or quantity of their 
benefits under the health plans had been diminished, the ``only 
theoretical basis for appellants' claim that they received an `inferior 
health care product' is their subjective belief that Aetna's policies 
and practices are so unfavorable to enrollees that their very existence 
. . . demonstrates that they overpaid for the coverage.'' 24
---------------------------------------------------------------------------
    \24\ Id. at 496.
---------------------------------------------------------------------------
    Looking to Pegram, the Third Circuit rejected this theoretical 
basis for recovery. The court stressed that under this theory the 
plaintiffs would be asking the court to pass judgment on Aetna's 
policies and practices leading to a ``myriad of practical problems 
which undoubtedly arise in a situation in which the federal courts are 
asked to determine the social utility of one particular HMO structure 
as compared to another.'' 25 The court refused to accept 
plaintiffs' notion implied by their complaint that it should evaluate 
the social utility of Aetna's health plans. To stress this point, the 
court indicated that this theory would require the trier of fact to 
``inappropriately act as a state regulatory commission and determine 
the value of Aetna's product.'' 26
---------------------------------------------------------------------------
    \25\ Id. at 499.
    \26\ Id.
---------------------------------------------------------------------------
    The Third Circuit's refusal to go down the road of passing judgment 
on a health plan's otherwise legal policies and practices with its 
``myriad of practical problems'' gives a clear signal that Pegram's 
most significant impact may come from its clear message of restraint to 
the federal judiciary in the debate over managed care.
Conclusion
    The Court's decision in Pegram has given the federal courts 
direction when addressing physician compensation arrangements and risk 
sharing in the context of ERISA. It has validated the concept that the 
treatment decisions of physicians, even if mixed with ERISA eligibility 
questions, are to be left to the purview of state medical malpractice 
law. Moreover, the Court's resolution of these issues does not mean a 
shift in how the federal courts should analyze ERISA preemption 
questions relating to HMO medical necessity decisions. Contrary to the 
views of the DoL, Pegram did not hold that HMO coverage decisions 
involving medical necessity issues are subject to state medical 
malpractice law.
    Pegram's most significant impact, however, may be in its call for 
judicial restraint when federal courts are faced with broad challenges 
to managed health care practices. The Court's clear message was that 
the courts were not the appropriate venue for the making of health care 
policy. That responsibility remains with Congress.
                                 ______
                                 
                       The ERISA Industry Committee
                                             Washington, DC
                                                     April 23, 2001
The Honorable W.J. Billy Tauzin
Chairman, House Committee on Energy & Commerce
2125 Rayburn House Office Building
Washington, D.C. 20515

The Honorable Michael Bilirakis
Chairman, Subcommittee on Health Committee
House Committee on Energy & Commerce
2125 Rayburn House Office Building
Washington, D.C. 20515
    Dear Chairman Tauzin:
    Dear Chairman Bilirakis:
    I am writing to respond to your request for our view on whether the 
Supreme Court's decision in Pegram v Herdrich, 530 U.S. 211 (2000), 
changed the law governing ERISA preemption and, specifically, on the 
relevance of footnote 9 of the Court's opinion to this question.
    In our view, footnote 9 makes it clear that Pegram does not change 
the law governing ERISA preemption.
    In Pegram, the Supreme Court addressed the question of whether an 
HMO's mixed eligibility and treatment decisions are fiduciary acts 
within the meaning of ERISA. A plan beneficiary had claimed in Pegram 
that an HMO, acting through its physician-owners, violated its ERISA 
fiduciary duty to act solely in the interest of beneficiaries by making 
medical treatment decisions while influenced by an arrangement under 
which the physician-owners profited by minimizing medical services. The 
Court held that ERISA does not treat HMOs as fiduciaries when they make 
mixed eligibility and treatment decisions and that therefore the 
beneficiary did not have an ERISA cause of action against the HMO for 
breach of fiduciary duty.
    In footnote 9, the Court observed:
        ``ERISA makes separate provision for suits to receive 
        particular benefits. See 29 U.S.C. 
        Sec. 1132(a)(1)(B).[1] We have no occasion to 
        discuss the standards governing such a claim by a patient who, 
        as in the example in text[ 2], was denied 
        reimbursement for emergency care. Nor have we reason to discuss 
        the interaction of such a claim with state-law causes of 
        action, see infra, at 235-37.''
---------------------------------------------------------------------------
    \1\ By contrast, ERISA Sec. 502(a)(2), 29 U.S.C. Sec. 1132(a)(2), 
authorizes suits for appropriate relief under ERISA Sec. 409, 29 U.S.C. 
Sec. 1109(a), which makes a fiduciary personally liable for any losses 
incurred by the plan (or for any profits made by the fiduciary) as a 
result of its breach of fiduciary responsibility.
    \2\ In the text, the Court referred to an example in the 
Government's amicus brief involving an HMO that refused to pay for 
emergency care on the ground that there had not been an emergency.
---------------------------------------------------------------------------
    At pages 235-37, the Court observed that if the plaintiff's 
position in Pegram had prevailed, the question whether ERISA preempts 
state malpractice law would have been raised since, under the 
plaintiff's theory, the treating physician (as well as the HMO) could 
be held liable under ERISA for breach of fiduciary duty:
        ``This result, in turn, would raise a puzzling issue of 
        preemption. On its face, federal fiduciary law applying a 
        malpractice standard would seem to be a prescription for 
        preemption of state malpractice law, since the new ERISA cause 
        of action would cover the subject of a state-law malpractice 
        claim. See 29 U.S.C. Sec. 1144 (preempting state laws that 
        ``relate to [an] employee benefit plan''). To be sure, New York 
        State Conference of Blue Cross & Blue Shield Plans v. Travelers 
        Ins. Co., 514 U.S. 645, 654-655 (1995), throws some cold water 
        on the preemption theory; there, we held that, in the field of 
        health care, a subject of traditional state regulation, there 
        is no ERISA preemption without clear manifestation of 
        congressional purpose. But in that case the convergence of 
        state and federal law was not so clear as in the situation we 
        are positing; the state-law standard had not been subsumed by 
        the standard to be applied under ERISA. We could struggle with 
        this problem, but first it is well to ask, again, what would be 
        gained by opening the federal courthouse doors for a fiduciary 
        malpractice claim, save for possibly random fortuities such as 
        more favorable scheduling, or the ancillary opportunity to seek 
        attorney's fees. And again, we know that Congress had no such 
        haphazard boons in prospect when it defined the ERISA 
        fiduciary, nor such a risk to the efficiency of federal courts 
        as a new fiduciary-malpractice jurisdiction would pose in 
        welcoming such unheard-of fiduciary litigation.''
    The Court thus decided nothing at all about ERISA preemption. To 
the contrary, footnote 9 emphasized that the Court was not deciding the 
standards governing benefit claims, such as claims for reimbursement of 
health care expenses, or the interaction between benefit claims and 
state-law causes of action. There was no reason for the Court to decide 
these issues. The only issue in the case was whether mixed eligibility 
and treatment decisions by HMO physicians were fiduciary decisions 
under ERISA.
    Both footnote 9 and the Court's comments on pages 235-37 emphasize 
that the Court deliberately chose not to ``struggle'' with the 
``puzzling issue of preemption.'' The Court's comments on preemption 
were dictum in any event, since the Court was able to resolve the issue 
before it--which involved the application of ERISA's fiduciary 
standards, not state law--without deciding the preemption issue.
    It is perilous to seize on dictum to predict how the Court will 
decide a future case. For example, on the same day Pegram was decided, 
the Court refused to follow dictum in its 1993 Mertens decision. See 
Harris Trust & Savings Bank v. Salomon Smith Barney Inc., 530 U.S. 238, 
249 (2000) (``Salomon invokes Mertens as articulating an alternative, 
more restrictive reading of [ERISA] Sec. 502(l) that does not support 
the inference we have drawn . . . But the Mertens dictum does not 
discuss--understandably, since we were merely flagging the issue, see 
508 U.S. at 255, 260-61--that ERISA defines the term `person' without 
regard to status as a cofiduciary . . .''). The Harris Trust decision 
thus demonstrates that dictum in an opinion is not a reliable indicator 
of how the Court will decide an issue when the issue is actually 
presented to the Court for decision in the future.
    We hope our comments will be helpful to you. If we can be of 
further assistance, please let me know.
            Sincerely,
                                            Mark J. Ugoretz
                                                          President
cc: The Honorable John Shadegg
   U.S. House of Representatives
   432 Cannon House Office Building
   Washington, D.C. 20515

   Nandan Kenkeremath
   Counsel, House Committee on Energy & Commerce
   H316 Ford House Office Building
   Washington, D.C. 20515

   Doug Stoss
   Legislative Assistant to Representative John Shadegg
   432 Cannon House Office Building
   Washington, D.C. 20515
                                 ______
                                 
            National Association of Insurance Commissioners
                                                     April 19, 2001
The Honorable Michael Bilirakis
Chairman
Committee on Energy and Commerce
Subcommittee on Health
U.S. House of Representatives
2125 Rayburn House Office Building
Washington, D.C. 20515
    Dear Representative Bilirakis: Attached please find our responses 
to the questions raised by you in connection with the testimony of the 
National Association of Insurance Commissioners (NAIC), at the March 
15, 2001 hearing regarding federal and state roles in managed care.
    On behalf of the members of the NAIC, I would like to thank you for 
the opportunity to testify before your Subcommittee.
            Sincerely,
                                       Steven B. Larsen    
           Chair, Health Insurance & Managed Care (B) Committee    
                    Commissioner, Maryland Insurance Administration
Attachment
         Responses for the record of Commissioner Steven Larsen
    Question 1. The White House, in its statement of principles, has 
provided for a broad set of patient protections through a system that 
provides ``deference'' to State patient protection laws and to ``the 
traditional authority of states to regulate health insurance.'' Can you 
explain the current system, what is the traditional authority of the 
States, and why such deference is important?
    The enactment of the Employee Retirement Income Security Act of 
1974 (ERISA) created a dual federal-state regulatory structure in this 
country for health insurance and health benefits. Under ERISA, 
generally, federal law governs employer-sponsored group health plans. 
However, state laws that regulate the business of insurance are saved 
from preemption by virtue of the saving clause (Section 514 of ERISA). 
As a consequence of the saving clause, states regulate fully insured 
employer-sponsored plans by regulating the health insurers and HMOs 
that cover the services and benefits under the plan. The saving clause 
was enacted to preserve the states' traditional role of regulating 
insurance, including the regulation of insurance policies purchased by 
ERISA plans (fully insured plans).
    The states have taken this role seriously. They have enacted 
patient protections for consumers in individual and group plans under 
their authority to regulate the business of insurance, and they have an 
established infrastructure to enforce these rights. State regulators 
are presently enforcing many of the patient protection provisions that 
are being considered by the Congress and that are included in the 
President's ``Principles for a Bipartisan Patients' Bill of Rights''.
    Deference is important because states have adopted protections 
tailored to their state markets based on size, population, structure 
and need. One size regulation does not fit all. To require all states 
to adopt the same blanket regulation for all situations could result in 
over-regulation of and unneeded expense to the marketplace. State 
legislatures are sensitive to their marketplaces and consumer concerns, 
and when needed, they have been proactive in establishing consumer 
protections that are tailored to the needs of their individual states' 
health care markets. In addition, states have expertise in their laws 
and their markets, and they have an effective infrastructure in place 
that can quickly and efficiently respond to consumers. Consumers are 
not forced to call Washington, DC with a local issue. Congress should 
recognize the states' efforts and expertise in developing these 
protections and give the states the greatest amount of flexibility in 
preserving and enforcing these protections.
    Question 2. Your testimony uses the term ``taken as a whole''. What 
are your views on the use of ``substantially equivalent'' and the 
modifier ``taken as a whole''? How important is it that the standard be 
flexible?
    It is critical that the standard be flexible for states. Although 
some of the legislative proposals generally attempt to save state laws 
that are equal to or more protective than the proposed federal 
standards using the HIPAA ``prevents the application'' standard, the 
President's Principles seek to preserve state authority beyond the 
federal floor. The concepts of ``state certification'' and 
``substantial equivalence'' will give greater deference to the states 
and preserve more of their laws.
    Using these concepts, the states would certify that their statutory 
and regulatory patient protections taken as a whole are ``substantially 
equivalent'' or are comparable to the federal standards and that the 
state laws should remain in force. This approach would prevent the 
debate from getting bogged down in whether the state language is 
exactly the same as the federal bill, especially if the intent and the 
outcome are similar. This flexible approach would allow as many state 
laws as possible to remain in place, and it would allow states room to 
apply the protections in a manner appropriate for their health 
insurance markets.
    While ``substantially equivalent'' and ``taken as a whole'' were 
the prevalent approaches that had been introduced at the time of the 
hearing, other approaches are being developed that also would preserve 
and give deference to state laws. Approaches such as ``consistent with 
the intent of the legislation'' and ``comparable to the federal 
legislation'' are being discussed. We welcome any approach that allows 
states to continue to enact reforms based on their state markets and 
gives states maximum flexibility in how they meet the federal 
requirements, while ensuring that all individuals have a basic level of 
protection.
    Question 3. If a State passed a law which found that a set of State 
patient protections meets the relevant federal standards for 
acceptability, should we recognize that finding as final? In other 
words, the national objectives are the full patient protections but the 
State makes a finding and not Federal bureaucrats. Would you support 
that concept?
    Yes, to both parts of the question. States already will be 
analyzing their laws to see if they comply with the federal law and 
will identify any areas of state law that need to be amended. States 
know the full scope of their laws and where the protections are located 
within the statutes and regulations. State laws are already 
operational, and states are enforcing these laws. States will be in the 
best position to evaluate whether the state laws measure up to the 
federal law not only as the laws are written but also as they function 
and operate in a real world situation.
    Question 4. Should Congress look at some of the existing patient 
protection laws in the states and simply grandfather them in. In other 
words, should Congress make findings that certain state provisions are 
good patient protections and there is no need for further disruption or 
uncertainty?
    While our membership has not discussed this approach, we do welcome 
approaches that would preserve state laws through a grandfathering 
process. Issues that would need to be considered under this approach 
would be how the determination is made regarding which state laws to 
grandfather, and whether states would have the flexibility to amend 
these protections in the future in response to changes in the market. 
States are more able to respond quickly to the needs of industry and 
consumers, and we would not like to see a static approach implemented 
that would lock the states into outdated or antiquated laws.
    Question 5. Do you agree that two laws on the same issue should not 
apply at the same time? If they both applied would it not just create 
unnecessary conflict and confusion?
    Yes, it is important that two laws not apply at the same time. 
These questions highlight why it is so important that deference be 
given to state laws and states be given maximum flexibility to preserve 
as many state laws as possible. If the state law remains in place, 
there is no need for both state and federal laws to apply at the same 
time to the same entity. The state laws would apply to individual and 
group fully insured plans as they do now and the federal law would 
apply to self-funded plans. This would avoid unnecessary conflict and 
confusion.
    Question 6. If a State chooses not to meet the Federal standard but 
simply continue with its own laws wouldn't that mean that there would 
be dual regulations, which could be inconsistent and which there might 
be conflicts in enforcement?
    This would result in dual regulation, with the state enforcing 
state law over insurance coverage and the federal government enforcing 
the federal protections for all group plans, either insured or self-
insured. Consumers could be confused by these distinctions.
    In terms of enforcement, the states have an effective 
infrastructure in place to enforce these laws (see Question #14), but 
there is still the question of how the new federal standards will be 
enforced. There is no federal infrastructure in place such as there is 
in the states to enforce patient protections, and none of the current 
proposals appropriate money to the federal agencies to develop an 
infrastructure. As such, we suggest that Congress give the Department 
of Labor (DOL) the authority to contract with those states that want to 
enforce the federal patient protection standards for all group plans, 
including self-funded ERISA plans. This contract arrangement would be 
voluntary on the part of those states that want this enforcement 
authority and would be done on a state-by-state basis. The DOL-state 
contract structure would function like other federal arrangements that 
give federal grants to the states to implement and enforce federal 
programs.
    Question 7. What should we do about a State that has very little 
managed care penetration? Should States with little managed care in the 
state be subject to the same approach as states with significant 
managed care?
    Our members believe all consumers deserve a basic level of patient 
protections. Having said that, we ask Congress to recognize that states 
have tailored their patient protections to their markets and to give 
deference to and preserve those state laws to the greatest extent 
possible. The states have adopted protections based on size, 
population, structure and need of their markets. As this question 
implies, one size regulation does not fit all. To require all states to 
adopt the same blanket regulation for all situations could result in 
over-regulation of and unneeded expense to the marketplace. State 
legislatures are sensitive to their marketplaces and consumer concerns, 
and when needed, they have been proactive in establishing consumer 
protections that are tailored to the needs of their individual states' 
health care markets.
    Question 8. If there is a dispute between the State position that 
its laws are sufficient and a Federal bureaucrat, should it be 
reviewable in court and who should get any deference on that issue?
    Because of the extensive nature and complexity of the patient 
protections, reasonable people are likely to disagree on whether a 
state law offers sufficient protections to consumers. The focus should 
be on whether the intent and the outcome of the laws are similar, not 
whether every single word of every provision is exactly the same. If we 
lose sight of the big picture and the protections offered as a whole, 
every little detail of every law will be litigated. We would prefer not 
to have these types of disputes settled in courts while consumers wait 
to have the state patient protection laws enforced.
    In these types of disputes, if a state can reasonably assert that 
the state law offers sufficient protections, we believe the state 
should be given deference. Unless a state's assertion has no reasonable 
basis or evidence, there should be a presumption that the states are in 
the best position to evaluate whether the state laws measure up to the 
federal law not only as the laws are written but also as they function 
and operate in a real world situation. The states will also know how 
and why a state law has been tailored to its particular market and can 
explain how the tailored state law offers sufficient patient 
protections.
    Question 9. In your testimony you mention the need for an 
appropriate transition period. How is the State legislature going to 
know what passes a given standard without some information from 
whomever decides on the test?
    To date, the proposed standards in the various bills seem broad 
enough to allow the states to make the determination regarding whether 
their laws meet the overall goals and intent of the legislation; 
however, this question implies that the states need to wait for federal 
regulations setting forth criteria and examples of how to meet the 
standards. Either way, states will need time to review their laws, 
compare them to the federal law, and determine what changes, if any, 
need to be made. In addition, states will need time to enact the 
changes in their legislatures. Not all state legislatures meet every 
year, and even some that do may consider only non-budgetary or fiscal 
issues every other year. Several years will need to be afforded for the 
states to complete the process.
    Question 10. Can you describe some of the problems the states had 
in enacting the Health Insurance Portability and Accountability Act 
(HIPAA) provisions?
    The process of reviewing state laws and making them HIPAA-compliant 
was very labor-intensive. HIPAA had a much narrower focus regarding 
insurance laws than the patients' bill of rights provisions. HIPAA 
essentially addressed three issues: (1) guaranteed issue in the small 
group market and for a small class of individuals; (2) guaranteed 
renewability of all health insurance policies; and (3) portability 
(creditable coverage so people do not have successive preexisting 
condition exclusions when they change jobs and plans). The patients' 
bill of rights covers a much greater number of provisions, and these 
provisions are much more complex. Therefore, it is essential that the 
states have as much flexibility as possible to not have to rewrite 
their laws if they accomplish the same objective. That is why a 
deferential standard of review is appropriate.
    Question 11. How have the states and Health Care Finance 
Administration and the Department of Labor been working together since 
the enactment of HIPAA?
    Generally the relationships have been good. HCFA and DOL staffs 
attend NAIC meetings regularly, and work with individual states on a 
case-by-case basis. However, it is not the best model to have more than 
one regulator for insured plans. We understand the plans' concerns 
about having to deal with both state and federal regulators on 
insurance products. It is confusing, time-consuming, and not a logical 
allocation of resources. Again, HIPAA's breadth was relatively small 
compared to the patients' bill of rights, and neither federal agency 
has the resources or infrastructure to be an effective insurance 
regulator and ensure that the rights conferred to patients are actually 
enforced.
    Question 12. Do you have any comments on HCFA or DOL enforcing the 
law? What problems arise when the federal government enforces part of 
the insurance laws in a state and the state enforces other parts?
    These agencies do not have the resources (money or staff) or the 
infrastructure established to make sure these protections are enforced. 
The patients' bill of rights does not appropriate any funds to create 
this infrastructure, which by the way, would duplicate the state 
infrastructure.
    As we stated in Question #11, it is not the best model to have more 
than one regulator for insured plans. We understand the plans' concerns 
about having to deal with both state and federal regulators on 
insurance products. Also, it is not helpful for consumers to have two 
regulators for insurance laws. They will not know which regulator to 
call if regulation and enforcement is on a provision-by-provision 
basis. It is confusing, time-consuming, and not a logical allocation of 
resources. The states regulate insurance and enforce these laws, and 
the federal government should let the states continue to do so.
    As we stated in Question #6, Congress could give the Department of 
Labor (DOL) the authority to contract with those states that want to 
enforce the federal patient protection standards for all group plans, 
including self-funded ERISA plans. This contractual arrangement would 
be voluntary on the part of those states that want this enforcement 
authority and would be done on a state-by-state basis. The DOL-state 
contract structure would function like other federal arrangements that 
give federal grants to the states to implement and enforce federal 
programs.
    Question 13. Why is it so important for the states to enforce the 
patient protections?
    While we are sometimes accused of engaging in a ``turf war,'' we 
believe for several reasons that it is best for the consumers if the 
states not only keep their state laws, but also enforce the patient 
protections.
    First, state regulators are presently enforcing many of the patient 
protection provisions that are being considered by the Congress and 
that are included in the President's Principles. The most important way 
states enforce these laws, and thus ensure that consumers get the 
benefits to which they are entitled, is through state internal and 
external review processes. Internal and external review standards are 
the heart of the patient protections. Enforcement of the other patient 
protections, through these review processes, is what makes the other 
protections real, rather than illusory. Congress should not disrupt 
these state processes.
    We should note here that if Congress preempts internal and external 
review processes, Congress would be threatening the ability of state 
insurance departments to handle any type of consumer question, 
complaint or grievance. Consumers' complaints often initiate these 
review processes.
    Second, as we discuss in Questions #14, infrastructure is critical 
for enforcing any new patient protections and the states have an 
extensive infrastructure in place to protect consumers. The federal 
government does not. State insurance departments have established their 
regulatory infrastructures based on their markets and have allocated 
significant resources to assist consumers. Consumers are able to call 
their state insurance departments and the departments can quickly and 
efficiently respond. Consumers are not forced to call an agency in 
Washington, DC and be routed around looking for the right contact 
person. State systems that are working and that are user-friendly for 
consumers should not be preempted by Congressional action that cannot 
guarantee the enforcement of these protections.
    Question 14. Explain the infrastructure that the states have in 
place already to enforce patient protections.
    Infrastructure is critical for enforcing any new patient 
protections. Not only have states established a statutory framework of 
patient protections, but also states have a regulatory structure in 
place that is able to handle and quickly respond to consumers' 
complaints and grievances. This regulatory structure includes: consumer 
representatives and market conduct reviewers who respond, investigate 
and enforce the patient protection standards; toll-free consumer 
telephone lines and Internet access; and on-site representatives to 
respond to complaints.
    Just to quantify the level of state resources (time, money and 
people-power) that is necessary to regulate the business of insurance 
and to successfully handle consumer concerns, in 1999 state insurance 
departments responded to more than 3.3 million consumer inquiries and 
followed-up on more than 448,000 consumer complaints or grievances. 
State Departments of Insurance employed 1,045 financial examiners, 345 
market conduct examiners, 384 financial analysts, 786 complaint 
analysts, and 75 consumer advocates. The examiners conducted 1,562 
financial exams, 1,122 market conduct exams, and 554 combined financial 
and market conduct exams.
    State insurance departments have established their regulatory 
infrastructures based on their markets and have allocated significant 
resources to respond to consumers. Consumers throughout the country 
have easy access to a network of assistance. State systems that are 
working should not be preempted by Congressional action that cannot 
guarantee the enforcement of these protections.
    We are concerned by the potential impact of any federal patient 
protection legislation on consumers. If the federal legislation 
preempts state laws and state infrastructure, the federal government 
does not have the resources (money and staff) or the infrastructure to 
enforce these new protections. With all due respect, we do not think 
consumers benefit from the preemption of state law or state 
infrastructure. As such, we ask Congress to recognize the effective 
state infrastructure already in place and to preserve it so consumers 
in insured plans may continue to enjoy the benefits of state oversight.
                                 ______
                                 
                   National Conference of State Legislators
                                                     April 11, 2001
The Honorable Michael Bilirakis
Chairman, Subcommittee on Health
Committee on Energy and Commerce
U.S. House of Representatives
2125 Rayburn House Office Building
Washington, D.C. 20515
    Dear Chairman Bilirakis: Thank you for giving me the opportunity to 
testify before your subcommittee at the hearing on ``A Smarter Health 
Care Partnership for American Families: Making Federal and State Roles 
in Managed Care Regulation and Liability Work for Accountable and 
Affordable Health Care Coverage.'' Attached is my response to the six 
follow-up questions you posed. I have also attached a copy of NCSL's 
policy on managed care reform.
    On behalf of the National Conference of State Legislatures, I want 
to express our continued support for the establishment of patient and 
provider protections for individuals who receive health care services 
from managed care entities. We look forward to working with you and 
your colleagues, both in the House and the Senate, to achieve this 
goal. Please call Joy Johnson Wilson in the NCSL Washington Office or 
me if we can be of additional assistance to you or your staff as you 
proceed on this important issue.
            Sincerely,
                                              Angela Monson
                       Oklahoma State Senate, President-Elect, NCSL
Attachment
Enclosure
           Responses for the Record of Senator Angela Monson
    Question 1. If a state passed a law that found that a set of state 
patient protections meets the relevant federal standards for 
acceptability, should that finding be recognized as final at the 
federal level? In other words, the national objective is the full 
patient protections but the state makes a finding, not the federal 
government? Would you support that concept?
    Yes, we would support this concept. NCSL has long-standing health 
insurance policy that states, ``Where states already have similar 
legislation in place, a process for declaring `substantial compliance' 
should be developed.'' We believe this could apply to a single state 
law or a set of state laws that, when viewed in their totality, provide 
similar protections and as such, meet or exceed the national patient or 
provider protection objectives.
    Question 2. Should Congress look at some of the existing patient 
protection laws in the states and simply ``grandfather'' them in? In 
other words, should Congress make findings that certain state 
provisions are good patient protections and there is no need for 
further disruption or uncertainty?
    NCSL would support ``grandfathering-in'' existing state laws. It 
would be particularly useful for patient or provider protections that 
have already been enacted by a majority of the states and that are 
similar across the states. A good example would be a ban on ``gag 
clauses.'' It would be relatively easy for the federal legislation to 
include a ``gag clause'' protection that would not be imposed in a 
state that has a ``gag clause'' ban in effect in state law when the 
federal law is enacted.
    Question 3. Do you agree that two laws on the same issue should not 
apply at the same time? If they both applied would it create 
unnecessary conflict and confusion?
    I am not sure that I agree. I do not think it is unusual to have 
more than one law address an issue or different parts of an issue. This 
situation certainly exists in the health insurance area, where state 
laws regulating health insurers do not apply to individuals who receive 
their health care coverage through federally regulated, self-insured 
entities. This situation causes confusion among consumers and could 
easily be rectified by amending the Employee Retirement Income Security 
Act (ERISA) to permit states to regulate self-insured entities. 
However, there are no active proposals to do so. We would be pleased to 
work with you on crafting legislation that would accomplish this. The 
enactment of federal legislation that would provide protections to 
individuals in federally-regulated plans similar to those already in 
effect for individuals in state-regulated plans would go a long way 
towards alleviating confusion and inequities among similarly situated 
individuals with respect to their health care coverage and related 
protections.
    Question 4. What should we do about a state that has very little 
managed care penetration? Should states with little managed care be 
subject to the same approach as states with significant managed care 
penetration?
    Establishing an approach based on managed care penetration assumes 
that there is a significant relationship between managed care 
penetration and the existence of state law regulating the managed care 
industry. I am not certain that a significant relationship exists. Even 
the states with the lowest rate of managed care penetration have 
enacted state laws regulating the managed care industry. Some of these 
states have done substantial work in this area. Alaska, the state with 
the lowest rate of HMO penetration in the United States, has enacted 
laws providing for: freedom of choice; a point of service option; 
direct access to chiropractic care; inpatient care after childbirth; an 
independent appeals process; a ban on gag clauses; and a ban on 
financial incentives. Vermont, ranked 48th of the 50 states and the 
District of Columbia in HMO penetration has enacted state laws 
providing for: direct access to obstetricians and gynecologists; 
standing referrals; continuity of care; an emergency care service 
mandate; the prudent layperson standard; disclosure of restrictive drug 
formularies and procedures for obtaining coverage of nonformulary 
drugs; a definition of medical necessity; an independent appeals 
process, a ban on gag clauses, a ban on financial incentives; prompt 
payments to providers; independent ombudsman programs; and the 
licensing of medical directors.
    Because a state cannot be compelled to enact federal insurance 
legislation, a state could, by failing to enact complying state law, 
``opt out'' of all or some of the federal provisions regulating managed 
care entities and permit the federal government to do so. This would 
not require any special treatment under the federal law because a 
federal ``fall back'' provision would have to be part of any federal 
insurance legislation. We believe that, if states are given sufficient 
time to review their laws and to make revisions and adjustments to 
them, most states will want to maintain regulatory authority in this 
area regardless of the rate of HMO penetration in the state.
    Question 5. If there is a dispute between the state position and a 
federal representative over whether its laws are sufficient, should it 
be reviewable in court? Who should get deference on that issue?
    Deference should be given to states and their assessment of their 
laws. NCSL urges the adoption of a process that presumes the state law 
is sufficient if the state determines that it is. So once a state has 
certified, by a process established in the federal law, that a 
particular state law is equally protective, there would be a 
presumption that the state has made a correct determination. We would 
urge the first level of review to be at the federal department level, 
if a party (the appropriate parties to challenge a state determination 
should be specifically identified in the federal law) challenges the 
state certification. NCSL would certainly not want to preclude any 
state from seeking relief through the courts if it feels the federal 
review process has not treated it fairly.
    Question 6. In your testimony, you mention the need for an 
appropriate transition period. How is the state legislature going to 
know what passes a given standard without some information from 
whomever decides on the test?
    We believe the effective date of the federal legislation in each 
state should occur after the state legislature has met in a regular 
session. After the federal legislation is enacted, states will know 
whether and how state laws will be preempted. The transition period is 
needed to permit states to assess the status of their laws, to make any 
changes that they deem appropriate and to determine any additional 
steps (e.g., certify state law as equally protective) the state may 
wish to pursue.
    If, for example, more protective state laws are ``saved'' from 
preemption, a state may want to revise its existing laws to make them 
more protective than the federal law to maintain state regulatory 
authority. If the federal standard saves ``equally protective or more 
protective'' state laws, a state will want to review its laws to make a 
state determination regarding the status of the state laws compared to 
similar or comparable federal law. Even if the federal law is less 
clear and suggests that a state law or some group of state laws that 
are equally or more protective than the federal law would be saved from 
preemption, the state should have the opportunity to make its 
assessment and to determine whether it wants to assert state authority 
with respect to a law or group of laws in the state according to the 
procedure established in the federal law. For example, a state 
legislature may direct the state insurance commissioner or governor to 
save state regulatory authority for a certain law or group of laws by 
statute, based on their review of those laws. States will need some 
time to make an assessment of the affected state laws and to determine 
what the appropriate next step should be.
               National Conference of State Legislatures
                            official policy
POLICY: Managed Care Reform
COMMITTEE: Health

    NCSL supports both the establishment of needed consumer protections 
for individuals receiving care through managed care entities. We also 
support the development of public and private purchasing cooperatives 
and other innovative ventures that permit individuals and groups to 
obtain affordable health coverage. We strongly oppose preemption of 
state insurance laws and efforts to expand the ERISA preemption. The 
appropriate role of the federal government is to: (1) ensure that 
individuals in federally-regulated plans enjoy protections similar to 
those already available in most states; (2) establish a floor of 
protections that all individuals should enjoy; and (3) to provide 
adequate resources for monitoring and enforcing federally-regulated 
provisions. The Senate-passed version of the ``Patient Bill of 
Rights,'' generally preserves the traditional role of states as 
insurance regulators, and focuses most of its attention on the 
federally regulated, self-funded ERISA plans. Individuals who receive 
their health care through these plans have not benefited from the state 
laws enacted to provide needed protections for individuals who receive 
care through managed care entities. It is appropriate and necessary for 
the Congress to address the needs of these individuals.
    States have taken the lead in providing needed regulation of 
managed care entities. The reforms at the state level have enjoyed bi-
partisan support and have been successful. If states had the ability to 
provide these protections to people who receive their health care 
benefits from self-funded ERISA plans, we would surely have done so. We 
have asked for the privilege on many occasions.
    Today we see federal legislation that will largely preempt these 
important state laws and replace them with federal laws that we submit 
the federal government is ill-prepared to monitor and enforce. None of 
the would provide additional resources to the U.S. Department of Labor 
or to the U.S. Department of Health and Human Services to hire and 
train staff to implement the many complex provisions of these bills.
Preemption of State Laws And State Regulation of Managed Care Entities
    It is widely believed that the pending legislation creates a 
federal floor and would not preempt state laws that are more protective 
of consumers. We are not certain that is true. Unless state 
legislatures adopt legislation that mirrors the federal legislation, 
state insurance commissioners would not be authorized to continue to 
regulate managed care entities under any preempted state laws. In some 
cases ironically, state insurance commissioners would be unable to 
enforce existing state law that would have afforded these same 
individuals needed protections. As a result, after passage of the 
federal legislation, the regulation of managed care entities could be 
largely a federal affair. Again, we believe the current federal 
infrastructure for the oversight and enforcement of health insurance 
regulations is inadequate. The federal government will not be able to 
deliver on the promise and may very well prevent states from delivering 
on theirs regarding patients rights.
Access to Health Insurance Proposals
    NCSL strongly opposes proposals that exempt association health 
plans (AHPs), Health Marts and certain multiple employer welfare 
arrangements (MEWAs) from critical state insurance standards. These 
proposals would permit more small employers to escape state regulation 
and oversight through an expansion of the ERISA preemption. States have 
tailored their health care reforms to fit local health insurance 
markets and to address the concerns of local consumers.

 The impact on federal insurance reforms. The federal 
        government, through the enactment of the Health Insurance 
        Portability and Accountability Act of 1996 (HIPAA), made an 
        effort to stabilize and improve consumer protections (through 
        state regulation) of these markets. Enactment of AHP/MEWA 
        provisions in any form would undermine these efforts. We are 
        particularly concerned about: (1) the impact on state small 
        group and individual insurance markets; and (2) the opportunity 
        inadequate regulation provides for fraud and abuse. These 
        concerns are in addition to our larger concerns about the 
        ability of the federal government to adequately regulate an 
        expanded health insurance market.
 The impact on state insurance markets. Recent state reforms 
        have guaranteed small employers access to health insurance and 
        have made coverage more affordable for many small businesses by 
        creating large insurance rating pools. These large pools assure 
        that all small firms can obtain coverage at reasonable rates, 
        regardless of the health of their employees. The success of 
        these state small group reforms, however, depends on the 
        creation of a broad base of coverage. By expanding the 
        exemption provided in ERISA, the House-passed bill would shrink 
        the state-regulated insurance market and threaten the viability 
        of the markets and any reforms associated with these markets. 
        These proposals undermine HIPAA by creating incentives for 
        healthy groups to leave the state-regulated small group market, 
        only to return when someone becomes ill. This incentive for 
        adverse selection would be disastrous, compromising state 
        reforms and raising health care costs for many small firms and 
        individuals.
 Fraud and abuse. MEWAs have become notorious for their history 
        of fraudulent activities. The House-passed bill would undermine 
        federal legislation that specifically gave states the authority 
        to oversee MEWAs. A policy adopted because federal regulation 
        had proven ineffective in preventing abuses. Under the proposed 
        legislation, many MEWAs could become exempt from state 
        regulation by becoming federally certified as Association 
        Health Plans (AHPs). The proposal does not provide sufficient 
        protections for employees and employers against victimization 
        by unscrupulous plan sponsors.

```