Patient Protection and Managed Care

Patient Protection and Managed Care

Order Code RL31631
Report for Congress
Received through the CRS Web
Patient Protection and Managed Care
October 25, 2002
Jean P. Hearne
Hinda Ripps Chaikind
Specialists in Domestic Social Policy
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress

Patient Protection and Managed Care
Summary
Most Americans have health insurance plans that provide services through some
kind of managed care arrangement. While financial incentives under fee-for-service
insurance can lead to wasteful and possibly harmful excess services, incentives under
managed care plans could lead to underutilization of necessary services. Congress
is responding to this concern by proposing to regulate, at the federal level, various
aspects of managed care and other types of health insurance. During the 106th
Congress, the House and Senate passed comprehensive patient protection bills but
were unable to reconcile the differences and send a bill to the President. The 107th
Congress has revisited the patients rights debate. The Senate and the House have
each passed a bill (S. 1052 and H.R. 2563, respectively) that would establish federal
standards mirroring various state laws as well as recommendations in the 1997
Consumer Bill of Rights as developed by former President Clinton’s Advisory
Commission on Consumer Rights and Quality in Health Care. However, as a
conference committee has not yet been appointed to negotiate between House and
Senate-passed versions of the bill, it is unlikely that agreement will be reached before
adjournment of the 107th Congress. This debate will most likely continue in the 108th
Congress. This document provides background information on the issues
surrounding patient protection and reviews the major differences between the Senate-
passed and House-passed bills.
Both of the bills under consideration would apply federal patient protections to
all insured Americans. The most significant differences between these bills are in the
provisions expanding patients’ legal remedies against their health plan providers
when medical care is unjustly denied and the denial results in harm. Other
differences include provisions applying the protections to federal health programs,
prohibiting discrimination on the basis of genetic information, and encouraging
health insurance coverage expansions.
The health insurance industry and many employer groups are strongly opposed
to increased federal regulation of managed health care. They argue that it is
unnecessary because the market is responding to consumer concerns, and that more
regulation will raise health care costs, increasing the number of uninsured Americans.
On the other hand, supporters of increased federal regulation, including many
provider and consumer advocacy groups, believe that such regulation is needed to
restrain market excesses that could jeopardize health care quality and access and that
such regulation would result in only small additional costs.

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Managed Care Organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Regulation of Managed Health Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
The Role of ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Legislation and Major Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Scope of Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Access and Choice of Providers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Grievance and Appeals Processes and Remedies . . . . . . . . . . . . . . . . . . . . . 8
Internal Appeals Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
External Appeals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Remedies and Access to Courts. ERISA plans . . . . . . . . . . . . . . . . . . 12
Non-ERISA plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Remedies and Access to Courts: The bills . . . . . . . . . . . . . . . . . . . . . 14
Association Health Plans and Qualified Health Benefit Purchasing
Coalitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
AHPs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
HBPCs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Legislative Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Additional Relevant CRS Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
List of Tables
Table 1. Timeframes for Appeals: 107th Congress Patient Protection
Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Patient Protection and Managed Care
Introduction
Most Americans have health insurance plans that provide services through some
kind of managed care arrangement. While financial incentives under fee-for-service
insurance can lead to wasteful and possibly harmful excess services, incentives under
managed care plans could lead to underutilization of necessary services. Congress
is responding to this latter concern by proposing to regulate, at the federal level,
various aspects of managed care and other types of health insurance. During the
106th Congress, the House and Senate passed comprehensive patient protection bills
but were unable to reconcile the differences and send a bill to the President. The
107th Congress has revisited the patients rights debate. The Senate and the House
have each passed a bill (S. 1052 and H.R. 2563, respectively)1 that would establish
federal standards mirroring various state laws as well as recommendations in the
1997 Consumer Bill of Rights as developed by former President Clinton’s Advisory
Commission on Consumer Rights and Quality in Health Care. However, as a
conference committee has not been appointed to negotiate between House and
Senate-passed versions of the bill, it is unlikely that agreement will be reached before
adjournment of the 107th Congress. This debate will most likely continue in the 108th
Congress.
Traditionally, the regulation of health insurance largely has been left to the
states. They have passed numerous managed care and patient protection laws.
However, the federal Employee Retirement Income Security Act of 1974 (ERISA)
preempts the application of such laws for about 56 million persons enrolled in “self-
insured” group health plans through private employers. These are plans in which the
employer takes some or all of the risk of paying for covered items and services. For
enrollees of self-insured plans, federal law applies, but few protections currently exist
in the federal statutes. As a result, there is a patchwork of federal and state regulation
leading many to seek federal standards that would apply broadly to all health plan
enrollees, regardless of who sponsors their health plan or whether they self-insure.
Both S. 1052 and H.R. 2563 would apply federal patient protections to all
insured Americans. The most significant differences between these bills are in the
provisions expanding patients’ legal remedies against their health plan providers
when medical care is unjustly denied and the denial results in harm. Other
differences include provisions applying the protections to federal health programs,
1 For more detailed descriptions of the provisions included in S. 1052 and H.R. 2563, see
CRS Report RL30978, Patient Protection During the 107th Congress: Side-by-Side
Comparison of House and Senate Bills by Hinda Chaikind, Jean Hearne, Fran Larkins and
Angie Wellborn.

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prohibiting discrimination on the basis of genetic information, and encouraging
health insurance coverage expansions.
The health insurance industry and many employer groups are strongly opposed
to increased federal regulation of managed health care. They argue that it is
unnecessary because the market is responding to consumer concerns, and that more
regulation will raise health care costs, increasing the number of uninsured Americans.
On the other hand, supporters of increased federal regulation, including many
provider and consumer advocacy groups, believe that such regulation is needed to
restrain market excesses that could jeopardize health care quality and access and that
such regulation would result in only small additional costs.
Managed Care Organizations
Background
Managed care generally refers to a payment system or delivery arrangement in
which a health plan attempts to control or coordinate the use of health services by its
enrollees in order to control spending and promote health. Like fee-for-service
insurers, managed care organizations (MCOs) accept financial responsibility for a set
of benefits in return for a premium paid by or on behalf of each enrollee. Unlike fee-
for-service insurers, many MCOs directly provide or arrange for health care services,
through affiliated physicians, hospitals and other providers, instead of simply paying
bills.
MCOs try to control hospital admissions, diagnostic tests, or specialty referrals,
either through programs to review the use of services or by giving participating
physicians a financial stake in the cost of the services they order. They may also
select low-cost providers of services or negotiate discounted rates from providers.2
At one time, the only type of arrangement that offered managed care was a
health maintenance organization (HMO). Today, managed care is provided by an
array of entities, such as preferred provider organizations (PPOs) and provider
sponsored organizations (PSOs), many of which offer access to a wider range of
providers than do traditional HMOs. Like traditional HMOs, these arrangements
provide covered services through provider networks. Enrollees are given financial
incentives to use services within the plan’s provider network, but still receive some
coverage even if they decide to obtain care from outside providers.
Almost 93% of insured employees were covered by some form of managed care
in 2001: Over 23% of covered employees were enrolled in HMOs, twice as many
workers, 48%, were enrolled in PPO plans and 23% were in point-of-service plans.
Point of service plans are defined as being similar to HMOs but they allow patients
to use non-network providers at a higher cost than for network providers. Since the
2 For more detail, see CRS Report 97-482, Managed Health Care: The Use of Financial
Incentives, CRS Report 97-913, Managed Health Care: A Primer and CRS Report 98-117,
Managed Health Care Cost and Quality Control Strategies.

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early 1990s, insured workers’ enrollment in traditional fee-for-service plans dropped
from about 50% to only 7%, reflecting the addition of managed care features to many
of the former fee-for-service plans. The broad shift to managed care has been driven,
largely, by cost concerns. Among all size employers in 2001, average fee-for-service
premiums were almost 20% higher than HMO premiums and between 4% and 7%
higher than PPO premiums, according to the Employer Health Benefits 2001, Annual
Survey by the Kaiser Family Foundation and Health Research and Educational
Trust.
Regulation of Managed Health Care
Employers’ benefit plans, which often include health insurance (or health
benefits through managed care), are regulated by the federal government under the
Employee Retirement Income Security Act (ERISA). Such “ERISA plans” are
subject to standards for reporting and disclosure, fiduciary conduct, enforcement of
rights, and protections against discrimination whether the employer purchases health
insurance for employees or self-insures by accepting some or all of the risk for the
cost of services. Consequently, managed care entities that provide benefits under an
employer benefit plan must include those ERISA protections in their products.
(Employer benefit plans sponsored by governmental employers and churches are not
subject to ERISA.)
States, too, regulate many health insurance products. States have traditionally
had regulatory authority over the business of insurance and most have exercised that
authority in areas where ERISA standards are largely absent or viewed to be
inadequate. For example, reporting and disclosure rules under ERISA may not be
particularly timely, procedures for claims denial leave great room for variation
among plans, and court remedies available under ERISA do not allow for money
damages. As a result, many states have stepped in to establish stronger protections
for health plan beneficiaries. Since many managed care products are considered
insurance, managed care entities must include those protections in the products they
sell.
States, on the other hand, are not permitted under ERISA to regulate employers’
benefit plans (this is known as the ERISA preemption clause, discussed in greater
detail below). ERISA frees employer benefit plans from state regulation but many
employers offer benefit plans that include health insurance products. In this case the
employer purchases health insurance from a traditional insurer (or MCO) and the
insurer bears the risk of covering the cost of the benefits. Despite ERISA’s
preemption on employer benefit plans, these insurance products have already met
state requirements for insurance. Other employers offer “self- insured” health plans
– where the employer bears some or all of the risk of paying for the plan’s covered
services. Such self-insured (or self-funded) plans are not generally considered
insurance and therefore, are not subject to many of the states’ insurance and patient
protection laws.

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This division of regulation between the states and the federal government is
further complicated by the Health Insurance Portability and Accountability Act of
1996 (HIPAA, P.L. 104-191), as amended. Prior to HIPAA, the states regulated such
aspects of health insurance and managed care as licensure, solvency, benefits, and
rating. HIPAA, however, imposes federal requirements relating to portability of
health insurance on state-regulated insurers and MCOs. It also applies such
requirements to ERISA plans. (The term “portability” as used in HIPAA means, for
example, the ability to change health plans without experiencing preexisting
condition exclusions.)
Whether more federal regulation of health insurance is desirable or needed is
hotly debated. HIPAA regulates only certain aspects of eligibility and coverage. It
does not regulate broader aspects of health care delivery, such as choice of providers,
grievance procedures, and quality assurance. States have been passing managed care
laws, but these do not apply to the enrollees in self-insured ERISA plans. This means
that roughly 30% of a state’s privately insured population is not covered by these
laws. State laws also are widely variable, with some providing for comprehensive
protections, and others providing for narrowly targeted measures.
It is partly because of this patchwork of regulation that some are seeking federal
standards for managed health care that would apply to all enrollees, regardless of
whether the plan is sponsored by an employer or by an MCO. Proponents of federal
action are divided, however, over the scope of federal regulation, how it should
interact with ERISA, and its relationship to state laws. Should standards govern the
entire range of plan-provider and plan-enrollee relationships or should they be more
targeted? Should standards apply to fee-for-service insurance as well as managed
care? Should there be uniform national standards or should there be flexibility for
state laws similar to or more protective of consumer and provider rights?
MCOs and employer groups tend to oppose federal regulation of managed care.
They argue that a market unimpeded by federal interference is the most efficient way
to ensure that health plans meet consumer demands for affordable, accessible, and
high quality health care. In their view, government regulation is not only unnecessary
because the market is already responding to consumer concerns but also would add
significantly to the cost of health insurance. This, in turn, would lead to greater
numbers of uninsured. Moreover, they assert that national standards are inflexible
and would impede cost-effective innovations in the design of health insurance
coverage.
The Role of ERISA. One concern during the patient protection debate is
whether to apply such standards only to self-insured plans or to all group health plans
and health insurance issuers (“health insurance issuers” is defined in HIPAA to
include insurance companies, insurance services, or insurance organizations
including HMOs licensed to engage in the business of insurance). As mentioned
above, ERISA already imposes minimum standards for plans sponsored by private-
sector employers, including fiduciary standards, reporting and disclosure
requirements, nondiscrimination, and grievance procedures. It also requires such
plans to comply with federal portability, maternity stay, coverage for reconstructive
surgery following mastectomy (discussed below), and mental health requirements as
a result of HIPAA, P.L. 104-204, and P.L. 105-277).

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The ERISA preemption clause impedes states from implementing laws that
“relate to” employer benefit plans. In practice, this frees self-insured plans from state
laws regulating insurance because those plans are not considered to be insurance.3
This preemption provision was designed to ensure uniform national requirements for
multi-state employer plans, and protects self-insured health plans from potentially
costly state regulation, such as state mandated benefit laws, risk pool assessments,
premium taxes, and consumer protection managed care laws. Continuation of
ERISA preemption is viewed as critical by the self-insured, employer community.
Other stakeholders, in contrast, such as governors, state insurance regulators, and
consumer groups, see ERISA as a major impediment to state insurance reform. In
their view, it is largely because of ERISA’s regulatory limitations and its preemption
of state insurance law that Congress needs to act.
Legislation and Major Issues
The two patient protection bills under consideration are S. 1052: the
“Bipartisan Patient Protection Act”, passed by the Senate on June 29, 2001, and
H.R. 2563, the “Bipartisan Patient Protection Act”, passed by the House on August
2, 2001. S. 1052 was introduced in the Senate by Senators McCain, Edwards and
Kennedy on June 14, 2001. H.R. 2563, was introduced on July 19, and incorporated
many of the amendments included in the Senate-passed bill, with several major
exceptions: (1) H.R. 2563 includes only a sense of the Congress, rather than a
requirement, that these protections would apply to federal health programs; and (2)
H.R. 2563 does not include provisions expanding the current law prohibitions on
discrimination based on genetic information, and (3) H.R. 2563 includes tax
provisions not found in S. 1052.4 H.R. 2563 was further modified before passage to
include two new major amendments. The two major amendments resulted in other
differences, the most significant of which are in provisions expanding the right to sue
for benefits denied, increasing health insurance coverage options (Association Health
Plans and Medical Savings Accounts), and defining the ability of states to apply
substantially equivalent state laws in lieu of the federal laws.
Scope of Application
One important distinction among the patient protection bills considered during
the 107th Congress is in their scope of application. The question here is whether the
federal protections should apply to all Americans, only to those who are covered
under employer-based plans, or only to those with employer-based coverage who do
not have access to similar protections from their states. The reach of the proposed
protections is the subject of the first of President Bush’s principles: that federal
protections should apply to all health plan enrollees while giving deference to
3 See CRS Report 97-938, Managed Health Care: Federal and State Regulation and CRS
Report 98-286, ERISA’s Impact on Medical Malpractice and Negligence Claims Against
Managed Care Plans.
4 For a discussion of the tax provisions, see CRS Issue Brief IB98037, Tax Benefits for
Health Insurance: Current Legislation, by Bob Lyke and Christopher Sroka.

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existing state protections. Both of the bills passed during the 107th Congress would
apply their standards to all (insured) Americans, but both also include provisions
allowing state laws to apply under certain circumstances to those plans that are
subject to state laws. Both bills allow for the substitution of state law, if it meets
criteria for substantial compliance with federal standards with two exceptions. The
first exception is that the House-passed bill does not allow state laws defining
internal and external appeals processes to apply in lieu of the federal laws. The
second exception is related to state laws limiting damages in health care-related
lawsuits. S. 1052 would allow a state to determine non-economic damage amounts
in state court, while H.R. 2563 allows states to apply their own damage limits, but
only up to the federally established maximum amounts.
The bills would apply to individually-purchased plans as well as employer-
sponsored plans, and to state and local government-sponsored plans. S. 1052 was
amended before passage so that its provisions, including the expanded right to sue,
would apply to all federally sponsored health plans including the Federal Employees
Health Benefits Program, Medicare, Medicaid, the State Child Health Insurance
Program, Veterans, Department of Defense and all other federal programs providing
health care or coverage. H.R. 2563 does not specifically apply its provisions to
federal government-sponsored plans, but since the Federal Employee Health Benefit
(FEHB) program plans are offered by insurers and HMOs which are subject to the
group plan provisions, FEHB plans would be expected to comply with patient
protection legislation, if passed. Other federally sponsored health plans or programs,
such as Medicare and Medicaid, would not be covered by the provisions of H.R.
2563, although this bill includes a provision expressing the sense of the Congress that
the President should issue an Executive Order requiring federal officials take feasible
steps to apply patients rights to federal health programs.
Both bills include provisions that exempt fee-for-service plans from many of the
protections in the bill, including a requirement for a consumer choice option, choice
of health care professional, access to emergency care, specialists, obstetricians and
gynecologists (OB/GYN), pediatric care, and continuity of care. S. 1052 does not
apply its exemption to federal health plans and programs. Fee-for-service plans are
defined in the bills as those that reimburse providers on a fee-for-service basis
without placing them at financial risk, do not vary providers’ reimbursement based
on contract terms or use of health care services, allow access to any provider legally
authorized to provide covered services (and are willing to accept the payment terms)
and do not require prior authorization.
Access and Choice of Providers
S. 1052 and H.R. 2563 include a number of identical provisions ensuring that
health plan enrollees have access to certain types of services and providers without
such barriers as prior authorization and increased copayments. The provisions in
common include:
! Access to Emergency Services. Some MCOs require prior authorization for
emergency department services. Without it, consumers who go directly to the
emergency room, and for whom the plan later determines that emergency care
was not medically necessary, may be responsible for the entire bill. The bills

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addressed this issue by establishing a “prudent layperson” standard for plans
that cover emergency services. This standard would require plans that cover
emergency care to cover such care for the treatment of any condition which
a prudent layperson would reasonably believe puts them at serious risk of
injury or death. The bills also prohibit plans or issuers from charging patients
more for using a non- network provider than would have been charged if the
emergency services were provided in-network. The bills include a provision
requiring that emergency ambulance services be subject to the same type of
standard.
! Access to Physicians Specializing in Ob/Gyn and Pediatric Care and other
Specialty Services. Some MCOs restrict access to specialty care and
specialists by requiring referrals from primary care or “gatekeeper” physicians.
Although gatekeeping has enabled plans to reduce costs, its use has led to
consumer complaints about difficulties in gaining access to medical services.
The bills passed in the 107th Congress include provisions: (1) requiring plans
that cover obstetrical and gynecological care to allow enrollees to visit
physician and non-physician specialists without first receiving a referral and
prohibiting prior authorization for the OB/GYN services that they order, (2)
requiring that pediatricians be considered as primary care providers for plans
that require such a designation, and (3) requiring plans that cover the services
of specialists to ensure enrollees have timely access to those specialists.
! Continuity of Care. A patient undergoing a course of treatment in the care of
a health care provider whose contract with an MCO is terminated would be at
risk of losing access to their established providers. The bills would require
plans to cover some continued care with terminated providers for certain plan
enrollees undergoing a course of treatment during a transition period of at
least 90 days.
! Point-of-Service Option. Point-of-service options allow enrollees of closed-
network plans to have access to non-participating providers, though typically
at a higher cost and on a fee-for-service basis. By 1996, over 80% of HMOs
reported having a POS option of some kind. The bills would require group
health plans that have closed networks to provide point-of-service options. S.
1052 and H.R. 2563 do not require point-of-service coverage, however, for
those individuals given a choice of non-network coverage through another
plan or issuer in the group market.
! Information Disclosure. Economists maintain that access to information and
the ability to choose among competing options are the hallmarks of an
efficiently functioning market. They reason that informed consumers and
purchasers can help maximize value if cost and quality data are readily
available and understandable. Although the health care system in total may
diverge in significant ways from a free market model, many observers
nevertheless believe that the disclosure of useful health care information is an
important goal. Each of the bills requires extensive information to be
provided to individuals at time of enrollment and annually thereafter.

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! Medical Communications. The phrase “gag rules” refers to clauses in
provider contracts that prohibit or limit provider-patient communications
about: (1) medical conditions, care, and treatment; and (2) compensation
arrangements that produce financial incentives to under-provide care.
Although some recent studies suggest that gag clauses are not prevalent in
today’s contracts, other observers point to some of the more subtle ways plans
may discourage certain forms of medical communications between health care
professionals and patients. The bills include prohibitions on such contract
clauses.
! Access to Prescription Drugs and Clinical Trials. The current bills include
provisions requiring plans that limit coverage of drugs to those on a list,
sometimes referred to as a formulary, to develop those formularies with
physicians and pharmacists and to allow exceptions from the formulary when
a non-listed drug is medically necessary and appropriate. S. 1052 and H.R.
2563 would limit additional cost-sharing for non-formulary drugs.
The bills also include provisions requiring plans to cover routine patient costs
incurred through participation in an approved clinical trial.
! Discrimination Protection for Providers. Both bills include a provision that
would prohibit discrimination with respect to participation or indemnification
against any provider who is acting in accordance with license or certification
under state law.
One significant set of protections included in the Senate bill are provisions that
expand upon the current law prohibition on discriminating against individuals based
on genetic information. The Senate bill would prohibit plans or issuers, in both
group and individual markets, from: (1) establishing rules for eligibility (including
continued eligibility) for any individual based on genetic information of that
individual or their dependent, (2) denying eligibility or adjusting premium or
contribution rates on the basis of predictive genetic information for an individual or
that person’s family member, and (3) requesting or requiring that an individual or
that person’s family members provide predictive genetic information. It would also
require plans to provide notice of confidentiality safeguards when requesting such
information, to post or provide notice of confidentiality practices and to have
safeguards in place with respect to predictive genetic information.
Grievance and Appeals Processes and Remedies
Most MCOs have internal procedures to address enrollee complaints about
waiting times, unresponsive staff, and other quality of service issues. While such
grievances may or may not be resolved to an enrollee’s satisfaction, often they are not
appealable. (Enrollees in state-regulated MCOs can complain to the state’s
department of insurance.)
In addition, many health plans have procedures to deal with complaints about
reimbursement for, and coverage of, medical care. Under the traditional fee-for-
service system where the insurer is separate from the health care provider, such
complaints usually relate to a health plan issuer refusing to pay for care already

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received. In certain MCOs, on the other hand, where the entity managing care is also
providing care, patients may be denied certain services or treatments in the first place
— a practice which has led many to complain that they are not receiving sufficient
medical care to retain or regain their health.
The House- and Senate-passed patient protections bills under consideration in
the 107th Congress include provisions requiring and defining the internal review
procedures for coverage denials.
Internal Appeals Process. An enrollee in an ERISA plan has a right to
reasonable opportunity for a full and fair review by the plan of a decision denying a
claim. The Department of Labor has established procedures for such reviews5. Plans
must conform with those requirements for all claims filed on or after January 1, 2002.
The rules have established some uniformity of internal appeals procedures. If the
internal review determination is in the enrollee’s favor, then the plan provides the
service and/or pays the claim. If it is not in the enrollee’s favor, he or she may sue
under ERISA for the benefit that has been denied (see below). As an intermediate
step, some employers provide for an independent external review of the benefit
denial (see below).
For an enrollee who is not in an ERISA plan (such as a managed care plan
bought in the individual market or one that covers state and local governmental
employees), the internal appeals process is different. State laws require that HMOs
have a procedure in which they reconsider initial denials of payment or coverage.
Upon being notified that an HMO has denied approval of a service or benefit, an
enrollee (or an enrollee’s provider) has a right to appeal a decision to an individual
or panel within the HMO.
5 See 29 CFR Part 2560, 11/21/2000 for the final rule.

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Table 1. Timeframes for Appeals: 107th Congress
Patient Protection Proposals
S. 1052 and H.R. 2563
Initial decision
ASAP – “As soon as possible” in accordance with the medical exigencies
of the case, but no later than:
Routine: 14 days after receiving information but no later than 28 days;
Expedited: 72 hours;
Ongoing: ASAP with sufficient time for appeal;
Previously provided services: 30 days after receiving necessary information,
but no later than 60 days
Internal
ASAP – “As soon as possible” in accordance with the medical exigencies
review
of the case, but no later than:
Routine: 14 days after receiving information but no later than 28 days;
Expedited: 72 hours after request;
Previously provided services: 30 days after receiving necessary information,
but no later than 60 days.
External
ASAP – “As soon as possible” in accordance with the medical exigencies
review
of the case, but no later than:
Routine: 14 days after receiving necessary information, but no longer than
21 days after request;
Expedited: 72 hours after request;
Ongoing: 24 hours after request;
Previously provided services: 30 days after receiving information, but no
later than 60 days after request.
The 107th Congressional bills broadly allow for denied claims for benefits or
coverage or disputes over cost sharing amounts to proceed to internal review. The
bills would require that internal reviews be conducted by individuals with
appropriate expertise so long as those individuals were not involved in the initial
determination. They also would require that physicians with appropriate expertise
conduct reviews for appeals of denials that require the evaluation of medical facts,
that are based on a determination that the treatment is not medically necessary, or
are experimental or investigational. The only difference between the two bills on
internal review is that S. 1052 would allow state internal review statutes that are
determined to be substantially similar to those described in the bill, to apply in lieu
of the federal provisions while H.R. 2563 would not.
Table 1. summarizes the timelines for initial decision making, as well as for
internal and external review of requests for payment of claims as proposed under S.
1052 and H.R. 2563. The bills set timelines for routine and expedited reviews –
those that occur before the service is provided to the patient. The timelines ensure
that the patient does not wait too long for approval or denial at each stage of the
review process. Expedited reviews may be requested by a patient (or their
authorized representative) when the timeline for a routine determination would
seriously jeopardize the life or health of the patient to maintain or regain maximum
function. The bills also specify timelines for claims related to ongoing care, such

CRS-11
as when a patient is in a hospital and is requesting approval for a longer stay, and for
care that has already been provided.
External Appeals. Under current law, ERISA does not require plans and
issuers to provide for external review of coverage determinations, although some
private employers voluntarily provide such a process. Enrollees in these plans,
whether the plans are fully-insured or not, can appeal adverse coverage decisions to
an external appeals entity if one exists. On the other hand, enrollees in non-ERISA
plans may have external appeal rights if they reside in states that have enacted laws
requiring MCOs to provide for an external appeals process.
The debate on codifying a definition of “medical necessity” most often comes
up with respect to establishing a standard of review for external appeals, although
such a definition could also impact initial coverage decisions. Today, physicians
and their patients sometimes complain that their treatment decisions and referrals
are determined by the plan not to be “medically necessary.” As a result, insurers
refuse to pay for such services or MCOs refuse to provide the services. Some states
have responded to such complaints by establishing a definition of medical necessity
in state law — thereby legislating a standard for medical decision making. Such a
definition could provide enrollees who are appealing adverse coverage decisions
with an objective standard to claim that a service is needed — a standard that is not
set by the plan itself. Some advocates, including providers, argue for a standard of
care for medical necessity that is the “generally accepted standard of practice.”
Opponents believe that a federal definition of medical necessity will be overly
bureaucratic and will result in defensive and costly medical practices. Others
propose that a federal definition of medical necessity is unnecessary if strong, valid,
and scientific standards for external reviewers are defined and if those standards
make clear that the review cannot be limited by insurers’ contract clauses that define
medical necessity in a restrictive way.
The external review provisions have evolved significantly since the 106th
Congress where there were major differences between the bills especially with
respect to the characteristics of the external review entities, standards for review
(including the consideration of plans’ medical necessity definitions), whether the
decisions of the reviewers are binding, and whether other types of dispute resolution
are allowed. Today the bills are mostly alike in those areas, with a few remaining
differences. H.R. 2563 would not allow state external review laws to apply in lieu
of the federal provisions, and further specifies that the external review panel: (1)
would consist of three individuals, and (2) in a case involving a physician, all three
reviewers would be physicians.
The two bills are the same with respect to the types of adverse coverage
decisions that may enter into external review. They would require a system for the
external review for benefits denied because they are determined by the plan to not
be medically necessary, are investigational or experimental, or involve medical
judgement. The bills would also allow insurers to require payment of a refundable
filing fee of no more than $25. They would allow plans to condition the external
review on the completion of an internal review except when internal review
decisions do not meet specified time lines, and to waive the internal review process
allowing claims to proceed directly to external review.

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The bills include selection criteria for external reviewers designed to ensure
adequate expertise of panel members, independence from the plan or issuer, as well
as fairness. Both bills would also require the “applicable authority” to implement
procedures to assure that the process of selecting the external review entity will not
create incentives to bias the decisions of the entity. In addition, they would prohibit
participants, beneficiaries, enrollees or the plan or issuer from determining or
influencing the selection of the external review entity.
The bills would require the reviewing entities to screen claims to determine if
they meet the criteria to proceed to external review. Reviewers would be directed
to take into account whether the plan or issuer’s decision is in accordance with the
medical needs of the patient; the medical condition and personal medical
information of the patient; the opinion of treating physicians or health care
professionals; the plans’ definition of medical necessity and experimental coverage,
although the reviewers would not be bound by such definitions; and the decisions
of internal reviewers. Other information, such as valid scientific and clinical
evidence, treatment guidelines, and community standards of care may also be
considered. The bills would require a de novo determination. The decision of the
external reviewer would be considered to be binding.
S. 1052 and H.R. 2563 would authorize civil penalties of up to $1,000 a day
if the determination of the external reviewers was not followed and additional
penalties for cases in which the appropriate Secretary6 determines that there is a
pattern or practice of repeated refusals to authorize benefits following external
review. This penalty could not exceed the lesser of 25% of the value of benefits not
provided or $500,000. In addition, both bills would allow the Secretary to assess a
civil penalty against any plan of up to $10,000 for the plan’s failure to comply with
deadlines, to be paid to the participant or beneficiary if the determination of the
external reviewers is not followed.
Remedies and Access to Courts. ERISA plans. Under ERISA,
enrollees in employer-sponsored plans can only sue an ERISA plan for benefits due
under the plan. State law causes of action, which include consequential and punitive
damages, are not available and ERISA does not provide for such damages. This is
the case whether the employer-sponsored health benefits are insured or self-insured.
It is also an exception to the usual interpretation of ERISA preemption – that is, that
ERISA overrides state laws regulating employer benefit plans but not those
regulating the business of insurance. This exception results from a 1987 Supreme
Court decision (Pilot Life Insurance Co. vs. Dedeaux, 481 U.S. 41).
It is less clear whether or not enrollees in ERISA plans can sue for negligence,
wrongful death, or medical malpractice. Some courts have found that MCOs or
6 The Secretaries of Labor and Health and Human Services would be jointly responsible for
the execution of this Act. The bills require them to issue an interagency memorandum of
understanding to ensure that (1) regulations, rulings, and interpretations issued by each
relating to the same matter under the provisions of this Act (and any amendments) are
administered so as to have the same effect at all times; and (2) there is a coordinated
enforcement strategy that avoids duplication of enforcement efforts and assigns priorities
in enforcement.

CRS-13
other entities that contract with an ERISA plan can be held liable for the quality of
the medical care, including substandard care and negligent or faulty delivery of
services. In this case, an enrollee would be able to sue under state law. If, however,
an enrollee sues the ERISA plan itself for malpractice, wrongful death, or
negligence, the court could dismiss the suit because no such cause of action exists
under ERISA and any state laws relating to the plan could be preempted.
Further complicating the question of liability is that for many self-insured
employer plans, the line between the administrative functions of the plan and the
medical decisions of the plan can be blurred. The courts have been clear that state
laws that relate to administrative functions of ERISA plans are preempted. On the
other hand, the courts have spoken equivocally on the question of where an
administrative (i.e., quantitative) decision ends and a medical or qualitative decision
begins. If, for example, a plan denies urgently needed medical care that a patient
cannot afford to pay on his or her own, or promised coverage is delayed until it is
too late to do any good, then is that a benefit decision or a medical decision?
Because the federal circuit courts are divided on this issue, some legal experts
predict the Supreme Court will take it up. Against this backdrop, however, the
current bills propose to resolve the ERISA plan liability issue through legislation.
Non-ERISA plans. If an enrollee in an individually purchased plan or other
non-ERISA plan receives an adverse coverage determination at the external review
stage, then he or she can attempt to sue the MCO in state court. Remedies vary by
state. Typically, they include the cost of the denied service as well as consequential
costs (such as lost wages) and non-economic costs (such as pain and suffering). An
enrollee may also be able to sue for punitive damages.
State laws also vary as to whether they allow enrollees in non-ERISA plans to
sue MCOs (as opposed to doctors or other providers) for medical malpractice. In
many states, such suits never get to trial because the organization is protected by the
anti-corporate practice of medicine laws. Simply stated, those laws hold that an
HMO cannot make medical decisions because the HMO is not a health care
professional. Since it cannot make medical decisions, it cannot be held responsible
for medical malpractice. Many would like to see this shield against HMO liability
removed. In their view, the organization should be legally responsible for
withholding care or delivering poor quality care because it influences providers’
actions through financial incentives or more direct controls over medical practice.
In May 1997, Texas became the first state to explicitly override its corporate
practice of medicine law with a new law that holds MCOs liable for medical
decisions affecting a patient’s health. This law was challenged in federal court by
Aetna Health Plans, which argued that the law is preempted by ERISA because it
improperly interferes with administration of employee benefit plans (see below).
The court upheld the states’ provisions subjecting MCOs to liability for such
decisions.7
7 For more information on this issue, see CRS Report 98-286, ERISA’s Impact on Medical
Malpractice and Negligence Claims Against Managed Care Plans.

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Remedies and Access to Courts: The bills. Provisions involving
judicial remedies and access to courts have proved to be the most difficult to resolve
during the debates in both of the chambers. While both the House- and Senate-
passed bills allow some lawsuits to proceed at the state level and expand both the
causes of action and the damages available at the federal level, the approaches
approved by the House and Senate are significantly different. Compromise during
conference negotiations will require addressing the two different approaches.
S. 1052 would allow state law causes of action involving medically reviewable
decisions and would expand federal law causes of action for denials of benefits that
are not based on medical decisions. This approach is based on the traditional
authority of ERISA over the administrative duties of the plan’s fiduciary. S. 1052
would create a federal cause of action for personal injury or wrongful death but only
when a state cause of action is pre-empted by ERISA. It would also expand the
remedies available under ERISA to include economic and non-economic damages
in cases of personal injury or death but would not allow for exemplary or punitive
damages. For state law claims, S. 1052 would not allow for punitive or exemplary
damages when plans meet the requirements for the review and appeals process, with
two exceptions: (1) when state law allows only for punitive or exemplary damages
in cases of wrongful death, or (2) when the defendant can prove the plan’s willful
or wanton disregard for the rights or safety of others. Finally, S. 1052 would allow
a civil assessment in any action of up to $5 million payable to the claimant if he can
establish the bad faith and flagrant disregard on the part of the plan for the rights of
its participants or beneficiaries.
H.R. 2563 would amend ERISA to create a federal cause of action if a
designated decision maker fails to exercise ordinary care in making a determination
for either an initial claim or for internal review, or fails to comply with the external
review decision; if that failure is the proximate cause of personal injury or death.
State courts would have concurrent jurisdiction over claims under this new federal
cause of action, which means that state courts could hear those claims, the federal
law would apply, but the state courts’ procedural rules could be used to process
those claims. The designated decision maker would be liable for economic and
noneconomic damages. Noneconomic damages would be limited to $1.5 million
and punitive damages of up to $1.5 million could only be awarded when benefits
were not provided following an independent reviewer’s determination that they
should be provided. States may further limit those damages for federal law claims
heard in state courts. Economic damages are uncapped.
Both bills include provisions intended to protect employers, by limiting federal
or state causes of action against a group health plan, employer or plan sponsor
unless such person or persons directly participated in the consideration of a claim
for benefits and in doing so, failed to exercise ordinary care. The bills would shield
employers from liability when those employers have “designated decision makers”.
Designated decision makers would assume all liability of the employer or plan
sponsor. Finally, S. 1052 would prohibit any federal cause of action against a group
health plan that is self-insured and self-administered by an employer or a multi-
employer plan, for the performance of, or the failure to perform any non-medically
reviewable duty under the plan.

CRS-15
Both bills generally require administrative processes (internal and external
review) to be completed before a cause of action may be brought against any
individual in connection with a denial of a claim for benefits. The bills allow, in
federal causes of action, for a participant or beneficiary to seek injunctive relief
before finishing internal and/or external review if he can demonstrate that
completing the processes would result in irreparable harm. In state causes of action,
S. 1052 and H.R. 2563 allow an exception to the exhaustion rule in cases where the
external review entity fails to make a determination within the defined timelines.
Finally, both bills would limit certain class action lawsuits and S. 1052 would limit
attorneys’ contingency fees.
MCOs, employers and the health insurance industry are strongly opposed to
changes in the ERISA preemption enjoyed by private employer-sponsored plans.
These and other critics argue that increasing access to such remedies as
compensatory and punitive damages would significantly inflate health care costs.
They assume that patients, attorneys and even providers would much more readily
pursue state law causes of action against health plans and plan sponsors for medical
negligence and malpractice. The result, critics predict, would be defensive
medicine, higher liability insurance and thus premiums, and perhaps even reductions
in covered benefits or a higher number of uninsured individuals. Conversely, many
of those who support the modification of ERISA consider the likely cost effects to
be far more modest. To support this view, they cite the absence of runaway medical
cost inflation in those sectors — non-ERISA employer sponsored plans and the
individual insurance market — that do not now enjoy preemption from state causes
of action. In June 1998, CBO estimated the cost of ending the ERISA preemption
as 1.2% of the premiums of all employer sponsored plans. However, it should be
noted that CBO cautioned that this estimate “depends on assumptions for which the
supporting data are extremely limited or nonexistent.” Recent CBO cost estimates
for S. 1052 conclude the liability provisions would increase premiums by .8%.
Association Health Plans and Qualified Health Benefit
Purchasing Coalitions
The House bill identifies two types of employer purchasing arrangements;
Association Health Plans (AHPs) and Qualified Health Benefit Purchasing
Coalitions (HBPCs). The purpose of such groups is to provide a mechanism for
employers to band together to purchase insurance coverage for their employees. The
concept of employers grouping together to purchase insurance is not new. A
number of different styles of employer-based health insurance purchasing groups
exist today. There are both public purchasing groups and private purchasing groups;
some that self-insure and others that bargain with carriers to offer a single or
multiple insured products. There are a number of possible advantages for employers
that purchase insurance through a well-designed group. By pooling their insurance
risks together, the employers in the group may be able to increase their bargaining
power with carriers and share administrative functions resulting in lower premium
costs. Employees of those firms may be able to select from a larger number of plans
than if their employers were to obtain insurance independently. Multiple employer
welfare arrangements (MEWAs), a broad category of employer purchasing groups,
have traditionally been established by trade or business associations to provide

CRS-16
insurance to a particular group of employers. While the primary purpose of
MEWAs is to enjoy the economies of scale of banding together, a secondary
purpose, for those groups with below-average risk, is to buy lower-priced coverage
reflecting their lower risk.
AHPs. The House-passed bill establishes AHPs as certified group health plans
sponsored by associations. The primary differences between AHPs and existing
MEWAs is that AHPs would not be subject to most state insurance laws including
benefit mandates (except that they must comply with any federal or state laws that
require coverage of specific diseases, maternal and newborn hospitalization, and
mental health), solvency standards, and pricing rules. Those AHPs with at least one
self-insured offering would be required to meet the bill’s reserve requirements and
provisions for solvency.
Other major requirements include the following:
! AHPs must offer at least one insured health coverage option unless the self-
insured plan existed on the date of enactment of the Bipartisan Patient
Protection Act, or it does not restrict membership to one or more trades but
whose eligible participating employers represent a broad cross section of
trades and businesses or industries, or the plan covers eligible participating
employees in one or more high risk trades that are listed in the bill.
! The association sponsoring the plan must have been in existence for at least
3 years and must be operated by a board of trustees with complete fiscal
control and responsibility for all operations.
! Self-insured AHPs must meet reserve requirements and provisions for
solvency, they must have at least 1,000 participants and beneficiaries, and
have offered coverage on the date of enactment or represent a broad cross-
section of trades, or represent one or more trades with average or above
average health insurance risk.
! All employers who are members must be eligible to enroll, all geographically
available coverage options must be made available upon request to eligible
employers, and eligible individuals cannot be excluded because of health
status.
! Premiums for any particular small employer are prohibited from being based
on the health status or claims experience of its plan participants or on the
type of business or industry in which the employer is engaged.
The bill also establishes an “Association Health Plan Fund” from which the
Secretary of Labor (or applicable authority) would make (or authorize to the
Secretary of Labor) payments to ensure continued benefits on behalf of AHPs in
distress. The AHPF would be funded by annual payments made by AHPs. In
addition, the Secretary of Labor would be required to report to Congress no later
than January 1, 2006, on the effect of AHPs on reducing the number of uninsured
individuals.
Advocates of purchasing groups look to them as a mechanism to extend
coverage among the working uninsured by reducing the barriers that small
employers face in providing coverage for their employees. AHP proponents argue
that state consumer protections, benefits mandates, and solvency standards raise the

CRS-17
price of health insurance and that the resulting inflated cost of insurance is a major
barrier that prevents small employers from sponsoring health benefits. Under
current law, large employers that self-insure their employees are exempt from such
state laws while small employers are not. The advocates say that by exempting
association-sponsored plans from state laws, the playing field will be made more
level between small and large employers.
Opponents of the AHP provisions as they appear in the House bill, on the other
hand, raise the concern that the provisions create increased opportunities for risk
segmentation – that AHPs will be able to offer plans to healthy groups at better
prices leaving relatively more unhealthy people in the insured market and subject
to states’ laws. Opponents in the insurance industry as well as those representing
consumers, are concerned that the additional risk segmentation could actually
increase the number of uninsured by undermining the traditional insurance industry
while substituting a market without the many protections that states have put into
place over the last several decades. Some health policy analysts have staked out a
middle ground arguing that association health plans are not likely to have a
significant impact on the number of uninsured, but raise fears that establishing
association plans as entities exempt from state consumer protections will bring back
the fraudulent health insurance schemes and insecure entities that have plagued
association sponsored plans in the past.
HBPCs. Qualified HBPCs are defined as private not-for-profit corporations
that sell three or more (where feasible) unaffiliated health plans through licensed
insurers to small employers in the service area. The House bill sets composition
requirements for the boards of HBPCs, requires HBPCs to accept all eligible small
employers, and prohibits HBPCs from assuming financial risk for plans. The bill
would pre-empt state laws that impede the establishment and operation of a HBPC
and that prohibit health insurance issuers from reducing premiums to reflect
administrative savings for health insurance sold through HBPCs. Finally, it would
provide tax advantaged status for funds provided by private foundations to HBPCs.
Legislative Options
The following bills to establish comprehensive patient protections have been
introduced during the 107th Congress.
S. 6 (Daschle)
Patients’ Bill of Rights Act. Introduced January 22, 2001. Referred to Senate
Committee on Health, Education, Labor, and Pensions.
S. 283 (McCain, Kennedy and Edwards)
Bipartisan Patient Protection Act of 2001. Introduced February 7, 2001.
Referred to Senate Committee on Senate Health, Education, Labor, and Pensions.
H.R. 526 (Ganske)
Bipartisan Patient Protection Act of 2001. Introduced February 8, 2001.
Referred to House Committees on Education and the Workforce and Energy and
Commerce.

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S. 872 (McCain, Kennedy and Edwards)
Bipartisan Patient Protection Act. Introduced May 14, 2001 and placed on
Senate Legislative Calendar under General Orders on May 15, 2001.
S. 889 (Frist, Breaux and Jeffords)
Bipartisan Patients’ Bill of Rights Act of 2001. Introduced May 15, 2001.
Referred to Senate Committee on Health, Education, Labor, and Pensions.
H.R. 2563 (Ganske)
Bipartisan Patient Protection Act. Introduced July 19, 2001. Referred to
House Committees on Education and the Workforce, Energy and Commerce, and
Ways and Means Passed House August 2, 2001.
S. 1052 (McCain, Kennedy and Edwards)
Bipartisan Patient Protection Act. Introduced June 14, 2001. Referred to
Senate Committee on Senate Health, Education, Labor, and Pensions. Passed
Senate June 29, 2001.
H.R. 2315 (Fletcher)
Patients’ Bill of Rights Act of 2001. Introduced on June 26, 2001.
Additional Relevant CRS Reports
CRS Report RL30978, Patient Protection During the 107th Congress: Side by Side
Comparison of House and Senate Bills
CRS Report RS20868, Employer Liability Provisions in Selected Patient Protection
Bills
CRS Report RL30144, Side by Side Comparison of Selected Patient Protection Bills
in the 106th Congress
CRS Report RS20315, ERISA Regulation of Health Plans
CRS Report RS20258, Patient Protection and Mandatory External Review:
Amending ERISA’s Claims Procedure
CRS Report RL30077, Managed Care: Recent Proposals for New Grievance and
Appeals Procedures
CRS Issue Brief IB98037, Tax Benefits for Health Insurance
CRS Report 97-643, Medical Savings Accounts
CRS Report 98-286, ERISAs Impact on Medical Malpractice and Negligence
Claims
CRS Series on Managed Health Care:
CRS Report 97-913, A Primer
CRS Report 97-938, Federal and State Regulation
CRS Report 98-117, Cost and Quality Control Strategies
CRS Report 97-482, The Use of Financial Incentives