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.

The NAIC Special Committee on Health Insurance ("Special Committee") is composed of 45 state insurance regulators. The Special Committee was established as a forum to discuss federal proposals related to health insurance and to provide technical assistance to Congress and the Administration on a nonpartisan basis.

Today, I would like to discuss what the members of the NAIC have done to protect managed care consumers and the recent threats we have seen to these protections. First, I will discuss the role of the states in regulating health plans. Second, I will discuss what specific actions the NAIC and states have taken to provide protections to consumers of health plans regulated by the states. Next, I will explain how these state protections are being threatened or eroded by activities undertaken by all three branches of the federal government. Fourth, I will provide you with some of our proposed solutions. Finally, I will discuss how the NAIC and the NAAG can work more closely together to preserve the role of the states in regulating health insurance.

The enactment of the Employee Retirement Income Security Act (ERISA) in 1974 created a dual regulatory structure in this country for health insurance and health benefits. Under ERISA, the federal government has jurisdiction over all group health plans, but state laws that regulate the business of insurance are saved from preemption by virtue of the savings clause (Section 514 of ERISA). The savings 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 members of the NAIC want to ensure that all consumers who are covered by health plans have the ability to have their questions, claims and grievances addressed. We do not want the state systems that are already in place to be preempted by Congressional or regulatory action.

The states have been aggressive in establishing and enforcing patient protection laws for consumers in fully insured plans under the states’ authority to regulate the business of insurance. Many states have already completed extensive work to ensure that the health care benefits provided by managed care entities are of the highest caliber. To assist the states in this work, the NAIC has established a comprehensive regulatory structure. Parts of this structure also apply to fee-for-service plans.

As part of this regulatory structure, the NAIC Executive and Plenary Committees have adopted 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 network adequacy. (Managed Care Plan Network Adequacy Model Act.)

• Establishing utilization review requirements, including provisions to ensure that only medical doctors have the authority to deny a requested service and that insureds are provided with the medical criteria used to evaluate medical necessity. (Utilization Review Model Act.)

• Providing quality improvement and/or measurement standards. (Quality Assessment and Improvement 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.)

• Requiring plans to establish specific procedures for determining enrollee coverage, payment for services, and 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 appeals process, including time frames for routine and expedited cases. (Health Carrier Grievance Procedure Model Act; Utilization Review Model Act; Health Maintenance Organization Model Act.)

• Prohibiting restrictions on communications (anti-gag rule). (Managed Care Plan Network Adequacy Model Act.)

These consumer protections have been adopted by the NAIC and many states after lengthy deliberations with input from consumers, health care providers, insurers and regulators. This type of legislation allows both Insurance Commissioners and Attorneys General to respond to consumer complaints. If these types of laws are preempted by federal legislation, it will be much more difficult for Departments of Insurance and Attorneys General offices to intervene on behalf of our constituents.

In addition to the specific provisions established and endorsed by the NAIC, many states have enacted additional consumer protections on their own, each designed to fit the need of a particular state’s citizens and its health care market. Examples include:

• Requiring access to ob/gyn care without referral from a primary care provider.

• Prohibiting genetic discrimination for underwriting purposes.

• Requiring and establishing standards for an external review process, including time frames for routine and expedited cases.
• Requiring disclosure of plan information including information about prescription drug formularies and how the experimental nature of requested treatment is determined.

These are just a few of the additional protections that some of the states have enacted for consumers in fully insured ERISA plans.

In addition to establishing a statutory framework for patient protections, every state has in place a regulatory framework that includes consumer representatives and market conduct reviewers who respond, investigate and enforce the patient protection standards. Consumers throughout the country have easy access to a network of assistance. Many states are also making efforts to reach out to consumers in a proactive way. Informing consumers of their rights ahead of time often prevents consumers from becoming the victims of health care abuse or fraud.

One reason states devote substantial resources in conducting market conduct examinations is to prevent fraud and to prosecute it when it does occur. As you know, every state has a specific insurance fraud law. State Departments of Insurance work closely with their Attorneys’ General offices with regard to fraud in order to protect their consumers. Any preemption of state laws by Congress, the Department of Labor, or the courts threatens the states’ ability to continue to play this critical role.

While it is vitally important that our two organizations work more closely together to ensure that any federal patient protection legislation respects the role of the states, it is just as important that we cooperate more fully in preventing further erosion of our authority to protect consumers by the courts and through the federal regulatory process.

Even though Congress clearly intended for states to regulate insurance and states have demonstrated the ability to do so, the states’ authority to protect consumers in fully insured plans has been threatened by all three branches of government. Recent decisions of some federal courts have threatened the ability of states to enact and enforce laws regarding grievance procedures and remedies for health insurance consumers in the fully insured market. Depending on the structure of the legislation, Congress has the potential to preempt state consumer protections through federal patient protection legislation. In addition, the Department of Labor proposed a grievance procedure regulation that may further erode states’ abilities to protect their citizens because of its unclear scope. All of these actions risk leaving consumers unprotected, and each of them will be discussed below.

The first area of erosion will be of particular interest to the Attorneys General as well as to the Insurance Commissioners. While the ERISA preemption is commonly understood to apply to self-funded plans, a number of recent court cases have expanded the scope of the ERISA preemption into the insured market. Three cases in particular have threatened to erode the continued ability of states to regulate the health insurance marketplace.

In April 1997, the Fourth Circuit struck down Maryland’s regulation to set minimum attachment points on stop-loss insurance.^. The purpose of the Maryland regulation was to prevent the sale of insurance policies, which essentially served as health insurance policies for small businesses, but which did not comply with the consumer protection laws applicable to health insurance policies. The court ruled that the purpose and effect of the regulation was to impact self-funded plans, even as it acknowledged the legitimate concern of the state regulator over the sale of such policies. This case is particularly problematic in that it prevents a state from regulating stop-loss insurance, despite the court’s acknowledgement that it is clearly an insurance product, which is otherwise subject to the states’ regulatory authority.

These three cases exemplify the very real threat that recent federal court decisions, even if limited to certain jurisdictions, threatens the states’ authority to regulate fully insured plans, and to protect consumers in those plans.

The enactment of ERISA created a dual regulatory structure in this country for health insurance and health benefits. Had ERISA not been enacted, we might question any federal role in setting standards for health plans. However, state insurance departments lack jurisdiction over self-funded ERISA plans. We believe that consumers within such ERISA plans would benefit from the same types of protections available under state law. The NAIC has advocated and continues to advocate that Congress amend ERISA to provide set standards for self-funded ERISA plans.

With respect to state-regulated insurers and health plans, we continue to believe that the states are better able to determine what works best in their marketplaces. The delivery of health care services is a local activity. A single federal standard will be difficult to apply to diverse populations and different geographic areas and may stifle innovation in local markets.

In its attempt to provide more health care protections for consumers, Congress may erode existing state consumer protections and the states’ authority to implement them by enacting federal patient protection legislation that preempts or duplicates state law. Preempting state law in this area may

have numerous unintended consequences including the possibility that consumers in fully insured plans could lose protections already provided by state legislatures. One specific threat is the possibility that consumers could lose their access to effective grievance and appeals processes established under state law.

The proposed Department of Labor (DOL) claims handling regulation for group health plans has the potential to erode states’ authority to regulate the business of insurance, and indirectly, fully insured ERISA plans.

In terms of possible solutions to these problems, the NAIC has focused on educating Congress, the federal agencies, and the courts. Specifically, the NAIC has testified before Congress many times regarding patient protections including grievance procedures. In seeking to preserve state protections, we have asked Congress to respect what states have already done to protect their consumers. We have asked Congress to allow states to continue to regulate fully insured plans and to enact consumer protections based on the needs of the individual states’ marketplaces. We have urged Congress not to preempt existing state laws that already address the patient protections Congress hopes to enact.

Given this period of eroding state ability to protect consumers, it is critical that NAAG and the NAIC work more closely together in order to prevent the further erosion of protections for our consumers. The court cases ruling that managed care entities are not in the business of insurance are particularly disturbing. Such a determination would prevent a state from enforcing solvency standards, premium rates, market conduct, and consumer complaint handling for all managed care plans. A state would not be allowed to take these entities through insolvency proceedings. Instead the entity would enter into federal bankruptcy court, which provides only limited protections for the enrollees of the plan.