The Supreme Court held 6/20/02 in a 5-4 decision that the Illinois Health Maintenance Organization Act, as applied to health benefits provided by a health maintenance organization under contract with an employee welfare benefit plan, is not preempted by the Employee Retirement Income Security Act of 1974 (ERISA).
The Illinois Act provides recipients of health coverage by HMO's with a right to independent medical review of certain denials of benefits. In this case, one such recipient sought independent review of a denial of benefits and the HMO refused to provide the independent review. When the recipient sued to compel compliance with the Illinois Act, the HMO argued that the recipient's cause of action was completely preempted under ERISA.
Although ERISA contains an express preemption provision, it also contains a saving clause providing that it should not be construed to preempt "any law of any State which regulates insurance, banking, or securities." In determining that the Illinois Act "regulates insurance," the Court first applied a "common-sense view of the matter," which requires that in order to be deemed as "regulating" insurance, a law must be specifically directed toward that industry. Next, the Court applied three factors it had identified in a previous case to confirm its conclusion that the Act regulates insurance — i.e. whether the law targets practices or provisions that (1) have the effect of transferring a policyholder's risk, (2) are an integral part of the policy relationship between insurer and insured, and (3) are limited to entities within the insurance industry. The Court then found that the Illinois Act satisfied the second and third factors. The Court therefore held that the Illinois Act fell within ERISA's saving clause and was not preempted by ERISA.