Is the Wall Strong Enough?

Recent Air Ambulance Decisions Hint that McCarran-Ferguson Insurance Barrier to Federal Involvement in Workers’ Comp May Be Decaying

Two recent court decisions, one from Texas [PHI Air Med., LLC v. Tex. Mut. Ins. Co., 2018 Tex. App. LEXIS 849 (3rd Dist., Jan. 31, 2018)], the other from the Tenth Circuit [EagleMed LLC v. Cox, 868 F.3d 893 (10th Cir. 2017) signal that the “wall” or barrier created by the McCarran-Ferguson Act (“MFA”), 11 U.S.C.S. § 1011, et seq., which generally prevents federal oversight in state workers’ compensation programs, may be showing some signs of decay. In both cases, courts have ruled that the states may not regulate the amounts air ambulance firms charge for transporting injured employees who are covered by state workers’ compensation programs. Such regulation is not allowed because air ambulances are “air carriers,” whose compensation rates are preemptively governed by the Airline Deregulation Act (“the ADA”)[see 49 U.S.C.S. § 41713(b)]. In both decisions, courts have utilized a narrow definition of “business of insurance,” as that term is used in the MFA.

The Texas Decision

PHI Air Med., LLC (“PHI”) provides air-ambulance services throughout Texas and elsewhere in the country, charging for that service by billing a “per-trip charge” and an additional charge for the miles transported. PHI and several Texas insurers (“Insurers”) disagreed on the amount that PHI could recover for its transport of injured workers covered by workers’ compensation policies issued by the Insurers, and the issue was brought before the Texas Division of Workers’ Compensation.

In Texas workers’ compensation cases, generally speaking, medical providers for injured workers are reimbursed in one of three ways:

  • 125 percent of the Medicare fee schedule;
  • 125 percent of the published Texas Medicaid fee schedule, if the code is not included in the Medicare schedule; or, if neither applies, then
  • The “fair and reasonable” rate under 28 Tex. Admin. Code § 134.1.

Airline Deregulation Act Preemption?

The Division determined that the applicable provisions of the Texas Labor Code and related rules were preempted by the ADA, and the Insurers appealed, requesting a de novo hearing at the State Office of Administrative Hearings. An ALJ found (1) that the federal ADA did not preempt the Act, and (2) that PHI should recover 149% of the Medicare rate for such services. The Insurers and PHI sought judicial review, and the Division intervened. Following a hearing, the trial court issued a final order declaring that the ADA did not preempt the Act and that the Insurers could not be asked to pay more than 125% of the Medicare amount. PHI appealed.

PHI is Registered Air Taxi

The 3rd District Court of Appeal indicated the initial issue was whether PHI’s services fell within the preemption provision of the ADA. Relying upon the reasoning set forth in several decisions, including the 10th Circuit’s decision in EagleMed, mentioned above and discussed below, the Court found that PHI, as a registered air taxi, with all relevant and required certificates, was an air carrier under Subpart II of the ADA. As an air carrier, its rates were not subject to state-level control.

Does McCarran-Ferguson “Reverse-Preempt” the Texas Comp Act?

The Court stressed that the second question to be determined was whether the MFA removed the Texas Workers’ Compensation Act from ADA preemption (i.e., reverse-preempted the Act). Readers will recall that, generally speaking, the MFA states that the “business of insurance” shall be subject to the laws of the several States which relate to the regulation or taxation of such business [15 U.S.C.S. § 1012]. The Court indicted that it was required to determine whether the relevant provisions of the Texas Workers’ Compensation Act (and any associated rules) were enacted “for the purpose of regulating the business of insurance.”

McCarran-Ferguson Focuses on Relationship Between Carrier and Policyholders

Quoting the U.S. Supreme Court, in U.S. Dept. of Treasury v. Fabe, 508 U.S. 491, 500, 113 S. Ct. 2202, 124 L. Ed. 2d 449 (1993), the Court said the focus of the MFA is on “the relationship between the insurance company and its policyholders.” The Court added that cases interpreting the scope of the MFA have identified three criteria relevant to determining whether a particular practice falls within that Act’s reference to the “business of insurance”:

  1. Whether the practice has the effect of transferring or spreading a policyholder’s risk;
  2. Whether the practice is an integral part of the policy relationship between the insurer and the insured; and
  3. Whether the practice is limited to entities within the insurance industry.

That is to say that a statute must do more than affect insurance companies—it must focus on the relationship between the insurance company and the policyholder. The court added that insurance companies may do many things that are subject to paramount federal regulation; however, only when they are engaged in the “business of insurance” did the MFA apply.

The Court found the U.S. Supreme Court’s decision in Group Life & Health Ins. Co. v. Royal Drug Co., 440 U.S. 205, 99 S. Ct. 1067, 59 L. Ed. 2d 261(1979) compelling. In Royal Drug, the agreements at issue limited the prices participating pharmacies would be paid for drugs, thus minimizing the insurance company’s costs and maximizing its profits. The 3rd District Court noted that according to the U.S. Supreme Court, such agreements “may well be sound business practice, and may well inure ultimately to the benefit of policyholders in the form of lower premiums, but they are not the ‘business of insurance.’” 440 U.S. at 214. The Supreme Court also added that the agreements at issue were not between the insurance company and its insureds, but between the insurer and pharmacies providing services to the insureds.

Reimbursement by PHI is Preempted by ADA

The 3rd District Court concluded that the various Texas statutes and rules that attempted to regulate PHI’s reimbursement were preempted by the ADA’s prohibition on state attempts to regulate an air carrier’s price, route or service, and were not “reverse-preempted” by the MFA.

10th Circuit’s Recent EagleMed Decision

In Eaglemed LCC v. Cox, 868 F.3d 893 (10th Cir. 2017), the Tenth Circuit Court of Appeals held that to the extent Wyo. Stat. Ann. § 27-14-401(e) and its associated rate schedule set forth a mandatory maximum reimbursement rate for air-ambulance claims under the state’s Workers’ Compensation Act, the statute and schedule were preempted by the ADA [see Larson’s Workers’ Compensation Law, § 94.03]. Setting up the argument taken up by the Texas court in PHI Air Med, the 10th Circuit added that the MFA did not preclude federal preemption of the state provisions.

The Tenth Circuit indicated, however, that the U.S. District Court had exceeded its authority when it ordered officials at the Wyoming Department of Workforce Services to pay the full amount companies charged for air-ambulance services, whatever that amount might be. The Court acknowledged various medical expense studies, which indicated the cost of air-ambulance services had increased significantly in recent years, but the Court said policy arguments in favor of excluding air-ambulance providers from the scope of the ADA’s preemption provision must be addressed to Congress, not the courts.

Commentary: How Strong is the MFA Wall?

Since its enactment in 1945, the MFA has provided safe cover for state regulators responsible for controlling and otherwise regulating the “business of insurance” at the state level. Many workers’ compensation practitioners and state administrators have assumed that because of the close interconnection between an employer’s obligation to provide workers’ compensation coverage for its employees and the state’s duty/obligation to regulate insurance carriers within its borders, that the MFA operates as a firewall between a state’s workers compensation law and the federal government. Yet, is that really true?

For example, could Congress establish a national standard mandating that impairment ratings for all injured workers must be established by utilizing the AMA Guides, Sixth Edition? Could Congress pass legislation requiring the utilization of particular medicine practice guidelines for injured workers (e.g., those established by the American College of Occupational and Environmental Medicine (ACOEM)? Could it legislate laws and/or rules governing the treatment of work-related back injuries by chiropractors? Could it establish some sort of mandatory national drug formulary for use in cases involving employee injuries and/or occupational diseases?

Note that my question is not should Congress do so, or even does Congress desire to do so? Rather, my question—and I admit that based on my own research, I don’t fully know the answer yet—is could Congress make such laws? Utilizing the logic of Royal Drug, PHI Air Med., LLC, and EagleMed, proponents of such federal “intervention” could argue that the restrictions and controls were not beyond the federal government’s allowed reach.

None of the hypothetical regulations and controls would appear to impact the “business of insurance” directly with any particular state. Injured workers after all are not policyholders, although they may be considered third-party beneficiaries, at least in some states. If the MFA’s primary focus is on the relationship between the insurance company and the policyholder (i.e., the carrier and the employer), how could an employer, or carrier, or another stake-holder use the MFA as a shield.

Congressional action in any of these areas would affect the profitability of the insurance industry, but multiple court decisions have clearly established that the profit level of the carrier, while obviously an important component of its overall business, is not swept up within the meaning of its “business of insurance.”

From time to time, one hears debate as to whether a federalization of workers’ compensation might be on the horizon. Were such action to come, it need not arrive in one neat package, but in small doses. State-controlled workers’ compensation is not so much susceptible to frontal attack as it is subject to erosion around its edges, where the MFA is at its weakest. Agree? Disagree? I’d love to hear from any of you as to your thoughts.

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