Beginning July 1, 2010, all health insurers and health maintenance organizations (HMOs) doing business in Illinois will be required to notify covered individuals of the right to request an independent, external review of denied claims. Under current Illinois law, only Illinois HMO plan members have had a right to an independent, external review of denied claims.

The Illinois Insurance Fairness Act (H.B. 3923) (the “Fairness Act”) signed into law January 5, 2010, adds the Health Carrier External Review Act (the “Act”) to the Illinois Insurance Code effective July 1, 2010. This Act significantly expands the external review process because the number of Illinois residents covered by HMOs – currently the only health carriers subject to external claim reviews – has decreased by over fifty percent over the last decade, with now less than one million Illinois residents covered by an HMO. HMOs limit a participant’s choice of doctors and hospitals by requiring their members to utilize only HMO networks. This new Illinois legislation will require external claims review for all insured health plans, most notably those plans that include preferred provider organizations (“PPOs”), which have become increasingly favored by insureds because of their greater selection of providers including those out of network.

While the Act will increase application of an external claims review to a total of 4 million Illinois residents, the remainder of Illinois residents who are covered by union or self-funded health plans may not have the benefit of an independent, external claims review unless it is voluntarily provided. Both union and employer health are generally subject to federal law that requires a claims review, but not a review that is independent of the parties involved in providing the health benefits.

Background Regarding External Review

Most states have laws that require an external, independent review of claim denials (according to a January 25, 2010, publication by the American Medical Association, only Mississippi, Nebraska, North Dakota, South Dakota and Wyoming have no such laws). Because state external review laws vary significantly in their scope and application, the National Association of Insurance Commissioners (“NAIC”) adopted a Uniform Health Carrier External Review Model Act (the “Model Act”) to standardize claims review procedures. Under the Model Act, external review procedures are intended to give insureds the ability to trigger an independent review of a health insurer’s refusal to pay for specific procedures or services. Importantly, the entire cost of the independent review must be paid by the insurer.

Illinois joins only a small group of states (among them Connecticut and North Carolina) in enacting legislation substantially based on the Model Act. Illinois, like most states, requires that complainants first exhaust their insurer’s internal review procedures before invoking external review. Unlike the internal review procedures in other lines of insurance, however, Illinois and most states require a relatively thorough claims review by the insurer. Not unexpectedly, the Act’s external review procedure (and decisions from that procedure) does not eliminate other remedies such as private lawsuits.

Health Plans Covered By the Act

Health insurers and HMOs that insure Illinois residents are subject to the Act. Other entities subject to the Act are limited health service organizations and voluntary health service plans. Union and employer self-funded health plans are not subject to the Act because they are governed by the Employee Retirement Income Security Act of 1974 (“ERISA”). While ERISA prescribes certain claims review procedures, there is no requirement that those reviewing the claims be independent of the plan.

Illinois Current External Review Law Was Saved From Preemption By ERISA

In Rush Prudential HMO, Inc. v. Moran, 536 U.S. 355 (2002), the Supreme Court decided that the current Illinois external review law – that requires only HMOs to provide an independent, external review regarding medical necessity – survived preemption by ERISA. In Moran, the Court ruled that the law was saved from preemption because it functioned as “garden variety insurance regulation” similar to a mandated state insurance benefit and not as a separate enforcement scheme. Under the “savings clause” of ERISA, state insurance laws that apply to a welfare benefit plan are saved from preemption, unlike most other state laws that would otherwise apply. The Moran decision cleared the way not only for Illinois, but also for other states to require independent external health claims review.

The holding in Moran, however, does not mean that all state external review laws are safe from preemption. For example, Hawaii’s Supreme Court held that ERISA preempted Hawaii’s external review requirement because it “too closely resemble[d] adjudication” by creating remedies in addition to those in ERISA. The preempted remedies included judicial review of external review decisions and detailed procedural requirements for hearings. See Hawaii Management Alliance Ass'n v. Insurance Commissioner, 100 P.3d 952 (2004). The Hawaii Supreme Court based its analysis on Rush as well as a subsequent decision in Aetna Health Inc. v. Davila, 542 U.S. 200 (2004). In Aetna, the Court ruled that ERISA preempted a state law that provided recovery for patients who were injured by an HMO’s wrongful claim denial.

Requirements of the Illinois External Review Act

While the Act is lengthy, below sets forth some of the highlights of the legislation, many of which were noted by the Governor and Insurance Director upon being signed into law.

Denied health insurance claims will be eligible for external review if certain conditions are met including the following:

  • The individual receiving or requesting the treatment was covered under the plan at the time of treatment;  
  • The treatment in question is a covered benefit under the plan, but does not meet the health carrier’s requirements for medical necessity, appropriateness, health care setting, level of care, or effectiveness;  
  • The individual has exhausted the internal appeals process (unless the timeframe for completion of a standard external review or expedited internal review would significantly increase the risk to a person’s health or significantly reduce the treatment’s effectiveness); and  
  • In cases where the health carrier determined that the treatment in question is experimental or investigational, the individual’s health care provider has certified that the treatment in question is medically necessary.  

External reviews will be conducted by nationally-accredited Independent Review Organizations (IROs) approved by the Illinois Insurance Department every two years. When conducting external reviews, IROs must:  

  • Assign qualified and impartial physicians or other health care professionals who are experts in the treatment of the person’s condition, and who are knowledgeable about the treatment that is the subject of the review;  
  • Maintain a system operating 24 hours a day, seven days a week to accept and process information related to the review; and  
  • Be independent, unbiased, and free of conflicts of interest with any of the individuals or entities involved in the review.  

External Review Time Frames  

Standard external reviews must be completed within 20 business days after the request for external review is first received.

Expedited external reviews must be completed within 72-120 hours after the request for external review is first received (either orally or in writing).

Other Pertinent Requirements of the Fairness Act

Internal Appeals

Standard internal appeals must be completed within 15 business days after the health carrier has received all required information. Expedited internal appeals must be completed within 24 hours after the health carrier has received all required information.

Health Carrier Expense Reporting

Beginning in 2011, the Fairness Act requires health carriers doing business in Illinois to provide data on how much in premiums and what percentage of those premiums is spent to pay claims and health care costs versus covering administrative costs. The Illinois Department of Insurance will post such data online.

Standardized Health Insurance Applications

Health carriers that cover individuals and small group markets (2-50 employees) must accept a standard health insurance application by Jan. 1, 2011. The Fairness Act establishes a committee within the Insurance Department to create the standardized health insurance application, consisting of consumers, small business owners, insurance agents and company representatives. Advocates of the standard application believe this will help individuals and small groups to more easily shop for the best coverage, by eliminating the need to fill out a new detailed application for each health carrier.

Conclusion

By expanding claims review requirements to include several million additional Illinois residents, together with other requirements of the Fairness Act, the General Assembly seeks health insurance regulatory reform independent of any action at the federal level. Locke Lord Bissell & Liddell LLP will continue to follow the numerous developments in health care regulation and assist clients in complying with the new regulations.