The Texas-Aetna Settlement:
A Significant Experiment
in Managed Care Reform

By Seth J. Chandler

The mongoose was introduced into Hawaii to control rats. Although it has succeeded in part, with its propensity to hurt desired features of the Hawaiian ecology, it has become a pest arguably worse than the one it has attacked. To many, managed care organizations are the mongoose of the American health care ecology. They were introduced to control a serious problem: runaway inflation of health care costs ignited by pouring tax subsidized fee for service indemnity programs on top of a pre-existing commensal relationship between doctors and their patients. They have instead become a widely reviled feature of American life. With their second guessing of the medical necessity for treatments concocted by treating physicians, their forcing of physicians to internalize the cost of treatments they prescribe, and their ability to exaggerate the price advantage of using physicians willing to discount their services, many believe that managed care has too often come at the expense of actual human health -- not to mention the capacious pocketbooks of medical practitioners eager to improve it.

As federal and state legislatures have mulled correctives against the excessive "success" of this relatively new animal, two of the combatants have recently fashioned a private solution that enlightens the debate in this field. Through the settlement of a lawsuit, the State of Texas and Aetna U.S. Healthcare developed a plan which, while not comprehensive, nonetheless broadly addresses some of the perceived worst abuses of modern managed care. The settlement, termed an "Assurance of Voluntary Compliance," does so in a way that may avoid ERISA preemption that has hindered other state efforts at reform. (A copy of the settlement may be obtained at

The settlement, the result of a lawsuit filed in 1998 under Texas' Deceptive Trade Practices Act, and other authority, has five major provision of particular interest to health care reformers.

1. ERISA Preemption Waiver

In recent years, managed care entities have been protected from state efforts at reform by the federal Employee Retirement Income Security Act of 1974 (ERISA), whose section 514 (29 U.S.C. 1144)  preempts all state laws that relate to the sort of employee benefit plan that provides most of private health insurance to Americans today. See Wendy E. Parmet, Regulation and Federalism: Legal Impediments to State Health Care Reform, 19 Am. J.L. & Med. 121, 132 (1993). Courts have expansively read an exception to a provision that might have saved laws regulating insurance from this federal interference. Thus, efforts by states to attack the core of managed care generally fail.

The Aetna settlement attempts to sidestep ERISA's preemptive force. It does so by taking advantage of the fact that courts have interpreted ERISA's preemption provision as a waivable choice of law rule. See Allen v. West Point-Pepperell, Inc., 11 F. Supp. 2d 277, 282-83 (S.D.N.Y. 1997) (citing cases). Aetna thus agrees in the settlement not to assert ERISA preemption in future actions brought against it. This waiver should permit the substantive provisions of the settlement governing core issues such as precertification, compensation of physicians, and continuity of care, to function without the typical federal court interference.

Aetna does not completely waive ERISA protection, however. The waiver does not apply to actions brought by individuals against Aetna for violation of the terms of the settlement. Indeed, the settlement document makes clear that third parties, such as patients, have no additional rights as a result of the settlement. Enforcement is left exclusively in the hands of the Texas Attorney General. The power of settlement to reform managed care rests not diffusely with attorneys throughout the state, but substantially in a centralized political authority.

2. Appeals of Adverse Precertification Decisions

Managed care organizations frequently attempt to reduce consumption of medical services by requiring precertification of expensive procedures. By leaving unwarranted refusals of precertification to the slow and expensive process of judicial review, critics have charged, however, that managed care organizations effectively reduce medically necessary care. States, such as Texas, have attempted to control this side effect of managed care by requiring alternative, swifter vehicles for gaining review of precertification decisions. In Article 20A.12A of its Insurance Code, Texas, for example, purports to subject health maintenance organizations, even ones servicing ERISA plans, to Article 21.58A of its Insurance Code, which requires prompt, reasoned precertification decisions from licensed doctors. Perhaps more importantly, it permits insureds to appeal adverse decisions under Article 21.58C of the Insurance Code to a state supervised organization independent of the managed care organization, which in turn is required to make swift decisions, particularly where a life threatening condition exists. In Corporate Health Insurance, Inc. v. Texas Department of Insurance, 12 F. Supp. 2d 597 (S.D. Tex. 1998), the federal court system ruled (predictably) that this method of state control of precertification decisions was preempted for ERISA plans.

With Aetna now waiving ERISA preemption, the settlement agreement effectively undoes the Corporate Health Insurance case and explicitly requires Aetna and those with whom it in turn contracts to comply with Article 21.58A and, presumably (though not explicitly), Article 21.58C insofar as it is referenced therein. Aetna's insureds should thus now be able to obtain swift redress of adverse precertifications decisions similar to that already available to Texas insureds of non-ERISA plans and potentially available to other Americans should the pending federal Bipartisan Consensus Managed Care Improvements Act, H.R. 2723, 106th Cong. (1999), or one of its variants become law.

Aetna additionally agrees to accept a "floor" on medical necessity. Treatments are now medically necessary if they improve or preserve health, life or function, slow the deterioration of health, life or function or can be used to prevent or diagnose medical problems. The provision contains a major safeguard for Aetna, however. If there is a less expensive equally effective treatment available, Aetna is not barred from contending that the more expensive treatment is not medically necessary. Aetna has also agreed to publish its medical necessity guidelines on its web site,

3. Expanded Coverage for Experimental and Investigational Therapies and Clinical Trials

Historically, managed care and health insurers have been reluctant to pay for experimental medical procedures. They have feared that those in the medical field, encouraged by the virtually limitless amount patients would be willing to pay to prolong their existence or improve their health status, would develop expensive procedures of dubious efficacy and force insurers to pay for the research. Robert H. Jerry, II, Health Insurance Coverage for High-Cost Health Care: Reflections on the Rainmaker, 26 U. Mem. L. Rev. 1347, 1369-70 (1996). In recent years, however, some states have begun to mandate that insurers and managed care entities provide coverage for experimental and investigational therapies where there are no conventional alternatives and where there is some scientific basis for thinking the experiment might succeed. See generally Sharona Hoffman, A Proposal for Federal Legislation to Address Health Insurance Coverage for Experimental and Investigational Treatments, 78 Ore. L. Rev. 203, 221-39 (1999) (explaining state statutes).

The Aetna settlement adds Texas to the list of jurisdictions in which, at least in some circumstances, an insurer will be forced to pay for experimental treatment. To trigger the protection, the member's physician must certify that the member is likely to die within two years and that standard therapies have not and will not likely be effective or appropriate. If so, then Aetna will pay for experimental therapy proposed by the physician provided that two sources of medical evidence suggest the therapy is more likely to benefit the patient than standard alternatives. Acceptable sources of evidence include typical medical journals and other peer reviewed literature and abstracts. The settlement lets patients appeal adverse decisions on the experimental exclusion the same way they do other adverse precertification decisions, such as those on medical necessity.

4. Physician Compensation

Another managed care weapon blunted by the settlement is the use of financial compensation schemes that invert the traditional incentive to overtreat and instead reduce provider income based on the intensity of medical service they provide. The settlement defends against these practices in three ways: direct prohibitions on Aetna, indirect prohibitions on those with whom Aetna does business, and public disclosure.

The settlement curbs the most direct forms of inverse compensation schemes. Under the settlement, Aetna agrees not to make gross dollar compensation of any provider with whom it contracts directly in any inverse way on the provider's consumption of medical resources. "Capitation" for primary care physicians remains permissible, however, so long as the capitation rates "assures sufficient compensation to primary care physicians for the provision of medically necessary covered services" and so long as, under certain circumstances the primary care provider may substitute a per visit compensation scheme. Thus, each time an Aetna-capitated physician sees or treats a patient, the physician's effective hourly or per service rate may still decline, but the physician's gross income from Aetna should remain constant. A similar compromise exists for networks with whom Aetna contracts. Aetna may still require those networks to suffer a financial loss whenever they refer patients out of network, but Aetna must see to it that the risk thereby accepted is limited through stop loss insurance, reinsurance or other mechanisms that will "reasonably protect [providers] from any inducement to limit medically necessary covered services."

In addition to these direct means, Aetna agrees to urge network providers with whom it contracts either to include similar direct restrictions in their contracts with providers or to confess their failure to do to the Texas Attorney General. Some of those so confessing might then be vulnerable to action under Texas Administrative Code § 3.3703 for a contract creating incentives to limit medically necessary services.

Finally, Aetna agrees to distribute a two page statement to potential beneficiaries that explains the virtues of placing "appropriate financial incentives" on providers but from which more astute applicants may be able to infer the conflict of interest created thereby. The statement will make clear that potential beneficiaries are entitled to find out the nature of compensation arrangements between Aetna and its physicians. The settlement thus appears to require the sort of disclosures recently held not be generally mandated for ERISA fiduciaries by the Fifth Circuit in Ehlmann v. Kaiser Foundation Health Plan of Texas, 198 F.3d 552, (5th Cir. 2000), though required by other courts, e.g., Shea v. Esenstein, 107 F.3d 625 (8th Cir. 1997).

5. Continuity of Care

By making the price for medical service from a given physician depend on a managed care entities' decision whether, for example, to include that physician in its list of preferred providers or as a member of an HMO, managed care induces suboptimal exchange of information between patient and physician. Why bother explaining everything to one's doctor or, reciprocally, investing in an investigation of a patient's elaborate medical history when most of the time it does not matter and when those mutual investments can be rendered worthless by the managed care entity's decision to deselect or otherwise disfavor the physician? Moreover, when that risk materializes and the physician is "deselected" by the managed care entity, the patient is harmed by the loss of any time and energy they had already invested notwithstanding the risk.

The Texas-Aetna settlement makes a small effort to tackle this problem but does so in a way that helps physicians more directly than patients. Limited protection is available under the settlement if the physician is deselected prior to both the expiration of either the patient's "plan year" and the expiration date of the physician's contract with Aetna or one of its network providers. If this deselection occurs, then the physician generally may continue treating the patient under the old compensation arrangement until either the patient's plan year ends or the physician's contract expires. And if the physician's contract expires first, the physician generally may continue treating the patient until the member's plan year expires, but is compensated for that time interval only at Aetna's "usual and customary" (read "low") HMO fee-for-service schedule. Subject to the law of abandonment, however, the physician need not continue to provide these services if it finds the compensation scheme inadequate. The settlement thus fails to act as a form of "deselection insurance" for patients. The settlement somewhat lengthens the time that a patient may hope for treatment by his current physician, but not very long, and not with great certainty.

The Bottom Line

Much of the debate about curbs on managed care rests on untested empirical assertions: it would be too costly to require independent review; it would be to burdensome to reduce ERISA preemption and subject managed care entities to a potpourri of state laws, capitation is enough to control physicians from overtreating. If nothing else, the Texas-Aetna settlement provides an excellent experiment for testing such propositions. The loopholes noted by critics may prove too capacious to constrain the impulses of a formerly aggressive managed care entity. See Richard A. Oppel, Jr., Physicians Find Fault with Aetna U.S. Healthcare Settlement in Texas, N.Y. Times, April 20, 2000, at C2. The extra expense it imposes on Aetna plans may make the organization less attractive to the primary direct purchasers of health coverage -- employers, whose concern for managed care abuse is sometimes less than devoted. Or the more liberal terms on which Aetna now binds itself to deal may in fact make Aetna more successful in the market place than it would otherwise be. The results are worth scrutinizing to see whether this Texas solution to the problems posed by managed care functions well.