Petitioners include several health maintenance organizations (HMOs) and a Kentucky-based association of HMOs. In order to control the quality and cost of health-care delivery, these HMOs have contracted with selected doctors, hospitals, and other health-care providers to create exclusive “provider networks.” Providers in such networks agree to render health-care services to the HMOs’ subscribers at discounted rates and to comply with other contractual requirements. In return, they receive the benefit of patient volume higher than that achieved by nonnetwork providers who lack access to petitioners’ subscribers.
Kentucky’s AWP statutes impair petitioners’ ability to limit the number of providers with access to their networks, and thus their ability to use the assurance of high patient volume as the quid pro quo for the discounted rates that network membership entails. Petitioners believe that AWP laws will frustrate their efforts at cost and quality control, and will ultimately deny consumers the benefit of their cost-reducing arrangements with providers.
The specific issue in this case was whether the Kentucky law was preempted by a federal statute, the Employee Retirement Income Security Act of 1974 (ERISA), which regulates national markets for employee benefits, such as health coverage. ERISA prevents states from implementing their own benefit regulations, except that insurance regulation—traditionally a state function—is “saved” from ERISA preemption. Thus, the HMOs asked the Supreme Court to declare the AWP law did not “regulate insurance,” and thus was invalid under ERISA. Kentucky argued AWP does regulate insurance, and thus was saved from preemption.
This case was largely an exercise in statutory construction, and the result was probably correct under the circumstances. Still, the problem with the AWP law is not that it runs afoul of ERISA, but that it runs afoul of the Constitution. Any law forcing individuals to associate in a business context—here, compelling networks to admit physicians—violates the First Amendment, and more generally exceeds the federal and state government’s authority.
The government has no interest or right to initiate force for the purpose of determining marketplace structure or outcomes, and that is precisely the point of an AWP law. Kentucky’s scheme was designed to allow patients to choose their doctor by denying networks the right to choose whom they wish to conduct business with. Imagine if AWP laws were used in other industries; could you see a law firm being forced to give a partnership to any lawyer who wanted it? Or perhaps a college forced to hire any professor that showed up? Yet it’s somehow acceptable to force physician networks to admit members, even when doing so increases the cost of health care to the consumer.