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Posted On: Aug. 23, 1998 12:00 AM CST

BOSTON -- A legal battle is looming in Massachusetts as HMOs fight a state mandate to provide unlimited prescription drug benefits for retirees eligible for Medicare.

The outcome of the dispute could have repercussions in other states, benefit experts say.

HMOs contend a 1997 federal law giving retirees new private-market alternatives to the traditional Medicare program pre-empts the Massachusetts requirement that they offer either unlimited prescription drug benefits or no drug benefits to Medicare-eligible retirees.

HMOs, in filings with the federal Health Care Financing Administration, have proposed offering scaled-back prescription drug benefits in the state -- generally ranging from $800 to $1,200 a year -- in their Medicare Risk HMO plans next year as part of an effort to keep their plans affordable for retirees.

But those proposals are drawing fire from Massachusetts state officials, who warn they may file suit if the HMOs attempt to carry out their plans to cut back prescription drug benefits.

"Our position is, if these companies ignore state mandates, we will consider them in violation of our law. At that point, legal action is certainly a possibility," said a spokesman for the Division of Insurance in Boston.

The controversy has brought in Massachusetts' chief executive. "I simply will not stand by and let these benefits be cut," Massachusetts Gov. Paul Cellucci said in a statement. Gov. Cellucci said he is seeking the help of Sen. Edward Kennedy, D-Mass., for assistance in maintaining the drug benefit mandate.

The resolution of the controversy could have an impact beyond health maintenance organizations in Massachusetts and their enrollees.

If the HMOs prevail, the victory will give them and other health care plans the ability to offer benefits that they say would best meet retirees' needs for the premium paid.

"This is an important issue. Plans want to provide benefit programs that best meet consumer needs. Unlimited prescription drug benefits is a very expensive benefit. Some plans want to offer a more limited benefit that more people can afford," said William Graham, staff counsel for the Massachusetts Assn. of HMOs in Boston.

"We want to offer choice and affordability," said a spokeswoman for Blue Cross & Blue Shield of Massachusetts, which wants to offer a $1,200-a-year prescription drug benefit in its Medicare risk HMO and charge a monthly premium of $60.

"We are looking for the right balance between premium costs and out-of-pocket costs for members," said Alan Raymond, vp-public affairs at Harvard Pilgrim Health Care, an HMO in Brookline, Mass. Next year, Harvard Pilgrim wants to offer retirees in eastern Massachusetts a zero-premium Medicare risk plan with an $800 annual cap on prescription drugs.

But if Massachusetts regulators prevail in this battle, it could be a green light to other states to mandate benefits -- at substantially higher cost -- for HMOs and other health care plans that cover retired workers opting out of Medicare and into their own programs.

"Other states are going to keep an eye on this," said John Piro, a consultant with Hewitt Associates L.L.C. in Rowayton, Conn.

The Massachusetts controversy currently only affects individual policies that HMOs offer to retired employees who have opted out of the traditional Medicare program and receive coverage through so-called Medicare risk HMOs.

Massachusetts regulators have not tried to order Medicare risk HMOs to comply with the prescription drug benefit mandate for coverage negotiated by employers for their retired employees.

But employers would be likely to feel the impact of state benefit mandates on risk HMOs and other plans by the end of next year when a 1997 federal law giving retirees new private market alternatives to Medicare fully goes into effect.

With a plethora of private market alternatives to the traditional Medicare program almost certain to develop, more employers are likely to drop their own plans and reimburse retirees for all or a portion of those plans' premiums.

"If there are a lot of choices out there, employers may say: 'We don't need to be in the retiree health care plan business. Maybe we will be in the plan premium subsidy business,' " said Mary Case, a principal with PwC Kwasha in Fort Lee, N.J.

But if Medicare alternative plans are loaded down with expensive state mandates, their appeal to retirees could be limited.

"The question is not today, but what happens two or three years down the road," said Jim Winkler, a Hewitt Associates consultant in Rowayton, Conn.

Mandates like those in Massachusetts can make plans "unaffordable for individuals and, ultimately, employers," said Karin Landry, a consultant with Watson Wyatt Worldwide in Wellesley Hills, Mass.

The Massachusetts controversy involves the interaction of both state and federal laws and regulations.

Under a Massachusetts 1994 law and later regulations, HMOs and other health insurers must provide either unlimited or no prescription drug coverage in plans they offer retirees eligible for Medicare.

But HMOs say the 1997 federal Balanced Budget Act pre-empts state laws affecting private plans -- known as Medicare + Choice plans -- that contract with HCFA to provide coverage to retirees opting out of the traditional Medicare program.

HMOs note that HCFA regulations issued in June stipulate that for Medicare + Choice plans, "the specific pre-emption of state laws" would prevent the application of mandated benefit laws, such as the Massachusetts prescription drug mandate.

"The federal law is very clear and explicit and pre-empts state mandates, including the Massachusetts mandate," said Mr. Raymond of Harvard Pilgrim Health Plan.

But Massachusetts regulators view the federal law and regulations differently.

"Absent a judicial determination that any state law is pre-empted, state law will continue to apply to insured plans. . . .The Division also notes that HCFA's interim final rule does not appear to contain any prohibition which would prevent carriers from complying with all applicable state laws," Massachusetts Insurance Commissioner Linda Ruthardt said in a bulletin to insurers and HMOs.

Many HMOs want to cut back prescription drug benefits at a time when HMOs say drug costs are rising at a rate of 15% to 20%, one reason HMOs and insurers are boosting rates after several years of rate stability.