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WASHINGTON -- Federal health care officials are siding with Massachusetts health maintenance organizations that are fighting a state mandate to provide unlimited prescription drug benefits for retirees eligible for Medicare.

HMOs say a 1997 federal law giving retirees additional private market alternatives to the traditional Medicare program pre-empts a Massachusetts law and regulations that require Medicare risk HMOs to offer either unlimited prescription drug benefits or no drug benefits to retirees.

Responding to inquiries from state officials, Nancy-Ann DeParle, administrator of the federal Health Care Financing Administration, says state laws that "dictate" what benefits must be provided by Medicare + Choice organizations, such as HMOs, are pre-empted by the 1997 law.

"States cannot specify what must be included as a federal Medicare benefit," Ms. DeParle wrote in a letter to Massachusetts Attorney General Scott Harshbarger.

Several Massachusetts HMOs, in filings with HCFA, have proposed offering a prescription drug benefit capped at $800 to $1,200 a year to keep premiums more affordable for Medicare-eligible retirees.

The state's Division of Insurance, though, has warned that it may take legal action against the HMOs if they offer reduced prescription drug benefits (BI, Aug. 24).

Preliminary settlement reached

LEXINGTON, Mass. -- Interneuron Pharmaceuticals Inc., the developer of withdrawn diet drug Redux, has reached a preliminary agreement to settle all litigation against it from use of the drug for $70 million plus the full amounts of its insurance policies.

The company will deposit $15 million into a settlement fund, and once the settlement is finalized, it will add another $55 million of the company's royalties from other drugs over the course of a seven-year period.

After deducting defense costs to date, insurance proceeds will exceed $30 million under three policies: a $20 million primary policy from Columbia Casualty Co., a CNA subsidiary; a $5 million excess policy from Reliance National Insurance Co.; and a $15 million excess policy from New Hampshire Insurance Co., an American International Group Inc. unit, said Barbara Wrubel, a partner with the New York law firm of Skadden, Arps, Slate, Meagher & Flom L.L.P., Interneuron's attorney.

The total number of plaintiffs is unknown, but Interneuron will go ahead with the settlement only if all claimants, current and future, resolve their claims through the settlement fund and not through litigation.

Court approval of the settlement is required.

State probes Fremont files

SAN FRANCISCO -- State auditors can access Fremont Compensation Insurance Group's workers compensation claim files without first having to subpoena the insurer, a San Francisco Superior Court ruled.

California Department of Industrial Relations auditors had been investigating allegations that Fremont Compensation "had illegally falsified dates on benefit notices to injured workers, back-dated checks to avoid paying penalties and altered medical bills and invoices at several of its adjusting locations, including San Francisco, Glendale and Fresno," according to a Sept. 1 news release from the DIR.

Marcus S. Topel, an attorney at Topel & Goodman in San Francisco who represented Fremont Compensation, said the allegations are unwarranted. But Fremont Compensation did find employees in its Fresno, Calif., office had back-dated "a minuscule amount" of documents, he said. Fremont fired them, changed its procedures so that the back-dating could not happen again and referred employees for prosecution to the Fresno County District Attorney's Office, according to Mr. Topel.

"There were no allegations the company had authorized it or encouraged it or that it was anything but these guys in this particular office trying to correct deficiencies such as missing deadlines," he said.

In June 1988, Fremont "abruptly denied (the Department of Workers' Compensation) further access to claims and filed a lawsuit" attempting to force investigators to obtain a subpoena before proceeding with their investigation. But the DIR's procedures are constitutional, and a preliminary injunction would preclude the agency from carrying out its legislative mandate, Judge Raymond D. Williamson said in a ruling last month.

The court did not address the allegations that led to the DIR's non-random audits, and the DIR has not released information on its findings. Depending on its findings, the DIR can hold a hearing and assess a civil penalty.

Aetna to cut Medicare offerings

BLUE BELL, Pa. -- Aetna U.S. Healthcare is pulling out of the Medicare risk HMO market in six states and parts of three others.

The HMO giant no longer will offer a Medicare HMO product in Delaware, Maryland, Massachusetts, New Hampshire, Rhode Island and Virginia. Also, the company is withdrawing from the District of Columbia; Windham and Tolland counties in Connecticut; Polk County, Fla.; and Marin and Sonoma counties in California.

The withdrawal will be effective Jan. 1, 1999.

After the move, which will affect about 58,000 plan members, Aetna U.S. Healthcare still will serve some 469,000 Medicare HMO members in 16 states.

"In those areas where Aetna U.S. Healthcare could not offer substantial additional benefits over traditional Medicare due to the federal payment structure, the company had no alternative but to allow its current contracts to expire," Aetna said in a written statement.

A member in a terminated plan can return to traditional Medicare; purchase a Medicare supplement to the traditional plan; or enroll in another plan's Medicare risk HMO, if available, the company said.

Aetna's move follows similar pullouts by other managed care companies. In June, Anthem Blue Cross & Blue Shield stopped offering a Medicare risk HMO in 19 Ohio counties (BI, June 15). Foundation Health Systems Inc. will exit the Medicare market in some counties in California, Connecticut and New Jersey, and PacifiCare Health Systems Inc. is getting out of the Medicare risk market in Utah, southern Oregon and parts of Washington state.

Despite these pullouts, the number of retirees signing up for Medicare HMOs has climbed along with the number of plans in the market (BI, Aug. 24).

ERISA pre-empts law: Court

ST. LOUIS -- The Employee Retirement Income Security Act pre-empts an Arkansas law that requires insurers, health maintenance organizations and other health care plans to accept within their networks any provider willing to accept plan terms, a U.S. appellate court ruled last week, upholding an earlier ruling.

While ERISA does not pre-empt state regulation of the insurance industry, the Arkansas Patient Protection Act went far beyond insurer regulation, according to the 8th U.S. Circuit Court of Appeals.

"An act that purports to regulate 'health benefit plans' defined so broadly as to include employers and administrators of self-insured plans, as well as traditional insurance, simply does not fit with a common sense view of a law directly specifically toward the insurance industry," the appeals court ruled.

The 1995 Arkansas law, which a federal judge earlier permanently enjoined the state from enforcing (BI, Feb. 10, 1997), also barred health care plans from imposing different copayment or deductible features that would influence participants' choice of providers.

Earl estimate below $50 million

NEW YORK -- Insurers will pay less than $50 million in claims related to Hurricane Earl, according to estimates released Friday by the Insurance Information Institute.

The hurricane destroyed fewer than a dozen houses, though hundreds more suffered some damage -- mostly water damage -- as did approximately 50 businesses, according to preliminary statistics released Friday by the Florida Department of Community Affairs.

Earl, which battered parts of Florida's Panhandle last week before moving on to Georgia and South Carolina, does not appear likely to come even close to setting any records for insured property damage.

"Mostly, we will be dealing with people who have experienced flooding problems," Craig Fugate, chief of the Florida Division of Emergency Management's Bureau of Preparedness and Response, said in a statement released Friday.

Fears that Earl might prove as destructive as 1995's Hurricane Opal soon evaporated as Earl's winds slowed as it struck land. Opal caused an estimated $1.8 billion in insured property damage along the Gulf Coast (BI, Oct. 9, 1995).

Meanwhile, the Property Claim Services unit of the Insurance Services Office Inc. estimated last week that insured property damage from late August's Hurricane Bonnie will total about $360 million in three Southeastern states (BI, Aug. 31). North Carolina sustained most of the damage, registering estimated insured property damage of $240 million.

Briefly noted

Trinity Acquisition P.L.C., the consortium led by U.S. private equity firm Kohlberg Kravis Roberts & Co. L.P., last week declared unconditional its bid for Willis Corroon Group P.L.C. As of Sept. 1, Trinity owned or had received valid acceptances of its bid representing 64.05% of the London-based broker's shares. The announcement effectively puts an end to speculation that Aon Corp. would step in with a rival offer for Willis Corroon. . . .The California Supreme Court ruled last week in a wrongful termination case, Richard Green vs. Ralee-Engineering Co., that employers' right to discharge employees can be limited by fundamental public policy that is embodied in administrative regulations. Employers previously were limited only by public policy found in constitutional or statutory provisions. Defense attorneys say the decision could lead to increased litigation against employers. . . .A Senate subcommittee rejected appeals from employer groups late last week and voted against funding for a "thorough and comprehensive study on ergonomics by the National Academy of Sciences." The businesses wanted a study completed before the Occupational Safety and Health Administration issues any ergonomic standard. OSHA has been considering promulgating such a standard -- which is opposed by employers -- for years, but has been repeatedly prohibited from doing so by Congress. . . .Proposed Labor Department regulations would require health care plans to decide within 72 hours claims involving urgent care and within 15 days for claims involving non-urgent care. Current regulations now give health plans 90 days to respond to claims by paying them, denying them, or seeking more information from participants. . . .The National Committee for Quality Assurance has downgraded its accreditation of Oxford Health Plans Inc. two steps to provisional accreditation from a full accreditation. The rating means Oxford meets some NCQA standards and has adequate programs for quality improvement. The downgrade, which is to be reviewed in a year, came after the NCQA conducted a discretionary review in May because of the health plan's ongoing financial problems. . . .The ERISA Industry Committee is asking the Pension Benefit Guaranty Corp. to adopt "more consistent and realistic assumptions" in valuing employers' pension plan liabilities and in measuring its own financial condition. . . .Aon Re Worldwide Inc. has formed Aon Re Europe to integrate its reinsurance brokerage operations throughout Europe. Jurgen Grupe, head of Aon Jauch & Huebener reinsurance operation in Germany, will serve as chairman of the new operation, effective immediately. . . .The Senate gave its final approval last Thursday to a Treasury Department appropriations bill that expands prescription drug benefits for federal employees by requiring that their health plans cover contraceptive drugs or devices (BI, Aug. 3)

Errors & omissions

* The July 20 directory of agents and brokers contained an incorrect figure for the 1997 brokerage revenues of Cameron M. Harris & Co. The correct figure is $17,753,828.