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From the Employer's Guide to Self-Insuring Health Benefits, Thompson Publishing Group

Guest Article

California Agency Cannot Require MCOs to Cover Drugs For Sexual Dysfunction, State Appeals Court Rules

Summary: A California appeals court ruled that the agency responsible for regulating managed care organizations does not have the authority under state law to require plans to cover all medically necessary drugs, including drugs for treating sexual dysfunction.

A managed care organization (MCO) cannot be forced to cover prescription drugs that treat sexual dysfunction under California state law, a state appeals court in California held. Therefore, the state's MCO regulatory agency exceeded its authority when it declined to approve an MCO's policy amendment that would exclude coverage for sexual dysfunction under its outpatient prescription drug program. The case is Kaiser Foundation Health Plan, Inc. v. Zingale, 2002 WL 1380899 (App. Ct. Calif., June 27, 2002.

Facts of the Case

California's Knox-Keene Act (KKA) establishes various requirements for "health care service plans," which are essentially MCOs. This includes providing all "basic health care services" -- a term that does not include prescription drug benefits. The state's Department of Managed Health Care (DMHC) was created under the KKA to have oversight authority over its provisions. Any MCO policy amendments must be filed and approved by the DMHC.

Kaiser Foundation Health Plan, Inc., submitted a proposed policy amendment that excluded coverage for sexual dysfunction treatment under its outpatient prescription drug program. DMHC Director Daniel Zingale issued a decision that the proposed amendment violated the KKA. In the DMHC's view, the agency could require MCOs with prescription drug programs to cover all medically necessary prescription drugs.

Kaiser sued in state trial court, which found that the DMHC did not have statutory authority to disapprove Kaiser's amendment simply because it did not cover prescription drugs to treat sexual dysfunction. After the court ordered that the DMHC approve the amendment, the agency appealed.

To appeals court indicated that "on its face," the KKA does not give the DMHC the authority to require MCOs with prescription drug programs to cover all medically necessary drugs. However, the DMHC issued a regulation invoking such an authority, and maintained that the KKA gives it general regulatory discretion to impose this requirement; therefore, it can require Kaiser to cover prescriptions drugs for sexual dysfunction.

The DMHC alleged that its authority can be found in a KKA provision requiring MCOs to maintain an expeditious process for prescribing providers to obtain authorization for a medically necessary prescription drug that is not on a formulary. The DMHC argued that the word "authorization" refers to the prescription drug payment. Kaiser countered that the word only refers to non-formulary versus formulary drug use, and has nothing to do with whether the drug is covered under the prescription drug program.

The KKA provisions in question allow providers to obtain authorization for a non-formulary drug not if medically necessary to do so. The legislative history indicated that, the provision's goal was only to protect patients from overly restrictive drug formularies and from being steered toward cheaper drugs -- not to prohibit MCOs from limiting the conditions that they would cover for prescription drugs. Therefore, the KKA provision does not require an MCO's prescription drug program to cover drugs for every medical condition, the court determined.

Furthermore, the provision does not give the DMHC the authority to require Kaiser to cover prescription drugs for sexual dysfunction. The court noted that while the KKA does require MCOs to cover prescription drugs -- such as pain medication for the terminally ill, contraceptives for women, an AIDS vaccine and insulin for diabetics -- to treat specific conditions, no such provision exists regarding the treatment of sexual dysfunction. Therefore, adopting the DMHC's interpretation would make the KKA's requirement to treat specific conditions "superfluous," which would violate the rule of statutory construction. Furthermore, Kaiser's interpretation is more consistent with legislative intent, according to the court. This intent is further evident by another part of the provision that requires MCOs to continue covering a drug for an enrollee who has been taking, and still needs, a drug. This requirement would be unnecessary if the legislature intended to mandate coverage of all medically necessary prescription drugs.

The court also noted that on the same day that Kaiser challenged the DMHC denial, the DMHC issued emergency regulations -- to be effective immediately -- that interpreted the KKA provision as requiring any MCO with a prescription drug program to cover all medically necessary outpatient prescription drugs. The DMHC said that the court should defer to its interpretation of the statute under these regulations. However, the court rejected this argument, agreeing with Kaiser that a court does not defer to an agency's view when deciding whether regulations lie within the scope of statutory authority; rather, the court has the final responsibility in interpreting the law.

Accordingly, the appeals court ruled that the DMHC exceeded its statutory authority, affirmed the trial court's decision and ordered the DMHC to approve Kaiser's policy amendment.


The DMHC's lack of authority, as determined by the court, nullifies its emergency regulations. However, the state still could appeal the ruling.

Plan sponsors that provide prescription drug coverage through California-based MCOs may want to review their coverage policies and confer with those MCOs. While some plans may want to continue covering drugs that treat sexual dysfunction and other conditions to comply with the emergency regulations, others may not want to do so, particularly when they only covered the drugs to comply with those rules. Thus, these plans may want to consider their options for eliminating certain coverage. But plans may want to delay doing anything beyond reviewing current coverage policies until the state decides whether to appeal. Once that issue is settled, desired coverage changes can be implemented.

Excerpted from the August 2002 supplement to Employer's Guide to Self-Insuring Health Benefits, © Thompson Publishing Group, Inc., 2002. All rights reserved.

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