AI Guardrails in Insurance: States Push Back as Washington Signals Preemption
States and the federal government are on a collision course over one of the most sensitive uses of AI in health care: prior authorization and claims decisions. A recent KFF Health News report outlines the split: the White House pitching national primacy on AI policy, while legislatures in both red and blue states move to curb how carriers use algorithms.
President Donald Trump's December executive order frames stringent state rules as a drag on U.S. competitiveness and hints at withholding funds or litigation to block "excessive" regulation. On the ground, lawmakers in Arizona, Maryland, Nebraska and Texas passed limits last year, with Illinois and California acting earlier and Rhode Island and North Carolina weighing similar bills. Florida rolled out an "AI Bill of Rights" that restricts AI use in claims processing and gives regulators access to inspect algorithms.
Public mood is cold on AI. A Fox News poll found 63% of voters are very or extremely concerned. At the same time, frustration with prior auth remains high, and ProPublica's reporting has spotlighted systems that speed denials with limited physician review.
Insurers dispute the narrative that advanced AI is auto-denying care. Executives from Cigna and UnitedHealth told House lawmakers that denials aren't driven by AI. Carriers argue automation accelerates approvals and trims admin waste, with Optum promoting "tech-powered prior authorization." Medical groups aren't convinced. The American Medical Association is pressing for stronger transparency, human review with teeth, and timely access to care.
What this means for insurers
Expect a patchwork. States have broad authority over fully insured plans but can't touch self-insured employer coverage under ERISA, as University of Minnesota professor Daniel Schwarcz notes. Many bills require a human sign-off, but few define what meaningful review looks like. That gap invites scrutiny of rubber-stamping and places the burden on carriers to prove clinical judgment, not just a click.
Trade group AHIP is calling for one national playbook to avoid duplicative compliance. The administration's attempt to preempt state laws could land in court. Harvard Law School's Carmel Shachar has flagged that sweeping preemption generally sits with Congress, not the executive branch. Until that's resolved, compliance will be state-by-state for fully insured business and policy-driven for self-funded ASO clients.
Compliance moves to make now
- Inventory every AI/ML and rules-based tool touching prior auth, utilization review and claims. Label each as "assistive" vs. "determinative."
- Define "human in the loop" minimums: required credentials, evidence review depth, override authority, and documented rationale per decision.
- Stand up auditable trails: model inputs, guidelines used, timestamps, reviewer IDs, and outcome rationales accessible on demand to regulators.
- Tighten vendor contracts: mandate transparency on features, update logs, bias tests, and the right to audit models and prompt/rule sets.
- Quality controls: stratified sampling of approvals and denials, false-positive/false-negative tracking, and turnaround time monitoring.
- Member safety: fast-lane escalation for time-sensitive care, with clear SLAs and clinical criteria published for providers and members.
- Appeals and reconsideration: require humans to review AI-assisted outcomes de novo, with measured reversal rates and reason codes.
- ERISA segmentation: separate controls and reporting for self-funded clients; brief plan sponsors on model governance and audit readiness.
- State rulebook: maintain live summaries of enacted and pending state requirements; map each control to statutes and regulator guidance.
- Communications: align language used with regulators, employers, providers and members; avoid implying that automation limits clinical judgment.
If you're standardizing processes across markets, build to the strictest state baseline for fully insured plans, then relax only where you can prove equivalent protection. It's cheaper than retooling after an inquiry.
For a deeper dive on operational playbooks and tooling, see AI for Insurance.
What to watch next
- Preemption challenges and any congressional movement that clarifies federal vs. state authority.
- State definitions of "meaningful human review" and algorithm audit access (Florida's approach will be instructive).
- House and Senate hearings with payer execs, plus any CMS signals for Medicare Advantage prior auth oversight.
- Provider lawsuits citing delayed care and opaque denials; watch for settlements that set de facto standards.
Antitrust Watch: Ugg Lawsuit Puts "Sham Litigation" Theories Back in Play
Deckers Outdoor, maker of Ugg, faces an antitrust suit from Quince alleging a "legal assembly line" of trade dress claims aimed at chilling competitors. The complaint says Deckers has filed hundreds of cases over unregistered, generic product designs. A prior Northern District of California case found trade dress claims for the UGG Tasman slipper and Classic Ultra Mini boot to be generic and unprotectable.
Quince argues Deckers kept filing similar suits anyway, forcing costly discovery to push settlements. It pegs Deckers' share of the "Sheepskin Casual Footwear Market" above 50% and claims prices run 50% to 100% higher than rivals because lower-priced options get squeezed out. Deckers hasn't responded publicly.
Why this matters for insurance
The facts are footwear, but the principle travels. Using legal or contractual pressure as a competitive moat can trigger antitrust theories if it looks exclusionary or pretextual. For carriers, that's a reminder to pressure-test strategies around network exclusivity, vendor lock-in, MFN clauses, data-sharing limits, and aggressive IP enforcement.
Even if conduct is lawful, discovery can be punishing. Document legitimate business justifications, pro-competitive benefits, and member outcomes. Make sure pricing and contracting reviews involve antitrust counsel before they land in a complaint.
Action items for legal and commercial teams
- Review litigation posture: confirm claims and defenses are rooted in protectable rights and backed by consumer benefit, not just competitor burden.
- Contract check: re-evaluate exclusivity and MFN language; add guardrails and sunset provisions where risk is high.
- Pricing memos: contemporaneously record reasons for differentials tied to quality, access, and service-avoid narratives that hinge on competitor suppression.
- Discovery readiness: centralize key documents (guidelines, audits, decision memos) and train teams on preservation and consistent messaging.
The throughline between both stories is simple: if a decision tool or legal tactic affects patient access or market choice, expect oversight. Build controls that stand up in daylight-auditable logic, human judgment that actually matters, and contracts that compete on value, not pressure.
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