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Managed Care
Issues August 17, 2000  |
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By: Thomas M. Crawford |
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| Managed Care As of June 2000, 32 states had enacted some type of independent review process, the overwhelming majority of these laws were created in 1997 or later. The independent appeals boards were created primarily in response to a 1997 law in Texas that permitted plan members to sue their MCOs for malpractice. Several prominent MCOs initiated a lawsuit to challenge the law claiming that it violated the Employee Retirement Income Security Act ("ERISA"). Prior to this time, MCOs successfully argued that ERISA preempted claims for malpractice and limited a claimant’s damages to the cost of the denied or delayed benefits and attorneys fees. However, in that case, the Fifth Circuit recently upheld the statute on the basis that the Texas statute allows suits for healthcare services actually delivered, not for coverage disputes. Corporate Health Ins., Inc. v. Texas Department of Insurance, __ F.3d __ (5th Cir. 2000). The appellate court ruled that the managed care provider wears two hats – healthcare insurer and medical care provider. It is for liability arising from the latter role that permits plan participants to sue their MCOs, according to the court. Interestingly, the Fifth Circuit struck down the portion of the statute that created an independent review organization even though it had been amended in 1999 to make the process voluntary. The Court reasoned that the definition of "adverse determination" included a determination by a managed care entity as to coverage not just negligent decisions by a physician, and consequently was preempted by ERISA. The Fifth Circuit’s decision also included a footnote citing to the U.S. Supreme Court’s unanimous decision which acknowledged that some states permit medical malpractice suits against HMOs. Pegram v. Herdrich, __ U.S. __ (June 2000). In Pegram, the Court gave HMOs a measure of support when it held that patients cannot sue HMOs for giving doctors financial bonuses to hold down treatment costs under the Employee Retirement Income Security Act ("ERISA"). In this case, plaintiff sued her HMO saying that her appendix ruptured and peritonitis set in because her doctor delayed diagnostics tests for eight months. The delay was caused by the doctor’s desire to use a facility owned by the HMO. In addition to her medical malpractice claim, plaintiff sued the HMO under ERISA claiming that the health plan managers acted as fiduciaries. Outside the fiduciary argument, this decision provided acknowledged that Congress has promoted the formation of HMOs and the purpose of the HMO is to make a profit. In summary, the Pegram decision effectively precludes the MCOs’ desire to seek the Supreme Court’s review of the Corporate Health ruling. The Supreme Court, in Pegram, stated that Congress had a "superior institutional competence" in deciding how to hold HMO’s accountable. Over the last five years, Congress has been unable to agree on legislation defining patients’ rights and to establish remedies for the violations of such rights. Although the Senate and House appear to have made significant progress on their competing bills, the forecast for enactment of a law does not to be on the near horizon. One of the principal sticking points is the whether patients should be given the right to sue MCOs for injuries caused by the denial of care. Another point that may doom passage of the competing bills is the prohibition of HMO practices of offering bonuses to physicians who cut back on medical services. Illinois is one of the recent states to have its highest court to rule on the right to sue a managed care organization. In Jones v. Chicago HMO Ltd. Of Illinois, 2000 WL 637290 (Ill. May 18, 2000), the Illinois Supreme Court held that an HMO may be sued by injured patients under a theory of direct corporate negligence. More specifically, the court found that an HMO could be found liable if it assigned an excessive number of patients to a primary care physician and the patient was injured because of his inability to be treated by the overloaded physician. The Jones decision follows on the heels of the 1999 Illinois Supreme Court decision, Petrovich v. Share Health Plan of Illinois, Inc., 188 Ill.2d 17 (1999), where the Court held that HMO’s could be held vicariously liable for medical malpractice of its independent-contractor physicians. The reasoned that the vicarious liability could be imposed under the doctrines of apparent authority and implied authority. The Jones decision, however, focuses on "institutional negligence", that is, direct corporate negligence in assigning a patient load to a primary care physician than can be reasonably treated. Patients are not the only groups to express dissatisfaction with MCOs. In a recent study, physicians and hospitals gave a 2.2 overall rating (out of five) in the category of quality of care provided. Interestingly, nearly one-third of U.S. hospitals have cancelled an HMO contract, mainly because of poor financial results according to another study conducted by Deloitte and Touche. Although not directly set forth in the study, some of the "poor financial results" may be the consequence of increased liability exposure arising from their MCO contractual obligations. Class action lawsuits and the presence of well-known successful plaintiffs attorneys have made the liability exposure for MCOs a high stakes gamble. A recent article reported that there were 56 such class actions pending across the country. Numerous lawsuits were filed in various courts alleging that MCOs placed cost savings ahead of patient care and that doctors were encouraged to under-treat patients to save money. The filings were choreographed by a coalition of plaintiffs lawyers including most notably, Richard Scruggs, the Ness Motley firm and the Lieff Cabreser firm. Mr. Scruggs previously represented Mississippi against cigarette manufacturers and reached a $4.1 billion settlement. The MCO lawsuits name Aetna, CIGNA, Humana, Foundation Health Systems, PacifiCare Health Systems, Prudential Insurance and United HealthCare – at least four the defendants were, or are currently insured by CNA. The cases were consolidated in federal court in Miami. Mr. Scruggs’ goal appears to put intense pressure on the MCOs to defend these lawsuits to the point that the defendants have no choice but to settle. These cases involve millions of plaintiffs and one recent suit against Aetna allegedly involves more than 18 million plan members. To further highlight the blight of the MCOs is the fact that one suit that was brought by a plaintiff class of physicians who contracted with the plans. The coalition led by Mr. Scruggs provides numerous advantages to plaintiffs by permitting attorneys to share information, pooling resources, comparing legal theories and sharing responsibility for litigation. In addition to the traditional theories of liability, these class action lawsuits also seek damages for alleged fraud under RICO, primarily on purported misrepresentations about the nature of coverage and the decision-making processes used by HMOs. The allegations further claim that HMOs fail to disclose certain aspects of their business operations. Last year, the U.S. Supreme Court held removed certain protections for insurers in RICO cases. To further drive home the coalition effort, Mr. Scruggs has formed the "REPAIR" team which stands for RICO & ERISA Prosecutors Advocating for Insurance Reform. The American Medical Association also appears to have come out strongly in support of the expansion of common law litigation against the managed care industry. In a November 3, 1999 letter to the Honorable Neil Abercrombie of the U.S. House of Representatives, the AMA indicated that a Kaiser Foundation study had found that 60% of employers support the right of their employees to sue a health plan, up from 46% in 1998. Somewhat surprisingly, even 61% of small employers (with presumably the most to lose in terms of the potential for increased premiums) favored the right of employees to sue plans for problems arising from benefit delays or denials. Similarly, some procedures within ERISA itself came under attack in the second half of 1999. Patients’ rights advocates have argued, for instance, that when HMOs contract to provide Medicare benefits, claim denials invoke "state action" sufficient to allow a suit to be filed without prior exhaustion of the benefits appeal process. Both a United States District Court and the Ninth Circuit U.S. Court of Appeals have agreed with this assertion – in a case entitled Grijalva v. Shalala – but the case has most recently been remanded by the United States Supreme Court to the district court for further proceedings. Although not directly related to the increased liability exposure, HMOs are announcing their withdrawal from many Medicare markets. For example, UnitedHealth Group Inc. said it is cancelling coverage in 21 counties in eight states, affecting 56,000 of its 400,000 Medicare HMO enrollees. With this move, UnitedHealth is completely exiting from the Medicare HMO business in the states of Arizona, Georgia and Maryland. Aetna is also following suit and its exit from certain Medicare markets is expected to affect 355,000 people, nearly one-half of its Medicare HMO enrollees. In all, analysts predict that more than 700,000 people will be dropped from their current plans. The Medicare HMO insurers cite inadequate federal reimbursements coupled with rising health care costs have made it unprofitable to continue in certain geographic areas. Challenges by Physicians In addition to the consumer challenges discussed above, MCO procedures have also been put to the test in litigation by physician groups. For instance, on October 5, 1999, the Connecticut State Medical Society – New Haven (with a membership of 6,500 physicians) sued its Health Maintenance Organization, Physicians Health Services, for breach of contract, violation of the Connecticut Unfair Trade Practices Act and violation of the Connecticut Unfair Insurance Practices Act. The medical society’s suit alleges a systemic breakdown of PHS’ managed care practices, including failures to make timely payments, and usurpation of the physicians’ decision making power. A second class action was filed on September 16, 1999 in Somerset County, New Jersey entitled Courtney v. Aetna U.S. Healthcare. In the Courtney suit, the plaintiffs allege that the HMO defendant violated New Jersey statutory laws by failing to pay doctors on time and, in some instances, failing to pay them at all. A similar suit Solomon v. Aetna, was filed earlier in the year in Philadelphia, Pennsylvania. These actions basically piggyback onto state laws (passed in 30 jurisdictions) which mandate prompt payment of medical expenses by HMOs. There are some indications that these physician challenges to MCO procedures are beginning to force change on the part of the industry. There was substantial media attention attendant to a November 8, 1999 announcement by United Health Group, reportedly the nation’s second largest health insurer, that doctors would be given the final say under its health plans as to the medical necessity of treatment. The rationale for the change was reported by United as economic, i.e., removing a layer of utilization review oversight which in turn resulted in a 9.5% reduction of medical costs and allowed a 20% reduction in United’s national medical monitoring staff. * * * This article is published by Litchfield Cavo and is for information
only. It is not a substitute for legal advice or individual analysis
of a particular legal matter. Readers should not act without seeking
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entire disclaimer. For further information, write to us at firm@litchfieldcavo.com.
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