Legal developments in managed mental health care.

Legal Developments in Managed Mental Health Care

There has been rapid development in recent years of employer programs aimed at controlling the skyrocketing costs of providing mental health care benefits to employees. This column, which is based on a presentation at a Client Briefing Conference conducted by Epstein Becker & Green, P.C., on September 13, 1989, in Dallas, Tex., discusses some of the legal issues that have arisen in connection with the various plans that have been developed. "Health Law" is a regular feature of Physician Executive contributed by Epstein Becker & Green. Douglas A. Hastings, Esq., a partner in the law firm's Washington, D.C., offices, serves as column editor.

A dramatic rise in mental health care costs and utilization has been experienced in recent years by employers in terms of out-of-pocket payments for care and of lost productivity due to drug and alcohol abuse and other mental health problems in the workforce. Between 1985 and 1987, psychiatric and substance abuse costs to employers increased 45 percent nationwide. These costs are now rising at about twice the general rate of medical inflation. A number of reasons have been offered for the dramatic growth in mental health care costs. First, the increased incidence of drug and alcohol abuse triggers a need for more care in this area. Second, as treatment for psychiatric and substance abuse problems continues to gain social acceptance, more care is demanded. Third, mental health providers have observed the growth and have become more aggressive in providing and advertising their services. Fourth, legislation in many states has created mandated benefits in the mental health arena, expecially for expensive inpatient care. Finally, many traditional health benefit plans require greater co-payment for outpatient services, forcing patients to seek the more expensive inpatient route. In response to increased demand, a new managed mental health care industry has arisen, essentially in the past five years. Participants in this new industry are a diverse group. They include health care entrepreneurs, who see a new market within the larger managed care market in which there are fewer competitors and much more room for explosive growth; mental health providers, hospitals, physicians, and other practitioner, who see the potential for expansion of market share; insurers, who see mental health care as a source of product diversification and expansion or maintenance of market share; and employers, who are seeking to better control and direct their own health care benefit programs, both to contain costs and to provide necessary benefits to employees.

Types of Programs

What are the basic products and programs that constitute managed mental health care?

Employee Assistance Programs. These programs provide counselors, onsite or off, who advise employees on a wide range of personal problems--substance abuse, family issues, financial problems, or other similar matters. The idea, from the employer's perspective, is to provide a valuable service to employees and to intervene early enough to avoid more expensive health problems at a later time. There is current debate as to whether employee assistance programs are really cost effective. Some recent articles have raised the question of whether employee assistance programs actually fuel the demand for mental health care by creating more referrals to providers rather than fewer.

Utilization Management. Utilization review or case management programs, which I will refer to as "utilization management programs," are increasingly common these days in all health benefits programs. Many companies offer utilization management services to employers and third-party payers. The typical components of an overall utilization management program include preadmission certification, concurrent review of length of stay, and retrospective studies to identify utilization patterns and high utilizers. However, the mental health field is unique in many respects with regard to utilization management. For example, most psychiatric hospital admissions are emergencies, making it difficult to have an effective preadmission certification program. It also may be difficult to develop mental health management protocols and standards without psychiatrists, psychologists, and other mental health specialists involved. Thus, a separate business line for many utilization management companies has arisen in the mental health field, and a number of companies specializing in mental health utilization management have also been established. In many cases, the data, standards, and protocols developed by such companies have been viewed as trade secrets and have been the basis of some legal battles, especially over non-compete clauses in employee contracts. Mental health utilization management can be an effective tool for containing costs. Indeed, for many employers, inpatient services comprise as much as 70 percent of the overall cost of mental health care. Bringing the number of inpatient days down in such circumstances obviously can be a source of savings. One insurance company has reported that its costs for mental health services in its unmanaged, traditional indemnity plans are 25-30 percent of the total, but only 6-8 percent in plans with utilization management components. Aggressive utilization management programs have in some cases triggered a shift to outpatient care from inpatient care. As a result, outpatient utilization and costs are rising, and utilization management of outpatient services also has become a necessity.

PPO-Type Arrangements. In the PPO context, employers contract directly or through a broker or insurer with providers, usually on a discounted fee-for-service basis. There may or may not be a significant utilization management component in the PPO arrangement. In the typical setup, employees have incentives (economic or otherwise) to use the preferred providers. Such incentives often involve lower copayments for employees, especially in outpatient services. The PPO or broker, if any, is not at risk from an insurance standpoint in the typical PPO arrangement.

HMO-Type Arrangement. Mental health care HMO-type arrangements are often referred to as employer "carve-outs" or single service health care plans. The employer pays a fixed fee to a company or group of providers to provide all mental health care services pursuant to a benefit plan. Patients must go only to the panel providers. The mental health HMO, and frequently its contracting providers, is at risk financially for the services provided. One difficulty with the risk arrangement has been the problem of getting solid experiential data on actual mental health care costs and utilization in order to set valid capitation amounts for the mental health HMOs and their providers.

Hybrid Plans. An increasing trend is to develop specific mental health products that do not fit into the traditional "alphabet soup" of managed care. The employer's goal is simply to place a limit on its mental health care costs and allow the employee to go to any provider he or she chooses, but to create a system whereby the employee will have to pay some additional amount for care that is more expensive. The fundamental legal issue is whether the contracting plans or providers of these services can, legally and financially, structure programs to accept the necessary risk.

Legal Issues

For the most part, the legal issues that have arisen in connection with these plans are relevant to both the employer and the managed mental health care organization or provider. In many cases, it is in both parties' interest to resolve the issue or at least to fairly discuss and allocate the legal risks involved.

Contracting Issues. The managed mental health arena is intensively contract-oriented. Employers may have contracts with insurers, third-party administrators, utilization management companies, hospitals, physicians, and other providers. Each of those parties may have contracts with one or more of the others as well. Moreover, as managed mental health has unique operational and regulatory problems, it is very important that lawyers and others involved in the contracting process understand not only managed care generally but managed mental health care in particular.

Liability Issues.

* Tort Liability. Both employers and managed mental health care companies have potential exposure to claims of negligent selection of providers in connection with alleged medical malpractice. Indeed, employers are potentially liable for their selection not only of individual providers but also of managed mental health care companies providing utilization management and/or risk-based services. Hence, both employers and managed mental health care companies need to establish and maintain selection standards and engage in a structured credentialing process for all providers. Further, they should document all of their credentialing procedures to demonstrate that due care is used. Employers should review the track records of managed mental health care companies on quality as well as costs, check for any history of litigation, and otherwise make a reasonable due diligence effort. Another basis for tort liability derives from negligence in operating a utilization management program. Such negligence may result from failure to keep proper records, failure to provide appropriate physician review, failure to provide due process in connection with grievances and appeals, or other similar claims. In addition, a clearly faulty medical necessity decision could produce liability. In this regard, employers should learn the basics of utilization management and make sure that any contractor providing utilization management services establishes clear-cut procedures and appropriate appeals and review before any final denials are made. Moreover, it is in the interest of mental health utilization management companies to obtain insurance against liability claims and for employers to ensure that companies they are contracting with own such insurance. * Breach of Contract/Insurance Bad Faith Claims. The failure by an employer or other payer to pay a claim as allegedly promised in an insurance contract (or denial of benefits under an ERISA-governed plan) can result in a liability claim on a breach of contract theory. There should be specific language in insurance contracts and ERISA plans regarding the employer's right and intention (and that of any agent of the employer) to make medical necessity determinations in connection with payment of claims. * Breach of Privacy. Another potential basis for a claim is a breach of privacy suit by an individual against an employer or a managed mental health care company. Insurance contracts and ERISA plans, as well as claim forms, should have clear language authorizing access to records for review. Moreover, medical record data should be kept strictly confidential and not be disclosed except as essential in connection with rendering care or making appropriate medical necessity determinations.

ERISA Prudent Purchaser Requirements. In recent months, the Pension and Welfare Benefits Administration of the Department of Labor (DOL) has begun to aggressively investigate ERISA plans and their service providers, including health care service providers, to ensure that there are no improper arrangements between them. Moreover, DOL is seeking to ensure that plans are efficiently using plan assets to purchase services; that is, that prices are at market levels and that services are reasonably accessible to all covered employees. Recent cases have shown that DOL is prepared to extend the recordkeeping and reporting requirements of both ERISA plans and service providers to a level beyond that traditionally required. This effects any proposed employer mental health carve-out in terms of how the program is bid initially, as well as how it is implemented. The new DOL initiatives would require employers and plan trustees to show that they have acted as prudent buyers in their contracts with service providers, including that (1) they either competitively bid the program or have some documented method to ensure that they received fair prices and (2) monitored the services provided on an ongoing basis, with appropriate recordkeeping, to ensure that services paid for were properly provided and of an appropriate quality.

Interference with the Right to Practice Medicine. In an 1989 case in Michigan, certain contracting psychiatrists in a General Motors pilot program aimed at managing mental health care sued to stop the program on a variety of grounds. The basic claim was that the program interfered with the doctors' right to practice medicine according to their best judgment. This amounted to a challenge to the right of employers to engage in utilization review and quality assurance on behalf of their employees. In its decision, the court fully backed the right of General Motors to engage in a managed mental health care program and make medical necessity decisions. Nevertheless, the issue of whether managed care interferes inappropriately with the rights of providers may trigger similar cases in the future.

Licensure/Regulatory Issues. The degree of potential licensure or regulatory oversight in managed mental health care programs is determined by the level of risk incurred by managed mental health care companies that are not providers or licensed insurers. In other words, if a company other than a hospital or a medical group practice on one hand, or an HMO or an insurance company on the other hand, is ceded risk by an employer in connection with a managed mental health care program, the question arises as to whether such a company is engaged in the business of insurance under state law. As a general premise, even where an employer is otherwise fully self-insured, if it insures the mental health portion of its coverage, the company providing that insurance is subject to licensure.

* Where an employer hires a contractor

to perform utilization management

services only, there should not be an

insurance issue, because utilization

management does not involve

insurance risk. However, state insurance

departments are beginning to look at

regulating utilization management

activities. The State of Maryland, for

example, has a new law requiring

certification of third-party utilization

management companies. * Where there clearly is no risk

associated with the PPO entity, PPO-type

managed mental health care

arrangements also do not trigger state

insurance licensure. However, state PPO-enabling

laws may affect the way in

which the mental health PPO can

operate. Particularly where the PPO-enabling

legislation creates certain

mandated benefits and/or provider

freedom of choice rules, the result

may be to make the value of a mental

health PPO questionable. * In HMO-type managed mental health

care arrangements, licensure under

state insurance laws clearly will be

relevant. If the managed mental health

care company must go out and obtain

an insurance license or can only offer

the managed care program through

an existing licensed entity, the overall

cost of the program may be significantly

greater. While some HMOs and

insurance companies have special

mental health managed care programs,

many of the companies offering these

specialized services have developed

from the mental health provider arena

rather than the insurance arena, and

are not licensed as insurers. It

behooves both employers and their

potential contractors in a managed mental

health program to focus on licensure

issues early so that problems do not

arise after the program is already in

place. The basic problem with insurance licensure in connection with managed mental health care is that state laws that govern mental health insurance, or for that matter any type of single service health care plan, are uneven and inconsistent. Only a few states at present have single service health care plan statutes, despite the adoption by the National Association of Insurance Commissioners of a model single service plan act. In the absence of such statutes, states can only look to other statutes on the books. HMO laws generally do not apply in these situations, because they require that a licensed HMO provide a full range of basic health care services. PPO laws generally do not allow for the taking of risk. Indemnity insurance laws simply do not fit the requirements of an HMO-type arrangement for a particular type of service and generally require far too much financial capital in terms of surplus and reserve to be useful to managed mental health care companies. Finally, nonprofit health service plan laws (so-called Blue Cross statutes) sometimes offer a legal avenue for operating a managed mental health care company, but these laws generally require operation through a nonprofit corporation and are laden with numerous other historical requirements for Blue Cross companies that often make operating in a single health care service arena difficult, if not impossible. One approach is for a managed mental health company to contract with a licensed insurance company, such as an indemnity insurer or an HMO, to provide the mental health component of an insurance program. However, most insurers or HMOs currently do not offer targeted mental health plans or carve-outs. Even where they do, the programs may be more expensive than if offered directly to employers by a smaller group of local providers or other interested parties. Thus, in many cases, when a smaller company is interested in developing risk-based managed mental health care programs, it may seek to structure the program to avoid a finding that it is in the business of insurance. One alternative is to establish a case management or PPO-type arrangement with significant upside incentives if savings are realized. Such an arrangement will give the mental health care company some of the upside potential of a risk program without the down side. However, employers are not likely to offer as generous an up side in this sort of arrangement. Another option is to structure the program so that all medical risk is ceded to providers through, for example, capitation payments. The mental health care company arranging for care on behalf of the employer ultimately receives what can legitimately be called an administrative fee. In this type of arrangement, the managed mental health care company must be concerned with potential licensure or certification issues under state third-party administrator statutes. Another alternative to licensure is to run the program through a contract or joint venture with a licensed insured HMO, where, in essence, the HMO or insurance company offers its license and certain limited services for a fee or a portion of the premiums. The managed mental health care company provides most of the services under the contract to the employer. There may be a question nevertheless in an arrangement such as this as to whether the managed mental health care company is acting as a reinsurer. In some cases, none of these alternative arrangements really satisfies the total needs of either the employer or the managed mental health care company. In many states, none of the licensure options really makes sense for mental health carve-out programs. The regulatory tangle makes it difficult for employers and providers to develop the programs, even where all parties would be willing to comply with any sensible regulatory requirements. Where employers or managed mental health care companies are seeking to develop a program in several states, the regulatory complexities can be even worse, as the applicable laws may require approaching the problem under different rules and regulations in each state. New legislation is clearly a necessity. My concluding advice on this unique and complex regulatory situation is to address it forthrightly at the start of planning for any managed mental health care program. While there may be no simple answer, or ultimately no acceptable answer, the down side of going ahead with a program and having it halted in midstream because of a regulatory challenge is simply too great to risk in most cases.

Douglas A. Hastings, Esq., is a Partner in the Washington, D.C., offices of Epstein Becker & Green, P.C.