Litigating claims against managed health care organizations: trend for the 1990s.

In the relatively recent past, medical negligence claims were straightforward: A claim was asserted either against a treating physician for negligence or against a hospital responsible for the negligence of a nurse or some other staff personnel. Most of the voluminous reported case law concerning medical negligence fits this scenario.

Within the past 10 years or so, in response to legitimate concerns about spiraling health care costs, both public and private payors of health care bills have experimented with a variety of cost-containment mechanisms. Many of these "mechanisms" directly affect the health care process.

Managed health care organizations, such as health maintenance organizations (HMOs), preferred physician organizations (PPOs), or independent practice organizations, use two broad categories of cost-containment measures. First, administrative factors are designed to contain costs, including benefit package design, underwriting, eligibility determination, provider selection, health care delivery methods, and controls on quality of care. Second, direct cost-containment measures are employed, such as reducing frequency of medical services and claims, reducing expenditures for services rendered, and changing the point of service to less expensive locations or procedures.(1)

To minimize the second category of costs, managed health care organizations use four tools.

Physician and hospital reimbursement methods. This category represents the largest expenditure by managed health care organizations and almost always includes built-in designs to encourage "efficient practice of medicine." These include risk sharing, which is similar to profit sharing. If earnings are up, hospitals and physicians receive part of the profits in addition to their normal payments. Conversely, if earnings drop, hospitals and doctors may even be penalized.

Goals. These are established to minimize the number of patients admitted to hospitals and their length of hospitalization; to increase the use of out-patient procedures; and to encourage the use of lower-cost treatment alternatives (for example, the use of drugs rather than surgery).

Medical review organizations. These arc used by managed health care organizations and many third-party payors, such as Medicare and insurance companies, to review requests for treatment or hospitalization and then "recommend" to the third-party payor exactly what treatment should or should not be given or approved.

Predetermined "diagnostic related groupings." These DRGs are used to determine appropriate treatment for a particular diagnosis.

Quality review techniques. These techniques are used to monitor the "use patterns" of hospitals and physicians in an attempt to decrease unacceptable high-use patterns.(2)

Various other financial incentives are provided by managed health care organizations to physicians and hospitals. HMOs frequently withhold 15 percent to 30 percent of a physician's or hospital's fees until the end of the year and pay those fees only if the physician meets a set of resource utilization goals. Payments may be made in inverse proportion to a physician's average patient cost. Finally, in some HMOs or PPOs, a primary care physician may even be allowed to keep all funds budgeted for the care of his or her patients but not spent by the end of the year.

Cost-containment measures can and do create conflicts between doctors and patients. These conflicts arise from patients' normal desire to use all available medical services that might be of any benefit to them, and the desire of HMOs or PPOs to minimize expenditures. Conflicts may also arise from a physician's desire to earn more money from the HMO or PPO by limiting the care provided to patients.

Therefore, if a procedure may cure an ailment, a patient will, of course, want the procedure. However, if the probability of success is too low or if the procedure is extremely expensive, the managed health care organization will most likely deny coverage.

Treating physicians working with managed care organizations are almost always placed in the middle of this conflict. On the one hand, they are obligated to provide acceptable medical care to patients. On the other hand, if they do too many tests, spend too much money, or order too long a hospitalization, they may not get paid as much by the HMO or PPO. In some cases, physicians may even be penalized. Physicians are, therefore, essentially forced to choose between potential medical negligence lawsuits if they provide too little care, or risk not getting paid for their services if they choose to provide too much care, in the opinion of the HMO or PPO.

Seminal Case

As the number of managed health care organizations has risen, a body of case law has emerged to deal with the increasingly important role that they play in our health care system. The seminal case discussing potential liability of a managed care organization for improper use of cost-containment procedures is Wickline v. State.(3)

In Wickline, the plaintiff received medical treatment through payments by Medi-Cal, a federally funded third-party medical payor. According to Medical's pre-authorization procedure, Lois Wickline was cleared for surgery on an occluded abdominal aorta. After surgery, the treating physician requested an eight-day hospitalization extension to further observe Wickline's condition because of fear of infection.

Medi-Cal submitted the treating physician's request to a consulting physician for a utilization review. The physician, who conducted an extremely limited review of Wickline's medical records, recommended a four-day extension, which Medi-Cal granted.

Wickline's treating physician released her after four days without seeking a review of the denial for more days or making another request for an extension. After her release, Wickline developed an infection that resulted in her leg being amputated. Wickline then sued Medi-Cal, alleging that it was negligent in not approving the full extension her treating physician had requested.

The California Court of Appeal defined the legal issue as follows:

Principally, this matter concerns itself

with the legal responsibility that a

third-party payor, in this case the State

of California, has for harm caused to

a patient when a cost containment program

is applied in a manner which is

alleged to have affected the implementation

of the treating physician's

medical judgment.(4)

After reviewing the facts of the case, the Wickline court set forth the standard of law to be applied:

The patient who requires treatment

and who is harmed when care which

should have been provided is not provided

should recover for the injuries

suffered from all those responsible for

the deprivation of such care, including,

when appropriate, health care

payors. Third party payors of health

care services can be held legally accountable

when medically inappropriate

decisions result from defects in the

design or implementation of cost containment

mechanisms as, for example,

when appeals made on a patient's behalf

for medical or hospital care are arbitrarily

ignored or unreasonably disregarded

or overridden.(5)

The appellate court next applied this principle to the facts of the case but denied the plaintiff's claim. The court relied on evidence that showed that (1) the responsibility to discharge the patient rested solely with the treating physician; (2) the physician's decision to release Wickline was within the accepted medical standard of care; and (3) the treating physician made no effort to appeal Medi-Cal's denial.

"While we recognize, realistically, that cost consciousness has become a permanent feature of the health care system, it is essential that cost limitation programs not be permitted to corrupt medical judgment. We have concluded, from the facts in issue here, that in this case it did not."(6)

The Wickline decision raises many issues regarding a patient's right to sue a managed health care organization for improper medical treatment resulting from its cost-containment decisions. For example, does the physician's responsibility for treating the patient absolve a managed health care organization from any liability resulting from restricting medical care? Also, do the public policy arguments supporting cost containment necessitate granting third-party payors some form of immorality from liability for injuries resulting from decisions related to the cost-containment procedures?

Wilson Case

These issues were addressed in part by a later California Court of Appeal case, Wilson v. Blue Cross of Southern California.(7) The family of Howard Wilson Jr., who sought and was denied in-patient hospital treatment for drug problems and depression and other psychiatric problems, brought the suit.

Wilson's treating physician, Dr. Warren Taff, admitted him to College Hospital in Los Angeles and made a request to Blue Cross of Southern California for him to stay three to four weeks for the necessary treatment program for his depression, drug dependency, and anorexia. The Wilson family's Blue Cross policy specifically allowed any member who is a registered patient in an approved hospital to remain in that hospital for up to 30 days if the treating physician determines this is medically necessary.

Blue Cross in turn submitted the treating physician's request for a 30-day hospitalization for Wilson to an outside company, Western Medical Review, for utilization review despite the fact that there was no contractual or statutory provision allowing Blue Cross to make this referral. Western Medical's physician consultant, Dr. John Wasserman, determined that Wilson could be treated adequately as an outpatient and said that the request for hospitalization was "not justified or approved."(8) Consequently, Taff was forced to release Wilson from the hospital, and Wilson committed suicide 20 days later.

Responding to arguments advanced by Blue Cross and Western Medical that public policy favors concurrent cost utilization procedures and even provides for limited or full immunity, the court said that no such public policy exists. The court contrasted the Wilson case with the Wickline case, where there was a clearly expressed public policy favoring limiting the scope of liability of public systems such as welfare and Medi-Cal.

Wilson also addressed the language in Wickline that implies that a third-party payor will be absolved from tort liability on the ground that the physician has sole responsibility for making discharge decisions--not the payor.

This broadly stared language was unnecessary

to the decision and in all contexts

does not correctly state the law

relative to causation issues in a tort

case.... The language in Wickline

which suggests that civil liability for a

discharge decision rests solely within

the responsibility of a treating physician

in all contexts is dicta.(9)

The court held that the decision of Blue Cross and Western Medical not to approve the 30-day hospitalization the treating physician requested could be found to be a "substantial factor" in causing Wilson's death. However, as this case only dealt with reversing an entry of summary judgment, the court of appeals remanded it for trial.

Other Cases

In another California case, Hughes v. Blue Cross of Northern California, the Hughes family sued for breach of the implied covenant of good faith and fair dealing (bad faith) and punitive damages as result of the denial of coverage for a psychiatric hospitalization for their son who was severely mentally ill. In denying payment, Blue Cross concluded that Patrick's hospitalization and treatment were not medically necessary.(10) The jury awarded compensatory and punitive damages to the plaintiffs.

The California Court of Appeal affirmed, holding that the jury, could have reasonably inferred that Blue Cross's denial of coverage was rooted in an established company policy of operating a review process in conscious disregard of the insured's rights. Also, the court said that denial of coverage was the result of fragmentary medical records, a cursory review of those records, and a purposeful application of a standard of medical necessity at variance with established community standards.(11)

In Williams v. HealthAmerica, an Ohio case, Sharon Williams brought suit against her HMO, alleging that it acted in bad faith by denying her repeated requests to sec a specialist after she had lost confidence in her primary care physician's ability to treat her condition.(12) The HMO's claims adjustor denied her requests on the basis that she had not received a referral from her primary care physician as required by the policy.

The primary physician had treated Williams for about a year with little success. The pain continued to increase. On her own, Williams then went to a specialist who made a diagnosis of endometriosis and treated the condition successfully.

In reviewing the dismissal of the case by entry of summary judgment in favor of HealthAmerica, the Ohio Court of Appeals noted that HMOs in Ohio had a legal duty imposed by statute to institute complaint systems and to administer them in good faith. In overturning summary judgment for HealthAmerica, the court held that there was enough evidence for reasonable minds to find that the HMO had acted in bad faith in denying the plaintiff's repeated request for referral to a specialist and in the unprofessional way it had mishandled her claim.

In Bush v. Dake, a Michigan County Circuit Court refused to dismiss a complaint against an HMO.(13) The plaintiff alleged that the organization's cost-containment system had produced her injury by causing her physicians to provide inadequate care.

This allegation was based on the fact that the physicians were allowed to share in any surplus funds that remained in the HMO at the end of an accounting period due to a low number of specialist referrals or hospitalization days. However, although the court refused to dismiss the case on summary judgment, it also noted that the defendant health maintenance organization could not be held liable simply for creating a health care system that included cost-containment features and that negligence and causation would have to be proven.

ERISA Issues

Few cases other than those discussed above have addressed the issue of liability of managed health care organizations. In part, this may be due to an increasing use of the broad preemption provisions of the Employees Retirement Income Security Act of 1974 (ERISA).(14)

Under these preemption provisions, many state law claims, such as breach of contract, fraud, negligence, and misrepresentation, may no longer be available.(15) Preemption of a state law depends on whether the claim "has a `connection with or reference to' a benefit plan."(16) In Elsesser v. Hospital of Philadelphia College, the plaintiff tried to sue an HMO for denying coverage for a heart monitor under his health plan.(17) The court found that the denial was related to benefits provided by the employee benefit plan and the claim was, therefore, preempted.

The issue of ERISA preemption was not raised in either Wickline or Wilson. However, in Hughes, the court held that ERISA must be raised as an affirmative defense by the insurer or it will be waived."(18)

Another possible reason for the small number of cases advancing HMO and PPO liability for medical negligence may emanate from the Wickline decision itself. It has been stated that the Wickline position of public policy support for health care utilization review has been successfully used by HMOs to argue that courts should not second guess cost-containment decisions. This argument may have resulted in many cases against HMOs being dismissed at the summary judgment level.(19) But the restriction by Wilson of the Wickline public policy argument could lead to more cases in this area.(20)

With the large jury verdict in Fox v. Health Net, a 1993 California case, it appears as though this may already be occurring.(21) In this case, the family of Nelene Fox, who was denied treatment for metastatic breast cancer and later died, sued her HMO (Health Net), alleging bad faith, breach of contract, and negligent and intentional infliction of emotional distress. The jury found for the plaintiffs and awarded $12 million in compensatory damages and $77 million in punitive damages.

Fox requested high-dose chemotherapy treatments concurrent with an autologous bone marrow transplant. Health Net denied payment for these treatments on the grounds that the procedures were "experimental" and had produced no proven results for metastatic breast cancer patients.

The plaintiffs' attorneys, however, were able to convince the jury that the denial of the requested treatment was profit-motivated. It was shown that Health Net had paid for this same treatment for two other women before Fox had made her requests and that Health Net had disregarded the advice of an outside consultant who recommended that the HMO pay for these treatments. Also, evidence was presented that the employee who denied Fox's treatment was compensated partly based on how much money he was able to save Health Net.(22)

As our health care system places more and more emphasis on cost-control mechanisms by the increasing use of HMOs, PPOs, and other managed health care organizations, the issue of liability for cost-containment decisions will arise more often.

Medical negligence attorneys must now both be aware of and understand the important role played by managed health care organizations in determining the nature, extent, and quality of treatment that is provided by patients. Potential cases need to be examined for damage caused by cost containment, whether it be by encouraging the treating physician to withhold treatment or by inadequate case review methods resulting in an unfair denial of medical treatment to the patient.

A practitioner must also examine all relevant statutes governing HMOs, PPOs, and the like for procedural requirements or policy statements. The relevance of managed health care organizations to any case involving inadequate health care must never be disregarded or underestimated.

Notes

(1) CHARLES W. WRIGHTSON JR., HMO RATE SETTING AND FINANCIAL STRATEGY 61 (1990). (2) Id. at 54. (3) 239 Cal. Rptr. 810 (Ct. App. 1986). (4) Id. at 811. (5) Id. at 819 (emphasis added). (6) Id. at 820. (7) 271 Cal. Rptr. 876 (Ct. App. 1990), reh'g denied, Oct. 11, 1990. (8) Id. at 882. (9) Id. at 880. (10) 263 Cal. Rptr. 850 (Ct. App. 1989), cert. dismissed, 495 U.S. 944 (1990). (11) Id. at 858 59. (12) 535 N.E.2d 717 (Ohio Ct. App. 1987). (13) No. 86-25767 NM-2 (Mich., Saginaw County Cir. Ct. Apr. 27,1989). (14) 29 U.S.C. [subsections]1001-1461 (1988). (15) See Elsesser v. Hospital of Philadelphia College, 802 F. Supp. 1286 (E.D. Penn. 1992). This case allowed a claim against the HMO alleging vicarious liability for physician negligence to proceed on the grounds that the claim was not based on obligations under the HMO's benefit plan. Id. at 1290-91. (16) Id. at 1291 citing Corcoran v. United Healthcare, 965 F.2d 1321 (5th Cir.), cert. denied, 113 S. Ct. 812 (1992). (17) Id. (18) 263 Cal. Rptr. 850, 865 67. (19) Michael C. Thornhill, Managed Care at Risk, 13 WHITTIER L. REV. 359,366 (1992). (20) Id. (21) Fox v. Health Net, Civ. No. 219692 (Cal., Riverside County Super. Ct., Dec. 28, 1993). (22) Michael Meyer & Andrew Murr, Not My Health Care, NEWSWEEK, Jan. 10, 1994, at 36; Bill Scanlon, Denver Doctor Helps Family Beat HMO, ROCKY MOUNTATN NEWS, Jan. 4, 1994, at 9a.

John G. Salmon practices with Salmon, Godsman & Nicholson in Englewood, Colorado.