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California heats up: will a jury decide the future of medicine? (Managed Care on Trial).

THE CALIFORNIA health care scene is getting nastier and more contentious as conflict resolution shifts from negotiation to litigation. Major players are deciding that they have little to lose and potentially much to gain by going to court. Several recent actions illustrate this trend.

* In late 1998, the California Medical Association joined a physician lawsuit against UCLA School of Medicine, charging the school with violating the state bar against the corporate practice of medicine. This case tested the liberties and limits of academically based medical groups and marked the first time that our state medical association had gone to court against one of our medical schools. Then CMA President, Robert Reid, MD, said, "It is with great regret that we join this suit....We are strong supporters of the U.C. system....We are also aware of the problems the U.C. system faces in funding graduate medical education. But this is not the way to solve those problems." (1)

* The suit challenged UCLA's business plan, which expanded the school's historical role as a research and teaching institution by acquiring community hospitals and clinics and forcing staff members to become part of the university medical group. The suit alleged that this business plan forced physicians into illegal fee-splitting and referral schemes. The case also questioned the practice of hiring community physicians and advertising them to the public as "assistant clinical professors and faculty members" when these physicians did not have any significant teaching duties. (1)

* Ultimately, CMA lost, as the appellate court agreed with the trial judge that medical schools are fully exempt from the corporate bar. The facts of the case were not tried, as the cause of action was disallowed. In June the California Supreme Court declined to review this decision. In pursuing this case, the CMA has suffered a major setback in its efforts to protect the corporate bar in California. In essence, now the eight California medical schools may develop their business plans with complete disregard of the corporate bar. This is not what CMA hoped to achieve. Going to court always is a gamble.

* In June, Catholic Healthcare West filed suit against Blue Cross of California, claiming $50 million in underpaid or unpaid claims and charging the state's largest for-profit health plan with breach of contract and fraud. Blue Cross disputed this charge, with spokesman Michael Chee responding, In our view, this is just a disappointing move to gain leverage." Michael Mattoch, Chief Counsel for the California Healthcare Association said, "This is D-Day. When an organization the size of Catholic Healthcare West decides to make a move like this, I think it has to be taken as a clear indication of the level of frustration among hospitals." (2) California hospitals also expressed their frustration in a new survey, which indentified Blue Cross as the most problematic payer in the state. (3)

* Tough politics aren't only played out in the courtroom. Mercy Healthcare of Sacramento (a division of CHW) has been in a two-year struggle with the Service Employees International Union (SEIU) over unionizing the Mercy hospitals. In a hotly contested January 2000 election, the SEIU failed to win the right to represent the Mercy workers. The union appealed the vote to the National Labor Relations Board (NLRB), which found that there were some irregularities in the voting process but not enough to disallow the election results. For the moment, Mercy Healthcare had prevailed.

Payback time came in June when labor pressure on the state retirement system, CalPERS, successfully blocked a bid by Western Health Advantage to become the newest HMO available to CalPERS' one million members. WHA met all the criteria for approval and had a positive staff recommendation, but it is partly owned by Mercy Healthcare. That fact alone scuttled the deal. One CalPERS benefit committee member. Rob Feckner, said, "There is the potential that those premium dollars would be used for anti-union activity." He further noted that WHA "looks like it offers a good value for the service they provide." (4) Clearly the CalPERS decision was based on grounds other than staff recommendation or value. WHA is still hoping that CalPERS will reconsider this decision. (5)

* In a separate action, the same Mercy Healthcare system is the defendant in an employee whistleblower suit accusing Mercy of stealing millions from the government through a systematic scheme of false reports to Medicare. The U.S. Department of Justice recently joined this suit, which accuses Mercy Healthcare of nearly $19 million in overpayments due to a series of accounting tricks and cost shifting. An attorney for Mercy said, "When we get to the end, Mercy Healthcare Sacramento will be shown to have acted in good faith and it will be apparent that there were no false claims made to the government." (6) Obviously, the whistle-blowing former employees and the DOJ do not agree. The whole subject of Medicare fraud and abuse is an ever evolving and tricky business. (7) If a major, religiously based hospital system is found guilty of Medicare fraud, how many other hospitals will be in the same boat?

* Even in my backwater town of Placerville, four local physicians have filed suit against U.C. Davis Medical Group, contending wrongful termination when their clinic was closed as part of its retrenchment. This case alleges that U.C. Davis Medical Group promised them long-term employment but reneged. The doctors claim that they met their production goals but were let go anyway. (8) A generation ago, nearly all physicians were self-employed, so a wrongful termination lawsuit would be impossible. In today's clinic environment, such actions are not a surprise. Perhaps this sort of case is the wave of the future in physician employment issues.

The big one

All of these lawsuits may have significant impact in California and other states. However, the case with the most far-reaching implications could be California Medical Association v. Blue Cross et al., which was filed in U.S. District Court on May 25, 2000. (9) CMA's Board of Trustees voted unanimously to allow the state physician organization to be the lead plaintiff in a class action lawsuit against the three largest for-profit health carriers in the state (Blue Cross/WellPoint, PacifiCare, and Foundation/HealthNet). Filing for injunctive relief under the Racketeer Influenced and Corrupt Organizations Act (RICO), CMA alleges that the health plans have used coercive, unfair, and fraudulent means to dominate and control physician-patient relationships for their own financial gain.

This case is one of several that are being filed against the managed care industry in multiple states, including New York and Georgia. (10) The lawyers involved expect the federal courts to consolidate these cases into one trial, much as was done with the tobacco lawsuits. Indeed, many of the same attorneys from the tobacco settlement are leading this charge as well. Surely, this consolidated suit and trial will be a case for all physician executives to monitor.

These class action lawsuits strike at the very basis of managed care, and as such they deserve particular analysis. Regardless of your personal position regarding this lawsuit and its companions, the outcome of this assault on managed care will shape the future of our profession for years to come. If the plaintiffs prevail, the whole structure of health care cost controls will change; If the defendants win, the managed care model will be endorsed and locked in place for many years.


The most intriguing aspect of the CMA suit is its use of the RICO statute. We normally think of RICO cases as the type that bring mobsters to justice. The CMA is not asserting that the mob has taken over managed care. Why, then, is this suit filed as a RICO action?

The Employee Retirement Income Security Act of 1974 provides the answer. ERISA preempts liability lawsuits against managed care organizations under almost all conditions. Every attempt at finding a means of establishing liability against MCOs has floundered against the ERISA defense. In June the U.S. Supreme Court ruled in favor of HMO liability protection in a lawsuit challenging an HMO's right to give doctors bonuses for keeping down the costs of treatment. (11)

Using RICO may provide plaintiffs with a pathway around the ERISA blockade. CMA notes that "RICO appears to provide the most viable legal approach to obtaining the relief physicians and patients need." (12) This filing is a civil RICO action, not a criminal one. The key element in making this a RICO case will be establishing a long-standing pattern of fraudulent practices against providers and patients. On the other hand, lawyers for managed care organizations believe "the (June U.S. Supreme Court) ruling marked the death knell of class action lawsuits against managed care companies that are based on federal benefits law and racketeering claims." (13) Whether or not RICO offers a viable challenge to ERISA preemption remains to be seen.

What is charged?

These excerpts from the suit itself give the flavor of the argument:

* "Physicians have been forced to suffer from patently unfair contract terms, delays, decreases and denials in payment of claims, and the refusal of defendants to provide the data necessary to enable physicians to evaluate the rates provided and the level of risk assumed under the contract." (14)

* "Yet, defendants set reimbursement rates, including capitation rates, to these physician groups at unconscionably low levels which defendants know are not adequate to cover the medical services defendants promise to provide their members and/or know are for services for which there can be no sound actuarial projection because expected usage cannot be controlled or predicted." (14)

* "As a result of defendants' coercive, unfair, and fraudulent activities, these defendants not only intrude into the physician-patient relationship, but utilize their power to dominate and control this relationship for financial gain to the detriment of both patients and physicians." (14)

Certainly, the language of any lawsuit makes for reading that should be kept in context. Nevertheless, most doctors in California and elsewhere would agree with many, if not all, of the complaints in this suit. Marie Kuffner, MD, CMA's President, said, "It is with sadness that we are forced to this last resort. We physicians have tried to work with the for-profit HMOs in the marketplace and have attempted to curb the abuses through the legislative process--all to no avail. We cannot continue to allow our patients' health to be jeopardized by corporate greed. For years these profit-driven companies denied needed services, interfered with medical decisions, and valued dollars more than lives. We are here to say, 'No more in the State of California.'" (15)

Not surprisingly Walter Zelman, President of the California Association of Health Plans, sees things differently. Calling the suit a "publicity stunt," Zelman went on to say, "This is a relatively groundless legal attack which is more about public relations and politics than it is about finding genuine solutions." Foundation Health Systems' Lisa Kalustian added, "The only winners will be the attorneys, not the physicians, the patients, or our health care systems." (10)

What is being sought?

The CMA lawsuit asks for injunctive relief for the physicians of California from several alleged activities:

1. It asks the court to make a declaration against for-profit managed care organizations' "right to usurp the Plaintiffs members' ability and duty to make decisions regarding patient needs, based on professional medical judgment and the professional standard of care, and to prevent Plaintiffs members from providing appropriate medical care." (14)

2. It seeks an injunction enjoining the defendants from "pursuing fraudulent and extortionate polices and practices" including "prohibiting the payment of reimbursement which is not adequate to cover the costs of delivering health care services Defendants have promised Defendants' members." (14)

3. It seeks "An injunction enjoining the Defendants from utilizing or enforcing any current or proposed provider contracts or policies which compromise patient care or are otherwise unfair or unreasonable." (14) The suit lists ten categories of contracts and polices to be enjoined, including:

* The definition of medical necessity

* Utilization review criteria and procedures, including prior authorization or physician profiling

* Clinical practice guidelines and/or medical management policies

* Drug formularies

* Patient referral standards, including those applicable to out-of-network referrals

* Quality assurance programs and audits

If the court enjoins against even several of these policies and procedures, managed care as we know it is dead. The suit does not seek any monetary damages except for plaintiffs legal costs to be paid by the defendants.

Who is not named in this suit?

Two groups are conspicuously absent in this action: (1) physician groups and IPAs; and (2) not-for-profit managed care organiztions. Part of CMA's reason for joining this lawsuit relates to those who are unnamed. An official CMA Q&A release addresses the issue of medical groups and IPAs: "The complaint directly states that these entities (medical groups and IPAs) will not be defendants in this lawsuit as these groups, as well as solo practice physicians and physicians in small groups, have all been subject to the unfair practices of the health plans." "CMA's involvement seeks to ensure that California medicine, including groups and IPAs, are at the table with us. Without that involvement, we are unable to influence both the course of the litigation and the potential future of any court-directed reshaping of California's delegated health care delivery model." (15)

This is a tacit admission of one reason why CMA had to become the lead plaintiff in this suit--being outside means having no say in the direction that the litigation takes. Later in the same Q&A document CMA notes, "The attorneys bringing the lawsuit were clear that with or without CMA's participation, they would be filing a class action against these specific, for-profit plans. Under the circumstances, given the scope and magnitude of the litigation, CMA believes that its presence in the case is in the best interest of California physicians, physician groups, and their patients." (15)

The CMA remains silent on the issue of not-for-profit health plans. California's MCOs have been consolidating for the last decade. The three remaining not-for-profit plans of any size are Kaiser, Blue Shield, and Lifeguard. The largest for-profit plans are Blue Cross, PacifiCare. HealthNet--all named in this suit. Other MCOs have relatively low California market penetration. Clearly, physicians and hospitals see the for-profit MCOs as a breed apart. Thus, they are the targets in this suit.

The largest HMO in California is Kaiser, which is also the oldest and operates on a much different basis than all the rest. Kaiser is a closedpanel HMO that contracts exclusively with the Permanente Medical Group. Quite a few PMG doctors are members of CMA. Many of the issues raised by the CMA lawsuit, such as utilization review, clinical practice guidelines, drug formularies, and the like take on a different flavor when they are part of an integrated, closed-panel, not-for-profit HMO such as Kaiser Health Plan. CMA clearly hopes to keep CMA v. Blue Cross et al. focused on the actions of for-profit managed care companies while avoiding the not-for-profit managed care organizations completely.

One to watch

An increasingly nasty and litigious health care environment cannot be comfortable for physicians in general or physician executives in particular. Many physician executives are finding themselves on one side or the other of issues such as these while still having to do business with those on "the other side." Physicians are generally not well trained to deal with this sort of situation. Thus, physician executives need to monitor their own reactions when dealing with the "enemy." These stressful situations call for a calm demeanor and carefully considered dialog.

We can hope that some sort of acceptable early settlement will come out of these class action lawsuits, but, more realistically, we should expect the cases to consolidate and go to trial. Perhaps the plaintiffs will prevail. This happened in the tobacco settlement. A settlement or plaintiff victory scenario will quickly and profoundly change health care funding and delivery. On the other hand, the defendants could triumph. ERISA presents a formidable defense for HMOs. If so, expect more of what we have now for years to come. Either way, the stakes are huge as this drama plays itself out.

This is definitely one to watch.


lam an active member of CMA, but my purpose in writing about this lawsuit is reporting about it rather than advocating its cause. All of the information contained in this article was taken from publicly available sources.


(1.) California Mcdical Association. CMA Alert. Deccmber 10, 1998.

(2.) Fisher, Jean P. Catholic Healthcare Sues Blue Cross. Sacramento Bee. June 10, 2000.

(3.) Fisher. Jean P. Health Plans Fall Short In Provider Greup Poll. Sacramento Bee. June 28, 2000.

(4.) Fisher, Jean P. Mercy Takes a Hit in Fight with Union. Sacramento Bee. June 5, 2000.

(5.) Robertson, Kathy. CalPERS Urged to Reconsider its Vote to Exclude HMO. Sacramento Business Journal, June 30, 2000.

(6.) Walsh, Denny. U.S. Joining Suit Alleging Mercy Fraud. Sacramento Bee. May 11, 2000.

(7.) Cys. Jane. OIG Releases Draft of its Fraud and Abuse Guidelines. American Medical News. June 26, 2000.

(8.) Robertson. Kathy. Laid-off Placerville Clinic Doctors Sue UC Davis. Sacramento Business Journal. May 19. 2000.

(9.) Fisher. Jean P. Three of State's Largest Health Plans Sued by Physician's Group. Sacramento Bee. May 26, 2000.

(10.) California HealthCare Foundation. HMO Lawsuits: CMA Suit Targets Three Insurers' Tactics. California Helathline. May 26, 2000.

(11.) California HealthCare Foundation. Supreme Court: Ruling Puts Burden on New Agency. California Heaithline. June 14, 2000.

(12.) California Medical Association. Questions and Answers Concerning CMA's Participation in a Class Action Lawsuit Against Major For Profit Health Plans. June 9, 2000.

(13.) Klein, Sarah A. justices Validate HMO Pay Incentives. American MedicalNews. June 26, 2000.

(14.) California Medical Association v. Blue Cross et al. case no. C001894 VRW, U.S. District Court. Northern District of California (available as a download from the CMA Website:

(15.) California Medical Association press release. "CMA Files Suit for Injunctive Relief Against Major Health Plans Under Federal RICO Laws." May 25, 2000.

RELATED ARTICLE: What is WellPoint?

Outside of California, the name WellPoint may not mean much, but for California doctors and hospitals it is very familiar. In 1996 formerly not-for-profit Blue Cross of California converted to for-profit status and became WellPoint. WellPoint is the company name, but it still sells its insurance products under the Blue Cross label. Unlike many other states, in California Blue Cross and Blue Shield have been separate and competing companies all along. Blue Shield has remained a non-profit organization. WellPoint hopes to expand to other states in the coming years.

The birth of WellPoint was controversial. When Blue Cross converted to for-profit status after a half-century of non-profit status, it was legally obliged to provide to the people of California some restitution for its many years of foregone taxes. Blue Cross proposed creating and endowing two non-profit foundations with several hundred million dollars in cash and WellPoint stock. This deal was initially accepted by the state, but consumer activists complained that the funding was far too small considering Blue Cross' decades of tax savings and that WellPoint would control the boards of both foundations. Eventually, Blue Cross funded the two foundations to the tune of more than 3 billion dollars.

Shop for health insurance in California and you will learn that Blue Cross premiums are nearly always the lowest available--even lower than not-for-profit Blue Shield. How do they do it and still deliver dividends to their shareholders? As reported in The Wall Street Journal on May 31, 2000, WellPoint's CEO Leonard Schaeffer has pursued one simple strategy: "Squeezing doctors and hospitals" by spending only 77.9 cents of each premium dollar for medical services. Blue Cross is the least favorite health plan of California hospitals m a recent poll, but WellPoint/Blue Cross has captured 19 percent of California's insured population. The Blue Cross business model utilizes PPOs much more than the HMO approach.

Schaeffer was quoted as saying any doctors or hospitals that don't like doing business with WellPoint should drop out of the Blue Cross network. The plan's market penetration makes this a losing proposition for most providers, and Schaeffer knows it. Nevertheless, WellPoint officials admit they must improve provider relations, but this does not mean moving away from the business plan that has made this MCO one of the few financial successes in the state.

Earl P. Washburn, MD

Earl (Trey) R. Washburn, MD, FAAP, is an Administrative Physician at El Dorado Pediatric Medical Group, Inc., in Placervile, California. He can be reached by calling 530/626-1144 or via email at
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Author:Washburn, Earl R.
Publication:Physician Executive
Geographic Code:1U9CA
Date:Sep 1, 2000
Previous Article:Hospitals canceling managed care contracts. (Short Takes: News at Deadline).
Next Article:Managed care medical directors under fire. (Managed Care on Trial).

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