Printer Friendly

Court decisions hold implications for managed care plans.

Court Decisions Hold Implications for Managed Care Plans--Part Two

In the final half of this report, I will summarize key cases in these areas of the law; the Employment Retirement Income Security Act, professional liability, and bankruptcy.

Employment Retirement

Income Security Act (ERISA)

Firestone Tire and Rubber Co. v. Bruch [1]

In early 1989, the U.S. Supreme Court addressed the question of whether a court's review of an ERISA benefits denial should be based on the court's interpretation of the evidence (de novo review) or on the narrower question of whether the ERISA plan abused its discretion in denying the claim. The Court held that review should be de novo unless the benefit plan expressly reserves the discretionary authority to determine eligibility for plan benefits, in which case a court would look only at whether the determination was "arbitrary or capricious."

The difference between the standards of review is significant. Under an "arbitrary or capricious" standard, a reasonable interpretation of the plan provisions will be upheld, even if the court otherwise would interpret the provisions differently. Under a de novo standard, the contest between two equally plausible interpretations will be resolved in favor of the interpretation preferred by the court. As a consequence of Firestone, health plans governed by ERISA should include explicit provisions in their plan documents indicating that the plan's interpretation of eligibility and benefit standards is intended to govern unless that interpretation is arbitrary or capricious.

Anschultz v. Connecticut General Life Insurance Co. [2]

The federal ERISA statute expressly preempts all state laws that "relate" to employee benefit plans, except to the extent such state laws specifically are directed toward the "business of insurance." The scope of this preemption provision has been the subject of much litigation. Its impact on HMOs and other insurers, as ERISA plan fiduciaries, is becoming increasingly well-defined.

The Eleventh Circuit recently held that ERISA preempts Florida's insurance code provision authorizing suits by an insured against an insurer for a wrongful denial of benefits. Although finding that the statute at issue "regulated" insurance within the common understanding of that phrase, the Court found that it nonetheless did not regulate insurance in a McCarran-Ferguson sense, as it bore no relation to the transfer of risk and did not regulate specific practices or contract terms. Thus, the insurance law cause of action was abrogated in favor of ERISA.

Kanne v. Connecticut General Life Insurance Co. [3]

In a case presenting legal issues similar to those of Anschultz, the Ninth Circuit recently ruled that a California statute prohibiting unfair insurance practices, specifically the untimely processing and payment of claims, was preempted, relying primarily on the Supreme Court's Pilot Life holding that ERISA provides an exclusive remedy for benefit claims by ERISA plan participants. Accordingly, the state law could not be a supplement to ERISA for claims processing disputes.

Varol v. Blue Cross & Blue Shield of

Michigan [4]

ERISA also has been extended to preempt a state law challenge by a participating physician to a prepayment plan's utilization review procedures. The case involved a pilot program for psychiatric managed care sponsored by General Motors and administered by Blue Cross of Michigan. The physician-plaintiffs, participating providers in the plan, challenged the plan's prior authorization and concurrent review requirements under a Michigan statute prohibiting the unlicensed practice of medicine and under the Michigan Non-Profit Health Care Corporation Act, which, inter alia, prohibits interference by Blue Cross in the physician-patient relationship. The Court concluded that all state law claims were preempted by ERISA under the reasoning of Pilot Life. The Court noted that, although the dispute might appear to be between the plaintiffs and Blue Cross, it in fact implicated the ERISA plan, because the relationship between the plaintiffs and Blue Cross existed solely because of the plan. The Court found that the plaintiffs' claims, if successful, would "gut" the plan and its essential purpose.

Aetna Life Insurance Co. v. Borges [5] and

Attorney General v. Blue Cross and Blue

Shield [6]

In two recent decisions, state escheat laws sere enforced against ERISA plans on the ground that their impact on ERISA plans was too tenuous to warrant preemption. (Escheat statutes provide for the forfeiture of unclaimed or abandoned property to the state.) As a consequence, the insurers of those plans were required to turn over substantial sums of money to the states, representing issued but unpresented drafts for benefit payments.

DeGenova v. Ansel [7]

A Pennsylvania State court held that ERISA did not bar a negligence claim against the insurer of an ERISA plan based on the acts of a physician selected by the plan to provide a second opinion. The court denied the insurer's motion to dismiss, holding that the plaintiff-employee was not seeking ERISA benefits or claiming improper administration of the plan. The court found the plaintiff's claims to be only remotely related to ERISA.

Professional Liability

Schleier v. Kaiser Foundation Health Plan

of the Mid-Atlantic States [8]

One of the broadest determinations of HMO liability is embodied in this recent federal appeals court decision, which concerned the alleged negligence of Kaiser physicians in failing to diagnose and treat the plaintiff's husband for coronary artery disease, leading to his death from a heart attack. Of particular dispute in the case was Kaiser's liability for the alleged negligence of a cardiologist who was not a Kaiser physician but who was retained by Kaiser as a consultant during the deceased's course of treatment. The trial court denied Kaiser's motion for a directed verdict on this liability question and the appellate court affirmed.

The appellate court's decision rested on two theories. First, the court found that the consulting physician could be viewed the ostensible agent of Kaiser. The court relied on analogous hospital cases in which, e.g., independent contractor physicians in the hospital emergency department have been deemed to be the hospital's agents on the grounds that patients reasonably believed that such physicians were furnished by the hospital and had no actual notice to the contrary. The court reasoned that the plaintiff's expectations as to the consulting physician were similar, as the physician was brought in to examine the deceased during an episode of hospitalization that was under the supervision of Kaiser physicians.

While that result may be unsurprising in light of recent liability trends, more unusual was the court's separate and additional invocation of the stricter doctrine of respondeat superior, finding a "master and servant" relationship based on Kaiser's control over the physician's selection and retention, the fact that the physician acted" within the ambit of Kaiser's regular business," and the fact that Kaiser possessed the ability to control the consultant's behavior. This finding of "control," highly unusual as to nonemployee physicians, turned on the court's conclusion that the physician acted neither on his own initiative nor independently. Instead, the physician "answered to" and made recommendations to the deceased's primary caretaker, a Kaiser physician. Significantly, this finding of "control" was made without explicitly rejecting Kaiser's claim that the consultant was an independent contractor. The Court appears to have adopted a theory of control that holds an HMO liable for the acts of independent contractors regardless of whether any "ostensible agency" relationship is involved.

Boyd v. Albert Einstein Medical Center et

al. [9]

A Pennsylvania appellate court similarly reversed a grant of summary judgment in favor of an IPA-model HMO in a case alleging that the HMO's contracting physicians were its ostensible agents. The plaintiff sought to hold the HMO liable for negligent diagnosis and treatment by the physicians. The trial court held that the plaintiff failed to establish the existence of an agency relationship under either of two tests recognized in Pennsylvania: Either the patient must reasonably look to the institution (i.e., the HMO) rather than the individual physician for care, or the HMO must "hold out" the physician as its employee by acting or failing to act in a way that would lead the patient to a reasonable belief that the HMO in fact is rendering the treatment.

The appellate court's reversal was predicated primarily on the first test. The court concluded that in a time of changing medical practice, patients look increasingly to institutions (hospitals and, arguably, HMOs) as sources of care. The court also suggested that the plaintiff submitted to the care of the physician primarily at the invitation of the HMO. Specific facts that the court found relevant were statements by the HMO in various contracts that it provides health services in order to "promote and protect" the health of its members and that it operates on a "direct service" basis; payment of fees by the plaintiff to the HMO rather than to the physician; limitation by the HMO of the plaintiff's choice of physician; screening and selection of participating physicians by the HMO; and both control of access to specialty care and selection of the specialist to whom a member would be referred by the HMO's primary care physicians.


In re: Family Health Services, Inc., et al.

(Maxicare) [10]

A significant legal question in this well-publicized bankruptcy proceeding is whether the various Maxicare plans should be treated as "insurance companies" and, therefore, ineligible for protection under the federal bankruptcy law. In California, where Maxicare is headquartered and where it has a significant number of enrollees (and where the bankruptcy proceedings are pending), HMOs are not considered insurance companies under state law. In other states where Maxicare operates, however, HMOs arguably are subject to regulation as insurers. The significance of the distinction lies in the fact that state insurance departments have extensive authority to control the reorganization or liquidation of insurance companies as an extension of their statutory authority to protect insurance plan enrollees. Thus, at least some of Maxicare's profitable assets, such as Maxicare Health Plans of the Midwest, could be removed from the bankruptcy proceedings and placed under the control of one or more state insurance commissioners. Seven state insurance departments filed motions to that effect.

Maxicare and its creditors' committee opposed the motions because the removal of profitable plans from the bankruptcy proceedings would reduce the funds available to protect their interests. HMO trade associations supported the state insurance commissioners on the grounds that enrollee interests would receive a higher priority under state law than under the federal Bankruptcy Code.

In four virtually identical opinions, the Bankruptcy Court denied all of the motions. [11-14] The Court found that, in all of the states but one, the state statutory scheme distinguished between "HMOs" and "insurance companies," notwithstanding the several insurance departments' authority to regulate HMOs. The Court also held that HMOs do not meet the federal "business of insurance" test of the McCarran-Ferguson Act. The Court concluded that Congress did not intend to include HMOs within the exclusion for "insurance companies" in the Bankruptcy Code.

Fundamentally, however, the Court's opinions turn on a policy-based analysis of whether the federal law is a satisfactory alternative to liquidation under state law. The Court found that state law preferences in favor of plan enrollees within the state and the probable interests of the states in liquidating, rather than rehabilitating, the plans are "anathema" to the federal bankruptcy law's tenet of equal treatment and distribution to all creditors. The Court, accordingly, found that removal of the various plans from the bankruptcy proceedings would disadvantage both the debtors and the creditors.


[1] 109 S.Ct. 948 (1989).

[2] 850 F.2d 1467 (11th Cir. 1988).

[3] 859 F.2d 96 (9th Cir. 1988).

[4] 10 E.B.C. 2049; 1989 U.S. Dist. LEXIS 2549 (E.D. Mich 1989).

[5] 869 F.2d 142 (2d Cir. 1989).

[6] 424 N.W. 2d 54 (Mich. App. 1988).

[7] 1988 Pa. Super. LEXIS 3665 (Feb. 8, 1989).

[8] 876 F.2d 174 (D.C. Cir. 1989).

[9] 547 A.2d 1229 (Pa. Super. 1988).

[10] Case Nos. SA89-01544JW, SA90-01558JW (C.D. Cal.).

[11] In re: Maxicare Health Insurance Co., 1989 Bankr. LEXIS 1332 (C.D. Cal. Aug. 14, 1989).

[12] In re: Maxicare Health Plans of the Midwest, Inc., 1989 Bankr. LEXIS 1227 (C.D. Cal. July 26, 1989).

[13] In re: Maxicare North Texas, Inc., 101 Bankr. 618; 1989 Bankr. LEXIS 931 (C.D. Cal. June 9, 1989).

[14] In re: Maxicare Louisiana, Inc., 101 Bankr. 636; 1989 Bankr. LEXIS 953 (C.D. Cal. June 9, 1989).

Robert W. McCann is a Partner, Epstein Becker & Green, Washington, D.C.
COPYRIGHT 1990 American College of Physician Executives
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1990, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
Printer friendly Cite/link Email Feedback
Title Annotation:part 2
Author:McCann, Robert W.
Publication:Physician Executive
Date:Mar 1, 1990
Previous Article:Sammons departure portends organizational changes.
Next Article:Evolution toward revolution.

Related Articles
Court decisions hold implications for managed care plans - part one.
Litigating claims against managed health care organizations: trend for the 1990s.
States call for HMO accountability.
Overcoming ERISA.
HMO can be sued for negligent medical decision, Pennsylvania court rules.
Latest decisions in RICO lawsuits against HMOs offer good and bad news for plaintiffs.
Managed care medical directors under fire. (Managed Care on Trial).
ERISA does not preempt state medical malpractice suit, Second Circuit rules.
Supreme Court limits patients' right to sue HMOs.

Terms of use | Privacy policy | Copyright © 2021 Farlex, Inc. | Feedback | For webmasters