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Liability of medical directors: a growing concern. (Managed Care on Trial).

IN RECENT YEARS, physician executives carrying out their responsibilities in quality and resource management have been faced with growing potential liabilities from the legal system. This is particularly true for the medical directors of managed care organizations and provider groups that assume managed care risk. Historically, legal attacks on such organizations have been aimed at the corporate entity and based on a wide range of legal theories. The current backlash in public opinion against managed care" has only augmented the number of such legal challenges. Of more intimate concern to medical directors is the growing number of actual and potential legal suits aimed personally at such doctors.

Physicians holding administrative positions in health plans or large provider groups are subject to a number of legal vulnerabilities. even when their motivation is improved quality of care.

* In state houses and courts around the country, efforts are being made to hold managed care plan medical directors liable for health plan coverage decisions that are found to adversely affect patient care. Several state medical boards have threatened to revoke the licenses of managed care medical directors when their decisions result in the delivery of poor quality care or lead to a poor outcome.

* Traditional tort suits against managed care entities, based on direct liability for acts or omissions in utilization management or vicarious liability for the acts of physicians in its provider network, have been limited in the past by the protection of the federal Employee Retirement Income Security Act of 1974 (ERISA). However, ERISA protection has been crumbling in numerous jurisdictions throughout the nation, opening up MCOs and their medical directors to new liabilities. This is despite dramatic but limited victories by the managed care industry in the Supreme Court and other federal courts this past summer.

* Medical directors involved in the extensive physician profiling that has emerged in recent years may find that a new set of legal vulnerabilities is waiting to spring from this enterprise. The health care community is rushing forward with profiling technology well ahead of any widely accepted ground rules--rules of behavior or of ethical conduct. This is the circumstance in which society frequently turns to its courts and judicial system to hammer out acceptable terms for the use of a new technology. The legal system then works out the compromises necessary to accommodate the interests of multiple parties and to protect the rights of individuals. (1)

As provider credentialing and recredentialing have become increasingly important quality improvement measures in an era of physician surplus, physician executives responsible for these activities may face a new onslaught of suits by both injured patients and providers with claims of negligent credentialing.

The power to discipline medical directors

Perhaps the most threatening of the new attacks on medical directors has come from state boards of medical licensure. Physicians and their employers cannot purchase insurance against the removal or suspension of a license and such actions become part of the doctor's file in the National Practitioner Databank. According to James R. Winn, MD, head of the Federation of State Medical Boards (FSMB), "...more and more boards are making sure they have authority over medical directors making medical decisions in their states and that those doctors, like all others, will be accountable for care decisions that affect the welfare of patients." (2)

The FSMB adopted in 1998 language calling on all state boards to seek legislation or regulatory changes that would clearly define medical director determinations of medical necessity or appropriateness as the practice of medicine. It also supports state board efforts to require medical directors to be licensed in all states in which the plan's patients reside. To date at least 18 states have implemented this recommendation and several others have rules or legislation pending (3) A spokeswoman for the New Hampshire Medical Society has been quoted as saying, "With the big stick of the medical board, we hope that medical directors will make good decisions early on."

Currently, only Arizona has successfully disciplined a medical director for a questionable pre-authorization decision. In an action upheld by the Arizona Supreme Court, a Blue Cross/Blue Shield medical director was issued a letter of concern. Earlier this year the Texas medical board attempted to discipline a medical director at United Healthcare for his denial of services to a 13-year-old child. The child's parents had requested private duty nurses for their son, who required home ventilator care for severe respiratory problems. The request was deemed by a United Healthcare medical director to be for custodial care and was turned down as an uncovered service.

The medical board determined that the denial was the practice of medicine and failed to meet accepted standards of care. In February of this year, the Texas board proposed publicly reprimanding the United Healthcare medical director, imposing a $5,000 fine, probated suspension of his medical license, and 12 hours of mandatory home ventilator training. United Healthcare has filed a federal lawsuit to block the board's sanctions, claiming the protection of the Employee Retirement Income Security Act (ERISA). (4)

In Ohio, the state attorney general has ruled in an advisory opinion that HMO medical directors medical necessity decisions don't count as the "practice of medicine." This advisory opinion had been requested by the State Medical Board of Ohio seeking a declaration that medical directors in the state are subject to the Board's authority. In Ohio, as in other states, this issue may be taken up in the legislature. Medical directors in some plans may still benefit from the potent, yet weakening shield of ERISA law. However, physicians in similar administrative roles in risk bearing group practices or health plans not covered by ERISA are increasingly vulnerable to the sanctions of state medical boards. Physicians in these positions should monitor their local situations closely to assess their personal liability.

Stripping away the ERISA shield

Liability arising out of managed care activities is surging and medical directors who once felt safe behind the protective walls of ERISA have reason for concern. If a plaintiff is receiving health care benefits through an employer, his or her liability claims based on vicarious liability or negligence in UR, QA, or credentialing may be preempted by ERISA. (5) For health plans that fall under its protection, ERISA preempts all state laws, including torts for breach of contract and negligence. When applicable, this preemption eliminates the traditional elements of a civil suit, including jury trial and compensatory damages.

Congress is under pressure to modify ERISA to permit suits against managed care companies and their agents for injuries resulting from "improper" UR or implementation of other cost containment measures. In February 1999 the American Bar Association adopted a resolution calling for removal of the ERISA "shield" and together with the American Medical Association and many consumer, patient, and physician groups, it has lobbied Congress to eliminate ERISA's preemptive effect on quality of care claims.

Even in the absence of new federal legislation, many courts have found rationales for allowing suits against MCOs to go forward despite ERISA. They generally do so where a clear quality of care concern is the central issue, as opposed to controversy over the quantity or nature of the medical benefits to which the plaintiff is entitled. Earlier this summer, the Supreme Court weighed in on this controversy. While rejecting an Illinois patient's attempt to sue a for-profit HMO for giving its physicians year-end bonuses if they held down spending on patient care, the Court did suggest that suits alleging negligent care could proceed in state courts. Justice David Souter noted that in "an HMO system, a physician's financial interest lies in providing less care, not more," but "The check on this the professional obligation to provide covered services with a reasonable degree of skill and judgment in the patient's interest." (6)

This summer the Fifth Circuit U.S. Court of Appeals partially upheld Texas' HMO Liability Act, finding that ERISA does not completely preempt Texas citizens' right to sue health plans. The 1997 statute was the nation's first HMO liability law and permits enrollees to sue HMOs when they fail to meet an ordinary standard in treatment decisions. It is these types of suits in particular that are likely to draw in the medical directors of managed care organizations. Similar HMO liability laws have passed in half a dozen states and are under consideration in many more.


It has never been a more challenging time to be a physician executive. The increasing complexity of health care science, the rapid accumulation of new responsibilities, and the extreme volatility of the health care marketplace require physicians in management to be on a constant learning curve. For those medical directors in managed care organizations, whether working on the provider or on the payer side or for non-profit or for-profit companies, monitoring the increasing threat of lawsuits must also be a concern. Medical directors must track the aggressiveness of local medical boards, know their local statutes and regulations, assure they maintain adequate malpractice insurance, and keep in touch with their corporate counsel. Ultimately, overseeing high quality care and keeping patient's best interests foremost will provide the greatest protections to these physicians.


(1.) The Legal Status of Provider Profiles, Physician Profiling: Background and Practical Experience. Ed. Pechman, K. J. Tampa, Florida: ACPE, 2000.

(2.) American Medical News, May 8. 2000.

(3.) Arizona, California, Delaware, Florida, Hawaii, Kentucky, Louisiana, Nevada, New Hampshire, North Carolina, North Dakota, South Dakota, Washington.

(4.) United Healthcare Ins. Co. v. Levy, No. 3-00-CV0569M (N.D. Tax. Filed Mar. 15, 2000).

(5.) Employee Retirement Income Security Act of 1974, 29 U.S.C. [section]1144(a).

(6.) Pegram v. Hedrich, No. 98-1949 (U.S. Juno 12, 2000).

Todd Sagin, MD, JD, CPE, consult and lectures on a broad range of health care issues. During his career he has served as Chief Medical Officer and Medical Director of risk bearing integrated delivery systems, PHOs, and medical groups. He is board certified in Family Practice and Geriatrics. He can reached by calling 215/233-9529 or via email at
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Author:Sagin, Todd
Publication:Physician Executive
Geographic Code:1USA
Date:Sep 1, 2000
Previous Article:Managed care medical directors under fire. (Managed Care on Trial).
Next Article:HMOs on trial: a Texas lawyer seeks HMO accountability and equilibrium. (Managed Care on Trial).

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