BASICS OF
MANAGED CARE LIABILITY AND HMO MALPRACTICE
Introduction
The Contractual Relationship Between Insurer and Insured
The Insurer’s Duty of Good Faith and Fair Dealing
Elimination of Bad Faith Lawsuits After Pilot Life
Alternative Theories of Liability against Managed Care Plans
Can HMO’s Be Liable For Medical Malpractice?
Can Managed Care Plans Be Held Liable For The Malpractice of Its Participating
Physicians?
Re-Emergence of Liability For Extra-Contractual Damages
Strategies to Minimize Risk for Managed Care Liability
1.
Introduction
This article
will provide individuals involved in managed care with a basic understanding of the
concepts behind the emerging legal theories of liability currently being brought against
managed care plans.
"Basics of
Managed Care Liability and HMO Malpractice" will discuss the evolution of bad faith
litigation against health insurers and the protections health plans now enjoy against such
lawsuits under ERISA, and the development of alternative theories of liability against
health plans such as lawsuits for negligent credentialing, "HMO malpractice",
and "IPA liability".
This article
will conclude with a brief discussion on strategies managed care plans can use to reduce
their risk for managed care liability and defend themselves from such allegations in
court.
2.
The Contractual Relationship Between Insurer and Insured
A health
insurance policy is a legal contract between the insurer and its insured to provide
policy benefits for health care services furnished to its members. Insured have the right
to sue their insurers for breach of contract if the insurer refuses to provide benefits as
contractually required under the terms of the policy. The insured’s recovery is
limited to the amount of policy benefits owed.
3.
The Insurer’s Duty of Good Faith and Fair Dealing
In most states,
insurers owe their insured not only a contractual duty to provide benefits, but also a
legal duty to act in good faith and to deal fairly due to the special relationship between
an insurer and its insured. In those states, not only may an insured seek to recover
policy benefits by suing his or her insurer for wrongful refusal to provide benefits, but
the insured may also sue for bad faith refusal to provide benefits and seek to recover his
or her emotional distress, financial loss, and in some states, attorney’s fees, for
the insurer’s bad faith. If the insurer has acted with malice or wanton disregard of
the insured’s rights, the insurer may be liable for punitive damages in an amount
deemed necessary by a jury to punish the insurer for its actions.
As a result,
bad faith lawsuits became very popular because the wrongful denial of a claim for a modest
amount in policy benefits could turn into a large jury verdict to compensate the insured
for his or her emotional distress and to punish the insurer for its conduct. Because the
denial of health claims can have significant emotional appeal to juries, and the potential
for extremely large jury verdicts arising out of a comparatively small amount in claims
made health insurers targets for bad faith lawsuits.
For example, in
Southern California, a health care plan was sued a number of years ago for refusing to
authorize coverage and provide some $200,000 in plan benefits for a autologous bone marrow
transplant with high dose chemotherapy for breast cancer for one of its members. The
member sued her plan for bad faith refusal to provide benefits and a jury awarded not only
the $200,000 in benefits, but also some $89 million for her emotional distress and for
punitive damages. The case was later settled out of court.
4.
Elimination of Bad Faith Lawsuits After Pilot Life
However, in
1987 the United States Supreme Court held in a case entitled Pilot Life v. Dedeaux,
that in lawsuits arising out of denials of health benefits owed under an
employer-sponsored health benefit plan, those lawsuits could not be brought under state
laws alleging bad faith because those state laws are replaced or preempted under the
federal Employee Retirement and Income Security Act ("ERISA"). If a health plan
regulated under ERISA wrongfully denied health benefits to one of its plan beneficiaries,
the beneficiary could only sue under ERISA to recover the amount of plan benefits owed and
could not sue to recover for his or her emotional distress or for punitive damages against
the plan. In addition, the beneficiary no longer had a right to a jury trial under ERISA.
This legal
decision took away the potential for large jury verdicts for lawsuits based upon the bad
faith denial of benefits by an employer-sponsored health plan. Although Pilot Life
did not apply to individual plans or government plans, it did apply to employer-sponsored
health plans. Given the significant number of employer-sponsored plans in this country and
the high cost of prosecuting bad faith actions, this legal decision sharply reduced the
number of bad faith lawsuits against health plans.
5.
Alternative Theories of Liability against Managed Care Plans
The search for
alternative remedies by attorneys representing health plan members coupled with the rise
of managed care as a method of containing health care costs has resulted not only in the
on-going creation of regulatory legislation of the industry by the state and federal
government, but also in the development of novel legal theories against managed care
plans.
For example, in
Darling v. Charleston Community Memorial Hospital, a physician was sued for medical
malpractice. The physician was a member of the plan’s provider network and the plan
was sued for negligent credentialing because had the plan properly investigated the
physician’s lack of professional credentials, they would not have allowed the
physician to join their network and treat the plan member.
6.
Can HMO’s Be Liable For Medical Malpractice?
Another fertile
area for new legal theories is the emergence of medical malpractice claims against managed
care plans.
In Kuhl v.
Lincoln National, a patient with heart trouble sought authorization from his managed
care plan for a specialized cardiac surgery. The plan initially authorized the surgery,
but later revoked that authorization. After appeal, the plan agreed to authorize the
surgery but the patient died while waiting for the surgery. The plan was sued for medical
malpractice for the delay caused by the plan.
In Corcoran
v. United Healthcare, a high-risk pregnancy patient sought hospitalization as
recommended by her physician. Her managed care plan refused authorization for an
in-patient stay. Her physician then recommended 24 hour nursing care at home, but her plan
authorized only eight hours a day for home nursing care as medically necessary. The
patient then suffered a miscarriage at home. The plan was sued for medical malpractice.
Managing the
care of patients to contain costs by dictating the availability of treatment for services
such as bone marrow transplants, organ transplants, experimental therapies, and medically
unnecessary treatment may subject managed care plans to lawsuits for medical malpractice.
Another common subject of medical malpractice lawsuits against managed care plans is
limiting the availability of medications to those on a plan’s formulary.
Managed care
plans have long argued that they cannot be sued for medical malpractice because they are
not physicians and do not provide care and treatment for patients that must meet certain
professional standards of care. However, courts around the country have increasingly found
managed care plans to be managing the care of the patient so as to affect the quality of
care being provided to the patient.
7.
Can Managed Care Plans Be Held Liable For The Malpractice of Its Participating Physicians?
Managed care
plans have also been sued for the malpractice allegedly committed by physicians on their
provider networks under the legal principle that employers are responsible for the acts of
their employees. Plans have argued that network physicians in an independent practice
association ("IPA") are not their employees and that they should not be held
vicariously liable for their negligent acts. To answer this question, courts have examined
whether the plan controls the manner by which the physician practices medicine under the
common law of respondeat superior.
In
Dunn v.
Praiss, a health maintenance organization ("HMO") was held liable for the
malpractice committed by an IPA physician in their network because the physician was paid
by the HMO based upon the number of members in the HMO and not on a fee-for-service basis,
the physician worked in the HMO’s facilities and required to accept the HMO’s
members as his patients, and the HMO’s marketing materials advertised the physician
as being affiliated with the HMO.
In
Decker v.
Saini, a HMO was held liable for the malpractice committed by an IPA physician on its
network because the HMO’s marketing materials identified the physician as a part of
the HMO so that the patient reasonably believed that the physician was an employee of the
HMO under the legal theory of ostensible agency.
In
Shea v.
Esensten, the refusal by a primary care provider to authorize a referral to a
cardiologist resulted in a fatal heart attack. The managed care plan was sued and at
trial, it was shown that the primary care provider had a financial incentive to limit
referrals to specialists. The court held that managed care plans have a fiduciary duty
under ERISA to disclose their providers’ financial incentives that may affect patient
care.
8.
Re-Emergence of Liability For Extra-Contractual Damages
The
significance of the development of new legal theories such as medical malpractice to
impose liability against managed care plans is the re-emergence of potential
extra-contractual damage awards against plans. Although Pilot Life and ERISA
preemption eliminated the ability of plan members to obtain jury awards for emotional
distress and punitive damages for the bad faith denial of claims, new legal theories such
as HMO malpractice allow plan members to potentially obtain jury awards for wage loss,
pain and suffering, and punitive damages if juries find the cost-containment management of
health care by managed care plans to result in medical decisions that are inconsistent
with the standard of care owed to the patient.
Managed care
plans have responded by arguing that legal theories such as HMO malpractice are
essentially lawsuits over the denial of plan benefits that should be preempted by ERISA in
cases involving employer-sponsored plans. For example, in Kuhl v. Lincoln National
and Corcoran v. United Healthcare, the courts agreed and held that those managed
care plans could not be sued for medical malpractice in those cases and that those
families could recover only the plan benefits that should have been provided, and could
not recover any wage loss or loss of the care, comfort, and society the families suffered
due to the death of a family member.
However, in a
trial in Georgia a number of years ago, a jury found an HMO liable for $45 million because
its recommendation that the parents bring their ill child to the emergency room of one of
their participating hospitals across town rather than to other closer hospitals resulted
in the death of the child. The court held that the case involved the denial of health care
rather than the denial of benefits and refused to throw out the lawsuit under ERISA.
Courts
throughout the country have wrestled with these questions without reaching any consensus
over whether these managed care liability cases are really denial of benefit cases which
should be subject to ERISA preemption, or whether they are in fact, medical malpractice
cases.
9.
Strategies to Minimize Risk for Managed Care Liability
Managed care
plans should take steps to reduce their risk of incurring liability for medical
malpractice by formulating reasonable and current medical policies regarding utilization
of health care rescues and new technology formed by qualified persons, considering the use
of alternative dispute resolution forums to resolve disputes, utilization of risk managers
to work with providers, perform meaningful credentialing of providers performed
periodically or delegate such responsibilities to the IPA, create programs for impaired
providers, obtain appropriate insurance coverage, and consult with legal counsel on policy
decisions and high risk cases.
Because
lawsuits against managed care plans before juries tend to take on the appearance of
referendums against managed care, qualified expert witnesses who can testify as to the
positive aspects of managed care should be located and developed. Managed care plans also
need to reach out through the media at every opportunity in an attempt to educate the
public about the advantages of managed care and counter-act the negative images of managed
care in the media.
