MANAGED
CARE LIABILITY
TO CONSUMERS OF HEALTH CARE
Is there such
thing as managed care liability today? Certainly, the much maligned ERISA preemption of
tort actions against employer health plans has limited and in many cases eliminated, plan
liability for alleged wrongs to consumers. The suggestion that there is no managed care
liability, however, is at odds with recent news reports of multi-million dollar verdicts
against well known health plans as well as a growing number of decisions rejecting ERISA
preemption and permitting state common law actions against health plans.
This apparent
quandary is best understood by examining the evolution of health plan liability law over
the past two decades. In the 1970’s, although Congress was enacting legislation which
would eventually be at the heart of the current debate most consumers were blissfully
unaware of the coming trend and took for granted that the medical care prescribed by their
physician would be paid by their insurer. When it was not, it was assumed that the patient
had the right to sue the insurer for refusing payment. The suits were usually filed in
state court, alleging state common-law claims for breach of contract and bad faith.
I.
HEALTH PLAN LIABILITY BEFORE PILOT LIFE – BAD FAITH AND PUNITIVE DAMAGES
Since the early
1980’s, most state jurisdictions have embraced the notion that there is a duty of
good faith and fair dealing inherent in every insurance contract and that a health plan
breaches that duty if it "unreasonably" fails to pay for services covered by the
contract. Many courts have held that the relationship of insurer to insured is fiduciary
in nature and thus the standard of conduct imposed upon the insurer is higher than in the
typical arms-length commercial transaction. The great risk to plans posed by the doctrine
of bad faith failure to provide benefits is that breaches of the duty expose the carrier
not only to traditional contract damages, but also to tort damages for emotional distress,
and to punitive damages if the claimant can convince a jury that the carrier’s
conduct involves fraud, oppression or malice.
One of the
early, California bad faith cases to be tried against a health insurer, was Elmer
Norman vs. Colonial Penn Life Insurance in 1979. Mr. Norman had coverage through the
Association of Retired Persons with Colonial Penn, which denied a $48 claim he submitted
for hearing tests. He took his complaint to William Shernoff, a California lawyer who had
been successful in trying bad faith cases against disability carriers. Mr. Shernoff took
the case to trial, at which the jury angry with the insurer, awarded Mr. Norman his $48
claim, and $4,500,000 in punitive damages.
Given this kind
of result, there followed in the late 70’s and early 80’s a significant number
of bad faith actions against health insurers and plans. The defense of these claims was
expensive for the carriers, because plaintiff attorneys sought emotional distress and
punitive damages in every case, refusing to settle unless the settlement far outweighed
the amount of the claim at issue. Carriers couldn’t just pay a claim in order to get
rid of the case and save defense costs; they were forced to aggressively defend even
"nuisance" cases because of starry-eyed expectations of huge punitive awards
like Mr. Norman’s.
As is true
today, most Americans in the 1970’s and 80’s belonged to health plans purchased
and paid for by their employers. Consequently, many of the bad faith actions of this era
were against employer-paid health plans. The defendant insurers would argue that the still
relatively new ERISA law was intended to regulate employer health plans and provided an
exclusive remedy for persons denied payment of a health care benefit claim. These
arguments were met with mixed success, resulting in a growing number of inconsistent court
rulings on the issue of ERISA preemption. These inconsistencies were resolved by Justice
O’Connor in the seminal case of Pilot Life v. Dedeaux.)
II.
1987 PILOT LIFE – BAD FAITH ACTIONS AGAINST EMPLOYERS, EMPLOYER PAID PLANS ARE
PREEMPTED BY ERISA
Pilot Life Pilot Life
confirmed
that ERISA was intended to preempt state common law causes of action, including those for
breach of contract and bad faith, against employer paid health plans. Employees who wanted
to dispute a claims decision made by their employer paid health care plan, were directed
to ERISA’s statutory remedy. This, Justice O’Connor might argue, was the precise
intent of the ERISA statute and remedy:
"In sum,
the detailed provisions of Section 502(a) set forth a comprehensive civil enforcement
scheme that represents a careful balancing of the need for prompt and fair claims
settlement procedures against the public interest in encouraging the formation of employee
benefit plans."
Id. at 481 U.S.
54.
The value of
the Pilot Life decision to carriers was immediate and dramatic. The scope of the
preemption was sweeping, because most Americans receive health coverage through their
employer. Thus ERISA preempted all claims except those brought by individuals who obtained
their health coverage by purchasing it on their own, or those who worked for a federal,
state, or local government, whose benefits were not subject to ERISA preemption. This
preemption swept up a great majority of potential claimants who previously were advancing
state law tort claims for denial of health benefits.
III.
ERISA DAMAGES: FOR BENEFITS AND ATTORNEY FEES ONLY, NO EMOTIONAL DISTRESS OR PUNITIVE
DAMAGES
The primary
reason carriers welcomed ERISA preemption was the difference in potential damages
available under ERISA claims versus state law based bad faith claims. As noted above, in
bad faith claims, the great majority of jurisdictions treated the action as a tort claim
which entitled the plaintiff to seek emotional distress and punitive damages. Under ERISA
the only damages available are the cost of disputed benefits and attorneys’ fees. The
absence of emotional distress and punitive damages removed most of the incentive to bring
bad faith cases unless the cost of the disputed services was very substantial.
IV.
ERISA EXCEPTIONS: STATE EMPLOYEES, PLANS, INDIVIDUAL PLANS AND CHURCHES
The Pilot
Life decision, while expansive, did not preclude all common-law claims for bad faith
against health insurers. Since ERISA governed only employer paid plans, insureds who
purchased their own coverage were free to sue the plan in state court for benefits denied
or delayed. State government employee health care benefits are provided by state, not
federal, governments, so they are not governed by ERISA. The recent multi-million dollar
verdicts against Health Net, Humana and Aetna, were permitted because the plaintiffs were
state government employees and thus entitled to pursue their claims in state court and
seek punitive damages, unfettered by ERISA’s more conservative remedy.
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