LIABILITY
FOR COVERAGE DENIALS BY MANAGED CARE PLANS
Brock D. Phillips
1. Introduction
Liability issues for managed care plans can broadly be divided into two areas, the first being liability concerns that arise out of relationships with
insureds, the second being liability issues that arise out of relationships with providers of health care (independent contractor or employee physicians and other health professionals).
Generally, liability issues with insureds have generally taken one of two forms: (1) disputes over providing or reimbursing for services, i.e. bad faith claims, and (2) claims that the plan committed medical malpractice. A third emerging area is the filing of large class actions on behalf of insureds against plans, typically alleging breach of fiduciary duties and other ERISA violations, as well as RICO violations.
This paper provides an overview of the legal theories now being asserted against plans by their
insureds, either for denial of reimbursement, denial of care or possibly vicarious liability for activities of providers of care. ERISA preemption as a defense will be covered, as will strategies for reducing risk of claims of this type.
2. Definition of A Managed Care Plan
Uncertainty in the definition of what is a managed care plan lies at the heart of many disputes over the scope of plan liability. This author does not believe there is any clear consensus about what the term "managed care plan" means. Depending on who is advancing the definition, it probably has embraced everything from traditional indemnity plans on the reimbursement side to small physician IPAs on the provider side.
Because so many different types of entities consider themselves managed care plans, they bring dramatically different perspectives to the liability problems faced by managed care plans. Managers and counsel with backgrounds in indemnity tend to understand and accept the liability risks presented by denial of services (or reimbursement) because the bad faith doctrine is well understood by that community. But they have little experience with, and tend to rebel against, the notion that their activities might constitute medical malpractice. Similarly, they are often unfamiliar with the idea that they may have an affirmative duty to credential providers effectively and fairly. Conversely, those who come to the managed care arena with a background in direct patient care readily understand and accept malpractice and credentialing problems, but are entirely unfamiliar with claims processing issues which can turn into bad faith litigation.
This author believes that true managed care inevitably involves characteristics of both payors and providers. The term "plan" embraces the insurance or indemnity aspect of the product, while the term "managed" implies involvement in how care is provided. When a product truly offers managed care (or claims it does) it will be exposed to all of the forms of liability which adhere to both insurers and providers.
3. Managed Care Bad Faith Liability Issues
And ERISA Preemption
The Duty of Good Faith and Fair Dealing
The liability presented by disputes with insureds over providing disputed benefits (or reimbursing for benefits already received by the insured) has been well understood and thoroughly litigated over the last twenty years. Since the early 1980's, the great majority of 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 normal arms-length commercial transactions. 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 breach of contract damages, but also to tort damages for emotional distress and potentially punitive damages if the claimant can convince a jury that the carrier's conduct involves fraud, oppression or malice.
The dimensions of the duty of good faith and fair dealing varied little in decisions from around the country. It was (and is) widely accepted that third party payors for health care have a duty to promptly pay all covered claims. Investigations into claims must be conducted fairly and in a timely manner. The insurer must not simply look for grounds to deny a claim but must evaluate a claim giving consideration to all the terms of the governing policy and treating the rights of the insured with the same consideration as the carrier accords its own rights and duties. Any ambiguities in a health policy will be interpreted against the carrier to create coverage whenever the policy language renders the issue uncertain.
These same duties apply without question to managed care plans that include in their product the obligation to pay for or provide health care benefits as described in a policy or contract. Virtually everyone in the industry is familiar with the case of Nelene Fox
v. Health Net, which was tried in state court in Southern California. The case involved a refusal of Health Net to pay for a bone marrow transplant for Nelene Fox, a victim of breast cancer. Plaintiff's counsel, who was the brother of Ms. Fox, aggressively litigated the case and discovered a number of facts hurtful to Health Net's position. An angry jury brought in an $89,000,000 verdict against Health Net.
Another interesting example of the application of bad faith law to a managed care HMO occurred recently when a Wisconsin trial court ruled that an HMO member could sue his plan for bad faith when the plan refused to provide a certain level of benefits "outside" of its own network. In McEvoy
v. Group Health Cooperative of Eau Claire 213 Wisc. 2d 507, 570 N.W. 2d 397 (1997), the HMO argued that it is a provider of health care, not an insurer and thus while it can be sued for malpractice, it cannot be sued for bad faith failure to authorize benefits. The trial court rejected this argument, finding that in making an administrative decision not to authorize a certain level of out-of-network care, the HMO was acting "purely like an insurer" and could be sued for acting in bad faith.
