Health plan liability in the age of managed care.

• Author: Conrad, Robert J., Jr.
• Position: Health Care and the Law

AS THE landscape of health care has been transformed from one dominated by fee-for-service providers and indemnity insurers to one in which "managed care" is rapidly achieving hegemony, a litigation earthquake has been building. Cost containment mechanisms commonly employed by managed care plans--pre-authorization requirements, second surgical opinions, length-of-stay limitations, choice of provider restrictions, capitation and other provider risk-sharing mechanisms--insinuate managed care plans in medical decisions in ways unknown under traditional indemnity health insurance. Because these mechanisms may affect directly the medical care received by patients covered by health plans, they increase the liability potential for plan providers, administrators, insurers and sponsors.

Claims against health plans essentially fall into two categories--first, claims for wrongful denial of access to needed medical treatment and, second, claims based on quality of care or provider malpractice. The volume of these claims and the theories of liability under which they are asserted are likely to increase dramatically as relationships between health care providers and plans evolve under managed care and the lines of demarcation between provider and plan grow less distinct. Complicating the issue is the morass of preemption issues under the Employee Retirement Income Security Act.

As virtually every health care provider, insurer and benefit plan is either actively involved or contemplating becoming so in managed care, lawyers advising them should be familiar with the kinds of claims brought against managed care plans, the legal theories asserted and the applicability of ERISA preemption.

CLAIMS BASED ON COVERAGE DECISIONS

"Utilization review," now often called "utilization management," are terms used to denote programs and procedures by which health plans attempt to assure that services provided are medically necessary and cost effective. Under traditional indemnity insurance plans, utilization review usually is performed retrospectively--that is, claims for payment are reviewed after the patient receives the service. Issues of medical necessity and cost effectiveness may be argued between providers and carriers, but the patient's access to care is not directly affected.

In managed care programs, utilization review is more commonly prospective or concurrent. With prospective utilization review, the provider or the patient must obtain prior approval from the health plan before the service may be rendered. Under concurrent utilization review, the health plan monitors the patient's course of treatment (for example, the length of a hospital stay) and specifies the last day for which payment will be made. Because lack of coverage frequently translates, at least as a practical matter, to lack of access to care, prospective and concurrent utilization review can expose a health plan to liability claims of a kind from which indemnity plans are largely insulated.

The earliest temblors of health plan liability were felt, not inappropriately, in California, where managed care plans have for been predominant for some time. Several cases litigated in California nicely illustrate the trajectory of potential health plan exposure to civil actions for damages and administrative fines.

1. Civil Liability

   In Wickline v. State,(1) one of the first utilization review cases to attract national attention, Mrs. Wickline contended that Medi-Cal (California's Medicaid program) was negligent in approving payment for only a four-day extension of her hospitalization for post-operative complications, rather than the eight-day extension requested by her physician. As Medi-Cal's decision was not appealed by her physician, she was discharged from the hospital when the Medi-Cal-approved extension expired, only to be readmitted nine days later with severe pain and discoloration in her right leg, which eventually had to be amputated above the knee.

   Mrs. Wickline's subsequent successful action against Medi-Cal for damages was reversed by the California Court of Appeal, based principally on its finding that Medi-Cal's four-day restriction was not the cause of the Mrs. Wickline's arguably premature discharge. Responsibility for that decision, the court concluded, rested with the Mrs. Wickline's treating physician.

   The court's analysis of the plaintiff's negligence claim, however, is at best imprecise. The opinion did not address "proximate" or "legal" causation, concluding only, as a factual matter, that Medi-Cal was not responsible for the patient's discharge. An alternative basis for the holding may reside in the court's additional reference to evidence that Medi-Cal's decision leading to Mrs. Wickline's discharge was in accordance with the usual standards of medical practice in the community, and that, as a result, Medi-Cal was not culpable of a breach of duty.

   Health plans generally took some comfort from the apparent proposition of Wickline that ultimate responsibility for medical decisions rests with the patient's attending physician, not the patient's health plan. Wickline does not, however, bolt the door against health plan liability for utilization review decisions, as the court expressly recognized that third-party payers might be liable for "defects in the design or implementation of cost containment mechanisms as, for example, when appeals made on a patient's behalf for medical or hospital care are arbitrarily ignored or unreasonably disregarded or overridden." Indeed, the court considered it "essential that cost limitation programs not be permitted to corrupt medical judgment," even while concluding that medical judgment was not corrupted by the Medi-Cal restriction evidenced in the case before it.

   The crack in the door left by Wickline was opened further by the same California Court of Appeal in Wilson v. Blue Cross of Southern California,(2) another suit alleging wrongful premature discharge. The patient was admitted to a psychiatric hospital for depression, chemical dependency and anorexia, and his treating physician recommended three to four weeks of inpatient care. The patient's health insurer, Blue Cross, conducting concurrent utilization review, announced after 10 days that it would not approve payment for further inpatient care. Discharged by his treating physician, the patient committed suicide three weeks later.

   Suit against the patient's insurance company and its agents advanced three causes of action. The first was directed against the insurance company and its adjuster for tortious breach of the insurance contract. A second was asserted against the insurer's utilization review company and its medical reviewer for tortiously inducing the insurance company to breach the contract. And a third claim was made against all defendants for wrongful death.

   The trial court granted summary judgment on all counts for all defendants, relying on Wickline for the proposition that the decedent's attending physician, not the health plan, was responsible for the timing of the patient's discharge.

   The court of appeal reversed, essentially recanted its suggestion in Wickline that the decision to discharge a patient is the treating physician's sole responsibility. Instead, Wilson read Wickline only for the limited proposition that under applicable rules and regulations Medi-Cal was permitted to deny medical benefits when such denial was in accordance with the usual standards of medical practice in the community, and that the questioned discharge decision fell within those standards.

   Continuing, the court stated that to the extent Wickline implied that the physician's compliance with the utilization review recommendation without protest caused the plaintiff's injury so that Medi-Cal could not be held liable, it misstated the law of causation in the context of a tort case. The proper test for causation in a tort case under California law, the court explained, is whether the defendant's conduct was a "substantial factor" in bringing about the harm. Because there was a triable issue of fact in Wilson as to whether the defendants' denial of benefits was a substantial factor in the patient's death, summary judgments in their favor were reversed and the case was remanded for trial.

   The door left unlocked in Wickline and nudged ajar in Wilson was thrown open in Fox v. HealthNet.(3) Mrs. Fox was enrolled with the defendant, a California health maintenance organization, through her husband's employer, a California school district. Diagnosed with breast cancer in June of 1991, she underwent two radical mastectomies and conventional chemotherapy before being evaluated by the Norris Cancer Center at the University of Southern California as an eligible candidate for a bone marrow transplant. The City of Hope National Medical Center, however, had previously refused to consider Mrs. Fox for the treatment protocol owing to metastases of the cancer to her bone marrow.

   HealthNet denied coverage on the ground that bone marrow transplantation was...