Not just a minimum income policy for physicians: the need for good faith and fair dealing in physician deselection disputes.

AuthorCoppolo, Stephen D.

TABLE OF CONTENTS INTRODUCTION I. THE PROBLEM OF PHYSICIAN DESELECTION A. Deselection Defined B. Common Bases for Physician Deselection II. PUBLIC POLICY ARGUMENTS FOR AND AGAINST LEGISLATIVE AND JUDICIAL RESPONSES TO PHYSICIAN DESELECTION ABUSES A. Arguments Favoring Greater Legislative and Judicial Involvement 1. The Impact of Deselection on Physicians 2. Analogous Principles in the Employment Law Context 3. Physicial Deselection Affects Patient Health B. Arguments Against Greater Legislative and Judicial Involvement III. JUDICIAL RESPONSES TO PHYSICIAN DESELECTION A. Harper v. Healthsource B. New Jersey Psychological Ass'n C. Potvin v. Metropolitan Life Insurance Co. IV. WHY HAS THE HARPER/POTVIN TREND FAILED TO MATERIALIZE? AN ANALYSIS OF LEGISLATIVE AND MARKET DEVELOPMENT A. Theories on the Failure of a Harper/Potvin Trend To Materialize B. Legislative Protections for Physicians Facing Deselection 1. An Overview of State Statutes 2. The New York Statute as a Model of a Comprehensive Protective Statute C. Market Forces Will Continue To Encourage MCOs To Deselect Physicians for Legitimate and Illegitimate Reasons V. PROPOSED GUIDELINES FOR COURTS FACING PHYSICIAN DESELECTION LITIGATION A. Courts Should Use the Implied Covenant of Good Faith and Fair Dealing To Respond to Deselection Abuses B. Courts Should Provide Procedural, Not Substantive, Protections to Physicians Facing Deselection C. Specific Procedural Components Courts Should Require Under Good Faith and Fair Dealing 1. Notice and a Reasonable Period of Time Prior to Termination Becoming Effective 2. Some Ability for the Physician To Inspect the Insurer's Evidence 3. A Hearing at Which the Physician Can Be Represented and Present a Defense CONCLUSION INTRODUCTION

Physician deselection has been described as a "very complex issue that lacks a complex history." (1) Essentially, a standard contract term that gave no physician pause in the "good old days" now causes significant heartburn for doctors living in the world of managed care. The term "physician deselection" generally refers to the process by which a managed care organization (MCO) terminates its relationship with an affiliated physician in its network, whether with cause or without cause. (2) The problem of physician deselection is a product of the transition of the U.S. health care delivery system from a fee-for-service insurance model to a managed care model.

In the era of fee-for-service health insurance, insurers would pay for the medical bills of their insured essentially without regard to who was the treating physician. (3) During the MCO revolution of the 1980s and 1990s, physicians' role with respect to insurers suddenly changed from something akin to independent contractors to something much closer to being true employees. Physicians now need to worry not only about treating patients, but also about providing their services in a "managed care compatible" fashion. (4) In 1996, when the Supreme Court of New Hampshire issued its decision in Harper v. Healthsource New Hampshire, Inc., (5) a state court of final jurisdiction for the first time held that deselections without cause and without the opportunity for review violate public policy. (6)

Though case law on physician deselection appears to have stagnated since the 2000 California Supreme Court decision in Potvin v. Metropolitan Life Insurance Co., (7) legislators and courts need to continue working to prevent deselection abuses. This Note will examine recent judicial and legislative attempts to provide procedural protections to physicians facing deselection. This Note will also analyze the current state of health insurance markets to assess whether they have stabilized to the point where improper deselections will no longer be a significant problem. Evidence of continued consolidation among health insurers and increased competitive pressures will demonstrate the likelihood that insurers will continue to attempt to weed out physicians whose treatment costs are above average, whether due to legitimate aspects of the physicians' practice styles, patient advocacy, or other factors.

This Note will argue that the strongest method of protecting physician interests in the continually changing managed care environment is through the enactment of strong procedural protections for deselected physicians rather than through prohibitions against deselection on the basis of certain protected activities. While state legislative action is the preferred method of ensuring procedural protections for physicians, (8) Potvin and Harper demonstrate that existing common law doctrines are flexible enough to handle the implications of this emerging trend.

In the absence of state legislative action, courts can and should provide minimal procedural safeguards against abuses in physician deselection by reading the implied covenant of good faith and fair dealing into physician-MCO contracts. Using state and federal statutes as a basis for determining the current boundaries of public policy, courts should provide for the following: a notice period for physicians facing deselection; the opportunity for physicians who believe their termination is sought on improper bases to have an administrative review where they may challenge the termination; the ability for physicians to view evidence against them and have an attorney or other representative present at the review; the involvement of an unbiased physician at the review if the termination is made on medical grounds; and lastly, access to judicial review to ensure such procedures are followed.

Part I of this Note will examine physician deselection, how it is accomplished, and what effect it has on physicians and their patients. Part II will consider particular arguments for and against extending greater protections to physicians facing deselection. Part III will examine case law developments relating to physician deselection, including Harper and Potvin. Part IV will suggest and examine two hypotheses for the failure of the predicted trend of Harper- and Potvin-type decisions spreading to other jurisdictions across the country. This Part will examine the possibility that (1) state legislatures have already adequately dealt with MCO deselection abuses, and/or (2) health insurance markets have stabilized enough that where improper physician deselections are no longer a concern. Part IV will argue that neither state legislative developments nor conditions in health insurance markets eliminate the need for further judicial intervention in this area. Lastly, in Part V, this Note will suggest that courts adopt the Harper approach of employing the implied covenant of good faith and fair dealing to provide procedural protections to physicians facing deselection, and will consider the optimal shape of those protections.

  1. THE PROBLEM OF PHYSICIAN DESELECTION

    1. Deselection Defined

      Physician deselection occurs when a managed care organization removes a physician from the group of providers authorized to receive reimbursement in return for treating the MCO's patients. (9) Although deselection is based on contract principles, (10) the significant power of MCOs in many geographical markets, and the negative consequences that can occur when physicians are deselected, raise concerns that transcend pure contract law. In fact, for the physicians who are being deselected, the economic effects can be equivalent to being fired. (11)

      Deselection is typically accomplished through MCO use of provisions in their contracts allowing either "with cause" or "without cause" termination of physicians. Historically, without cause terminations have been the preferred method of removing a physician from an MCO's provider list. (12) Clauses allowing MCOs to terminate their affiliation with a physician "are almost universally present in physician/MCO provider agreements." (13) Without-cause termination clauses are also particularly susceptible to abuse by MCOs, because they can be used to mask a decision to terminate for reasons that violate public policy. (14) Indeed, the Potvin court found the use of a without-cause termination provision to be unenforceable when it conflicted with a physician's common law right to fair procedure. (15)

      Because a physician's relationship with an MCO "is not an employer-employee relationship," (16) and the physician is not "really an independent contractor for" the MCO, (17) a physician can be left without recognized legal recourse to challenge the basis for the termination. (18)

    2. Common Bases for Physician Deselection

      MCOs deselect physicians for a variety of reasons: some of which are recognized as permissible, and some not. (19) This Section will discuss some of the most common, but is not meant to be exhaustive.

      An obvious, and clearly legitimate, basis for an MCO to seek to deselect a physician from its provider network is poor quality of care. Falling under this classification are "issues of board certification, pending disciplinary or malpractice actions, as well as sexual harassment or other improper conduct." (20) MCOs have a duty to their enrollees to ensure that network physicians will not cause them harm or behave inappropriately toward them. (21) As one commentator noted, "MICOs are increasingly taking on the role that hospitals had in an earlier era, in terms of credentialing and otherwise vouching for the quality of care provided by their physicians." (22) Given that MCOs are increasingly assuming the responsibility to ensure network physicians are competent, it is entirely appropriate that MCOs have procedures in place to remove potentially dangerous providers from access to their enrollees.

      Legitimate business motives on the part of the MCO are also a valid reason for physician deselection. Like any business, MCOs must be able to reduce the size of their networks and their overhead costs should business conditions necessitate such action. Courts have traditionally been deferential to...

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