The Managed Care Dilemma: Can Theories of Tort Liability Adapt to the Realities of Cost Containment? - Barbara A. Noah

• Jurisdiction: United States,Federal
• Publication year: 1997
• Citation: Vol. 48 No. 3

The Managed Care Dilemma: Can Theories of Tort Liability Adapt to the Realities of Cost Containment?by Barbara A. Noah^*

I. Introduction

During the past decade, the United States health care system has undergone a transformation from a market comprised mainly of self-employed physicians in solo or small group practices to one in which far fewer physicians engage in this type of independent practice.¹ More than three quarters of the physicians in this country now practice medicine within some form of managed care organization ("MCO") or see some managed care patients.² "Managed care" is a term used to describe a variety of organizations that control costs and utilization of health care services through techniques such as using physicians as "gatekeepers" for hospitalization and specialists and requiring prepay-ment by subscribers for services.³ The rate of patient enrollment in MCOs continues to increase rapidly, with approximately sixty million Americans currently enrolled in health maintenance organizations ("HMOs") and another ninety million in other types of managed care plans.⁴ Estimates suggest that if enrollment continues at the current rate, eight out of ten Americans will receive care from some sort of MCO by the year 2000.⁵

Not surprisingly, as growing numbers of patients receive health care services from MCOs, criticisms have proliferated about the quality of care provided by these organizations. In the past few years, HMOs in particular have faced escalating consumer and physician complaints about the effects of cost-cutting on patient care. The public increasingly perceives the care provided through MCOs as inferior to traditional fee-for-service care.⁶ Responding to constituent pressures, legislatures in more than twenty states recently have considered bills regulating managed care practices,⁷ and Congress has now taken up the issue.⁸ Even some employers who offer access to managed care plans as part of their benefits packages have begun to scrutinize HMOs more closely.⁹

Disputes persist about the quality of care delivered by HMOs and other managed care providers.¹⁰ Critics argue that MCOs will overuse cost-cutting methods and thus provide inferior care to pocket greater profits.¹¹ In an effort to contain costs, MCOs undeniably make decisions that affect the quality of care, but health care costs cannot continue rising without limitation. Government or private insurance can no longer pay for all medically beneficial treatments for covered individuals without risking bankruptcy.¹² Health care costs now account for nearly fourteen percent of the country's Gross Domestic Product, and this percentage will likely continue to increase.¹³ Medical spending increased at an average annual rate of 4.8% from 1960 to 1993.¹⁴ The shift to managed care has magnified dramatically the competing exigencies of quality care and cost control.

Notwithstanding the rapid and substantial transformation of the American health care market, the American legal system has acknowl-edged only gradually the advent of these fundamental changes, especially the tensions that exist between managed care and the traditional view of medicine in the context of medical malpractice litigation. Those who perceive a conflict between the existing malprac-tice standard and the need for cost containment tend to assume that cost control necessarily results in a deviation from the traditional medical standard of care. In the past several years, courts have held MCOs liable for medical malpractice akin to the corporate and vicarious liability of hospitals. As courts continue to develop and expand different theories for the imposition of such liability, MCOs will have to grapple with the financial consequences of ever-escalating tort claims while attempting to contain the costs of providing health care to their members.

Although valid criticisms have been leveled against the quality of care delivered by MCOs, recourse to the courts may not provide the optimum solution to the problem. In fact, the imposition of tort liability on MCOs fundamentally challenges the health care philosophy underlying managed care. These organizations evolved in part as a response to the growing scarcity and spiraling costs of medical resources. Individuals seeking both preventive and acute health care understandably desire the best available technology and the most thorough treatment protocols, but it is difficult to reconcile those preferences with managed care's goal of containing costs while providing access to a reasonable standard of care for a diverse patient population. If courts increasingly hold MCOs liable for the effects of their cost-containment measures, it will become more difficult for these organizations to provide wide and relatively inexpen-sive access to health care services.

Part II of this Article provides a brief description of the different types of managed care organizations and explores the philosophy of managed care, particularly regarding cost containment. Part III canvasses the different theories for imposing liability on MCOs for the effects of cost-containment measures as well as for the malpractice of their physicians. Part IV considers problems associated with the imposition of tort liability, and Part V suggests alternatives to tort liability and explores the ethical implications of reforms that exclude corporate liability altogether. Ultimately, this Article concludes that managed care organizations should receive statutory immunity from malpractice suits so long as government officials meaningfully regulate the delivery of health care services by these entities.

II. Emergence of the Managed Care Industry

To assess the consequences of imposing tort liability on MCOs, one must first understand their basic structure. Managed care organizations include HMOs and other "alternative" health care delivery systems that differ in structure from traditional fee-for-service care.¹⁵ Although this discussion will focus on HMOs, the descriptions below include some of the less common forms of MCOs as well.

A. Varieties of Managed Care Organizations

A number of alternative delivery systems have developed to allow for more effective management of health care. Each of these organizations differs in some way from the traditional fee-for-service mode of delivery in which patients or their insurers pay independently practicing physicians a separate fee for each visit or service. Managed care organizations vary in their degree of integration, ranging from simple associations of physicians to joint ventures between physicians and hospitals and, at the extreme end of the scale, to HMOs that fully integrate the insurance and provider aspects of health care delivery.

Generally, HMOs enroll subscribers who prepay a set fee in exchange for both primary care and hospital-based acute care over a certain period of coverage.¹⁶ The enrollment fee remains set regardless of the actual costs of the services utilized by any individual subscriber. HMOs contract with participating physicians to provide office-based primary care and with hospitals to provide acute care. Thus, HMOs function as both insurers and health care providers.¹⁷

HMO structures vary, but most health maintenance organizations fit into one of three basic models. In the "staff' model, the HMO directly employs its physicians, who work in a centralized care facility and receive salaries from the HMO.¹⁸ In the "group" model, physicians form a partnership or corporation that in turn contracts with the HMO to deliver health care to the organization's subscribers. Physicians in the group, acting as independent contractors for the HMO, care for HMO members at the group's health care facility in exchange for a fixed monthly fee for each enrollee.¹⁹ The group collects these "capitated" fees from the HMO and pays its physicians a base salary and bonuses, usually structured as financial incentives of some sort.²⁰ Finally, in the "independent practice association" ("IPA") model, an independent physician group, usually a partnership or corporation comprised of independent practicing physicians, contracts on behalf of its members to provide services for the HMO. In the IPA model, physicians practice in their own separate facilities and often continue to practice outside of the HMO. The HMO pays the IPA a capitation fee, and the IPA then compensates the participating physicians based on separate contracts between the IPA and the individual physicians.²¹ As explained more fully below, health maintenance organizations also vary dramatically in their methods of risk sharing, utilization review, and internal manage-ment.

The various HMO models represent the most common types of organizations that deliver managed care, but other managed care entities are becoming more common as well. For example, IPAs also negotiate payment contracts with other types of insurers to provide care and then pay their member physicians on a fee-for-service basis. Member physicians frequently practice independently outside of their IPAs or join multiple IPAs. Although some IPAs simply negotiate with insurers, others may also engage in utilization review, set practice standards, or engage in other administrative functions such as billing and purchasing for the group in order to reduce costs.²²

Preferred provider organizations ("PPOs") negotiate fees with groups of providers, physicians or hospitals, often at discounted rates.²³ In contrast to HMOs, PPOs generally contract to pay participating providers on a discounted fee-for-service rather than capitation basis.²⁴ Many PPO physicians maintain separate practices outside the organiza-tion or participate in more than one PPO.²⁵ Individual subscribers pay premiums to the PPO, and the organization reimburses participating hospitals and physicians for their services.²⁶ Moreover, patients who subscribe to PPOs may visit nonaffiliated doctors, but the plans impose financial disincentives such as...