Making a Killing
HMOs and the Threat to Your Health
|Contents | 1 | 2 | 3 | 4 | 5 | 6 | Apdx 1 | Apdx 2 | Apdx 3 | Notes|
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Getting Away With Murder
Why You Can't Sue Your HMO"They let a clerk thousands of miles away make a life-threatening decision about my life and my baby's life without even seeing me and overruled five of my doctors," said Slidell, Louisiana resident Florence Corcoran. It is a story that echoes so many tragedies recounted in this book. But as with many of the other stories, there's a twist a second tragedy. "They don't get held accountable. And that's what appalls me. I relive that all the time. Insurance companies don't answer to nobody."
Corcoran faced a high-risk pregnancy. Her obstetrician ordered her hospitalized, as she had been in a previous high-risk birth. Yet her managed health care company, United Healthcare, overruled her doctor and denied the hospitalization, even though it had a second opinion agreeing with the doctor's advice. Instead, Corcoran's insurer ordered home nursing for ten hours each day.
During the last month of Corcoran's pregnancy, when no nurse was on duty, the baby went into distress. Denied the monitors and care she would have had in the hospital, Florence Corcoran's baby died.
Mrs. Corcoran filed a wrongful death action in Louisiana state court, alleging medical malpractice. But because of a legal loophole that exempts health insurance companies from such lawsuits in instances where the plaintiff receives insurance through her employer, as Corcoran did, her managed care insurer could not be held liable!
"If I go out on the street and murder a person, I am thrown in jail for murder and held accountable," said Corcoran. "What's the difference between me and this clerk thousands of miles away making a life decision which took the life of my baby and she gets off scott-free and keeps her job?"
This is the dirty little secret that lets HMOs walk away from responsibility for denying or interfering with medically appropriate treatment. Corporate health providers that administer employer-paid health benefits are above the law. How big is this loophole that Florence Corcoran and her baby fell through? Fully 125 million Americans with employer-paid health coverage in the private sector are unable to sue their HMOs or insurers for damages no matter how egregious the HMO conduct or serious the consequences of the treatment denial. HMOs can operate with virtual impunity.
How did they get this shield of immunity?
In 1987, creative insurance-industry lawyers convinced a majority of the Justices of the U.S. Supreme Court that the federal Employee Retirement Income Security Act of 1974 or ERISA put the industry above state common law under which damages are available to injured consumers.2 How did they convince the highest court in the land? Company lawyers argued that the corporation was not technically in the business of insurance but merely an administrator of employee benefits. This meant that it could not be held accountable under state laws, but was subject to ERISA's federal scheme, which provides little remedy, as discussed in more detail below.
The Pilot Life Insurance v. Dedeaux case did not involve an HMO, but rather a disability insurer. But as managed care became ascendant, the precedent stuck.
If a patient who is denied doctor-recommended care by his HMO tries to file a case in state court, where damages are available under state common law, HMO lawyers will have the case "removed" to federal court under ERISA's rules. HMOs or insurers that lose the federal ERISA grievance only pay the cost of the procedure or benefit they denied in the first place, no other damages or penalties. Thus there is no financial incentive for the HMO to provide timely treatment. And that is the good news. The bad news is that companies are obligated to provide the cost of the benefit only when the patient survives long enough to receive it. If the patient dies before receiving the treatment, the insurer or HMO pays nothing. Because there is no meaningful penalty for denying medically necessary treatment, there is no incentive to approve costly care.
Imagine that the penalty for bank robbery was limited to giving back the stolen money. No jail time, no fines, just pay the money back and only if you are caught. To top it off, the repaid money would be interest free. Would bank robbery increase under such conditions? That's the situation HMOs and insurers enjoy under ERISA.
For this reason, even conservative judges have condemned ERISA's injustice and pleaded for Congress to clarify accountability for HMOs.
California's conservative Federal Judge J. Spencer Letts wrote in 1997, when he was hamstrung by ERISA's ban on damages, "This case reveals that for benefit plans funded and administered by insurance companies, there is no practical or legal deterrent to unscrupulous claims practices. Without these practical incentives there is no counter-balance to insurance companies' interest in minimizing ERISA claims."3 (emphasis added)
Federal Judge William Young, appointed by Ronald Reagan, also recently expressed his frustration with ERISA's prohibition in a Massachusetts case: "Disturbing to this Court is the failure of Congress to amend a statute that, due to the changing realities of the modern health care system, has gone conspicuously awry from its original intent. This court had no choice but to pluck [the] case out of state court…and then, at the behest of Travelers, to slam the courthouse doors in her [the wife's] face and leave her without any remedy. ERISA has evolved into a shield of immunity that protects health insurers…from potential liability for the consequences of their wrongful denial of health benefits."4
These judges are reacting to violation of a basic tenet needed to make a market function: fundamental fairness.
When good companies are not rewarded and bad ones are not punished, the market is not free to compete on the basis of quality. ERISA's shield of immunity supplies a powerful incentive to ignore the most basic ethical considerations in providing care: low quality actors come out ahead because they make the most profits by providing the least and worst care. Competition is then almost exclusively focused on cost-cutting a structural recipe for the crisis of quality we now have under HMO medicine. Insurers find this loophole so lucrative that they even teach their claim handlers to respond differently depending on whether the claim is subject to the ERISA loophole or not. In some cases, the shield of immunity does not apply and patients can sue their HMO, a circumstance that will be discussed shortly. An internal Aetna videotaped training session, discovered during a 1998 Alaska lawsuit, shows how insurers and HMOs can teach claim handlers to treat ERISA and non-ERISA claims differently.
The videotape of company lawyers training Aetna claims managers shows they consider liability exposure as a determinant of whether or not to pay a policyholder's claim.5 As the Associated Press reported, "The topic is long-term disability claims, not health insurance, but the company says its policies do not differ."6
Early in the training video, Aetna's in-house counsel Jeffrey Blumenthal clarifies the difference between ERISA and non-ERISA cases: "We have an obligation, certainly, in a non-ERISA setting, under State law, to conduct what is called a reasonable investigation."7 The implication is that in the no-liability ERISA case, no investigation is necessary.
Aetna is far more cautious about cases in the one state where HMOs and insurers are liable for their actions. Blumenthal notes of a new state liability law in Texas, meant to apply to all patients: "In the state of Texas, the State Court in that scenario, we could be subject to we'll get into more of this later to back pay and damages, to punitive damages, to a whole range of extra-contractual liability that could be many, many millions of dollars."8
Another attorney adds about ERISA, "It is a very important distinction…one you have to know when you're processing a claim."
Still another attorney says, "As a practical matter, you really may have to do more on a non-ERISA plan to protect against some of the exposure we're talking about."9
Later, realizing what's been said, and trying to cover it up, Blumenthal said, "Well, let me just say that in the non-ERISA context, none of you will ever have to testify, ‘Well, you know, we do more in the non-ERISA context than the ERISA context because our lawyers tell us there's punitive damage exposure.' That that would be a cry to Congress to enact legislation to repeal ERISA, there's obviously attempts to do that."10
Writing about Blumenthal's blundering disclaimer, Orange County Register columnist Dan Weintraub says, "It would be ironic if Blumenthal's statement as recorded on Aetna's own tape becomes the cry that Congress finally heeds…The picture is grainy, the lighting is weak and the sound fades in and out. But the message in a newly disclosed videotape could not be clearer: Aetna Inc. treats people who can sue for punitive damages better than those who can't."11
The tape and evidence in the case also show that following the Pilot Life decision, Aetna dropped its field investigation force, (the people who ‘worked up' documentation of legitimate claims so they could be paid) and increased its claims personnel caseloads to four to four-and-a-half times the industry average. This made it harder to document a claims file for payment. The burden of proving that a claim should be paid shifted from the company to the patient.
After viewing the tape, national columnist Jane Bryant Quinn wrote, "The tape shows that, instead of gathering evidence itself, Aetna tells the sick person to handle it. If he or she doesn't present exactly the proof Aetna wants, or presents it after the final deadline for claims, too bad."12
In the training video, one long-time Aetna employee spells out the differences in company policy before and after the shield of immunity from prosecution was erected by the Pilot Life case in 1987. The twenty-year veteran of the Department says, "We used to investigate 100% of our cases practically, and that was called ‘overkill.' But now we investigate a far, very tiny percentage of that…And what we're finding today is that the claim investigator does not have the [time] because of the 8 or 900 case load versus 200 for competitors, and go out and solicit all these [materials]…the question is having the time to go out and investigate and work up that file the way it's supposed to be."13
While Aetna initially told the Associated Press that the procedures at issue applied to HMO claims too, company spokespeople subsequently retreated from that position, later writing, according to Quinn, that "the interpretation of the videotape is inaccurate, but because of the misperception, Aetna would change its system." Nonetheless, testimony and documents in the case at issue, Fisher v. Aetna, and another Alaska case brought to light the following startling revelations about Aetna's claims handling in wake of the the Pilot Life decision. They show how for-profit insurers and HMOs can change their policies when given shields of virtual immunity. After the 1987 ruling:
The adjusters know how difficult it is for a disabled person to handle those burdens and that the claims personnel is in the best position to gather information and investigate claims. In the video, they put it this way:
Trainee: If we're trying to be very specific about what kind of wouldn't it be better, you know, by law, if it should go to court or whatever, [for the analyst] to do the requesting [of the medical records] themselves.16Aetna lawyers claimed "management" rejected those ideas.
The most tragic consequence of the Aetna system is not just that consumers shoulder the burden of proving their claims, but the caste-like system that results. Two patients with precisely the same medical needs are treated very differently by the Aetna claims system simply because one is subject to the ERISA loophole and one is not.
Patients with employer-paid health care in the private sector have become second class citizens in the minds of insurers and HMOs because these working Americans have no recourse to receive damages against the companies.
The ERISA law applies only to private industry benefits. Americans who buy their own health insurance, employees who received health insurance through church or government employers, and Medicaid and Medicare recipients, are not subject to the ERISA loophole and can sue their insurer for bad faith and punitive damages.
The non-ERISA claims that are subject to liability, according to the training video, receive an extra level of review and are all considered by the Specialty Review Team. The ERISA claims can be denied without going to the Specialty Review Team. There is no need for scrutiny, because there is no remedy for the patient if a legitimate claim is denied.
The lack of remedies for patients with employer-paid insurance benefits in private industry following the Pilot Life decision allows HMOs and insurers to breach the code of good faith and fair dealing with impunity. The Aetna evidence which the company tried to keep under seal shows how insurers can respond when their insureds have no remedy.18
Unfortunately, Aetna does not appear to be alone.
Los Angeles Times columnist Ken Reich noted that, after two columns on patient complaints at Prudential HealthCare, eleven of Prudential's very own employees wrote or phoned saying they were troubled about the way PruCare deals with claims.
"Emphasis at the L.A. center is on individual production rather than quality," e-mailed one employee at the company's new Los Angeles National Service Center, one of four such centers nationwide. "Currently, an examiner is expected to ‘finalize' that is, pay or deny 82 claims per day. This is roughly one claim every five to six minutes, which leaves little time for careful consideration of difficult issues…Productivity is reported on weekly scorecards, and the cumulative scores are posted, by name, for all examiners to see. Few want to be in last place."19
The employee continued. "Credit is given only for either successfully paying…or denying a claim. Leaving it pending for more information or referring it to someone with more experience…results in zero credit to the examiner for the time spent. Some of these examiners intentionally deny claims that could be processed correctly so they may meet the standard for production. They…rationalize that the provider or member will appeal the denial and eventually get paid correctly. This ultimately results in additional delays and an unnecessarily increased workload."
Congress and state legislatures are still grappling with the growing toll of ERISA casualties.
Stephanie Ulrich, the woman discussed in a previous chapter who had an aneurysm, was not admitted for an angiogram, and was almost shunted to a nursing home, is one example of an ERISA casualty. And ERISA prevented the widow of Glenn Nealy, the cardiac patient who could not get to an HMO cardiologist (Chapter One), from ever collecting a dime.
These patients, like the other 125 million Americans with private sector employer-paid insurance benefits, all are subject to the ERISA loophole and have been unable to hold their HMOs and insurers accountable for damages.
There is little question that one reason these patients have been treated so callously is their lack of a remedy. Judith Packevicz, whose doctors recommended a liver transplant denied by her HMO (Chapter One), was also an ERISA victim of a sort. Packevicz first filed her case in federal court under ERISA law, not for damages but simply to force the HMO to provide treatment. But because she received health care through her public employer, the City of Saratoga Springs, she soon discovered that the shield of immunity did not apply to the HMO and she could file in state court and receive damages. Once she did refile, within a few days, her HMO relented and told her it would reevaluate her situation and, ultimately, agreed to pay. This was the good news. Unfortunately, it was too late. Packevicz died before she could benefit from the transplant that might have saved her. She was a victim of the HMO immunity shield even when it did not apply to her.
Ulrich's story is also very instructive. She had two HMOs one through her mother's private employer, and the other through her own public employer. In the end, the health care company hired by her public employer, the non-ERISA carrier, paid its share of the bills. The private-sector, ERISA claim was never covered.
At least Ulrich received her care. Others have been less fortunate.
In l991, Phyllis Cannon was diagnosed with acute myeloblastic leukemia. When she went into remission, her doctor urged that she undergo an autologous bone marrow transplant (ABMT). Yet her insurer, Blue Lines HMO, delayed authorization for three months, by then the cancer had returned and Mrs. Cannon could no longer benefit from the treatment.
When he brought the case to court, the judge was sympathetic. But noting the problem of ERISA's broad preemption of remedies for wrongful death, Judge John Porfilio, of the Tenth Circuit Court of Appeal, ruled in Cannon's case that, "Although moved by the tragic circumstances of this case, and the seemingly needless loss of life that resulted, we conclude that the law gives us no choice but to affirm"20 that Mr. Cannon has no remedy for his loss.
In the fee-for-service age, traditional insurers may not have paid bills for services already rendered. This often drove people into bankruptcy. But because the patient had already been treated, the issue was only money. Under HMO medicine, the shield of immunity can be a death sentence. When treatment itself is withheld, patients die.
When is an Insurer not an Insurer?
Consider the tragedy of 34 year-old Stephen Parrino who was diagnosed with a brain tumor. His HMO, lacking expertise in the area, referred Stephen to California's Loma Linda University Medical Center. There Parrino underwent successful surgery to remove the tumor.
Stephen's treating physicians at Loma Linda immediately ordered that he undergo proton-beam therapy no later than seven to ten days after the surgery. Proton-beam therapy is recognized as appropriate and necessary by the medical community for the prevention of tumor reoccurrence. The therapy is extremely expensive, and Stephen could not pay for it on his own.
When Loma Linda contacted Stephen's HMO to request that the company authorize the treatment, the HMO responded that it would not pay. Stephen called his HMO's customer service department. The HMO claim reviewer explained that the company would not pay for the treatment because it was "experimental, unapproved and not medically necessary" and thus "did not fall within managed care guidelines."
According to Stephen's father, Nick Parrino, Loma Linda Hospital told Stephen, at the time of his denial, that proton radiation was being paid for by fifty-two insurance companies, Medicare and Medicaid.
Even though the HMO had originally referred Stephen to Loma Linda, the company now rejected Loma Linda's judgement that the treatment was "medically necessary." And the specialists specifically said the proton-beam therapy must be given no later than two weeks following brain surgery to be effective.
During repeated calls to the HMO claim reviewer, Stephen threatened a lawsuit if the company did not authorize the treatment within the seven to ten day time period. He continued calling during an almost two month period, but was informed that authorization had been denied. The HMO claim reviewer did say he would ask for a second opinion from a doctor at the USC Kenneth Norris, Jr. Cancer Hospital.
Seven weeks after the surgery had been completed, the USC doctor seconded the opinion that the proton-beam therapy was "medically necessary" for Stephen. He put in the request for authorization to Stephen's HMO.
Two weeks later, Stephen had a CT scan at Loma Linda. He was informed that his brain tumor had reoccurred in the same place it was removed. The very next day, Stephen was informed by his HMO that he had been approved for the proton-beam therapy. But the delay had sealed Stephen's fate.
Stephen underwent a second surgery at Loma Linda during which the surgeons found the tumor more difficult to remove than during the first surgery. The recurring tumor spread to the rest of Stephen's body, including his lungs. Stephen was diagnosed with metastatic cancer.
Stephen subsequently brought suit against the HMO in state court, alleging that the denial of his initial claim for proton-beam therapy was improper. Claiming ERISA preemption, the HMO had the action removed to the U.S. District Court for the Central District of California. Stephen requested a remand motion, but the District Court denied it and dismissed each of his cause of actions.
With no timely remedy against his HMO, the recurring tumor killed Stephen Parrino. Stephen's estate appealed the decision, arguing that the removal to the District Court was improper. However, on appeal the Ninth Circuit found, "Because Parrino was a participant in an ERISA plan, and at least some of his claims fall within the scope of [ERISA], they are completely preempted." The U.S. Supreme Court refused to hear the case on appeal.
The family is left with no remedy. The Parrinos are double victims first losing Stephen when the HMO denied needed care, then by a system that denies patients and their survivors legal recourse.
It is a cruel irony. HMOs evade accountability for failing in precisely the role they claim to succeed at: managing care, not delivering it.
Wronged patients and their loved ones can take doctors to court for medical negligence. Such cases of quality-of-care violations are not preempted by ERISA. But when the families of patients like Stephen Parrino try to take their HMO to court, the HMO claims that it did not deny medical treatment but rather simply denied coverage and therefore cannot be sued for medical malpractice. HMOs that administer employer-paid benefits know that they cannot be taken to court, either, for breaching the duty of good faith, because such state lawsuits are superseded by ERISA under the reasoning of Pilot Life.
Are HMOs insurers or caregivers, money managers or care managers?
Tragedies such as Stephen Parrino's occur because HMOs hide behind many fictions, depending upon which is convenient.
On television, HMOs advertise that their doctors and treatment are the best. In court, HMOs claim they do not deny medical treatment, simply coverage, and therefore cannot be held accountable for negligence. In advertisements, HMOs promise patients that they will be protected when they are sick. But when a patient with employer-paid health care tries to sue an HMO for bad faith, the company claims it is not an insurance company, but simply an administrator of employee benefits, so, under ERISA, it cannot be held accountable for damages.
For patients with employer-paid health care, who are precluded from receiving damages over a benefit dispute (coverage decision), HMOs deny treatment under the coverage tag and the ill have no remedy.
For other patients, who can receive damages over an insurance company's bad faith, the HMO decision is presented as a medical determination. In the best case, the patient is told an "expert" has reviewed the file and the proposed treatment is not medically appropriate. In the worst case, the patient is never even told that there is any treatment available. Catch 22 is alive and well in the HMO industry. Often, no formal denial is ever made because a written denial is typically a trigger for a state review process.
This shell game keeps too many patients on the HMO industry's death row facing a denial of care but having no clear remedy.
Two hundred years of carefully crafted state common law has evolved to hold all sorts of wrongdoers accountable for all types of negligence. At the urging of both Democrats and Republicans, Congress has taken up returning actions against HMOs that improperly administer employee-employer benefit claims to the province of state common law. Unfortunately, in 1998, Republican leaders who have traditionally been aligned with the insurance industry, buried ERISA reform efforts in committee. Naturally, members of Congress have gold-plated insurance programs.
How closely have GOP leaders collaborated with the insurance industry to thwart reformers in their own party? An internal October 1997 memo from an HMO industry lobbyist to her colleagues said Senate Republican Leader Trent Lott and his aides had indicated that, "Senate Republicans need a lot of help from their friends on the outside" to stop ERISA reform, and that insurance industry lobbyists should "Get off your butts, get off your wallets,"21 meaning pump money into anti-reform efforts and politicians. Still, rank-and-file Republican reformers, while temporarily silenced by party leaders, will rise again.
Conservative Rep. Charlie Norwood of Georgia said: "One of the primary reasons I sold my dental practice in 1994 to run for Congress was to make sure the Clinton plan was dead for good. The Wall Street variety of Republican seems to think that Clinton Care is just fine, as long as corporations run the show instead of the federal government. Health insurance is the only industry in this country that enjoys a federally mandated shield against liability for its actions, and that's at the root of the horror stories of managed care."22
ERISA reform is bipartisan, in part because it deals with an issue of fundamental fairness and the failure of the free market to be truly "free." Placing trust in 200 years of carefully-crafted state common law is a non-regulatory, localized, state-based approach supported by conservative ideology and free-market philosophy. Conservatives, who love state control in other areas, should not insist on federal uniformity in health care.
But corporations do not like proposals that would impose liability on HMOs. They claim it would drive up health care costs. This argument is but a fig leaf. Two July 1998 studies show ERISA reform would be both health enhancing and cost effective.
In 1997, Texas became the first state in the nation to offer its citizens a way around ERISA, by allowing HMOs to be taken to court for what is a new cause of action for corporate medical negligence. The Texas law skirts ERISA's preemption because the law provides damages for quality-of-care violations or medical negligence which Courts have upheld as within the state's province instead of damages for bad faith and other contract-based benefit disputes which have traditionally been preempted by ERISA.
The Texas law, enacted under Republican Governor George W. Bush25, holds HMOs accountable when they have "exercised influence or control which result in the failure to exercise ordinary care." While HMOs claim states cannot pass such laws, a legal challenge to the Texas statute by Aetna was rejected in September 1998 by U.S. District Judge Vanessa Gilmore, who set aside arguments that the Texas "right to sue" statute violated the 1974 federal law governing employee pensions.
The Court wrote: "In this case, the Act addresses the quality of benefits actually provided. ERISA ‘simply says nothing about the quality of benefits received.' Dukes, 57 F.3d at 3576…the Court concludes that the Act does not constitute an improper imposition of state law liability on the enumerated entities."26
The Texas experience shows that such a liability law does not raise health care costs or result in litigiousness. The law's author, Texas State Senator David Sibley says, "When the state of Texas passed its state legislation holding managed care organizations accountable, the managed care industry said it would cost over a billion dollars. When an actuarial analysis by Milliman & Robertson for a Texas HMO was performed on the impact of the bill after it was passed, the cost was estimated to be far less a mere thirty-four cents per member per month (about 0.3%)." This estimate is from the industry's accountant.
"The law became effective on September 1, 1997 and since then not a single case has been filed," Sibley noted in June 1998, and since only a few lawsuits have been filed. "When asked about the impact, Texas physicians say they have not heard of any litigation but believe they are now receiving more attention from managed care reviewers when requesting necessary medical care for patients."27 Thus rather than spark a litigation explosion, the exposure to liability deters HMOs from withholding care and, instead, encourages them to provide quality services. It helps prod the corporate conscience.
Carol Cropper writes in the New York Times, "What lessons does Texas offer? The short answer is that the spotty early evidence does not support a lot of the dire warnings on Capitol Hill about a landslide of litigation." Cropper also cites a Texas Department of Insurance report which found that between September 1997 and March 1998 the increase in total spending per member per month of full service HMOs was only 0.1%.28
The implications are clear. Unless there are consequences to an HMO for denying expensive treatment, no matter how sorely the treatment is needed or how justified by medical science, the financial calculus of "managing care" will weigh toward withholding and delaying costly care.
The American public certainly understands the principle at work. Nearly eight out of ten Americans support having the right to sue HMOs, even if it means a $1–$10 increase in premiums per month, according to a poll commissioned by the American Psychological Association and reported in USA Today in June 1998.29
How can the ERISA loophole be closed? By legislative action.
Congress has the power to end ERISA's preemption of state consumer protection laws and states can specifically skirt the ERISA loophole and hold HMOs accountable for their decisions by creating a new "corporate negligence" law for HMOs, such as the one in Texas.
Most states have "corporate practice of medicine" laws that say corporations cannot practice medicine. That is how HMOs claim in court that they don't practice medicine, only provide coverage. Yet HMOs do deny treatment and overturn doctors' decisions. HMOs do dictate limits on medical treatments and care. New state laws, like the one in Texas, could require that HMOs be held accountable for reckless health care decisions.
The return to state laws is particularly needed because under state common law, HMOs, like other corporations, must act with good faith and obey the covenant of fair dealing. But until Congress and state legislatures act, patients will continue to be at the mercy of HMOs and insurers.
For every year of delay, ERISA casualties mount.
Certain medical malpractice cases, unlike bad faith cases, can survive ERISA challenges if the patient can prove that the HMO had knowledge of repeated negligence or was involved "vicariously" in the quality-of-care violation. This would include negligence in running a substandard hospital or contracting with incompetent doctors. It would also include HMOs that indemnified the doctors it employed against a lawsuit, as Kaiser does. Where state law permits, these patient claims are often pushed into mandatory binding arbitration. In these secret proceedings, controlled by private lawyers and retired judges who depend on repeat business from the HMOs, cases are screened from the open forum of public opinion. Forced arbitration is costly, unfair, and conceals quality-of-care violations.
Most patients do not even realize they have signed away their constitutional right to a jury trial in their HMO enrollment agreement. They only find out after becoming sick or injured when they try to go to court.
How have HMOs skirted the courts and required patients to submit to binding arbitration? Where state laws allow, most HMOs and managed care plans require the consumer to give up their right to sue in cases of malpractice or in disputes over quality of care as a condition of coverage.
Arbitrations are private. Decisions and evidence presented are never published. Repeated violations of quality-of-care standards are thus hidden from public view. Since no precedent is set, the next victim must start from scratch in making her case against the HMO.
It gets worse. While many patients are in a race against time for treatment, the arbitration system is frequently lengthy and sometimes deliberately drawn out by HMO attorneys.30
Kaiser doctors misdiagnosed Wilfredo Engalla's lung cancer as colds and allergies. By the time he was diagnosed properly five years later, the cancer was terminal. Engalla's family filed an arbitration claim against Kaiser for medical malpractice and, after waiting more than six months for an arbitration hearing, charged Kaiser with deliberately stalling to reduce any damages.31 By intentionally stalling, Kaiser could avoid liability after Wilfredo's death, as the dead can collect no compensation for their pain and suffering.
The case, ultimately heard before the California Supreme Court, became a national example of how HMOs can and will delay when able. Ironically, because the case went to court rather than arbitration, court-ordered data showed the systemic nature of the delays at Kaiser and the fact that Kaiser arbitration is more prolonged and costly than court cases.
Kaiser's service contract with its members promised an arbitrator would be appointed within two months. Pursuant to a court order, Kaiser's own statistician Michael Sullivan produced data regarding delays in Kaiser's arbitration system:
Ruling in the Engalla case, a conservative California Supreme Court found, "There is evidence that Kaiser established a self-administered arbitration system in which delay for its own benefit and convenience was an inherent part, despite express and implied contractual representations to the contrary."34
The six to one ruling held that if a patient can show that an HMO unreasonably delayed arbitration when it promised otherwise, it is essentially fraud, and the patient or next of kin can seek justice in court. The long-term problem remains, as Kaiser can simply rewrite its service contract to specify a longer period of time until arbitration must begin to avoid future liability.
According to the Engalla's oldest daughter, 28 year-old Aina Engalla Konold, "My dad had hoped to have his day in court. Kaiser knew he was dying. He was their patient and he was on oxygen when they took his deposition. But Kaiser only stalled and made us wait until after my father had died. He never got to tell his story or see the result of his case."
Patricia Engalla, 21, commented: "My father was always so responsible. He believed everything they told him. How was he to know?"
The HMOs promised binding arbitration would be more expeditious and less costly. Evidence suggests that, as part of the HMO strategy, the promises have failed on both accounts.
Arbitration is usually more costly than a trial and consumers cannot recover their legal costs, while the awards made by arbitrators are generally 20–50% lower than awards made by jurors. For instance, Linda Ross, whose mother died of a misdiagnosed and untreated pulmonary embolism in a Kaiser hospital in Fontana, spent nearly $22,000 in legal fees over the course of three years. When the case was finally heard, Ross was awarded only $150,000, significantly less than what a jury likely would have awarded, even though the arbitrators unanimously agreed on Kaiser's liability.35
Litigation costs, of course, mount during a prolonged waiting period to reach arbitration. In addition, the costs of arbitration are exponentially greater than a case that goes to trial. Filing fees for superior court litigants are $183. In the American Arbitration Association system, filing fees range from $500 to $5,000. Arbitrators generally charge $100–$400 per hour,36 whereas court costs amount to approximately $350 per day, according to one witness at a recent state hearing on the matter.
Due to the prolonged proceedings, arbitrations have become a cottage industry for retired judges and lawyers. The Los Angeles Times reports, "Even a part-time arbitrator can earn close to $200,000 in annual fees, according to those familiar with the system."37
The system also appears less than impartial. Arbitrators who rule against health plans and award substantial damages to the patient rarely find themselves asked to arbitrate future disputes, giving them a strong financial self-interest in securing favorable settlements for health plans.38
If patients survive ERISA's draconian restrictions, they are too often stuck in arbitration. In Adrian Broughton's case (Chapter Two), a California Appeals Court allowed the unfair business practice lawsuit despite the family's arbitration agreement with CIGNA. The Court found that because the claim against the HMO was that a door-to-door marketer fraudulently induced the patient's mother into joining the HMO, the mother was not bound by the arbitration clause. But Broughton was the exception, not the rule. (The HMO has appealed the decision and the California Supreme Court has agreed to hear the appeal.)
In response to the growing backlash against mandatory arbitration caused by HMO abuses of the process, the American Arbitration Association changed policy in 1998. Following the Engalla decision, the nation's largest and most powerful association of arbitrators decided not to conduct any further forced HMO arbitrations.39 In a joint statement with the American Bar Association and American Medical Association, it condemned the forum of arbitration for health disputes.
Unfortunately, the system refuses to die, as new arbitrators are hired to replace those who bow out over ethical concerns.
It is clear that the managed care industry uses arbitration not for expedient justice, but as a means to gain the upper hand over those who challenge them.
Patients should not have to sign their seventh amendment right to trial away when they sign up for an HMO. Until all states pass laws preserving patients' right to trial, however, the playing field of justice is dramatically tilted against the injured patient and in favor of the HMO corporation.
The tragic story of two year-old Steven Olsen, whose brain injury went untreated because of a hospital's refusal to administer a CT scan, which in turn led to cerebral palsy and blindness, was recounted in Chapter Three. The injustice does not end with Steven living in a world of darkness. His hospital and doctors were sued for medical malpractice. The jury found that his treatment was below the community's standard of care, and for his life of pain and suffering awarded him $7 million. But unfortunately for Steven, his parents, and even the jury, a California state law puts a cap on such awards, and a judge slashed it to $250,000.40
"The jury can not be told about the arbitrary cap for Steven's compensation, which the doctors and insurers lobbied state legislators to become California law," said San Diego resident Kathy Olsen, Steven's mom. "The judge was forced to reduce the decision made by a jury of our peers. I know that this law cannot be changed for my son Steven. But I do feel that if another child is injured like [the way he was], that he should get what he is rightfully due."
The jurors found out that their verdict had been reduced not by a judge but by reading about it in the newspaper. Jury foreman Thomas Kearns responded, writing a letter to the San Diego Union Tribune:
I served as foreman of the Steven Olsen jury ("Capping the cost of suffering," P A1, May 10, 1995). During some three weeks, we heard evidence and testimony in this tragic case. We viewed a video of Steven, age 2, shortly before the accident.Similar caps to the one in California have been enacted across the nation at the behest of lobbyists working for the medical-insurance industry. Pioneered in California, campaigns have foisted these restrictions on the public in twenty states.42 The campaigns have succeeded only by perpetuating fictions, which were used again by House Republicans under the banner of "HMO reform" in 1998 to pass legislation aimed at eroding the same patients' rights to fully recover in malpractice cases.
Two decades ago, skyrocketing premiums for medical malpractice insurance whipsawed California doctors and hospitals into supporting anti-consumer restrictions on the rights of patients. The most grotesque component of the 1975 Medical Injury Compensation Reform Act MICRA was the $250,000 cap on compensation for pain and suffering which, because of inflation, now limits victims of malpractice no matter how egregious to the equivalent of $50,180 in compensation in 1976 dollars.
It might seem logical that a cap on awards such as MICRA, when implemented, would lower health care costs. In fact, medical malpractice costs are less than 1% percent of all health care costs an insignificant component. Despite California's cap, medical malpractice premiums are a slightly higher percentage of health care costs in the state (0.86%) than in the nation (0.69%). The cap has not reduced overall health care costs, which are among the highest in the nation, and has not reduced per capita medical malpractice premiums below the national average.43
MICRA did, however, boost the profits of the malpractice insurance companies.44 In 1995, for every dollar of premiums malpractice insurers received, they paid malpractice victims a pitiful forty-one-and-a-half cents on average. Nearly the same amount forty cents of every dollar was paid to the insurance companies' own defense lawyers. MICRA has proven another windfall for the insurance industry.
Caps on pain and suffering reduce the deterrent effect of the medical malpractice liability system and the quality of health care. Dr. Troyen Brennan, co-author of the landmark study of medical malpractice by the Harvard School of Public Health, reports that restricting injured patients' rights to recover damages will reduce deterrence and increase the rates of medical injury. According to Harvard experts, 80,000 patients already die each year in hospitals alone due to medical negligence.45
MICRA's low limits on how much victims recover, as well as on how much victims can pay for legal representation, have driven consumer attorneys away from taking malpractice cases. The few court victories, like the Olsen's, ultimately have great reductions on hard-won compensation.
HMO medicine may have put the doctors' lobby in conflict with the HMO and insurance industry. But when it comes to limits on malpractice victims' rights, the doctors' lobby long ago made an alliance with the insurance industry to limit physicians' liability for medical negligence.
Harry Jordan is a classic illustration of the failure of such laws.
Jordan, a Long Beach California man, was hospitalized to have a cancerous kidney removed. But the surgeon took out his healthy kidney instead. A jury awarded Jordan more than $5 million, yet the judge was required to reduce the verdict to $250,000 due to California's cap on "non-economic" damages plus a mere $6,000 in "economic costs". Jordan, who lived on 10% kidney function for more than a decade after the case, could no longer work, though the jury (which could not be notified about the "non-economic" cap) did not take this into account. Jordan's court costs not including attorney fees amounted to more than $400,000. His medical bills, which were frequently denied by insurers, totaled more than $500,000. He paid, until his death in the late 1990s, $1,700 per month in health insurance.
In the age of mismanaged care, the stakes are different. It is not just a slip of a scalpel that can be subject to MICRA-like limits, but the mismanagement of HMOs.
Responding to demands across the country for ERISA reform, the industry has promoted this poison pill of damage caps on HMO liability.
When multi-billion dollar corporations enjoy liability caps, the financial calculus for HMOs deciding whether to grant treatment will more often than not weigh on the side of denial. Under market-oriented medicine, only the threat of costly lawsuits will force Wall Street-driven HMOs to provide timely and adequate treatment.
Even the American Medical Association, which long fought for medical malpractice damage caps on physician liability, now recognizes this. In 1998, the organization took a courageous stand, insisting that the caps not apply to HMOs if the ERISA shield is lifted. The AMA also asked that the legislation federalizing the caps on doctors not be attached to the ERISA reform bill, knowing it was a poison pill.
Physician and Texas State Senator David Sibley wrote: "In Texas, civil liability for damages of a ‘physician or health care provider' is limited…akin to California's MICRA. For the purposes of SB 386 [the Texas HMO liability law], however, we determined that managed care companies should not be treated any differently than other profit-making business enterprises that are subject to liability under traditional tort laws.
"Because HMOs and managed care companies (including doctor-run medical groups) often apply a financial filter to determine treatment denials, their liability must not be artificially limited by a compensation cap. Such restricted responsibility would mitigate against approval of the most expensive treatment, such as cancer care. Under the Texas law, physician-run medical groups are considered managed care entities and do not fall under the compensation cap applicable to sole practitioners."46
The few California cases where MICRA has applied to HMO patients lucky enough to find a medical negligence cause of action reveal disastrous public policy outcomes. Some of the patients whose stories are told in previous chapters went on to be victimized again by MICRA's draconian limits.
The costs of these restrictions are born unequally by patients throughout society. Consider the following:
The case shows that courts too often do not distinguish between an administrative decision based on financial consideration and an instance of medical negligence caused by incompetence. Medical malpractice compensation caps let HMOs and hospitals escape accountability by putting money ahead of good medicine.
There are more restrictions. Maybe the most frequent assault on a consumer's legal rights is capping a consumer attorney's contingency fees but not defense attorney fees. The legacy of MICRA, where a consumer's attorney's contingency fee is capped, demonstrates how patients are denied appropriate representation. Consider these implications:
All other industries face the scrutiny of state common law liability. If HMOs and managed care insurers cannot withstand such scrutiny, why should they deserve to exist?