Avoiding Litigation over Managed Health Care Decisions

By Melbinger, Michael S.; Kalish, Gerald I. | Risk Management, October 1994 | Go to article overview

Avoiding Litigation over Managed Health Care Decisions


Melbinger, Michael S., Kalish, Gerald I., Risk Management


Managed health care and utilization review are essential strategies for employers seeking to control escalating health care costs. The failure to exercise appropriate care in implementing and operating these programs, however, can lead to liability and litigation. This fact was established by the recent Fox vs. Health Net of California case, in which a California jury awarded nearly $90 million to the estate of a deceased participant of a health maintenance organization (HMO) that had denied coverage of a bonemarrow transplant.

A decade ago, managed care was practically nonexistent, and litigation over health and welfare benefit plans did not exist at all. As medical care costs skyrocketed, employers embraced managed care to help control costs. Yet while managed care was successful in reducing costs, it also resulted in coverage restrictions, limitations under group health plans and denials of benefits. As the dollars at stake in health-plan claims increased, lawyers inevitably became involved, whether on behalf of plan participants, beneficiaries or employers. In fact, litigation over managed health care decisions has now eclipsed litigation over pension benefits.

Clearly, the risk of managed health care litigation is an ever-present danger for corporations that use managed care or utilization review. In addition to the Health Net case, hundreds of other cases have appeared in recent years. Consequently, the risk manager for a company that uses managed care or utilization review in its health care plans must quantify this risk and develop an approach to remediate it or insure against it.

The term "managed care" is broadly applicable to several cost control/cost management practices, including utilization review and management, direct negotiation with health care providers over fees and practices, and the organization of health care providers into managed care organizations such as HMOS, preferred provider organizations (PPOs) and point-of-service plans. Utilization management and review is a particularly popular form of managed care, and includes programs such as peer review and concurrent review, preadmission certification, second surgical opinions and case management. Utilization review programs typically involve an outside firm retained by the sponsor of a group health plan to evaluate medical services and, recommend appropriate, cost-efficient alternatives.

In order to avoid litigation and liability over managed care programs, employers should take several steps. First, it is important to update the legal document that embodies the company,s group health plan. Employers should scrutinize restrictions on the availability and level of coverage and procedures for claiming benefits, and ensure that all communications to employees and procedures for administering the plan agree with the plan's actual language and design. Secondly, employers should establish internal procedures for selecting and monitoring the performance of provider networks, and keep accurate documentation of the selection and review process. Employers must also accurately communicate to employees the procedures for obtaining medical care and the types and definitions of covered medical procedures in addition to encouraging employee input about perceived problems.

ERISA Implications

Group health plans are subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA). Under ERISA, a fiduciary of a plan is required to discharge fiduciary duties with respect to a plan (1) solely in the interests of plan participants and beneficiaries, (2) for the exclusive purpose of providing benefits to them and defraying reasonable expenses of administering the plan, (3) with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, and (4) in accordance with the documents and instruments governing the plan. …

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