Health Plan Liability in the Age of Managed Care

By Conrad, Robert J., Jr.; Seiter, Patrick D. | Defense Counsel Journal, April 1995 | Go to article overview

Health Plan Liability in the Age of Managed Care


Conrad, Robert J., Jr., Seiter, Patrick D., Defense Counsel Journal


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.

A. 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. …

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