HMOs and Bad Faith: A New Danger

By Muldowney, Timothy J.; Smith, Todd G. | Defense Counsel Journal, October 1998 | Go to article overview

HMOs and Bad Faith: A New Danger


Muldowney, Timothy J., Smith, Todd G., Defense Counsel Journal


HMOs and Bad Faith: A New Danger

Writing the June newsletter of the Casualty Insurance Committee, Timothy J. Muldowney and Todd G. Smith of Madison's LaFollette & Sinykin analyze a new Wisconsin decision and its consequences

Conflicts of interests can be the source of claims against many types of professionals. They also lie at the heart of most bad faith claims. Bad faith claimants contend that an insurer's financial interests in refusing to resolve a claim are directly at odds with their own interests. Courts, in turn, have agreed that such conflicts are a fundamental concern in many bad faith claims.

It should come as no surprise that managed care entities are now facing claims of bad faith for their decisions concerning treatment and that those claims are also being based on the conflict between cost containment goals of the managed care entity on the one hand and the right to proper patient care on the other. An obvious conflict between the interests of the managed care entity and its subscribers exists when the entity must decide, in the first instance, what care must be provided under the contracts with its subscribers.

They're not new

Claims for bad faith against managed care entities are not new. See, e.g., Williams v. HealthAmerica, 535 N.E.2d 717 (Ohio App. 1987), and Rederscheid v. Comprecare Inc., 667 P.2d 766 (Colo.App. 1983). Late last year, the Wisconsin Supreme Court faced for the first time the issue of whether an HMO could be liable for bad faith because of its refusal to provide out-of-network treatment for a teenager suffering from an eating disorder. McEvoy v. Group Health Cooperative of Eau Claire, 570 N.W.2d 397 (Wis. 1997).

In McEvoy, one of only a few appellate decisions involving HMO liability for bad faith, the court applied its well-recognized common law test for bad faith claims, a test established two decades ago in Anderson v. Continental Insurance Co., 281 N.W.2d 368 (Wis. 1978), and followed in many other jurisdictions that allow common law claims for bad faith against insurers. McEvoy also provides one of the more detailed discussions yet of an HMO's duty to its subscribers when performing its dual functions of medical service provider and benefits administrator.

Although the decision may have limited applicability for many managed care entities because of the prospect of preemption under ERISA, see Pilot Life Insurance Co. v. Dedeaux, 481 U.S. 41 (1987) (common law cause of action for bad faith preempted under ERISA), it still provides a helpful framework to analyze the responsibilities of managed care entities in the bad faith arena.

Minor dependent's claim

McEvoy involved a claim by a minor dependent of a government employee who was a member of Group Health Cooperative of Eau Claire (GHC), a Wisconsin staff model HMO. It provided services to network participants through clinics in Eau Claire and allowed referrals to out-of-network providers when unable to offer necessary care through its own providers.

By its subscriber contract, GHC would cover up to 10 weeks of in-patient psychological care and would also pay for out-ofnetwork care within those contract limits. However, staff physician referrals to outof-network providers had to be approved by GHC's medical director. He, in turn, was responsible for GHC's cost containment program and medical management.

In 1991, 13-year-old Angela McEvoy began experiencing anorexia nervosa, an eating disorder. Her treating physician at GHC recommended psychological in-patient treatment at the University of Minnesota Hospital, an out-of-network facility. GHC's medical director initially approved two weeks of treatment, subsequently approved four additional weeks, but later, against clear recommendations of treating physicians, refused to approve the final four weeks of treatment benefits under the subscriber contract.

When it terminated the out-patient treatment, GHC offered Angela placement in its out-patient group therapy for compulsive overeaters. …

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