HMO Liability: Legal Barriers Are Finally Breaking Down

January 1, 1999

For decades, physicians have railed against the inequities of malpractice laws, lobbying for statutory changes that would insulate them from injustices, both real and perceived. In an ironic twist, extending tort liability has become the latest weapon against managed care companies and the medical directors who often make utilization review determinations. As a result, managed care companies are now rushing to embrace the once scorned external review and independent appeals processes in a last-ditch effort to stave off reforms requiring them to justify health care decisions in front of judges and juries.

For decades, physicians have railed against the inequities of malpractice laws, lobbying for statutory changes that would insulate them from injustices, both real and perceived. In an ironic twist, extending tort liability has become the latest weapon against managed care companies and the medical directors who often make utilization review determinations. As a result, managed care companies are now rushing to embrace the once scorned external review and independent appeals processes in a last-ditch effort to stave off reforms requiring them to justify health care decisions in front of judges and juries.

In Texas, the HMOs failed to see the handwriting on the wall. They have been unable to overturn Senate Bill 386, a measure that went into effect last year allowing HMOs to be held liable for malpractice if they made negligent benefits decisions affecting care. In September, proponents of the law won their first round when a federal judge ruled that most of the provisions did not violate federal pre-emptions under the Employee Retirement Income Security Act of 1974 (ERISA) (Corporate Health Insurance Inc., et al. v The Texas Dept. of Insurance, et al., U.S.D.C., Southern District of Texas, Houston Division, Civil Action No. H-97-2072).

A month later, the family of Joseph W. Plocica, a 68-year-old Fort Worth man who committed suicide after a serious bout with depression, became the first plaintiffs to sue under Senate Bill 386, claiming that a managed care organization and its officials had negligently forced his discharge from a psychiatric hospital by denying benefits. According to the complaint filed in Kathryn A. Plocica, et al. v NYLCare of Texas Inc., et al., Tarrant County District Court, 141st Judicial Dist., No. 141-175780-98, Plocica's HMO refused to authorize additional hospitalization despite the protests of his treating psychiatrist, Harold Eudaly Jr., M.D. After being discharged in July of 1998, Plocica is said to have ingested a half-gallon of antifreeze in a suicide attempt that eventually lead to his death.

That the first case under the new Texas law involved a psychiatric patient comes as no surprise to Bernard Gerber, M.D., a psychiatrist with Quest HealthCare in Houston and chair of the managed care committee of the Texas Society of Psychiatric Physicians (TSPP). The circumstances alleged in the Plocica lawsuit, Gerber said, mirror a common refrain from psychiatrists in Texas who often struggle to obtain care for their patients from recalcitrant utilization reviewers.

"It's not surprising that the first lawsuit would be a psychiatric case. From our vantage point, psychiatric care has always been the stepchild in terms of benefits and coverage. The patients have always been discriminated against," Gerber said. "Managed care has continued that trend."

The new law puts medical directors and other physician reviewers in a dilemma, Gerber said, because, despite their denials, they have taken on the role of making medical treatment decisions. With HMOs now accountable for negligent determinations, managed care doctors have moved toward giving more credence to treating physicians, which is a positive development.

Gerber concedes an expansion of the malpractice laws to increase and improve the quality of care received by the mentally ill and other individuals is an ironic development. Both the TSPP and the Texas Medical Association (TMA) lobbied heavily for the bill. Ultimately, the "less Draconian micro management of psychiatric care" the law encourages, Gerber said, should mean broader access and quality without significantly affecting overall cost.

"When the TMA argued for the legislation, it was a matter of fairness," said Gerber, who also serves on its committee for Psychiatric Health Care and Mental Retardation. "If someone is making these kinds of decisions they need to be as equally accountable as anybody else making medical decisions."

Rocky Wilcox, J.D., the TMA's general counsel, said that the new law has not set off internecine struggles between treating and reviewing physicians. Under prior state appellate decisions, physicians making what amounted to medical decisions for HMOs could be held liable for malpractice. What the new law does is bring the managed care company itself into the fray, making it accountable for benefits decisions that deny care.

Wilcox is surprised that more cases haven't been filed to date, saying that the law is new and still under appeal to higher federal courts. That cases brought under the law could be dismissed several years down the line if the law is not upheld by appellate courts may be causing plaintiffs' attorneys to stick with more traditional malpractice theories, Wilcox said. Nevertheless, he agreed that the expansion of malpractice liability was meant to level the playing field among those parties making medical decisions, and to assure that tort law was "consistently applied."

That sentiment is spreading throughout the country. In October, for instance, a Connecticut federal judge ruled, in what is being hailed as a landmark decision, that an HMO should not be shielded by ERISA from claims that it negligently denied psychiatric care to 16-year-old Nitai Moscovitch, who later committed suicide. Meanwhile, federal officials at the Labor Department have filed a friend-of-the-court brief with the U.S. Supreme Court in Unum Life Insurance Co. of America v Ward, urging the high court to allow individuals to sue under state insurance laws when care is improperly denied.

Last August it appeared that efforts to reform the managed care industry in California were doomed, but following the recent election of Democrat Gray Davis as governor, and with the prospect that Democratic majorities in the legislature will likely resurrect HMO liability measures, the managed care industry is scrambling. In December, a group of HMOs, all members of the California Association of Health Plans (CAHP), agreed to voluntarily implement independent appeals processes to handle disputed claims.

According to CAHP officials, the program should mitigate concerns that managed care organizations place financial interests over issues of patient care. "This effort is aimed at addressing the single greatest fear that people have-that in some critical circumstance they may be denied care that they may need," said Walter Zelman, CAHP's president, in a December 1998 Los Angeles Times interview. "And this is aimed at addressing that fear."

Meanwhile, the fear the managed care organizations may actually be addressing is the prospect that they have offered too little too late. Legislators in California and other states, along with the federal government, are expected to take up the issue of HMO liability again this year, and with widening public support for greater accountability it is increasingly likely that new regulations will limit managed care's ability to deny care without some legal exposure. (At press time, we learned the Plocica lawsuit has been moved from state to federal court [Plocica v. NYLCare of Texas, Inc., N.D., Tex. No4-98CV1021-E, 11/18/98]. NYLCare has argued that the patient was covered under a Medicare plan that did not fall within the reach of the state law, according to an article in Health Care Policy (Dec. 7). Plocica attorney George Parker Young said they will seek to convince the federal court to remand the case back to the state court-Ed.)