Lawsuits Break Health Plans Grip: Are Reforms Imminent?

March 1, 1999

Lately, things have not been going well for some of the nation's largest health plans. Lawsuits have managed care organizations around the country worried that their cost-cutting measures may end up penalizing them with liabilities in the hundreds of millions of dollars.

Lately, things have not been going well for some of the nation's largest health plans. A jury decision on Jan. 20, 1999, against Aetna U.S. Healthcare of California Inc., a subsidiary of the Hartford, Conn.-based Aetna Inc., broke a record with a verdict totaling more than $120 million after the jury found that Aetna had breached its contract with a subscriber. On the same day in a separate case, the U.S. Supreme Court ruled that federal law does not preempt managed care giant Humana Inc., headquartered in Louisville, Ky., from being sued under the Racketeer Influenced and Corrupt Organizations Act (RICO) for allegedly defrauding its policyholders.

Taken together, these cases have managed care organizations around the country worried that their cost-cutting measures may end up penalizing them with liabilities in the hundreds of millions of dollars. Congress is set to consider competing bills covering health care reform, and these recent rulings could have a profound impact on the outcome of that debate. According to some experts, however, the increasing willingness of the courts to come to consumers' rescue could strengthen the position of health plans as they put lobbying pressure on both federal and state legislators.

In Goodrich v Aetna, a San Bernardino, Calif., jury awarded the widow of David Goodrich $4.5 million in compensatory damages after determining that the managed care company had failed to provide the treatments which would have prolonged his life. He died in 1995 after battling a rare form of stomach cancer for several years.

Then, in a second decision that shocked Aetna and the health care industry, the jury awarded another $116 million in punitive damages, determining that under California law the company acted in bad faith. Goodrich, a county prosecutor, had been a government employee, a class of individuals not subject to the federal laws preempting these types of suits, making this case one of the few nationwide that ever gets heard by a jury.

"I think the meaning of this verdict is that people are just plain mad," said Michael Bidart, the Claremont, Calif.-based attorney for Teresa Goodrich, in a Jan. 21, 1999, Los Angeles Times article. "The HMOs are corporate executives practicing medicine where profit is the motive, not the best interest of the patients."

Meanwhile, 3,000 miles away in Washington, D.C., the nation's high court ruled in Humana Inc., et al., Petitioners v Mary Forsyth et al. (No. 97-303) that a federal law-the McCarran Ferguson Act (15 U.S.C. 1011 et. seq.)-which prohibits interference with state regulation of the insurance industry did not prevent a suit under RICO. According to a federal district court complaint filed by a group of Humana Health Insurance of Nevada Inc. policyholders, Humana entered into a concealed agreement with a local hospital under which it received discounted rates for hospital rooms. Patients, however, were billed at the undiscounted rates. Benefits were calculated by Humana based on the allegedly inflated charges. As a result, according to the plaintiffs, rather than the 20% co-payment required by the Humana policy, beneficiaries contributed amounts as high as 65%.

Humana claimed that since Nevada had its own laws regulating insurance, including penalties for their violation, applying the Racketeer Influenced and Corrupt Organizations Act statute would "invalidate, impair, or supersede" state legislation, an outcome prohibited by McCarran-Ferguson. Justice Ruth Bader Ginsburg rejected that argument, saying that the RICO complaint existed "in harmony" with state regulation.

"When federal law does not directly conflict with state regulation, and when application of the federal law would not frustrate any declared state policy or interfere with a state's administrative regime, the McCarran-Ferguson Act does not preclude its application," Ginsburg wrote. The decision opens the way for the RICO complaint against Humana to proceed. If found liable for violating the statute, the managed care organization could be tagged with treble damages.

Both Aetna and Humana have decried the rulings, denying that they engaged in any illegal or unethical conduct. At the same time, the publicly traded managed care organizations insisted that the conduct involved occurred long ago, before they instituted reforms to address what may have been problems in the past.

"This case [Goodrich] involved policies and procedures in place several years ago in Aetna Health Plans," the company said in a prepared statement. "Aetna U.S. Healthcare...has several programs in place to assist our members in getting access to high quality care." For instance, 10 days before the jury returned its verdict, Aetna U.S. Healthcare announced the implementation of an external review process for all of its HMO members. This process permits an independent physician review of requests for care.

A Humana spokesperson responded to the Supreme Court ruling saying, "this lawsuit was filed in Nevada in March 1989, and involves a dispute over the discounted billing arrangements in the period [from] 1984 to 1989 between Humana's health plan and [a] hospital in Las Vegas, and Humana health plan members' coinsurance obligations...[W]ith specific respect to its insurance billing practices, Humana's conduct has always been consistent with industry and government practices."

With both state and federal legislatures stalled, for the most part, over implementation of health care system reforms, the courts are increasingly the only avenue left for patients hurt by the system, says Mark Hiepler, a Thousand Oaks, Calif.-based attorney. Hiepler rose to national prominence after winning an $89 million verdict against Health Net in 1993. This record verdict in a case involving the cancer death of his sister, Nelene Fox, was unmatched until the decision in Goodrich in January 1999.

These types of court decisions against managed care organizations send an important message to policy-makers who must gauge the outrage among their constituents. However, Hiepler conceded that large jury verdicts can also play into the hands of health care companies who are richer and more adept at affecting legislation than are patient or physician groups. It depends on whether "the industry's spin is the one that is heard the most, because [large jury verdicts are] what the insurance industry will use as an example," Hiepler told Psychiatric Times in a recent interview.

After testifying before Congress and state legislatures, and after serving a stint on a special health care reform task force convened by former California governor Pete Wilson, Hiepler has despaired that anything other than the sting of lawsuits will motivate change. "You're dealing with corporations now that play for quarterly profits, and they own [both houses of the legislature in California], the federal legislature, and so there's really very little that can be accomplished legislatively in this area," Hiepler said. "So jury verdicts send the strongest and boldest message, but unfortunately [the insurance industry] uses an occasional excellent punitive damage verdict to say that if held accountable...there'd be other awards."

During this legislative session in Congress, two hotly contested issues will be enterprise liability (a term used to describe laws that would hold HMOs accountable for coverage decisions that affect patient care and outcomes) and Employee Retirement Income and Security Act of 1974 (ERISA) reform that would enable states to enact or implement their own regulations. Large jury verdicts, according to Hiepler, could give legislators the excuse to vote against change, when in fact their reticence to enact legislative changes is motivated by huge health industry political contributions.

Already, the fallout is apparent as health insurance industry lobbyists line up to protect existing legal immunities. Richard Coorsh, a spokesperson for the Health Insurance Association of America in Washington, D.C., called the Goodrich verdict "a sad example of a jackpot-by-jury mentality, which will only hurt consumers in the long run." Saying that subjecting health care plans to punitive damage claims, or eliminating the ERISA protections afforded in most cases, would increase premiums and result in more uninsured individuals, Coorsh added that the industry estimated that more than 1.5 million people could be affected.

Bidart, in an interview with Psychiatric Times after the Goodrich verdict, called that argument fallacious. He denied that reforming the system would open the floodgates of litigation or increase costs. "These kinds of cases would never, ever come about but for the gross conduct on the part of the insurance carriers," he said. "If they had accountability, and if the remedies existed, there's no way that they would behave this way."

Bidart conceded that the managed care industry could use the potential for large judgments to thwart reform, but he downplayed the impact of verdicts like that in the Goodrich case. "By and large the verdict is being viewed as a sign of the abuses, of people being fed up with [them], and of it being a time for change."