Physician Liability in a Managed Care Environment

Note: In a recent development occurring since this article was submitted, the Texas state assembly and senate agreed on legislation that would allow consumers to sue their health maintenance organizations for medical malpractice. Effective September 1997, the bill enables consumers to collect awards if they can show that their illnesses were made worse by managed care companies' decisions to deny, delay, or reduce treatments. As described in this article, similar measures are pending in other states and are likely to be raised in many more

ABSTRACT

Physicians must be the patient's honest advocate. In these days of escalating managed health care, however, is this statement becoming an oxymoron? Since the early 1970s, the federal government has embraced the concept of health maintenance organizations (HMOs) as a strategy to deliver health care. Prepaid health coverage plans provide medical services to a relatively large population at a fixed rate. They started with approximately 3.6 million beneficiaries. In 1995, nearly 150 million Americans were enrolled in HMOs or other managed care entities. The growing dominance of managed care as the primary structure for the delivery of health care is undeniable. The battles of choice, access, and quality of health care are now being waged in corporate boardrooms of managed care conglomerates. Physicians and hospitals, as well as HMOs, might face lawsuits should any of these factors be compromised, because when a patient receives inadequate or negligent medical care, the battle moves to the courtroom. This article focuses on the liability of a physician in a managed care setting when things go wrong for a patient.

Key words: Managed care; legal liability; malpractice; negligence; ERISA; informed consent; denial of benefits; denial of treatment; gag rules.

INTRODUCTION

Probably every physician in America has seen the Norman Rockwell painting that first appeared on a 1929 cover of the Saturday Evening Post: the kindly grayhaired family physician, stethoscope in hand, leans over the doll of a ponytailed little girl. The painting depicts an era to which many physicians can relate but which many lament represents days gone by. No longer can physicians make house calls, with a family relying on a doctor's opinion and advice for every ailment, every ache and pain, perhaps even what to have for supper.

Under the law existing at the time of the Rockwell painting, physicians generally enjoyed wide clinical discretion concerning treatment recommendations. During the next six decades, the health care industry slowly shifted its center of focus to the local hospital, in which hundreds of medical personnel work as teams to make the sick well. Currently, with many hospitals now losing money and desperate for patients, health maintenance organizations (HMOs) have capitalized on that vulnerability. Managed care is taking the health care industry on yet another turn, shaping the practice of medicine in this country, and, to a degree, shaping the way patients view physicians.

In this new era of merging medical practices, consolidating hospital beds, and insurance companies banding together to form managed care empires, the tide is turning toward an insurer-dominated health care industry. Driven by a cost-cutting frenzy, the forces of managed care now seem to be determining the parameters of medical care. Large and powerful corporations are controlling which hospitals and other health care providers can serve a community and which services will be provided. They also dictate hospital rates, treatment policies, physicians' compensation and working hours, and even individual health care decisions. Such consequential actions cannot go unpoliced or unregulated. Much has been written on the potential liability of these companies. Often, however, the physician is named in such a lawsuit, with a plaintiff relying on various theories.

With practice guidelines, benefit denials, and prescribed courses of treatment and hospital stays, the physician oftentimes remains liable should a bad result occur. The physician is caught in the middle of liability lawsuits. Some theories under which physicians might find themselves liable are outlined below.

LIABILITY OF GATEKEEPER AFTER REFERRAL

Many managed care organizations function under a gatekeeper concept, whereby the general or primary care practitioners control a patient's access to specialists. The primary care physician's responsibility as gatekeeper is to review and authorize patients' access to specialty, emergency, and hospital care and to diagnostic tests. Many courts have held that the gatekeeper might face liability exposure to the HMO patient, not only for wrong decisions in denying or delaying treatment, but also for referral to a specialist when a medical condition is improperly treated.

Driven by a cost-cutting frenzy, the forces of managed care now seem to be determining the parameters of medical care.

The dissent in Cox v. Kingsboro Medical Group, 214 A.D.2d 150, 632 N.Y.S.2d 139 (1995), aff'd, 88 N.Y.2d 904, 646 N.Y.S.2d 659 (1996), raised many troubling questions when the court held that a question of fact did not even exist in determining liability of a specialist's and general practitioner's treatment of a patient for the same condition:

¥ What are the customs and practices that have developed between the two medical groups over their years of association? Did the gatekeeper receive any fees from the HMO while this patient was in the care of the specialist?

¥ Do these customs and practices result from contractual or fee arrangements through the managed care organization?

¥ What were the terms of any written or oral contract with the physicians' groups and the managed care organization?

¥ By what procedure would the patient be returned to the general practitioner?

¥ How was the patient affected by the two medical groups' relations with each other?

¥ Could the patient have requested a second opinion from a different specialist or general practitioner under the plan?

¥ How closely related were the specialist and the general practitioner?

¥ What percentage of the general practitioner's patients were referred to this specialist? Some other questions the courts will ask in making this determination are:

¥ Did the gatekeeper remain involved in the care of the patient after referred to the specialist?

How much time passed since the general practitioner's last examination or treatment with the patient?

¥ Did the gatekeeper retain authority to approve of the patient's care, including testing?

¥ Did the gatekeeper maintain records for the patient, even if they were test results ordered by the specialist?

¥ Did the standard of care require that the gatekeeper follow up or intervene in the care of the patient?

The more closely tied a primary care physician and specialist, the more likely a court will impute liability to one provider for the negligence of another in a referral case. The New York court in Cox v. Kingsboro Medical Group realized that the answer to a liability question today is highly complex:

We recognize that the very nature of medicine as it is practiced today pursuant to insurance plans, managed care, and a multitude of differing arrangements, inevitably produces a degree of dependence and interrelationship between primary care physicians and specialists. We do not imply that such dependency, regardless of degree or character, should necessarily justify the application of the doctrine of constructive participation in continuing care, imputing the negligence of one to the other and thereby extending the Statute of Limitations. It is obvious that such a result could egregiously increase the exposure of the medical profession to enormous and often unwarranted liability, at a high cost to both the medical profession and ultimately the public. On the other hand, we also recognize that the changes in medical care also inevitably bring with them an increase in the proliferation of forms and other red tape as well as the potential for the delay of patient care and the increased possibility for failure of communication, where the patient may fall through the cracks in the very manner alleged to have occurred in this case.

The more closely tied a primary care physician and specialist, the more likely a court will impute liability to one provider for the negligence of another in a referral case.

The continuous treatment theory dates back to at least 1923, when fee-for-service plans were the rule. A determination of liability is a more complicated question under managed care schemes, but the conclusion generally seems to be that courts will examine the facts of each relationship to make a determination of liability. No hard and fast rules exist in today's medical care environment; rather, the courts will consider a number of factors.

DENIAL OF BENEFITS

If a patient is being denied benefits, a court must first determine who denied them. A gatekeeper physician might face a bad faith or breach of fiduciary duty action if he or she is the physician who made the erroneous decision. Even if the physician blames the HMO and states that the test or benefit was not extended because the HMO failed to approve it, such denial still could amount to a physician's negligence. Wickline v. CA, 192 Cal.App.3d 1630, 239 Cal. Rptr. 810 (1986), represents the first time a plaintiff tried to tie a payer of health care services into the chain of medical malpractice. There, the plaintiff alleged that premature discharge from the hospital, as dictated by her medical insurance policy, caused her injury. Although her physician disagreed with the policy, the physician did not appeal the decision of the program reviewers. The court held that: the physician who complies without protest with the limitations imposed by a third party payer, when his medical judgment dictates otherwise, cannot avoid his ultimate responsibility for his patient's care. He cannot point to the health care payer as the liability scapegoat when the consequences of his own determinative medical decisions go sour.

A gatekeeper physician might face a bad faith or breach of fiduciary duty action if he or she is the physician who made the erroneous decision.

Denial of treatment cases generally become a battle of medical experts in a courtroom. Most experts would agree that the primary duty of care is that which a reasonable physician in the community would have provided, regardless of the HMO's policy concerning payment for services. Medical necessity decisions fall into a gray area when deciding whether certain care is needed. If reasonable physicians differ on the need, the physician may not be in violation of professional standards. Therefore, a malpractice liability lawsuit might not stand when a physician failed to pursue care for a patient.

Some physicians who are sued individually file cross-claims against the HMO for its part in the decision and, thereby, run the risk of being terminated by the managed care company as an approved provider. In 1995, some 20 New York anesthesiologists filed a federal lawsuit against Hartford-based Aetna Health Plans, charging that the insurance company's refusal to negotiate the terms of its managed care contract could endanger the quality of the medical care the physicians provided. The physicians had asked Aetna to include a new appeal procedure to resolve any dispute over coverage. The lawsuit, thought to be the first time that quality of care was at issue in managed care litigation, really concerns the question of whether a managed care company can effectively supersede professional independence.

Injured plaintiffs also can pursue a tort of intentional interference with the physician-patient relationship as HMOs inject themselves more into the physician's treatment decisions, another relatively new area of liability. A bill pending in the Missouri legislature would allow actions to proceed against HMOs for allegedly making determinations that influence physician's medical decisions. A law recently took effect in New Jersey that allows physicians to be in charge of quality assurance in coverage decisions.

Newspaper headlines describe women who attempt to undergo costly bone marrow transplantations in a last-chance effort to fight metastatic breast cancer. When appealing for health insurance for this therapy, however, many patients are denied coverage, which generally makes the treatment financially infeasible for the individual. Some managed care officials on utilization review committees label the treatment "unproved," "experimental," "unpromising," i.e., loopholes to avoid coverage. Physicians, then, are often forced to spend many hours on the telephone or writing endless letters to try to get the treatment approved for coverage. Worse still, though, are the physicians who refuse to get involved or who are prevented from disclosing this option to their patient for fear of being dropped by the health care network.

Some managed care officials on utilization review committees label the treatment "unproved," "experimental," "unpromising," i.e., loopholes to avoid coverage.

FINANCIALLY DRIVEN MEDICAL DECISIONS

More and more patients are including their physicians as defendants in a cause of action when the decision to forego treatment is driven for purely financial reasons. Physicians are often confronted with making life-and-death health care decisions with dictates from the insurer. What this might mean is that a physician's medical opinion is being second-guessed for economic reasons by insurance adjusters, midlevel corporate executives, or non-medical entrepreneurs who are watching out for the insurance company's bottom line before approving non-emergency treatment. Several plaintiffs attempted to recover in medical negligence actions, arguing that they were harmed as a proximate result of their health insurance plans' use of financial incentive arrangements to compel the physician to limit services in a negligent manner. In an unreported case, Bush v. Dake, No. 86-25767 (Mich. Cir. Ct., Saginaw County, decided April 27, 1989), the court refused to dismiss a lawsuit and stated that the issue of whether a financial incentive plan contributed to the physician's negligence was a triable issue of fact. More recently, in Gross v. Prudential Health Care Plan, No. CJ-9474267 (Okla.Cty.Ct., Oct. 1, 1996), the plaintiff's allegations that his physicians and PruCare committed fraud by failing to disclose a minimal profit sharing arrangement was allowed to be determined by a jury. The plaintiff also alleged a breach of the implied contractual duties of good faith and fair dealing when the HMO and physician failed to refer the patient to a specialist.

Courts also might consider the issue of a denial of benefits under the law of economic abandonment. Under the contractual or statutory terms of the new forms of limited coverage, courts have held that a patient has no right to insist on free treatment that is deemed unnecessary by the physician or by practice guidelines. Thus, in several cases, courts have rejected abandonment charges despite the presence of economics in the physician's motivation.

In Surgical Consultants, P.C. v. Ball, 447 N.W.2d 676 (Iowa Ct. App. 1989), the court, over dissent, found that the physician did not breach his contract with the patient and that he was not liable for negligence or abandonment for his refusal to provide follow-up care to his patient. He had terminated the physician-patient relationship after performing gastric bypass surgery ("stomach stapling") when his patient did not pay the $1,299 balance of her medical bill. The court found that the testimony of nurse's aides was insufficient to offer a jury evidence of the prevailing standard of care for the surgical profession and whether the physician had met that standard here. The court also found that a claim of abandonment requires more than a mere termination of a physician-patient relationship. There must be evidence that the following events occurred:

¥ the physician terminated the relationship at a critical stage of the patient's treatment, and

¥ the termination was done without reason or sufficient notice to enable the patient to procure another physician, and

¥ the patient is injured as a result of this conduct.

Such was not the case here.

MEDICAL MALPRACTICE

Physicians might be liable for malpractice when negligent, substandard medical care is provided in a physician's referrals to specialists or for refusal to approve medical tests or admittance to a hospital. In this new managed care environment, however, patients are attempting to become more empowered and are suing their HMO directly or vicariously for medical malpractice.

A growing number of federal and state courts have allowed such suits to stand against an HMO for the acts of its health care professionals. Some courts use a control test to examine the degree of control an HMO exercises over a physician's practice to evaluate whether an independent contractor status should be ignored and vicarious liability applied. In Schleier v. Kaiser Foundation Health Plan, 876 F.2d 174 (D.C.Cir. 1989), the court held an HMO liable for the malpractice of a cardiologist to whom the patient had been referred by the primary care physician. The court examined several factors of the HMO-physician relationship in deciding whether the requisite degree of control existed:

¥ the selection and engagement of the specialist,

¥ the payment of wages,

¥ the power to discharge,

¥ the power to control the specialist's conduct, and

¥ whether the work was part of the regular business of the employer.

Even an individual practice association, in which the HMO merely holds out the independent contractor physicians as employees or agents, might be held liable, as the court found in McClellan v. Health Maintenance Organization of PA, 413 Pa.Super 128, 604 A.2d 1053 (1992). Courts will examine whether a patient justifiably relied upon the conduct of the HMO in creating an ostensible agency relationship through an appearance of authority. Such vicarious liability on the part of the HMO provides, at the very least, an incentive for the company to select the most competent physicians.

THE ERISA FACTOR

In 1974, Congress passed the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. [sct] 1001-1461, a comprehensive statute designed to promote the interests of employees and their beneficiaries in the employee benefit plans. ERISA sets minimum uniform standards for employee benefit plans and provides for uniform remedies in the enforcement of the plans. ERISA encompasses plans, funds, or programs established or maintained by an employer or an employee organization for the purpose of providing medical, surgical, hospital care, sickness, accident, disability, death, unemployment, vacation and severance benefits. In many instances, an HMO is sponsored by an employer through a qualified benefit plan. The HMO then contracts with the employer to provide health care benefits through the plan offered to employees.

Employees have sued stating various claims under aspects of the benefit plans. ERISA, however, explicitly supersedes or preempts certain state law claims to the extent that they relate to employee benefit plans not exempt from federal regulation. Although the courts are split in this country, the emerging rule seems to be that ERISA preemption applies only to claims that an HMO failed to authorize treatment or the administration of the health plan, as opposed to a claim that a physician committed malpractice. The reason underlying the distinction between breach of contract based on the policy and negligence claims for ERISA preemption purposes is twofold. First, the courts recognized that the preemptive effect of ERISA will be circumscribed in those cases in which a state law relating to ERISA in "too tenuous, remote or peripheral a manner to warrant a finding that [it] relates to the plan," according to the Supreme Court of the United States in Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 100 n. 21 (1983). Secondly, if ERISA were interpreted to preempt all claims that affect an HMO, these companies would enjoy a unique status in the law. HMOs, in effect, would lead a "charmed existence that was never contemplated by Congress," as one court put it in United Wire v. Morristown Memorial Hospital, 995 F.2d 1179, 1193 (3d Cir.), cert. Denied, 510 U.S. 944 (1993). The preemption doctrine, though, leads some injured patients to turn to the physician as the primary target for litigation when something goes wrong.

Nearly three-quarters of those who receive health insurance through their employers are covered by some type of managed care plan, increased from 51% just 2 years ago. The proportion of private employees enrolled in managed care plans grew from 5% in 1980 to 55% in 1992. ERISA "supersedes any and all state laws insofar as they may now or hereafter relate to any employee benefit plan" (29 U.S.C. [sct] 1144(a)). Significantly, ERISA exempts governmental employee benefit plans from its coverage. For ERISA's purposes, a governmental plan is defined as a plan established or maintained for its employees by the government of the United States, by the government of any state or political subdivisions thereof, or any agency or instrumentality of any of the foregoing (29 U.S.C. [sct] 1002(32)). Thus, when a governmental employee covered by a governmental plan is injured, the ERISA preemption does not apply.

Even an individual practice association, in which the HMO merely holds out the independent contractor physicians as employees or agents, might be held liable. . .

More and more exceptions, however, to the ERISA preemption rule are being carved out by the courts in an attempt to limit its sweeping coverage. In Haas v. Group Health Plan, Inc., 875 F. Supp. 544 (S.D. Ill. 1994), the court declared that a medical malpractice claim based on an HMO physician's substandard treatment of a patient is not preempted by ERISA. Similarly, in Dearmas v. Av-Med, Inc., 865 F. Supp. 816 (S.D. Fla. 1994), the court held that ERISA does not preempt a claim alleging that the HMO is vicariously liable for its treating physicians' actions.

More recently, in Ouellette v. The Christ Hospital, 942 F. Supp. 1160 (S.D. Ohio, 1996), the HMO had a policy requiring patients who had their ovaries removed to be discharged from the hospital within 2 days. The patient said she was discharged in accordance with this policy even though she was suffering from severe pain and fever and had blood in her urine. She sued the HMO on the basis that the 2-day policy caused the physicians to commit malpractice by discharging her too early. Although the HMO claimed that ERISA preempted the lawsuit, the court disagreed, saying the plaintiff wasn't "challenging the amount of benefits but the quality of the service she received." Such a claim, the court said, "is separate and distinct from a claim for benefits under a plan."

Perhaps one of the most perilous aspects of managed care is the insurance company's gag rules, which prevent practitioners from discussing with their patients what the managed care plan is doing, the patient's treatment options, or the reasons for the decisions made.

INFORMED CONSENT

The doctrine requiring a physician to obtain a patient's informed consent before undertaking treatment first appeared circa 1957. The values that underlie that doctrine, however, took shape hundreds of years ago. The managed care scheme takes this idea a step further. Perhaps one of the most perilous aspects of the managed care scheme is the insurance company's gag rules, which prevent practitioners from discussing with their patients what the managed care plan is doing, the patient's treatment options, or the reasons for the decisions made. President Bill Clinton criticized such clauses as an unwarranted interference in the physician-patient relationship.

Managed care plan subscribers are initially provided with a pamphlet outlining their medical benefits, but nowhere does it appear that doctors may be financially hurt if they refer the patient to a specialist to undertake further testing. Under some plans, commonly referred to as a "capitated plan," the general practitioner as gatekeeper receives a set fee each month for every subscriber assigned to the practice, regardless of how much or how little treatment, if any, is provided. Typically, the physicians' groups hold back a percentage of this revenue to cover their operating costs and produce a profit. They, in turn, pay their primary care physicians a set capitation fee, and they then negotiate capitation contracts with an array of specialists. Every time, however, that a capitated physician performs a service or admits a patient to the hospital, it cuts into his or her income. This system even encourages physicians to make medical decisions or perform duties beyond their expertise to avoid payment for referrals to specialists. If the physician spends less than the capitated rate, the difference is pocketed. If more is spent, the physician must swallow those losses or try to recoup them through reinsurance policies. The legal problem becomes entangled when the physician receives bonuses for medical decisions that enhance the HMO's bottom line or a withholding of payment for those that detrimentally impact the HMO.

Physicians should resist the attempt to join forces with the insurer. They should try to protect the sanctity of patient choice, as well as the physician-patient relationship, whenever possible...

The patient is totally unaware of these financial incentives or risks to the physician. This situation puts the physician and patient in a precarious conflicting position. When the physician is on such a fixed income, every time a patient is treated, the patient becomes a liability, not an asset. Worse still, the patient is not aware (and sometimes not allowed to be made aware) of the physician's dual role of caregiver and cost manager when the physician is considering medical alternatives. If HMOs are not required to inform new subscribers of the financial arrangements with physicians at the time the subscribers join the plan, then physicians should be required to disclose any financial incentive arrangements to patients at the initiation of the physician-patient relationship. At this stage, the patient perhaps should have the option of changing health insurance plans. At the very least, the patient will be made aware of the financial context in which a physician might make a treatment recommendation.

A movement apparently is afoot to enact legislation banning all gag rules. In February 1997, the U.S. Department of Health and Human Services, at the direction of President Clinton, sent a letter out to all state Medicaid directors informing them that gag rules are prohibited for Medicaid HMOs. Clinton also expressed his support of H.R. 586, the Ganske-Markey Bill, introduced in Congress at approximately this same time, which proposes to ban gag rules for all managed care organizations throughout the country. Several bills have been sponsored in the Senate, including Senator Paul Wellsteon's (D-MN) Patient Protection Act (S. 346), which would prevent HMOs from dismissing physicians without cause. A similar bill was proposed in the House by Rep. Pete Stark (D-CA). Furthermore, during the past 2 years alone, at least 25 states enacted or introduced laws regulating gag rule provisions in medical care policies.

Also, when legislatures did not act, the courts did. Courts are developing an informed consent doctrine to embrace the requirement that physicians disclose each decision to decline even potentially beneficial treatment options when based on economically motivated or other reasons. The leading case on this point came out of the California Supreme Court, which held that the concept of informed consent is broad enough to encompass whether a physician has an economic interest that might affect the physician's professional judgment. Moore v. Regents of the University of CA, 793 P.2d 479, 483, 51 Cal.2d 120 (Cal. 1990).

In Shea v. Esensten, 107 F.3d 625 (8th Cir. 1997), the court found that ERISA required the HMO to disclose to its enrollees the compensation agreement between the HMO and its physicians. Patrick Shea died of heart failure after his primary care physician refused to refer him to a cardiologist, despite Shea's symptoms. Under Shea's health plan, a primary care physician's fees were reduced if he or she made too many referrals. The court found that the widow stated a claim against the HMO for breaching a fiduciary obligation that it had to disclose all material facts affecting her husband's medical interests and that any financial "incentives must be disclosed and the failure to do so is a breach of ERISA's fiduciary duties."

CONCLUSION

Growing up with Norman Rockwell's "Doctor and Doll" is a powerful image, yet how distant it now might seem as the business of health care approaches a new millennium. Medical malpractice litigation has evolved significantly during the past two decades. This evolution was the result of a perceived health care crisis that stimulated increased proactive consumerism in the health care arena. HMOs are touted as attractive because they purport to offer health care at a lower cost to the consumer. These purported savings, however, if they even exist, come at the expense of the subscribers' freedom to choose their health care provider and the providers' freedom to choose treatment methods.

Physicians should resist the attempt to join forces with the insurer. They should try to protect the sanctity of patient choice, as well as the physician-patient relationship, whenever possible by:

¥ working to abolish HMO-imposed gag rules,

¥ working with state legislatures to eliminate an HMO's ability to avoid civil liability for bad outcomes resulting from care that is denied,

¥ trying to lobby the managed care outlet for medical physicians to be in charge of quality assurance in making coverage decisions,

¥ requiring the managed care plans to disclose to all potential enrollees how much of the premium dollar is actually spent on medical care, and

¥ getting involved in the Congressional efforts to achieve stricter regulation of HMOs.

The prospect of physician actions against HMOs seems to be the next battleground to establish the contours of managed care liability, particularly when physicians are terminated as approved providers because they overused the plans. This last frontier of managed care litigation carries neither ERISA preemption nor caps on punitive damages.

In Harper v. Healthsource New Hampshire, 674 A.2d 962 (N.H. 1996), the state supreme court ruled that the refusal to reappoint a surgeon to a panel after ten years with the HMO could violate public policy. The surgeon was permitted to challenge the HMO decision on the ground that his termination violated the implied covenant of good faith and fair dealing traditionally read into contracts. On the other hand, a federal court in Texas found that five physicians who had been de-selected from a health care provider network had no private cause of action under Texas law, according to Texas Medical Association v. Aetna Life Insurance Company, 80 F.3d 153 (5th Cir. 1996). The court held that only the Texas Department of Insurance had the authority to bring an action to enforce Texas' rules governing insurance companies. This case was posited more as a deprivation of due process rights rather than as a wrongful termination suit.

Undoubtedly, business and medicine are inextricably tangled in creating social questions that legislatures attempt to solve. When solutions for individuals are not immediately forthcoming, however, the legal process will continue to step in to determine what is just. It seems that, just as the medical field is customizing health care to fit its needs, so, too, the legal field will create HMO-custom standards of care to govern lawsuits brought by injured patients under the emerging health care schemes.

Reference

1. Inglehart JK. Health policy report, health issues, the president, and the 105th Congress. N Engl J Med 1997; 336:671.