BREAKING DOWN THE WALL (ERISA): THEORIES OF RECOVERY AGAINST HMO’S

By: Richard C. Miller
rmiller@monseesmayer.com

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The increase in enrollment in health maintenance organizations (HMOs) in the 80’s and 90’s has lead to an increase in problems and complaints from patients. HMO’s have become a healthy target for plaintiffs in medical malpractice suits. As health care litigation increases so do the theories of recovery against the HMO’s. The solid wall known as ERISA is being demolished brick by brick. To avoid ERISA preemption, Plaintiffs are coming up with new theories and expanding old ones—and judges are listening. Large verdicts have been awarded under these new theories, which has caused some to liken health care litigation to “the tobacco litigation of the turn of the century.” See Second Opinions on HMOs, Michael Higgins, 85-APR A.B.A.J. 60 (1999).

This article will mention some of the new theories of recovery that are being used by plaintiffs against HMOs and discuss a few of the key cases using these theories. “HMO” is used generically in this article to describe all forms of healthcare plans that may be subject to ERISA.

A. Fiduciary Duty

This is the standard cause of action contemplated by the ERISA statute in which plaintiff must show: (1) that the defendants are plan fiduciaries; (2) that the defendants breached their fiduciary duties; and (3) that a cognizable loss resulted. See 29 U.S.C. Section 1104(a). A fiduciary breaches its duty of care when it acts to benefit its own interests over the interests of the patient. A fiduciary must act “with an eye single to the interests of the participants and beneficiaries.” See Donovan v. Bierwirth, 680 F.2d 263 (2 nd Cir. 1982). Perhaps the most significant case is now before the U.S. Supreme Court on the theory of whether physician incentives breach the HMO’s fiduciary duty to its members under ERISA. In Herdrich v. Pegram, 154 F.3d 362 (7 th Cir. 1998); cert.granted –U.S.– (1999). An action for breach of fiduciary duty was brought against the HMO because it created incentive plans for the physicians based on reduced costs to the HMO. “The plan dictated that the very same HMO administrators vested with the authority to determine whether health care claims would be paid, and the type, nature, and duration of care to be given, were those physicians who became eligible to receive year-end bonuses as a result of cost-savings.” Id at 372. The bonuses were calculated between total plan costs and revenues. This form of bonus gave the physicians an incentive to limit treatment to keep HMO costs down which in turn would give them a larger bonus. The court stated that although incentives in general will not automatically give rise to a breach of fiduciary duty, here the incentive rose to the level where “the fiduciary trust between plan participants and plan fiduciaries no longer exists.” Id at 373.

B. Corporate Negligence

“This theory imposes direct liability against [an HMO] who fails to uphold the proper standard of care owed to the patient. This theory creates a non-delegable duty which is owed directly to the patient. Under corporation liability, an [HMO] owes a duty of care to its patients to maintain safe and adequate facilities and equipment; to select and retain competent physicians; to oversee all persons who practice medicine; and to formulate, adopt and enforce adequate rules and policies to ensure quality care for its patients.” See HMO Liability Presents Risks to Physicians, Anna M. Bamonte, esq., Physician’s News Digest 1999. Plaintiffs need to show that HMO’s are, in effect, practicing medicine based on the fact that they actively manage patient care, and influence physicians’ medical treatment decisions and that the injuries Patients suffered were directly caused by the negligence of the HMO.

A leading case that successfully used this theory is: Shannon v. McNulty, 718 A.2d 828 (Super. Ct. Penn. 1998) (HMO that provided telephone service for emergency care staffed by triage nurses had duty to oversee that the dispensing of advice by those nurses would be performed in medically reasonable manner, and was subject to corporate liability for breach of that duty.) The court relied on Thompson v. Nason Hosp., 591 A.2d 703 (Pa. 1991) which created a duty on the part of a hospital directly to its patients, by passing the need to rely on the negligence of an intermediary. TheThompson court stated four general areas of corporate liability: (1) A duty to use reasonable care in the maintenance of safe and adequate facilities and equipment; (2) A duty to select and retain only competent physicians; (3) A duty to oversee all persons who practice medicine within its walls as to patient care; (4) A duty to formulate, adopt and enforce adequate rules and policies to ensure quality care for patients. Id at 831. After applying the test set out in Thompson, the court found that when an HMO provides health care services, rather than just paying for those services, the HMO has a non-delegable duty to render the medical decisions affecting a subscriber’s care in a medically reasonable manner.

Other Cases: Harrell v. Total Health Care, 781 S.W.2d 58 (Mo. 1989) (en banc) (this claim was not successful but is a good illustration of the application of the doctrine.); McClellan v. Health Maint. Org. of Penn., 604 A.2d 1053 (Pa. Super. Ct. 1992); Wickline v. California, 228 Cal. Rptr. 661 (Cal. Ct. App. 1986) (the court stated third party payors of health care services can be held legally accountable when medically inappropriate decisions result from defects in the design or implementation of cost containment mechanisms.).

C. Health Plan Negligence

Under this theory the Plaintiff claims that the HMO was negligent in providing contractually guaranteed medical benefits in such a dilatory fashion that the patient was injured. This type of claim may not be preempted by ERISA based on the fact that they are intertwined with the provision of safe medical care and there was no intent of the part of Congress to preempt state laws concerning the regulation of medical care. In addition courts have stated that “negligence laws have only a tenuous, remote, or peripheral connection with [ERISA] covered plans, as in the cases with many laws of general applicability.” See New York State Conf. Of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645 (1995).

Other Cases: Dukes v. U.S. Healthcare, Inc., 57 F.3d 350 (3 rd Cir. 1995);Pappas v. Asbel, 724 A.2d 889 (Pa. 1998); Plocica v. Nylcare of Texas, Inc, 43 F.Supp.2d 658 (N.D.Texas 1999).

D. Vicarious Liability: Respondeat Superior

The structure of the HMO will determine whether a plaintiff can use this theory.

In order for an HMO to be liable the plaintiff must show an employer-employee relationship or a closely analogous agency relationship between the HMO and the physician. Some factors the court may look at to determine whether the HMO should have respondeat superior liability are:

  1. The degree of control exercised by the HMO over the physician;
  2. The method of payment by the HMO to the physician;
  3. Ownership of the instrumentalities used to deliver care;
  4. Contractual language used between the HMO and the patient; and
  5. Contractual language used between the HMO and the physician.

The HMO is most vulnerable when the physician is a direct employee as in the staff model HMO. When the physician is paid by the HMO, it usually has direct control over his activities and is more likely to be responsible for them. With respect to the issue of ownership of the instrumentalities, the answer is usually less clear. “The offices of the member physicians are typically separate from the HMO offices. The HMO will have less control over physicians when the physicians are utilizing their own facilities, medical equipment, ancillary personnel, and their own supplies. It is less likely to appear to a patient that the physician is an employee of the HMO.” See Emerging Theories of Liability in the Managed Care Industry, Diana Bearden, 47 Baylor L. Rev. 285 (1995).

Other Cases: Sloan v. Metropolitan Health Council, 516 N.E.2d 1104 (Ind. Ct. App. 1987) (when the usual requisites of agency or an employer-employee relationship exist, a corporation [HMO] may be held vicariously liable for malpractice for the acts of its employee-physicians.); Dunn v. Praiss, 606 A.2d 862 (N.J. Super. Ct. App. Div. 1992) (HMO is vicariously liable for physician when physician is acting either actually or apparently as the agent of the HMO. Some of the key indications of the agency relationship were that neither the physician or his group was paid on a fee-for-service basis; rather they were paid on a per capita basis, based upon the number of subscribers to the HMO; they were not free to accept or reject a particular patient; and they examined the decedent at the HMO’s office.); Shannon v. McNulty, 718 A.2d 828 (Sup. Ct. Penn. 1998) (In order for a plaintiff to state a cause of action, the complaint must: contain factual allegations sufficient to establish the legal requirements that the HMO has undertaken (1) to render services to the plaintiff subscriber, (2) which the HMO should recognize as necessary for the protection of its subscribers, (3) that the HMO failed to exercise reasonable care in selecting, retaining, and/or evaluating the plaintiff’s primary care physician, and (4) that as a result of the HMO’s failure to use such care, the risk of harm to the subscriber was increased.)

E. Vicarious Liability: Ostensible Agency

The Restatement of agency Section 267 states that “ostensible” or “apparent” agency is:

“One who represents that another is his servant or other agent and thereby causes a third person justifiably to rely upon the care or skill of such apparent agent is subject to liability to the third person for harm caused by the lack of care or skill of the one appearing to be a servant or other agent as if he were such.” See Restatement (Second) of Agency Section 267 (1958). In the HMO context, if the patient is led to reasonably believe that the physician is the agent of the HMO and can prove the elements then the HMO may be liable. The key here is not what is actually true but what appears to be true to a reasonable subscriber to the HMO. The elements of ostensible agency set out in Lopez v. Central Plains Regional Hosp., 859 S.W.2d 600 (Tex. App. 1993): a plaintiff must prove (1) they had a reasonable belief in the agent’s authority; (2) the belief must be generated by some holding out by act or neglect of the HMO; and (3) the plaintiff must justifiably rely on the representation of authority. Id at 605.

Some things to look for are whether the patient is limited in choosing his/her physician. Are there several physicians to choose from or only a very limited selection? Does the subscriber have a list of physicians to choose from or is one assigned to the subscriber? The more choices the subscriber has the less likely it appears to be an agency relationship. Also, if the HMO has clearly set out some sort of disclaimer in the materials the subscriber receives then this can shield the HMO from the appearance of an agency relationship.

Other Cases: Negron v. Patel, 6 F.Supp.2d 366 (E.D. Penn. 1998) (The court stated this cause of action would be preempted by ERISA if it were based on their rights under the contract, e.g. denial of a promised benefit. But since they were claiming they received a promised service from the provider who performed that service negligently the claim was not preempted.); Boyd v. Albert Einstein Medical Center, 547 A.2d 1229 (Pa. Super. Ct. 1988) (the court stated two factors to be important: (1) whether the patients will look to the institution, rather than the individual physician for care; and (2) whether the institution “holds out” the physician as its employee.); McClellan v. Health Maintenance Org. of Penn., 604 A.2d 1053 (Pa. Super. Ct. 1992); Schleier v. Kaiser Found. Health Plan, 876 F.2d 174 (D.C.Cir. 1989)

F. Americans with Disabilities Act

“The Americans with Disabilities Act protects disabled individuals against discrimination in employment and access to public accommodations, including access to goods and services. Thus, although there may be no ERISA violation in a given plan decision, the ADA might require a different outcome.” See Hot ERISA Topics, DeBofsky, 88 Ill.B.J. 27 (2000).

Other Cases: Zamora-Quezada v. Health Texas Medical Group, No. Civ. A. SA-97-CA-726 (W.D.Tex. Nov. 30, 1998) (denying motion to dismiss judge stated plaintiffs’ affidavits raised an issue of fact as to whether the plan discriminated against the disabled.); Doe v. Mutual of Omaha Ins. Co., 179 F3d 557 (7 th Cir.) (in AIDS medical coverage case, court held that the ADA only requires that a benefit be provided; the benefit amount could not be regulated even if below the actual cost of treatment.); Bragdon v. Abbott, 118 S.Ct. 2196 (1988) (court ruled the inability to have children is a protected disability under the ADA and it may be impermissible to deny infertility treatment.); Bielicki v. City of Chicago, 1997 WL 260595 (N.D.Ill. 1997) (court stated it might be a violation of ERISA to exclude fertility treatment.);Henderson v. Bodine Aluminum, Inc., 70 F.3d 958 (8 th Cir. 1995) (ADA was used to challenge an insurer’s approval of high dosage chemotherapy for some conditions while rejecting it for other forms of cancer.)

G. RICO

In Humana, Inc. v. Forsyth, 525 U.S. 299 (1999), the Supreme Court ruled that a RICO claim could be brought against an insurer that was overcharging its insureds on medical co-payments. As a result of this decision, plaintiffs have a way to recover more than just lost benefits because of the trebling component of federal and state RICO laws. However, this case dealt with billing issues rather than the standard of care provided by the HMO and any allegations of malpractice. There is a lot of opportunity for litigation in the billing practice area from failure to pass along discounts to its members that the HMO has negotiated with providers to improper attempts to subrogate of otherwise recover benefits in violation of state law. But this is a topic for another paper and presentation.

H. Other Theories

Other theories have been tried with varying degrees of success in different jurisdictions. These include breach of contract, breach of warranty and bad faith actions under state common law. Some cases of note are: Pulvers v. Kaiser Foundation Health Plan, 160 Cal Rptr. 392 (Cal.App. 1979);Wisenbarger v. Gonzales Warm Springs Rehabilitation Hospital, 789 SW2d 688 (Tex.App. 1990); McClellan v. Health Maintenance Organization of Pennsylvania, 604 A.2d 1053 (PA.Super. Ct.), appeal denied, 616 A.2d 985 (PA. 1992); Williams v. Health America, 535 NE 2d 717 (Ohio App. 1987).

I. Healthcare Legislation

Congress is currently debating whether the “Patients’ Bill of Rights” should contain the fundamental right to sue your HMO if it is negligent. While this issue is mired in election year politics, several states have passed laws regulating healthcare plans starting with Texas, followed closely by Missouri. Texas’ statute gives patients the right to sue, compared to merely requiring certain types or levels of benefits, hence the most significant litigation is coming out of the state. See Corporate Heart Insurance v. Texas Dept. of Insurance, 12 F.Supp. 2d 597 (S.D.Tex 1998) and Plocica v. Nylcare of Texas, Inc., 43 F.Supp.2d 658 (N.D.Tex 1999).