Managed Care Plan Liability: An Analysis Of Texas And Missouri Legislation

Patricia A. Butler, JD, DrPH

November 1997

Background

As increasing numbers of Americans receive health care coverage through managed care plans, public attention has been focused on some of the problems consumers have with such plans. Although most consumers report satisfaction with their plans, some express concern that plans’ financial incentives limit access to needed services. For example, some consumers are not referred to specialists, some needed specialists are not part of managed care plan networks, and some chronically ill people must seek a referral from a primary care physician even though a specialist is more appropriate to manage their care. The prevalence of these problems is unknown, but they are taken seriously by state and federal policy makers who see a solution in the courts. By allowing plan participants to sue their health plans, as they can currently sue their physicians, lawmakers hope managed care plans will become more responsive to consumers. Health plans, on the other hand, oppose such laws on the belief they will drive up costs. Two states, Texas and Missouri, recently passed legislation permitting managed care plan participants to sue plans when they are injured by a denial of health coverage.

Current Health Care Liability Laws and Proposals

Current laws in most states generally permit consumers to sue managed care plans for actions that injure them. However, in many states, managed care plans can effectively avoid such lawsuits under “corporate practice of medicine” laws, which prohibit organizations not owned by physicians from employing physicians. These laws have been interpreted by many courts as barring suits against HMOs and other health plans on the ground that HMOs and other corporations cannot be sued for medical malpractice if they are prohibited from “practicing medicine.”

The new Missouri and Texas laws both eliminate this defense to a suit against managed care plans, but Texas goes further in two important ways:

• First, the Texas law creates an explicit new legal claim that managed care plan participants may use as the basis of a lawsuit: the assertion that a plan failed to use “ordinary care” in denying or delaying payment for care recommended by a physician or other provider. The result of the Texas law is similar to court decisions in other states, but Texas is the first state to define a specific standard of liability for managed care plan decisions in legislation.
• Second, the Texas law creates “independent review organizations” to which managed care plan enrollees can appeal disputes over plan coverage.

Missouri’s new law removes the corporate practice of medicine defense to suits against health plans but does not create an explicit claim, leaving it to the state’s courts to decide what kinds of plan misconduct may result in liability.

Proposals to expand or clarify the liability of managed care plans have been considered in several other states, such as California and New York. Federal liability legislation has also been introduced, for example, in bills sponsored by Representative Norwood, Senator D’Amato, and Representative Stark.

Objectives of Texas and Missouri Laws

Both the Missouri and Texas managed care plan liability laws are part of comprehensive initiatives to regulate managed care plans, and both were developed through the work of bipartisan interim legislative committees. An alliance of state medical societies and consumer groups in each state supported the liability legislation to achieve several objectives:

• Health plan accountability. Sponsors and supporters in both states asserted that managed care plans’ decisions to deny or delay coverage influence physicians’ willingness to provide treatment. When these decisions injure plan participants, plans should be held accountable.
• Equitable treatment. Bill supporters saw no justification for treating managed care plans differently from other businesses, which can be held responsible for conduct that injures customers.
• Injury prevention as well as compensation. Supporters hope that the threat of litigation can encourage more appropriate managed care decisions about what is “medically necessary.” The new external review procedure in Texas was also intended to avoid litigation and provide quicker resolution of participant disputes with their plans.
• Consistency with tort reform. Legislators who had supported previous state tort reforms (e.g., limits on jury awards, attorneys’ fees, and time to file lawsuits) felt it appropriate to impose responsibility proportionate to the actual conduct of organizations and individuals. Consequently, they argued that health plans should be held responsible for decisions that affect physicians’ medical care decisions.

These bills were opposed in both states by health insurers and managed care plans, as well as some business representatives, who raised several concerns about liability expansion. For example, bill opponents argued that managed care plan premiums would increase substantially because the threat of liability would force plans to cover inappropriate care and because of the potential that juries might make large financial awards because they view managed care plans as having “deep pockets.” Without cost studies to support these estimates, however, this argument was not persuasive. Health plans in both states also asserted that plan participants can already sue under various legal theories, although court opinions in both states seemed to limit the rights of plan participants to sue their plans.

Despite the opposition of powerful insurance and business organizations, liability laws passed in Texas and Missouri due to an apparent combination of compelling public interest in the issue and political forces. The initiatives were bipartisan, sponsored by highly respected legislators, and supported by a unique coalition of provider and consumer groups. Perhaps most important, through hearings held by interim study committees and legislative committees in both states during the regular session, legislators learned the deep public frustration with managed care plans, which they believed required action.

Policy Issues Raised by Managed Care Liability Proposals

Imposing liability on managed care plans raises several challenging policy questions.

• The appropriateness of negligence remedies. A question underlying the debates over managed care plan liability is whether the process of seeking financial awards for negligence (misconduct) under American tort law is the best way to remedy participants’ disputes over plan coverage. Would other mechanisms like arbitration or the Texas external review procedure be quicker and more cost-effective?
• Cost impacts. The potential impact of expanded managed care plan liability on costs of medical care has not been evaluated and deserves further examination.
• ERISA. States face challenges to expanding consumer remedies for managed care plan decisions because of ERISA, the Employee Retirement Income Security Act of 1974. ERISA governs private sector health and other employee benefit plans. The Supreme Court has interpreted a provision in ERISA that preempts state laws affecting employee benefit plans to mean that health plan participants are prohibited from suing their plans in state court when they are injured by plan coverage denials or delays. ERISA provides very limited remedies for such injuries. Only Congress can change this interpretation of federal law.

The Missouri managed care plan liability law is unlikely in itself to draw an ERISA challenge because it merely removes a defense to lawsuits against managed care plans. By creating a new source of liability for negligent coverage denials and delays, however, the Texas law raises ERISA issues and has already been contested in federal court by Aetna.

Summary and Key Findings

Public and private health care purchasers are attracted to managed care because of its potential to avoid wasteful care, improve coordination of care, and hold an organization accountable for personal health status improvements. But managed care raises the dilemma of how to cut fat (inappropriate care) without cutting muscle (appropriate care). Purchasers need to appreciate the potential for managed care plans to harm consumers through care coverage denials as well as consumers’ fears that their doctors can no longer act in their patients’ best interests. On the other hand, consumers need to understand the costs they incur when higher health coverage premiums from marginally effective or excessive care reduce the money their employers have to pay wages.

To summarize, the report’s key findings are:

• The successful passage of these liability expansion proposals was due in large measure to the overwhelming tide of popular support for state policy makers to do something about managed care plan coverage denials that were seen as arbitrary and unfair.
• Currently, general legal (“common law”) theories provide state court remedies for managed care plan actions that injure consumers. But in many states, the “corporate practice of medicine” defense may bar suits against managed care plans. Such states at least would need to eliminate this immunity in order to allow plan participants to sue managed care plans, if these lawsuits are considered appropriate policy.
• So far, states have taken two approaches to increase managed care plan liability: 1) repealing the “corporate practice of medicine” defense, leaving to the state’s courts to define how liability can be imposed, and 2) creating an explicit statutory definition of managed care plan liability.
• ERISA, the federal pension law, limits the remedies available to consumers in private sector employee plans to suits to enforce plan terms or recover the cost of the denied benefits. Unlike other types of civil lawsuits against doctors or insurance companies, employee health plan participants cannot sue in state court for lost wages, pain and suffering or punitive damages. Consequently, ERISA may override newly enacted health plan liability laws, and only Congress can amend ERISA.
• In developing a fair way to redress disputes between consumers and their plans, policy makers must balance procedures through which consumers can obtain needed care or compensation for injuries against potential adverse effects of such remedies on the ability of managed care plans to reduce inappropriate care and contain costs.
• A procedure under which plan participants can appeal coverage denial decisions to a review organization outside the plan could offer several advantages. It could provide an appeal mechanism independent of the plan and avoid real and perceived conflicts of interest. It also could offer a way to resolve coverage disputes before harm occurs, averting the need for later lawsuits.

* * *A full copy of the report can be ordered by calling the Kaiser Family Foundation’s publication request line at (800) 656-4KFF and asking for document #1343. A report on The Impact of Managed Care Legislation: An Analysis of Five Legislative Proposals from California is avaialble separately. Return to top

Managed Care Plan Liability: An Analysis Of Texas And Missouri Legislation

The Impact of Managed Care Legislation: An Analysis of Five Legislative Proposals From California

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The Impact of Managed Care Legislation: An Analysis of Five Legislative Proposals from California

Health Policy Economics GroupPrice Waterhouse LLP

November, 1997

Executive Summary

Managed care has grown tremendously in recent years. From 1988 to 1997, at firms with 200 or more employees, the proportion of employees enrolled in HMOs nationwide increased from 18 percent to 33 percent. The presence of managed care varies by state across the country but is particularly strong in California where the proportion of HMO enrollment is more than 50 percent of the private insurance market in several large metropolitan areas. For example, in Sacramento, 92 percent of those with private insurance are enrolled in HMOs; in San Francisco and San Jose, the proportion is more than 68 percent.

As managed care has grown, in California and throughout the country, complaints against managed care plans have also mounted. Patients have raised concerns that managed care plans deny necessary coverage or provide access to mainly lower quality services. Physicians and other providers have expressed concerns that managed care plans may dictate care, monopolize the marketplace, and exclude independent practitioners. As a result, legislation aimed at addressing some of these concerns has been proposed at the federal and state levels.

This report presents results from a study conducted by Price Waterhouse LLP which was commissioned by The Henry J. Kaiser Family Foundation. The purpose of the study was to assess the impact of managed care reform legislation on HMOs and their enrollees. Specifically, the study analyzes five areas of California legislation: insurer liability, use of drug formularies, mental health parity, direct access to obstetric and gynecologic services, and lengths of stay for mastectomy patients. For each of these areas, the paper examines the specifics of the legislative bills in California, the likely impact of the legislation on HMOs by organizational type, and the corresponding effects for consumers.

Measuring the Impact of Managed Care Legislation

For the most part, many of the concerns about managed care plans have arisen because of the nature of the services provided by these plans. Managed care plans offer a lower-cost alternative to traditional, fee-for-service health insurance. Managed care plans are able to keep costs low through the use of various cost-saving strategies. For example, most HMOs limit access to providers by the use of a gatekeeper, usually a primary care physician, who must give prior approval before enrollees receive services from other providers, such as hospitals and medical specialists. Managed care plans also engage in practices of limiting the types of services provided to enrollees. For example, they may deny coverage for diagnostic tests and other procedures that the plan determines not to be medically necessary. They encourage outpatient treatment rather than inpatient care, and, when inpatient treatment is necessary, they encourage short hospital stays. The purpose of much of the recently proposed legislation is to protect consumers from some of the least desirable features of managed care cost-saving practices.

Managed care legislation, like most consumer protection, has positive and negative aspects. On the positive side, most of the proposals are intended to improve access to health care providers and medical services. As an example of managed care legislation, health plans could be required to give enrollees access to any provider that they choose. This would increase access to a variety of providers and have positive benefits for enrollees. On the other hand, this type of legislation might be costly to HMOs and other managed care organizations. If HMOs incur increased costs as a result of legislation, they would likely reduce covered services or increase enrollee premiums and/or out-of-pocket costs. If HMOs increase their rates, or reduce benefits, then some enrollees may decide to enroll in traditional insurance plans. In the extreme, managed care regulation could make managed care noncompetitive with traditional, fee-for-service insurance.

Difference in Impact by Type of HMO. The impact of consumer protection legislation may vary depending on the type of managed care plan. There are four basic types of HMOs:

• Staff model-Physicians practice as employees of the organization, frequently in an office comprised of only HMO staff.
• Group model-The managed care organization pays a physician group a negotiated, per capita rate which the group then distributes among the individual physicians.
• Network model-HMOs contract with two or more group practices and usually pay a fixed monthly fee per enrollee.
• Independent practice/physician association (IPA) model-HMOs contract with individual physicians in independent practice or with associations of independent physicians.

Because the physician and the plan are much more integrated in staff and group model HMOs than in IPA and network model HMOs, staff and group model HMOs are most likely to be able to manage care as well as coordinate and control the behavior of plan physicians. IPA and network model HMOs, on the other hand, are more loosely designed and thus are more limited in the methods by which they can control plan physicians.

For the most part, legislation aimed at reforming managed care seems directed toward HMOs. Although there are forms of managed care plans other than HMOs-such as preferred provider organizations (PPOs) and point-of-service plans (POSs)-that may be impacted by health care legislation, this study primarily focuses on the impact of managed care legislation on HMOs.

ERISA. The impact of state managed care legislation could be limited because of preemptions under the Employee Retirement Income Security Act (ERISA) of 1974. ERISA provides a broad federal preemption of state laws that relate to employee benefit plans. State insurance laws, however, do not fall under this preemption. Thus, state laws may affect non-self-insured employer-sponsored plans through regulation of the insurers. Because of ERISA, non-risk-bearing networks contracting only with self-insured plans and the self-insured plans themselves are exempt from complying with state managed care legislation. With respect to liability, however, both non-self-insured and self-insured plans can be shielded by ERISA from state attempts to expand insurer liability. Plaintiffs are permitted to sue only for the value of the benefit denied. They are not permitted to sue for other damages under ERISA. Because of ERISA preemptions, the effects of state-level managed care reforms would be limited since many employer-sponsored plans will not be affected by these reforms. Only the federal government can enact legislation that governs all managed care plans.

Insurer Liability

Background. Traditionally, insurance plans have not been the target of liability suits since they have not been viewed as being participants in the decision-making process regarding the treatment of patents. With the evolution of managed care, this has changed. By definition, managed care plans manage patient care. The plans not only reimburse a portion of the medical expenses incurred by a patient, they may also greatly influence a patient’s treatment. As a result, recently, there has been a legislative movement to hold managed care plans legally accountable for their role in the decision-making process of patient care. The concept behind the legislation is the idea that if managed care plans face a greater potential for lawsuits, they will be more likely to make decisions that are in the best interest of their patients.

Legislation. Insurer liability legislation has been introduced in the U.S. Congress and in numerous states. In 1997, the California legislature considered five bills related to insurer liability. Three of the bills-SB 324, SB 557, and AB 794-extend liability to managed care organizations by expanding the definition of the practice of medicine to include decisions regarding the medical necessity or appropriateness of any diagnosis, treatment, operation, or prescription. Among other actions, AB 794 also requires that health plans make available to the public, upon request, the criteria used by plans to determine whether to deny or authorize health care services. A fourth bill, AB 536, solely requires plans to make available to the public, upon request, the criteria used in deciding whether to deny or authorize care. The fifth bill, AB 977, provides that a health care service plan would be liable for damages for harm to an enrollee that is caused by the plans failure to exercise ordinary care or caused by decisions made by employees, agents, ostensible agents, or certain representatives of the health care service plan.

Impact. In this study, we assess the impact of expanding liability to managed care organizations through legislation. We find that the impact of expanding malpractice to managed care plans has the potential to greatly reduce their ability to control costs through case management, especially for group model HMOs, but the actual impact may be negligible because of a number of mitigating factors.

First, most employer-sponsored plans may be able to avoid liability by claiming the ERISA preemption. Second, to the extent that group model HMOs are currently being successfully sued in California, then the potential for additional lawsuits may be slight for those HMOs. Therefore, the impact of managed care liability legislation may mainly be limited to a subset of IPA model HMOs, but the effect on these HMOs would be modest. We estimate that at the most, premiums of IPA model HMOs would increase from 0.1 to 0.4 percent.

To the extent that management efficiency is reduced as a result of expanded liability, enrollees would likely gain access to care that they otherwise would not have received. Some of this care may be appropriate and necessary, thus improving the quality of treatment for some enrollees.

Use of Drug Formularies

Background. In the early 1990s, many managed care organizations adopted the use of drug formularies as a method for reducing the costs of prescription drug coverage. A formulary is a list of drugs, rated on clinical and cost criteria, that have been approved and are covered by the plan for treatment of particular illnesses. As a result of concerns about the effects of formularies on managed care enrollees, various forms of legislation have been created.

Legislation. In 1997, more than 40 bills concerning drug formularies have been introduced in more than 25 states. In 1997, the California legislature considered three bills that address issues related to drug formularies: SB 625, AB 974, and AB 1333. SB 625 requires that plans provide an expeditious process by which prescribing providers may obtain authorization for a medically necessary nonformulary prescription drug, make known to the enrollee any reason for disapproval, and make available their formularies upon request. AB 974 requires that a plan provide coverage for a drug if coverage for that drug had been previously approved by the plan for the enrollee and if the drug continues to be prescribed by the physician. AB 1333 prohibits a plan from requiring physicians to prescribe a drug from the formulary if the appropriate drugs from the formulary have been tried and have been unsuccessful in treating the patient.

Impact. By making the consumer better informed, legislation such as SB 625 may enable enrollees in managed care plans to have more negotiating power regarding their treatment, but we do not expect large financial consequences for managed care plans. Based on our assumption that formularies enable plans to save money by providing the most cost-effective medications, as a result of AB 974 and AB 1333, we would expect HMOs (particularly IPA model HMOs) to incur increased costs. Because these bills are limited in scope, the resulting increases in premiums for HMOs would be fairly modest-most likely significantly less than 0.6 percent. In general, both AB 974 and AB 1333 provide certain enrollees easier access to nonformulary drugs while not having a significant impact on the financial stability or the management style of HMOs.

Mental Health Parity

Background and Legislation. The idea of requiring parity in health insurance coverage for mental disorders has been a much debated issue in recent years. In 1996, President Clinton signed into law the Mental Health Parity Act of 1996 which amended ERISA and the Public Health Service Act to provide parity between annual and/or aggregate lifetime dollar limits on mental health benefits with the limits on medical and surgical benefits of group health plans. Various forms of mental health parity legislation have been passed in numerous states. In 1997, the California legislature considered AB 1100 which would mandate health care plans to cover biologically based severe mental illnesses for enrollees of all ages and cover serious emotional disturbances of children under the same policy terms and conditions applied to other medical conditions.

Impact. As a result of AB 1100, those with severe biologically based mental illnesses and children with serious emotional disturbances would likely obtain improved access to mental health services, since their conditions would be subject to the same policy coverage as other physical illnesses. These enrollees would be likely to use more mental health services which, in turn, would lead to increased costs for the health plans.

We estimate the increase in premiums resulting from these increased costs would be approximately 2.1 percent for all plan types in California. Specifically, we estimate that there would be a 1.0 percent premium increase for HMOs, 2.7 percent increase for PPOs/POSs, and 3.6 percent increase for fee-for-service plans.

This bill would also increase the market share for managed care plans since those plans would have lower increases in premiums than traditional fee-for-service plans. Furthermore, since HMOs, particularly group models, are good at managing care, enrollees may not experience as significant an increase in access to mental health services as those in fee-for-service plans. The effects of parity would fall more strongly on fee-for-service plans which use the limits on services to control costs instead of case management techniques which are the mainstay of managed care. For that reason, the mental health parity legislation would tend to increase enrollment in HMOs.

Direct Access to Obstetrical and Gynecological Services

Background and Legislation. As with care from other specialists, many HMOs require that a woman have a referral from her primary care physician to see an obstetrician and gynecologist. However, many have argued that women should have direct access to obstetricians and gynecologists who, in many situations, are viewed as primary care physicians. Legislation providing some form of such access has been passed in many states. In 1994, California enacted legislation enabling women to choose an obstetrician and gynecologist as their primary care physician. In 1997, the Assembly and the Senate in California passed legislation (AB 1354) that would have required health plans to provide women with direct access to obstetrical and gynecological services, but that bill was vetoed by the Governor.

Impact. Given that women in California could already choose obstetricians and gynecologists as their primary care physicians, we estimate that AB 1354 would result in slightly higher premiums and out-of-pocket costs for HMO enrollees, approximately a 0.35 percent increase.

At the same time, enrollees would benefit from easier access to obstetrical and gynecological services and, in some circumstances, would benefit from improved quality of care. We expect similar impacts on both IPA model and group model HMOs. However, this type of legislation could have a longer-term impact on managed care that would be much larger in magnitude, if it sets in motion other legislation that would hinder the ability of managed care plans to limit access to specialists other than obstetricians and gynecologists.

Lengths of Stay for Mastectomy Patients

Background and Legislation. Since the 1996 passage of federal legislation mandating lengths of stay for maternity visits, mandating lengths of stay for mastectomies has become a common area for managed care legislation. In response to increased outpatient surgeries and decreased inpatient lengths of stays for mastectomies, legislation mandating minimum hospital stays has been introduced at both state and federal levels. In 1997, the California legislature considered bills that would mandate that the hospital length of stay for mastectomies be determined by the physician in consultation with the patient and those that mandate a 48-hour minimum stay.

Impact. We estimate that if a 48-hour minimum stay for mastectomies were enacted, the mean length of hospital stay for mastectomies would increase by 11 percent, from 2.0 days to 2.2 days. This estimation is based on the assumption that 25 percent of the short-stay patients-those who would have previously stayed less than 48 hours-elect to stay the full 48 hours if this legislation is enacted. In terms of an increase in health plan premiums, we estimate that the 48-hour minimum stay would result in only a one-hundredth of a percent (0.01%) increase in premiums, for both IPA model and group model HMOs. We would expect a similar increase in California and nationwide.

Conclusion

Based on our analyses, we were able to draw several conclusions which we hope will provide a starting point for further analyses of these proposals as well as other proposals that would regulate this industry.

First, proposals for managed care reforms improve some aspect of medical care or access to services for enrollees in managed care plans. Every proposal that we considered would, to some extent, force HMOs to offer more and/or better services to enrollees.

Second, proposals for managed care reforms tend to increase health plan costs and raise premiums. More services implies higher benefit costs for health plans. The plans, in turn, pass the costs along in the form of higher premiums. We estimate only small premium increases as a result of specific pieces of managed care legislation. However, if a large proportion of current managed care legislation were enacted, then the impact might be very large premium increases accompanied by a large shift in enrollment to fee-for-service plans. The impact of legislation, however, would likely vary according to type of HMO.

Finally, the impact of state managed care legislation could be severely limited by ERISA which enables self-insured plans to avoid compliance with state legislation. Furthermore, under ERISA, both self-insured and non-self-insured plans can avoid the attempts of states to expand insurer liability. In order to ensure that reforms affect all health plans, legislation would have to be passed at the federal level.

* * *A full copy of the report can be ordered by calling the Kaiser Family Foundation’s publication request line at (800) 656-4KFF and asking for document #1342. A report on Managed Care Plan Liability: An Analysis of Texas and Missouri Legislation is available separately. Return to top

The Impact of Managed Care Legislation: An Analysis of Five Legislative Proposals from California

Managed Care Plan Liability: An Analysis Of Texas And Missouri Legislation Library Index

Note: This publication is no longer in circulation. However, a few copies may still exist in the Foundation’s internal library that could be xeroxed. Please email order@kff.org if you would like to pursue this option.

These resources were prepared for a briefing held for journalists in New York City on November 4, 1997 in New York City as part of a joint program by The Alan Guttmacher Institute, The Kaiser Family Foundation and the National Press Foundation. This program focused on mergers, acquisitions, consolidations, joint ventures, and other affiliations between Catholic and non-Catholic hospitals and health systems and the effect these affiliations have on access to reproductive health services. A report prepared for the Kaiser Family Foundation on this same topic called Is There a Common Ground? Affiliations Between Catholic and Non-Catholic Health Care Providers and the Availability of Reproductive Health Services is online.

Fact Sheet

Q & A

This study analyzed five 1997 managed care consumer protection proposals currently or recently under consideration by the California state legislature: allowing consumers to sue their HMO (health maintenance organization) or managed care plan; expanding access to prescription drugs not approved by the health plan; expanded coverage of mental health services; direct access to obstetrical andgynecological services; and lengthened minimum hospital stays for mastectomy patients.

• Report: The Impact of Manged Care Legislation: An Analysis of Five Legislative Proposals from California
• Report: The Impact of Manged Care Legislation: An Analysis of Five Legislative Proposals from California

This report analyzes recently enacted laws in Texas and Missouri that expand consumers’ ability to sue their HMOs or other managed care plans for inappropriately denied care or similar problems.

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Medicaid Facts: Medicaid’s Role for Children

This fact sheet provides an overview of children’s eligibility and coverage under Medicaid, summarizes Mediciad benefits and expenditures for children, and highlights key issues facing the program as it continues to serve children.

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