Court of Last Resort: TMA Takes Legal Action to Stop Managed Care Abuses

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Law Feature -- June 2001  

By Walt Borges
Associate Editor

When then-Texas Medical Association President Jim Rohack, MD, took the podium on March 27 to announce that TMA was joining a national class action lawsuit accusing for-profit managed care organizations of racketeering, he was quick to point out that the decision to join was a reluctantly employed tactic of last resort.

Announcing that TMA had joined the California Medical Association, the Medical Association of Georgia, the Denton County Medical Society (DCMS), and individual physicians in a federal lawsuit being heard in Miami, Dr. Rohack stressed "that we have arrived at the courthouse with considerable reluctance." Only after legislative and regulatory efforts failed, he explained, did TMA turn to the courts.

Citing loopholes in federal and state law and a lack of state government resources to enforce existing laws, Dr. Rohack charged that investor-driven managed care organizations (MCOs) continue to cut corners, bully doctors, and lie to patients.

"This is our Alamo," he said. "This is our last chance to halt these HMOs' [health maintenance organizations'] predatory and destructive business practices that cannot be remedied through the well-worn paths to the legislature, the Congress, and the regulatory agencies."

But Dr. Rohack had another point to his message: The lawsuit attempts to force changes in MCO practices that will save for-profit managed care companies from their destructive fascination with profits and market share, a fascination that has eroded the quality of medical care in the United States and Texas, and interfered with the relationship between doctors and patients.

"If they [MCOs] don't manage care instead of just managing costs, if they don't put patient care over market share, if they don't begin to genuinely value patients over profits, they will die," Dr. Rohack predicted. "They will become lumbering dinosaurs, a dead-end branch on the health care evolutionary tree."

Barry Jacobs, MD, a reproductive endocrinologist, says the DCMS involvement in the lawsuit resulted from a groundswell of interest after physicians in the county, located just north of Dallas, became aware of the national class action suits. Dr. Jacobs says Major Blair, MD, the DCMS president in 2000, asked him to draft a resolution requesting that TMA also join the national suit. Eventually, DCMS members were asked whether the county medical society should join the suit, Dr. Jacobs says, and only one of the 30 or so physicians present at the meeting dissented.

TMA General Counsel Donald P. Wilcox, JD, credits the DCMS resolution for prompting both TMA and DCMS to approve participation in the suits in late summer of 2000. "The county medical society physicians were the catalyst for the more formal physician involvement in the cases," Mr. Wilcox said.

One of the individual physician plaintiffs is Lewisville obstetrician-gynecologist Michael Burgess, MD, who, the pleadings state, has patients insured by Aetna, United, and Prudential. Dr. Burgess alleges the health plans improperly bundled treatment to reduce his payments, made inappropriate medical necessity determinations, delayed payments, wrongfully denied payment, and increased administrative expenses.

Defendants in the Texas portion of the lawsuit are CIGNA and Humana Inc., but the suit involves multiple claims that also name as defendants Aetna US Healthcare Inc., Coventry Health Care Inc., Health Net Inc., PacifiCare Health Systems Inc., Prudential Insurance Co. of America, United Health Group, and WellPoint Health Networks Inc.

The insurers are alleged to have conspired to delay and reduce payments to physicians, hospitals, and other health care professionals. The mechanisms for the underpaying of physicians included downcoding and bundling, precertification abuses, and coercive and intimidating tactics in negotiating with physicians.

A first step  

Paul Handel, MD, immediate past chair of the TMA Council on Socioeconomics, says the decision to join the lawsuits is a first step as well as a last step. He describes the TMA involvement in the suit as the opening move of a grand strategy to save health insurers from themselves.

"The patients' rights laws in Texas are the gold standard, and we are working to ensure fair business practices in a competitive health care market," Dr. Handel said. "But the enforcement of the law is at best uneven in Texas because of the ERISA [Employee Retirement Income Security Act] loophole. The federal antitrust laws make some issues beyond the reach of the state, and regulators often lack adequate resources and legal tools."

The result, he says, is a managed care industry that does as it pleases, using economic power and market share to bully physicians and physician groups into accepting contracts that validate questionable claims practices and coverage decisions. Well-intentioned plans are at a severe disadvantage and are compelled to mimic a rival's bad marketing behavior.

"On an unsupervised playground, the bullies always win," said Kim Ross, TMA vice president for public policy.

Mr. Ross says TMA leaders recognized that state and federal legislation involving health insurers had its limits and anticipated what would happen in the wake of the passage of new Texas laws. TMA leaders and lobbyists began working with lawyers and proselytizing other state medical associations and the American Medical Association to lay the groundwork for innovative legal challenges that would result in a federal court order that would inspire the plans to compete over the quality of their services. It also would force Congress to enact uniform laws governing HMOs.

"After the legislature enacted comprehensive patient protections, many of the plans simply hid their activities in their skunk works," said Dr. Handel. "They exploit the physicians' ethical and legal duty to do right by their patients regardless of economic risk. They protect their market share through a range of schemes that have pushed some practices to the brink of insolvency. There are dangerous disincentives and barriers to appropriate care hidden behind the curtain, out of view of the patients and out of reach of most public officials and regulators."

In joining the suit, TMA specifically complained of the actions of two health insurers, CIGNA and Humana Inc. Neither health insurer was pleased with the TMA action.

"CIGNA HealthCare believes the lawsuit has no merit," said Tania K. Graves, CIGNA's public relations director for the southwest region. "We are committed to providing our members access to quality care at affordable prices, and we will continue to defend that commitment vigorously."

Humana spokesperson Tom Noland said the company believes the suits "are without merit. We are vigorously defending ourselves on behalf of our more than 5 million health plan members. And we hope and believe we will prevail."

Linda Smith, JD, Humana's lead counsel in the case, told the Dow Jones Newswire in March that the company would ask the judge in the case to dismiss the racketeering and conspiracy allegations.

Fighting back  

The class action lawsuit actually is a consolidated series of suits that began in Alabama in 1999, when a physician sued Humana, CIGNA, and several other HMOs. The doctor alleged that health insurers used fraudulent marketing tactics and financial incentives to restrict patient care, thereby breaching their obligations under federal law to provide necessary medical care. Within a year, a score of other suits making similar allegations were filed on behalf of patients and physicians.

In May 2000, the California Medical Association entered the dispute, filing a suit against PacifiCare Health Systems, the HealthNet subsidiary of Foundation Health Systems, and the Blue Cross of California unit of WellPoint Health Networks. In the summer of 2000, more than 20 suits involving physicians and patients were consolidated under U.S. District Judge Federico A. Moreno in Miami. Judge Moreno has since split the patient and physician claims into separate legal actions. Twenty doctors from seven states are now involved in the suits.

The TMA Board of Trustees approved the use of legal action to challenge managed care last year after receiving the go-ahead from the TMA House of Delegates, says Mr. Wilcox. TMA had been working informally with attorneys representing both patients and physicians since work began on the suits, he says.

The amended pleadings in the consolidated class action suit offered the best potential for meeting TMA's objectives, Mr. Wilcox notes.

Judge Moreno gave TMA the opening it needed on March 2 when he issued preliminary rulings in the consolidated cases involving physicians. He gave the physicians a major victory by holding that ERISA, federal antitrust law, and recent rulings by the U.S. Supreme Court do not prevent health insurers from being held accountable. But he also dismissed portions of the doctors' lawsuits because they failed to show the defendant health plans were acting together as an "enterprise."

"Judge Moreno has given the plaintiffs a bright-line guide as to how to perfect their racketeering case against these HMOs," Mr. Wilcox said at the time.

In the ensuing three weeks, TMA leaders and lawyers worked with the legal team managing the class action suit to bring TMA into the suit. The plaintiffs' legal team, which features several prominent lawyers, includes Archie C. Lamb Jr., JD, a Birmingham-based lawyer, and Richard "Dickie" Scruggs, JD, a Mississippi attorney who was one of the attorneys who successfully sued tobacco companies.

The revamped suit was filed in Miami on March 26, and TMA joined California and Georgia as major medical organizations asking the judge to order changes in the way managed care treats physicians.

Mr. Wilcox says TMA's turn to litigation occurred only after efforts to pass state and federal laws failed and after state insurance regulators foundered in enforcement efforts.

"This is the next logical step in a long line of steps to address the problems physicians face with managed care," Mr. Wilcox said.

The class comes first  

The revamped pleadings are now before Judge Moreno. After hearings that were set for May, the judge must address two legal issues before any trial is scheduled. The first is whether the 20 physicians and three state medical organizations, which represent more than 75,000 physicians, will be certified as representatives of a class of similar plaintiffs. The second issue is whether the doctors and associations can use the civil version of the federal racketeering law to pursue the case.

Class action lawsuits constitute a special type of litigation designed in part to allow the courts to efficiently try claims of a group of people who have a common legal position. For the group members, it allows individuals to assert claims that otherwise would be too expensive to pursue.

For example, if a physician has a legal claim against an insurer for $10,000 but it would cost $50,000 to prepare the case and hire an expert witness to analyze insurer practices, few lawyers would be interested in taking the case, given the returns are small and the costs -- and risks -- are great. Even if the doctor suggested a contingency fee arrangement for the lawyer, in which the attorney would be paid a percentage of what he or she won in damages, few lawyers could afford to risk $50,000 to prepare a case that would earn a 30- to 40-percent fee from a $10,000 award.

But if a number of physicians faced the same problem and had similar legal claims, they could form a group to bring a class action suit, pooling resources to hire lawyers and prepare the case. Their class action suit would present their lawyers with the potential for greater benefit from the same basic risk.

The named individuals or groups in the class action also are designated under the law to represent the interests of the larger group in the litigation, although judges have substantial discretion to require class members to approve or opt out of any settlement or damage award.

Federal class action suits, such as the current case, must meet four requirements:

  • The class must be large enough to make the trying of individual lawsuits impractical (i.e., they would clog up the courts).
  • There must be common legal and factual questions.
  • The claims of the class representatives must be typical of those of the larger class.
  • The representatives must adequately protect the interests of the entire class of plaintiffs.

Judge Moreno will consider those factors when he decides whether to certify a class of plaintiffs in the suit. Although he held a certification hearing in May, it may be months before he issues an opinion explaining who is in the class.

The vehicle is RICO  

The judge must also decide whether the physicians and medical associations are correctly using the federal Racketeer Influenced and Corrupt Organizations (RICO) Act to attack managed care behavior. By challenging HMO practices prohibited under RICO, the physicians and medical associations can take advantage of several features they would not have if the suits were tried piecemeal under conventional civil law.

A RICO-based suit allows the medical associations and individual physicians to use both federal and state law to sue insurers. It also attacks health insurance practices based on patterns of behavior, not just single incidents of illegal activity. Prosecutors often use RICO to pursue criminals, but the civil component of the law permits individuals and groups to assert that they have been economically damaged through a pattern of misconduct.

Under RICO's civil provisions, individuals can seek treble damages for violations of the law. Attorneys' fees are not paid from the damages awarded to physicians. Instead, they are assessed to defendants in addition to the damages won by the physicians. Those damages could include expenses incurred by TMA, DCMS, and individual physicians in support of the cases.

Ms. Smith, the Humana attorney, told the Dow Jones Newswire that the revamped suit still failed to show that the nine defendant health care companies acted together as an enterprise. Ms. Smith also said the suit's conspiracy allegations were "built on smoke and mirrors. There is nothing there."

In the revised petition laying out the allegations, lawyers for the doctors accused MCOs of undertaking actions detrimental to the health of patients and the public welfare.

The defendant health care insurers "take funds that have been rightfully earned by physician[s] … and divert them to their own profit. Without adequate and timely payments, physicians cannot maintain their practices and cannot provide the continuity of care that patients require as a matter of sound medical practice," the lawyers wrote.

"Defendants equate medical necessity with financial expediency, despite the clinical and financial consequences," the petition alleges.

The lawsuit also alleges that the insurers:

  • Deny, delay, and diminish payments to physicians to profit from retaining the money, and manipulate and exploit industrywide practices for financial gain;
  • Manipulate coding practices and ignore state prompt pay laws;
  • Use unsound actuarial principles as the basis for capitation payment schedules, and manipulate the schedules to increase profits at the expense of the physicians;
  • Conspired to create these schemes using economic power and third-party independent practice associations (IPAs) to enact the scheme;
  • Extort physician participation in all types of plans through "all-products" requirements;
  • Fail to adjust compensation and incentives for age, benefits based on sex, and illness burden; and
  • Used limited pools of patients when making actuarial projections.

Possible gains  

What do Texas physicians stand to gain? Mr. Wilcox, the TMA general counsel, says Judge Moreno is being asked to issue orders prohibiting the illegal behavior of Humana and CIGNA. Specifically, the medical associations and physicians are asking the judge to prohibit 24 specific practices. (A copy of the lawsuit is posted on the TMA Web site.)

While Dr. Rohack, in announcing the suit, took great pains to explain that TMA was seeking "injunctive" relief and not money, some Texas physicians may stand to recover compensation for past services if the efforts of the individual physicians who are plaintiffs prove successful, Mr. Wilcox says.

He explains that individual Texas doctors who contracted with one or several of the defendant health plans and were subject to the illegal practices may be part of the class that could receive a portion of the damages if the class action is certified and if the plaintiffs win. Lawyers for the class representatives will contact potential members of the class if and when Judge Moreno agrees to the certification. Mr. Wilcox says he expects the class certification to be approved.

"Judge Moreno is on a fast track to try this case as soon as possible," Mr. Wilcox explained. "Of course, the defendants will seek to delay and deny."

The national class action suit is not the only legal avenue being considered by TMA leaders, Mr. Wilcox says. Texas law presents new opportunities for class action suits, and TMA is preparing to file suits, albeit without the racketeering claims authorized solely under federal law, against "the worst for-profit managed care abusers doing business in Texas," he said.

"We are working on filing lawsuits in state courts based on legal claims involving the [Texas] clean claims law and possibly the Deceptive Trade Practices Act," Mr. Wilcox explained. "They would be filed on behalf of physicians and, possibly, patients."


Lawsuit-related Web sites

Information on the lawsuit against managed care abuses can be found on the Internet. Available resources include:

Announcement by Jim Rohack, MD  

Amended complaint  

Physicians and Managed Care -- The Texas experience  


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