HMO Liability

Texas Case Could Set a National Health Care Reform Precedent

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Law Feature -- May 2000

By Alice Adams

The appellate courtroom of the Fifth Circuit Court of Appeals in Austin's federal building was business-as-usual that brisk March morning. Only the red, white, and blue of the American and Texas flags interrupted the institutional drabness of the setting.

The court had already heard two cases as legal teams took their seats for the third hearing. There was no hint that Case No. 98-20940 -- which challenges a Texas statue giving patients the right to sue health maintenance organizations (HMOs) for harmful medical necessity decisions -- could catapult the litigants before the US Supreme Court for a ruling that would have a major impact on health care reform efforts.

The original case, Corporate Health Insurance, Inc, et al, v The Texas Department of Insurance (TDI), et al, was filed in June 1997 by Corporate Health Insurance, Inc; Aetna Health Plans of Texas, Inc; Aetna Health Plans of North Texas, Inc; and Aetna Life Insurance. It challenged Senate Bill 386, passed by the Texas Legislature earlier that year that held HMOs liable for the failure to exercise ordinary care when making health care treatment decisions. Thanks to lobbying efforts by the Texas Medical Association, passage of the bill made Texas the first state to pass legislation holding managed care organizations accountable for their decisions. The insurance companies argued that the law conflicts with the federal Employee Retirement Income Security Act (ERISA), which preempts most state law remedies against health plans.

The case initially was heard in the US District Court for the Southern District of Texas, Houston Division. (See "Texas Breaks New Ground," December 1998 Texas Medicine , pp 58-61.) In September 1998, Judge Vanessa Gilmore upheld the primary part of the bill that allows patients to sue HMOs, but tossed out the law's independent review organization (IRO) process that allows patients to appeal adverse decisions before taking their cases to court. She left open the question of the kinds of treatment decisions for which HMOs may be held liable and threw out some of the law's provisions that were drafted specifically to protect physicians from prurient HMO practices.

Judge Gilmore ruled that ERISA preempted the portion of SB 386 that prohibits HMOs from retaliating against physicians when they advocate for their patients by going against HMO decisions. And, she struck down the bill's prohibition against "hold harmless" clauses in HMO contracts that force physicians to relieve HMOs upfront of any liability.

Citing earlier court cases involving ERISA health plans, Judge Gilmore urged Congress to clarify ERISA . "Interpreting the legislative intent concerning the scope of ERISA preemption can only be accomplished by the courts after the legislature has done its job," she said in a footnote to her 66-page ruling.

The insurance companies contend that if they wrongfully determine that the proposed treatment is not covered or if an agent for the company does not approve treatment, and harm or death occurs, the insurance company should be liable, as provided under ERISA, only for the amount of money it would have paid for the treatment.

The state maintains that if the insurer fails to exercise ordinary care when making health care treatment decisions and harm or death of the patient results, the insurer should be liable for much more than the cost of the treatment it had initially refused to cover.

Kim Ross, TMA's vice president for public policy, says the fact that the 5th Circuit is reevaluating state and federal roles when balancing the states' right to regulate questions involving patient safety is promising in light of the debate over the federal Patients' Bill of Rights under way in Congress. "This is a closely watched case because the legal questions are precisely on point during not only a congressional debate but also a presidential election year involving our governor," he said. Governor George W. Bush has campaigned in support of the Texas approach to the issue.

"As anticipated by TMA and the American Medical Association when developing this state legislative strategy 2 years earlier, Judge Gilmore found that ERISA does not preempt the state's right to protect the safety of its citizens, so the legislature's imposition of a legal duty on the [health] plans and, thus, liability, was upheld," Mr Ross said. "As was also anticipated, the trial court further noted that the IRO process falls under the previously strict holdings of the 5th Circuit as an impermissible arranging of a health care benefit, as are the sections dealing with the prohibition of gag and hold harmless clauses."

Robert W. Sloane, MD, of Fort Worth, chair of the TMA Council on Legislation, says the significance of Judge Gilmore's ruling is twofold. "First, unless Congress were to actively halt the progression of this ruling, it is very likely that the way will be clear in other states to establish the legal basis for holding managed care organizations accountable. Second, an independent external appeals process will need to be authorized by Congress as a legitimate exception to ERISA preemption rulings," he said.

Dr Sloane and Mr Ross say the Senate version of the federal managed care reform bill -- backed by the Republican leadership -- would gut the Texas law. The bipartisan Norwood-Dingell bill in the House, "which was by no coincidence adapted from Texas law," establishes an external appeals process, Mr Ross says. TMA and AMA support the House version.

"The not-so-far downstream political implications put the viability of the Patients' Bill of Rights at risk," Mr Ross said. The bill is now in a House-Senate conference committee. Republican leaders have indicated, as have Texas Sens Phil Gramm and Kay Bailey Hutchison in meetings with TMA and other groups, that they intend to add federal tort law changes, he says. "Some Republican leaders have suggested adding the recommendations from the Institute of Medicine report on medical errors, as well as opening up the National Practitioners Data Bank to the public," he added.

The Texas approach

SB 386 and other laws addressing managed care issues passed by the Texas Legislature in 1997 constitute the most comprehensive managed care reform legislation adopted by any state. Other states have enacted portions of the highly complex and extensive laws, but they have not addressed the issue of ensuring patient protection and managed care's liability for its treatment decisions the way Texas has. Texas' action inspired immediate inquiries to TMA from state medical societies in several states. Similar legislation has been introduced in 38 other states, and California and Georgia have passed liability bills.

The legislative package held HMOs responsible for failure to exercise ordinary care when making health care treatment decisions that resulted in injury to or death of a patient. It also required HMOs to use trained physicians, physician assistants, or licensed nurses to confer with doctors in making medical necessity decisions, allowed patients to compare health care insurance plans, and freed physicians to tell patients of treatment options without penalty from the HMOs.

SB 386 allows patients with complaints to go before an independent physician reviewer certified by TDI. This reviewer would determine if the HMO should have paid for the requested treatment. In instances of life-threatening conditions, the reviewer's decision would be required within 5 days after the IRO receives the information necessary to make the determination.

Governor Bush allowed the bill to become law without his signature, and it took effect September 1, 1997.

Critics said health care costs would immediately escalate and that lawsuits against HMOs would be unending. Yet in the year after the legislation took effect, no lawsuits were filed and only about half of the 125 appeals heard by the TDI review process partially or completely overturned HMO decisions. Two years after the legislation passed, only six lawsuits against HMOs had been filed. More than 850 administrative appeals have gone to the IRO process, with about half favorable to the patient, says TDI spokesperson Lee Jones.

The hearing

Most appellate court hearings are brief, with each side allowed 15 to 20 minutes to present its arguments and a lesser amount of time for rebuttal. The triumvirate of judges hearing the case is allowed to inject questions for clarification.

The 5th Circuit is no different. Within less than a half-hour, plaintiff's attorneys John Shely, JD, and George Scott, JD, and the state's attorney, Asst Atty Gen David Mattax, JD, had presented their cases to Judges Patrick Higgenbotham, Robert Parker, and Nancy Atlas.

Because of the complexity and technical nature of the case, questions from the bench were many and often.

In defining the scope of the case, Judge Higgenbotham offered a scenario of a patient whose physician diagnosed a heart problem. In his scenario, the agent for the insurer denied the physician's request for bypass surgery and recommended that the patient take an aspirin a day instead.

Is this an implied medical decision? the judge asked. "By making this decision about the treatment of the patient, doesn't this place that agent -- and the insurer -- in the medical arena?"

"You [insurers] have elected to put yourselves into the medical arena with respect to what your contracts provide," Judge Atlas added.

Mr Shely argued that the Patient Protection Act improperly imposes state law liability on ERISA entities, impermissibly mandates the structure of plan benefits and their administration, unlawfully binds plan administrators to particular choices, and wrongfully creates an alternate enforcement mechanism.

Attorneys for the state "argued that SB 386 was fundamentally the regulation of health care, which is something Congress did not intend for ERISA to preempt," said Andrea Horton, spokesperson for Texas Atty Gen John Cornyn. "We also argued that an HMO could not try to create ERISA preemption by including provisions in an ERISA plan that conflicted with state law and then claim the conflict results in ERISA exemption."

Mr Mattax, in his interpretation of SB 386, said the statute ensures quality of care by prohibiting entities from challenging the physician. "It also provides an independent review process to determine the qualities of the decisions to allow or deny care," he said. However, he added, the insurer, in contracting with the patient, makes a special kind of contract and in its ability to provide or deny treatment coverage is acting much like a physician.

"If the insurer doesn't pay for treatment, the patient may not get that treatment," he continued, "and people buy insurance, relying on the insurer to take care of the financial details during illness, at moments of duress. And if treatment is denied by the insurance carrier and the patient is harmed or dies as a result, the Patient Protection Act holds the company liable for the full cost of the damage, not just the amount the policy would have paid for the treatment."

At press time, the court had not issued a ruling. But after the hearing, both Mr Mattax and Donald P. Wilcox, JD, general counsel for TMA, were optimistic about the outcome. "The panel from the Fifth Circuit seemed willing to listen to the issues and reasons for the statute," Mr Wilcox said. "They may take a fresh look at the ERISA issue when they write their opinion." TMA and AMA have filed amicus curiae briefs supporting the state's position.

Whatever decision the appeals court makes, an appeal by the losing side is expected and, thus, the case possibly will reach the US Supreme Court for a final ruling. "Only one case out of a hundred or more make it to the Supreme Court but this case certainly could be the one," Mr Wilcox said.

The Supreme Court could hear the case because it focuses on the conflict between state law and ERISA, Mr Wilcox says. "It is a hot topic, with the federal appellate courts applying the ERISA preemption inconsistently. The Supreme Court would have an opportunity to address the ERISA preemption issue squarely in this case."

Alice Adams is an Austin freelance writer.


Text of court ruling in HMO liability case (June 20, 2000)

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