Though June was a month of legal victories for the managed-care industry, some say it's too soon for health plans to celebrate.
In a blow to class-action attorneys and consumer advocates alike, the U.S. Supreme Court unanimously decided on June 12 that HMOs cannot be sued under a federal benefits law for rewarding doctors who limit patient care. A week later, U.S. justices issued another pair of opinions underscoring health plans' pre-emption from lawsuits over coverage decisions. And on June 22, the 5th Circuit Court of Appeals in New Orleans struck down the portion of Texas' pioneering HMO liability law that allows enrollees to sue over coverage denials.
"While we certainly consider them important victories for the (managed-care) industry, the court's recent rulings were really just a reaffirmation of the status quo," says David Reed, chairman of Santa Ana, Calif.-based PacifiCare Health Systems. "We've always known that the courts are not the place to settle healthcare disputes . . . so the decisions weren't a great surprise. In the end, we never expected anything less."
But others see the rulings as just one legal battle in what's shaping up to be a long and bitter war.
To be sure, in its June 12 ruling on Pegram v. Herdrich, the Supreme Court held that HMOs are not only supposed to control costs but are legally required to. This nod to "treatment rationing" considerably limits lawyers' ability to contest physician incentives and HMOs' other cost-saving tactics under the federal Employee Retirement Income Security Act, which governs workers' healthcare and pension benefits.
However, in a footnote, the opinion contained an almost offhand suggestion that ERISA may provide a means for another type of legal attack on managed care--that HMOs could violate the federal law by not disclosing the use of physician incentives.
"Although we are not presented with the issue here," Justice David Souter wrote, "it could be argued that (the HMO) is a fiduciary insofar as it has discretionary authority to administer the plan, and so it is obligated to disclose characteristics of the plan and of those who provide services to the plan, if that information affects beneficiaries' material interests."
This acknowledgment is good news for a group of plaintiffs' lawyers who are using the duty-to-disclose theory to pursue ERISA suits against Humana, Aetna and other major HMOs.
"That footnote smiles on our disclosure claim," says Jerome Marcus, a Philadelphia lawyer who is part of the plaintiffs' group. "The justices were under no obligation to add that footnote, yet they chose freely to do so."
The plaintiffs' duty-to-disclose claim is simple and straightforward, crafted to avoid the legal pitfalls that have doomed earlier cases, Marcus adds. "Our case doesn't say, `You can't do that (use incentives).' It simply says, `You have to tell us if you're going to do it.' Otherwise, the customer isn't getting what he paid for."
By withholding that information, Marcus says, HMOs have been making money they don't deserve. The lawsuits claim members were shortchanged the difference between what they paid for their insurance policies and what the policies would have been worth in the marketplace if those details had been disclosed.
The Pegram ruling also does little to quell the flood of lawsuits now being filed under another, perhaps more ominous, federal statute, the Racketeer Influenced and Corrupt Organizations Act.
Enacted in 1970 to prosecute mob figures, RICO carries provisions against conspiracy, fraud, extortion, coercion and other far-reaching crimes. Lawyers are trying to consolidate various cases against HMOs into a class action that would use this anti-racketeering law to prove an array of allegations made by angry doctors and patients.
The California Medical Association recently filed a federal suit on behalf of more than 30,000 doctors, using the RICO law to allege that four of the state's largest health plans damaged the physicians' businesses and "victimized" their patients.
The lawsuit accuses Blue Cross of California, Foundation Health Systems, PacifiCare Health Systems and PacifiCare Operations of conspiring to hold down doctors' fees and using coercive, unfair and fraudulent means to place themselves between doctors and patients, among other things.
Lawsuits like this are of growing concern to managed-care firms because RICO's broader parameters could allow prosecutors to pull together separate events to show a pattern of fraudulent behavior across the entire industry, says Frank McArdle, an attorney and consultant with Hewitt Associates in Washington.
"The potential damages are far greater in these RICO cases--three times the damages that are usually awarded," McArdle said. "But they are still in the early stages, so it's hard to know how much weight the courts will give them."
RICO, though, has been applied successfully in cases beyond organized crime before.
In April 1998, the National Organization for Women used the statute to win a federal class action suit against anti-abortion activist Joseph Scheidler and his Pro-Life Action League. A federal court in Chicago ruled that the defendants had engaged in racketeering when certain violent acts, such as the burning of abortion clinics, were carried out.
Already RICO charges are proving tougher for health plans to shake than cases filed under ERISA.
Take Humana, which still faces a RICO lawsuit that was first filed in 1989 and has since paved the way for other insurers to be sued under the anti-racketeering law. In this case, Nevada patients claimed that a subsidiary of Humana secretly negotiated a rebate with a hospital, then failed to pass the discount on to members.
The Louisville, Ky.-based insurer won the first round in federal court by arguing that the RICO statute could not be used because of provisions of the McCarran-Ferguson Act, which states that no act of Congress can "invalidate, impair or supersede" any state law. But the plaintiffs appealed, and a major portion of the lower court ruling was reversed.
Humana then took the case to the Supreme Court, which in January 1999 ruled that the racketeering law could be used in this instance because it advanced a state's ability to fight insurance fraud and did not frustrate any state statute.
The managed-care industry is now holding its breath on another RICO lawsuit, this one filed against Aetna.
The 3rd Circuit U.S. Court of Appeals in Philadelphia recently heard oral arguments on the case, which claims the Hartford, Conn.-based health insurer attracted enrollees with the promise of high-quality benefits but provided as little care as possible. If the 3rd Circuit upholds the lower court's decision to throw out the case, it could take the wind out of other RICO cases pending against the industry.
"The decision is going to be very important," says Stephanie Kanwit of Epstein, Becker & Green, a law firm in Washington. "In a way, it's make-or-break for the industry."
Finally, the growing number of state suits could pose another threat to health plans.
Last month, the 5th Circuit U.S. Court of Appeals partially upheld Texas' HMO Liability Act, finding that ERISA does not completely pre-empt Texas citizens' right to sue health plans. The 1997 statute, which became the nation's first HMO liability law, permits enrollees to sue HMOs that fail to meet an ordinary standard in treatment decisions.
In its ruling, the 5th Circuit said health plans cannot be sued for denials of coverage, since those decisions fall within a plan's administrative role and thus would be pre-empted by ERISA. However, the court did allow for managed-care plans to be sued over "health services actually delivered," i.e., for vicarious liability associated with a contracted provider's malpractice.
"This decision . . . reaffirms the state's ability to regulate HMOs and the quality of medical decisions that HMOs make," Texas Attorney General John Cornyn said in a written statement.
And Texas isn't alone. Six other states have similar liability laws on their books, and eight more plus the District of Columbia have measures pending, according to the National Conference of State Legislatures.
"The managed-care industry is now facing legal attacks on multiple fronts," Hewitt's McArdle says. "In a way, HMOs need anti-liability legislation even more in the wake of Pegram than before it."