The nation's largest arbitration firm has rankled the managed-care industry by declaring it will no longer handle healthcare disputes unless both sides voluntarily agree to the out-of-court process.
The American Arbitration Association announced its new stance at a California Assembly meeting called last week to discuss a package of bills designed to make arbitration fairer to consumers. Though health plans argue that arbitration is speedier, cheaper and less contentious than going to court, critics contend the private system of resolving disputes is riddled with secrecy, conflicts of interest and legal duplicity.
The controversial decision came as a blow to California HMOs, almost 80% of which require members to submit their grievances to an arbitrator instead of filing lawsuits. That's because the AAA's stance could tip the scales in favor of a bill, passed by the state Senate last year but not yet by the state Assembly, that would allow patients to bypass binding arbitration and sue their HMOs under the state's new patient-protection law.
"My first reaction was surprise," said Walter Zelman, president of the California Association of Health Plans. "I'm concerned that the AAA may not have thought through the problem with giving individual consumers the option of arbitration. I have grave doubts that (a voluntary system) would work."
The AAA's announcement also could have ripple effects well outside California. More than 30 other states allow health insurers to put mandatory arbitration clauses in their contracts.
"We're looking at the ruling and its potential implications on laws and regulations in California and elsewhere," said Susan Pisano, spokeswoman for the American Association of Health Plans.
The New York-based AAA handled about 200,000 disputes last year, but only 16 of those involved healthcare. Still, its opinion is often sought in national policy debates about dispute resolution. The organization said it formed a task force in 1997 with the American Medical Association and the American Bar Association to study healthcare arbitration. The panel concluded in 1998 that the process should be used only if a patient voluntarily agrees after a dispute occurs-a recommendation the AAA had not implemented until now.
But Zelman said criticism of mandatory arbitration is misplaced. If consumers were allowed to choose which forum to use for their disputes, they would select the one most likely to award the largest verdicts, he said.
"Arbitration has to be agreed on up front. Otherwise, you don't get the trade-off, which is lower premiums," he said. "There has to be some predictability in the system."
What's more, Zelman said, most complaints are settled well before they reach arbitration, either through an internal grievance process within an HMO or through an independent medical review overseen by the state. Excluding malpractice cases, California health plans see a total of 10 to 20 arbitration rulings per year, or about one per every 1 million enrollees, he said. "That hardly amounts to a crisis," he said.
Kaiser Permanente, California's largest HMO, faced 122 arbitration rulings in its home state last year, of which only six involved contract disputes, said Kathleen McKenna, the company's director of public affairs. The Oakland, Calif.-based company sees far more malpractice cases than other HMOs because, as an integrated healthcare system, it handles legal claims for its medical providers, while independent health plans do not.
Kaiser directly oversaw its own arbitration process until 1997, when the California Supreme Court ruled that the health plan had committed fraud in manipulating its in-house system in a case in which a patient died before his complaint could be heard. The company farmed out its dispute resolution to an independent law firm in 1998, and officials now say the system is a model for others.
"Mandatory arbitration is a fair and equitable way to resolve healthcare disputes," McKenna said. "Not only does it give plaintiffs an unbiased venue in which to air their grievances, it prevents many runaway, emotionally driven, multimillion-dollar jury verdicts." She said one-third of Kaiser's arbitration cases last year favored the patient, with awards averaging $200,000.
But critics argue that the arbitration process is stacked against patients because HMOs get to select the firms that make the decisions. In addition, they said, arbitrators who want repeat business may have an incentive to favor health plans, which hire hundreds of arbitrators each year.
Kaiser, for instance, said it works with a dispute-resolution firm that assigns its cases randomly to some 300 arbitrators. But a review of 1999 arbitration claims on file with the California Department of Managed Health Care shows 30% of Kaiser's cases were decided by just eight repeat arbitrators, according to a report by the California Research Bureau. And six of the eight ruled in favor of Kaiser in 80% of cases.