Health insurers celebrated two key Supreme Court decisions last week that could effectively limit their exposure to financially disastrous lawsuits.
The rulings-one that set strict guidelines for limiting punitive damages, and another that upheld the use of arbitration in settling disputes between doctors and HMOs-came as much-needed relief to insurers, which have watched their federal protections steadily whittled away in recent years. Just one week earlier, for instance, the Supreme Court upheld Kentucky's "any willing provider" statute, a ruling that industry observers say could crimp HMOs' ability to hold down costs and expose them to further state regulation (April 7, p. 6).
"It's a real mixed message, if you look at the three decisions together," said Peter Kongstvedt, vice president and healthcare analyst at consulting firm Cap Gemini Ernst & Young. "There's a common thread, and that's costs. But while one of the rulings opens the door to higher costs, the second two aim to control them."
In one decision last week, the Supreme Court struck down as unconstitutional a $145 million punitive-damages award against State Farm Mutual Automobile Insurance Co., sharply limiting juries' power to punish wayward companies with huge verdicts. Although the case involved a car insurer, the court's decision bodes well for health insurers, as well as providers, at a time when malpractice reform legislation is under heated debate.
The ruling stemmed from a 7-year-old case in which a jury awarded a Utah couple $2.6 million in compensatory damages, and another $145 million to punish State Farm for fraud, bad faith and intentional infliction of emotional distress. Yet in a 6-3 split, the high court ruled that punitive damages should not exceed compensatory damages by more than a single-digit ratio.
Consumer advocates decried the ruling, arguing that large damage awards, while rare, provide a meaningful way for jurors to punish outrageous corporate conduct. But the Health Insurance Association of America, which had filed a court brief in support of State Farm, hailed the decision as a win for both insurers and their enrollees.
"This ruling is a big victory for anyone concerned about the consequences of jackpot justice, including consumers and policyholders who ultimately pay for outrageous jury awards through higher prices," Jeff Gabardi, HIAA's senior vice president and general counsel, said. "It gives us hope that insurance carriers may still have some protection from the unlimited punitive damages too often awarded in today's lawsuit lottery."
In a second case decided last week, the Supreme Court ruled that a billing dispute between doctors and two HMOs, PacifiCare Health Systems and UnitedHealth Group, should be settled through arbitration as dictated in their provider contracts. The unanimous decision reversed a prior ruling by the 11th U.S. Circuit Court of Appeals in Atlanta, which had determined that the binding arbitration agreements could not be enforced because they excluded the triple damage award that the doctors were seeking under a federal antiracketeering law.
The debate was part of a far broader case now before the U.S. District Court in Miami. PacifiCare and UnitedHealth are two of about 10 insurers named in a class-action lawsuit filed on behalf of 600,000 doctors alleging racketeering, fraud and deceptive business practices. That trial is set to start May 19.
The doctors had argued that they couldn't receive "meaningful relief" through arbitration because their contracts prohibit punitive damage awards. But in an opinion written by Justice Antonin Scalia, the high court ruled it was "unclear" whether or not the agreements preclude the triple damages allowable under federal law, and said it would be "premature" for the high court to address that question before an arbitrator ruled in the dispute.
The doctors' attorneys said they would continue to pursue more general allegations of racketeering.
Last week's ruling could have taken some of the wind out of the plaintiffs' sails, said Susan Pisano, spokeswoman for the American Association of Health Plans. "The multidistrict case in Miami has been steadily whittled away," Pisano said. "With more cases being sent to arbitration, it is narrowed even further."