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Managed Care May Change Medical Malpractice Patterns

by Dr. Perry Hookman

By Dr. Perry Hookman - Email:

The structures of managed care delivery Systems -- the internalregulations, relationships and reimbursement mechanisms - are now being scrutinized bymedical malpractice plaintiffs, according to a new report.

The differences among managed care structures (for example, whetherphysicians are employees or independent contractors) add to the complexity and will affectthe nature of malpractice suits and liability, found the study by The Robert Wood JohnsonFoundation.

New types of suits already are emerging, and more surely willfollow, as plaintiffs' attorneys and the courts gain a clearer understanding of managedcare.

Courts have reached a few highly publicized verdicts against MCOs,but so far health plans are less likely to be sued than are doctors and hospitals. Thissituation may change, however, the report said, as the plaintiffs' bar increasinglyperceives MCOs to be the deepest pocket.

Fee-for-service (FF5) medicine involves a direct buyer-sellerrelationship: a physician implicitly agrees to treat a patient competently. The lawimposes a duty on physicians who fail to provide their patients with care that meetsprofessional standards. Substandard care that injures a patient constitutes negligence,normally called malpractice. Malpractice suits are brought in state courts.

In a managed care system, the actual care a patient receives may beinfluenced in part by the policies and procedures of the managed care plan. Therefore,patients believing they have suffered an injury may have a grievance not only with aphysician or other professional, but also with the MCO itself, the report added.

Under several legal theories, an MCO is vicariously responsible forthe acts of physicians:

  • If they are employees under the organization's control, as in staff model HMOs; or
  • If it creates the appearance that a contract physician is its employee, agent, or under the MCO's control regarding clinical decision-making, and the patient relies on this impression to his or her detriment.

IPA-model provider contracts sometimes require physicians to holdthe MCO harmless for any malpractice type claim. Regardless, the courts generally have notfound MCOs liable for the actions of independent contractor physicians. If these contractscontinue to hold up in court, they will serve as an impediment to attorneys trying topursue MCOs in malpractice cases, said the report.

The MCO, however, may be liable for the patients reasonably expectto look to the MCO rather than the individual physicians for care, or if the MCO conveysthe impression that the physician is an employee rather than an independent contractor. Inthe long run, the courts' willingness to hold dc MCOs liable for the acts of providerswithin their networks will be determined partly by the cohesiveness of the networks --both contractually and in the eyes of consumers.

MCOs also may be found directly liable for their own actions.Although case law on MCO corporate liability" is scarce, according to the report,corporate liability claims could be made against managed care plans on several potentialgrounds:

  • negligent credentialing of contracted providers;
  • negligent or excessive utilization review;
  • failure to implement specified quality assurance programs or redress identified deficits;
  • use of aggressive cost-control incentives designed to reduce utilization; or
  • denial of benefits or "bad faith" by the plan.

Experts are uncertain how rapidly or readily courts will accept suchcorporate liability theories. If corporate liability for MCOs follows the path ofinstitutional liability for hospitals, which is still patchy alter 30 years' development-- its acceptance will be slow and uneven, the report said.

The courts' general reliance on community practice standards fordetermining professional negligence may put MCOs, particularly HMOs, at a disadvantage.Medical malpractice law has evolved predominantly under FF5 medicine and its incentives.FF5 practitioners are held to a standard of care that reflects the customary practice ofsimilar practitioners; however, what drives customary practice in the FF5 setting is theexpected benefit of a particular procedure to the patient, with little regard for itscost.

Providers in managed care settings, by contrast, are expected toweigh both costs and benefits in their clinical decisions. Over time, therefore, practicepatterns in MCOs are likely to diverge from FF5-based community practice standards.However, if a poor outcome results, MCO providers and possibly the MCO itself, may be heldto these provider standards. Use of a different diagnostic technique or therapy -- even ifit is cost-effective -- may be difficult to defend if an untoward outcome occurs. Worse,the standard of care could even forestall innovations in medical care, the report said.

In some states, MCOs may find protection by invoking the"reputable minority" defense, which lets them show the acceptable alternativesto customary practice. By providing legitimacy for proven, effective practices that varyfrom community norms, the reputable minority defense may give MCO providers the leeway topractice in a manner that is both clinically sound and cost-effective. Whether thereputable minority defense should or will protect practices that save money, but producerelatively poorer health outcomes, is quite controversial and will likely be tested beforejuries in coming years.

Representatives of some MCOs assert that when medical care iscovered by an employer's self-insured plan, it is an employee benefit protected by theEmployee Retirement Income Security Act of 1974(ERISA). This federal law pre-empts anystate legislation affecting benefit plans. The Supreme Court has affirmed that theadministration of health benefits by self-funded employers is governed by ERISA and,therefore, that claims arising from benefits disputes should be resolved in federalcourts.

At issue currently is whether the ERISA statute was intended topre-empt states' broader regulation of healthcare quality, which for medical malpracticehas traditionally been through the state-based tort system. In a recent decision, Dukes v.U.S. Health-care Inc., the Court of Appeals for the Third Circuit concluded thatmalpractice claims generally do not fall under ERISA preemption.

However, it is often unclear whether a particular claim should beconsidered an ERISA benefits dispute or a traditional medical malpractice claim, based onallegations of poor quality care. The Dukes decision has identified a number of thornyissues that will likely arise as similar cases are argued in the future:

quot;We recognize that the distinction between the quantity of benefits due under a welfare plan and the quality of those benefits will not always be clear in situations like this where the benefit contracted for is healthcare services rather than money to pay for such services... We also recognize the possibility that an ERISA plan may describe a benefit in terms that can accurately be described as related to the quality of the service... The relevant inquiry is not whether there was an exception of acceptably competent services, but rather whether there was an agreement to displace the quality standard found in the otherwise applicable law with a contract standard. It may well be that an employer and an HMO could agree that a quality of healthcare standard articulated in their contract would otherwise be supplied by the applicable state law."

However, at least for now, the report said, most medical malpracticecases will be governed by state tort law and remain in state courts. Health plansoperating in more than one state will continue to find themselves dealing with thesestates' varying liability theories, the report added.

Larger health plans may try to include alternative disputeresolution (ADR) procedures and alternative standards of care in their subscribercontracts (as suggested by the Dukes decision), because in most states:

  • the legal environment is uncertain;
  • plaintiff recoveries are more limited under ERISA than under prevailing tort law; and
  • federal law is more hospitable to arbitration and other ADR mechanisms.