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Law & Ethics

PROLOGUE

Consumers Versus Managed Care: The New Class Actions

PROLOGUE: Amid constituents’ outcries over managed care’s well-publicized shortcomings, Congress has been debating the passage of a patients’ bill of rights since the late 1990s. At the same time that politicians were battling over this legislation, high-profile plaintiffs’ lawyers were also seeking to capitalize on the backlash against managed care by filing class-action lawsuits against health maintenance organizations (HMOs). The plaintiffs in these cases—some brought on behalf of consumers, others in the name of physicians and other providers—contest the legality of certain practices of managed care plans and seek far-reaching relief, including both money damages and injunctions shaping the way modern health plans conduct their businesses. If successful, the class actions against HMOs could have an even greater impact on today’s health plans than any of the pending federal bills.

Although earlier judicial actions may suggest that courts are unlikely to declare HMOs’ basic cost control methods fraudulent or otherwise illegal, noted legal expert Clark Havighurst observes in this article that at least the consumer class actions—those brought on behalf of subscribers—raise serious and provocative questions about the accuracy, candor, and completeness of health plans’ disclosures concerning their business practices. Focusing particularly on alleged discrepancies between what health plans’ ads, literature, and contracts promise consumers and what enrollees actually receive, Havighurst considers the implications of the pending consumer class actions for the modern U.S. health care system.

Havighurst is the William Neal Reynolds Professor of Law at Duke University in Durham, North Carolina. He received his law degree from Northwestern University.

Abstract

 
The plaintiffs in pending consumer class-action lawsuits against health maintenance organizations (HMOs) should fail in their claims for damages for fraud under federal anti-racketeering legislation. Although HMOs have regularly failed to disclose their business methods and have not strictly honored their contractual coverage promises, the circumstances in which they introduced cost controls into a market sadly lacking them suggest motives not deserving punitive sanctions. Courts could easily find that HMOs violated the Employee Retirement Income Security Act (ERISA), however. Injunctive relief compelling more extensive disclosures and clearer contracts might well legitimize HMOs’ methods and generally improve the performance of the health care marketplace.

Private Litigation, Public Stakes

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Consumer class actions are a conspicuous feature of the U.S. legal system, resembling in some respects the morality plays one sees in western movies. In general, however, such lawsuits are inspired less by specific grievances of the class members themselves than by the lawyers who initiate and fight the cases on the class’s behalf. Because class actions aggregate many small claims into one big one, they can yield large bounties for the plaintiffs’ lawyers. Thus, the opportunity to sue HMOs has attracted such luminaries of the trial bar as David Boies, whom the federal government hired to lead its antitrust posse in pursuit of Microsoft Corporation, and Richard Scruggs, one of the legal gunslingers portrayed in The Insider, the movie version of the showdown between trial lawyers and the tobacco industry. Although many class-action attorneys are quick to settle claims for their nuisance value, lawyers such as these play for the highest stakes and are not afraid to shoot it out with defendant corporations’ best hired guns.

Consumer class-action lawsuits against HMOs are not only being waged on the frontier of public policy; they are also tinged with a strongly populistic view of managed care. Plaintiffs’ lawyers of course always strike the pose of populists standing up for clients allegedly abused by powerful interests, and they easily equate their clients’ interests with the general public welfare. But consumer class actions are driven in large measure by the private interests of the lawyers themselves and by whatever view of the public interest they find it most convenient to take. Moreover, such litigation is often finally resolved not in court according to established legal principles but in settlement negotiations between lawyers for the plaintiff class and the corporate defendant, which is also primarily concerned with its own welfare, not the public’s. Despite the huge effects such settlements can have on the public interest, they are subject to only limited judicial oversight. Even when a case is fully litigated, the partisan nature of litigation and the all-or-nothing nature of the outcome create a substantial risk that the public interest will not be well served. In any event, even though these cases could significantly rewrite national policy governing HMOs, they may end up being resolved entirely outside the political process and without its inevitable checks and balances.²

Not only do these class actions raise important issues that the parties and the courts could easily mishandle, but they will be resolved in a climate intensely hostile to HMOs. Despite its contributions to controlling costs and revolutionizing health care decision making since the early 1980s, the managed care industry now faces a severe crisis of public confidence. Revanchist professional interests, aided by the media and headline-grabbing politicians, have mounted what is proving to be an effective counterrevolution. Indeed, most of the class-action complaints filed against HMOs are repetitive litanies of familiar grievances compiled in large measure from materials obtained from anti–managed care forces in the medical profession. The plaintiffs’ lawyers clearly expect to get good cooperation from the medical profession in trying these cases and to find judges and juries who share the public’s unhappiness with managed care. To be sure, some judges are loath to encourage disruptive class actions, and some courts have already resisted plaintiffs’ claims that threaten to roll back the managed care revolution.³ But persistent plaintiffs’ lawyers may yet find receptive locales in which to carry out their ambush of HMOs.

Although consumer class actions could distort national policy in numerous ways, they also could have salutary effects. What I find hopeful is that the complaints can be read not as direct legal attacks on HMOs’ cost-contol methods but as challenges only to their marketing and disclosure practices and performance of their contractual undertakings. So understood, they do not threaten to kill off the managed care movement or to impose still more legal control over HMOs’ business methods. On the contrary, the plaintiffs’ claims can be interpreted to embody the premise that consumers’ and patients’ rights should be defined not exclusively by courts or regulators as a matter of law but through market transactions and in private contracts. Under this premise, the most logical remedies for any violations would address HMOs’ marketing, disclosure, and contracting practices rather than dictating the manner in which HMOs must carry on their businesses or the coverage they must provide. Well-crafted prospective remedies of this kind might greatly improve the performance of the health care marketplace as a forum in which consumers can express their preferences.

High Noon At The HMO Corral

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With HMOs so well cast in the role of villains, the class actions promise high melodrama. Dramatic tension is heightened by the plaintiffs’ complaints, which question in highly charged terms some observable and disturbing discrepancies between what corporate health plans actually do for their subscribers and the representations, promises, and contractual commitments they made in marketing the plan. Unlike plaintiffs in other litigation against HMOs, class-action plaintiffs do not claim to have been physically injured by the alleged misrepresentations and contract breaches. Instead, they claim that they suffered a commercial injury when the plans failed to give them the kind of health coverage they thought they were buying. This legal theory of injury—necessitated because, in a class action, the alleged harms to the class’s members must have common elements—has some distance to go before it succeeds in the courts.⁴ But even though several cases have been dismissed for legal insufficiency, there have also been some favorable rulings.⁵ Even if a federal district judge in Florida dismisses the complaints in several of the most prominent cases (an early ruling was expected at this writing), an appeal is likely. The class-action threat to the managed care industry is not likely to go away soon.

Product or promises? Confronted with alleged discrepancies between an HMO’s promises and what it actually delivered, lawyers for a plaintiff class face a strategic choice: whether to take principal aim at an HMO’s product or its promises. In a number of the decided cases, the lawyers apparently chose to target deficiencies in the way HMOs do business—that is, managed care itself—instead of challenging only defects in the way the plan represented itself to consumers. In choosing this line of attack, the plaintiffs’ attorneys were apparently counting as much on public opinion as on law to secure a victory. So far, however, the strategy of vilifying HMOs and demonizing managed care has failed. Several cases (class actions and others) challenging HMOs’ care management tactics have been dismissed because the courts sensed that they were being asked to make legislative-type decisions about HMOs and even to terminate the national experiment with managed care itself. In its June 2000 decision in Pegram v. Herdrich, for example, the U.S. Supreme Court rejected the plaintiff’s legal theory in part because the effect of adopting it "would be nothing less than the elimination of the for-profit HMO [and perhaps even] nonprofit HMO schemes."⁶ In August 2000 a federal appeals court, in dismissing the complaint in Maio v. Aetna Inc., a major class action, took a cue from Pegram in concluding that "we must decline appellants’ invitation to pass judgment on the social utility of Aetna’s particular HMO structure."⁷ Earlier another court had ruled that "plaintiff’s concern about the soundness of managed care policy is best suited for resolution by branches of government other than the judiciary."⁸ It seems clear that courts will reject other claims that seem driven by a desire to dictate HMOs’ business methods or to stamp out managed care altogether.

Presumably, plaintiffs’ lawyers will realize that their luck may be better if they disclaim any intent to question the legality of HMOs’ methods and emphasize that HMOs’ actionable wrongs lie only in overpromising. Even limited in this way, the class complaints may still seem in the aggregate to implicate all of managed care. But although the disclosure and contracting practices challenged in each case may be typical throughout the managed care industry, the challenges to them are not nearly as lethal a threat to managed care itself as were the legal theories of the plaintiffs in Pegram and Maio. As the courts interpreted those theories, they aimed straight at the heart of managed care, challenging the substantive legality of cost containment methods without which "no HMO...could survive."⁹ In the pending cases, plaintiffs can lower their aim, to target only the legs on which an HMO’s business methods must stand legally.¹⁰ Thus, assuming that plaintiffs’ lawyers can resist the temptation to bash HMOs in general, courts cannot say in these cases, as the Supreme Court said in Pegram, that "the Judiciary has no warrant to precipitate the upheaval [in the HMO industry] that would follow a refusal to dismiss [the plaintiff’s claims]."¹¹

The RICO weapon. Most of the class-action complaints charge the HMO defendant with violating the Racketeer-Influenced and Corrupt Organizations Act (RICO), a statute originally conceived as a weapon against organized crime. Lawyers invoke RICO because it provides both a good context in which to demonize HMOs and a statutory basis for demanding triple damages and attorneys’ fees. The court of appeals in Maio dismissed a complaint based on RICO because, as pleaded, the claimed injury to the plaintiffs (the monetary difference in value between what consumers were promised and the allegedly "inferior" coverage they received) was too speculative to be recognized for RICO purposes. This ruling made some sense because without some showing that Aetna’s business practices actually and systematically denied patients high-quality care, there could be no finding of the requisite "pattern of racketeering activity" and no justification for imposing RICO’s highly punitive sanctions. In any event, plaintiffs seeking to establish a RICO violation would also have to show that the defendant HMO was guilty not just of misrepresenting its offerings but of outright consumer fraud. To establish fraud under RICO, a plaintiff must prove not just material misrepresentations but also the defendants’ criminal intent in making them.¹² Even an HMO that had dealt with the public in a seemingly cavalier way might therefore defend itself against a fraud charge by demonstrating that it was guilty of nothing more than pardonable circumlocutions and innocent shadings of the truth.¹³ Moreover, all HMOs have presented themselves to the public in nearly identical ways, suggesting that there were plausible explanations, besides venality, for their arguable deceptions.

The ERISA alternative. Even if the class-action plaintiffs cannot prove a RICO violation, however, they may be able to prove significant violations of ERISA, which carry less drastic sanctions. Unlike RICO, ERISA is not aimed at policing near-criminal behavior. Instead, it seeks to enforce "fiduciary" standards, which by definition are higher than the norms in ordinary business dealings and higher yet than the standards of conduct enforced by RICO. Even though the court’s reasoning in Maio may preclude ERISA-based direct attacks on the quality of HMO coverage without objective evidence of its actual inferiority, ERISA claims focused only on a fiduciary’s misrepresentations, nondisclosures, or deceptive contracts should withstand judicial scrutiny. In Pegram the Supreme Court easily rejected the plaintiff’s theory that ERISA gives courts a warrant to dictate the kinds of incentive arrangements that HMOs may and may not use with respect to physicians. The Court acknowledged, however, that HMOs, as ERISA fiduciaries, may be "obligated to disclose characteristics of the plan...if that information affects beneficiaries’ material interests."¹⁴ This dictum is a strong sign that misrepresentation claims may succeed where direct legal attacks on HMOs’ methods have failed.¹⁵

Wanted: For Fraud And Chicanery

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Taken collectively, the class-action complaints identify three areas in which serious discrepancies arguably exist between what HMOs promise consumers and what consumers actually receive. First, the plaintiffs claim that the plans’ many assurances concerning quality of care are inconsistent with their almost exclusive focus on controlling costs. Second, the complaints assert that at the same time that HMOs are representing that plan physicians continue in their traditional professional role and are therefore committed first and foremost to their patients’ welfare, they are systematically undermining physicians’ loyalty to patients by restricting their autonomy and imposing incentives to economize. Third, the plaintiffs allege that the plans, having promised to pay for all services that are "medically necessary," engage in unauthorized rationing of care—both explicitly, by refusing to pay for some services that physicians conscientiously recommend, and implicitly, by inducing physicians to cut costs. None of these allegations is frivolous on its face. Indeed, each relates to a problematic aspect of managed care that has already prompted serious questions in the courts, legislatures, the media, and the public mind. Although HMOs may escape the charge of fraud, they remain potentially subject to remedies under ERISA for the questionable ways in which they have used (in the words of one complaint) "undisclosed systemic internal policies and practices" to deny consumers coverage of a quality they were led—and thus had every contractual right—to expect.

The managed care industry naturally feels misunderstood and ill-treated in these lawsuits. After all, HMOs will contend, they have complied religiously with myriad government regulations and have done only what policymakers and employers (their principal customers) clearly expected them to do: control costs. But the plans are not being challenged for violating regulatory prescriptions, for disappointing employers’ expectations, or for deviating from standard industry practices. Instead, they have been charged with not being straight with consumers, who looked to them to take care of their families’ health.¹⁶ In truth, HMOs seem to have taken their cues mostly from government, employers, their competitors, and their marketing departments and not to have brought consumers into the decision-making loop. Thus, they have neglected to tell their subscribers clearly about their general intention to control spending at the possible expense of quality. Nor have they clearly disclosed their specific intentions to restrict physicians’ autonomy, to "incentivize" physicians in ways potentially inimical to patients’ welfare, and to deny coverage for prescribed services whenever they are deemed to fail a particular cost-benefit test.

Even though HMOs may have conducted themselves well by government’s and the industry’s own standards, that is not the principal issue here. To be sure, good intentions and compliance with regulatory and industry standards may be a solid defense to charges of consumer fraud. But they are not a sufficient answer to charges of nondisclosure, misrepresentation, and fiduciary breach under ERISA.¹⁷ Nor would it be sufficient for an HMO to claim that its cost-saving endeavors benefited subscribers by reducing plan premiums or that the economizing they achieved could be justified by cost-benefit analysis. Despite the possible validity of such claims as a matter of fact, economics, and public policy, a health plan has a serious legal problem if it fails to get reasonable contractual authority for any cost containment measures it employs to the possible detriment of patients. Here I address the merits of the class-action complaints with respect to each of the three types of abuses they allege.

Quality ("mere puffery"?). Complaints typically cite as misleading the plans’ advertising claims designed to reassure consumers about their commitment to quality of care. To establish actionable misrepresentation, the plaintiffs have to prove that the HMO’s promises went beyond the limits of what courts call "mere puffery" and generally tolerate in recognition that consumers know that advertising is self-serving and thus are duly skeptical about advertisers’ general claims of excellence. One court has already cited the puffery defense in dismissing a class action in which fraud claims were made against Aetna for allegedly misrepresenting its quality objectives.¹⁸ In several of the pending cases, however, Aetna ads are quoted at length to show that the defendants went beyond puffery and claimed to have a specific program for monitoring quality. The most specific example focused on ensuring that physicians were providing preventive care.¹⁹ Whether or not that program had enough substance to justify Aetna’s advertising, such advertising provides a weak basis for a consumer class action. If such advertising works at all, it is most likely to attract healthy rather than unhealthy subscribers, a result that would benefit, not harm, the plaintiff class (by allowing Aetna to charge lower premiums). At the same time, HMOs have strong reasons for not wanting to appear to offer especially good acute or chronic care for persons with serious health problems.²⁰ A reputation for such quality would attract subscribers who are more costly to treat. For these reasons, it is unlikely that any promises that an HMO might make in its advertising about quality of care would provide a convincing basis for a consumer class action.

This is not to say that HMOs are above disappointing reasonable consumer expectations with respect to quality of care. Because quality is difficult to detect and measure, purchasers may fail to appreciate when it is being skimped, thus making skimping by sellers more likely. Likewise, purchasers of health care may weigh tangible considerations such as cost more heavily than unmeasured quality, again tempting sellers to trim it at the margin. In particular, some employers may focus excessively on cost in purchasing health care, anticipating that their employees cannot appreciate marginal increments of quality or recognize their absence. As sellers, physicians and other providers may themselves sense that HMOs are more concerned about their fees than about small variations in quality. Accordingly, they may shade the latter to enhance their incomes —spending less time on each patient, for example.

There is little question that consumers’ information deficits concerning quality of care and health plans’ fear of adverse selection if they appeared to offer especially high-quality care represent serious market failures. Even though the threat they pose to essential quality is diminished (if not entirely offset) by substantial tax subsidies that induce consumers to spend additional amounts on health care, they should certainly be objects of legal and policy concern. Nevertheless, it is probably not appropriate for courts to try to correct for these market failures in resolving class-action litigation. It is simply too much to expect competing health plans to pay special attention to quality when it is so clearly against their commercial interests to do so. Whatever remedies might help here should come from legislatures, not the courts. In any event, despite all of their rhetoric, plaintiffs’ lawyers are unlikely to find convincing evidence of HMOs’ actively setting out to degrade essential quality. Although HMOs are committed to economizing at the margin and may run small risks in doing so, they appear scrupulous about not threatening quality in any essential way. Indeed, from the standpoint of economic efficiency, today’s HMOs seem to stop short of making many trade-offs between quality and cost that probably should be made.²¹

Physicians’ independence (whose doctor are you, anyway?). Here the complaints allege that plans misrepresent the nature of their relationships with physicians, implying that physicians remain wholly independent and as committed to the welfare of their patients as they ever were. There is substance to this charge. Without making any effort to overcome consumers’ natural and deep-seated assumption that their doctors can be trusted to be concerned exclusively with their health needs, HMOs use financial incentives, utilization review, physician profiling, and the threat of "deselection" to influence physicians’ clinical choices. Courts could easily rule that HMOs, as fiduciaries, are required not only not to misrepresent material facts but also to take special pains to ensure that naïve and ill-informed consumers are alerted to economic realities that most of them will not easily appreciate.²² Without clarity on these matters, consumers can reasonably claim to be deceived.

More than one complaint filed against Aetna quotes the declaration in its "Member Handbook and Certificate of Coverage" that Aetna physicians "maintain the physician-patient relationship with Members and are solely responsible to Members for all Medical Services."²³ This statement is alleged to be inconsistent with the limits Aetna plans impose on physician discretion and the incentives they employ to induce physician economizing. Clearly, however, Aetna intended the quoted representation (together with a separate reminder that plan physicians are neither employees of nor controlled by the plan) to protect the plan against vicarious liability for its physicians’ negligence and other torts. (It was, in other words, Aetna’s polite way of saying, "Don’t sue us. Sue your doctor.") Thus, Aetna was trying to have it both ways, exercising substantial influence over physicians’ clinical decisions while avoiding legal liability whenever a physician lets quality slip. It is at this point that courts might appropriately question HMOs’ professions of a general commitment to quality of care. Because HMOs can accept vicarious liability for their physicians’ torts and the attendant corporate responsibility for quality, a material misrepresentation might be found when a plan advertises a general commitment to quality while systematically denying any legal duty to maintain it. Class-action litigation provides a good opportunity to question the fundamental conflicts of interest that plans create for themselves when they assume responsibility for the cost of care without accepting legal responsibility for its quality.²⁴

Assigning blame. How much to blame HMOs for misleading portrayals of physician-patient relationships is a question in the class actions. Although HMOs have walked a narrow and problematic line, it was in many respects not a line of their own making but one drawn for them by strong tradition and even to some extent by the law itself. A central tenet of the conventional paradigm of medical care is that physicians are personally responsible for quality of care and are ethically bound not to abuse a patient’s trust, even when tempted by self-interest. This paradigm is directly reflected both in the law’s hostility to the "corporate practice of medicine" and in judicial hesitation to impose vicarious liability on corporate intermediaries.²⁵ HMOs also found it well entrenched in the mind of the consuming public, which did not seem at all ready to embrace a radical reinvention of the doctor-patient relationship, however much it was demanding aggressive cost containment. In these circumstances, HMOs naturally saw their mission as accommodating themselves to these public expectations, not as altering them or trying to reconcile the contradictions they embodied. To HMOs, their proper course was to assure consumers that the new medicine would be good for them (as was generally the case), not to burden them with unpalatable or undigestible facts. Thus, HMOs can argue that they were strongly called upon to control health costs and did so in the only way realistically open to them under conventional ways of thinking about medical care. This argument should provide a good answer to charges of consumer fraud.²⁶

The historical context provides no reason, however, to protect HMOs against charges of nondisclosure or misrepresentation under ERISA. That statute can easily be interpreted to require health plans, as fiduciaries, to be especially candid in their dealings with consumers even when euphemism is easier and soft-pedaling seems the kinder and gentler policy. Just as a physician is expected to level with patients in obtaining "informed consent," an HMO should spell out clearly and in some detail the choice it is offering to consumers in the marketplace. In markets as in doctors’ offices, individuals are entitled to choose for themselves, not just to have a well-intentioned surrogate decide what is best for them. Just how much disclosure is sufficient is a matter for courts to decide. At a minimum, however, HMOs should be expected to disabuse consumers of the romantic notion that their doctors’ medical decisions do not or should not include any consideration of costs.²⁷

Care provider or financing entity? Ultimately, the legal significance of HMOs’ undermining physicians’ loyalty to patients may turn on an unprecedented conceptual issue that first surfaced in Maio. To the court of appeals in that case, an HMO’s product is not the coverage and financial protection it provides but the health care actually delivered under the plan’s auspices. Thus, the plaintiffs could not object to the quality of their coverage as such but had to focus their complaint on the quality of care they actually received, any deficiencies in which "would have to be alleged and proven on an individual basis."²⁸ As the court saw it, "Aetna’s primary commitment to its HMO plan members is to provide quality health care services through its participating provider network," and the only possible proof of that pudding was in the eating, not in a comparison of the promises made with the quality of the protection itself.²⁹

Yet Aetna, like most other HMOs today, is not truly a provider of care but rather a financing entity that seeks to curb the consequences of moral hazard by placing some checks on provider discretion and introducing a degree of cost-consciousness into clinical decision making. Perhaps the best evidence of this is HMOs’ engagement of service providers as independent contractors and its related disclaimer of vicarious liability when these providers’ performance is deficient. Although early visions of managed care did contemplate extensive integration of financing and delivery and corporate provision of, and responsibility for, health services, that revolutionary model is not the rule today.³⁰ To be sure, HMOs’ representations often imply the contrary, as Aetna’s did. But that is precisely the problem that consumer class actions can and should address. It is ironic that the Maio court took Aetna’s advertised commitment to quality as proof that it was in the business of providing health services, not just arranging for them, and then used that clear misrepresentation to raise the plaintiffs’, not Aetna’s, burden of proof.³¹

Coverage (the promises they make). The class-action complaints typically allege that HMOs systematically fail to deliver all of the care they have undertaken to provide. HMOs’ contracts uniformly promise coverage of all "medically necessary" health services. On the face of it, this is a generous undertaking. Indeed, even if everyone in the health care industry understands that this is not an unlimited commitment to honor all well-considered prescriptions competent physicians might write and that individual HMOs may, within vague limits, define the term in their own ways, consumers cannot be presumed to share that understanding. Moreover, the linguistic qualification s that appear in some plan documents are probably not sufficient to lower consumers’ expectations, particularly given plans’ glowing representations about their commitment to quality. HMOs cannot easily escape the charge that they are not faithfully honoring their coverage commitments to consumers.

It is revealing to ask why HMOs made such seemingly open-ended commitments when they intended all along to resist covering many services that doctors would otherwise prescribe for their patients. Is this, as alleged, a simple case of consumer fraud? Or are there other reasons why health plans have not specified more clearly the limitations they intend to impose (or have their doctors impose) on paying for care of marginal value?

Admittedly, it is practically impossible to write contractual terms that precisely define a patient’s entitlement to care in all possible medical circumstances; indeed, this is the excuse that health plan lawyers give for committing their clients to cover all "medically necessary" services. It is not clear, however, that contracts could not be drafted to take many issues out of the never-never land of medical necessity. For example, detailed clinical protocols and prescriptive "practice guidelines" are increasingly available from many sources, and selected ones could be explicitly incorporated by reference as standards in health care contracts.³² Contracts also could specify in general language how generous the plan intends to be in cases not otherwise specifically provided for; then a well-designed procedure using medical experts could give effect to that general commitment, thus ensuring reasonably consistent coverage decisions that reflect subscribers’ collective willingness to pay for marginally beneficial care. Although the issue in the class actions is whether or not HMOs live up to their promises, a greater problem is almost certainly that HMOs promise consumers and patients altogether too much.³³ In any event, today’s health plan contracts with subscribers are much more opaque and imprecise than they need to be.³⁴

Even though HMOs are easy to criticize—and perhaps even to sue—for failing to match their performance to the generous terms of their contracts, they are not solely responsible for creating the legally perilous situation in which they now find themselves. At the time those contract terms were written, the public clearly expected health plans to assume active control over health care costs. To the industry, this strong consensus constituted a clear invitation to implement the methods of managing care that HMOs have universally employed. In responding to that invitation, individual plans relied too heavily on that now-collapsed consensus.

There is another reason, too, why HMOs neglected to obtain good legal cover for what they intended to do to limit coverage. Early HMOs and their lawyers could not depend on the courts to interpret contractual limitations objectively and to enforce them fairly.³⁵ Starting from the premise that consumers cannot easily understand and consent to arcane contractual limitations, courts generally sought to give effect to consumers’ "reasonable expectations" and were reluctant to enforce strictly any but the most unambiguous and uncontroversial limits on coverage. Indeed, judges had an open invitation to construe any contractual ambiguity they detected to reach pleasing results in individual cases. In these circumstances, health plans could see little to be gained by being candid and explicit about their intention to ration financing for wasteful or marginally beneficial care. In light of this historical circumstance, HMOs must feel that the new charges against them are particularly unfair. Indeed, the prominent role played by earlier plaintiffs’ lawyers in disabling private contracts as warrants for effective management of health care costs should make HMOs especially resentful of the charge that they should have obtained better contractual authority for their economizing efforts.

In the class actions, the circumstances outlined above should be enough to defeat claims of fraud and racketeering. There is still ample room, however, for courts to find ERISA violations and to demand fuller disclosures and more informative contracts in the future. A possible benefit that might flow from the class actions is greater appreciation by judges of the value to consumers of evenhanded, predictable enforcement of contractual limitations on coverage. If better contracts are written and appropriately enforced, consumers will in time have much better opportunities to economize sensibly in purchasing health care than HMOs offer them today.

Bringing The Villains To Justice

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The foregoing discussion has explained why the plaintiffs in the pending class actions against HMOs should generally fail in their claims for triple or punitive damages. Courts could easily find that HMOs violated ERISA, however, when they systematically misrepresented or failed to disclose material facts to prospective subscribers and took the rationing of financing beyond contractual bounds. Although the penalties for ERISA violations are much less onerous than those for criminal fraud under RICO, the class-action plaintiffs and their lawyers naturally hope to recover some monetary damages for past wrongs in addition to prospective injunctive relief and attorneys’ fees.³⁶ Not having suffered any physical injuries for which compensation might be paid, however, the plaintiffs must argue that ERISA violations injured them in their pocketbooks, inducing them to purchase coverage that was of less value to them than they were led to expect. There are serious legal questions whether such money damages are recoverable at all under ERISA.³⁷ But even if the plaintiffs can show that they are entitled to recover excess profits that an HMO earned at their expense as a result of its misrepresentations, most managed care companies suffered substantial financial losses on their HMO business during the relevant periods.³⁸ Thus, whatever the plaintiffs may have thought they were paying for, the coverage they actually enjoyed came to them at a bargain price. No doubt creative accountants could come up with some plausible damage claims, but the fact remains that HMOs in general, each selling roughly similar coverage in a highly competitive market, did not profit appreciably from whatever deceptions they practiced. Thus, the plaintiffs may find it difficult to establish their entitlement to significant money damages.

The most desirable outcome of these lawsuits from the standpoint of the public interest would be injunctive relief.³⁹ A series of court orders could specify just how HMOs can and should disclose their respective features in their marketing materials and plan descriptions and how they might state most clearly in their contracts and certificates of coverage whatever limits they intend to impose on patient entitlements.⁴⁰ A remedial injunction should scrupulously avoid prescribing the substantive terms of health coverage and should in no way curtail an HMO’s competitive freedom in designing its benefits and structuring its internal arrangements. It would be particularly regrettable, for example, if HMOs and plaintiffs’ lawyers negotiated settlements with all defendants that knit the managed care industry into a cartel with agreed-upon standards. In Texas the state’s attorney general recently sought to get a number of HMOs to give the same "Assurance of Voluntary Compliance" that Aetna had given in a case it had settled. Antitrust issues would arise if health plans were to surrender their competitive freedom to design their own coverage and business methods by agreeing with each other on the business methods they will or will not employ, even through an intermediary such as a state official or a federal court.

Courts would perform a valuable function, however, if they could clarify what an HMO must do to obtain from its subscribers effective contractual authority to conduct its business in a particular way and to ration financing, or actual care, in accordance with a standard of its own choosing. To be sure, courts will in any event find it difficult to frame injunctions that give consumers new and useful information that goes beyond new boilerplate language added to plan descriptions. But it is crucial for the future of managed care as a mechanism to give consumers control of how (and how much of) their money is spent on health services that these lawsuits result in more than a cathartic expression of public anger at HMOs. Ideally, court orders making HMOs clearly disclose their business methods would induce some health plans to reconsider those methods, possibly changing them in consumer-friendly ways—perhaps by dispensing with gatekeepers and moving to more open and transparent rationing of financing, by explicitly requiring physicians routinely to inform patients of their treatment options, or by redesigning coverage to provide indemnity payments (rather than no payment) if a patient elects a therapy that the plan does not cover.

Restoring Order In The Territory

Top Private Litigation, Public... High Noon At The... Wanted: For Fraud And... Bringing The Villains To... Restoring Order In The... NOTES

 
After the Supreme Court rejected the plaintiff’s complaint in Pegram v. Herdrich, many thought that the ball of HMO reform was now entirely in Congress’s court. Justice David Souter did seem to serve the matter to the legislature when he wrote for a unanimous Court that the legislative process is a "preferable forum for comprehensive investigations and judgments of social value, such as optimum treatment levels and health care expenditure."⁴¹ Heads therefore turned back to Congress, where proposals to create a new bill of patients’ rights against HMOs had been batted around for some time. Although the 106th Congress failed to adopt HMO legislation, many in Congress are still strongly tempted to respond to the public outcry against HMOs by enacting additional regulatory restrictions. Nevertheless, a legislature is not necessarily the best place to decide how HMOs should arrange their internal affairs or conduct their daily business. Given that all of the alternatives are less than perfect, the marketplace may ultimately be a better forum in which to determine which HMOs are unacceptably risky. There, consumers, employers, and employees could have some say about institutional arrangements and particularly about the levels of cost and quality they prefer. Circuit Judge Frank Easterbrook, dissenting on an issue in Pegram in the court of appeals, emphasized that "assessments of this kind belong to plan sponsors and participants, not to judges."⁴² (Nor to legislatures, he might have added.) The most promising claims in the new class actions are premised on this same notion, focusing as they do on sanctioning and correcting HMOs’ past unwillingness to give consumers good information about the choices they offer.

Can one realistically imagine a legal system that allows consumers to choose freely among a variety of health plans, each featuring different internal arrangements and a different balancing of cost, quality, and other factors?⁴³ Those who believe that a consumer-driven health care market cannot be trusted argue that as a practical matter, consumers have no adequate way of knowing the true nature and standard of care they are choosing in selecting a particular health plan. Yet this is precisely the proposition being tested in the consumer class actions against HMOs. The goal of courts in resolving these cases—and, indeed, the goal of national health policy generally —should be to encourage health plans to differentiate themselves explicitly from one another on the basis of their internal arrangements and the intensity and style of care they intend to underwrite for their enrollees. More extensive disclosures and more informative contracts, some of which promise consumers only basic or essential care and not all potentially beneficial (or "medically necessary") services, would give consumers for the first time a full range of price and quality options in purchasing health care, just as they have in purchasing other goods and services.

Any reform, whether implemented by judicial injunction or otherwise, that increases the quality and honesty of the information emanating from health plans and the precision, clarity, and enforceability of their contracts with subscribers would fill a crucial gap in American health policy.⁴⁴ Once consumers can finally exercise real choice with good information about the various features and potential downsides of the coverage they are buying, then perhaps courts and politicians could rest assured that the market for health care was giving people what they want. Only a well-functioning market can confer on HMOs the legitimacy they so clearly lack today—and so obviously need to carry out their highly sensitive but vital mission of giving consumers good value for money in health care spending.

NOTES

Top Private Litigation, Public... High Noon At The... Wanted: For Fraud And... Bringing The Villains To... Restoring Order In The... NOTES

 

1. Pegram v Herdrich, 120 S. Ct. 2143 (2000). The leading consumer actions still pending have been consolidated into a single proceeding, which also consolidates (on a separate "track") a number of similar class actions brought on behalf of providers. Humana Inc. Managed Care Litigation, S.D. Fla., MDL No. 1334. At this writing, the district judge was expected to rule in the near future on the defendants’ motions to dismiss the cases on the "subscriber track."
2. Lawyers for the plaintiffs have expressed the hope that their initiative will compensate for what they see as political gridlock preventing a proper legislative response to the public-opinion backlash against HMOs. See A. Bryant, "Who’s Afraid of Dickie Scruggs," Newsweek, 6 December 1999, 45–48.
3. See text accompanying Notes 6–8.
4. A failure to allege specific adverse health effects was fatal to the class’s claims in Maio v Aetna Inc., 221 F.3d 472, 493 (3d Cir. 2000). ("Simply put, appellants cannot demonstrate that Aetna’s policies ‘gave [appellants] less’ of a ‘health care product’ than what Aetna promised to deliver in terms of the level and quality of health care coverage under its HMO plan unless they allege and prove that those systemic practices actually negatively affected the health care that Aetna provided to its HMO members through its participating providers.") This ruling, even if correct (see text accompanying Notes 28–31), does not necessarily invalidate all consumer class actions against HMOs—for reasons explained later.
5. Dismissals include Maio v Aetna Inc.; Ehlmann v Kaiser Foundation Health Plan of Texas, 198 F.3d 552 (5th Cir. 2000); and Weiss v CIGNA Healthcare Inc., 972 F. Supp. 748 (S.D. N.Y. 1997). Favorable rulings include Shea v Esensten, 107 F.3d 625 (8th Cir.), cert. denied, 522 U.S. 914 (1997); and Drolet v Healthsource Inc., 968 F. Supp. 757 (D.N.H. 1997). Although the Supreme Court ruled against the plaintiff in Pegram, it left the door open to challenges to HMOs based on other legal theories. See text at Note 15.
6. 120 S. Ct. at 2156. See also 120 S. Ct. at 2157 ("the Federal Judiciary would be acting contrary to the congressional policy of allowing HMO organizations if it were to entertain an ERISA fiduciary claim portending wholesale attacks on existing HMOs solely because of their structure").
7. 221 F.3d at 499. See also Note 10.
8. Weiss, 972 F. Supp. at 753.
9. Pegram, 120 S. Ct. at 2150.
10. Although the plaintiffs in Maio clearly alleged misrepresentations as the basis for their claims, the district court interpreted their challenge much more broadly, saying, "Plaintiffs’ expression of dissatisfaction with defendants’ plans—indeed with HMOs in general—is more appropriately directed to the legislatures and regulatory bodies of the several states." Maio v Aetna Inc., 1999 WL 800315, at 2 (E.D. Pa. 1999), aff’d, 221 F.3d 472 (3d Cir. 2000). The court of appeals likewise read the plaintiffs’ case, at crucial points, as untethered from the operative contracts, viewing the situation simply as one "in which the federal courts are asked to determine the social utility of one particular HMO structure as compared to another." 221 F.3d at 499.
11. 120 S. Ct. at 2156.
12. G.P. Joseph, Civil RICO: A Definitive Guide (Washington: American Bar Association, 2000), 121–122.
13. It would be unusual to find a firm guilty of consumer fraud when it had adhered, without collusion, to practices customary throughout its industry. Whether collusion could be proved is doubtful. Despite important similarities, each plan appears to have adopted its own disclosure policies and contracts.
14. 120 S. Ct. at 2154 n.8. See also Drolet, note 5 (upholding a complaint based on misrepresentations of physician independence).
15. However, defendants argue that specific federal and state regulations already prescribe extensive disclosures by HMOs and that judicial supplementation of those requirements on the basis of more general statutory policies (such as fiduciary obligations) would be disruptive and inappropriate. See Ehlmann at 555 ("where ERISA provides a section specifically dealing with a particular information scheme, courts should not supplement that scheme by reference to a far away provision in another part of the statute"). See Note 17.
16. The plaintiffs must somehow get around the argument that they have not been victimized as consumers because, in most cases, they did not select the health plan themselves but instead enrolled in a plan selected by their employer as their purchasing agent. Whatever the employees may have thought was being purchased on their behalf, their employers certainly knew most of what the plaintiffs claim they themselves were not told, and it is normal to attribute an agent’s knowledge to the principal. Nevertheless, HMO advertising and plan descriptions are aimed at consumers, not just employers, perhaps providing a basis for subscribers to obtain legal relief if the plans, as fiduciaries, withheld or obscured relevant information and deliberately fostered beneficiaries’ misunderstanding. See Drolet at 760 (plaintiff in ERISA class action characterized as "a member of the limited class of persons who have been vested by Congress with the right to expect that fiduciaries of employee benefit plans will refrain from making false statements and material misrepresentations").
17. In arguing that they fully satisfy their obligations to consumers by complying with explicit disclosure requirements in federal and state law (see Note 15), the defendants are essentially inviting the courts to view health care as a public utility–like industry, in which consumers need to be protected against dishonest or financially unreliable sellers but have little need (because products are highly standardized) to distinguish among sellers on the basis of variations in the nature or quality of their products. Under this view, standardized disclosures about benefit packages would be all that consumers or the law should require. It is not obvious, however, that Congress intended consumer protection to be entrusted exclusively to public regulators or that it anticipated that HMOs, like public utilities and conventional insurance companies, would offer only essentially fungible products, not varying their content except in legally prescribed and defined ways. Nevertheless, even though the legal theory of the consumer class actions is rooted in free-market principles, the judicial system may ultimately resolve them under regulatory ones.
18. Maio v Aetna Inc., 1999 WL 800315 (E.D. Pa. 1999), aff’d on other grounds, 221 F.3d 472 (3d Cir. 2000).
19. Ibid., 221 F.3d at 476.
20. R.A. Dudley et al., "The Impact of Financial Incentives on the Quality of Care," Milbank Quarterly 76, no. 4 (1998): 649–686.
21. As the populists they are, plaintiffs’ lawyers will insist that economizing is reprehensible if it puts even one patient’s health in jeopardy. Yet welfare economics teaches us that trade-offs matter, that quality is not an absolute goal, and that cost-benefit analysis is justified. See United States v Carroll Towing Co., 159 F.2d 169, 173 (2d Cir. 1947) (setting forth the famous "Learned Hand" test for negligence, which contemplates comparing the cost of the potential harm, discounted by its probability, with the cost of preventing its occurrence). Health plans, however, have generally not gone so far as to embrace cost-benefit analysis, focusing their cost containment efforts only on "cost-effectiveness" and the elimination of services and incremental costs that seem to yield no benefit at all. See C.C. Havighurst, Health Care Choices: Private Contracts as Instruments of Health Reform (Washington: AEI Press, 1995), 92–152.
22. Consumers are apparently extremely reluctant to recognize that doctors’ clinical choices may reflect financial considerations. T.E. Miller and C.R. Horowitz, "Disclosing Doctors’ Incentives: Will Consumers Understand and Value the Information?" Health Affairs (July/Aug 2000): 149–155.
23. See, for example, Maio, 221 F.3d at 475.
24. Arguably, the best solution to the quality dilemma would be to make health plans, or in some cases their subcontractors, liable for physician malpractice and other torts, the frequency of which their policies may greatly affect. See C.C. Havighurst, "Vicarious Liability: Relocating Responsibility for the Quality of Care," American Journal of Law and Medicine 26, no. 1 (2000): 7–29.
25. See National Health Lawyers Association, Patient Care and Professional Responsibility: Impact of the Corporate Practice of Medicine Doctrine and Related Laws and Regulations (Washington: NHLA, 1997). In Petrovich v Share Health Plan Inc., 719 N.E.2d 756 (Ill. 1999), the Illinois Supreme Court imposed vicarious liability on an HMO but did so, seemingly, not to induce HMOs in general to take active responsibility for quality of care but as an exception to the usual rule intended to discourage HMOs from exercising any influence over the work of treating physicians.
26. See Note 31 for a ruling to this effect in a RICO case.
27. See Miller and Horowitz, "Disclosing Doctors’ Incentives."
28. 221 F.3d at 488.
29. Ibid., 491.
30. See Havighurst, "Vicarious Liability," 10–11; and W.A. Zelman and R.A. Berenson, The Managed Care Blues and How to Cure Them (Washington: Georgetown University Press, 1998), 12.
31. An equally striking irony is that the district court, although it also dismissed the complaint, treated physicians as wholly independent decision makers whose unethical betrayals of patients’ interests, rather than anything Aetna did, were the cause of any problems the plaintiffs might face. See Maio, 1999 WL 800315, at 2.
32. See, for example, Jones v Kodak Medical Assistance Plan, 169 F.3d 1287 (10th Cir. 1999).
33. See Note 21.
34. See Havighurst, Health Care Choices, 178–215, 227–262, and 146.
35. Ibid., chap. 9; M.A Hall and G.F. Anderson, "Health Insurers’ Assessment of Medical Necessity," University of Pennsylvania Law Review 140, no. 5 (1992): 1637–1712; and C.C. Havighurst, "Prospective Self-Denial: Can Consumers Consent Today to Accept Health Care Rationing Tomorrow?" University of Pennsylvania Law Review 140, no. 5 (1992): 1755–1808.
36. Although class attorneys may profit more if money damages are allowed, ERISA provides that defendants must pay the reasonable attorneys’ fees of successful plaintiffs in any case. 29 U.S. Code Annotated, sec. 1132(g) (2000).
37. Although ERISA suggests that damages for fiduciary breaches may not be recoverable by injured persons but only on behalf of the plan itself (for the benefit of beneficiaries), the Supreme Court has interpreted the statute in a way that may allow a direct recovery for intentional misrepresentations by a fiduciary. Varity Corp. v Howe, 516 U.S. 489 (1996). But see Mertens v Hewitt Assocs., 508 U.S. 248 (1993); and Drolet at 760 ("Drolet’s right to retrospective relief [may be limited] if she cannot demonstrate she relied on defendants’ alleged misrepresentations"). See also Note 4. Defendant HMOs also claim that under the so-called filed-rate doctrine applicable to public utilities, state regulation of their rates precludes collateral attack on their premiums. See, for example, Taffeta v Southern Co., 967 F.2d 1483 (11th Cir. 1992) (en banc).
38. "Over Half of HMOs Lose Money for Second Consecutive Year," Medical Benefits (September 1999): 3.
39. The defendants argue that injunctive relief would be inappropriate under the doctrine of Burford v Sun Oil Co., 319 U.S. 315 (1943), under which courts abstain from granting injunctions that would disrupt a well-articulated regulatory scheme. Again (see Note 17), the defendants’ reference to public utility law implies that health care is the product of a pervasively regulated industry, not a commodity bought and sold in negotiated voluntary transactions.
40. A particularly desirable outcome might be formulations of alternative contractual and other language that health plans of all kinds could use to explain for consumers’ benefit their specific business methods, their intended level of generosity in defining coverage, and the style of medicine they expect their participating physicians to practice. A possible model might be so-called Medigap insurance, for which federal law differentiates ten varieties of coverage. See 42 U.S. Code, sec. 1395ss (2000), 42 CFR, sec. 403.200 (2000). The courts, in consultation with the managed care industry, might pursue a comparable strategy for informing consumers about a wide range of options in the market for health coverage.
41. 120 S. Ct. at 2150.
42. Herdrich v Pegram, 170 F.3d 683 (7th Cir. 1999) (opinion dissenting from denial of rehearing en banc).
43. If not, one may ask why private health financing, with its high administrative costs, is retained at all. See C.C. Havighurst, "Why Preserve Private Health Care Financing?" in American Health Policy: Critical Issues for Reform, ed. R. Helms (Washington: American Enterprise Institute, 1993), 87. Also, see Havighurst, Health Care Choices.
44. See W.L. Sage, "Regulation through Information: Disclosure Laws and American Health Care," Columbia Law Review 99, no. 7 (1999): 1701–1829; and A. Enthoven and R. Kronick, "A Consumer-Choice Health Plan for the 1990s: Universal Health Insurance in a System Designed to Promote Quality and Economy," New England Journal of Medicine 320, nos. 1 and 2 (1989): 29–37, 94–101.

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