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The Impact Of State Managed Care Liability Statutes

Abstract

 
Since the mid-1990s ten states have enacted statutes that have created tort liability for patient harm caused by managed care organizations, and similar liability has been considered in Congress. This study is the first attempt to evaluate the impact of these state statutes on liability exposure and litigation activity. These statutes have resulted in little or no litigation and are not seen as creating any fundamentally new type of liability exposure. This muted effect is not attributable primarily to ERISA preemption but, rather, to the costs and complexities of suing a health plan, which deter lawyers from including this additional defendant in medical malpractice cases. The main drivers of increased liability concerns are the large class-action lawsuits that are pending under federal law and the few state cases with massive punitive-damage verdicts prior to these statutes. This suggests that a federal liability statute is not likely to greatly increase liability exposure unless it allows such suits.

Managed care liability statutes were enacted out of concern that MCOs are not held sufficiently responsible for personal injury caused by their wrongful actions or inactions.⁴ Space does not permit a full exegesis of barriers to liability, but they can be summarized as follows: (1) Common-law tort theories have not yet fully developed to recognize appropriate forms of liability for MCOs; (2) in some states, historical precedents banning corporations from practicing medicine were interpreted as barring MCOs from being held liable for the delivery of care; and (3) the federal Employee Retirement Income Security Act (ERISA) preempts state law from basing personal injury claims on the denial of benefits by employer-sponsored health plans.⁵

Description Of Liability Statutes

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States’ managed care liability statutes are far from uniform. While they all create a right to sue MCOs for wrongful actions that cause personal injury by affecting medical care, these statutes come in a variety of forms that target narrower or broader ranges of managed care activities that might have this effect.⁶ Arizona, Georgia, Louisiana, and West Virginia have narrower statutes that address only coverage determinations made by MCOs. The remaining states’ statutes apply more broadly to many or all respects in which MCOs might affect treatment decisions, including their role in directly arranging for or providing care.

Direct and vicarious liability. In legal terminology, the broadest statutes create, or at least recognize, both direct and vicarious liability. Direct liability applies when the MCO is the primary wrongdoer. Vicarious liability holds MCOs secondarily liable for errors made primarily by treating physicians. Most of these statutes are not clear about which forms of direct liability they might encompass, and several are ambiguous about the extent to which they create vicarious liability. For instance, although many of these statutes state that they create no new form of vicarious liability, several use language that appears to invoke vicarious-liability concepts. In short, the exact meaning of these statutes awaits interpretation through state appellate court decisions.

Preconditions for bringing suit. Managed care liability statutes also vary in the preconditions for bringing suit. Several states limit suit to patients with serious injuries (California, Georgia, New Jersey, and Washington) or require that external review mechanisms be pursued prior to suing for damages, except in certain circumstances (Arizona, California, Georgia, New Jersey, and Texas).

Damage caps. Most states leave the measure of damages to general governing law. Often this includes a separate, previously existing statute that caps the amount of punitive or noneconomic damages that can be recovered in any medical liability or tort case. There is a great deal of uncertainty over whether these general damage caps will apply to managed care liability statutes.

Despite the complexity of these state statutes, at its core each statute is thought to expand or intensify the liability exposure of MCOs. This naturally leads to two broad inquiries: (1) What differences do these statutes make in the extent of liability exposure; and (2) is this change in liability socially productive, or does it cause inappropriate behavior and costs? This paper addresses only the first of these questions in depth.

Study Methods

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As part of a larger study of managed care patient protection laws, six states were selected for in-depth case studies: two states with broad liability statutes (New Jersey and Texas), one state with a limited liability statute (Louisiana), and three states with no liability statute (Iowa, Michigan, and Virginia).⁷ These states were selected after a review of all fifty, to reflect a range of market, demographic, and legal characteristics.

In each state six to twelve confidential interviews were conducted in 2002 with key informants, including plaintiffs’ and defense lawyers, health plan managers, regulators, patient advocates, and various industry observers. In addition, two different focus groups were conducted, each with eight to ten experienced health care lawyers from across the country, and interviews were conducted at the home office of three of the largest national health plans. The total of eighty-five interview and focus-group subjects consisted of twenty-two in-house lawyers with health plans (eight national and fourteen more locally or regionally focused), seventeen managed care executives or advisers, ten independent defense-oriented lawyers (mainly representing health plans), twenty-three plaintiffs’ lawyers or patient advocates, and thirteen other market participants or observers (such as regulators or industry analysts). About half of these key informants focused on liability issues in one of the six states we selected for in-depth study. The rest addressed liability issues nationally or in a scattering of ten other specific states, including four other states with managed care liability statutes (California, Georgia, North Carolina, and Oklahoma).

Interviews and focus groups were semi-structured, following an interview guide that allowed for substantial variation to focus on the topics of particular relevance to those being interviewed. Individual interviews ranged from thirty to ninety minutes, but longer interviews covered a broad range of other issues relating to managed care patient protection laws, and discussion of liability issues ranged from five minutes to a half-hour. In addition, we researched newspapers, legal and trade journals, and court decisions. Standard qualitative methods were used to compile and interpret these sources of information.⁸

Study Results

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Overall impact. Overall, lawyers on both sides of the table reported that these statutes have not greatly increased MCOs’ liability exposure, and in the words of more than one observer, they have been a "non-event." Most plaintiffs’ lawyers reported that the plaintiffs’ bar was not suddenly viewing health maintenance organizations (HMOs) as being a more attractive target for suit. Defense lawyers viewed these statutes as merely "another arrow in the quiver" of plaintiffs’ lawyers. Health plan lawyers consistently said that they were not "quaking in their boots" but were taking a "wait and see" attitude toward the statutes. Although there was at first "a lot of worry," one lawyer said, "after more sober cost-benefit analysis," most health plans did not see these statutes as creating any major new source of liability.

Liability exposure. These key informants did have substantial differences of opinion about the extent of managed care liability exposure, but views did not differ noticeably according to the presence or absence of these statutes. Instead, the most visible driver of opinions about liability was whether the subject had more of a national or a local perspective. Most subjects who were focused on one of our particular study states, such as lawyers with local HMOs or Blue Cross plans, felt that the general liability exposure is low or only moderate. This was true in states both with and without managed care liability statutes. In the words of one health plan executive in a state with a broad liability statute, liability is more of a "theoretical concern" or general "cloud," created by the sense that "anyone can sue over anything," rather than a specific threat that drives health plans’ decision making. Many local health plan lawyers could think of only one or two tort suits by patients against their own company, and sometimes none, either before or after these statutes were enacted. Such suits typically were dismissed or settled for small amounts.

Quite a different perspective came from subjects who have a more national perspective (most of whom were with health plans). Although some agreed with the assessment of low liability exposure, most thought that it was strong or substantial. In the words of one defense lawyer, the "sharks are in the water" and are "sniffing blood." Others said that "lawsuits are coming at us from places they haven’t come before"; that the liability threat is "real, not imagined"; that there is enough potential for liability "to get into trouble"; and that although there was little real concern five years ago, there is "more panic" now.

Primary drivers of liability. When asked to identify the primary drivers of liability, key informants pointed to a variety of sources. Prominent in the minds of many were the large class-action suits that have been brought under the federal Racketeer Influenced and Corrupt Organizations (RICO) Act and ERISA statutes.⁹ Also mentioned frequently were the very large punitive-damage verdicts, approaching $100 million, which have been issued by juries in a few state cases prior to the enactment of these statutes.¹⁰ Other interview subjects attributed the liability threat to more traditional types of suits, which are "fueled by" the "constant drumbeat" of negative press generated by the media and patient advocacy groups that create the perception that MCOs are "cruel and heartless." One defense lawyer said that no one thing accounts for the liability threat. Rather, "it’s everything," as MCOs confront multiple theories of liability.

Number and types of suits. To date, however, there is no evidence of the "flood of litigation" that was predicted when states began to enact right-to-sue laws. The Texas statute has been in effect the longest—since 1997—and so Texas has the most litigation experience. According to the Texas lawyers we interviewed, only about twelve to fifteen lawsuits have been filed under the Texas statute, far fewer than anyone expected. Most of these were filed in the second through fourth years after enactment, shortly after the first judicial decision holding that the statute is consistent with ERISA (discussed more below). In recent years the stream of new case filings has "gone down to almost nothing." The first Texas case, Plocica v. NYLCare Health Plans Inc., was settled in 2000, and the first jury verdict exonerated the HMO in Brewer v. Chang. A second jury verdict, Pybas v. Cigna HealthCare, awarded $13 million (including $10 million in punitive damages) against CIGNA for prematurely discharging a nursing home patient who later died. Other Texas cases were settled for undisclosed amounts, were dismissed because of ERISA preemption, or are still pending.

In all of the other states combined, experienced lawyers and other key informants knew of only a few suits being filed under these statutes, and this was confirmed in our research of news articles and legal databases. Most of these states had not yet had a single suit filed—even populous states such as California and New Jersey (although some states have had nonstatutory suits). For instance, a patient advocate from New Jersey thought it was remarkable that nothing had happened during that statute’s first year, even though the New Jersey statute had been "waved around" as having a stronger version of liability than was contained in a pending federal bill.

Key informants attributed this dearth of litigation activity to several factors noted below. Notably, however, no one pointed to the various limitations or qualifications in these statutes that might be viewed as creating hurdles to suit. For instance, plaintiffs’ lawyers said that the list of more serious health conditions one must have in order to sue in some states is not limiting because no plaintiffs’ lawyer would want the case anyway unless the patient had a condition that would merit large damages. Lawyers also said that having to file for external review before suing is not a barrier and in fact is seldom done, since usually it is too late for external review when a case arises.

One reason frequently given for the absence of increased litigation is that most lawyers do not see the right-to-sue statutes as creating any fundamentally new theories of liability. At their core, most of these statutes create a form of liability akin to liability for "bad faith" denial of insurance benefits. Some statutes also appear to create vicarious liability for erroneous clinical determinations made by treating physicians. Most interview subjects had a difficult time distinguishing these theories of liability from what was already available, at least in theory, under the state’s common law. Although many of these states lacked a clear precedent applying these general tort theories directly to MCOs, most lawyers we spoke to thought that it was "just a matter of time, given the right set of facts" before courts would be willing to "hold [MCOs] responsible for their own decisions." Therefore, these statutes were viewed, for the most part, as doing little more than codifying existing state common-law theories of liability, not as creating a new "right to sue" MCOs.

Secondary effects of statutes. This is not to say, however, that these statutes are meaningless or completely without legal effect. These experienced lawyers pointed to several secondary, but important, effects. First, many lawyers, both plaintiff and defense, said that these statutes made it somewhat easier to articulate theories of liability, especially in states without previous appellate court precedents on point, since the statutes can easily be cited as legal authority for bringing a claim. Second, in the few states such as Texas where the "corporate practice of medicine" doctrine had been a bar to suit, the statute was seen as "putting a nail in the coffin" of this obstacle to liability. However, even in Texas this perceived barrier to suing was said to be far from absolute in practice. Instead, Texas lawyers explained that the corporate-practice defense was just another argument that MCOs often made but that courts often did not accept.

Also, many subjects commented that the state statutes had some impact on health plans’ behavior, even though they might not have made a major change in the law, simply by focusing more attention on the potential for being sued when personal injury results from managed care restrictions. This heightened attention prompted many health plans to review their managed care practices from a legal risk–management perspective. Although health plans said that this review did not lead them to change the substance of many or any of their medical management policies or other core managed care strategies (such as gatekeeping and capitation), most said that liability is one of the factors that has caused them to improve their procedures for making coverage determinations.

Avoiding ERISA preemption. Potentially the most significant effect of these statutes is to provide a route around ERISA preemption of state-law liability. Lawyers noted that as ERISA rulings have evolved in recent years, preemption appears to be eroding theories of liability that are based on quality of care rather than on making coverage determinations. A quality-of-care theory sounds more like vicarious liability for medical malpractice, which ERISA clearly does not preempt, since the primary wrongdoer is the treating physician, not the health plan. It is on this basis that an appellate court found the Texas statute to be consistent with ERISA, since the court read the statute as creating only vicarious liability (a reading that most lawyers thought was strained or flat wrong under the statute’s language).¹¹ Plaintiffs’ lawyers in Texas, however, have not restricted themselves to pure vicarious theories of liability. Instead, they have used the Texas statute to articulate liability theories under which the MCO is the primary wrongdoer but is accused of making a bad medical decision rather than a bad coverage decision. These attempts to blur the distinction between medical treatment and insurance coverage decisions aim to take advantage of another Supreme Court precedent that suggests that liability claims based on "mixed" medical and coverage decisions might not be preempted.¹²

So far, these attempts have been largely successful in appellate court decisions from the Third Circuit (which covers New Jersey) and to a lesser extent from the Fifth Circuit (which covers Texas).¹³ There was widespread agreement in our interviews that ERISA preemption is "eroding" or being "diluted" "month by month" by various appellate court decisions that have "chipped away at the veneer" of the idea that "you can’t sue your HMO." One defense lawyer said, "Nobody can be sure what court is going to rule which way" on preemption or whether a lawyer "can find a creative way to keep [the case] in state court." Defense lawyers noted that a variety of possible defenses, such as ERISA preemption, are possible but that none of these is viewed as "airtight."

Several defense lawyers said that "smart plaintiff lawyers" are learning how to plead their cases to "get around ERISA," by framing almost any scenario as a quality-of-care issue rather than a covered-benefits issue. Plaintiffs’ lawyers in some states agreed that ERISA is not a bar to suing as long as you avoid "pleading into the teeth of ERISA" by taking the "square peg of a benefits denial case and fitting it into the round hole of a direct liability theory." Two very experienced lawyers in the Fifth Circuit said that the only kinds of cases they would decline to take based on ERISA preemption are denials of coverage based on explicitly excluded services, such as not covering any organ transplants. However, ERISA does not prevent them from taking cases that involve coverage denials that are based in part on medical criteria, and they are taking cases now that they would have turned down five years ago based on ERISA preemption.

Despite this erosion, ERISA preemption remains a hill that plaintiffs must climb. Several lawyers noted that decisions finding ways around ERISA are still localized to some jurisdictions, whereas in other jurisdictions the ERISA barrier remains much stronger. Some plaintiffs’ lawyers said that they are unwilling to file suits based on coverage denials because leading ERISA preemption rulings have not yet been overruled. Most defense lawyers we spoke to thought that the recent Supreme Court rulings reaffirm preemption "at its core" and raise questions or set limits only at the boundaries. Thus, at the moment, although ERISA preemption is far from absolute, it creates substantial uncertainties in plaintiffs’ ability to bring suit under these state statutes, because of the difficulties in drawing the lines required by the evolving federal court analysis.

Finding the right case to bring. If the ERISA barrier were removed, these key informants still had serious doubts about whether these statutes would give rise to much litigation, because of the gatekeeping role that plaintiffs’ lawyers play in determining which kinds of litigation merit time and effort. Contrary to the common perception that plaintiffs’ lawyers are eager to add more deep-pocket defendants to their lawsuits, almost all of the plaintiffs’ lawyers we interviewed said that they are very reluctant to sue health plans unless the right set of facts presents itself. Because plaintiffs’ lawyers work on a contingency-fee basis, they have to fund the costs of litigation out of pocket. These expenses are usually several tens of thousands of dollars, even in ordinary medical malpractice cases. Lawyers explained that adding an entirely different theory of liability and a large institutional defendant with "infinite resources" to defend itself greatly magnifies the anticipated cost and length of litigation, as does the introduction of ERISA preemption issues. A defense lawyer agreed that suits against health plans are among "the most complex you’ll ever encounter."

Cases harder to litigate Plaintiffs’ lawyers noted that unless a physician works full time for one health plan, suing both the physician and the health plan makes cases harder to settle, and using newer theories of liability makes an appeal by the defendant more likely if there is a successful trial. Also, the absence of state appellate decisions under these statutes creates large uncertainties about which types of experts are required at trial, what kind of evidence is admissible, and how jury instructions should be framed, all of which create a much higher risk of reversal on appeal. According to one experienced Texas lawyer, "The simple truth of the matter is that no one is going to invest a small fortune in a case whose outcome is uncertain."

Providers are better targets than MCOs. Plaintiffs’ lawyers explained that taking on these additional challenges is unnecessary if the facts point to other well-insured defendants, such as the physician or hospital, as the potential wrongdoer. In the words of one lawyer, "What do I need with another set of lawyers when I already have the [providers] on the hook?" Another lawyer said that he likes to "use a rifle rather than a shotgun," meaning that he needs a "very good reason" to add another defendant that will bring in another set of lawyers, experts, and depositions. Another said, "If you have a great medical malpractice case, why would you want to screw it up by bringing in an HMO?" Therefore, although plaintiffs’ lawyers were interested in seeing these statutes tested, most of the ones we interviewed, including some who review several hundred potential medical malpractice cases each year, reported that they had not yet seen the right set of facts for a test case.

Deep-pocket MCOs. Lawyers in several states explained that the major advantage to naming an MCO as a defendant is the possibility of obtaining very large punitive damages or higher compensatory damages by introducing economic issues in order to "poison the well." This advantage is minimized, however, in states with caps on damages that apply to health insurers. In addition, the prospect of punitive damages is realistic only when the health plan appears to be the primary wrongdoer. However, several experienced plaintiffs’ lawyers explained that they rarely or never encounter malpractice cases involving a denial of coverage or a health plan’s interference with treatment. Instead, at most, physicians sometimes claim that they failed to offer treatment because they thought that it would not likely be covered, but physicians are reluctant to claim even this since it suggests that they succumbed to economic influence. In the words of one defense lawyer, "It is going to be a freak situation where a doctor comes forward and says that he altered his treatment based on what the insurance will pay for."

Looser managed care controls. This experience is consistent with other reports that health plans in recent years have lessened many managed care controls, such as greatly reducing the number of procedures that require prior authorization or allowing patients to go directly to specialists without seeking prior approval.¹⁴ One prominent medical malpractice lawyer thought that the absence of "egregious facts" in the cases he screens indicates that the few "horror stories" one hears are not "typical day in and day out" cases but instead are "one in a million" "anecdotes." Another plaintiffs’ lawyer, who also commented that he does not see the kinds of "abuses" he used to read or hear about, speculated that this is because HMOs have "tweaked the system" to eliminate their "worst practices," under pressure from providers and the public backlash.

External review instead of court. Finally, even when disputes arise that implicate a health plan, lawyers and other subjects on both sides thought that the need to consult a lawyer and seek redress in court is dampened by the external review programs that have been adopted in most states.¹⁵ There was widespread agreement that appealing coverage denials to an independent physician with relevant qualifications is a preferable form of dispute resolution, one that prevents the harm from occurring in the first place and that provides a speedy and trustworthy resolution of disputes when they arise.

Discussion

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A number of policy implications potentially flow from these findings. The fact that these statutes have not created the level of litigation that many people expected when they were being debated means that there is less basis to oppose these laws, at both the state and federal levels, and also that there is less need for these laws than was often assumed. According to some advocates, these statutes are needed to create a right to sue MCOs, a right that did not otherwise exist. According to some opponents, these statutes would cause a "flood of litigation" that would increase health insurance costs by roughly 5 percent.¹⁶ But neither of these extremes is borne out by experience. Very little, and in many states, no litigation has yet emerged from these statutes, for the following reasons. Managed care theories of liability were already recognized in most states under common law. Regardless of the source of liability, plaintiffs’ lawyers are reluctant to sue MCOs because of the complexity and cost of this litigation, unless the MCO appears to be the primary wrongdoer, which is seldom the situation in medical malpractice cases. Even when the MCO is more directly implicated, ERISA preemption remains a major uncertainty.

Considering a federal law. Resolving the uncertainty over ERISA preemption is one reason for considering a federal liability law. Federal enactment could also resolve the extent to which MCOs are subject to extremely large verdicts that threaten their very existence or their ability to maintain core cost containment mechanisms. Interviews revealed that it is this potential, rather than the simple "right to sue," that has the biggest impact on the minds of MCO managers and that attracts the interest of plaintiffs’ lawyers. If damages are capped, as the Bush administration proposes, and if ERISA preemption continues to erode in the courts, as legal scholars predict, a federal liability law could end up being close to the "nonevent" that most subjects thought these state statutes were.

Patients’ only recourse. Even if this turns out to be the case, it is important to realize what one patient advocate told us: The right to sue is still an important protection, even if it is rarely used, because it is a patient’s only recourse if injury has already occurred from a denial of treatment. In this regard, litigation is not only a complement to administrative dispute resolution, as many subjects noted, but also a backstop that creates some redress when harm results from the many cases of coverage denial that are not initially appealed.

The jury is still out. Perhaps the safest conclusion to draw from this research is that the jury is still out.¹⁷ State managed care liability statutes have been on the books only a few years and several for little more than one year when these interviews were conducted. Therefore, many lawyers felt that it is too early to know what impact these laws will eventually have. Lawyers sometimes noted that their views were based only on initial interpretations or untested assumptions and that these views could change dramatically if court rulings come out differently than anticipated, as often happens. As one health plan executive stated, "Everyone is still trying to figure out" what these statutes will mean.

Editor's Notes

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Mark Hall is professor of law and public health at Wake Forest University in Winston-Salem, North Carolina. Gail Agrawal is associate dean for academic affairs and professor of law at the University of North Carolina School of Law in Chapel Hill.

This work was funded by the Robert Wood Johnson Foundation’s Changes in Health Care Financing and Organization (HCFO) initiative. The American Health Lawyers Association was helpful in arranging focus groups. Neither group had any role in the analysis or conclusions, which are solely the authors’ own.

NOTES

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1. F.A.Sloan and M.A. Hall, "Market Failures and the Evolution of State Regulation of Managed Care," Law and Contemporary Problems 65, no. 4 (2002): 169–206; and J.E.Billi and G.B. Agrawal, eds., The Challenge of Regulating Managed Care (Ann Arbor: University of Michigan Press, 2001).
2. G.B.Agrawal and M.A. Hall, "What If You Could Sue Your HMO? Managed Care Liability beyond the ERISA Shield," St. Louis University Law Journal (Spring 2003):235–298.
3. Texas enacted the first law in 1997, followed by Georgia in 1999; Maine and Oklahoma in 2000; Arizona, California, New Jersey, and Washington in 2001; and North Carolina and West Virginia in 2002.
4. S.Rosenbaum, An Overview of Managed Care Liability: Implications for Patient Rights and Federal and State Reform, Pub. no. 2001-06 (Washington: AARP, March 2001).
5. Agrawal and Hall, "What If You Could Sue Your HMO?"; W.S. Brewbaker, "Managed Care Liability," in Health Care Corporate Law: Managed Care, ed. M.A. Hall and W.S. Brewbaker (Gaithersburg, Md.: Aspen Publishers, 1996); and E.H.Morreim, Holding Health Care Accountable (Oxford: Oxford University Press,2001).
6. For fuller descriptions, see P.Butler, Managed Care Organization Liability Laws: Current Status and Experience (Menlo Park, Calif.: Henry J. Kaiser Family Foundation, August 2001).
7. Sloan and Hall, "Market Failures."
8. Symposium, "Qualitative Methods in Health Services Research," Health Services Research 34, no. 5, Part 2 (1999): 1083–1263.
9. C.C.Havighurst, "Consumers versus Managed Care: The New Class Actions," Health Affairs (July/Aug 2001): 8–27.
10. M.A.Hall, M.A. Bobinski, and D. Orentlicher, Health Care Law and Ethics (New York: Aspen Publishers, 2003),456.
11. Corporate Health Ins. v. Texas Department of Ins., 220 F.3d 641 (5th Cir. 2000).
12. Pegram v. Herdrich,530 U.S. 211 (2000).
13. Bauman v. U.S. Healthcare, Inc., 193 F.3d 151 (3rd Cir.1999); and Roark v. Humana, Inc., 307 F.3d 298 (2002).
14. J.C.Robinson, "The End of Managed Care," Journal of the American Medical Association 285, no. 20 (2001):2622–2626; and[Abstract/Free Full Text]G.P.Mays, R.E. Hurley, and J.M. Grossman, "An Empty Toolbox? Changes in Health Plans’ Approaches for Managing Costs and Care," Health Services Research 38, no. 1, Part 2 (2003):375–393.[CrossRef][ISI][Medline]
15. E.Kinney, Protecting American Health Care Consumers (Durham, N.C.: Duke University Press,2002).
16. C.R.Gresenz et al., A Flood of Litigation? Predicting the Consequences of Changing Legal Remedies Available to ERISA Beneficiaries, Pub. no. IP-184 (Santa Monica, Calif.: RAND, 1999); and American Association of Health Plans, Health Plan Liability: What You Need to Know (Washington: AAHP, 2002).
17. This is so, not only because of the points made in text, but also because of this study’s inherent limitations, which include a focus on only a limited number of states, and the potential in qualitative research that findings may be biased by the subjective views of the informants and the authors.

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