Casualty Actuarial Society
SEMINAR ON RATEMAKING
March 12, 2001
Stephen C. Klein
BARGER & WOLEN LLP
515 S. Flower Street, 34th Floor
Los Angeles, California 90071
(213) 680-2800
sklein@barwol.com
Patients’ Rights Liability Issues

Case Law Developments

Changes in Legislation

Pending Legislation
Recent Cases

U.S. Healthcare v. Bauman,
193 F.3d 151 (5th Cir. 9/16/99)

New Jersey state court medical malpractice action
removed to Federal Court on the basis of ERISA
preemption and dismissal sought
US Healthcare sought to be held liable for negligent
failure to authorize in-home visits by a pediatric
nurse, which trial court found was preempted as an
attempt “to recover benefits due” which are
preempted by Section 514(a) of ERISA.

US Healthcare v. Bauman

Third Circuit disagreed that the negligence
claim was an attempt to get benefits

Under Dukes v. US Healthcare, 57 F.3d 350
(1995), Court rejected contention that
complaint raised claims regarding “rights
under the terms of the plan”

No ERISA preemption
Recent Cases

Hull v. Fallon and Prudential Healthcare,
188 F.3d 939 (1999)

Plan participant sued administrator for failure
to order stress test - vicarious liability
asserted against the plan

Case was removed on grounds of claimed
ERISA preemption and dismissal sought
Hull v. Fallon and Prudential Healthcare


District court found claims preempted as the
administrator was not acting as a treating
physician, thus no cognizable claim for
malpractice could be asserted
8th Circuit agreed holding that “[b]ecause the
claims related to administration of benefits,
they fell squarely within the scope of section
502(a) for which there is complete
preemption
Recent Cases

Pegram v. Herdrich, 530 U.S. 211 (2000)

Claims asserted against Carle Health Insurance
Management on the basis of breach of fiduciary duty
under ERISA
Plaintiff alleged that provision of medical services
under the terms Carle HMO plan, rewarding its
physician owners for limiting medical care, entailed
an inherent or anticipatory breach of fiduciary duty,
since such terms created an incentive to make
decisions in the physicians’ self-interest rather than
the exclusive interest of plan participants.

Pegram v. Herdrich

District court held Carle was not an ERISA fiduciary

7th Circuit Court of Appeals reversed holding that
Carle was acting as a fiduciary when its physicians
made the challenged decisions and that Herdrich’s
allegations were sufficient to state a claim

United States Supreme Court reversed finding that
no fiduciary duty should be imposed on an HMO
because of its structure
Pegram v. Herdrich
Highlights






All HMOs involve rationing of care
Courts are not in a position to differentiate HMOs
Two types of decisions made by physicians acting on
behalf of the HMO:
“eligibility decisions” and “treatment decisions”
Congress did not intend HMOs to be treated as a
fiduciary to the extent it makes eligibility decisions
acting through its physicians
Questioned value to plan participant of having this
kind of ERISA fiduciary action
Recent Cases



Maio v. Aetna - US Healthcare, 221 F.3d 472
(3d Cir. 2000)
RICO class action for providing an inferior
plan compared to what was marketed
Third Circuit agreed with the District Court’s
dismissal because plan participants could not
establish that they suffered a cognizable
injury to business or property - essential to a
RICO claim
Maio v. Aetna - US Healthcare
Highlights




Plaintiffs failed to allege medical injuries, that they
received inadequate or inferior care or sought but
were denied necessary care as a consequence of the
structure of the HMO plan and its plans and practices
Gravamen of claim -- what was delivered was not
worth as much as what was marketed
RICO requires injury to business or property by the
conduct constituting the violation
Because complaint admits no adverse medical
consequence, there can be no proof of overpayment
Legislative Changes

Managed Health Care Insurance
Accountability Act of 1999

California Civil Code §3428

“FOR SERVICES RENDERED ON
OR AFTER JANUARY 1, 2001
Civil Code §3428 (a)

Health care service plan (H&S §1345) “shall
have a duty of ordinary care to arrange for
the provision of medically necessary
health care service to its subscribers and
enrollees, where the health care service is
a benefit provided under the plan and
shall be liable for any and all harm legally
caused by its failure to exercise that
ordinary care when both of the following
apply:
Civil Code §3428



(a)(1) The failure to exercise ordinary care resulted in
the denial, delay or modification of the health care
service recommended for, or furnished to, a
subscriber or enrollee;
(a)(2) The subscriber or enrollee suffered substantial
harm.
(b)(1) Substantial harm means loss of life, loss or
significant impairment of limb or bodily function,
significant disfigurement, severe and chronic physical
pain, or significant financial loss
Civil Code §3428

(b)(2)Health care services need not be recommended
or furnished by an in-plan provider, but may be
recommended or furnished by any health care
provider practicing within the scope of his or her
practice

(b)(3)Health care services shall be recommended or
furnished at any time prior to the inception of the
action, and the recommendation need not be made
prior to the occurrence of the substantial harm
Civil Code §3428

(c) Health care plans are not health care providers

(d) Health care plans cannot seek indemnity from a
provider for liability imposed under subdivision (a).

(g) This section does not create any new or additional
liability on the part of a health care service plan or
managed care entity for harm caused that is
attributable to the medical negligence of a treating
physician or other treating health care provider.
Civil Code §3428

(h) This section does not abrogate or limit any other
theory of liability otherwise available by law

(j) Damages recoverable for a violation of this
section, include, but are not limited to, those set
forth in Section 3333.
Civil Code §3333

Section 3333, referred to in Section 3428, contains
the MICRA (Medical Injury Compensation Reform
Act) limitations for noneconomic damages against a
health care provider. It also recites the damages
available for tort as being “for the breach of an
obligation not arising from contract, the measure of
damages, except where otherwise expressly
provided by this code, is the amount which will
compensate for all the detriment proximately caused
thereby, whether it could have been anticipated or
not.”
Civil Code §3428
Legislative Comment

Health care service plans and all other managed care
entities declared to be in the business of insurance in
this state per McCarran-Ferguson Act

Nothing in the Managed Health Care Insurance
Accountability Act imposes the regulatory
requirements of the Insurance Code on health care
service plans regulated by the H&S Code

Purpose of these provisions is to avoid ERISA
preemption
Civil Code §3428
Background

California Act modeled after Texas statute

Texas statute was designed to skirt ERISA
preemption by providing damages for quality of care
violations, which Courts in Texas have upheld as
within the state’s province instead of damages for
bad faith and other coverage disputes which are
clearly preempted by ERISA

Provides a direct cause of action against the HMO
Civil Code §3428
Background

Proponents assert status quo maintained as MICRA
neither expressly included or excluded, leaving the
matter to be determined by the courts on a case-bycase basis

Proponents argue (1) that if responsible agent’s
liability is capped, the courts will likely find that the
principal’s liability is capped and (2) where the
principal directs or ratifies the actions of the agent,
the principal’s liability it its own and public policy may
dictate that it not be limited
Civil Code §3428
Opponents Concerns

Makes health plans liable for physician malpractice

Undermines MICRA

Erodes physician autonomy

Use of civil actions threatens arbitration

Will increase health care costs
California Association of Health Plans
stated

“SB 21 allows for lawsuits with unlimited economic
damages, unlimited pain and suffering damages and
unlimited punitive damages. Multi-million dollar
awards, such as the $120 million dollar award against
one health plan, would divert important health care
resources out of health care delivery and drive up
health care premiums. If health plans are subjected
to open-ended damage awards, they will become the
“deep pockets” of the health care delivery system,
vulnerable to every legal assault and unable to
maintain affordable health care premiums for
employers and individuals.”
PENDING LEGISLATION

Proposed amendments to Public Health Service Act,
ERISA and the Internal Revenue Code of 1976 “to
protect consumers in managed care plans and other
health coverage”

The PATIENTS’ BILL OF RIGHTS
The Patients’ Bill of Rights

Title I -- Improving Managed Care

Grievance and Appeals

Access to Care

Access to Information

Protecting the Patient-Doctor Relationship
The Patients’ Bill of Rights

“Claim for Benefits” is defined as any request for
coverage (including authorization of coverage), for
eligibility, or for repayment in whole or in part, for an
item or service under a group health plan or health
insurance coverage

“Denial” means a denial or a failure to act on a timely
basis upon, in whole or in part, the claim for benefits
and includes a failure to provide benefits (including
items and services) required.
The Patients’ Bill of Rights


Section 119, dealing with coverage for individuals participating
in approved clinical trials, provides that a health plan or insurer
may not deny the individual participating in a clinical trial or limit
or impose additional conditions on the coverage of routine
patient costs for items and services furnished in connection with
participation in the trial and may not discriminate against the
individual on the basis of the enrollee’s participation in such trial.
An individual is qualified for clinical trial purposes is a participant
or beneficiary in a group health plan, or who is an enrollee under
health insurance coverage that has a life-threatening or serious
illness for which no standard treatment is effective, is eligible for
the clinical trial in accordance with its protocol and the trial offers
meaningful potential for significant clinical benefit for the
individual.
The Patients’ Bill of Rights

Subtitle D, Protecting the Patient-Doctor Relationship, provides
protection for the health care professional in his or her
communication with the patient about treatment. Section 131
prohibits any contract between a health plan or insurer and a
health care provider that would restrict a health care
professional “from advising such a participant, beneficiary, or
enrollee who is a patient of the professional about the health
status of the individual or medical care or treatment for the
individual’s condition or disease, regardless of whether benefits
for such care or treatment are provided under the plan or
coverage, if the professional is acting within the lawful scope of
practice.”
The Patients’ Bill of Rights

Section 301 of the PBR adds Section 714 to
ERISA, entitled Patient Protection Standards

In essence, it provides that group health
plans and health insurance issuers offering
group health insurance coverage in
connection with a group plan shall comply
with the Patients’ Bill of Rights Act
The Patients’ Bill of Rights

Per §302, ERISA §514 is amended

Preemption not to apply to certain actions arising out
of provision of health benefits

Limitation on punitive damages - applies in certain
instances

State law superseded in limited circumstances
CONCLUSIONS



Judicial erosion of ERISA preemption is occurring in
limited cases giving rise to greater liability by health
care plans, but Federal Courts do not think ERISA
can be interpreted to deal with challenges to the
business of HMO Structure
Changes in State law, such as California’s Managed
Health Care Insurance Accountability Act of 1999,
pose uncertain liabilities from direct action against
health plans
Pending Federal legislation could dramatically impact
ERISA preemption and health plan liability