Managed Care Liability

Managed Care Liability: Sign of Things to Come for ACOs?
By: Douglass G. Hewitt, Esq.
Accountable Care Organizations (“ACOs”) are the latest health care delivery vehicle in
the on-going effort to achieve the dual goals of health care reform: cost containment and
improved quality of care. Initially conceived as a means of reducing Medicare expenditures,
ACOs may take many forms. Depending upon the organizational structure deployed, ACOs and
managed care organizations (“MCOs”) may have similar characteristics and, therefore, ACOs
may face liability exposures akin to those previously faced by MCOs. As the focus of ACOs
shifts from Medicare beneficiaries to patients insured by commercial payors, those exposures
will undoubtedly increase. Although ERISA preemption, which insulated MCOs from many
forms of liability, will likely not apply to ACOs, the experience of MCOs may provide useful
insights for ACOs’ seeking to avoid or mitigate these emerging exposures.
The following outlines characteristics of ACOs and MCOs, summarizes theories of
liability that have been asserted against MCOs and might be asserted against ACOs and offers
some lessons learned from MCO litigation that may be useful to those designing ACOs.
Essential Characteristics of ACOs under the PPACA
As envisioned by the Patient Protection and Affordable Care Act (“PPACA”), ACOs will
utilize financial incentives to promote delivery of care to Medicare patients in a cost effective
and coordinated manner across a continuum of care. ACOs may be independent legal entities
comprised of primary care physicians, specialists and hospitals that provide care to Medicare
patients. An ACO will be responsible for monitoring expenditures for assigned beneficiaries as
well as the quality of care provided to those beneficiaries. If an ACO meets certain quality and
costs containment standards, the ACO may receive additional compensation tied to the savings
that the ACO achieves.
Entities that may participate in Medicare as an ACO can assume a variety of legal
structures, including group practices, independent practice associations (“IPA”) or networks of
individual practitioners, partnerships of hospitals and professionals, joint ventures or hospitals
that employ physicians. Although not expressly stated in the PPACA, ACOs formed among two
or more otherwise independent entities will likely be required to establish a separate legal entity.
Although the PPACA permits substantial flexibility in the organizational structure of
ACOs, an ACO must demonstrate several core characteristics, including: 1) A legal structure
allowing for the receipt and distribution of shared savings to participating physicians and
hospitals; 2) A leadership and management structure that includes clinical and administrative
systems; and, 3) Defined processes to promote evidence-based medicine and patient engagement,
report on quality and cost measures, and coordinate care.
Along with the structural requirements, eligible ACOs must meet quality reporting
requirements to be set by the Department of Health and Human Services (“HHS”), including
reporting on: (i) clinical processes and outcomes; (ii) patient experience; and (iii) utilization.
Under the PPACA ACO model, ACO providers will continue to be paid on a Fee-ForService basis, but ACOs and their members will be eligible to receive incentive payments if their
estimated per capita Medicare expenditures are below an HHS designated benchmark. The HHS
secretary is authorized, but not required, to use other payment models. As the ACO model
expands to non-Medicare patients, ACOs will likely increasingly utilize alternative methods of
physician compensation intended to incent physicians to reduce the volume of services rendered
and improve the quality of care.
Implementation of non-Fee For Service payment
methodologies, such as pay for performance models, will require ACOs to monitor utilization,
deter outliers and engage in peer review, credentialing and more robust case management
functions analogous to traditional managed care functions.
Managed Care Organizations May be Analogous to ACOs
MCOs include a broad spectrum of legal entities including preferred provider
organizations (“PPO”), point of service (“POS”) plans, Health Maintenance Organizations
(“HMO”) and others. MCOs may be fully risk-bearing entities or may only provide claims
administration services or network management functions for self-funded groups. The diversity
in MCO business models has yielded a broad spectrum of potential liabilities.
Under Illinois law, an HMO is defined as “any organization formed…to provide or
arrange for one or more health care plans under a system which causes any part of the risk of
health care delivery to be borne by the organization or its providers” 215 ILCS 125/1-2(9).
HMOs differ in the structure and the cost containment practices they employ. IPA model HMOs
are financing entities that arrange and pay for health care by contracting with independent
medical groups and practitioners. Many HMOs utilize a PCP gatekeeper, require in network
referrals and pay a form of capitated rate. HMOs frequently delegate credentialing, utilization
review and case management functions to the provider group and assume limited financial risk.
Under the PPO model, the insurer contracts with participating providers, pays
participating providers a contracted rate and retains greater financial risk and responsibility for
credentialing, utilization review and case management functions.
Theories of MCO Liability
MCOs face liability for insurance activities arising from claims adjudication processes
and coverage decisions, provider contracting (including any willing provider statutes) and
extensive regulation by state Departments of Insurance and the federal Department of Labor
under ERISA and DOL regulations. MCOs may face liabilities derived from the impact that
managed care processes may have on provider’s treatment decisions and the quality of patient
care based on physician compensation methodologies, case management and utilization review
of treatment decisions, as well as liabilities arising from the termination of providers that fail to
provide care in accordance with utilization review decisions. The theories of liability asserted
against an MCO vary according to its structure, payment methodology and internal processes.
MCOs face tort liability in connection with care management, peer review, credentialing
and network management functions. The seminal Illinois case imposing liability on an HMO for
direct or institutional negligence is Jones v. Chicago HMO, Ltd., 191 Ill.2d 278 (2000). Noting
that HMOs because HMOs undertake, “an expansive role in arranging for and providing health
care services to their members, they have corresponding corporate responsibilities”, the Jones
Court held that an HMO’s “administrative or managerial acts”, including negligently assigning
too many patients to a physician, may support the claim of direct or corporate negligence. In the
wake of Jones, direct corporate negligence claims that are not the subject of appellate decisions
have been asserted against MCOs based on negligent credentialing, utilization review and case
management activities.
The theory of liability for malpractice of network physicians depended upon the MCO’s
structure. Staff model HMOs employ physicians and may be directly liable for the physician’s
malpractice under principles of respondeat superior. Where the MCO provides care through
employed physicians, MCOs have been held to undertake independent duties to select and retain
competent care-givers, properly oversee the care they provide and establish and adhere to
policies needed to ensure quality care.
IPA model HMOs, PPOs, POSs and other MCOs also face exposure for malpractice of
network physicians under theories of vicarious liability. Under Petrovich v. Share Health Plan of
Illinois, Inc., 188 Ill.2d 17 (1999), an IPA model HMO may be vicariously liable for the
negligence of independent contractor physicians under doctrines of apparent authority and/or
implied authority. Petrovich also suggested receptivity to holding HMOs accountable for
medical malpractice of network physicians on the basis of breach of contract and/or breach of
Under Petrovich, an HMO can be liable for a network physician’s malpractice under
apparent authority if the HMO held itself out as the provider of health care and the patient
justifiably relied upon the HMO to provide health care services. Petrovich further held that an
HMO can be vicariously liable for a network physician’s malpractice under principles of implied
authority where the facts and circumstances show that the HMO asserted sufficient control over
the physician’s behavior. Under Petrovich and its progeny, evidence of control over network
physicians may exist where the HMO has the right to make prospective medical necessity
decisions and the HMO can refuse to pay for care that it perceived to be inappropriate. An
HMO’s capitation method of compensation creates further indicia of a right to control the
physician’s decision-making by virtue of financial incentives aimed at discouraging a physician
from ordering necessary medical care. Utilization of statutorily mandated medical records review
and a retrospective quality assurance review are not deemed to be indicia of control.
In Illinois, the vast majority of managed care liability litigation involved vicarious
liability claims against HMOs, rather than PPO or POS plans. Prior to Petrovich, HMOs
successfully asserted ERISA preemption as a defense by characterizing their actions as claims
processing. After Petrovich, theories of liability evolved to agency and direct negligence, with
occasional consumer fraud, tortious interference and breach of fiduciary duty claims.
MCOs responded to the evolving theories of liability by modifying their marketing
materials to eliminate statements that could be seen as holding themselves out as providers of
care and included explicit disclaimers in benefit booklets and elsewhere. HMOs modified
internal processes to implement retrospective rather than concurrent medical necessity
determinations and modified case management and recordkeeping protocols. HMOs have
successfully defended implied agency claims by stressing the absence of a direct contractual
relationship with the treating physician and, thus the absence of a contractual right to control the
physician’s behavior or determine the physician’s compensation. HMOs have also successfully
argued that utilization review and case management functions were delegated to the IPA and that
medical necessity/coverage determinations are made retrospectively.
Although PPOs have a direct contractual relationship with a participating provider (that
could be argued to support an inference of a right to control necessary to support a claim of
implied agency) and are directly involved in prospective or concurrent utilization review,
credentialing and case management functions, there have been far fewer managed care liability
suits against PPOs than HMOs. In our experience, the PPO model allows insurers the
opportunity to assert more direct influence on treatment decision-making and creates more
opportunity to assert direct negligence or implied agency claims. Apparent agency claims against
PPOs have not fared well, principally because proof of reliance on the PPO as the provider of
care has been difficult to sustain due to the member’s ability to choose their provider.
MCOs face substantial non-tort liability exposures that may be applicable to ACOs,
including breach of fiduciary duty, tortious interference with fiduciary or contractual relations
and consumer fraud/misrepresentation based on the failure to disclose financial incentives and
other quality improvement/ utilization review methods that have the potential to impact provider
treatment decisions. MCOs have responded to these claims by modifying disclosures and internal
processes. Finally, MCOs have faced liability for network administration functions, including
decisions to terminate or exclude a potential provider from its network based on any willing
provider statutes, anti-trust and other statutory and common law theories of liability.
Potential Theories of MCO Liability That May Be Asserted against ACOs
Depending upon an ACO’s organizational structure, as well as its payment, cost
containment and quality assurance methodologies, an ACO may have many similarities to an
HMO. Under the PPACA, ACOs, like HMOs, will rely on financial incentives to modify
physicians’ behavior in order to reduce utilization and improve quality of care. ACOs, like
HMOs, “provide or arrange” for health care under a system which causes a part of the risk of
health care delivery to be borne by the organization or its providers. To the extent that a form of
capitation is used, the analogy becomes stronger.
In order to measure its performance against HHS benchmarks, report on quality and cost
measures, coordinate care and allocate savings among participating members, ACOs will require
extensive utilization review and case management processes akin to those used by HMOs. To the
extent that those processes are conducted on a prospective or concurrent basis, the ACO is
behaving similarly to a PPO. ACOs will also need to implement peer review processes to assess
processes designed to promote evidence based-medicine in accordance with the PPACA. Like
IPA model HMOs, ACOs must credential participating physicians and may utilize a form of
economic credentialing to modify the behavior of (or terminate) physician outliers.
ACOs that utilize bundled payments, capitation or other forms of risk bearing payment
arrangements are arguably assuming insurance risk and, therefore, may be subject to regulation
as an insurer or HMO by the Department of Insurance or Department of Labor. Less likely is the
possibility that an ACO may be subject to any willing provider statutes.
Three primary classes of potential ACO plaintiffs are patients, providers within the ACO
and providers that have been excluded from or terminated by the ACO.
Patients Claims
ERISA will likely not apply to ACOs and, therefore, ERISA preemption will not create a
barrier to malpractice claims against the ACO by patients. ERISA preemption has been the first
line of defense asserted by MCOs, and without ERISA preemption, courts will likely extend
liability to ACOs for direct/institutional negligence and the malpractice of ACO providers.
ACOs will likely face liability for direct corporate negligence, based on either negligence
of employed physicians under respondeat superior or the ACO’s breach of an independent duty
to select and retain competent caregivers, oversee the care they provide and to establish or adhere
to policies that ensure quality of care. ACOs will likely face claims of institutional negligence
similar to that imposed on HMOs in Jones based on the ACO’s administrative or managerial
acts, including case management, peer review, credentialing and network management functions.
Depending on the structure of the ACO, the ACO may also face tort liability for
malpractice of physicians and other providers acting on behalf of the ACO under theories of
vicarious liability. To the extent that the ACO, through marketing materials or otherwise, holds
itself out as the provider of care and the patient relies upon the ACO rather than individual
physicians to provide care, claims of apparent authority may lie. More likely are claims of
implied authority based on evidence that the ACO exerts control over the physician’s behavior
through financial incentives aimed at discouraging physicians from ordering allegedly necessary
care. To the extent the ACO engages in retrospective or prospective utilization review, the claim
of implied authority may have greater strength. Depending upon the structure and constituent
groups within an ACO, the ACO may face imputed liability for the negligence of other members
of the ACO based on joint venture, partnership and other theories.
Although not well developed in the appellate decisions involving MCOs, patients have
asserted non-tort theories of liability, including contract, consumer fraud, breach of fiduciary
duty and other common-law claims based on a failure to disclose the existence or impact of
financial incentives, particularly capitation. MCOs have successfully avoided liability for such
claims where financial incentives and other quality improvement/utilization review methods are
adequately disclosed in benefit booklets and marketing materials.
Claims by Physicians or Allied Health Professionals within the ACO
Disputes between HMOs and network providers principally focused on reimbursement
for services outside of the contractually agreed services subject to capitation, services that were
excluded from coverage or in excess of policy limits and other reimbursement disputes.
Participating PPO providers asserted breach of contract and fraud based claims based on nondisclosure of the basis for reductions in reimbursements or denial of coverage, including
bundling and other billing and coding issues.
Depending on the compensation methodology utilized by the ACO, the ACO may also
face disputes with member physicians based on perceived inequities in compensation. MCOs,
particularly PPOs, have faced challenges relating to the reasonableness of benchmarks and
performance measurements and the administration of payments, including the inconsistent
application of performance measurements or errors in computations. One could easily foresee
that an ACO would face similar exposures as well as claims based on disparate or unequal pay
between comparable physicians and/or the use of different criterion without a rational basis.
Additionally, ACOs will likely face complaints by member physicians arising from their
termination or non-renewal based on failure to meet cost or quality benchmarks, particularly
where those criteria are not included within employment contracts.
ACOs will alter physician independence and thus create potential for disputes among
member physicians and between the ACO and member physician for many reasons. Participation
in an ACO may create pressure for a physician to use mandated protocols based on evidence
based standards that are inconsistent with the physician’s judgment as to the most appropriate
care or require referrals within the ACO when other providers may offer better treatment
alternatives. A physician that receives reduced compensation because he deviated from a
mandated protocol or made a referral to a non-ACO provider in order to provide treatment
required to comply with the standard of care may assert that his compensation or termination is
unlawful and contrary to public policy.
Participation in an ACO may engender financial pressure from colleagues or employers
to utilize treatment modalities to achieve cost containment in order to earn additional
compensation. Participation in an ACO may also give rise to joint responsibility for actions of
providers in other organizations within the ACO.
Potential Causes of Action by Physicians Outside of the ACO
MCOs are subject to any willing provider statutes and other regulations governing
contracting with participating providers that may be applicable to ACOs if they are deemed to be
an HMO or other entity engaged in the business of insurance. To the extent that an ACO is
deemed subject to these laws, care must be taken to establish and enforce clear criteria for
membership. ACOs with sufficient market power to be deemed a monopoly might be subject to
liability for unreasonable refusal to contract with a provider. ACOs that refuse to contract with
individual members of member physician groups may face claims of arbitrary or discriminatory
refusal to contract.
ACOs are likely to face liabilities that are similar to those previously faced by MCOs and
the lessons learned by MCOs will be invaluable to ACOs as they try to avoid or mitigate those
exposures. MCOS’ experience in establishing cost containment methodologies and quality
standards, as well as the content of their communications with insureds regarding those standards
and processes, can provide useful guidance for those involved in the creation of ACOs.