Managed care has changed the health-care system and promises to change health-care law. The body of managed healthcare law encompasses decisions and statutes in three distinct areas. These areas are:  (1) the managed care organizational structure; (2) the contractual and ethical relationships between the three involved parties: the managed care organization, the physician, and the patient; and (3) the evolving tort law negligence theories against the physician and the managed care organization.

In Illinois, managed healthcare law is still largely undefined. It is this amorphous character of law that can cause concern to the Illinois physician. The purpose of this article is to address some of those areas of concern and to highlight evolving legal theories in Illinois.

Insurance, business sectors have joined forces

Today's healthcare environment, dominated by managed care, developed in response to rising healthcare costs. Managed care is generally considered the result of insurance and business sector efforts to rework the traditional fee-for-service healthcare model. Managed care organizations were developed for the purpose of giving the insurance industry more control over what was considered excessive, expensive or unnecessary medical treatment. At the same time, the business community reacted to the increasingly burdensome weight of rising healthcare insurance premiums for its employees. These dual driving forces of business and insurance resulted in the introduction of managed care in its various forms.

The managed care model's response to these forces was to require or encourage patients to obtain care from certain individuals and institutional providers so that the medical care could be controlled and supervised by the insurance company, which negotiated contractual terms for payment and services.

Patient advocate vs. managed care physician?

The physician's historical role as patient advocate and the role imposed by the managed care organization as the gatekeeper, or contracted care physician, are potentially conflicting roles. The reason for the potential conflict stems from the fact that the physician-patient relationship in a managed care setting has the added element of cost-containment pressures.

The simplest and most attractive tort theory that a plaintiff can argue is that the managed care organization and the physician, together, substituted economics for sound medical care at the patient's expense. But before the physician can defend against these attacks, several issues must be addressed.

• Can the physician's duty of care to the patient co-exist with contractual duties to the managed care organization?
• Can the physician remain the patient's advocate and fulfill contractual obligations to the managed care organization?
• Is it a conflict of interest for a doctor to enter into a contractual agreement with financial incentive plans when the doctor, in order to benefit, must deny, or at the very least, strictly control certain aspects of the patient's care?
• Is the physician's contractual economic obligation to the managed care organization to be put above the patient's interest?
• Is the contractual obligation equal to the patient's interest?
• Should the contractual obligation always succumb to the patient's interest?

These questions pose potentially volatile issues to a jury even while the answers are unclear. The legal defense must maintain a central theme that dispels the plaintiff's rallying cry that the managed care organization encourages substandard care by its physicians because economics supersede good medicine. The defense argument must be that the managed care system discourages excess or unnecessary care and provides "standard" care for patients.

What is the level of care a physician is required to deliver to a patient? Illinois tort law mandates that it is not the highest possible standard of care or the best care at any cost that is required. The standard of care may be defined in this context as what a reasonable physician in the community should provide regardless of any decision about payment for services. The "reasonable care" benchmark is the standard in all medical negligence cases. The law is not changed in the managed care context. Ordinary and reasonable care is provided within the managed care organization's economic constraints, provided the physician's medical judgment is not overruled by any economic considerations.

The plaintiff's goal is to convince the jury that managed care physicians are rewarded for spending less money on the patient. The plaintiff will argue, for example, that an MRI, although necessary, cuts into the profits of the managed care organization and of the physician, and therefore will not be ordered even though it is a necessary test. The defense must confront this attractive argument by simply admitting that the primary care physician shares the financial risk with the third-party payer. There is an undeniable incentive not to deliver excess or unnecessary care. Cost must be a consideration or the entire healthcare system cannot function. The key to the defense is that the physician delivers, as always, standard and reasonable care, not excess or unnecessary care.

Plaintiff's theories of alleged financial conflict of interest are defeated when the treatment is shown to have been unnecessary, by expert defense testimony, or when the physician's best medical judgment overruled the treatment, without consideration of cost reduction.

As a practical matter, the physician must consider full disclosure to the patient about the elements of managed care in his practice. The AMA advocates disclosing "relevant" financial interests to the patient. A federal appellate court in Minnesota held that an HMO has a fiduciary duty to disclose physician incentives that could affect treatment decisions (Shea v. Medica). The physician should consider the type of financial incentives that are relevant to the patient's interest and disclose those facts.

Theories of liability

Gatekeeper liability. Gatekeeper liability theories focus on the financial relationship between the physician and the managed care organization. The theories simply set up a conflict of interest and assert that the physician cannot put the patient's interests first if the financial arrangement with the managed care organization is also primary.  To counter these allegations, the medical decision-making process must be clearly documented.

There have been Illinois cases that shed light on juries' thoughts regarding gatekeeper theories of liability. In 1995, an Illinois jury awarded a $9.6 million verdict against the gatekeeper. The managed care organization gatekeeper diagnosed a pregnancy and referred the patient to an obstetrician for care. Under the managed care organization contract, the obstetrician was obligated to refer the patient back to the gatekeeper for routine laboratory studies and ultrasound exams. The gatekeeper's involvement was that he received the results, signed the test form and mailed them back to the obstetrician. The plaintiff argued that the gatekeeper was "involved" in the treatment and should have called the obstetrician or intervened when an abnormal lab test and ultrasound were reported (Thomas v. Antony).

A possible lesson to be learned in trying to contain potential gatekeeper liability is that the physician should inquire if the managed care organization has adequate, locally available, competent specialists, or whether the patient can use "out of plan" specialists when the primary care physician believes it is necessary. Most important, areas of responsibility between the gatekeeper and specialist must be clearly defined and understood. Communication between the gatekeeper and specialist must be consistent and clearly defined.

Treatment delays. Some courts recognize the existence of liability for a physician's delay in providing treatment. Liability can exist even if the managed care organization's policies required the additional tests and authorizations, consultations and reviews that caused the delay. In the California case of Pena v. Rouhe, (California Superior Court, 1993), a jury awarded $750,000 (verdict reduced to $400,000) because a surgery was not classified as "urgent" by the surgeon as required by the managed care organization and was therefore delayed.

Familiarity with the practice guidelines is the key to defending allegations of treatment delays. Before accepting a managed care organization contract, the practice guidelines should be carefully reviewed. That the guidelines were made with adequate physician input is critical.

Further, the physician must reconcile accepted standards of medical care with the practice guidelines. It is the physician who will be faced with a malpractice claim if the practice guidelines do not meet the standard of care.

Undertreatment or treatment denial. Although denial of treatment claims have been brought against managed care organizations, a mandatory arbitration of claim clause, in most contracts, keeps many of these matters out of the courts.

A plaintiff can allege malpractice occurred due to under-treatment by the physician based on adherence to managed care organization policies. In addition, the physician and the managed care organization can be sued for treatment denials. Jury verdicts in other states provide a framework for possible plaintiff's theories in Illinois. In 1993, an $89,000 jury verdict (verdict was reduced on appeal) in the Nelen Fox v. HMO (Oxnard, California) was based on allegations of HMO's bad faith, breach of contract, and intentional infliction of emotional distress.

In 1995, a $1.2 million arbitration verdict in Oxnard, California, was given for treatment denials (Christy DeMeurers v. Health Net).

In 1995, a $2.9 million award against an HMO for treatment denial was given by a California jury to Joyce Ching based on theories of breach of fiduciary duty intrinsic to the doctor-patient relationship.

In its opinion in Wickline v. State of California (1986), the California court sent out a clear warning that "the physician who complies, without protest, with the limitations on treatment imposed by a third-party payer, when the physician's medical judgment dictates otherwise, cannot avoid his ultimate responsibility for his patient's care." The California court felt very strongly that a cost limitation program cannot supplant medical judgment and the standard of care.

Theories of liability against the managed care organization. Plaintiff's theories against the managed care organization have included allegations of treatment delays and treatment denials, as discussed above, and allegations of vicarious professional liability. Vicarious professional liability theories include theories of apparent agency. Apparent agency theory states that since the managed care organization provided a physician to the patient, it gave the reasonable impression that the physician was an agent of the managed care organization.  

To prevail on vicarious liability theories, the plaintiff must prove that the patient reasonably relied on the managed care organization, not the individual physician, to provide the requisite standard medical care. The Illinois case of Raglin v. HMO Illinois, Inc. (1992) stands for the theory of "respondeat superior" in the managed care setting. In that case, it was alleged that the managed care organization had control over the physicians. The court imposed liability on the managed care organization for a physician's negligence.

Managed care organizations, under Illinois law, are held to the same standard of control over the physician that must be proven in other employer, employee, independent contractor contexts. In Texas, managed care companies were subject to direct malpractice liability as of May 1997. Legislators in New York are considering a similar approach.

Another theory against the managed care organization involves corporate negligence. The theory sets out that the failure of the managed care organization to select a qualified physician, or to properly review and supervise the physician's performance, is negligence.

In Illinois, there have been several lawsuits against managed care organizations for failure to provide benefits. Generally, under Illinois law, managed care organizations are held to the same standard as an insurance company doing business in the state. The same rules apply concerning assignment of claims, construction and interpretation of the contract.

Claims have been pursued against the managed care organization for vexatious and unreasonable failure to settle claims. A policy which is ambiguous or contradictory regarding whether a procedure is covered will be interpreted most favorably toward the insured.

A sound theory, as yet untested in Illinois, is that the plaintiff was fraudulently induced into accepting or paying for lower quality health-care provided through the managed care organization. A related plaintiff's theory is based on misrepresentation by the HMO of the scope of coverage.

The "hold harmless" clause

It is a rare physician who has not yet become associated m some manner with a managed care organization. Once a contractual association has been forged, it can be too late to evaluate the relationship. It is essential that the physician understand what the contractual relationship involves and identify potential problems inherent to the relationship.  

One of the most frequently asked questions by a physician involves the indemnification clause in the managed care contract. The question is: Do I need to sign it?

Many managed care contracts have indemnification clauses. Basically, these clauses state that the physician is required to indemnify, or hold harmless, the managed care organization for claims arising out of the managed care organization's negligence.

The physician needs to understand what he or she is agreeing to undertake. Theoretically, the managed care organization could be sued under vicarious liability theories. As described earlier, this means the managed care organization could be sued for the physician's alleged negligence. Therefore, the contract clause states that the physician must defend, indemnify, or both, the managed care organization for any liability arising out of the physician's negligence. Some contract clauses set out that the physician must hold the managed care organization harmless, even if the injury is due to delayed or denied care by the managed care organization.

When faced with an indemnification clause, the physician needs to make sure that his or her own insurance coverage is adequate. A physician's insurance policy may cover only the physician's negligent conduct and not any assumed liability of the managed care organization through an indemnity clause. The physician needs to inquire whether the liability insurance policy provides coverage for assumed third-party liability. Adequate insurance coverage for the added risk of third-party assumption of liability must be secured before signing a hold harmless clause.

Conclusion

Managed health care has undeniably altered the health-care system. Legal responses to this alteration are evolving in Illinois. The physician must reconcile the potentially conflicting interests of the physician-patient relationship and the physician-managed care organization contractual relationship.

A sound defense theme is that the managed care organization discourages excess and unnecessary care, but provides standard care defined by medically sound practice guidelines. As in all medical negligence cases, the physician is held to a standard of reasonable care.

There are several theories of liability that can be alleged against the managed care affiliated physician, including that economics replaced medical judgment and the standard of care was violated; that treatment delays or denials were based on guidelines unrelated to medical judgment; and the theories of gatekeeper liability.

The managed care organization can be sued for treatment delays; vicarious professional liability; apparent agency; corporate negligence; and insurance contract theories.

The common indemnification clause must be understood; physicians need to make sure their insurance coverage is adequate to cover the added risk.

In a managed care setting, the physician needs to adequately understand the relationships involved and the role undertaken. The best way to protect the physician-patient relationship is to provide reasonable medical care.

Copyright l997, Chicago Medicine.  Reprinted with Permission.