HMO MALPRACTICE: Effective Discovery
by Gregory R. Kauffman, M.D., J.D. and Cherie L. LaCour, J.D.

Our previous article in the New Mexico Trial Lawyer¹ discussed the law behind holding HMOs accountable for physician negligence. In that article, we emphasized that notwithstanding a multitude of articles having appeared in newspapers characterizing HMOs as legally immune², and articles in legal publications which do not directly address the issue³, HMOs can be sued vicariously for negligence by HMO physicians. This article discusses the methods used by HMOs to control physicians and corresponding discovery which may be employed to successfully maintain a suit against an HMO based on vicarious liability for medical malpractice.

TYPES OF HMOs

It is important to initially establish what kind of HMO you are dealing with since this information can effect the type of claim⁴ that is filed and the way that you approach discovery. There are many types of HMOs currently operating in the United States. The three most prevalent are the staff, group and network models. In staff model HMOs, the physicians are employees and the HMO typically owns the facility in which they practice. The group model HMO contracts with a physician group or association to provide services to their subscribers. Depending on the contract, the group may or may not be allowed to treat fee-for-service patients. An HMO network contracts with many individual physicians or groups. These physicians maintain their own practices and can see other fee-for-service patients.

METHODS USED BY HMOs TO CONTROL PHYSICIANS

When planning discovery in a case involving HMOs it is important to show the control the HMO exerts over the doctor. HMOs control physicians by dictating the extent of diagnostic or treatment plans through incentives and disincentives in various forms amounting to financial risk-shifting, and by utilization review.

Financial Risk Shifting

The predominant way HMOs control physicians is by financial risk shifting. Financial risk shifting transfers the monetary risk that the subscriber's premiums will not cover the cost of health care from the HMO to the treating physicians. This is accomplished by many methods including capitation, withholding, discounted fees, profit sharing, rewards and penalties. Financial risk shifting makes it more profitable for the physician to order fewer tests and perform fewer procedures.

Capitation is a common HMO risk-shifting technique whereby physicians, groups of physicians or other providers are paid flat fees for each enrollee. The provider then supplies all "necessary services" to the patient no matter what the cost. The amount of the capitation fee is determined by contract, before the services are rendered and in many cases before the need for such services is even known, and thus may not cover all the treatment needed by a particular patient. Consequently, the financial risk of treating a particular patient is carried by the provider, not the HMO. The provider, then, has a strong financial incentive to keep the cost of treatment below or at the capitation fee for each patient. All too often, this is accomplished by withholding necessary testing and treatment, failing to make appropriate referrals and failing to hospitalize patients even though they cannot be properly treated otherwise.

Another method that HMOs use to shift financial risk to providers is by a process called withholding. In withholding situations, the HMO retains a percentage of the payments otherwise due the physician and uses these retained funds to reward or punish the physicians based upon use trends over a claim period. The HMO typically holds back anywhere from 5% to 20% of the fee-for-service payments during a claim period. At the end of this period the physician's requests for reimbursement are reviewed, and if they fall below the target amount, the physician receives the withheld amount. If the requests do not meet the targets set by the HMO, the physician forfeits the withheld amount to the HMO. The targets involve many areas of practice, such as number of patients seen in a given time period, number of patient admissions to hospitals, number of patients referred to specialists and the number of prescriptions, tests and treatments ordered. This results in physicians trying to keep their treatment levels within the set limits and causes them to withhold treatment to some patients. This process has come to symbolize the HMOs "do less, make more" attitude.

Physicians who contract with HMOs often must agree to charge discounted fees to the HMO. In this case, the HMO assumes the risk that the patient's premiums will cover the cost of treatment. One again, however, risk is shifted to the physician in that the physician's discounted fees may not cover the doctor's actual costs.

HMOs also make profit sharing arrangements with physicians where a percentage of the HMOs profit is divided up among the physicians at year's end. This is an incentive to the physician to make sure that the HMO is profitable by doing less, and thus requiring the HMO to pay out less money in reimbursements.

Rewards and penalties are also used to affect the way physicians practice medicine and to make the HMO more profitable. Rewards can be a predetermined fixed dollar amount or a percentage of the surplus distributed among the physicians. A physician can also be awarded a bonus based on his productivity. HMOs can also penalize physicians in many ways. In withholding situation the HMO can increase the percentage of payment withheld the following year if the physician fails to meet targets set by the HMO. In capitation situations, the HMO can decrease the amount of the capitation payment the following year in response to overuse by the physician. In addition, HMOs may go so far as to threaten doctors with exclusion from the program, reduction of distributions from surplus and liens on future earnings.

Utilization Review

On of the most controversial ways that HMOs control a physician's treatment decisions is through the use of utilization review. Utilization review is the process by which an HMO determines if medical services are "appropriate and necessary". Unfortunately, "appropriate and necessary" may go the financial health of the HMO, rather than the health and safety of the patient, and the decision whether or not to cover a certain treatment may be made by medically uneducated administrators. These administrators typically compare a provider's treatment plan against a fixed set of HMO determined treatment protocols to determine if there is any variation. If there is a variation, the HMO refuses to authorize and cover the treatment. Uninformed patients or patients with limited resources faced with paying for procedures out of their own pockets will choose not to have the treatment, even if it is entirely "appropriate and necessary", or they may be forced to accept less expensive treatment that will not be as effective. Either way, the only up side seems to be that the HMO is now off the hook for the more expensive procedure.

DISCOVERY

Effective discovery in HMO cases is necessary to establish the important link between the HMO and the physician, and to support the allegation that bad care resulted more so because of financial concerns on the part of the physician, than from ordinary negligence.. A wealth of useful information can be obtained through paper discovery and depositions artfully done, keeping the overall purpose in mind. Suggestions for discovery in HMO cases, discussed below, are by no means all-inclusive.

Paper Discovery Directed to the HMO Physician

We will not discuss the usual discovery directed to a defendant physician except to point out that information regarding such things as the doctor's credentials are better obtained by requests for production than by using up interrogatories, and questions about standard of care and the specific events which are the subject of the lawsuit may be better asked at deposition.

Paper discovery to the physician of an HMO should be geared towards defining the relationship between the HMO and physician and identifying efforts by the HMO to influence the physician's medical decisions. A good place to start is with contracts and compensation information. Include interrogatories and requests for production requiring disclosure of compensation plans, especially all documents which describe the manner in which compensation is determined including: penalties, rewards, bonus arrangements, withholding, performance reports, "incentives", "report cards" and "relative value unit reports". Ask for copies of any contracts between the physician and the HMO and the HMO criteria for evaluation, continued employment and termination. Paper discovery to the physician of an HMO should be geared towards defining the relationship between the HMO and physician and identifying efforts by the HMO to influence the physician's medical decisions. A good place to start is with contracts and compensation information. Include interrogatories and requests for production requiring disclosure of compensation plans, especially all documents which describe the manner in which compensation is determined including: penalties, rewards, bonus arrangements, withholding, performance reports, "incentives", "report cards" and "relative value unit reports". Ask for copies of any contracts between the physician and the HMO and the HMO criteria for evaluation, continued employment and termination.

Other helpful information would include physician recruitment documents, which may provide insights into how the HMO operates. Request all HMO promulgated or sponsored guidelines, protocol and treatment plans. These types of documents may give a step-by-step outline of how the HMO would encourage a physician to treat certain illnesses or conditions.

Paper Discovery Directed to the HMO

Discovery directed to the HMO has a different purpose than that directed to the physician. Discovery to the HMO should be geared towards finding out how the HMO operates and how it holds itself out to the doctors it contracts with and to the patients it insures. Some of the most helpful information is contained in the HMO's marketing documents and documents provided to employer subscribers and patients. Check to see if the advertisements, commercials, sales materials, corporate discounts, certificates of coverage, pamphlets, etc., contain guarantees of quality care by the HMO, requirements that the patients are limited to the doctors on the HMO's provider list, and if the HMO assumes responsibility for the healthcare of its patients. These documents can be very helpful in proving that an ostensible agency exists.

Obtain from the HMO the same documents and information requested from the HMO physicians. Additional documents and information which can only be obtained from the HMO include protocols, diagnostic related groupings (DRG'S), manuals, guidelines, criteria or the like used in utilization review by the HMO. Also, in reference to utilization review, request the names, titles, locating information and credentials of all persons involved in credentialing and utilization review. Other people that should be identified include former HMO employees and physicians previously, but not presently, affiliated with the HMO, names and titles of all persons having a past or present ownership interest in the HMO and information potentially helpful in locating such persons.

Additional helpful information may be contained in fee schedules, personnel files, updated provider lists, physician recruitment material, grievance/member appeal documents, insurance policies covering the HMO and the physicians in your case and all correspondence between the physicians in your case and the HMO. Additional statutory or regulatory causes of action may be identified by requesting all documents filed with government regulatory agencies. Also, if it is the pertinent to your case, identify and obtain all documents prepared by HMO physicians and other personnel in connection with the HMO's decision to deny treatment or referral. Inquire about ownership of facilities and equipment used by the defendant doctor. Find out who pays for the nurses, technicians and other personnel working with the doctor or at the doctor's direction.

Deposition of the HMO President

From the deposition of the HMO president it is possible to get information concerning the practices and policies of the HMO that are not contained in documents. It is important to ask about the president's knowledge concerning the company's business practices, the methods used by the HMO to determine physician compensation, the incentives and disincentives, withholding plans, evaluations and other means of influencing physicians' decisions, knowledge of the facts in your case and knowledge of similar allegations in other cases. Be sure to review previous responses to paper discovery and if certain documents and information requested have not been provided, get this material at deposition through a notice duces tecum and directed questioning, and follow-up with motions to compel and motions for sanctions if necessary. Ask the HMO president about physician compensation issues, incentives, guidelines affecting treatment and if applicable, reasons for decisions made in your particular case. Try to get admissions that the corporation acted improperly, dishonestly, etc. Ask what would have happened to the HMO physician if he had gone against HMO recommendations and admitted the patient or followed some other line of treatment.

Deposition of the HMO Doctor

Do not neglect to interrogate the HMO doctor about all those things you would normally interrogate a defendant doctor about, including what constitutes good care, the standard of care, unacceptable care, etc. Ask if these are any different when an HMO is involved and if so how and why. Find out why things were done or not done.

The deposition of the HMO doctor allows the attorney to explore the relationship between the doctor and the HMO, including the doctor's understanding of how the HMO is run, how the HMO makes money, how the HMO's money making efforts impact what the doctor does and does not do generally, and how they influenced what happened in your case. Ask the same information of the doctor that you asked from the president of the HMO and explore any inconsistencies, and how the doctor came to any misperceptions. Ask about HMO ownership of equipment and facilities the doctor utilizes and the payment of personnel in the physicians office. This information may be helpful, of course, in establishing vicarious liability. Ask the doctor about his compensation plan and history, if he has met quotas, received bonus payments or been penalized for over-utilization. Ask the doctor about his knowledge of why any claims were denied.

Ask the doctor if things would have happened differently were the HMO not involved, and if so, how and why. Has the doctor's way of handling the condition at issue changed since becoming associated with the HMO? If so, find out how and why.

Deposition of Other HMO Employees

Depending upon the circumstances of your case, it may be helpful to depose other employees of the HMO. These include persons responsible for computing compensation, preparing report cards, conducting utilization review, recruiting doctors, etc.

CONCLUSION

Cases against HMO's, like medical negligence cases generally, are often won or lost in discovery. The major goals of HMO-directed discovery are finding evidence that will convince the jury that the doctor was acting as an agent or ostensible agent of the HMO and that the HMO controlled or influenced what the physician did or did not do through various measures aimed at risk-shifting and maximizing profit. Aggressive and effective discovery along these lines is essential in every HMO vicarious liability case.

¹Gregory Kauffman, MD, JD & Cherie L. LaCour, HMO Malpractice - Holding Health Maintenance Organizations Accountable For Physician Negligence, 26 N.M. TRIAL LAWYERS 147 (1998).

²See William M. Welch, 1974 Pensions Law Sparks Political Fire, USA TODAY, June 19, 1998, at 1A; Jamie Court, Close the HMOs' Favorite Loophole; Healthcare: A Federal Law Protects the Industry From the Consequences of Denying Care, L.A.TIMES, Jan. 21, 1998, at 7; Jamie Court, In Critical Condition: Holding HMOs Accountable for Their Egregious Conduct, CHI.TRIB., June 22, 1998, at 13N; Jane Bryant Quinn, It's Difficult to Sue An HMO for Negligence, BALTIMORE SUN, June 16, 1997, at 13C.

³Charles H. Baunberger, Vicarious Liability Claims Against HMOs, TRIAL, May 1998, at 30; Jeffrey M. Liggio, Preparing the HMO Case, TRIAL, May 1997, at 26. Theories set out in these articles may fall within provisions of the Employee Retirement Income Security Act (ERISA), relegating claimants to administrative remedies which may be wholly ineffective in cases of serious injury or death resulting from medical negligence.

⁴The available theories currently not preempted by ERISA are vicarious liability and agency theories such as apparent or ostensible agency.