HMO MALPRACTICE: Holding Health Maintenance Organizations Accountable for Physician Negligence
by Gregory R. Kauffman, M.D., J.D. and Cherie L. LaCour, J.D.

The Problem of HMOs

The provision of health care in the United States has been dramatically altered over the last decade by the relentless growth of managed care. Promising employers and legislators reduced costs of health care, HMOs have now replaced traditional medical insurance plans for the vast majority of American workers. Patients no longer have freedom to choose their own doctors, but are either assigned a "primary" by their HMO, or given a limited list of doctors to choose from. Patients are no longer able to see a specialist when they deem it necessary, but only upon the referral of their primary, who may have economic incentives to deny referral. The practice of medicine is now defined by HMO guidelines promulgated by medically uneducated administrators whose goal is to maximize profit rather than provide good medical care. For many HMOs and HMO doctors, the practice of medicine is secondary to the business of medicine. The predatory proliferation of HMOs, with their creed of "do less to make more", has diminished the quality of medical care more than any other event in the history of medicine.

HMOs have often escaped responsibility for poor medical care by means of the Employee Retirement Income Security Act (ERISA), which creates a federal preemption for any state claim that "relates to" any employee benefit plan. If an HMO benefit plan is ERISA-qualified, and claims against the HMO go to matters covered by ERISA, the preemption applies and the claimant is thereby limited to administrative remedies which only call for the HMO to do what it was required to do in the first place. For example, if referral to a specialist is denied or if treatment is withheld, the HMO could only be forced to pay for or provide the referral or treatment, but no other damages would be compensable. The HMO, then, has nothing to lose by denying benefits.

The time has come for HMOs to be held responsible for the damage they and the doctors working for them cause to subscribers. Even attorneys who regularly handle medical negligence cases commonly but erroneously think that HMO's cannot be held liable for the negligence of their non-employee doctors. On the contrary, with careful investigation, pleading and discovery, HMOs are not immune.

ERISA Preemption

Many lawsuits against HMOs are dismissed due to preemption by ERISA. Congress enacted ERISA to establish a system to regulate employee welfare benefit plans that provide medical care or benefits in the event of sickness, accident, disability or death. 29 U.S.C. §1002(1). Included in ERISA is a preemption provision that allows the law to supersede all state laws that "relate to any employee benefit plan". 29 U.S.C. 1144(a). A state law "relates to" a benefit plan "if it has a connection with or reference to such a plan." Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 96-97 (1983).

It is important to remember the ERISA preemption provisions only apply if the employee benefit plan is ERISA-qualified. A plan is ERISA-qualified if it is provided by an employer or an employee organization. However, there are some exceptions. A plan is not governed by ERISA if it is (1) a governmental plan; (2) a church plan; (3) a plan maintained to comply with worker's compensation or disability insurance laws; (4) a plan maintained outside of the United States; or (4) an excess benefit plan. 29 U.S.C. 1003(b). If a suit is brought based on an insurance plan that falls under one of the above mentioned categories, then ERISA preemption is not an issue and the HMO can be sued under any applicable state laws. Otherwise, ERISA preemption must be considered.

The Tenth Circuit has determined that there are four types of laws that are considered "related to" ERISA plans: (1) Laws that regulate the type of benefits or terms of ERISA plans; (2) laws that create reporting, disclosure, funding, or vesting requirements for ERISA plans; (3) laws that provide rules for the calculation of the amount of benefits to be paid under ERISA plans; and (4) laws and common-law rules that provide remedies for misconduct growing out of the administration of the ERISA plan." National Elevator Indus., Inc. v. Calhoon, 957 F.2d 1555, 1558-59 (10th Cir.), cert. denied, 121 L. Ed. 2d 331, 113 S. Ct. 406 (1992); see also Airparts Company, Inc., v. Custom Benefit Services of Austin, Inc., 28 F.3d 1062, 1064-65 (10th Cir. 1994); and Pacificare of Oklahoma, Inc., v. Burrage, 59 F.3d 151, 154 (10th Cir. 1995). Laws of general application in areas that are traditionally state regulated and that effect ERISA plans in a remote way are frequently considered not to "relate to" an ERISA plan. The fact that the law has some economic effect on the plan does not invalidate the law. Before a law will be preempted the law must effect the administration of the plan or the relationship between ERISA plan entities. See Pacificare, at 154.

Liability Theories against HMOs

Breach of Contract / Bad Faith

Breach of contract and bad faith are theories commonly used in an attempt to hold HMOs liable for the negligent actions of their plan doctors. Unfortunately, however, a claim against an HMO for failure to provide benefits, breach of contract or insurance bad faith will likely result in ERISA preemption. These claims are usually based on a denial of coverage for certain treatments, failure to refer or authorize consultation, failure to authorize certain tests or studies or, most importantly failure to provide quality care. "Quality care" has been frequently held to be a plan benefit covered by ERISA.

In Settles v. Golden Rule Insurance Co., 927 F.2d 505 (10th Cir. 1991), plaintiff sued Golden Rule Insurance Co. for terminating her husband's insurance coverage, which she claimed caused her husband to become severely depressed and later suffer a heart attack that caused his death. The court held that the plaintiff's breach of contract and wrongful death claims were preempted by ERISA. The court reasoned that since her claims were based on a denial of benefits, which is a administrative function of the plan, they were "related to" the employee benefit plan even though she was not claiming benefits under the plan. Likewise with her wrongful death claim because the action against the HMO for termination of benefits would not have survived before her husband's death and thus can not survive after his death. The court dismissed plaintiff's claim against Golden Rule.

The same basic result was reached in Cannon v. Group Health Service of Oklahoma, Inc., 77 F.3d 1270 (10th Cir. 1996). In that case, the plaintiff's wife was diagnosed with leukemia. During remission from the disease, her physician requested a bone marrow transplant. The insurers repeatedly denied preauthorization for the transplant claiming it was experimental, but later changed their decision and granted authorization. By the time the authorization was granted, the patient's leukemia was out of remission and the treatment was no longer effective. The plaintiff's wife died a month later. The plaintiff filed an action against Group Health Service for breach of contract or a breach of fiduciary duty related to the improper processing of the patient's claim for the bone marrow transplant. The court held that the claims were directly related to the administration of the plan and therefore preempted by ERISA.

Direct Negligence

Most direct negligence claims against HMOs arise out of negligent administration of cost-containment measures or failure to use due care in selecting and overseeing doctors. Speakers in seminars and articles appearing in national plaintiffs' lawyer publications have discussed direct negligence, such as for negligent credentialing, as a viable theory against HMOs, although without providing controlling authority and without addressing the pivotal distinction of ERISA qualification. See, e.g., Charles H. Baumberger, Vicarious Liability Claims Against HMOs, Trial, May 1998, at 30; James P. Frickleton, Litigating HMO Cases: HMO Liability for Corporate Negligence Claims Arising from Negligent Credentialing and Utilitzation Review Procedures, Address at the Litigating HMO Cases seminar (Sept. 19-20, 1997) (transcript available from ATLA).

There are no Tenth Circuit cases directly on point, but the probable holding and reasoning of the court in direct negligence cases against HMO's in an ERISA-qualified plan can be predicted. See Settles, 927 F.2d 505; Cannon, 77 F.3d 1270. Little could be said against a holding that any action dealing with the hiring of employees or contracting for physician's services is "related to" the ERISA plan since these actions are at the heart of plan administration. Likewise, administration of cost-containment measures involves a plan's decision regarding what treatments will be covered and to what extent, and would likely be considered "related to" an ERISA plan.

Vicarious Liability

Vicarious liability claims against HMOs have been successful in the Tenth Circuit, but they must be approached with some caution. The claim may likely survive or succumb to ERISA preemption on the pleadings alone. A vicarious liability claim can be based on either an employer/employee relationship, an agency relationship or an ostensible agency relationship or joint venture, depending on the structure of the HMO involved and the relationship between the HMO and the doctor presented to the subscriber.

In certain HMOs, such as Lovelace in New Mexico, the HMO doctors may be employees of the HMO, and in such cases, traditional employer/employee vicarious liability theories apply. Commonly, the HMO will characterize its doctors as independent contractors. In those cases however, the HMO may be held liable for the HMO doctor's negligence on an agency or ostensible agency theory. It is important in these cases to show the authority which the HMO holds over the doctor, direction or limitation of the diagnostic or treatment plan by the HMO, the naming of the doctor in its provider lists, advertising in which the HMO claims to provide medical care or supply physicians, and the incentives and disincentives which the HMO uses to encourage its doctors to put cost-cutting ahead of patient care. The Tenth Circuit has determined that agency and ostensible agency claims are not preempted by ERISA.

In a case of first impression for a district court, the Tenth Circuit in Pacificare of Oklahoma, Inc. v. Burrage, 59 F.3d 151 (10th Cir. 1995), held a medical malpractice claim against an HMO based on an agency theory was not preempted by ERISA. The court stated that the claim against the HMO did not sufficiently "relate to" the plan to cause ERISA preemption. The court reasoned that a medical malpractice claim involves actions between the doctor and the patient and whether the doctor exercised the standard of care required in his community. These actions implicate the HMO through an agency relationship between the HMO and the doctor. It does not involve the administration of the plan, or the plan's benefits or the quality of benefits. Although it may be necessary to reference the plan to determine the relationship of the doctor and HMO, doing so "does not implicate the concerns of ERISA preemption". Id., at 155.

Later, in Prudential Health Care Plan, Inc. v. Lewis, 1996 U.S. App. Lexis 2595 (10th Cir. 1996), the Tenth Circuit upheld Pacificare and denied preemption in a medical malpractice case claiming an ostensible agency relationship between a doctor and an HMO.

Joint Venture

Joint venture may likewise be a viable theory against HMOs provided, however, that certain criteria are met. In New Mexico, a joint venture must have (1) an agreement for the performance of a common purpose; (2) a joint proprietary interest in the subject matter; (3) a mutual right to control; and (4) a right to share jointly in the profits and losses. Cooper v. Curry, 589 P.2d 201, 205 (N.M. Ct. App. 1978); see also, Fullerton v. Kaune, 382 P.2d 529, 532 (N.M. 1963). The negligence of one participant in the joint venture may be imputed to another participant so as to make that participant liable for an injury sustained by a third person. 46 Am. Jur. 2d, Joint Ventures, §58, p. 78. There are no New Mexico or Tenth Circuit cases on point, however with appropriate facts, joint venture theory should be carefully considered.

Conclusion

Public awareness of bad medical care at the hands of HMOs is steadily increasing. The bias held by jurors in favor of doctors may not extend to an HMO corporate defendant and may, in fact, be a detriment, particularly if the HMO has restricted the doctor's ability to practice medicine in the best interests of the patient, instead pressuring the doctor to make the financial health of the HMO first priority. Doctor defendants and treating doctors will often go to ludicrous extremes at the behest of a common insurer or from a sense of camaraderie to avoid impugning another defendant or treating doctor not yet beyond the statute of limitations, but these persons are generally less willing to abandon science and honesty to protect HMOs. It is sad but true that many patient-beneficial changes in the way medicine is practiced come about only after negligent providers are made to pay for injuries and deaths resulting from bad care. With profit their lifeblood, HMOs will be no exception.

Plaintiffs' lawyers representing victims of medical malpractice must, in every case, carefully consider the question of HMO liability, and must endeavor to hold the HMO liable whenever it is in their client's best interest to do so.

This is the first of a two-part series on HMO malpractice. The second article will discuss discovery against HMOs and HMO doctors.