Liability May Be Shifting From MDs to Managed Care Co’s

SANTA MONICA, Calif--Just as physicians carry malpractice insurance for protection, managed care organizations also purchase insurance to protect against lawsuits. An insurance industry executive suggests that managed care plans may now need to increase their malpractice coverage, as risk liability appears to be shifting from the physicians who provide health care to the insurance plans that pay the medical bills.

These premiums have remained relatively low because, from an underwriting standpoint, managed care organizations are not viewed as direct providers of medical care but rather as health insurance companies, and their employees are seen as administrators, not providers, of health care. "As such, their premiums are commensurate with that risk exposure," said Steven C. Spina, assistant vice president, Zurich-American Insurance Group, Schaumburg, Illinois.

However, several factors could have a dramatic influence on the medical professional liability risks for managed care companies in the near future. The combined effect of these factors could lead to "a health care liability insurance crisis rivaling the one seen in the mid-1980s," Mr. Spina said at a seminar sponsored by the Defense Research Institute, Chicago.

Wrongful Denial of Benefits

In the 6 years that Zurich-American Insurance Group has insured this segment, it has accumulated about 700 claims. Mr. Spina noted that 85% of these claims involved allegations of wrongful denial of benefits, including cases related to utilization review, benefits claims handling, and vicarious medical professional liability actions brought via "ostensible agency" or "respondent superior" allegations (in which the plaintiff sues the company that contracts for a physician’s services, ie, the ostensible agent).

The other 15% of these cases included a broad range of allegations such as breach of contract, credentialing, physician deselection, and antitrust allegations.

It is expensive to defend these claims, he said, with 40% of the premium dollar going to defense costs. Even with these high costs, Mr. Spina described this segment of Zurich’s business as "profitable." However, for several reasons, he is not sure this trend will continue.

Negative Pressures on Profitability

He outlined three legal and social developments that are putting "negative pressure" on the profitability of this business of insuring the health care insurers.

Erosion of ERISA as a preemptive defense. The "preemption clause" of the federal Employee Retirement Income Security Act (ERISA) states that if a complaint "relates to" a benefit plan, the case is automatically preempted from the state to the federal level, where ERISA limits damages to the value of the benefit and attorney’s fees.

In 70% of Zurich-American’s claims, this ERISA protection was invoked, which significantly reduced recovery in these cases, or removed the managed care company from the action altogether.

Recently, however, courts have been more liberal in their interpretation of the "relates to" clause of ERISA with respect to managed care, Mr. Spina said. Several courts have allowed such lawsuits to remain at the state level. He added, "I believe this erosion will continue to the point where there won’t be any additional protection to a managed care organization from ERISA."

Increase in liability from vicarious to direct. Underwriters look for contract wording or standard operating procedures that limit managed care’s liability as "health care providers" during the utilization review process.

However, shielding managed care organizations from this direct liability can be difficult if the payment decisions they make via utilization review can be viewed as directly impacting the quality of care a patient receives. Linking a managed care plan to quality of care issues tends to increase the plan’s medical professional liability exposure.

New state laws. State laws may also have an effect on managed care plans’ liability. Mr. Spina cited a bill passed by the Texas Senate (effective September 1, 1997) that allows managed care companies to be sued for medical malpractice.

"IPA [independent practice association] model managed care organizations that contract with physicians and providers for services are now being put into the position to be sued as if they were staff-model HMOs, which employ physicians directly." He added that similar bills are pending in many other states.

The severity of claims against managed care plans is on the rise, according to jury and verdict research reports. While the frequency of claims has not yet increased, Mr. Spina predicted that it would, in part due to state regulations such as the aforementioned Texas bill.

A Public Relations Problem

"What we have here is a significant increase in the liability of managed care organizations, and possibly a shift in liability risks to managed care from other providers," he said. In addition, "managed care companies are increasingly difficult to defend before juries. They have a public relations problem. They are seen as not interested in quality of care, just in profits."