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Door Opens on Patients' HMO Suits

Industry angry as Labor Department changes view on state cases

Oct 10, 2000

Health maintenance organizations are facing sharp attacks on their nearly inviolable protection from patient lawsuits.

While lawmakers on Capitol Hill debate a patients' bill of rights -- caught between corporate lobbyists on one side and angry consumers on the other -- the courts are being urged to move ahead.

Using a recent Supreme Court decision originally hailed as a victory for HMOs, plaintiffs' attorneys are seeking to remove the federal protections that have kept managed-care businesses out of state courts and shielded them from juries with the power to exact large damages for wronged patients. What's given these attorneys a big boost is the Department of Labor's endorsement of a patient's right to sue HMOs under state law.

The department, a key player in the policy debate surrounding lawsuits against HMOs, is arguing in a Pennsylvania state case that the U.S. Supreme Court has carved out a broad area under which HMOs can find themselves liable under state law. It is the first time the department has interpreted the Supreme Court's June 12 decision in Pegram v. Herdrich -- and marks a reversal from the agency's previous stance in the case.

The lawsuit is pending in Pennsylvania Supreme Court, but HMOs are already irate at the Labor Department. Industry associations and attorneys call the department's arguments "overbroad" and dangerous.

"The industry is very upset about it," says Stephanie Kanwit, a Washington, D.C. partner at New York's Epstein Becker & Green who represents HMOs. "HMOs are going to be sued for everything they do and everything they don't do. What the Department of Labor opinion would do, if adopted by the court, is undermine every single element of managed care."

But plaintiffs' attorneys and patients' rights advocates, including the powerful AARP, hail the Labor Department's conclusion.

"If the position is adopted, it will have an enormous effect," says Marc Machiz, a partner at Washington, D.C.'s Cohen, Milstein, Hausfeld & Toll, which specializes in plaintiffs' suits in many areas, including health care. "It will enact into law what the people on the Hill are fighting about. It would decide that you could sue your HMO for damages when it is denying care or denying treatment."

ERISA's Reach

It has long been established that HMOs have strong legal protections. They can be sued, but due to regulations of the Employee Retirement Income Security Act of 1974 (ERISA), suits against HMOs are usually decided under federal law. And in federal court, HMOs can be sued only for benefits, not damages. That means, for instance, that a woman who develops breast cancer after an HMO refuses to authorize a mammogram can only win the few hundred dollars for the cost of the mammogram. For plaintiffs' attorneys, those restrictions make HMOs tantamount to untouchable.

ERISA governs employee benefits under federal law, ensuring equal treatment and rights across state lines. That keeps most suits against HMOs out of state court -- the preferred grounds for class actions and plaintiffs' lawsuits because of the ability to get punitive and compensatory damages.

Several states have passed patients' rights bills, allowing HMOs to be sued in state court on some grounds. State and federal courts have in recent years found that certain types of HMO decisions, most notably those involving medical judgment, fall under state, not federal law. Then came the U.S. Supreme Court's decision in Pegram v. Herdrich. The actual decision was a win for HMOs. The Court unanimously ruled that a patient forced to wait eight days for an ultrasound of her inflamed appendix, which eventually ruptured, did not have grounds to sue the HMO under ERISA.

But in further discussion, the Court paved the way for patients to sue by identifying certain types of HMO decisions that could be subject to state laws and civil suits. These so-called mixed decisions involve both coverage issues -- those involving what procedures and treatments the plan pays for -- and medical judgment -- what procedure or treatment is warranted. Such decisions, the Court wrote, may not be shielded from suit.

But what are mixed decisions? How broad a hole did the Supreme Court mean to carve out of ERISA? These are the questions that future court cases will have to decide.

The Labor Department filed an amicus brief in Pappas v. Asbel, a suit originally filed in Pennsylvania trial court by Basile Pappas and his wife.

According to Pappas, United States Healthcare Systems of Pennsylvania denied him a transfer in May 1990 to an out-of-network hospital with a spinal cord trauma unit. Pappas had an epidural abscess pressing on his spine that rendered him a quadriplegic. The HMO won in the trial court on ERISA grounds. But the Pennsylvania Superior Court and state supreme court ruled that the HMO could stand trial on the theory that its actions were not protected by ERISA. The case went to the U.S. Supreme Court, which sent it back to be evaluated in light of Pegram.

The Labor Department, which originally argued in Pappas that ERISA barred the suit against the HMO, now contends that it is probably permissible to sue in light of Pegram.

If the department prevails, it will have taken one of the first steps in hammering out a legal, not legislative, solution to the HMO dilemma. That may bring mixed benefits.

"It may be that the way we think the courts are heading may be a better, less disruptive way to sort out the problem," says Phyllis Borzi, a research professor at George Washington University School of Public Health and an attorney at Washington, D.C.'s O'Donoghue & O'Donoghue.

That doesn't mean that advocates are giving up on the patients' bill of rights. Court decisions can always be overturned, and relying on a legal remedy could mean that the right to sue HMOs would vary dramatically from state to state. And the bills in Congress go far beyond just establishing a right to sue, but also enact an external review program and create disclosure obligations for HMOs.

In fact, some watchers say that in the long run, HMOs may find Congress easier to deal with than the courts.

"If Congress truly does nothing on this, then the courts will eventually overturn ERISA," says John Stone, a spokesman for Rep. Charles Norwood, a Georgia Republican. "The worst thing that could happen to HMOs is that this bill doesn't pass."

What will most certainly happen soon is more HMO lawsuits.

"I think you are going to see an increase in the number of state lawsuits," says Susan Burke, a special counsel at Covington & Burling who specializes in health care. "The other wild card is that many states permit punitive damages. I think you are going to see the plaintiffs bar far more interested in these types of cases."

That is not an idea that HMOs relish. They argue that if suits start pouring in, HMO premiums will rise astronomically and price many people out of health care.

"That kind of accountability doesn't work," says Louis Saccoccio, general counsel for the American Association of Health Plans. "We have seen that in the medical malpractice area. You can't sue your way to better care."

Those arguments don't have much resonance beyond the insurance realm. Doctors and physicians argue that if they are liable for poor medical decisions, HMOs should be, too. And it doesn't fly with those who worry about what happens to patients if HMOs are immune from suit.

"If it did have a major impact, if there were thousands of people winning lots of big punitive damages, what kind of commentary is that on HMOs?" asks Rand Rosenblatt, a professor at New Jersey's Rutgers School of Law-Camden. "If lots of people had cases that just shocked juries, I think it would show something needs to be fixed."


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