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Wisconsin High Court Ruling: Bad Faith Can Apply to HMOs

Feb 1, 1998 |

A recent legal development may offer an alternative mechanism for health care providers and the organizations representing them to hold HMOs accountable for certain negligent actions.

In November 1997, the Supreme Court of Wisconsin affirmed a decision of the court of appeals which determined that the tort of 'bad faith' can be applied to health maintenance organizations. Previously, this tort pertained only to insurance companies. According to Black's Law Dictionary, 'bad faith' generally involves fraud, or design to mislead or deceive, or neglect or refusal to fulfill a duty or contractual obligation.

The court agreed that an HMO, as a hybrid of both a provider and an insurer, should be subject to the common law doctrine of bad faith for its out-of-network benefit decisions. In this case, Group Health Cooperative (GHC) of Eau Claire, Wisconsin, an HMO, had terminated out-of-network coverage for an adolescent diagnosed with anorexia nervosa, although approximately four weeks of inpatient psychological care benefits remained under the contract with GHC.

In deciding that GHC could be held liable as an insurance company, the court analogized the HMO's actions to classical insurers. For example, the court noted the power imbalance between the HMO and the subscriber insofar as the subscriber has little negotiating power. In addition, HMO laws treat these entities like insurance companies; i.e., they are required to establish contracts with subscribers with set terms of coverage, they are subject to many of the same regulations as insurance companies, and they are regulated by the same governmental body.

The court also documented public policy reasons to support its decision. For example, like insurers, HMOs exert significant influence on, if not outright control over, the costs of treatment regimens administered to patients. Therefore, the court asserted, the tort of bad faith must be available to 'level the playing field' where an adverse benefits ruling means that the care itself is effectively denied because the cost is prohibitive.

The court gave the following examples of a cause of action for bad faith:

when an HMO refuses to consider a patient or physician request for care or coverage; if the HMO makes no reasonable investigation of a request for care or referral put to it; if the HMO conducts its evaluation of a care or coverage request in such a way as to prevent it from learning the true facts upon which the plaintiff's claims are based; or if, as the plaintiffs allege in this case, the HMO conducts its evaluation of a request and bases its decision primarily on internal cost-containment mechanisms, despite a demonstrated medical need and a contractual obligation.

In this particular case, the court found GHC liable for ending the referral to an out-of-network provider against the recommendation of the

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