Making a Killing
HMOs and the Threat to Your Health

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Making a Killing

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Chapter 5

Getting Away With Murder

Why You Can't Sue Your HMO

"They let a clerk thousands of miles away make a life-threatening decision about my life and my baby's life without even seeing me and overruled five of my doctors," said Slidell, Louisiana resident Florence Corcoran. It is a story that echoes so many tragedies recounted in this book. But as with many of the other stories, there's a twist — a second tragedy. "They don't get held accountable. And that's what appalls me. I relive that all the time. Insurance companies don't answer to nobody."

Corcoran faced a high-risk pregnancy. Her obstetrician ordered her hospitalized, as she had been in a previous high-risk birth. Yet her managed health care company, United Healthcare, overruled her doctor and denied the hospitalization, even though it had a second opinion agreeing with the doctor's advice. Instead, Corcoran's insurer ordered home nursing for ten hours each day.

During the last month of Corcoran's pregnancy, when no nurse was on duty, the baby went into distress. Denied the monitors and care she would have had in the hospital, Florence Corcoran's baby died.

Mrs. Corcoran filed a wrongful death action in Louisiana state court, alleging medical malpractice. But because of a legal loophole that exempts health insurance companies from such lawsuits in instances where the plaintiff receives insurance through her employer, as Corcoran did, her managed care insurer could not be held liable!

Florence Corcoran
Florence Corcoran
The case was dismissed, but not for lack of merit. Fifth Circuit Court of Appeal Judge Carolyn Dineen King wrote that "the basic facts are undisputed," but "the result ERISA [the federal Employee Retirement Income Security Act] compels us to reach means that the Corcorans have no remedy, state, or federal, for what may have been a serious mistake." She continued, saying ERISA "eliminates an important check on the thousands of medical decisions routinely made. With liability rules generally inapplicable, there is theoretically less deterrence of substandard medical decision making."1

"If I go out on the street and murder a person, I am thrown in jail for murder and held accountable," said Corcoran. "What's the difference between me and this clerk thousands of miles away making a life decision which took the life of my baby and she gets off scott-free and keeps her job?"

This is the dirty little secret that lets HMOs walk away from responsibility for denying or interfering with medically appropriate treatment. Corporate health providers that administer employer-paid health benefits are above the law. How big is this loophole that Florence Corcoran and her baby fell through? Fully 125 million Americans with employer-paid health coverage in the private sector are unable to sue their HMOs or insurers for damages — no matter how egregious the HMO conduct or serious the consequences of the treatment denial. HMOs can operate with virtual impunity.

How did they get this shield of immunity?

In 1987, creative insurance-industry lawyers convinced a majority of the Justices of the U.S. Supreme Court that the federal Employee Retirement Income Security Act of 1974 or ERISA put the industry above state common law — under which damages are available to injured consumers.2 How did they convince the highest court in the land? Company lawyers argued that the corporation was not technically in the business of insurance but merely an administrator of employee benefits. This meant that it could not be held accountable under state laws, but was subject to ERISA's federal scheme, which provides little remedy, as discussed in more detail below.

The Pilot Life Insurance v. Dedeaux case did not involve an HMO, but rather a disability insurer. But as managed care became ascendant, the precedent stuck.

If a patient who is denied doctor-recommended care by his HMO tries to file a case in state court, where damages are available under state common law, HMO lawyers will have the case "removed" to federal court under ERISA's rules. HMOs or insurers that lose the federal ERISA grievance only pay the cost of the procedure or benefit they denied in the first place, no other damages or penalties. Thus there is no financial incentive for the HMO to provide timely treatment. And that is the good news. The bad news is that companies are obligated to provide the cost of the benefit only when the patient survives long enough to receive it. If the patient dies before receiving the treatment, the insurer or HMO pays nothing. Because there is no meaningful penalty for denying medically necessary treatment, there is no incentive to approve costly care.

Imagine that the penalty for bank robbery was limited to giving back the stolen money. No jail time, no fines, just pay the money back — and only if you are caught. To top it off, the repaid money would be interest free. Would bank robbery increase under such conditions? That's the situation HMOs and insurers enjoy under ERISA.

For this reason, even conservative judges have condemned ERISA's injustice and pleaded for Congress to clarify accountability for HMOs.

California's conservative Federal Judge J. Spencer Letts wrote in 1997, when he was hamstrung by ERISA's ban on damages, "This case reveals that for benefit plans funded and administered by insurance companies, there is no practical or legal deterrent to unscrupulous claims practices. Without these practical incentives there is no counter-balance to insurance companies' interest in minimizing ERISA claims."3 (emphasis added)

Federal Judge William Young, appointed by Ronald Reagan, also recently expressed his frustration with ERISA's prohibition in a Massachusetts case: "Disturbing to this Court is the failure of Congress to amend a statute that, due to the changing realities of the modern health care system, has gone conspicuously awry from its original intent. This court had no choice but to pluck [the] case out of state court…and then, at the behest of Travelers, to slam the courthouse doors in her [the wife's] face and leave her without any remedy. ERISA has evolved into a shield of immunity that protects health insurers…from potential liability for the consequences of their wrongful denial of health benefits."4

These judges are reacting to violation of a basic tenet needed to make a market function: fundamental fairness.

When good companies are not rewarded and bad ones are not punished, the market is not free to compete on the basis of quality. ERISA's shield of immunity supplies a powerful incentive to ignore the most basic ethical considerations in providing care: low quality actors come out ahead because they make the most profits by providing the least and worst care. Competition is then almost exclusively focused on cost-cutting — a structural recipe for the crisis of quality we now have under HMO medicine. Insurers find this loophole so lucrative that they even teach their claim handlers to respond differently depending on whether the claim is subject to the ERISA loophole or not. In some cases, the shield of immunity does not apply and patients can sue their HMO, a circumstance that will be discussed shortly. An internal Aetna videotaped training session, discovered during a 1998 Alaska lawsuit, shows how insurers and HMOs can teach claim handlers to treat ERISA and non-ERISA claims differently.

The videotape of company lawyers training Aetna claims managers shows they consider liability exposure as a determinant of whether or not to pay a policyholder's claim.5 As the Associated Press reported, "The topic is long-term disability claims, not health insurance, but the company says its policies do not differ."6

Early in the training video, Aetna's in-house counsel Jeffrey Blumenthal clarifies the difference between ERISA and non-ERISA cases: "We have an obligation, certainly, in a non-ERISA setting, under State law, to conduct what is called a reasonable investigation."7 The implication is that in the no-liability ERISA case, no investigation is necessary.

Aetna is far more cautious about cases in the one state where HMOs and insurers are liable for their actions. Blumenthal notes of a new state liability law in Texas, meant to apply to all patients: "In the state of Texas, the State Court — in that scenario, we could be subject to — we'll get into more of this later — to back pay and damages, to punitive damages, to a whole range of extra-contractual liability that could be many, many millions of dollars."8

Another attorney adds about ERISA, "It is a very important distinction…one you have to know when you're processing a claim."

Still another attorney says, "As a practical matter, you really may have to do more on a non-ERISA plan to protect against some of the exposure we're talking about."9

Later, realizing what's been said, and trying to cover it up, Blumenthal said, "Well, let me just say that in the non-ERISA context, none of you will ever have to testify, ‘Well, you know, we do more in the non-ERISA context than the ERISA context because our lawyers tell us there's — punitive damage exposure.' That — that would be a cry to Congress to enact legislation to repeal ERISA, there's obviously attempts to do that."10

Writing about Blumenthal's blundering disclaimer, Orange County Register columnist Dan Weintraub says, "It would be ironic if Blumenthal's statement — as recorded on Aetna's own tape — becomes the cry that Congress finally heeds…The picture is grainy, the lighting is weak and the sound fades in and out. But the message in a newly disclosed videotape could not be clearer: Aetna Inc. treats people who can sue for punitive damages better than those who can't."11

The tape and evidence in the case also show that following the Pilot Life decision, Aetna dropped its field investigation force, (the people who ‘worked up' documentation of legitimate claims so they could be paid) and increased its claims personnel caseloads to four to four-and-a-half times the industry average. This made it harder to document a claims file for payment. The burden of proving that a claim should be paid shifted from the company to the patient.

After viewing the tape, national columnist Jane Bryant Quinn wrote, "The tape shows that, instead of gathering evidence itself, Aetna tells the sick person to handle it. If he or she doesn't present exactly the proof Aetna wants, or presents it after the final deadline for claims, too bad."12

In the training video, one long-time Aetna employee spells out the differences in company policy before and after the shield of immunity from prosecution was erected by the Pilot Life case in 1987. The twenty-year veteran of the Department says, "We used to investigate 100% of our cases practically, and that was called ‘overkill.' But now we investigate a far, very tiny percentage of that…And what we're finding today is that the claim investigator does not have the [time] — because of the 8[00] or 900 case load versus 200 for competitors, and go out and solicit all these [materials]…the question is having the time to go out and investigate and work up that file the way it's supposed to be."13

Investigations Stop After Pilot Life Ruling

While Aetna initially told the Associated Press that the procedures at issue applied to HMO claims too, company spokespeople subsequently retreated from that position, later writing, according to Quinn, that "the interpretation of the videotape is inaccurate, but because of the misperception, Aetna would change its system." Nonetheless, testimony and documents in the case at issue, Fisher v. Aetna, and another Alaska case brought to light the following startling revelations about Aetna's claims handling in wake of the the Pilot Life decision. They show how for-profit insurers and HMOs can change their policies when given shields of virtual immunity. After the 1987 ruling:
  • Aetna abolished its claims-handling guidelines — leaving analysts without guidance about how to fairly treat claimants. Trial testimony demonstrated that the previous guidelines worked and were essential for analysts to treat claimants fairly. Industry experts characterized the elimination of the guidelines as outrageous.14

  • Aetna eliminated field representatives in 1989, and by 1992, had none. Field representatives are the people who ordinarily investigate a claim by talking to the claimants, the doctors involved in treatment, the claimants' friends, and co-workers. Field representatives are often necessary to fairly investigate and evaluate a disability claim. Trial testimony reveals that Aetna no longer interviews claimants and rarely contacts friends and co-workers or the treating doctors (except to get medical records).15

  • In the early 1990s, Aetna began asking its analysts to reduce the use of Independent Medical Exams (IME). These are exams by independent doctors to gain another perspective on whether or not someone is disabled. Instead of IMEs, Aetna placed increasing reliance on its in-house doctors.

  • By the mid-1990s, Aetna-based evaluations of its analysts in part on their ability to reduce investigations and reduce payments on claims.
The training tape makes clear that the burden of proving a claim falls on the consumer. This is an enormous advantage to the insurer since at this point the patient, who must supply all necessary information to the investigator, is often weak with illness or in an otherwise medically compromised condition. It is hardly the time for someone to vigorously vindicate their rights.

The adjusters know how difficult it is for a disabled person to handle those burdens and that the claims personnel is in the best position to gather information and investigate claims. In the video, they put it this way:
Trainee: If we're trying to be very specific about what kind of — wouldn't it be better, you know, by law, if it should go to court or whatever, [for the analyst] to do the requesting [of the medical records] themselves.16

Another trainee: If you are concerned with all that money going out, why couldn't some of the money be allocated to perhaps set up a special (indiscernible), reviewing these claims (indiscernible) — she has a better handle on, really what our claim load is more so than you do. How come time can't be spent on people that can really go out and research all these medicals that are just sitting there in the file?17
Aetna lawyers claimed "management" rejected those ideas.

Medical Apartheid

The most tragic consequence of the Aetna system is not just that consumers shoulder the burden of proving their claims, but the caste-like system that results. Two patients with precisely the same medical needs are treated very differently by the Aetna claims system — simply because one is subject to the ERISA loophole and one is not.

Patients with employer-paid health care in the private sector have become second class citizens in the minds of insurers and HMOs because these working Americans have no recourse to receive damages against the companies.

The ERISA law applies only to private industry benefits. Americans who buy their own health insurance, employees who received health insurance through church or government employers, and Medicaid and Medicare recipients, are not subject to the ERISA loophole and can sue their insurer for bad faith and punitive damages.

The non-ERISA claims that are subject to liability, according to the training video, receive an extra level of review and are all considered by the Specialty Review Team. The ERISA claims can be denied without going to the Specialty Review Team. There is no need for scrutiny, because there is no remedy for the patient if a legitimate claim is denied.

The lack of remedies for patients with employer-paid insurance benefits in private industry following the Pilot Life decision allows HMOs and insurers to breach the code of good faith and fair dealing with impunity. The Aetna evidence — which the company tried to keep under seal — shows how insurers can respond when their insureds have no remedy.18

Unfortunately, Aetna does not appear to be alone.

How to Evaluate a Claim in Six Minutes

Los Angeles Times columnist Ken Reich noted that, after two columns on patient complaints at Prudential HealthCare, eleven of Prudential's very own employees wrote or phoned saying they were troubled about the way PruCare deals with claims.

"Emphasis at the L.A. center is on individual production rather than quality," e-mailed one employee at the company's new Los Angeles National Service Center, one of four such centers nationwide. "Currently, an examiner is expected to ‘finalize' — that is, pay or deny — 82 claims per day. This is roughly one claim every five to six minutes, which leaves little time for careful consideration of difficult issues…Productivity is reported on weekly scorecards, and the cumulative scores are posted, by name, for all examiners to see. Few want to be in last place."19

The employee continued. "Credit is given only for either successfully paying…or denying a claim. Leaving it pending for more information or referring it to someone with more experience…results in zero credit to the examiner for the time spent. Some of these examiners intentionally deny claims that could be processed correctly so they may meet the standard for production. They…rationalize that the provider or member will appeal the denial and eventually get paid correctly. This ultimately results in additional delays and an unnecessarily increased workload."

Patients Pay The Price

Congress and state legislatures are still grappling with the growing toll of ERISA casualties.

Stephanie Ulrich, the woman discussed in a previous chapter who had an aneurysm, was not admitted for an angiogram, and was almost shunted to a nursing home, is one example of an ERISA casualty. And ERISA prevented the widow of Glenn Nealy, the cardiac patient who could not get to an HMO cardiologist (Chapter One), from ever collecting a dime.

These patients, like the other 125 million Americans with private sector employer-paid insurance benefits, all are subject to the ERISA loophole and have been unable to hold their HMOs and insurers accountable for damages.

There is little question that one reason these patients have been treated so callously is their lack of a remedy. Judith Packevicz, whose doctors recommended a liver transplant denied by her HMO (Chapter One), was also an ERISA victim — of a sort. Packevicz first filed her case in federal court under ERISA law, not for damages but simply to force the HMO to provide treatment. But because she received health care through her public employer, the City of Saratoga Springs, she soon discovered that the shield of immunity did not apply to the HMO and she could file in state court and receive damages. Once she did refile, within a few days, her HMO relented and told her it would reevaluate her situation and, ultimately, agreed to pay. This was the good news. Unfortunately, it was too late. Packevicz died before she could benefit from the transplant that might have saved her. She was a victim of the HMO immunity shield even when it did not apply to her.

Ulrich's story is also very instructive. She had two HMOs — one through her mother's private employer, and the other through her own public employer. In the end, the health care company hired by her public employer, the non-ERISA carrier, paid its share of the bills. The private-sector, ERISA claim was never covered.

At least Ulrich received her care. Others have been less fortunate.

In l991, Phyllis Cannon was diagnosed with acute myeloblastic leukemia. When she went into remission, her doctor urged that she undergo an autologous bone marrow transplant (ABMT). Yet her insurer, Blue Lines HMO, delayed authorization for three months, by then the cancer had returned and Mrs. Cannon could no longer benefit from the treatment.

Jerry and Phyllis Cannon
Jerry and Phyllis Cannon
Her HMO claimed that Cannon's bone marrow transplant would be "experimental," even though this procedure was a covered benefit under Cannon's policy. She died just weeks later. Because Mrs. Cannon received health insurance through her employer, the ERISA loophole required Blue Lines to pay no price for its delay and gave Phyllis' husband, Jerry Cannon, no compensation for the death of his wife.

When he brought the case to court, the judge was sympathetic. But noting the problem of ERISA's broad preemption of remedies for wrongful death, Judge John Porfilio, of the Tenth Circuit Court of Appeal, ruled in Cannon's case that, "Although moved by the tragic circumstances of this case, and the seemingly needless loss of life that resulted, we conclude that the law gives us no choice but to affirm"20 that Mr. Cannon has no remedy for his loss.

In the fee-for-service age, traditional insurers may not have paid bills for services already rendered. This often drove people into bankruptcy. But because the patient had already been treated, the issue was only money. Under HMO medicine, the shield of immunity can be a death sentence. When treatment itself is withheld, patients die.

The HMO Shell Game:
When is an Insurer not an Insurer?

Consider the tragedy of 34 year-old Stephen Parrino who was diagnosed with a brain tumor. His HMO, lacking expertise in the area, referred Stephen to California's Loma Linda University Medical Center. There Parrino underwent successful surgery to remove the tumor.

Stephen's treating physicians at Loma Linda immediately ordered that he undergo proton-beam therapy no later than seven to ten days after the surgery. Proton-beam therapy is recognized as appropriate and necessary by the medical community for the prevention of tumor reoccurrence. The therapy is extremely expensive, and Stephen could not pay for it on his own.

When Loma Linda contacted Stephen's HMO to request that the company authorize the treatment, the HMO responded that it would not pay. Stephen called his HMO's customer service department. The HMO claim reviewer explained that the company would not pay for the treatment because it was "experimental, unapproved and not medically necessary" and thus "did not fall within managed care guidelines."

According to Stephen's father, Nick Parrino, Loma Linda Hospital told Stephen, at the time of his denial, that proton radiation was being paid for by fifty-two insurance companies, Medicare and Medicaid.

Even though the HMO had originally referred Stephen to Loma Linda, the company now rejected Loma Linda's judgement that the treatment was "medically necessary." And the specialists specifically said the proton-beam therapy must be given no later than two weeks following brain surgery to be effective.

During repeated calls to the HMO claim reviewer, Stephen threatened a lawsuit if the company did not authorize the treatment within the seven to ten day time period. He continued calling during an almost two month period, but was informed that authorization had been denied. The HMO claim reviewer did say he would ask for a second opinion from a doctor at the USC Kenneth Norris, Jr. Cancer Hospital.

Seven weeks after the surgery had been completed, the USC doctor seconded the opinion that the proton-beam therapy was "medically necessary" for Stephen. He put in the request for authorization to Stephen's HMO.

Two weeks later, Stephen had a CT scan at Loma Linda. He was informed that his brain tumor had reoccurred in the same place it was removed. The very next day, Stephen was informed by his HMO that he had been approved for the proton-beam therapy. But the delay had sealed Stephen's fate.

Stephen underwent a second surgery at Loma Linda during which the surgeons found the tumor more difficult to remove than during the first surgery. The recurring tumor spread to the rest of Stephen's body, including his lungs. Stephen was diagnosed with metastatic cancer.

Stephen subsequently brought suit against the HMO in state court, alleging that the denial of his initial claim for proton-beam therapy was improper. Claiming ERISA preemption, the HMO had the action removed to the U.S. District Court for the Central District of California. Stephen requested a remand motion, but the District Court denied it and dismissed each of his cause of actions.

With no timely remedy against his HMO, the recurring tumor killed Stephen Parrino. Stephen's estate appealed the decision, arguing that the removal to the District Court was improper. However, on appeal the Ninth Circuit found, "Because Parrino was a participant in an ERISA plan, and at least some of his claims fall within the scope of [ERISA], they are completely preempted." The U.S. Supreme Court refused to hear the case on appeal.

The family is left with no remedy. The Parrinos are double victims — first losing Stephen when the HMO denied needed care, then by a system that denies patients and their survivors legal recourse.

It is a cruel irony. HMOs evade accountability for failing in precisely the role they claim to succeed at: managing care, not delivering it.

Wronged patients and their loved ones can take doctors to court for medical negligence. Such cases of quality-of-care violations are not preempted by ERISA. But when the families of patients like Stephen Parrino try to take their HMO to court, the HMO claims that it did not deny medical treatment — but rather simply denied coverage — and therefore cannot be sued for medical malpractice. HMOs that administer employer-paid benefits know that they cannot be taken to court, either, for breaching the duty of good faith, because such state lawsuits are superseded by ERISA under the reasoning of Pilot Life.

Are HMOs insurers or caregivers, money managers or care managers?

Tragedies such as Stephen Parrino's occur because HMOs hide behind many fictions, depending upon which is convenient.

On television, HMOs advertise that their doctors and treatment are the best. In court, HMOs claim they do not deny medical treatment, simply coverage, and therefore cannot be held accountable for negligence. In advertisements, HMOs promise patients that they will be protected when they are sick. But when a patient with employer-paid health care tries to sue an HMO for bad faith, the company claims it is not an insurance company, but simply an administrator of employee benefits, so, under ERISA, it cannot be held accountable for damages.

For patients with employer-paid health care, who are precluded from receiving damages over a benefit dispute (coverage decision), HMOs deny treatment under the coverage tag and the ill have no remedy.

For other patients, who can receive damages over an insurance company's bad faith, the HMO decision is presented as a medical determination. In the best case, the patient is told an "expert" has reviewed the file and the proposed treatment is not medically appropriate. In the worst case, the patient is never even told that there is any treatment available. Catch 22 is alive and well in the HMO industry. Often, no formal denial is ever made because a written denial is typically a trigger for a state review process.

This shell game keeps too many patients on the HMO industry's death row — facing a denial of care but having no clear remedy.

Two hundred years of carefully crafted state common law has evolved to hold all sorts of wrongdoers accountable for all types of negligence. At the urging of both Democrats and Republicans, Congress has taken up returning actions against HMOs that improperly administer employee-employer benefit claims to the province of state common law. Unfortunately, in 1998, Republican leaders who have traditionally been aligned with the insurance industry, buried ERISA reform efforts in committee. Naturally, members of Congress have gold-plated insurance programs.

How closely have GOP leaders collaborated with the insurance industry to thwart reformers in their own party? An internal October 1997 memo from an HMO industry lobbyist to her colleagues said Senate Republican Leader Trent Lott and his aides had indicated that, "Senate Republicans need a lot of help from their friends on the outside" to stop ERISA reform, and that insurance industry lobbyists should "Get off your butts, get off your wallets,"21 meaning pump money into anti-reform efforts and politicians. Still, rank-and-file Republican reformers, while temporarily silenced by party leaders, will rise again.

Conservative Rep. Charlie Norwood of Georgia said: "One of the primary reasons I sold my dental practice in 1994 to run for Congress was to make sure the Clinton plan was dead for good. The Wall Street variety of Republican seems to think that Clinton Care is just fine, as long as corporations run the show instead of the federal government. Health insurance is the only industry in this country that enjoys a federally mandated shield against liability for its actions, and that's at the root of the horror stories of managed care."22

ERISA reform is bipartisan, in part because it deals with an issue of fundamental fairness and the failure of the free market to be truly "free." Placing trust in 200 years of carefully-crafted state common law is a non-regulatory, localized, state-based approach supported by conservative ideology and free-market philosophy. Conservatives, who love state control in other areas, should not insist on federal uniformity in health care.

But corporations do not like proposals that would impose liability on HMOs. They claim it would drive up health care costs. This argument is but a fig leaf. Two July 1998 studies show ERISA reform would be both health enhancing and cost effective.
  • In a study of one million public employees in California, people who can sue their managed care plans already, the Kaiser Family Foundation found the cost of lawsuits and settlements minimal — no more than thirteen cents per member, per month.23

  • The Congressional Budget Office reported that giving patients the right to sue would add only 1.2% to health care premiums, including costs of so-called defensive medicine. That's less than half the minimum estimate of the HMO-industry lobby.24
But the greatest evidence that ERISA reform is both cost-effective and health-enhancing is from Texas.

In 1997, Texas became the first state in the nation to offer its citizens a way around ERISA, by allowing HMOs to be taken to court for what is a new cause of action for corporate medical negligence. The Texas law skirts ERISA's preemption because the law provides damages for quality-of-care violations or medical negligence — which Courts have upheld as within the state's province — instead of damages for bad faith and other contract-based benefit disputes which have traditionally been preempted by ERISA.

The Texas law, enacted under Republican Governor George W. Bush25, holds HMOs accountable when they have "exercised influence or control which result in the failure to exercise ordinary care." While HMOs claim states cannot pass such laws, a legal challenge to the Texas statute by Aetna was rejected in September 1998 by U.S. District Judge Vanessa Gilmore, who set aside arguments that the Texas "right to sue" statute violated the 1974 federal law governing employee pensions.

The Court wrote: "In this case, the Act addresses the quality of benefits actually provided. ERISA ‘simply says nothing about the quality of benefits received.' Dukes, 57 F.3d at 3576…the Court concludes that the Act does not constitute an improper imposition of state law liability on the enumerated entities."26

The Texas experience shows that such a liability law does not raise health care costs or result in litigiousness. The law's author, Texas State Senator David Sibley says, "When the state of Texas passed its state legislation holding managed care organizations accountable, the managed care industry said it would cost over a billion dollars. When an actuarial analysis by Milliman & Robertson for a Texas HMO was performed on the impact of the bill after it was passed, the cost was estimated to be far less — a mere thirty-four cents per member per month (about 0.3%)." This estimate is from the industry's accountant.

"The law became effective on September 1, 1997 and since then not a single case has been filed," Sibley noted in June 1998, and since only a few lawsuits have been filed. "When asked about the impact, Texas physicians say they have not heard of any litigation but believe they are now receiving more attention from managed care reviewers when requesting necessary medical care for patients."27 Thus rather than spark a litigation explosion, the exposure to liability deters HMOs from withholding care and, instead, encourages them to provide quality services. It helps prod the corporate conscience.

Carol Cropper writes in the New York Times, "What lessons does Texas offer? The short answer is that the spotty early evidence does not support a lot of the dire warnings on Capitol Hill about a landslide of litigation." Cropper also cites a Texas Department of Insurance report which found that between September 1997 and March 1998 the increase in total spending per member per month of full service HMOs was only 0.1%.28

The implications are clear. Unless there are consequences to an HMO for denying expensive treatment, no matter how sorely the treatment is needed or how justified by medical science, the financial calculus of "managing care" will weigh toward withholding and delaying costly care.

The American public certainly understands the principle at work. Nearly eight out of ten Americans support having the right to sue HMOs, even if it means a $1–$10 increase in premiums per month, according to a poll commissioned by the American Psychological Association and reported in USA Today in June 1998.29

How can the ERISA loophole be closed? By legislative action.

Congress has the power to end ERISA's preemption of state consumer protection laws and states can specifically skirt the ERISA loophole and hold HMOs accountable for their decisions by creating a new "corporate negligence" law for HMOs, such as the one in Texas.

Most states have "corporate practice of medicine" laws that say corporations cannot practice medicine. That is how HMOs claim in court that they don't practice medicine, only provide coverage. Yet HMOs do deny treatment and overturn doctors' decisions. HMOs do dictate limits on medical treatments and care. New state laws, like the one in Texas, could require that HMOs be held accountable for reckless health care decisions.

The return to state laws is particularly needed because under state common law, HMOs, like other corporations, must act with good faith and obey the covenant of fair dealing. But until Congress and state legislatures act, patients will continue to be at the mercy of HMOs and insurers.

For every year of delay, ERISA casualties mount.
  • Rhonda Rae Fleming Bast's HMO delayed her bone marrow transplant and she died. Three years later, Rhonda's husband and son filed suit against the HMO. However, because Rhonda received her health care through her employer, the state law claim was preempted by the federal ERISA law. Deciding that the wrongful death claims of the Seattle resident's family were preempted by Congress, the Appeals Court said without Congressional action there was nothing it could do.

  • "Until this day, my HMO refuses to pay for the procedure that saved my career and my quality of life," says Debra Moran, of Winfield, Illinois. "If the HMO knew they would have to pay damages, I don't think they would ever treat me this way. I thought I had more rights, but instead I am paying huge credit card finance fees to pay off this procedure. I mortgaged our future and our house, as well as our 401k, to pay for this surgery." Moran's managed care ERISA nightmare began in July 1995 when she developed pain in her hand, wrist, elbow, shoulder and neck. The pain came from two related conditions that impair circulation and neural transmission. As the conditions worsened, the pain grew. The Winfield, Illinois resident could not cook, clean, or go to work. She continued to get a run-around from her HMO. Debra was forced to find out about her condition herself — through research and an out-of-pocket evaluation by a specialist in Virginia. The specialist recommended surgery to repair the nerve and restore circulation. Unfortunately, the HMO denied payment for this $100,000 procedure, claiming it was not medically necessary, even though Debra's pain was medically documented and her primary-care doctor at the HMO backed her up. ERISA's standard for proving an "arbitrary and capricious" denial to recover even those costs is much higher than the "medically necessary" standards under state law. Even if she does prevail and the HMO has to pay for the treatment, the HMO will still pay no damages.

  • In Baltimore, Maryland, Michelle Leasure-Firesheets, a disability advocate with incontinent ostomy (no bowel control), was denied ostomy supplies which are 100% covered under Maryland law. Michelle has systemic lupus which compromises her immune system. Still, her insurer expected her to wash out her colostomy bags and reuse them for five days each. The stress from the denial of supplies may have contributed to a stroke requiring a hospital stay. Ironically, she could get benefits if she went on welfare, but she wants to work. She has no remedy under ERISA.

  • Madison Scott was born prematurely but otherwise healthy in Orange County, California. She required monitoring to prevent Retinopathy, which can cause blindness. Her parent's HMO delayed treatment and refused referrals for Madison until her eye condition became serious. After five failed surgeries it was determined that Madison, at three months of age, was completely and permanently blind. The HMO faces no liability due to ERISA.

  • Three year-old Kyle Morgan of Bakersfield, California began having ear problems at six months of age. His HMO withheld tests and treatments that could have detected Kyle's cholosteatoma. Now the bones in his ears have had to be removed due to destructive infections and Kyle has suffered hearing loss. Kyle's hearing loss looks like it will continually worsen into adolescence and he will require monitoring every year to check for more potential problems. Kyle's family has no legal remedy.

  • Nine year-old Alex Giles of Houston, Texas was athletic. However, he fainted on numerous occasions while exercising. Though fainting during exertion is a serious medical indication of a cardiac condition, Alex's managed care doctor never studied the boy's medical history or ordered any diagnostic tests. Alex's mother was simply told to give him Gatorade. After more fainting spells and further disregard from his plan doctor, Alex tragically died undiagnosed. The HMO argues that ERISA preempts Alex's family's claims, though Alex's family is attempting to take the company to court under Texas's HMO liability law. To date, the HMO has lost its appeals.

  • Frank Wurzbacher is a retiree in Covington, Kentucky who had surgery for prostate cancer. He took monthly lupron injections to keep the cancer from returning. After a new insurer took over his health plan, Frank's coverage was cut back and he could no longer afford the injections. The only alternative he could afford, according to his doctor, was castration. Frank tried unsuccessfully to get his insurer to change its mind. Frank had the castration procedure done, only to return home to a mailed notice that he could receive the injections. His company had decided a month prior, but administrative snafus prevented the information from getting to Frank. Wurzbacher's benefits are subject to ERISA.

  • Bobby Kuhl suffered a major heart attack that required specialized surgery. His HMO refused to refer Bobby to a qualified hospital for the procedure, but later relented. The delay cost Bobby the chance for surgery, because of deterioration to his heart. Later, the HMO refused Bobby evaluation for a heart transplant. Bobby managed to get himself placed on a transplant list, but died waiting. A federal court refused Bobby's family a remedy due to ERISA.

  • Ariday Dearmas was injured in an auto accident and taken to her HMO hospital in Miami, Florida. Because of a lack of "in-network" HMO doctors, she was transferred to four different hospitals in three days. She suffered irreversible nerve damage as a result, but her family cannot hold the HMO accountable in court.

  • Norco, California resident Melody Johnson tragically died at 16 from cystic fibrosis after her HMO denied referrals to a Cystic Fibrosis Center and attempted to treat her condition without adequate expertise. Her HMO has not been held accountable due to ERISA.

  • Complaining of depression, Los Angeles resident Douglas Hovey visited his HMO. The company downplayed his condition, blamed it on sexual dysfunction and prescribed antidepressant drugs. With persistent symptoms and suicidal thoughts, which occurred only after he was placed on the antidepressant, Douglas continued to receive only drug treatments from his HMO. Finally, after his HMO doctors refused to continue seeing him because of a lack of resources, Douglas, in the ultimate act of alienated defiance, committed suicide at the age of 23. His family has no remedy because of ERISA.

    Serenity Silen
    Serenity Silen
  • Serenity Silen's HMO delayed diagnosing her acute myeloid leukemia, complicating the possibility for a cure. After numerous instances of misdiagnosis, dangerous oversights in Serenity's care and a denied authorization for a bone marrow transplant, her parents were forced to transfer her to a more qualified hospital. They found themselves in a fight with the HMO to get coverage paid for at the new facility, where care was taken to alleviate her pain and, according to her mother, she found renewed strength in her final fight against leukemia. Unfortunately, Serenity succumbed to the disease at sixteen years of age in October 1998. Due to ERISA, the HMO is liable for no damages in her death.

  • Refused treatment by his HMO for a tumor the HMO said was terminal, Bill Beaver of Pollock Pines, California searched out life-saving treatment from John Hopkins Hospital, which spared his life for four years but for which his HMO refused to pay. (Chapter One) Because of ERISA, Bill was prevented from recovering damages, or even the cost of the treatment — he couldn't even find an attorney to take his case.

  • Simi Valley, California resident Janice Bosworth was one of a group of breast cancer patients initially denied bone marrow transplants by Health Net who ultimately died. The two other women in the group, Nelene Fox and Christine deMeurers, had health care coverage through public employment, and were not subject to ERISA. Their families won multi-million dollar judgments after their deaths. But Bosworth had her health care through her private employer, which, ironically, was Health Net, the HMO initially denying her the life-saving care. As noted in Chapter One, she finally secured the transplant for herself, but did die two years later. Bosworth's surviving husband and son, subject to ERISA, have been unable to recover damages from the HMO for Janice's death.
These are just a few of the cases where patients and their families were denied recourse.

Till Delay Do Us Part

Certain medical malpractice cases, unlike bad faith cases, can survive ERISA challenges if the patient can prove that the HMO had knowledge of repeated negligence or was involved "vicariously" in the quality-of-care violation. This would include negligence in running a substandard hospital or contracting with incompetent doctors. It would also include HMOs that indemnified the doctors it employed against a lawsuit, as Kaiser does. Where state law permits, these patient claims are often pushed into mandatory binding arbitration. In these secret proceedings, controlled by private lawyers and retired judges who depend on repeat business from the HMOs, cases are screened from the open forum of public opinion. Forced arbitration is costly, unfair, and conceals quality-of-care violations.

Most patients do not even realize they have signed away their constitutional right to a jury trial in their HMO enrollment agreement. They only find out after becoming sick or injured when they try to go to court.

How have HMOs skirted the courts and required patients to submit to binding arbitration? Where state laws allow, most HMOs and managed care plans require the consumer to give up their right to sue in cases of malpractice or in disputes over quality of care — as a condition of coverage.

Arbitrations are private. Decisions and evidence presented are never published. Repeated violations of quality-of-care standards are thus hidden from public view. Since no precedent is set, the next victim must start from scratch in making her case against the HMO.

It gets worse. While many patients are in a race against time for treatment, the arbitration system is frequently lengthy and sometimes deliberately drawn out by HMO attorneys.30

Kaiser doctors misdiagnosed Wilfredo Engalla's lung cancer as colds and allergies. By the time he was diagnosed properly five years later, the cancer was terminal. Engalla's family filed an arbitration claim against Kaiser for medical malpractice and, after waiting more than six months for an arbitration hearing, charged Kaiser with deliberately stalling to reduce any damages.31 By intentionally stalling, Kaiser could avoid liability after Wilfredo's death, as the dead can collect no compensation for their pain and suffering.

The case, ultimately heard before the California Supreme Court, became a national example of how HMOs can and will delay when able. Ironically, because the case went to court rather than arbitration, court-ordered data showed the systemic nature of the delays at Kaiser and the fact that Kaiser arbitration is more prolonged and costly than court cases.

Kaiser's service contract with its members promised an arbitrator would be appointed within two months. Pursuant to a court order, Kaiser's own statistician Michael Sullivan produced data regarding delays in Kaiser's arbitration system:
  1. Kaiser's statistician's data showed that during the later part of the 1980s, on the average, it took 863 days (almost two-and-a-half years) to reach a Kaiser arbitration hearing. With the advent of fast track in our courts, the court system would prove significantly quicker. More importantly for the Court was the gap between Kaiser's promise of sixty days until the appointment of a neutral arbitrator and its practice of taking years to resolve disputes.

  2. Statistically, delays occur in 99% of Kaiser medical malpractice arbitrations; in only 1% of all Kaiser cases is a neutral arbitrator appointed within the sixty-day period provided by the provision.32
More recent data from Kaiser shows the company did not improve its record in the 1990s. The average time for an arbitration case to come to a hearing was: 3.2 years (1992), 2.9 years (1993) and 3.1 years (1994).33

Ruling in the Engalla case, a conservative California Supreme Court found, "There is evidence that Kaiser established a self-administered arbitration system in which delay for its own benefit and convenience was an inherent part, despite express and implied contractual representations to the contrary."34

The six to one ruling held that if a patient can show that an HMO unreasonably delayed arbitration when it promised otherwise, it is essentially fraud, and the patient or next of kin can seek justice in court. The long-term problem remains, as Kaiser can simply rewrite its service contract to specify a longer period of time until arbitration must begin to avoid future liability.

According to the Engalla's oldest daughter, 28 year-old Aina Engalla Konold, "My dad had hoped to have his day in court. Kaiser knew he was dying. He was their patient and he was on oxygen when they took his deposition. But Kaiser only stalled and made us wait until after my father had died. He never got to tell his story or see the result of his case."

Patricia Engalla, 21, commented: "My father was always so responsible. He believed everything they told him. How was he to know?"

The HMOs promised binding arbitration would be more expeditious and less costly. Evidence suggests that, as part of the HMO strategy, the promises have failed on both accounts.

Arbitration is usually more costly than a trial and consumers cannot recover their legal costs, while the awards made by arbitrators are generally 20–50% lower than awards made by jurors. For instance, Linda Ross, whose mother died of a misdiagnosed and untreated pulmonary embolism in a Kaiser hospital in Fontana, spent nearly $22,000 in legal fees over the course of three years. When the case was finally heard, Ross was awarded only $150,000, significantly less than what a jury likely would have awarded, even though the arbitrators unanimously agreed on Kaiser's liability.35

Litigation costs, of course, mount during a prolonged waiting period to reach arbitration. In addition, the costs of arbitration are exponentially greater than a case that goes to trial. Filing fees for superior court litigants are $183. In the American Arbitration Association system, filing fees range from $500 to $5,000. Arbitrators generally charge $100–$400 per hour,36 whereas court costs amount to approximately $350 per day, according to one witness at a recent state hearing on the matter.

Due to the prolonged proceedings, arbitrations have become a cottage industry for retired judges and lawyers. The Los Angeles Times reports, "Even a part-time arbitrator can earn close to $200,000 in annual fees, according to those familiar with the system."37

The system also appears less than impartial. Arbitrators who rule against health plans and award substantial damages to the patient rarely find themselves asked to arbitrate future disputes, giving them a strong financial self-interest in securing favorable settlements for health plans.38

If patients survive ERISA's draconian restrictions, they are too often stuck in arbitration. In Adrian Broughton's case (Chapter Two), a California Appeals Court allowed the unfair business practice lawsuit despite the family's arbitration agreement with CIGNA. The Court found that because the claim against the HMO was that a door-to-door marketer fraudulently induced the patient's mother into joining the HMO, the mother was not bound by the arbitration clause. But Broughton was the exception, not the rule. (The HMO has appealed the decision and the California Supreme Court has agreed to hear the appeal.)

In response to the growing backlash against mandatory arbitration caused by HMO abuses of the process, the American Arbitration Association changed policy in 1998. Following the Engalla decision, the nation's largest and most powerful association of arbitrators decided not to conduct any further forced HMO arbitrations.39 In a joint statement with the American Bar Association and American Medical Association, it condemned the forum of arbitration for health disputes.

Unfortunately, the system refuses to die, as new arbitrators are hired to replace those who bow out over ethical concerns.

It is clear that the managed care industry uses arbitration not for expedient justice, but as a means to gain the upper hand over those who challenge them.

Patients should not have to sign their seventh amendment right to trial away when they sign up for an HMO. Until all states pass laws preserving patients' right to trial, however, the playing field of justice is dramatically tilted against the injured patient and in favor of the HMO corporation.

Putting a Lid on Justice

The tragic story of two year-old Steven Olsen, whose brain injury went untreated because of a hospital's refusal to administer a CT scan, which in turn led to cerebral palsy and blindness, was recounted in Chapter Three. The injustice does not end with Steven living in a world of darkness. His hospital and doctors were sued for medical malpractice. The jury found that his treatment was below the community's standard of care, and for his life of pain and suffering awarded him $7 million. But unfortunately for Steven, his parents, and even the jury, a California state law puts a cap on such awards, and a judge slashed it to $250,000.40

"The jury can not be told about the arbitrary cap for Steven's compensation, which the doctors and insurers lobbied state legislators to become California law," said San Diego resident Kathy Olsen, Steven's mom. "The judge was forced to reduce the decision made by a jury of our peers. I know that this law cannot be changed for my son Steven. But I do feel that if another child is injured like [the way he was], that he should get what he is rightfully due."

The jurors found out that their verdict had been reduced not by a judge but by reading about it in the newspaper. Jury foreman Thomas Kearns responded, writing a letter to the San Diego Union Tribune:
I served as foreman of the Steven Olsen jury ("Capping the cost of suffering," P A1, May 10, 1995). During some three weeks, we heard evidence and testimony in this tragic case. We viewed a video of Steven, age 2, shortly before the accident.

This beautiful child talked and shrieked with laughter as any other child at play. Later, Steven was brought to the court and we watched as he groped, stumbled and felt his way along the front of the jury box. There was no chatter or happy laughter.

Steven is doomed to a life of darkness, loneliness and pain. He is blind, brain damaged and physically retarded. He will never play sports, work or enjoy normal relationships with his peers. His will be a lifetime of treatment, therapy, prosthesis fitting and supervision around the clock.

Medical testimony revealed that a facial injury to Steven, suffered in a fall, resulted in complications. The attending physician correctly listed "CNS abscess" in her differential diagnosis, but failed to order a brain scan, choosing instead to go with her instincts and treat him for meningitis. Three days later, Steven's brain herniated from the abscess. The physician had not met the standard of care.

After summation, our jury delivered a just verdict, and in accordance with the judge's charge, a fair award which included $7 million for pain and suffering. I only learned of the $250,000 cap on pain-and-suffering awards from your newspaper, as the judge saw fit to keep this information from the jury.

Our medical-care system has failed Steven Olsen, through inattention or pressure to avoid costly but necessary tests. Our legislative system has failed Steven, bowing to lobbyists of the powerful American Medical Association (AMA) and the insurance industry, by the Legislature enacting an ill-conceived and wrongful law. Our judicial system has failed Steven, by acceding to this tilting of the scales of justice by the Legislature for the benefit of two special-interest groups.

America deplores the frivolous lawsuit. Dubious "whiplash" and "backache" claims waste time and resources of the courts. Some limit on awards in such cases is reasonable. However, our "one size fits all" awards-law equates in terms of upper limitation the most minor of malpractice conditions with the catastrophic situation of the magnitude of that which has befallen Steven Olsen.

I think the people of California place a higher value on a human life than this. Let us change this egregious law.

San Diego41
Similar caps to the one in California have been enacted across the nation at the behest of lobbyists working for the medical-insurance industry. Pioneered in California, campaigns have foisted these restrictions on the public in twenty states.42 The campaigns have succeeded only by perpetuating fictions, which were used again by House Republicans under the banner of "HMO reform" in 1998 to pass legislation aimed at eroding the same patients' rights to fully recover in malpractice cases.

Two decades ago, skyrocketing premiums for medical malpractice insurance whipsawed California doctors and hospitals into supporting anti-consumer restrictions on the rights of patients. The most grotesque component of the 1975 Medical Injury Compensation Reform Act — MICRA — was the $250,000 cap on compensation for pain and suffering which, because of inflation, now limits victims of malpractice — no matter how egregious — to the equivalent of $50,180 in compensation in 1976 dollars.

It might seem logical that a cap on awards such as MICRA, when implemented, would lower health care costs. In fact, medical malpractice costs are less than 1% percent of all health care costs — an insignificant component. Despite California's cap, medical malpractice premiums are a slightly higher percentage of health care costs in the state (0.86%) than in the nation (0.69%). The cap has not reduced overall health care costs, which are among the highest in the nation, and has not reduced per capita medical malpractice premiums below the national average.43

MICRA did, however, boost the profits of the malpractice insurance companies.44 In 1995, for every dollar of premiums malpractice insurers received, they paid malpractice victims a pitiful forty-one-and-a-half cents on average. Nearly the same amount — forty cents of every dollar — was paid to the insurance companies' own defense lawyers. MICRA has proven another windfall for the insurance industry.

Caps on pain and suffering reduce the deterrent effect of the medical malpractice liability system and the quality of health care. Dr. Troyen Brennan, co-author of the landmark study of medical malpractice by the Harvard School of Public Health, reports that restricting injured patients' rights to recover damages will reduce deterrence and increase the rates of medical injury. According to Harvard experts, 80,000 patients already die each year in hospitals alone due to medical negligence.45

MICRA's low limits on how much victims recover, as well as on how much victims can pay for legal representation, have driven consumer attorneys away from taking malpractice cases. The few court victories, like the Olsen's, ultimately have great reductions on hard-won compensation.

HMO medicine may have put the doctors' lobby in conflict with the HMO and insurance industry. But when it comes to limits on malpractice victims' rights, the doctors' lobby long ago made an alliance with the insurance industry to limit physicians' liability for medical negligence.

Harry Jordan is a classic illustration of the failure of such laws.

Jordan, a Long Beach California man, was hospitalized to have a cancerous kidney removed. But the surgeon took out his healthy kidney instead. A jury awarded Jordan more than $5 million, yet the judge was required to reduce the verdict to $250,000 due to California's cap on "non-economic" damages — plus a mere $6,000 in "economic costs". Jordan, who lived on 10% kidney function for more than a decade after the case, could no longer work, though the jury (which could not be notified about the "non-economic" cap) did not take this into account. Jordan's court costs — not including attorney fees — amounted to more than $400,000. His medical bills, which were frequently denied by insurers, totaled more than $500,000. He paid, until his death in the late 1990s, $1,700 per month in health insurance.

In the age of mismanaged care, the stakes are different. It is not just a slip of a scalpel that can be subject to MICRA-like limits, but the mismanagement of HMOs.

The Poison Pill

Responding to demands across the country for ERISA reform, the industry has promoted this poison pill of damage caps on HMO liability.

When multi-billion dollar corporations enjoy liability caps, the financial calculus for HMOs deciding whether to grant treatment will more often than not weigh on the side of denial. Under market-oriented medicine, only the threat of costly lawsuits will force Wall Street-driven HMOs to provide timely and adequate treatment.

Even the American Medical Association, which long fought for medical malpractice damage caps on physician liability, now recognizes this. In 1998, the organization took a courageous stand, insisting that the caps not apply to HMOs if the ERISA shield is lifted. The AMA also asked that the legislation federalizing the caps on doctors not be attached to the ERISA reform bill, knowing it was a poison pill.

Physician and Texas State Senator David Sibley wrote: "In Texas, civil liability for damages of a ‘physician or health care provider' is limited…akin to California's MICRA. For the purposes of SB 386 [the Texas HMO liability law], however, we determined that managed care companies should not be treated any differently than other profit-making business enterprises that are subject to liability under traditional tort laws.

"Because HMOs and managed care companies (including doctor-run medical groups) often apply a financial filter to determine treatment denials, their liability must not be artificially limited by a compensation cap. Such restricted responsibility would mitigate against approval of the most expensive treatment, such as cancer care. Under the Texas law, physician-run medical groups are considered managed care entities and do not fall under the compensation cap applicable to sole practitioners."46

The few California cases where MICRA has applied to HMO patients lucky enough to find a medical negligence cause of action reveal disastrous public policy outcomes. Some of the patients whose stories are told in previous chapters went on to be victimized again by MICRA's draconian limits.
  • Recounting her nightmare with California's medical malpractice cap, Suzanne Lobb (Chapter Three), whose husband died unattended at a Kaiser-owned hospital, says, "My husband's death ended my life as I had known if for twenty-eight wonderful years. Our family has been devastated by this loss. Not only have we been betrayed by a health care provider that promised to protect us, but [by] our legal system as well. Within a couple of weeks, I had obtained a copy of my husband's medical charts. It was not difficult to see his life literally slip away on paper. My next visit was to an attorney's office. I, like most people, was unaware of the law in the state of California which limits the award for medical malpractice. I was shocked and distressed that a hospital could be this negligent and be so protected. To an HMO as large as Kaiser, a maximum $250,000 award for pain and suffering is a mere slap on the wrist. They can afford to cut costs and take chances with lives because this law makes it affordable for them to do just that."

  • Kevin McCafferey (Chapter Two), whose son is crippled because no doctor was present during the high-risk delivery at Kaiser, said, "My lawyer informed me that suits against my HMO are decided through arbitration. I asked what this meant and he told me that there would be no jury involved. An arbitrator would decide the case. Furthermore, he informed me that there were set limits determining the size of the award in these type of injury suits. They were typically a lot less than those awarded by a jury in other states, but in California this was the law. When I asked about factoring in lost wages for Colin, or emotional stress caused to the parents, he said it was too difficult to prove. Lost wages are difficult to prove unless someone is actually working. I thought this unfair. It seemed as if they were penalizing Colin because he was a baby and because he happened to be born in California. My lawyer also told me the whole arbitration process was kind of rigged in the HMO's favor. The arbitrators were typically retired judges seeking means to supplement their income, and many relied on my HMO for a steady stream of cases. Given this fact, it made it difficult for an arbitrator not to favor the HMO, since the HMO would cut them off if there were too many adverse decisions. Ultimately, since there was not much choice in the matter, we settled for $250,000. The settlement was in the form of a structured annuity, which probably can be purchased for less than the cash value. Although it was better than nothing, I still don't think it's enough. Worst of all, I am troubled by the fact that the HMO still does not provide the option for a doctor when delivering babies. This seems absolutely ludicrous to me."

  • Linda Ross's mother died unattended at a Kaiser emergency room after a six-hour wait and not being administered an expensive blood thinner on hand. She says, "Under existing California law, I will never be able to do anything to hold these individuals accountable for my mother's death. They will hide behind the HMO's corporate veil, completely immune from any responsibility for their actions. Moreover, $250,000 is inconsequential to the giant HMO that let my mother die. I just have to keep telling myself that the justice the state laws deny me, I will have to count on God to provide."
Medical malpractice victims receive too little compensation, not too much. The Harvard School of Public Health's Medical Malpractice Study reports that only one out of every sixteen victims of medical malpractice ever receives any compensation for their injuries. The record of MICRA-type limits adds insult to injury.

The costs of these restrictions are born unequally by patients throughout society. Consider the following:
  • Arbitrary caps on "non-economic" compensation unfairly discriminate against the suffering of women. Women are more frequently the victims of negligence because they undergo more surgery — sustaining injuries such as laceration of the uterus or loss of a newborn during childbirth. These injuries do not carry high "economic" price tags but involve significant loss. Caps not only deny women victimized by medical malpractice fair compensation and legal representation for their injuries, but subject women to the scalpels of incompetent but undeterred practitioners.

  • Arbitrary caps on "non-economic" compensation unfairly discriminate against the littlest victims, children. Children cannot prove significant future wage loss. Their families cannot realistically estimate the expenses they are to incur over the course of a lifetime.

  • Caps on "non-economic" compensation devalue the lives and health of low income patients. Caps on pain and suffering discriminate against the suffering of low-income people whose "economic" basis for the recovery of damages — wages — are limited. A strictly "economic" evaluation based on wages devalues what victims will create or produce in the future, their quality of life, as well as an injury's impact on their ability to nurture others. For instance, a laborer may lose his arms due to the exact same act of medical negligence as a corporate CEO, but the CEO would be able to collect millions (because of his high wage loss, which is reimbursable) and the laborer would be closely limited to the $250,000 cap. A housewife similarly would be limited to the cap no matter the physical or emotional depths of her injury. Caps assign greater value to the limbs and lives of some people than those of others.

  • Even taxpayers get it in the neck because caps make them foot the bill for dangerous doctors' mistakes. Malpractice victims receive compensation only for medical bills and lost wages. But those who are not wage earners — such as seniors, women, and the poor — have no other resource from which to pay for unforeseen medical expenses and basic needs. A cap may force malpractice victims to seek public assistance from state or federal programs funded by taxpayers.
It's not just ERISA, which prevents suits, or damage caps that stack the deck against justice. Many awards are structured as annuities. As Kevin McCafferey alluded to above, the payment of the award for his son is not a lump sum but a periodic payment through an annuity. This arrangement creates problems for the victims, and further helps those committing the injustices.
  • Debts paid on a periodic basis are far from secure. In particular, annuities purchased by defendants to satisfy periodic payment obligations can be risky ventures. For instance, Executive Life Insurance Co. of Los Angeles, one of California's major insurers and seller of annuities, failed in 1991 and was seized by government regulators. Many of the 350,000 policyholders received only dimes on the dollar. If the seller of the annuity falls into bankruptcy, it is the patient who is denied compensation, because the defendant is no longer responsible for the debt. This is a substantial shifting of risk onto innocent patients who, in states like California, already face other harsh restrictions.

  • If a patient dies, all payments stop and the victim's family receives nothing. Wrongdoers are rewarded for causing the most severe, life threatening injuries. If a patient dies, periodic payments immediately cease and the guilty physician is allowed to keep the remainder of his money. Awards do not revert to the next of kin.

  • Periodic payments reduce the already limited compensation received by victims, as the value of the verdict diminishes over time due to inflation. No adjustment is typically made in the payments to reflect the inflation rate or changes in the costs for medical care, which have risen sharply and well above the inflation rate for many years.

  • Periodic payment agreements put the burden on the victim to meet their basic needs. The periodic payment arrangement, once approved, is extraordinarily difficult to modify. If costs of the victim's medical care increase beyond his means, or a special expensive medical technology is made available which the victim requires, the injured patient must retain a lawyer to have the schedule modified — and may very well not succeed.
The pernicious cumulative impact of these MICRA restrictions on patients can be seen in a recent Los Angeles case described in Chapter One. Dawnelle Barris, whose eighteen month old daughter Mychelle died from a treatable infection because her HMO would not authorize treatment at an out-of-network hospital, saw her $1.35 million award against the HMO and hospital slashed to $250,000 in March 1998. Even though the case involved violations of a federal patient-dumping statute, the California Supreme Court ruled that MICRA applied. The HMO and hospital will hardly learn their lesson. After costs and attorney fees, Dawnelle will receive less than $150,000 for her daughter's preventable death.47

The case shows that courts too often do not distinguish between an administrative decision based on financial consideration and an instance of medical negligence caused by incompetence. Medical malpractice compensation caps let HMOs and hospitals escape accountability by putting money ahead of good medicine.

There are more restrictions. Maybe the most frequent assault on a consumer's legal rights is capping a consumer attorney's contingency fees but not defense attorney fees. The legacy of MICRA, where a consumer's attorney's contingency fee is capped, demonstrates how patients are denied appropriate representation. Consider these implications:
  • Only the most seriously injured victims with clear-cut cases to prove can ever find legal representation. In states with caps on attorney contingency fees for medical malpractice cases (and particularly in states such as California where a victim's pain and suffering compensation is also capped), injured patients simply cannot find legal representation. It is not cost-effective for attorneys to take the vast majority of cases. The President of Safe Medicine For Consumers, a California-based medical malpractice survivors group, notes, "The vast majority of individuals who contact us are women, parents of children or senior citizens. 90% of these individuals are unable to pursue meritorious medical malpractice cases because they can not find legal representation on a contingency basis and their savings have been wiped out."

  • Eroding the contingency fee mechanism contributes to a deteriorating quality of health care and passes costs onto taxpayers. Left without legal representation, victims go uncompensated, and dangerous medicine goes undeterred. Taxpayers pay the cost of low-income victims' medical care and basic needs through public assistance programs if the physicians or HMOs responsible for the injuries are not held accountable.

  • Undermining the viability of the contingency fee mechanism discriminates against low-income patients who are most at risk of medical malpractice. A contingency fee system is a poor patient's only hope of affording an attorney to challenge a negligent physician. Undermining such a system through caps on fees reduces incentives for attorneys to take malpractice cases and gives HMOs and hospitals a license to treat poor patients callously. Dr. Troyen Brennan of Harvard reported to Congress that: "Poor patients are one-fifth as likely to bring claims as are the wealthy. The aged are also unlikely to bring claims…the poor are more dependent on contingency fee mechanisms in order to bring claims,…[a proposal limiting contingency fees for plaintiffs] will likely worsen the inequity of the tort system…. [the proposal] will likely lead to less compensation for individuals injured by medical malpractice, will reduce the deterrence of practices that cause such injuries and overall will increase the costs of the medical-care system."48

  • Limiting plaintiff attorney contingency fees, but not defense attorney fees creates an uneven playing field for victims. Defendants can typically afford very high-priced attorneys who fly special expert witnesses in from out of state. A contingency fee practice demands that a plaintiff's attorney must front the cost of expert witnesses to refute the testimony of experts flown in by the defendant. With caps on fees, such costs become prohibitive for the victim's legal counsel.
Perhaps the most important point lost in the thicket of these restrictions on patients' rights is this: HMOs and insurers would not have to limit their liability — through ERISA or MICRA-type restrictions — if they simply played fair and dealt with patients in good faith.

All other industries face the scrutiny of state common law liability. If HMOs and managed care insurers cannot withstand such scrutiny, why should they deserve to exist?

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