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Managed care liability

By Edward F. Shay, Esq.

In Oklahoma, a professor is suing his HMO because he believes that it designed financial incentive which delayed definitive diagnosis of an infection in his spine. In Georgia, an HMO was held liable for $40 million when a six month old boy with a rare blood disease lost his legs because he had to travel 42 miles to a hospital where the HMO received a 15 percent discount. Ten years ago HMOs did not face this type of liability; but today they do. Clearly, liability in managed care is changing.

Liability at the Beginning of the Managed Care Revolution

In order to appreciate the evolving changes in managed care liability, it is instructive to compare actual cases from the beginning of the managed care revolution with current legal developments. Cases which are representative of the early years of the managed care revolution demonstrate that HMOs and other types of insurance and health benefit plans faced very limited liability risk for managed care actions and decisions.

For example, in Chase v. Independent Practice Association, a 1991 case of medical malpractice, a Massachusetts court addressed the question of whether an HMO should be liable for the acts of the physicians who deliver care to the HMOs members. The facts were as follows. In 1982, Rae Ann Chase gave birth to a retarded child and sued her obstetrician, Dr. Kaufman. Ms. Chase alleged that Dr. Kaufman had failed to perform important tests during her pregnancy. In addition, Ms. Chase sued the Independent Practice Association (IPA) which contracted with Dr. Kaufman’s group practice for OB/GYN services. In examining whether the IPA could be held liable for Dr. Kaufman’s actions, the court stated that the IPA did not control the activities of Dr. Kaufman and could not, therefore, be liable for them. Chase v. Independent Practice Association is a textbook case in which a court concluded that the IPA or an HMO could not be liable for the malpractice of a physician, because the IPA or HMO only arranged for services but did not get involved in providing those services. Because it was not involved in the direct provision of patient care, the court concluded that the IPA could not be liable for malpractice.

In Teti v. US Healthcare, a federal court in Pennsylvania in 1989 was asked to decide whether an HMO could be liable for an undisclosed incentive payment arrangement with physicians. In this case, Teti sued US Healthcare alleging that the HMO had concealed from Teti its incentive compensation referral fund. Teti further argued that the concealment of the referral fund was part of a fraudulent scheme and that the failure to disclose the scheme violated anti-racketeering statutes. The court dismissed Teti’s case for two reasons. First, the court concluded that Teti was not personally harmed by any alleged scheme. Second, the court concluded that Teti had failed to show that “racketeering” as defined in the federal racketeering law had occurred between the HMO and other individuals.

In a third early managed care liability case, a federal court in Georgia was asked to decide whether an HMO could be liable for interference with a doctor/patient relationship. In Rollo v. Maxicare, Rollo sued Maxicare when his employer changed its health benefits coverage. Rollo alleged that the HMO had interfered with his relationship with his doctor and his right to continuity of care under his employer’s health benefits plan. Importantly, the court never reached the merits of Rollo’s allegations. Instead, the court decided that a claim of negligence or similar common law litigation could not be brought against the employer or the HMO because the Employee Retirement Income Security Act (ERISA), a federal law, preempted and nullified Rollo’s claims under state law and, since Rollo had not requested the type of relief available under ERISA, the court dismissed his case.

Certain conclusions can be offered by examining these examples of liability cases from the early years of the managed care revolution in health care delivery. First, the courts applied traditional legal analysis to the relationship between HMOs and providers charged with malpractice. The prevailing view was that unless the HMO employed a physician charged with malpractice that the HMO could not be held liable for the acts or omissions of its participating providers. Second, as the Teti case demonstrates, the courts had little understanding of how HMOs provided incentives to physicians and usually considered these arrangements relatively benign. Third, in the early years of managed care liability the courts employed ERISA extensively to protect HMOs from most claims of negligence because those claims arose under state law and ERISA provided that only the remedies available under that federal statute could provide relief to the members of HMOs and other managed care organizations. While these conclusions may seem incongruous with the current status of managed care liability, they are nonetheless fairly reflective of managed care liability in the mid to late 1980’s.

Liability in the Current Managed Care Environment

By the mid 1990’s, the status of managed care liability—especially as it relates to HMOs and similar managed care organizations—has changed dramatically. Contrasting cases and their outcomes demonstrate the extent of change.

In the current environment, HMOs and managed care organizations are liable for the malpractice for their participating physicians. In Pennsylvania, the courts announced in McClellan v. HMO PA, that HMOs would be liable for the actions of their physicians on much the same basis as hospitals are found liable for the negligence of members of their medical staff in the hospital. In a far-reaching decision, the court in McClellan held that HMOs have a “corporate responsibility” to uphold a proper standard of care for their members. Accordingly, the court in Pennsylvania concluded that an HMO could be liable for the negligent selection and retention of physicians whose quality of care was substandard.

In other recent cases, courts have begun to demonstrate a greater interest in the financial relationships between HMOs and their participating providers. In the highly publicized case of Fox v. Healthnet, a California jury awarded $77 million to the survivors of a woman who was denied a bone marrow transplant for breast cancer. In the Fox case, an HMO had denied coverage stating that a bone marrow transplant was a “investigational” procedure. The plaintiff showed that the HMO used a vague definition of what was “investigational” and that the definition would preclude many routine procedures if it were consistently applied. The plaintiff also showed that the HMO had an undisclosed set of financial incentives which appeared to reward the denial of care for costly procedures. The apparent incentive to deny access to costly care led to the multi-million dollar punitive damage award by the California jury.

Finally, in 1995, a federal court in Pennsylvania held that ERISA, the federal law which had so long protected HMOs from liability, should not be applied in cases of medical malpractice. In Dukes v. US Healthcare, the plaintiff, Cecelia Dukes, sued the HMO for medical malpractice following the death of her husband, Darryl. Darryl Dukes’ primary care physician had operated on his ear and ordered certain blood studies. The blood studies were delayed and two days later Mr. Dukes died. Mrs. Dukes alleged that the HMO was responsible for the omissions of its providers who had acted as its agents. The HMO argued that ERISA preempted any claims for malpractice which were based upon state law and restricted any remedies available to Mrs. Dukes to those provided in the statutory scheme of ERISA. In a lengthy decision, the court held that ERISA was not intended to preempt malpractice claims. It ordered the case back to state court for trial on the merits.

What are the Trends in Managed Care Liability?

Comparing and contrasting the case law from the early years of managed care with recent decisions in the current environment, it is clear that the roles and responsibilities in managed care have shifted and that liability is tracking along the same lines. As managed care organizations have undertaken increasingly pivotal roles in decisions affecting the delivery of health care, the judges have re-evaluated their earlier views and imposed liability. Similarly, litigation over incentive payments by HMOs to providers to contain the cost of care has grown increasingly successful as the inner workings of managed care have become increasingly well understood. In the current environment, where incentives appear to contribute to the denial of access to medically necessary care, these incentive arrangements have the potential to result in huge punitive damage awards to injured persons. Finally, HMOs are now being held liable for failure to manage the care which they arrange as well as the cost of care.


Managed care liability will continue to develop and change as the “standard of care” in managed care continues to evolve. Many forces will shape our perception of what is an appropriate standard of care. Continued media focus on managed care will enlighten public and judicial understanding of how managed care works or does not work as represented to its subscribers. As more and different provider arrangements contract on a risk basis, liability risk will change to parallel changing patterns of payment risk. Large networks of hospitals and physicians which share risk may become liable in the future as de facto partnerships. Quality monitoring and standard-setting organizations such as the National Committee for Quality Assurance will play an increasingly important role in defining a body of standards against which managed care performance can be measured. Finally, as HMOs rely increasingly on information technology to manage care, privacy and confidentiality will emerge as important theories of managed care liability.

Edward F. Shay, Esq., is a member of Saul, Ewing, Remick & Saul’s Health Law Department in Philadelphia.

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