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Challenging Blues medical necessity denials

By Charles I. Artz, Esq.

In a case of first impression, a split Pennsylvania Supreme Court held in Rudolph v. Pa. Blue Shield that physicians may challenge in court Blue Shield’s Medical Review Committee decisions demanding repayment of claims because they allegedly lack medical necessity. The Supreme Court decided Rudolph on August 21, 1998. Blue Shield asked the Supreme Court for reargument. The request was denied on October 28, 1998. Thus, Rudolph is final. The Supreme Court’s decision reversed the Superior Court’s holding in 1996, which precluded physicians from suing Blue Shield in court.

Joseph Rudolph, M.D., was a participating Blue Shield physician. Between June 1986 and November 1987, Dr. Rudolph and Family Professional Center, P.C. (his professional corporation), provided medical services to Blue Shield subscribers. Dr. Rudolph was denied payment by Blue Shield on the grounds that his services were neither medically necessary nor cost effective. Dr. Rudolph then requested his claim to be presented to Blue Shield’s Medical Review Committee (MRC).

On November 3, 1987, MRC denied Dr. Rudolph’s claims and ordered him to repay $26,005. Within two months, Dr. Rudolph sued Blue Shield in the Allegheny County Court of Common Pleas. Four years later, the judge ordered the case be heard by a panel of physician arbitrators. On February 15, 1994, the Court entered an award that Blue Shield must return the $26,005, which MRC ordered Dr. Rudolph to repay, and also awarded Dr. Rudolph $75,000 for other medical services. The trial court confirmed the award. With interest, the total judgment entered against Blue Shield was $110,580.

Blue Shield appealed to the Superior Court. It argued that the trial court did not have subject matter jurisdiction to review Blue Shield’s MRC decision. At that point, a few trial courts in Pennsylvania had held that physicians could challenge Blue Shield’s MRC decisions in court; however, neither Blue Shield nor the physicians in any of those cases ever prosecuted an appeal in Superior Court. Thus, Rudolph would be making new law.

Blue Shield argued that its enabling legislation coupled with its bylaws precluded “judicial review,” i.e., a physician could not challenge the MRC decision in court. Superior Court agreed, holding the MRC was “common law arbitration” not subject to de novo review by a court. It reversed the trial court’s verdict in Dr. Rudolph’s favor.

Supreme Court Decision

The Court was divided on this case. Only six Justices decided it because Justice Saylor had not yet been elected to the Court when the case was argued. Three Justices held that Blue Shield’s Medical Review Committee is formed pursuant to a regulatory statute. They held Blue Shield is a creature of the state, and like an administrative agency, is subject to due process review.

In its due process analysis, the Court recognized that neither the Blue Shield statute nor contracts between participating physicians and Blue Shield state that the MRC is the sole and exclusive forum for disputes. The Court stated, however, that “[i]t would be absurd to conclude that the Legislature would have contemplated an inherently unfair forum” to resolve such disputes. The Court held the MRC, by definition, was “not impartial.” Thus, “the doctor was entitled to some sort of review which could provide appropriate relief.” The majority held that Dr. Rudolph was entitled to a de novo hearing in the Court of Common Pleas following the MRC decision. Hence, the Court reversed the Superior Court’s 1996 decision and reinstated the trial court’s decision, awarding Dr. Rudolph damages in excess of $110,000 against Blue Shield.

Concurring and Dissenting Opinions

One Justice concurred in the result. Instead of finding the MRC violated constitutional due process rights, Justice Nigro found that a physician had the right to sue Blue Shield in court following the MRC proceedings because the contract between the physicians and Blue Shield is “unconscionable” and a contract of adhesion. An unconscionable contract is one in which an absence of meaningful choice on the part of one of the parties exists and the contract terms are unreasonably favorable to a party maintaining leveraging power in the relationship. He reasoned the MRC was “biased” in favor of Blue Shield. Judge Nigro found that the contract also violated “public policy,” because the “physician is often ‘stuck’ with making treatment decisions based, not in the best medical interests of the patient, but on the likelihood of reimbursement.” Accordingly, the Blue Shield Act should be interpreted to include impartial judicial review of decisions of Blue Shield’s “self-serving Medical Review Committee.”

Two Justices dissented, finding Blue Shield’s MRC was not a state actor, and no due process was required. Further, the dissenters argued that physicians contracted away their rights to judicial review following an MRC decision.

Implications of Rudolph

Four Justices of the Pennsylvania Supreme Court found Blue Shield’s MRC to be inherently biased. The same four Justices, although for different legal reasons, voted to allow physicians to sue Blue Shield in court following an MRC decision either denying reimbursement or demanding recoupment of payment based upon the decision that the physician’s treatment was not medically necessary. The Court’s ruling means that physicians can sue Blue Shield in their local county court after Blue Shield completes its MRC proceeding. Blue Shield, therefore, has lost its virtual control over medical necessity decision-making (for the short term at least).

Physicians who have had claims denied or recoupment demanded by the MRC have the right now to initiate litigation in the physician’s local county court. Claims should include counts for breach of contract and violation of the physician’s constitutional due process rights. The Court must review the case de novo. This means the Court need not give any deference to the MRC decision and can judge the facts independently. Blue Shield’s own medical necessity definition will be the legal standard by which claims are adjudicated.

Blue Shield Definition of Medical Necessity

Blue Shield’s statute does not define “medical necessity.” Blue Shield’s bylaws permit participating providers to bill Blue Shield for covered services only if such services are “medically necessary.” The Bylaws go on to state that medical necessity determinations are made by Blue Shield in consultation with providers engaged in active clinical practice. Blue Shield’s standard subscriber agreement defines the term “medical necessity,” but preserves virtual discretion in medical necessity decisions.

The definition of “medical necessity” applied by the MRC is somewhat different. It states as follows:

• Pennsylvania Blue Shield defines “medical necessity” as a need for a particular item or service, required for the diagnosis or treatment of disease, injury or defect.

• In order for Blue Shield to consider a service as medically necessary, there must be active symptomatology or evidence of the disease, injury or defect, and the need for the services must be documented in the patient’s records. Blue Shield will deny payment where there is no identifiable relationship between the reported service and the diagnosis or symptom is reported.

• A limited or comprehensive health screening of any kind or any periodic examination which is initiated for reasons other than symptomatology is not eligible for payment. In addition, Blue Shield will not reimburse services performed at the request of the patient or at the suggestion of the doctor without symptomatology or evidence of disease. This determination also takes into account the need for the frequency and/or level of the services reported.

This definition is used before MRC and was published in a recent Blue Shield Reference Guide for participating providers. Physicians must document their medical records sufficiently to satisfy the definition of medical necessity and present evidence in court to meet each of these elements. The active symptomatology requirement is not disclosed in the subscriber contract but is imposed on physicians when they get to the MRC.

Objective/Reasonable Review

Since the Blue Shield Participating Provider Agreement and Subscriber Agreement suggest Blue Shield and its consultants (together with the MRC) collectively determine what constitutes medically necessary care, the question is whether a court will give deference to Blue Shield’s interpretation. The answer should be “no” for at least three reasons.

First, the Supreme Court’s express holding in Rudolph was that “the doctor was entitled to a de novo hearing in the Court of Common Pleas on the merits of his claim.” De novo review, by definition, means in layman’s terms a “fresh look.” Thus, no deference to Blue Shield’s decision is warranted.

Second, the Superior Court recently held in Tagliati v. Nationwide Insurance Co. that medical necessity decisions must be “viewed under an objective and reasonable standard.” Imposition of an objective standard generally removes an insurer’s ability to use a “20-20 retroscope.”

Third, a passage of dicta from Shannon v. McNulty, a recent landmark decision imposing corporate liability on HMOs, suggests that, when “an insurer or a managed care organization, interjects itself into the rendering of medical decisions affecting a subscriber’s care, it must be done so in a medically reasonable manner.” These decisions demonstrate a willingness of Pennsylvania’s appellate courts to judge insurers’ treatment decisions in an objective manner, rather than lending any credence or deference to the insurer’s decision about, or interpretation of, its definition of medical necessity.

Physicians’ Access to the Legal System

Physicians can access the legal system to challenge a Blue Shield medical necessity denial in three ways. They each relate to the amount of money at issue in the claim. First, physicians can file a complaint before the local District Justice (DJ). The DJ’s jurisdictional limit is $8000. If a claim is less than $8000, the physician can fill out the simple complaint form and prosecute the claim him or herself based upon the standards outlined above. Bringing legal counsel to the DJ hearing is usually not necessary; however, retention of counsel before the hearing to help construct the arguments and flow of evidence is often a useful expenditure of fees.

Second, if a claim is in excess of $8000, but below the county’s compulsory arbitration limits, a complaint can be initiated in the local county court. Compulsory arbitration limits range from $25,000 in smaller counties, to $35,000 in mid-sized counties, to $50,000 in larger counties. The matter is referred to “compulsory arbitration” if the amount is less than the county’s jurisdictional limit. Legal counsel is usually required to draft the particulars of the complaint; however, as in the DJ matter, “trying” the case can be done quite efficiently by the physician alone.

A compulsory arbitration claim is heard by three local attorneys. Evidentiary rules are relaxed. The hearings on medical necessity claims typically take only an hour or two. Testimony involves the patient’s explanation of how the treatment improved the patient’s condition, and the physician’s substantiation of that through medical records and satisfaction of each element of “medical necessity” discussed above.

Claims in excess of the county’s jurisdictional limit should be handled by legal counsel. Depending upon the strength of the case and the type of law firm selected, some firms will take such cases on contingency fee arrangements; others will not.

Regardless of the forum selected and the amount at issue, DJs, arbitrators and judges are swayed heavily by the patient’s testimony and the physician’s documentation.

Bad Faith Claims

Another question that naturally arises is whether a physician can assert a claim for “bad faith” against Blue Shield based upon a medical necessity denial. Experience teaches that reasonable disputes about medical necessity should not result in a bad faith claim. Much valuable time and legal resources can be wasted asserting a bad faith claim through numerous pretrial motions and protracted discovery. A more prudent approach for physicians (whose efforts are aimed at getting the bill paid rather than exacting vengeance) would be to forego bad faith claims unless the denial was egregious enough to meet the “lack of any reasonable foundation in fact or in law” standard.

Case law from the auto insurance context teaches that bad faith claims can be asserted (a) when the utilization review entity concluded the medical treatment was necessary and the carrier still refused to pay and (b) the review process was merely a sham designed to deny all payment for services regardless of the propriety of treatment.

Blue Shield “Out”

The Supreme Court in Rudolph stated in a footnote that the Court did “not address the question whether judicial review is available to a physician where there is no due process violation.” The Court’s opinion appears to give Blue Shield an “out.” That is, if Blue Shield reconstitutes its bylaws so that the possibility of an unbiased review panel exists, and therefore no inherent due process violation occurs, the question of law whether a physician has the right to go to court following such an unbiased review appears to remain open.

Charles I. Artz, Esq. is principal of the Harrisburg law firm of Charles I. Artz & Associates, which concentrates its practice in health care law.

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