By Andrea M Kahn-Kothmann, Esq.
The rise of managed care in the U.S. and the accompanying changes in reimbursement and benefit administration have transformed the practice of medicine in recent years. One specific development brought about by managed care is the new significance placed upon contractual relationships between providers and payors, specifically managed care organizations (MCOs). Unlike physicians’ historical relationships with Medicare, Medicaid and Blue Shield, their relationships with MCOs are fundamentally contractual in nature. Consequently, parties’ understanding and exercise of contract rights have taken on a much greater significance in the practice of medicine.
This article focuses on one particular type of contractual provision often found in MCO participation agreements—the so-called “without cause” termination clause. In contrast to a “for cause” termination provision (e.g., one that permits termination for breach of contract or loss of licensure), a without cause termination right allows the MCO to terminate the agreement without having, or having to articulate, a reason for its action. Although there may be a reason for the MCO’s decision to terminate (e.g., the MCO wants fewer network providers in a certain geographic area), it need not be one of the reasons that permits the MCO to terminate for cause.
In courts, legislatures, academic circles and media outlets nationwide, observers have been discussing the policy considerations associated with the exercise of such contractual rights in the context of an MCO-physician participation relationship. This article provides an overview of some recent judicial decisions on this issue as well as some states’ attempts to regulate this aspect of provider-payor relations through legislation.
Courts Examine Without Cause Terminations
Since the mid-1990s, courts across the nation have issued a number of significant opinions concerning the ability of MCOs to “deselect” physicians from their managed care networks by exercising their rights under without cause termination provisions in participating provider agreements. The following two cases provide a representative view of some of the public policy issues examined by courts in these matters.
Harper v. Healthsource New Hampshire, Inc.
Dr. Paul Harper, a primary and surgical care provider, had participated in the physician network established by Healthsource New Hampshire since its inception in 1985, and approximately 30-40 percent of Dr. Harper’s patient base was Healthsource-related. Healthsource’s participation agreement with Dr. Harper permitted the HMO to terminate the relationship both with and without cause.
In 1994, Dr. Harper concluded that Healthsource had been manipulating his patients’ treatment records. After notifying Healthsource of his concern, Healthsource informed Dr. Harper that it was terminating his participation agreement for cause because he had not satisfied the HMO’s recredentialing criteria. Dr. Harper appealed this decision within Healthsource, and, ultimately, Healthsource’s Executive Management Committee overturned the decision to terminate Dr. Harper for cause but decided to terminate him without cause.
Dr. Harper brought suit against Healthsource, alleging numerous causes of action, including violations of public policy and due process. A lower court granted Healthsource’s motion to dismiss the case, but, in a precedent setting opinion, the New Hampshire Supreme Court reversed that decision. The state Supreme Court concluded that “[t]he public has a substantial interest in the relationship between health maintenance organizations and their preferred provider physicians” and that this public interest as well as “fundamental fairness demand that a health maintenance organization’s decision to terminate its relationship with a particular physician must comport with the covenant of good faith and fair dealing and may not be made for a reason that is contrary to public policy.”
In light of Dr. Harper’s allegation that his termination without cause constituted retaliation for his attempts to correct patient records, the court determined that his claim that Healthsource’s termination decision had been made in bad faith or in a manner contrary to public policy should be heard. Although the Harper decision did not invalidate the use of without cause termination provisions in MCO participating provider agreements, it means that MCOs in New Hampshire will be required to use a great degree of caution when exercising such contract rights.
Potvin v. Metropolitan Life Ins. Co.
Since September 1990, Dr. Louis Potvin, an obstetrician and gynecologist, had been a participating physician in two managed care provider networks operated by Metropolitan Life Insurance Company (MetLife) in southern California. His participating physician agreement with MetLife provided that either party could terminate the relationship, with or without cause, by giving the other party 30 days prior written notice. In July 1992, Dr. Potvin received notice of without cause termination from MetLife.
In March 1993, Dr. Potvin learned from MetLife that, although the insurer had terminated the agreement pursuant to its without cause termination right, his “delistment” from MetLife’s provider network had been related to the fact that he did not meet the insurer’s retention standard for malpractice history. Dr. Potvin wrote to MetLife explaining his malpractice history, which involved one malpractice action that had been settled without admission of liability, and other claims that had been withdrawn. He requested a hearing on the matter, but MetLife never provided one. Dr. Potvin brought suit against MetLife, alleging, among other things, that he was entitled to a common law right of fair procedure. An appellate court agreed with Dr. Potvin and allowed the suit to proceed on this claim.
Following existing California court precedent, the Potvin court found that California’s “common law right to fair procedure applies to a health care plan’s decision to terminate a health care provider’s participation in the plan and overrides a provision in the agreement between the two allowing termination without cause.”
Critical to this holding was the existence of a judicially-established right in California to “fair procedure protecting individuals from arbitrary exclusion or expulsion from private organizations which control important economic interests.” In California, this principle had been applied generally to decisions concerning hospital medical staff membership and involving health care providers’ membership in provider networks. Concurring in an earlier court’s finding that “managed care providers control substantial economic interests,” the Potvin court determined that MetLife controlled a substantial economic interest for Dr. Potvin based upon the number of physicians involved in its network and the detrimental effect on Dr. Potvin following his deselection.
Having concluded that a right to fair procedure applied to Dr. Potvin, the court found there to be a triable issue of fact concerning whether the actual process by which Dr. Potvin was deselected had been arbitrary and capricious. This was based on the fact that MetLife had failed to give Dr. Potvin an opportunity to demonstrate that his malpractice history did not support a finding that he posed a risk to future patients. The Potvin decision is currently under review by the California Supreme Court, although observers generally believe that the holding in this case will limit the ability of health plans in California to terminate providers without cause.
Some state legislatures have moved ahead of the courts by enacting statutes that address the issue of MCOs’ termination and nonrenewal of network health care professionals. One example is Delaware, which, in July 1998, passed Senate Bill 194 to provide protections to practitioners who have contracted to be part of an insurer’s provider network. S.B. 194 augments an existing anti-gag-rule provision and requires that insurers give written notice of a decision to terminate or not renew a provider’s participation agreement no fewer than 60 days prior to the effective date of termination. Upon request by a provider, an insurer is required to provide a written explanation of the decision and an opportunity for an internal administrative review of the termination. If an insurer indicates that it used professional profiling data in making its assessment of the provider, such data must be furnished to the provider and discussed in the administrative review.
Although Delaware’s S.B. 194 addresses the “right to fair procedure” issues that were litigated in Potvin, it does not resolve many of the broader public policy considerations that arguably are implicated by MCOs’ use of without cause termination rights. S.B. 194 does not affect an insurer’s right to exercise a variety of for cause termination rights—including for breach of the participation agreement and failure to meet minimum requirements for participation in the insurer’s plan—nor does it limit an insurer’s ability to terminate an agreement for cause or without cause for economic reasons, as long as the required explanation of the reasons for termination are given upon request.
Pennsylvania has also legislated in this area. Pursuant to Act 68 of 1998, which becomes effective on January 1, 1999, if a managed care plan “denies enrollment or renewal of credentials” to a provider, the plan must furnish the provider with written notice of the decision including “a clear rationale for the decision.” Further, Act 68 prohibits managed care plans from terminating participating providers’ contracts on certain bases, including because the physician advocated for necessary and appropriate care for his patients, protested a plan decision or policy that he believed interfered with his ability to furnish care, has a substantial number of patients with expensive medical conditions, or refuses to perform a service on religious or moral grounds. Consequently, in addition to providing physicians with some of the procedural protections that Delaware mandated, Pennsylvania went a step further by barring several justifications that an MCO might use for terminating or failing to renew a participating network provider.
Although neither the Delaware nor Pennsylvania legislature restricted the use of without cause termination provisions in network participation agreements, as a practical matter, their imposition of a requirement to provide an articulated basis for terminations and nonrenewals of network providers is likely to reduce significantly the utility of such clauses.
The exercise of without cause termination rights is truly a double-edged sword for MCOs and practitioners alike. On the one hand, MCOs’ actual use of without cause termination provisions is probably rare and provides the plans with flexibility in composing their networks. Further, without cause termination rights benefit providers whose clinical competence is at issue, by enabling MCOs to end a participation relationship in a manner that doesn’t trigger National Practitioner Data Bank reporting requirements.
On the other hand, and particularly in light of the economic interests at stake, agreements that permit termination only for cause are inherently more fair to practitioners and force MCOs to articulate valid bases for their actions. As participation in managed care becomes more prevalent and the practices of plans are more highly regulated, both by federal and state governments and market forces, it remains to be seen where the balance of interests will come to rest.
Andrea M. Kahn-Kothmann, Esq., is with the law firm of Reed Smith Shaw & McClay in Philadelphia.