Patients'
Rights: A Double Standard
National Center for Policy Analysis, Brief Analysis No. 307
December 3, 1999
By John
Hoff
As everyone "knows," the
Patients' Bill of Rights that recently passed the House of
Representatives would allow members of Health Maintenance Organizations
to sue their plans. What most people probably don't know is that members
already can sue their HMOs under current law. So what's going on?
What the bill would really do
is encourage trial lawyers to flood the courts with malpractice-like
suits over what are essentially contract disputes. These tort lawsuits
would allege noneconomic damages (such as pain and suffering) and seek
punitive damages. Given the willingness of juries to award
multimillion-dollar judgments, the liability for health plans and
employers could be huge. Health insurance premiums would soar as a
result, pricing even more Americans out of the market and leaving them
uninsured.
Ironically, although the bill
would allow people to bring tort lawsuits against private-sector plans,
it does not grant similar rights to Medicare beneficiaries or to those
participating in the government's health plan for federal workers. If
it's good for private plans, why isn't the right to litigate in this way
also good for government-sponsored insurance?
The
Right to Sue an HMO. Ordinarily, insurance is regulated by the
state in which it is bought and sold. However, in 1974 Congress imposed
federal regulation on health plans sponsored by employers through the
Employee Retirement Income Security Act (ERISA). ERISA preempts - that
is, takes precedence over - state laws that relate to employer plans
under most circumstances. However, ERISA makes an exception regarding
insurance, in recognition of the states' traditional role in insurance.
Many employers' health plans, instead of being traditional insurance,
are "self-funded" and thus do not fall within ERISA's exception for
insurance. (In a self-funded plan, the employer assumes the risk for
claims. The employer may administer the plan itself, or it may hire a
third-party administrator.) In these cases, ERISA preempts the states'
laws.
ERISA does not preempt state
laws relating to an HMO that is not an employer's self-funded plan. Nor
does ERISA prevent members, even of a self-funded plan, from suing their
doctor or hospital for malpractice under state law. Further, self-funded
plans can be held liable under current law for their own malpractice as
providers of care or the malpractice of their doctors where state law
provides vicarious liability - i.e., recovery against plans for the
actions of employed doctors.
It is also possible to sue for
wrongful denial of coverage, asking the court to rule that the insurer
must provide the coverage under its contract. For ordinary insurance,
the suit can be brought under state law. For self-funded plans, ERISA
rules permit a case to be brought under federal law to recover the cost
of the denied treatment plus attorneys' fee, and to obtain appropriate
equitable relief.
What patients cannot do now is
sue a self-funded plan for malpractice-type damages relating to denial
of coverage. This means they cannot seek compensation for such
noneconomic damages as mental distress, pain and suffering, loss of
consortium, etc. Nor can they sue for punitive damages. By contrast,
ordinary insurance plans can be sued for all these things under state
law, depending on the law of the particular state. Where such suits are
allowed, lawyers use state law to turn the disputes over what services
health plans should cover into personal injury suits. ERISA, on the
other hand, provides only a contract remedy against self-funded employer
plans. It avoids turning a dispute over what in many cases is a
relatively small sum into a lawsuit for millions of dollars.
Turning
Contract Disputes into Tort Suits.
The Patients' Bill of Rights would change things. It would legitimize
and encourage the temptation to turn contract disputes into tort suits.
It would enable plan members to recover large judgments (and their
lawyers to take at least one-third of the recovery) for pain and
suffering and other noneconomic damages - all of which are necessarily
subjective and give juries great license. It would also allow the award
of punitive damages. The bill lets state law govern lawsuits. But this
is not a neutral stance. Passage of the legislation would signal the
federal government's support for such suits. Some state legislatures can
be expected to enact laws permitting patients to recover on these
extended theories of damage for coverage denials. Even in states whose
legislatures do not act, many state courts would make law to allow these
large recoveries.
The bill does not limit the
amount of noneconomic damages that can be recovered, with one exception.
In a suit over wrongful denial of coverage, the bill prohibits the award
of punitive damages if the plan follows the ruling of an outside review
panel that a treatment is covered. But this apparent protection is of no
value. A plan is not likely to be sued if it complies with the
determination of the panel that a treatment is covered because, if it
does, the patient would then have no complaint. Moreover, this
"protection" does not apply to the multitude of other theories on which
noneconomic damages can be awarded - pain and suffering, mental
distress, etc.
The bill also provides that a
plan's outside review panel (which would be regulated by and answerable
to the federal government) would not be bound by provisions of the plan
defining what is medically necessary and is thus covered.
New Risks for
Employers. The fear induced by
exposure to large judgments will make administrators of self-funded
plans reluctant to deny coverage - which, of course, is the intent of
the legislation. The result will be fewer denials - or potentially large
judgments for noneconomic damages if the health plan administrator
persists in interpreting and applying the employer's plan as originally
intended. In either event, employers that sponsor health coverage for
their employees will face higher costs.
Employers will also face more
direct risks. A part of the legislation states that an employer cannot
be sued unless the lawsuit is based on the employer's "exercise of
discretionary authority to make a decision on a claim for benefits"
under the plan. It is not clear, however, how much protection this would
provide after the courts are finished interpreting it. The courts might,
for instance, interpret it to mean that if an employer exercised
discretionary authority in one instance it could be sued even where it
did not make a decision in another case, the absence of a decision where
it could act itself being held to be the exercise of discretionary
authority. It is equally possible that actions of the plan administrator
will be attributed to the employer through a theory of agency and
consequently that the exercise of discretion by the plan administrator
will support lawsuits against the employer.
Even if it were successful in
avoiding direct liability, the employer would be dragged through
litigation. Litigation entails extensive "discovery." Communications
between the employer's human resources department and the plan
administrator would be scrutinized by plaintiffs' lawyers seeking to
prove that the employer made claims decisions and to establish an agency
relationship. Employees' records maintained by the employer or the
administrator would be at risk of public disclosure.
Imposing a
Double Standard. It is noteworthy
that the Patients' Bill of Rights would impose these new costs on
private-sector employers only, while exempting the federal government
itself.
If Medicare determines that a
treatment is not medically necessary, the beneficiary can go though an
appeals process and seek judicial review. But if he wins, he collects
only the cost of the treatment, as is now the law under ERISA. A
beneficiary covered by traditional Medicare cannot recover noneconomic
damages under state law if Medicare wrongfully denies a
claim.
To the same effect, the law
setting up the Federal Employees Health Benefit Program tracks ERISA in
barring lawsuits under state law against insurers who cover federal
government employees. The federal worker who is denied coverage can
collect the cost of the denied treatment, but not the consequential
damages that the Patients' Bill of Rights would allow to be assessed
against the plans of private employers.
Medicare and plans providing
coverage to federal workers have the same incentive to deny claims as
self-funded employer plans. If it is good policy to give private workers
the chance to recover noneconomic damages from their employers (directly
or indirectly), why shouldn't individuals covered under these federal
programs have the same rights? The answer, of course, is that the
federal government is not prepared to try to persuade taxpayers that the
increased cost this would entail is a good use of their tax money or to
persuade the beneficiaries to accept reduced benefits to offset these
additional litigation costs. It is easier for the government to force
private employers (and their employees, stockholders and customers) to
bear them.
If Medicare beneficiaries and federal
employees demanded rights equal to those extended in the Patients' Bill
of Rights, the cost of the new legislation would be better
appreciated.
This Brief Analysis was prepared by John
Hoff, a health care lawyer in Washington, D.C.