Consumers Versus Managed Care: The New Class Actions

Clark C. Havighurst


Health Affairs. 2001;20(4) 

In This Article

Wanted: For Fraud and Chicanery

Taken collectively, the class-action complaints identify three areas in which serious discrepancies arguably exist between what HMOs promise consumers and what consumers actually receive. First, the plaintiffs claim that the plans' many assurances concerning quality of care are inconsistent with their almost exclusive focus on controlling costs. Second, the complaints assert that at the same time that HMOs are representing that plan physicians continue in their traditional professional role and are therefore committed first and foremost to their patients' welfare, they are systematically undermining physicians' loyalty to patients by restricting their autonomy and imposing incentives to economize. Third, the plaintiffs allege that the plans, having promised to pay for all services that are "medically necessary," engage in unauthorized rationing of care -- both explicitly,by refusing to pay for some services that physicians conscientiously recommend, and implicitly, by inducing physicians to cut costs. None of these allegations is frivolous on its face. Indeed, each relates to a problematic aspect of managed care that has already prompted serious questions in the courts, legislatures, the media,and the public mind. Although HMOs may escape the charge of fraud, they remain potentially subject to remedies under ERISA for the questionable ways in which they have used (in the words of one complaint) "undisclosed systemic internal policies and practices" to deny consumers coverage of a quality they were led -- and thus had every contractual right -- to expect.

The managed care industry naturally feels misunderstood and ill-treated in these lawsuits. After all,HMOs will contend, they have complied religiously with myriad government regulations and have done only what policy makers and employers (their principal customers)clearly expected them to do: control costs. But the plans are not being challenged for violating regulatory prescriptions, for disappointing employers' expectations, or for deviating from standard industry practices. Instead, they have been charged with not being straight with consumers, who looked to them to take care of their families' health.[16] In truth, HMOs seem to have taken their cues mostly from government, employers, their competitors, and their marketing departments and not to have brought consumers into the decision-making loop. Thus, they have neglected to tell their subscribers clearly about their general intention to control spending at the possible expense of quality. Nor have they clearly disclosed their specific intentions to restrict physicians' autonomy, to "incentivize"physicians in ways potentially inimical to patients' welfare, and to deny coverage for prescribed services whenever they are deemed to fail a particular cost-benefit test.

Even though HMOs may have conducted themselves well by government'sand the industry's own standards, that is not the principal issue here. To be sure, good intentions and compliance with regulatory and industry standards may be a solid defense to charges of consumer fraud. But they are not a sufficient answer to charges of nondisclosure, misrepresentation, and fiduciary breach under ERISA.[17] Nor would it be sufficient for an HMO to claim that its cost-saving endeavors benefited subscribers by reducing plan premiums or that the economizing they achieved could be justified by cost-benefit analysis. Despite the possible validity of such claims as a matter of fact, economics, and public policy, a health plan has a serious legal problem if it fails to get reasonable contractual authority for any cost containment measures it employs to the possible detriment of patients. Here I address the merits of the class-action complaints with respect to each of the three types of abuses they allege.

Complaints typically cite as misleading the plans' advertising claims designed to reassure consumers about their commitment to quality of care. To establish actionable misrepresentation, the plaintiffs have to prove that the HMO's promises went beyond the limits of what courts call "mere puffery"and generally tolerate in recognition that consumers know that advertising is self-serving and thus are duly skeptical about advertisers' general claims of excellence. One court has already cited the puffery defense in dismissing a class action in which fraud claims were made against Aetna for allegedly misrepresenting its quality objectives.[18] In several of the pending cases, however, Aetna ads are quoted at length to show that the defendants went beyond puffery and claimed to have a specific program for monitoring quality. The most specific example focused on ensuring that physicians were providing preventive care.[19] Whether or not that program had enough substance to justify Aetna's advertising, such advertising provides a weak basis for a consumer class action. If such advertising works at all, it is most likely to attract healthy rather than unhealthy subscribers, a result that would benefit, not harm, the plaintiff class (by allowing Aetna to charge lower premiums). At the same time, HMOs have strong reasons for not wanting to appear to offer especially good acute or chronic care for persons with serious health problems.[20] A reputation for such quality would attract subscribers who are more costly to treat. For these reasons, it is unlikely that any promises that an HMO might make in its advertising about quality of care would provide a convincing basis for a consumer class action.

This is not to say that HMOs are above disappointing reasonable consumer expectations with respect to quality of care. Because quality is difficult to detect and measure, purchasers may fail to appreciate when it is being skimped, thus making skimping by sellers more likely. Likewise, purchasers of health care may weigh tangible considerations such as cost more heavily than unmeasured quality, again tempting sellers to trim it at the margin. In particular,some employers may focus excessively on cost in purchasing health care, anticipating that their employees cannot appreciate marginal increments of quality or recognize their absence. As sellers, physicians and other providers may themselves sense that HMOs are more concerned about their fees than about small variations in quality.Accordingly, they may shade the latter to enhance their incomes -- spending less time on each patient, for example.

There is little question that consumers' information deficits concerning quality of care and health plans' fear of adverse selection if they appeared to offer especially high-quality care represent serious market failures. Even though the threat they pose to essential quality is diminished (if not entirely offset) by substantial tax subsidies that induce consumers to spend additional amounts on health care,they should certainly be objects of legal and policy concern. Nevertheless,it is probably not appropriate for courts to try to correct for these market failures in resolving class-action litigation. It is simply too much to expect competing health plans to pay special attention to quality when it is so clearly against their commercial interests to do so.Whatever remedies might help here should come from legislatures,not the courts. In any event, despite all of their rhetoric, plaintiffs' lawyers are unlikely to find convincing evidence of HMOs' actively setting out to degrade essential quality. Although HMOs are committed to economizing at the margin and may run small risks in doing so, they appear scrupulous about not threatening quality in any essential way. Indeed, from the standpoint of economic efficiency, today's HMOs seem to stop short of making many trade-offs between quality and cost that probably should be made.[21]

Here the complaints allege that plans misrepresent the nature of their relationships with physicians, implying that physicians remain wholly independent and as committed to the welfare of their patients as they ever were. There is substance to this charge. Without making any effort to overcome consumers' natural and deep seated assumption that their doctors can be trusted to be concerned exclusively with their health needs, HMOs use financial incentives,utilization review, physician profiling, and the threat of "deselection"to influence physicians' clinical choices. Courts could easily rule that HMOs, as fiduciaries, are required not only not to misrepresent material facts but also to take special pains to ensure that naïve and ill-informed consumers are alerted to economic realities that most of them will not easily appreciate.[22] Without clarity on these matters, consumers can reasonably claim to be deceived.

More than one complaint filed against Aetna quotes the declaration in its "Member Handbook and Certificate of Coverage" that Aetna physicians "maintain the physician-patient relationship with Members and are solely responsible to Members for all Medical services."[23] This statement is alleged to be inconsistent with the limits Aetna plans impose on physician discretion and the incentives they employ to induce physician economizing. Clearly, however,Aetna intended the quoted representation (together with a separate reminder that plan physicians are neither employees of nor controlled by the plan) to protect the plan against vicarious liability for its physicians' negligence and other torts. (It was, in other words,Aetna's polite way of saying, "Don't sue us. Sue your doctor.") Thus,Aetna was trying to have it both ways, exercising substantial influence over physicians' clinical decisions while avoiding legal liability whenever a physician lets quality slip. It is at this point that courts might appropriately question HMOs' professions of a general commitment to quality of care. Because HMOs can accept vicarious liability for their physicians' torts and the attendant corporate responsibility for quality, a material misrepresentation might be found when a plan advertises a general commitment to quality while systematically denying any legal duty to maintain it. Class-action litigation provides a good opportunity to question the fundamental conflicts of interest that plans create for themselves when they assume responsibility for the cost of care without accepting legal responsibility for its quality.[24]

Assigning blame. How much to blame HMOs for misleading portrayals of physician-patient relationships is a question in the class actions. Although HMOs have walked a narrow and problematic line, it was in many respects not a line of their own making but one drawn for them by strong tradition and even to some extent by the law itself. A central tenet of the conventional paradigm of medical care is that physicians are personally responsible for quality of care and are ethically bound not to abuse a patient's trust, even when tempted by self-interest. This paradigm is directly reflected both in the law's hostility to the "corporate practice of medicine" and in judicial hesitation to impose vicarious liability on corporate intermediaries.[25] HMOs also found it well entrenched in the mind of the consuming public, which did not seem at all ready to embrace a radical reinvention of the doctor-patient relationship, however much it was demanding aggressive cost containment. In these circumstances,HMOs naturally saw their mission as accommodating themselves to these public expectations, not as altering them or trying to reconcile the contradictions they embodied. To HMOs,their proper course was to assure consumers that the new medicine would be good for them (as was generally the case), not to burden them with unpalatable or undigestible facts. Thus, HMOs can argue that they were strongly called upon to control health costs and did so in the only way realistically open to them under conventional ways of thinking about medical care. This argument should provide a good answer to charges of consumer fraud.[26]

The historical context provides no reason, however, to protect HMOs against charges of nondisclosure or misrepresentation under ERISA. That statute can easily be interpreted to require health plans, as fiduciaries, to be especially candid in their dealings with consumers even when euphemism is easier and soft-pedaling seems the kinder and gentler policy. Just as a physician is expected to level with patients in obtaining "informed consent," an HMO should spell out clearly and in some detail the choice it is offering to consumers in the marketplace. In markets as in doctors' offices, individuals are entitled to choose for themselves, not just to have a well-intentioned surrogate decide what is best for them. Just how much disclosure is sufficient is a matter for courts to decide. At minimum, however, HMOs should be expected to disabuse consumers of the romantic notion that their doctors' medical decisions do not or should not include any consideration of costs.[27]

Care provider or financing entity? Ultimately, the legal significance of HMOs' undermining physicians' loyalty to patients may turn on an unprecedented conceptual issue that first surfaced in Maio. To the court of appeals in that case, an HMO's product is not the coverage and financial protection it provides but the health care actually delivered under the plan's auspices. Thus, the plaintiffs could not object to the quality of their coverage as such but had to focus their complaint on the quality of care they actually received, any deficiencies in which "would have to be alleged and proven on an individual basis."[28] As the court saw it, "Aetna's primary commitment to its HMO plan members is to provide quality health care services through its participating provider network," and the only possible proof of that pudding was in the eating, not in a comparison of the promises made with the quality of the protection itself.[29]

Yet Aetna, like most other HMOs today, is not truly a provider of care but rather a financing entity that seeks to curb the consequences of moral hazard by placing some checks on provider discretion and introducing a degree of cost-consciousness into clinical decision making. Perhaps the best evidence of this is HMOs' engagement of service providers as independent contractors and its related disclaimer of vicarious liability when these providers' performance is deficient. Although early visions of managed care did contemplate extensive integration of financing and delivery and corporate provision of, and responsibility for, health services, that revolutionary model is not the rule today.[30] To be sure, HMOs' representations often imply the contrary, as Aetna's did. But that is precisely the problem that consumer class actions can and should address. It is ironic that the Maio court took Aetna's advertised commitment to quality as proof that it was in the business of providing health services, not just arranging for them, and then used that clear misrepresentation to raise the plaintiffs', not Aetna's, burden of proof.[31]

The class-action complaints typically allege that HMOs systematically fail to deliver all of the care they have undertaken to provide. HMOs' contracts uniformly promise coverage of all "medically necessary" health services.On the face of it, this is a generous undertaking. Indeed, even if everyone in the health care industry understands that this is not an unlimited commitment to honor all well-considered prescriptions competent physicians might write and that individual HMOs may,within vague limits, define the term in their own ways, consumers cannot be presumed to share that understanding. Moreover, the linguistic qualifications that appear in some plan documents are probably not sufficient to lower consumers' expectations, particularly given plans' glowing representations about their commitment to quality. HMOs cannot easily escape the charge that they are not faithfully honoring their coverage commitments to consumers.

It is revealing to ask why HMOs made such seemingly open-ended commitments when they intended all along to resist covering many services that doctors would otherwise prescribe for their patients.Is this, as alleged, a simple case of consumer fraud? Or are there other reasons why health plans have not specified more clearly the limitations they intend to impose (or have their doctors impose)on paying for care of marginal value?

Admittedly, it is practically impossible to write contractual terms that precisely define a patient's entitlement to care in all possible medical circumstances; indeed, this is the excuse that health plan lawyers give for committing their clients to cover all "medically necessary" services. It is not clear, however, that contracts could not be drafted to take many issues out of the never-never land of medical necessity. For example, detailed clinical protocols and prescriptive"practice guidelines" are increasingly available from many sources,and selected ones could be explicitly incorporated by reference as standards in health care contracts.[32] Contracts also could specify in general language how generous the plan intends to be in cases not otherwise specifically provided for; then a well-designed procedure using medical experts could give effect to that general commitment,thus ensuring reasonably consistent coverage decisions that reflect subscribers' collective willingness to pay for marginally beneficial care. Although the issue in the class actions is whether or not HMOs live up to their promises, a greater problem is almost certainly that hmos promise consumers and patients altogether too much.[33] In any event, today's health plan contracts with subscribers are much more opaque and imprecise than they need to be.[34]

Even though HMOs are easy to criticize -- and perhaps even to sue -- for failing to match their performance to the generous terms of their contracts, they are not solely responsible for creating the legally perilous situation in which they now find themselves. At the time those contract terms were written, the public clearly expected health plans to assume active control over health care costs. To the industry, this strong consensus constituted a clear invitation to implement the methods of managing care that HMOs have universally employed. In responding to that invitation, individual plans relied too heavily on that now-collapsed consensus.

There is another reason, too, why HMOs neglected to obtain good legal cover for what they intended to do to limit coverage. Early HMOs and their lawyers could not depend on the courts to interpret contractual limitations objectively and to enforce them fairly.[35] Starting from the premise that consumers cannot easily understand and consent to arcane contractual limitations, courts generally sought to give effect to consumers' "reasonable expectations" and were reluctant to enforce strictly any but the most unambiguous and uncontroversial limits on coverage. Indeed, judges had an open invitation to construe any contractual ambiguity they detected to reach pleasing results in individual cases. In these circumstances,health plans could see little to be gained by being candid and explicit about their intention to ration financing for wasteful or marginally beneficial care. In light of this historical circumstance,HMOs must feel that the new charges against them are particularly unfair. Indeed, the prominent role played by earlier plaintiffs' lawyers in disabling private contracts as warrants for effective management of health care costs should make HMOs especially resentful of the charge that they should have obtained better contractual authority for their economizing efforts.

In the class actions, the circumstances outlined above should be enough to defeat claims of fraud and racketeering. There is still ample room, however, for courts to find ERISA violations and to demand fuller disclosures and more informative contracts in the future. A possible benefit that might flow from the class actions is greater appreciation by judges of the value to consumers of evenhanded,predictable enforcement of contractual limitations on coverage.If better contracts are written and appropriately enforced,consumers will in time have much better opportunities to economize sensibly in purchasing health care than HMOs offer them today.


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