Utilization Review and Managed Health Care Liability

Richard A. Spector, MD, JD


South Med J. 2004;97(3) 

This article explores the development of jurisprudence interpreting application of the Employee Retirement Income Security Act of 1974 to patient care denials by managed care. It identifies quality-of-care protections for patient care under present federal law. If an insurance company utilization review denies care based on patient-specific reasoning, then the patient may have recourse against the utilization review on the basis of a state law claim of malpractice grounded in medical decision-making by the insurance company.

Utilization review (UR) is a safeguard against unnecessary and inappropriate medical care.[1] It allows health care providers to review patient care from perspectives of medical necessity, quality of care, appropriateness of decision-making, place of service, and length of hospital stay. The concept of UR is constant within the medical profession. Before and since managed health care, physician continuing education includes grand rounds, tumor conferences, tissue committees, and death and complications conferences. Each of these endeavors embraces the ideal of better patient care, absent the financial considerations of health care delivery, by exploring difficult diagnostic or therapeutic problems and errors or omissions in patient care. These endeavors use open debate to enhance medical judgment, patient care, and treatment outcome.

Within the concept of managed care, however, UR is under tension. Managed care UR seeks the efficient delivery of quality health care, with "efficient" referring to some form of review by the payer regarding payment of benefits. The tension between the quantity of health care that the payer will underwrite versus the quality of health care tends to put the physician in an adversarial relationship with the third-party payer and may leave the patient as a pawn between the two.

Typically, the managed care insurer reviews the availability of contract benefits and applies clinical guidelines to the individual patient's medical circumstances. The judgments then made are based on "medical necessity." In prospective and concurrent UR, an adverse decision may result in a patient foregoing the recommended procedure altogether.

UR judgments frequently are based on actuarial assessments of cost-benefit scenarios and/or clinical guidelines. In the former, the most common by Milliman and Robertson,[2] the guidelines clearly state that the final decision for treatment for specific individuals should be made only in conjunction with the application of professional medical judgment.

Clinical guidelines, also known as clinical pathways, predate managed care, although they have grown significantly as managed care has become more entrenched in American society. Originally, these pathways were developed by academic institutions in an effort to aid in the education of medical students and house staff. One of the earliest and most comprehensive is the Washington Manual of Medical Therapeutics.[3] These guidelines allowed for crib-sheet review of a disease process, the most common laboratory or radiographic investigation, a list of differential diagnoses, and recommended modes of therapy. Like Milliman and Robertson, the final judgment rested with the individual physician caring for the patient, based on the unique circumstances of the individual patient.

In both fee-for-service and managed care delivery models, the physician owes a duty directly to the patient to provide services with a reasonable degree of skill and judgment in a patient's best interest. Indeed, that responsibility extends to a requirement that the physician advocate the patient's needs before that patient's managed care insurer. "The patient who requires treatment and who is harmed when care which should have been provided is not provided should recover from the injuries suffered from all those responsible for the deprivation of such care ... [T]he physician who complies without protest with the limitations imposed by a third-party payer, when his medical judgment dictates otherwise, cannot avoid his ultimate responsibility for his patient's care."[4]

If the physician is obligated to provide medical care with a reasonable degree of skill and judgment in the patient's interest, by what standards may we judge an entity that intervenes in that obligation? The issue confronting the courts is whether the utilization review administrator is substituting his or her own medical judgment for that of the attending physician. If so, is intervention that influences the course and scope of medical treatment subject to tort remedy? This article will explore the development of jurisprudence interpreting application of the Employee Retirement Income Security Act of 1974 (ERISA) to patient care denials by managed care. It will identify quality-of-care protections for patient care under present federal law.

ERISA was promulgated to guarantee the well-being and security of employer-sponsored benefit plans. The federal district courts have jurisdiction for any civil action under ERISA, limiting relief to the recovery of benefits due, enforcement of rights under a claim, or to clarify rights to future benefits. ERISA is designed to return to a covered participant benefits due. It is silent with respect to remedies should the participant be injured or damaged, lose wages, or become disabled as a result of the intervention in the doctor-patient relationship by any managed care entity. Congress intended that ERISA should supersede any and all state law insofar as the state laws related to "any employee benefit plan."[5]

Interpreting this section, 1144(A), the United States Supreme Court ruled in Shaw v Delta Airlines, Inc., that "a state law relates to an ERISA plan if it has [any] connection with or reference to such plan."[6] As a consequence of this ruling, any malpractice action brought against an ERISA plan is preempted by federal law. Preemption would remove a state court claim to federal court. The federal court would then dismiss the claim because ERISA specifically does not afford relief for a malpractice claim. It would only afford relief for reinstitution of the benefits denied. Shaw undermined the state's interest in protecting the quality of health care afforded to its citizens.

The Supreme Court softened its broad application of §1144(A) in New York State Conference of Blue Cross and Blue Shield Plans v Travelers Insurance Co.[7] New York State had enacted a statute that required hospitals to collect surcharges from patients covered by commercial health plans and certain managed health care plans. Several of these managed care plans filed suit against the state, claiming that ERISA preempted the imposition of surcharges by the state. The intent of New York's statute was to provide safe medical care to the citizens of the state. The Supreme Court held that "quality control of benefits ... is a field traditionally occupied by state regulation."[8] The Court interpreted the silence of Congress as its intent to leave quality control to state regulation. The Court stated that ERISA's goals were to "avoid a multiplicity of regulation to permit the national uniform administration of employee benefit plans."[9] This clearly separated plan administration issues into a federally controlled structure, with issues relating to quality of care falling to state control.

Not until 2000 did the U.S. Supreme Court address the specific issue of medical malpractice by a managed care company.[10] Cynthia Herdrich was a patient insured under a physician-owned health maintenance organization (HMO) provided by her husband's employer. Dr. Laurie Pegram was her physician. Dr. Pegram also was an owner of the HMO. Mrs. Herdrich presented with complaints of lower abdominal pain and evidence of an expanding abdominal mass. Although a facility existed at which an ultrasound examination could be performed closer to Mrs. Herdrich's home and in a more timely fashion, Dr. Pegram elected to schedule an abdominal ultrasound examination at an HMO-approved facility 8 days after her office visit. During this wait, Mrs. Herdrich's acute appendicitis ruptured, resulting in peritonitis.

Mrs. Herdrich filed a complaint against Dr. Pegram and the HMO alleging medical negligence and breach of fiduciary duty. The state court found for Mrs. Herdrich on the medical negligence counts. The claim alleging breach of fiduciary duty to a plan participant was removed to federal court under ERISA. Ultimately, the case reached the U.S. Supreme Court. The Court recognized that Dr. Pegram's decision was entangled in both eligibility issues (quantity of benefits) and medical decision-making (quality of benefits). The Court held that medical decision-making (quality-of-care decisions) is handled appropriately as a medical malpractice issue in state court. By this holding, the Court recognized the state right to impose malpractice liability on HMO physicians who limit care to the patient's harm.

Frustrated by quality of health care issues in ERISA health plans, Texas enacted §88.002 of the Texas Civil Practice and Remedies Code. In part, it stated the following: "A health insurance carrier, health maintenance organization, or other managed care entity for a healthcare plan has the duty to exercise ordinary care when making healthcare treatment decisions and is liable for damages for harm to an insured or enrollee proximately caused by its failure to exercise such ordinary care."[11]

Four managed care plans immediately challenged this legislation in state court. The case found its way to the Fifth Federal Circuit, where the court was not persuaded that Congress intended for ERISA to supplant state regulation of the quality of medicine. The court stated, "a suit for medical malpractice against a doctor is not preempted by ERISA simply because the services were arranged by an HMO and paid for by an ERISA plan."[12] Referencing Pegram, the Corporate Health Court reiterated that quality-of-care regulation has been left to the states.[13]

Managed care challenges to state regulation of quality of health care continued, however. Illinois enacted §4-10 of their HMO Act, which provided for an independent medical review should an HMO deny a covered service on the basis of "medical necessity." Moran, an insured patient through Rush Prudential, sought relief under §4-10. Rush refused Moran's demand, and refused to comply, even after an Illinois state court's independent reviewer found the recommended care to be medically necessary. When Rush argued successfully in federal court that ERISA preempts the Illinois HMO Act, Moran appealed to the U.S. Supreme Court. Again, the Court ruled in favor of states' right to protect the health of its citizens. "Determining the standard of reasonable medical care is a quintessential state right to protect the health and welfare of [a state's] citizens." ERISA does not preempt a statute requiring an independent medical review on a medical necessity denial.[14]

Not until this year did any federal court address the criteria on which managed health care UR decisions could be evaluated to determine patient-specific prescription of appropriate treatment that rises to medical decision making.[15] Mr. Ciccio was diagnosed with multiple myeloma. His physician recommended tandem double stem cell transplant as Mr. Ciccio's best option for survival. Vytra's UR denied the double stem cell transplant on the basis of their experimental/investigational exclusion. Mr. Ciccio's physician wrote an appeal letter including medical reasoning for the double stem cell transplant. UR again denied the double stem cell transplant, but approved a single stem cell transplant as a covered benefit.

The Ciccios filed a medical malpractice claim in state court. On removal to federal court, the Second Circuit Court of Appeals observed that the correspondence between the treating physician and the utilization review of the managed care company strongly suggested that the insurance company was engaged in medical decision-making. The court based this conclusion on the following facts:

  • The treating physician supplied a thorough case history.

  • UR made medical determination on the basis of an aggregate of symptoms.

  • The treating physician appealed the UR denial.

  • The UR denial was "based on clinical peer review of additional information."

The court concluded that by denying one treatment and authorizing another, UR is engaged in patient-specific prescription of an appropriate treatment. This action amounts to medical decision-making. The court held that decision-mak-ing that affects the quality of medical care is a state law claim and not preempted by ERISA.

Physicians frequently face the frustration of prospective and concurrent review by managed care organizations. On the basis of the forgoing discussion, their responsibility to their patient goes beyond providing quality health care. It includes advocating for that care with the patient's insurance company. To protect that patient, that advocacy should be in written form and should be supported by a thorough case history. Should the treating physician's recommendations be denied by UR, the physician's appeal should be supported by appropriate peer-reviewed references.

On the basis of Ciccio, should the UR still deny care on the basis of patient-specific reasoning, then the patient may have recourse against the UR based on a state law claim of malpractice. Furthermore, state legislatures, through the lobbying efforts of its citizens, have the right to monitor and enforce standards for reasonable medical care to protect the health and welfare of its citizens, even when that effort impinges on ERISA-covered managed health care plans.