Legal Implications of Utilization Review
The recent decade has seen a dramatic increase in the use of utilization review (UR) programs in an effort to stem the tide of rising health care costs. UR serves to verify the medical necessity of hospital admissions and specific medical procedures. However, by intruding into the traditional physician-patient relationship, UR programs raise a host of liability issues.1
This paper reviews the rights and responsibilities of the parties involved in UR decisions in an effort to determine what legal guidelines exist and which areas remain unsettled.
The Types of Utilization Review
UR is used in one form or another by government payers such as Medicare, private insurers, health maintenance organizations (HMOs), and self-insured employers. Some payers perform the review in-house; others contract with independent entities to perform all or part of the review. If the physician's treatment plan is approved, the patient is fully covered
* William A. Helvestine is a Partner at Epstein Becker Stromberg & Green in San Francisco. The author gratefully acknowledges the assistance of Dena R. Belinkoff, an attorney with Epstein Becker Stromberg & Green, in the preparation of this paper.
to the limits of the plan; if not, the patient's financial coverage may be reduced or denied altogether. Many physicians criticize the intrusion of UR programs, while most payers claim they reduce health care costs.
Under traditional indemnity plans, UR occurs retrospectively. That is, claims for payment are reviewed after the treatment is rendered. Recently, prospective and concurrent review programs have become more prevalent. A prospective review program requires the physician to obtain prior certification from the payer before providing treatment. In concurrent review, the payer monitors a patient's treatment (usually the length of a hospital stay) and specifies the last clay for which payment is authorized.
Because these programs can directly affect the medical care of the patient, they increase the potential for harm and, consequently, the potential for liability arising out of the UR program. Prospective and concurrent UR decisions also pose dilemmas for the treating physicians and hospitals. If a treatment plan is disapproved, is the physician free to abandon the plan? To what extent is the physician or hospital obligated to provide the treatment despite the risk of nonpayment? How vigorously must the physician pursue any appeal rights to contest the UR decision?
The patient is also left in a quandary. The patient faces conflicting judgments by two medical professionals: the treating physician and the UR consultant. Should the patient rely on the treating physician's opinion, go forward with treatment and accept the resultant benefit penalties, or should he limit treatment to that which the payer will cover? Who is ultimately responsible for such decisions, and where should liability fall if the decision results in injury to the patient?
There are two leading court decisions regarding liability for UR decisions, Sarchett v. Blue Shield of California 43 Cal. 3d 1, 233 Cal. Rptr. 76, 729 P. 2d 267, (1987), and Wickline v. California 192 Cal. App. 3d 1630, 239 Cal. Rptr. 810 (1986). Sarchett, a retrospective review case, upheld the fundamental right of an insurer to challenge the treating physician's determination of medical necessity. Wickline, a case involving concurrent review, addressed the reviewer's potential liability to the patient for harm resulting from prospective or concurrent review decisions.
The Sarchett Decision
The most important aspect of the California Supreme Court's decision in Sarchett v. Blue Shield of California, supra, was that it affirmed an insurer's right to disagree with the treating physician's determination of medical necessity. The decision also made it clear that if coverage is denied, the insurer must inform the insured of any contractual rights to reconsideration or independent review, such as by arbitration.
The plaintiff, John Sarchett, was hospitalized for 3 days by his family
physician. Blue Shield reviewed the hospital records and determined that the hospitalization appeared to be for diagnostic purposes only. It denied coverage based on two policy exclusions: first, an exclusion for hospitalization that is primarily diagnostic, and second, an exclusion for nonmedically necessary services.
The California Supreme Court upheld Blue Shield's right to challenge the medical necessity of hospitalization, even though the patient had relied on the recommendation of the treating physician. The court squarely rejected the plaintiff's argument that the treating physician is the final arbiter of medical necessity. It found retrospective review to be an implied right of the insurance relationship, even though the policy does not expressly state that the insurer may conduct retrospective review.2
In the Sarchett case, the court also commented favorably on the increasing practice of health care payers to require preauthorization for elective procedures. However, lest payers become too aggressive in coverage decisions, the decision included a reminder that any doubts and uncertainties in an insurance policy will be construed in favor of coverage for the insured. As a result, the decision of a treating physician will rarely be reversed as being unreasonable or contrary to good medical practice, the court predicted.3
The Wickline Decision
Although the decision in Wickline v. California, supra, was only an intermediate appellate ruling in California, it promises to be a seminal decision in the area of UR liability. Mrs. Wickline was being treated for problems associated with her back and legs, and her physicians recommended surgery. While her hospitalization and treatment were covered by Medi-Cal (California's Medicaid program), Medi-Cal required precertification for hospital admission and assigned an approved length of stay for the admission. Any extension of the approved length of stay had to be authorized. Medi-Cal approved Wickline's surgery and authorized a 10-day length of stay, with payment approved until January 17, 1977.
Mrs. Wickline suffered complications after the original surgery, and two additional surgeries were performed. Her treating physician determined that she should remain in the hospital 8 clays beyond her scheduled discharge date and filled out a Medi-Cal form requesting an extension. The Medi-Cal on-site nurse reviewer, after consulting with a Medi-Cal physician adviser, approved only a 4-day extension. While there were appropriate spaces on the form for the on-site nurse's recommendation and the reason for disapproval by the physician adviser, both were left blank.
The attending surgeon discharged Wickline to her home when the 4-day extension period expired. All three of her treating physicians were
aware that there was a process whereby the Medi-Cal decision could be appealed, but none of them appealed. A week after discharge one of the physicians examined her and found nothing remarkable. Then, nine days after discharge, Wickline was readmitted to the hospital with severe pain and discoloration of her right leg, which eventually had to be amputated at the hip. Wickline brought an action alleging that her injuries were caused by Medi-Cal's negligence in failing to authorize the full 8-day extension. A jury awarded her $500,000.
The Court of Appeal reversed the jury verdict, reasoning that although the state's preauthorization program played a role in the decision to discharge Wickline, this role was not determinative. Rather, the decision to discharge Wickline was made by the attending physicians. The court held that Medi-Cal was not a party to that medical decision and could not be held liable if that decision were negligently made. In refusing to find liability for the review decision, the court placed responsibility for the hospital discharge on the attending physicians and implicitly criticized them for not appealing the Medi-Cal denial decision if they disagreed with it.
The fact that the Wickline court based its holding on the lack of causation by the UR decision, rather than on any other available alternative basis, suggests that the court was particularly sensitive to the danger of holding the UR organization liable. Viewed in this light, the Wickline decision is not merely an ordinary application of the law of causation, but represents a precedent against UR liability. The Wickline case provides judicial recognition of the need for and the importance of UR as a check and balance in a system in which health care costs typically are paid by third parties rather than by the patient.4
At the same time, the court clearly stated that third-party payers could be held liable for ''defects in the design or implementation of cost containment mechanisms'' that result in the denial of medically necessary services. The decision recognizes that negligent UR decisions may result in denial of needed treatment, thereby causing injury to the patient. It thus sets the stage for further development of the allocation of responsibilities in this area.
The Elusive Concept of Medical Necessity
A UR decision invariably turns on whether a treatment or service is "medically necessary." This term is not only difficult to define but it also is frequently confused with other terms or limitations of the insurance policy. Failure to isolate the "medical necessity" aspects of a decision can easily result in wrong decisions, and hence potential liability for the reviewer.
Examples of such confusion are cases in which coverage is denied because the procedure is "cosmetic" or "experimental."5 Often, a procedure
will be "cosmetic" only because it is not "medically necessary" under the circumstances. Plastic surgery that otherwise would be cosmetic becomes medically necessary following a disfiguring accident. And, yet, a reviewer may attempt to deny the surgery as cosmetic, without determining whether it is medically necessary under the circumstances. When the issue is whether something is ''experimental," it is generally presumed that some medical treatment is necessary. However, since the concept of "experimental" depends in part on whether the treatment is customary, the considerations are often similar to those used in determining medical necessity.
Definitions of "medical necessity" vary greatly.6 Some policies define medical necessity simply, such as "such services . . . as are reasonably intended, in the exercise of good medical practice, for the treatment of illness or injury."7
Other policies provide more lengthy criteria.8 Regardless of the definition, a determination of medical necessity is always a judgment call, and the reviewer must be careful not to apply an overly restrictive standard.9
An independent review organization is generally able to limit its decisions to whether something is "medically necessary." Where the review is conducted in-house by an insurance company or HMO, there may be more of a tendency to confuse a medical necessity determination with other coverage decisions. Care should be taken to delineate clearly the different reasons for a denial, even though the considerations may overlap.
In some cases, the UR entity's contract may require it to apply certain benefit restrictions, for example, in cases which the health plan covers certain procedures only if they are provided on an outpatient basis. In that situation, the UR entity is not making a decision as to medical necessity, but is simply applying nondiscretionary criteria. Presumably, the benefits restrictions satisfy any applicable regulatory requirements for minimum plan benefits. In such a case, the UR entity should not be held responsible for applying nondiscretionary criteria, since it is not making a medical necessity determination.
In some arrangements, the UR entity may be required to apply criteria, but has the latitude to deviate from the criteria in cases in which an exception is medically necessary, for example, when an outpatient procedure would be particularly risky for an elderly patient. Under this arrangement, the UR entity is exposed to liability because it must balance individual medical necessity against the standard criteria in each case. Of course, if such standard criteria appear in a variety of health plans, the very existence of the criteria may be evidence of the community standard of care.
Liability of the Review Organization
Potential liability for the review organization exists under various legal theories, which are discussed in this section. One of the more unsettled
areas is the extent to which Employee Retirement Income Security Act (ERISA) preemption applies. In a case in which ERISA applies, none of the common law claims discussed in this section would be available, and the plaintiff would be limited to ERISA remedies (see the section ERISA Preemption below).
Regardless of the legal theory, two factors weigh heavily in any case. The first factor is whether financial considerations influence the decision on medical necessity. A payer who conducts a review in-house may be more susceptible to improper fiscal considerations. For example, in one unreported case there was evidence that the medical director began systematically denying coverage for a particular treatment after attending a finance committee meeting where the costs for this treatment were singled out as being over budget. Independent review organizations may be less likely to be influenced by financial considerations, because the relationship between an independent reviewer's UR decision and the reviewer's compensation is indirect. However, the review organization's method of compensation may alter this conclusion. Most independent review organizations are compensated on a per-person or per-review basis. But if the review organization's compensation is based on the savings it realizes for its clients, then financial considerations might influence its decisions.
The second important factor in any UR liability case is causation. Wickline is a prime example of a case in which the plaintiff failed on the issue of causation. Regardless of the legal theory, causation typically is the biggest obstacle in the plaintiff's case.
Aside from these factors, the outcome of any liability case against a UR organization is likely to be influenced by the inherent sympathies of the jury, as illustrated by the Wickline case. That is, an injured individual generally will evoke more sympathy than the corporate review organization or insurance company.
The evidence in Wickline was overwhelming that Mrs. Wickline did not require continued hospitalization beyond the date of her discharge. Her bodily functions were all normal. She had commenced rehabilitation treatment. There was no open infection or open wound. No new symptoms had appeared, and she did not appear to be in any danger. Her initial length of stay had been extended for 4 clays for general observation. Her treating physician testified that at the time of discharge, her condition was neither critical nor deteriorating. If it had been, he testified, he would have kept her in the hospital regardless of the Medi-Cal decision. Moreover, she was examined a full week after her discharge by one of her physicians, who noted nothing remarkable in her condition.
How, then, did the jury assess liability against the utilization reviewer for half a million dollars? The answer is easythe jury system protects the individual against faceless bureaucracies. The jurors were presented with a
tragic situation in which, through no fault of her own, Mrs. Wickline lost her leg, suffered greatly, and would continue to suffer greatly for the rest of her life. Yet, the Medi-Cal reviewer could not even remember why he had denied the hospital stay extension. It should come as no surprise that the jurors who have the legless and tearful Mrs. Wickline and her family sitting before them day after day will be inclined to ignore fine distinctions in the evidence and compensate Mrs. Wickline for her suffering. From this perspective, the $500,000 verdict does not seem so large.
The Wickline case illustrates the basic difficulty in defending cases of this nature. Utilization review, when viewed most favorably, solves the broad societal goal of containing health care costs. But the plaintiff's attorneys are likely to cast UR as simply a tool of insurance companies to make more money. The review organization's paper forms, the inability to remember specific cases, and the inevitable failure to gather every detail and other indicia of bureaucracy, coupled with the inescapable fact that reducing the amount of medical care saves money for the insurer, will always embellish the plaintiff's case. Moreover, unlike a malpractice case in which evidence of a physician's coverage is carefully shielded from the jury, in a UR case, the insurance company itself is usually the named defendant. For these reasons, the role of the jury cannot be ignored in any assessment of utilization review liability.
Negligence is likely to be the principal cause of action against both a payer and an independent review organization for a UR decision. If the case involves a payer's in-house review, the plaintiff will probably proceed also on theories of breach of contract and breach of the implied covenant of good faith and fair dealing. In Wickline, a case involving in-house review, the only cause of action was negligence, and the court did not discuss any other potential theories. To establish negligence, the plaintiff must show that the defendant owed the plaintiff a duty of reasonable care, that the defendant breached the duty, and that the breach proximately caused the plaintiff's injury.
Existence of an Duty of Care
Whether a duty of care extends from an independent review organization to the patient depends on a variety of factors, but the courts are likely to find that a duty exists.10 A primary factor in determining whether a duty of care exists is foreseeability of harm. When a review organization denies authorization for a treatment program, it is certainly foreseeable that the patient may forego treatment. The review organization may argue that its determination is for payment purposes only and is not to be relied upon as
medical advice.11 Nevertheless, the UR decision inevitably will have some affect on the decision whether to proceed with treatment. At the least, the UR decision may be a factor for the patient to consider and in many cases, it will be the decisive factor. The argument that the UR decision affects payment only is more persuasive on the issue of causation than on the issue of duty, as discussed in the section Causation below.
Wickline clearly recognizes that a duty of care exists for UR decisions made in-house by a payer.12 However, there is also good reason for finding that the duty is owed by an independent review organization, given that the potential harm to the patient is just as foreseeable. The technical distinction that the independent review organization may not be in direct privity of contract with the patient should not prevent the imposition of a duty of care for tort law purposes.
The Standard of Care
The next issue in a negligence action is to define the standard of care.13 There are two subissues involved here. First, the review organization may be liable if a defect in its procedures resulted in harm to the patient. Second, even if the organization's procedures were adequate, the duty of care may be breached if the decision on medical necessity did not meet proper standards.
The standard of care for the procedural aspects of a UR decision is likely to be based on the standards followed by review organizations generally, that is, the standard of care in the community of consultants in the same business. Overall, UR procedures must be sufficient to obtain enough information to make an informed decision and to enable a timely dialogue and/or appeal if the treating physician or patient disagrees.
In Wickline the physician consultant reviewed only the Medi-Cal form completed by the treating physician. He did not review the patient's chart or consult with the treating physician or a specialist consultant before rejecting the requested hospital extension.14 The plaintiff attempted to show that these procedures were insufficient. The Wickline decision did not criticize the review procedure, thereby implicitly accepting the argument that the reviewer was entitled to rely on the information on the Medi-Cal form and that the burden was on the attending physician to justify the request by including all pertinent information on the form.15 Nonetheless, there is no doubt that the defendant's sloppy recordkeeping, including the failure to document any reasons whatsoever for the denial, played a persuasive role in the trial court.
The procedural safeguards for review organizations are increasingly the subject of articles and seminars. As a result, the industry appears to have developed minimum standards that are consistently suggested for
review organizations and would be put forth by plaintiff's attorneys in a UR case.16 These standards include the following:
1. review decisions should be made by qualified medical professionals, and any denial decisions should be made only by licensed physicians;
2. reviewers should consult with specialist physicians as appropriate;
3. efforts should be made to obtain all necessary information, for example, by reviewing the patient's charts and consulting with treating physicians as appropriate;
4. the reasons for decisions should be clearly documented;
5. there should be a well-publicized and readily available appeal mechanism; and
6. decisions and appeals should be made in a timely manner as required by the exigencies of the situation.
Finally, the review organization should be careful to follow its own procedures. The failure to follow one's own procedures exposes the entity to potential liability, regardless of whether the particular review decision was correct.17
The other standard of care in a UR liability case is the standard for the substantive decision on medical necessity. The duty of care for this medical judgment is likely to be the same as that for physicians generally. By using the expertise of physicians, UR organizations hold themselves out as having a special skill in the evaluation of medical treatment. The UR organization, through its individual physician and nurse review consultants, will likely be held to a professional standard of care.18 In other words, a UR consultant should authorize treatment if a physician applying the community standard of care would recommend this procedure as medically necessary.19
Many review organizations use standardized criteria to determine the appropriate treatment and length of hospitalization. A statistical methodology may be used to measure inappropriate treatment, admission, or length of stay.20 Of course, the criteria need to be based on an appropriate standard of care and should be reviewed periodically to ensure that they do not become outdated.
Some believe that the fear of liability may deter UR organizations from adopting well-reasoned criteria that deviate from the existing community standard of care, even if it can be demonstrated that the community standard may lead to unnecessary care. There is no doubt that because of liability concerns, close cases tend to be resolved in favor of allowing care based on the existing community standard. At the same time, it seems clear that UR reduces the volume of certain types of care, for example, inpatient hospital days for HMO enrollees. To some extent, the adoption of criteria is serf-validating; that is, as the use of the criteria becomes more
widespread, the criteria themselves become evidence of the community standard of care.
The development and refinement of utilization criteria is a fluid process. Even though a UR organization is held to the community standard of care, the community standard is rarely a bright line, but is more often a consensus of judgment. In a close case, the UR organization is well advised to research the literature or data on particular criteria before making a final decision, in order to assess how strong the expert testimony will be if the decision is challenged. If the literature or data are strong, there is a good likelihood of being able to defend successfully if the case is taken to trial. On the other hand, if the criteria are based on weak data, an obscure article, or an article that recognizes that the procedure is new and unverified, then the UR organization should give the benefit of the doubt to the patient and await further evidence before adopting a more restrictive standard.
Standardized criteria have the beneficial effect of providing a uniform basis for screening all cases initially. Some UR organizations, particularly payers performing UR in-house, develop criteria from their own enrollment population and physicians. Such statistical models may provide valid screening tools for initial decisions, but their use may lead to inappropriate decisions in individual cases posing variations from the statistical norm. If criteria are used, there should be procedures available to allow the reviewer to deviate from them in individual cases of medical necessity.21
Another danger in the use of utilization criteria is the possibility that overzealous and mechanical application of the criteria may contradict explicit coverage provisions in the policy. As long as the criteria are limited to quantitative considerations, such as statistical determinations of lengths of stay or lists of procedures ordinarily done on an outpatient basis, the criteria serve a useful purpose. However, a too sweeping exclusion may result in the denial of services that are medically necessary and, therefore, that are covered under the basic policy.22
The third issue in a negligence action against a review organization is whether the denial of coverage proximately caused the patient's injury. Causation was the decisive issue in Wickline and promises to be the single largest hurdle in most UR liability cases.
In Wickline, the treating physician failed to take any steps to contest the initial denial. In fact, he signed the hospital discharge order and testified at trial that Mrs. Wickline's condition at the time of discharge was neither critical nor deteriorating. The fact that the physician may have been intimidated by the Medi-Cal program did not mean that he was incapable
of contesting the decision if he disagreed with it. Thus, the court concluded that Medi-Cal did not participate in the medical decision to discharge Mrs. Wickline from the hospital and could not be held responsible for that decision.23
An alternative basis for the Wickline decision might have been that, wholly aside from the hospital discharge, the Medi-Cal decision was too remote from the infection and gangrene that eventually set in. In other words, the same harm would have befallen Mrs. Wickline even if she had remained in the hospital for the additional 4 days. One of her doctors testified that he examined her in his office a full week after the discharge (that is, 3 days beyond the extension that Medi-Cal denied) and that he did not note any material or substantial change in her condition.24
While Wickline provides an excellent description of the facts, its legal analysis is not as crisp. The holding could have been reached on any number of points, but the court's case law analysis is limited to a general recitation of overall negligence principles.25 The court does not specifically discuss proximate cause, superseding intervening cause, or how the principles of comparative fault may apply. The court simply concludes as a factual matter that the Medi-Cal decision had nothing to do with the hospital discharge.
There remains an infinite variety of fact situations in which the causation issue has yet to be explored. What if Mrs. Wickline's infection had set in only 1 or 2 clays after discharge instead of 10 days? At that time, she still would have been in the hospital if Medi-Cal had not denied the extension. Based on the court's analysis, Medi-Cal still would have been absolved of liability because, according to the court's analysis, Medi-Cal did not participate in the discharge decision.
Breach of Contract
A UR organization may be liable under contract theories as well as under tort theories. A contract typically exists between the patient and the third-party payer to pay for medically necessary services. When the payer performs UR in-house, an improper review decision that results in nonpayment is a direct breach of contract.
When the payer delegates UR to an independent review organization and improperly denies benefits based on the UR decision, a contract remedy against the payer would still be available to the patient, even though the utilization review was undertaken by the independent review organization.26 The absence of a contractual relationship between the patient and the UR organization does not insulate the payer from contract liability for the UR organization's actions.27 In addition, the patient may assert a contract claim directly against the independent entity if the patient is a third-party beneficiary of the contract between the UR entity and the payer. This
contract often sets forth the scope of services to be rendered and the standards for review. A third-party beneficiary relationship exists if the contract between the payer and the UR entity was intended to benefit the patient.28 The review organization will argue that its contract with the payer was not intended to benefit the patient, but was simply to provide services to the payer and to benefit the payer exclusively.29
The measure of damages for breach of contract is all damages reasonably foreseeable from the breach.30 In prior Or concurrent review, since it is foreseeable that denying authorization will result in the patient foregoing medical services, the defendant potentially is liable for injury or death caused to the patient.
The critical issue in a contract action, just as in a negligence claim, is causation. The plaintiff still must show that the review decision proximately caused the harm. Thus, in the final analysis, the pivotal issue in a contract claim is likely to be the same as in a negligence claim.
Insurance Bad Faith
Many states recognize tort liability against an insurance company for breach of the implied covenant of good faith and fair dealing. This cause of action exposes the defendant to punitive damages that ordinarily would not be available in a simple negligence or breach of contract case.31 Insurance bad faith theories are also useful to the plaintiff because they inquire directly into the process used to reach a coverage decision, and not merely the correctness of the decision itself.32 Similarly, the failure to provide adequate appeal rights may itself be the basis for bad faith liability.33
Insurers performing UR in-house have direct exposure to this liability. When the payer delegates the UR function to an independent entity, both the payor and the reviewer, as its agent, are potentially exposed to bad faith liability. When the payer ratifies the reviewer's decision, or leaves the decision primarily in the reviewer's hands, the courts are likely to hold the payer responsible to the plaintiff for the reviewer's mistakes.34
Whether the independent review organization is directly liable for insurance bad faith is a more complicated question. The legal basis for bad faith liability is unique because it contemplates a tortthe breach of a duty of carearising from a special contractual relationship. In contrast, the tort of negligence is not based in contract, but arises out of the finding that a duty of care is owed directly by one party to another. The difficulty in applying the bad faith tort theory in the UR context is the absence of the direct contractual relationship on which the tort is based between the plaintiff (the insured) and the independent UR organization. Furthermore, an independent review entity, unlike an insurance company, does not stand in an established "special" or fiduciary relationship to the
insured. The nature of the relationship between the insurer and the insured is one reason the courts have sanctioned the development of the bad faith doctrine. Also, as long as a reviewer's compensation is not incentive-based, the reviewer is not subject to the insurance company's inherent conflict of interest, namely, making more money by denying more care.
Despite these differences between the status of the insurance company and the independent reviewer vis à vis the insured, there are arguments that the reviewer should be subject to the same risk of bad faith liability as the insurer. First, the review organization makes decisions that directly affect the level of insurance benefits, and thus cause the same kind of harm as insurance company decisions do. Moreover, the harm is foreseeable, and the potential magnitude of the harm is great. Like the relationship between the insurance company and the insured, the relationship between the review organization and the insured is reflected in a nonnegotiable "adhesion" contract. As a practical matter, the insured cannot bargain with the reviewer over the nature of their relationship and, therefore, is forced to accept the reviewer's terms. Finally, the reviewer is acting in the role of an insurance company. For these reasons, an independent reviewer may be exposed to bad faith liability, even though the direct contractual link is absent.
While the courts generally have not imposed bad faith liability on the agents and contractors of insurance companies,35 at least one case found liability despite the lack of contractual privity. In Delos v. Farmers Insurance Group,36 the management company for a reciprocal insurer was liable under the implied covenant of good faith and fair dealing for bad faith handling of a claim. The court found that the management company was acting in the capacity of an insurer by processing claims. The case may be distinguishable from other cases because the management company was, in fact, an arm of the insurer and was the attorney-in-fact and, therefore, a fiduciary with respect to each insured. Nevertheless, the case is significant because the court wanted to prevent the insurer from insulating itself from liability by forming a management company, and consequently, the absence of contractual privity did not prevent the bad faith tort remedy. In addition, there is a possibility that an independent reviewer could be sued for conspiracy with the insurer to breach the implied covenant of good faith and fair dealing.37
As a practical matter, a plaintiff is likely to seek the punitive damages available for bad faith liability from the "deep pocket," which is the insurer, rather than the independent reviewer. However, there is a definite risk that an independent reviewer would be exposed to such liability or forced to defend against such claims.
Infliction of Emotional Distress
A review organization is potentially exposed to claims for infliction of emotional distress. In states where the intentional tort is recognized, proof is required of (1) extreme and outrageous conduct, (2) intent to cause severe emotional distress to the insured or reckless disregard of the probability that such distress would result, and (3) severe emotional distress suffered by the plaintiff as a proximate result of the defendant's conduct.38 The intentional tort has been interpreted to require proof that the defendant's acts were ''so extreme as to exceed all bounds of that usually tolerated in civilized community."39 Since such extreme misconduct is not likely to arise in the UR context, the more likely cause of action against a UR entity would be negligent infliction of emotional distress. The negligence tort requires a showing of (1) negligent conduct by the review organization, (2) severe emotional distress suffered by the patient, and (3) proximate causation.
Consumer materials from the payer or the review organization frequently will tout the beneficial services performed by UR or emphasize the quality aspects of the UR procedure. Such materials may support a claim for breach of warranty. The question generally will be whether the consumer materials were intended to warrant a specific result as opposed to being generalized sales puffing.40
An independent UR organization is well advised to specify in its payer contracts that the payer must include in its consumer documents certain provisions relating to UR. This is particularly important for UR organizations contracting with self-insured employers who may not be as sophisticated as large insurers in preparing consumer documents. At a minimum, the UR organization will want to make sure that the consumer materials reference the insured's consent to UR, clarify that the UR system is the payer's enterprise, and spell out the rights and obligations of the UR process. Another provision would state that the UR entity does not make medical decisions but only advises on payment questions, and that the patient and physician are solely responsible for deciding what medical treatment is provided. Although such statements may not be strictly enforceable, they can be helpful to a UR organization in defending against various liability theories.
The increasing use of computer software programs by UR organizations to determine the appropriateness of admissions may give rise to
claims focusing on the design of the software. A plaintiff could attempt to fashion an argument that he or she suffered damages resulting from an erroneous denial that was made by using a defectively designed software program. By arguing under a products liability theory that the software is a defectively designed product, the plaintiff need not prove that any party acted negligently. Products liability cases require proof only that the product was defective and that the defect caused the injury.41 In addition, the fact that the UR organization did not develop the software, but merely acquired it from a software vendor, may not insulate the UR entity from liability. The products liability doctrine casts a wide net over prospective defendants, permitting plaintiffs to sue virtually every party in the chain of the manufacture and distribution of a product.42
A key issue in a products liability case would be whether the use of the software program constitutes a product or a service. Products liability theories do not apply to services, but the distinction between a product and a service is not clearly defined in the law.43 Moreover, it appears that there is little precedent for finding that products liability applies to claims arising out of the use of computer software programs. However, there are cases finding that, for example, instrument approach charts used by pilots for landing are considered products for purposes of product liability claims brought in wrongful death actions against the manufacturers of the charts.44 Plaintiffs may try to extend these cases by analogy to software programs.
Defamation and Interference with Contractual Advantage
The UR entity's liability is not limited to potential claims by the patient. Physicians or other providers who are harmed by UR decisions may also bring suit. Typically, these actions would be for defamation or, potentially, for interference with the physician's contractual relationship with the patient.45
In Slaughter v. Friedman,46 plaintiff Slaughter was an oral surgeon who brought an action against a dental insurance company and its dental director for defamation and intentional interference with prospective advantage. In denying claims for Slaughter's services, the insurer enclosed a letter to the patients that described Slaughter's work as ''unnecessary," claimed that Slaughter had been "overcharging," and stated that the insurance company would report him to a dental association for disciplinary proceedings. The letters also advised the patients to make no further payments to Slaughter. The California Supreme Court upheld Slaughter's right to sue for defamation (the interference claim was not before the court).
Whenever a UR program informs a patient that the treating physician rendered, or proposes to render, treatment which is not medically necessary,
a potential defamation claim exists. The UR decision carries a stamp of authenticity and may cause a patient to question the doctor's medical judgment and capability. In addition, a finding that services were not medically necessary may justify the patient's decision not to pay for the services.
The UR entity would have available in a defamation action the defense of qualified privilege that applies to communications between persons with a mutual interest in the subject matter.47 The privilege is not absolute, however, and may be defeated by showing that the communication was made with malice. In the Slaughter case, the court found that the pleadings sufficiently raised the issue of malice to allow the complaint to stand.48 For these reasons, a UR organization should be careful to limit its communications simply to the basis for its denial decisions and should avoid unnecessary embellishments or inflammatory language.
A full discussion of potential antitrust liabilities is beyond the scope of this paper. However, a few points are worth noting.
For the review organization that does medical necessity determinations, antitrust is a relatively lesser threat than the other potential liabilities reviewed above are. Antitrust is a more immediate concern for entities that set uniform fee schedules or that limit or exclude providers, such as HMOs or preferred provider organizations (PPOs). When a closed-panel system such as an HMO excludes a physician because of high utilization, there is some potential for antitrust liability. As a general rule, the conduct will not be illegal per se but will be tested under the rule of reason. Under the rule of reason test, the challenged activity will be upheld when the legitimate, procompetitive interests outweigh the potential anticompetitive effects.49 As long as the defendant succeeds in having the court apply the rule of reason test, the beneficial effects of limiting the provider panel to cost-effective physicians are likely to prevail over the interest of a single physician in remaining on the panel, at least in cases in which the defendant's market share is within reasonable bounds.50
The difficulties in defending a provider exclusion case tend to be the inevitable problems of proving that a physician is a high utilizer. The excluded physician often attempts to show that he or she was singled out because of some personal animus by his or her competitors on the review committee. Often, the defendant's records are not as precise as the attorney would hope and the statistics are not consistent or are incomplete. Other physicians who have not been excluded may have equally bad or worse utilization records, thereby raising the question of unequal treatment. The excluded physician may have an outstanding reputation for quality, or may
claim that his or her patients tend to be sicker than the average population. All of these problems make the defense of the antitrust case more difficult, but there is nothing inherently illegal in excluding a provider based on utilization data.
For UR entities doing medical necessity determinations, the principal source of antitrust claims lies in restricting the availability of new or controversial treatments. Because UR applies a community standard of care, there is a built-in bias against new treatments that do not have widespread acceptance in the medical community. For example, various antitrust cases have been brought by purveyors of dimethyl sulfoxide and laetrile claiming that third-party payers and their reviewers were unlawfully refusing coverage for these new "miracle" cures. For a less controversial example, consider heart transplants. It is likely that utilization review entities continued to deny transplants as "experimental" or not medically necessary for some period of time beyond the point when transplants became relatively safe and even commonplace in sophisticated areas of practice.
In this kind of antitrust case, one of the biggest hurdles is to show that a combination or conspiracy exists to deny coverage. Unilateral action is insufficient to establish a violation under Section 1 of the Sherman Act; there must be a "contract combination or conspiracy in restraint of trade."51 The fact that several employees or even a committee of reviewers participated in a denial of coverage generally is not enough to establish antitrust liability because they all work under a single corporate entity.52 The plaintiff will want to show that a number of payers are conspiring to deny coverage of a new treatment. While the plaintiff often can show that a number of payers actually do deny coverage, it is a rare case when the plaintiff can establish an agreement among the payers to deny coverage.53
Liability of Consultants and Employees
The consultants and employees of the review organization may be found liable for torts in which they participated, just as is the case for any other individuals who work for a corporation. Their protection lies in proper insurance and in their right to indemnity from the corporation.
Many states have statutes that provide immunity from liability for certain peer review activities. However, these statutes generally do not protect the physician consultants of independent review organizations. The statutes generally are limited to certain types of peer review, such as hospital review committees, medical society committees, and certain committees of HMOs; and they generally focus on peer review of quality of care rather than medical necessity determinations for private payers.54 The immunity
is usually a qualified rather than absolute immunity, meaning that the participant who acts with malice is not shielded from liability.
When a physician provides independent consultant services to a UR entity, the physician's malpractice insurance may or may not cover those services.55 The UR entity's policy probably does not cover independent contractors and may also exclude claims arising from the provision or failure to provide medical services. Liability insurance needs to be clarified by both the physician consultant and the UR entity.
An employee of a corporation who is personally named in a lawsuit and is successful in the defense of the suit may have the right to indemnity from his or her employer under the applicable Corporations Code, unless it is shown that he or she did not act in good faith or acted against the best interests of the corporation.56 A corporation will generally have the option of indemnifying an agent for actions taken in good faith and with the reasonable belief that the actions were in the corporation's best interests? As a practical matter, employees generally expect the corporation to assume any liability in a situation such as that in the case of Wickline. However, cases will arise in which the corporation will not indemnify, the corporate insurance is exhausted, or the corporation is otherwise without assets. A physician consultant, therefore, is well advised to examine carefully the corporation's liability policy and to review his or her own consultant contract in light of the corporation's liability policy and the applicable law on indemnity.
The design of UR procedures is increasingly the subject of state regulation. The state of Maryland enacted legislation in early 1988 requiring a UR organization to obtain a certificate from a state agency before conducting UR.58 The application process requires, among other things, submission of a UR plan, including a description of review standards and procedures, the circumstances in which UR may be delegated to a hospital UR program; and the appeal mechanism for patients, providers, and hospitals. The legislation does not specify any detailed requirements for standards and procedures, and no regulations have been promulgated as of this writing.
Minnesota also enacted in 1988 a provision requiring prospective utilization review decisions to be made within ten business days. The time period does not run until all information reasonably necessary to the decision has been made available.59
Maine requires insurers with prospective review requirements to file annual reports setting forth the number and type of such review decisions.
The reports also must include a summary of denials and any appeals or lawsuits related to the prospective review.60
Louisiana presently has the most comprehensive legislation regarding prospective utilization review requirements.61 The Louisiana statute expressly permits a damages action for "unreasonable delay, reduction or denial" of services, and sets certain standards for prospective utilization review decisions. Decisions made within two working days are deemed to be timely; however, longer time periods may be justified under some circumstances. The statute further provides that decisions on medical necessity must be based on "nationally accepted current medical criteria," but the statute fails to give any further guidance as to what medical necessity means.
While the Louisiana statute expressly authorizes damages actions, it also limits the potential recovery. Damages for prospective review decisions are limited solely to physical injuries, which excludes punitive damages and also may be interpreted to exclude emotional distress damages. However, the prevailing plaintiff may recover reasonable attorneys' fees. The statute also imposes on the plaintiff a strict causation requirement, and limits damages solely to injuries that are the "direct and proximate cause" of the unreasonable delay, reduction, or denial. Thus, although some may view the Louisiana statute as unwanted regulation, the statute actually provides certain safeguards to the insurance industry and limits the amount of recoverable damages.
In Pilot Life Insurance Co. v. Dedeaux,62 the U.S. Supreme Court held that when insurance is provided through an ERISA plan, common law actions by an insured for bad faith denial of insurance coverage and related state law tort claims are preempted by ERISA.63 Most private employers' benefits plans are covered by ERISA.64 Thus, many of the liability theories discussed above are subject to an ERISA preemption defense. However, the courts are still grappling with the scope of preemption, and there remain areas of uncertainty.65
When a utilization review case is brought directly against an ERISA payer based on a denial of benefits or mishandling of a claim, the action should be preempted. The alleged wrong at issue is the denial of benefits provided by the ERISA plan, which is the same as the wrong involved in the Pilot Life case. The fact that consequential damages flowed from the denial of benefits (for example, Mrs. Wickline's loss of a leg) should not distinguish the case from that of Pilot Life.
When the defendant is an independent review entity, the ERISA preemption issue will turn on whether the review entity is deemed to be a
"fiduciary" under ERISA. A person or entity performs fiduciary functions, and is therefore deemed to be a fiduciary under ERISA, if it exercises discretionary authority or control over the plan.66 When the review entity makes the initial determination on coverage, for example, by refusing to authorize surgery or refusing to extend a hospital length of stay, a court is likely to hold that the review entity is exercising a fiduciary function. If the review entity is held to be a fiduciary, then ERISA preemption would apply.
However, if the court finds that the review entity is not a fiduciary, it is not clear whether ERISA preemption would apply.67 This area is one of continuing development following the Pilot Life decision.
ERISA preemption does not leave the plaintiff entirely without a remedy. However, the remedies available under ERISA may be severely restricted and may preclude the plaintiff from recovering consequential damages such as pain and suffering or, in a situation like that of Wickline, the cost of living a life as an amputee. The monetary remedy available to a plan participant in an ERISA action is limited generally to recovery of plan benefits, and consequential damages are not permitted.68 The court does have discretion under ERISA to fashion broad equitable relief,69 and given the right set of facts, a creative court may well attempt to fashion an equitable remedy to provide adequate compensation for the plaintiff.
Two other features of an ERISA action are worth noting. First, to the plaintiff's advantage, attorneys' fees may be awarded under ERISA. Second, to the plaintiff's general disadvantage, there is no right to a jury trial under ERISA.71
The recognition of ERISA preemption as a defense to state common law torts may lead plaintiffs to resort to other innovative theories to avoid preemption. One such theory would rely on a federal racketeer influenced and corrupt organization (RICO) action,72 which permits a prevailing plaintiff to recover treble damages and attorneys' fees. Since RICO is a federal action, it is not preempted by ERISA. Some courts have permitted a RICO cause of action against an insurance company for denying coverage.73 The plaintiff's theory is that the insurer misrepresented the coverage at the time the policy was issued. Since the insurer used the mails in selling the policies, the alleged misrepresentation constituted mail fraud, which is one of the predicate acts for RICO liability. Although these cases did not involve health insurance, similar allegations could arise in the health insurance context.
Liability of the Employer or Payer
If utilization review is performed in-house, then the employer or payer is directly liable for the consequences of review decisions.74 This section
addresses the liability of the payer or employer that contracts with an independent review entity. In that situation, the payer has the potential for direct liability or vicarious liability.
The principal practical distinction between direct and vicarious liability is whether the payer will be fully indemnified by the review entity. A principal who is found to be vicariously liable for the torts of its agent is entitled to full indemnity from the agent.75 However, if the payer is found to be directly liable for the harm, the damages will be allocated proportionately between the payer and the review entity based on their respective faults. Thus, the payer will want to avoid direct liability, if possible, and shift as much responsibility as possible to the review entity.
The employer or payer may be directly liable under several theories. First, if the payer acts on the reviewer's decision and denies coverage, there is potential liability for breach of contract. If a bad faith insurance claim is available, then the payer may also become liable for tort damages in cases which it adopts or ratifies the reviewer's decision. An insurance company may not escape liability by delegating its responsibilities to an outside entity.76 When the payer is not an insurance company but is, for example, a self-insured employer, the employer may still be liable for breach of its contract to pay benefits (or under ERISA for denial of benefits).
In a contract action, the payer could not avoid liability by showing that the review entity was an independent contractor. A party to a contract does not avoid contractual liability by delegating contractual obligations to another unless the delegate assumes liability and the obligee consents to the assumption.77 Few, if any, review contracts would qualify as an assignment.
A payer also may be liable directly in tort if it participates in the design of a faulty UR system or if the payer fails to exercise due care in selecting the independent review entity. The latter theory, negligent selection, is being increasingly recognized in a variety of fields.78 For this reason, a payer should inquire into the reputation of the independent · review organization, inquire directly about any lawsuits or judgments, and document the results of its inquiry as evidence of the exercise of due care.
A payer also may be found vicariously liable for the torts of the review entity under traditional principles of agency. It is frequently suggested that a payer may avoid vicarious liability in cases in which the review organization serves as an in. dependent contractor, rather than as an agent, as UR contracts almost universally contain independent contractor provisions.
While this distinction is theoretically possible, the independent contractor defense is difficult to sustain in practice. Not only is the independent contractor doctrine viewed with disfavor today,79 but it also may be difficult to prove independent contractor status.80
Even if the review entity is an independent contractor, the plaintiff may still be able to prevail under the doctrine of ostensible agency. Ostensible agency exists when one either intentionally or negligently allows another to believe that an agency relationship exists.81 In cases in which the review entity tells a hospitalized patient that the payer's benefits are terminating or tells the patient who wants an operation that the procedure is not medically necessary, the patient is likely to assume that the reviewer is the "agent" of the payer. A payer might be able to avoid ostensible agency by clearly emphasizing in its consumer documents that the review entity is entirely separate and independent. Even so, a court may be reluctant to allow the payer to escape liability entirely.
The most important protection for a payer is to insist that the reviewer carry adequate liability insurance. Ideally, the payer will be named as an additional insured on the review entity's policy, and the insurance company will be required to notify the payer directly of any change in coverage or cancellation. The payer should also review the terms of the reviewer's policy to see that it covers the various types of liability that can arise in the utilization review context.
Many payers also insist on indemnity and hold harmless provisions in the contract with the review entity. Such clauses are likely to be much less helpful without an adequate liability policy. Without insurance, the review entity may not be able financially to satisfy its indemnity obligation. Also, when one defendant is insured or is otherwise financially viable and the other defendant is uninsured, the plaintiff will try to tailor the case toward the financially viable defendant. Thus, the payer who otherwise may be a secondary defendant may find itself the primary target if the review entity is uninsured.
Liability of the Treating Physician
The impact of UR has fallen most heavily on practicing physicians. While a physician is accustomed to having some services questioned by retrospective claims review, the more intrusive forms of prior or concurrent review meddle directly in the physician's course of treatment of the patient. A review consultant, who usually and has never seen the patient, is questioning the physician's judgment as to what is medically necessary. Then, as
in the Wickline decision, the judicial system blamed the treating physician for failing to protest strongly enough against the reviewer's decision.
On a philosophical level, many physicians have cried foul. UR usurps the considered, professional judgment of the physician. It interferes with the essential relationship of trust between the physician and patient. It is Big Brother watching. Nevertheless, UR appears to be firmly entrenched in the U.S. medical system, and the courts will be forced to continue to grapple with the respective obligations of the parties.
Defining the obligations of treating physicians presents the largest area of unanswered questions.82 A UR denial places the physician at risk of nonpayment if he or she proceeds with the proposed treatment. Assuming that the physician appeals the UR decision, is he or she safe to defer to the reviewer and withhold treatment if the appeal is denied? Can the physician simply withdraw from treating the patient if the review decision is adverse and the patient cannot pay for the treatment? If the physician withholds treatment and harm results to the patient, does the UR decision provide the physician with a defense to a malpractice action?
Wickline suggests that a physician may not avoid a malpractice claim simply by acquiescing in a UR decision. Wickline held that the responsibility for the hospital discharge was solely that of the physicians. In that case, of course, the physicians did not protest Medi-Cal's denial, and by their testimony they agreed that the discharge was appropriate at the time. But Wickline did not say how far a physician must go in appealing a denial decision. Would the court have upheld Medi-Cal liability if the treating physicians had simply requested reconsideration and Medi-Cal had denied the request? Were the treating physicians required to pursue all available avenues of appeal, including an administrative review heating and even a court challenge to the decision? Was it even possible for these avenues of appeal to be resolved in the limited time before the patient was to be discharged? If, after contesting the decision, the physician still believed it was unsafe to discharge Mrs. Wickline from the hospital, were they required to keep her in the hospital and risk nonpayment?
Hard cases will arise when the physician vigorously appeals the denial, to no avail. In this situation, the risk of nonpayment is even clearer than it is at the time of the initial decision. At the same time, by protesting the initial decision, the physician may have created substantial evidence that the treatment is medically necessaryevidence that will be used against the physician if he or she then withholds treatment and harm occurs. At some point, if the physician's appeal is strong enough, a court is likely to hold the review entity responsible for musing at least part of the harm.83 But the possibility of sharing liability with another defendant is little solace to the treating physician, who still remains a clear potential defendant if he or she withholds treatment.
Most of these questions focus on the physician's obligation to provide treatment to a patient who cannot pay. When the physician has not commenced treatment, he or she is relatively free to turn away the case.84 Most UR cases, however, involve an established physician-patient relationship. Terminating this relationship may constitute the tort of medical abandonment.
The essence of abandonment is unilateral nonconsensual termination by the medical practitioner.85 The two elements required to avoid a claim of abandonment are (1) notice and (2) opportunity to secure alternative medical services. When a UR denial applies to a truly elective procedure, there is generally ample opportunity for the physician to satisfy these two elements before foregoing the course of treatment. However, when the patient is hospitalized and a certified length of stay expires, as in the Wickline case, there is little or no practical opportunity to give notice and to seek alternative treatment. The responsibility remains on the physician to provide care, or to keep the patient in the hospital, if the physician believes that the community standard would require such action.86
The physician also has increased exposure to claims of lack of informed consent.87 When a proposed treatment is denied, the physician must be careful to explain to the patient the options and the risks. The patient then must decide whether to go ahead with the treatment and pay for it out of his or her own pocket. Even if the risks inherent in the treatment are minimal, the financial pressure on the patient to forego treatment makes it particularly important for the physician to explain carefully the medical risks of foregoing the treatment.
Many physicians complain that they often are unable to learn the basis for a UR organization's denial decision. However, the appeals process should provide a means for obtaining the basis for the decision. In view of the responsibility placed by Wickline on the physician to appeal adverse decisions, the physician should demand the basis for the UR decision on the grounds that he or she needs it to respond adequately in the grievance or appeals process.88 Also, in this writer's opinion, it is generally good practice for the UR appeals committee to prepare a written statement of its decision. A written statement demonstrates a good faith, reasoned approach to the problem. Even if the patient or the physician disagrees with the conclusion, a well-reasoned written decision serves to dampen the sense of frustration and anger generated by a terse rejection of the appeal.
In any case in which a reviewer denies care, the physician, of course, is free to explain the denial and obtain the patient's consent to treatment and to pay for the care, notwithstanding the denial. However, a physician should take precautions to ensure that the patient understands fully the financial implications of such consent.
Legal Issues For the Patient
The patient, of course, lies at the heart of the controversy. Aside from the various liability issues discussed above, the most pressing issue for the patient is how to obtain timely review of a UR denial. The other issue for the patient is whether he or she must pay for physician services that the reviewer determines were not medically necessary.
The Need For Expedited Review
Consider Mrs. Wickline's situation when she was lying in the hospital recovering from multiple surgeries and was told that Medi-Cal would not cover further hospitalization. She could have either gone home, which would have been against the initial advice of her physician, or she could have remained in the hospital and risked the. devastating possibility of having to pay for it herself.
This situation highlights a major weakness in most UR systemsthe ability to resolve appeals in a timely manner. Most UR appeals systems are designed for retrospective review. They include multiple levels of in-house review, followed by an independent decision by an arbitrator, a court, or an administrative law judge. It may be weeks, months, or even years before a UR decision is reviewed by an independent third party.
While such a system may suffice for retrospective review, in a prior or concurrent review situation the patient's medical care is directly at stake. To be effective, the appeal process must occur within a time frame consistent with the patient's medical condition. For example, in cases in which the challenged decision is the discharge of a sick infant from the hospital to the home, it should be possible to complete the appeal before the infant is sent home and complications can set in. Another example is when an HMO patient needs urgent treatment of a specialized nature. If a question arises whether the patient needs to go out of the HMO plan to secure specialized services, there should be a means to resolve the question in the short time span dictated by the patient's medical needs.
One answer may be to seek expedited judicial relief. While immediate independent review has certain advantages, it also creates a cumbersome burden on the courts and results in the substitution of judicial judgment for medical judgment. Although physicians would say that the courts have not shied away from substituting their own judgment in the past, the prospect of reviewing a number of UR decisions on an expedited basis is not something the judicial system will welcome.
An analogous burden was thrust upon the courts in cases involving decisions to disconnect life support systems. Many courts resisted having to make these decisions.89 However, there is a difference between court
review of decisions to forego treatment of terminally ill patients and court review of UR decisions. Whereas the former decisions frequently border on the philosophical, decisions in UR cases often simply resolve disputes between two professionals' judgment of medical necessity. The latter dispute is similar to what the courts are asked to do in many routine cases. Nevertheless, the courts can be expected to resist the added burden on the judicial system of having to review UR denials, particularly if the review is expedited while the patient's treatment hangs in the balance.
Another means of resolving the problem of expedited review of UR decisions is to allocate the burden of payment prospectively to the payer. If care were deemed medically necessary until the conclusion of the review process, UR organizations would have a significant financial incentive to make careful, reasoned decisions and to expedite the review process. If a denial were subsequently upheld, the patient would incur the debt for the treatment rendered.
Payment For Unnecessary Medical Services
Another issue for the patient is whether the physician can collect payment from the patient for services that are determined to be medically unnecessary. Or, phrased differently, the issue is who should bear the risk of payment for claims that the payer denies because they are not medically necessary under the payer's rubric? One solution would be to allocate this risk by recognizing a new implied covenant in the physician-patient relationship obligating the physician to advise the patient on whether the physician's assessment of the medical necessity of services conforms with, or is defensible under, the insurance company's definition of medical necessity.90 As the interpreter of ''medical necessity,'' the physician is placed at financial risk for the cost of unnecessary services.
The rationale for adopting an implied covenant of medical necessity is to create a disincentive for physicians to overutilize medical services. It would also motivate physicians to appeal questionable UR denials out of self-interest, thereby enhancing the protection of the patient. The concept is supported by the disparity in knowledge between the physician and patient regarding medical necessity.91
Theoretically, both the review organization and the treating physician should operate under the same standard of medical necessity, which, by definition, should be determined by the community standard of care. There is a danger, of course, that a review organization would apply a standard in the middle to low range of the community standard of care. However, the judicial inclination to construe insurance policies against the insurer, and the general deference given to the judgment of the treating physician, tend to minimize this problem. In addition, the effect of the implied covenant
on the behavior of physicians could alter the community standard of care, as physicians become more cautious in recommending treatments for fear that they will be liable for payment to other providers and will not receive their physician fees.
As a practical matter, and without an implied covenant of medical necessity, if the physician, patient, and insurer are all joined in a single action in a case in which medical necessity is the issue, the patient is virtually certain to escape any payment obligation. The trier of fact can be expected to place the burden either on the physician or the payer, but not on the patient.92
When the patient is an HMO member, the question of payment for unnecessary services does not arise, at least for services from a participating physician, because the physician is prohibited from direct billing for covered benefits. The HMO system thus protects the patient by excluding him or her from payment disputes.
It is conceivable that legislation could mandate the same result in the indemnity insurance context. Such legislation would prohibit physicians from collecting for services determined to be medically unnecessary, in effect, codifying the implied covenant in the physician-patient relationship suggested above. There would be two problems with such legislation. First, it would be necessary to clarify the point at which there is a final determination that services were not medically necessary. This issue in itself could increase the volume of litigation as physicians scramble to obtain final determinations of medical necessity in order to support their bills. Second, such legislation could work to the detriment of patients by effectively prohibiting physicians from rendering care that may ultimately be beneficial, even though it cannot be shown to be medically necessary under standards of insurance coverage. A patient who can afford to pay for treatment should not be precluded from using his or her own funds to purchase the services he or she wants, even if the insurer will not pay for them.
If the current trends continue, the placement of liability for UR ultimately will be sorted out by the courts. However, many of the issues raised in this paper may not be developed thoroughly for judicial review because of the broad sweep of ERISA preemption of common law actions. Moreover, in cases in which the allocation of UR liability arises in an HMO context, the issues are likely to be resolved by arbitration and never reach the courts because of the binding arbitration clauses that are frequently found in HMO consumer documents and physician contracts.
When a UR case does reach the courts, the plaintiff has a range
of legal theories to test and several potential defendants, including the provider, the payer, and the utilization review organization, to bring into the lawsuit. Given the increased use of UR by cost-conscious payers, it is likely that opportunities for testing the various legal theories will be plentiful. In anticipation of this uncharted development of the law, the health care industry would do well to begin addressing the liability issues internally.
At the heart of one UR liability debate is the fundamental question of who should bear the risk of UR decisions and whether and how that risk can be allocated without resorting to the judicial system. A secondary, but perhaps more immediate, question is how to provide for expedited review of UR decisions, so that bad decisions are reversed before they have an immediate impact on the patient's medical care.
1. See generally Byrnes, "Corporation's Institution of Healthcare Utilization Review," Medical Trial Technique Quarterly (Spring 1987), at 478; Carabillo, "The Manageable Risks of Managed Care," Health Cost Management, Vol. 3, No. 6 (Nov./Dec. 1986), at 1; Eisenberg and Rosoff, "Physician Responsibility for the Cost of Unnecessary Medical Services,'' New England Journal of Medicine, Vol. 299 (July 13, 1978), at 776; Hershey, "Fourth-Party Audit Organizations: Practical and Legal Considerations," Law Medicine & Health Care, Vol. 14, No. 2, at 54; Lanzafame, Provider Liability Under Public Law 98-21: The Medicare Prospective Payment System in Light of Wickline v. State, 34 Buffalo L. Rev. 1011 (1985); Jespersen and Kendall, "Utilization Review: Avoiding Liability While Controlling Health Costs," HEALTHSPAN, Vol. 4, No. 7, at 3 (July 1987).
2. For a contrary decision, see Van Vactor v. Blue Cross Association, 50 Ill. App. 3d 709, 8 I11. Dec. 400, 365 N.E. 2d 638 (1977), which found no justification for the denial of benefits solely on the ground that the insurer disagrees with the honest judgment of the treating physician. The court concluded that decisions of medical necessity are "vested solely and exclusively in the judgment and discretion of the treating physician." Id. 365 N.E. 2d, at 647.
3. The court also concluded that Blue Shield acted in bad faith when it failed to inform the insured of his fight to impartial review and arbitration as provided in the policy. Although this aspect of the case turned on the particular conduct of Blue Shield, which went beyond a simple failure to inform of appeal fights, the decision emphasized the duty of the insurer to protect the rights of the insured at least equally with its own. 233 Cal. Rptr., at 84-86. Thus, even if the insurance policy contains clear and conspicuous language regarding remedial rights, the insurer should take affirmative steps to inform the insured of his or her rights if a denial of coverage is disputed.
4. The decision proceeds to review the beneficial aspects of the Medi-Cal program and the Medi-Cal regulations providing for prior authorization for hospitalization. Id., 228 Cal. Rptr., at 671. Although the court may have been citing this material in connection with the alternative defense of immunity raised by the state, the court states that it declines to address the immunity defense. See 228 Cal. Rptr. 669, at
672. The purpose of discussing the Medi-Cal regulations appears to be simply to show that prior review is an integral part of the payer's system.
5. Several courts have held an exclusion for "experimental" procedures to be inherently ambiguous, and hence unenforceable. See Johnson v. District 2 Marine Engineers Beneficial Assoc., 857F. 2d 514 (9th Cir., July 11, 1988); DiDomenico v. Employers Cooperative Industry Trust, 676 E Supp. 903 (N.D. Ind. 1987).
6. Some policies simply use the term but do not define it. These policies run the risk that a denial based on medical necessity will not be upheld because the term is not adequately defined. See, e.g., Dallis v. Aetna Life Insurance Co., 100 F.R.D. 765 (N.D. Ga. 1984); Zuckerberg v. Blue Cross Blue Shield of Greater New York, 119 Misc. 2d 834, 464 N.Y.S. 2d 678 (1983), rev'd on other grounds. 487 N.Y.S. 2d 595, 108 A.D. 2d 56 (1985).
7. Sarchett, supra, 233 Cal. Rptr., at 78.
8. One plan defines "medically necessary services" as those which are:
"(1) Appropriate for the symptoms and diagnosis or treatment of a condition, illness or injury.
(2) Provided for the diagnosis, or the direct care and treatment of the condition, illness or injury.
(3) In accordance with the standards of good medical practice.
(4) Not primarily for the convenience of the Member, or the Member's physician and surgeon, or the provider.
(5) The most appropriate supply or level of service which can safely be provided to the Member.
When applied to hospitalization, this further means that the member requires acute care as a bed patient due to the nature of the services rendered or the member's condition, and the Member cannot receive safe and adequate care as an outpatient."
9. Hughes v. Blue Cross, 199 Cal. App. 3d 318, 245 Cal. Rptr. 273 (1988), upheld liability against an insurer which applied a standard of medical necessity which was more restrictive than that of the medical community. Citing Sarchett, the court emphasized that the term medically necessary must be construed liberally so that uncertainties are resolved in favor of coverage. The court noted that by employing a standard of medical necessity significantly at variance with the medical standards of the community, the insurer places the insured at risk of incurring unforeseen liability, which is contrary to the insured's reasonable expectations. "[G]ood faith demands a construction of medical necessity consistent with community medical standards that will minimize the patient's uncertainty of coverage in accepting his physician's recommended treatment." Id. 245 Cal. Rptr., at 279.
10. See Wickline, supra, 228 Cal. Rptr., at 669; Rowland v. Christian, 69 Cal. 2d 108, 70 Cal. Rptr. 97, 443 P. 2d 561 (1968). Rowland lists the following factors as the major considerations in determining whether a duty exists: "The foreseeability for harm to the plaintiff, the degree of certainty that the plaintiff suffered injury, the closeness of the connection between the defendant's conduct and the injury suffered, the moral blame attached to the defendant's conduct, the policy of preventing future harm, the extent of the burden to the defendant and consequences to the community of imposing a duty to exercise care with resulting liability for breach, and the availability, cost and prevalence of insurance for the risk involved." Id. 69 Cal. 2d, at 112. Although the Wickline decision states that these factors lead it not to find liability, it appears that Wickline's holding is based on lack of causation rather than on the nonexistence of a duty. This is evident from a statement later in Wickline to the effect that third-party payers may be held liable for medically inappropriate decisions resulting from their cost-containment program. 228 Cal. Rptr., at 670.
11. UR contracts usually expressly distinguish between the role of the UR organization in determining the availability of coverage, the roles of the payer in making payment decisions, and the roles of the provider and patient in deciding whether to proceed with treatment. One UR contract states that the UR provider "shall not determine a participant's eligibility for benefits under the Group Contract. Group shall have final and sole authority for all benefit determinations." Another contract states that "the decision or determination to obtain or deliver any health care service is always made only by the [patient] and/or his or her physician, and any decisions made by the [UR organization] ... or the health benefit insurer... shall relate only to the obligation for payment for any such service under the terms of the group insurance policy "
12. The patient who requires treatment and is harmed when care that should have been provided is not provided should recover for the injuries suffered from all those responsible for the deprivation of such care, including, when appropriate, health care payers. Third-party payers or health care services can be held legally accountable when medically inappropriate decisions result from defects in the design or implementation of cost-containment mechanisms, as, for example, when appeals made on a patient's behalf for medical or hospital care are arbitrarily ignored or unreasonably disregarded or overridden. Wickline, supra, 228 Cal. Rptr., at 670-671.
13. Every person or entity is expected to exercise the care that the ordinary, reasonable person of common skill and prudence would use under the circumstances of the case. The standard of care is heightened if the person causing the injury enjoys some specialized skill or knowledge. Professionals such as doctors and lawyers are expected to use the skill and care common to their professions, not merely that of the "ordinary person." Prosser and Keeton, The Law of Torts, Section 32, at 185-186 (1984).
14. Wickline, supra, 228 Cal. Rptr., at 666.
15. Wickline's suggestion that the burden is on the treating physician to provide the reviewer with sufficient information is no': a panacea for every utilization review liability case. In Hughes v. Blue Cross of Northern California, 199 Cal. App. 3d 318, 245 Cal. Rptr. 273 (1988), the reviewing physician consultant testified, in explaining why his file lacked complete medical information, that he felt it was the responsibility of the treating doctor or the hospital to submit any information they felt was important. The court nevertheless upheld liability for bad faith claims denial, noting that the letters sent to the treating physician did not explain the medical basis for denial and failed to advise what information the reviewer already had and what additional information would be useful. Id. 245 Cal. Rptr., at 280.
16. See generally Jesperson and Kendall, supra note 1, at 7.
17. For a discussion of state regulation, see the section State Regulation.
18. See the sections Liablity of Consultants and Employees and Liability of the Treating Physician infra regarding the vicarious liability of the UR organization for the torts of its agents.
19. See Hughes v. Blue Cross, 199 Cal. App. 3d 318, 245 Cal. Rptr. 273 (1988) (bad faith verdict upheld in a case in which the insurer applied a standard of medical necessity that was more restrictive than the community standard).
20. See generally J. Restuccia, "The Appropriateness of Hospital Use," Health Affairs, at 130 (Summer 1984).
21. See the section The Elusive Concept of Medical Necessity for a discussion of situations in which criteria are expressly included as part of the plan benefits.
22. For example, a criteria that disallows all fertility services under an HMO plan that covers all medically necessary physician services may be too sweeping an exclusion.
23. Wickline, supra, 228 Cal. Rptr., at 671.
24. Id. 228 Cal. Rptr., at 668.
25. Id. 228 Cal. Rptr., at 669.
26. The payer's liability for tort damages resulting from the negligent act of an independent review organization may be more complicated, depending on whether the UR entity is viewed as an independent contractor or an agent or employee of the payor (see Liability of the Treating Physician).
27. When a contractual duty is delegated, the obligor remains liable to the obligee, unless the delegate assumes the obligations and the assumption is accepted by the obligee in substitution for the original obligor. See Calamari and Perillo, The Law of Contracts, Sections 277-280 (1970) and Restatement (2d) of Contracts, Section 150(3). There also would be a significant question of whether the duty to perform UR functions is a delegable duty under the law. See Calamari and Perillo, supra, Section 278; Hughes v. Blue Cross, 199 Cal. App. 3d 318, 245 Cal. Rptr. 273, (1988) (an insurance company generally cannot delegate its responsibilities to the insured).
28. See Calamari and Perillo, Restatement (2d) of Contracts, Section 302. The court will look to the surrounding circumstances to determine whether the patient is an appropriate third-party beneficiary. In cases in which the benefit literature describes the UR program as a beneficial service for the insureds, for example, in helping to avoid unnecessary hospitalization, the employee has a better chance of establishing a third-party beneficiary relationship.
29. This issue is likely not to be of much practical importance, since the patient can probably assert a negligence claim directly against the review organization. Whatever benefits the patient can obtain from a contract action, such as an action for breach of the implied covenant of good faith and fair dealing, ordinarily can be obtained in an action directly against the payor.
30. Restatement (2d) of Contracts, Section 351.
31. See generally Pilot Life Insurance Co. v. Dedeaux, 107 S. Ct. 1549 (1987); Fletcher v. Western National Life Ins. Co., 10 Cal. 3d 376, 401, 89 Cal. Rptr. 78, 93 (1970).
32. See, e.g., Egan v. Mutual of Omaha, 24 Cal. 3d 809, 157 Cal. Rptr. 482, 598 P. 2d 452 (1979) (bad faith failure to properly investigate claim); Taylor v. Prudential Ins. Co. of America, 775 E 2d 1457 (11th Cir. 1985) (reversing summary judgment for the insurer on the issue of bad faith where the insurer relied on a Medicare determination of no medical necessity without making its own investigation); Hughes v. Blue Cross, 199 Cal. App. 3d 318, 245 Cal. Rptr. 273 (1988) (bad faith verdict upheld where insurer denied claims without reviewing all relevant medical records, applied a standard of medical necessity that was more restrictive than a community standard, failed to explain medical grounds for denial of coverage, and failed to advise treating physician of what additional information would be useful for decision); Mordecai v. Blue Cross/Blue Shield of Alabama, 474 So. 2d 95 (Ala. 1985) road faith allegations arising from failure to consider portions of nurses' notes and to consult with treating nurses and physicians); AEtna Life Insurance v. LaVov, 470 So. 2d 1060 (Ala. 1984) (bad faith claim upheld where insurer misrepresented the extent of its medical review in denying the claim).
33. See generally Sarchett v. Blue Shield, supra; Davis v. Blue Cross of Northern California, 25 Cal. 3d 418, 158 Cal. Rptr. 828 (1979) (bad faith upheld in a case in which the insurer failed to inform the insured of rights to appeal an arbitration).
34. In such a case, the payer could seek indemnity from the reviewer, unless prohibited by some provision of the contract between the payer and reviewer. See Hughes v. Blue Cross, 199 Cal. App. 3d 318, 245 Cal. Rptr. 273 (1988).
35. Gruenberg v. AEtna, 9 Cal. 3d 566 (1973) (demurrer sustained as to bad faith liability of insurer's independent contractor adjusters and attorneys who were not party to the
insurance contract); Iversen v. Sup. Ct., 57 Cal. App. 3d 168, 127 Cal. Rptr. 49 (1976) (reversal of judgment against claims supervisor and claims examiner, both found to be independent contractors, because they were not party to insurance contract); Hale v. Farmers Insurance, 42 Cal. App. 3d 681, 117 Cal. Rptr. 146 (1974) (insurer not liable for employee's bad faith handling of claim where insurer has not ratified employee's acts). See also Reiderscheid v. Comorecare. Inc., 667 P. 2d 766 (Colo. Ct. App. 1983) ("The test of bad faith failure to exercise due care in discharge of a contractual duty and the granting of damages for mental anguish caused by a willful and wanton breach of contract are grounded in basic common law, and not solely in the area of insurance law."); Taylor v. Prudential Ins. Co. of America, 775 F. 2d 1457 (11th Cir. 1985) (upholding cause of action against insurer for bad faith and emphasizing the weight to be given to treating physician's opinion); Linthicum v. Nationwide Ins. Co., 723 P. 2d 675 (Sup. Ct. Ariz. 1986) (punitive damages may be recoverable against insurer for failure to disclose medical basis for denial or failure to seek direct input from treating physician).
36. 93 Cal. App. 3d 642, 155 Cal. Rptr. 843 (1979).
37. See Sprague v. Equifax Inc., 166 Cal. App. 3d 1012, 213 Cal. Rptr. 69 (1985); Younan v. Equifax Inc., 111 Cal. App. 3d 498, 169 Cal. Rptr. 478 (1980).
38. Fletcher v. Western National Life Ins. Co., 10 Cal. App. 3d 376, 89 Cal. Rptr. 78 (1970).
39. See Schlauch v. Hartford Acc. & Indem. Co., 146 Cal. App. 3d 926, 936, 194 Cal. Rptr. 658, 665 (1983), quoting Ricard v. Pacific Indem Co., 132 Cal. App. 3d 886, 895, 183 Cal. Rptr. 502, 507 (1982).
40. See Pulvers v. Kaiser Foundation Health Plan, 99 Cal. App. 3d 560, 160 Cal. Rptr. 392 (1979) (advertisement of "high standards" of medical service held not to warrant a specific result, but was generalized "puffing," to the effect that physicians would exercise good judgment in care).
41. The Restatement (2d) of Torts, Section 402A, states as follows: "... One who sells any product in a defective condition unreasonably dangerous to the user or consumer or to his property is subject to liability for physical harm thereby caused to the ultimate user or consumer, or to his property, if (a) the seller is engaged in the business of selling such a product, and (b) it is expected to and does reach the user or consumer without substantial change in the condition in which it is sold." In California, the plaintiff need not show that the product was "unreasonably dangerous," but only that the product was "defective." See Cronin v. J.B.E. Olson, 8 Cal. 3d 121, 104 Cal. Rptr. 433 (1972).
42. See Restatement (2d) of Torts, Section 402A, Comment f.
43. See generally CCH Products Liability Reporter, Section 4235.
44. See AEtna Casualty and Surety Co. v. Jeppesen & Co., 642 E 2d 339 (9th Cir. 1981); Brocklesby v. United States, 767 F. 2d 1288 (9th Cir. 1985), cert. denied sub nom, 106 s. Ct. 882 (1986).
45. See Slaughter v. Friedman, 32 Cal. 3d 148, 185 Cal. Rptr. 244, 649 P. 2d 996 (1982) (defamation; interference with prospective economic advantage); Teale v. American Manufacturers Mutual Ins. Co., 687 S.W. 2d 218 (Mo. Ct. App. 1985) (tortious interference); Moore & Assoc. v. Metropolitan Life Ins. Co., 604 S.W. 2d 487 (Tex. Civ. App. 1980) (claim stated for tortious interference with doctor-patient relationship by association of anesthesiologists against group medical insurer for insurer's letters to former patients advising that claims would not be paid in full because associaton's charges were excessive).
47. See, e.g., California Civil Code, Section 47(3).
48. Slaughter, supra, 185 Cal. Rptr., at 248-249. The court pointed out that defendants were only required "to inform dental patients of the basis for rejection of their claims; they were not required additionally to defame plaintiff with accusations regarding his dental practices."
49. See Chicago Board of Trade v. U.S., 246 U.S. 231 (1981); Dos Santos v. Columbus-Cuneo-Cabrini Medical Center, 684 F. 2d 1346 (7th Cir. 1982) (under rule of reason analysis, the hospital was permitted to grant exclusive privileges where policy is grounded in ensuring quality patient care and necessary hospital services).
50. See generally Northwest Wholesale Stationers. Inc. v. Pacific Stationery Printing, 105 S. Ct. 2613 (1985) (unless an organization possesses market power or controls access to an element essential for competition, expulsion for failure to follow reasonable rules is not per se illegal); see generally remarks of Charles E Rule, Assistant Attorney General, U.S. Department of Justice, March 11, 1988.
51. 15 U.S.C., Section 1.
52. Cf. Copperweld Corp. v. Independent Tube Corp., 467 U.S. 752, 104 S. Ct. 2731, 81 L. Ed. 2d 628 (1984).
53. Plaintiffs often attempt to rely on the doctrine of "conscious parallelism." Conscious parallelism is easy to allege but exceedingly difficult to prove. It requires proof that the parallel conduct was against the defendant's self-interest and was not based on good faith business judgment. See Supermarket of Homes v. San Fernando Valley Board of Realtors, 786 E 2d 1400 (9th Cir. 1986); Proctor v. State Farm Mutual Ins. Co.. 675 F. 2d 308 (D.C. Cir.), cert. denied, 459 U.S. 839 (1982).
54. See, e.g., California Civil Code, Sections 43.7, 43.8; California Health & Safety Code, Section 1370.
55. For example, Norcal Mutual Insurance Company's malpractice policy only covers claims alleging negligence in "direct patient treatment" or involving professional committee activities (which are limited to hospital staff committees or American Medical Association or medical society committees). Coverage is specifically excluded for "the performance of administrative duties, which are not direct patient treatment, as a medical director." If liability is found against an independent physician reviewer in a Wickline-type case, it is not clear whether the coverage for "direct patient treatment" applies. The physician providing consultant services should seek clarification from the carrier.
56. See, e.g., California Corp. Code, Section 317(d).57.
57. See, e.g., California Corp. Code, Section 317(b).
58. Md. Health Code Ann., Sections 19-1301 et seq.
59. Minn. Stat. 1988, Section 72A.20(4a).
60. Maine Ins. Code Title 24-A, Section 2679. Maine also has legislation pending that, if enacted, would impose certain criteria on independent review organizations, such as requiring prospective UR decisions to be made within a set time.
61. La. Revised Stat. 22:657(D).
62. 107 Sup. Ct. 1549 (1987).
63. See 29 U.S.C., Section 1144. See generally Helvestine, "ERISA Preempts Insurance Bad Faith Actions," HEALTHSPAN, Vol. 4, No. 10, at 8 (Dec. 1987).
64. Significant exceptions to ERISA coverage are government employee plans (including local government plans, such as school districts), certain church plans, and certain statutorily required workers' compensation, unemployment, and disability laws. UR cases will not be preempted when they arise under these kind of plans. See 29 U.S.C., Section 1003(b).
65. One major area of uncertainty has been whether ERISA preempts causes of action based on state statutes governing unfair insurance practices, such as California
Insurance Code, Section 790.03(h). In Kanne v. Connecticut General Life Ins. Co., 857 F. 2d 96, No. 85-5641, 5642 (9th Cir., Oct. 4, 1988), the Ninth Circuit held that ERISA preempts such claims. This issue is of considerably less importance following the California Supreme Court's decision in Moradi-Shalal v. Fireman's Fund Ins. Co., 46 Cal. 3d 287, 250 Cal. Rptr. 116 (1988), which overturned 10 years of precedent and held that no private right of action exists under Section 790.03(h). At this time, only Montana and West Virginia continue to recognize private actions under unfair insurance practices statutes. See Moradi-Shalal, supra, 250 Cal. Rptr., at 121 and note 6.
66. 29 U.S.C., Section 1002(21)(A); see Stanton v. Shearson Lehman/American Express, Inc., 631 E Supp. 100, 102 (N.D. Ga. 1986).
67. See Nieto v. Ecker, 945 F. 2d 868 (9th Cir. 1988) (rejecting a theory of liability under ERISA for aiding and abetting a fiduciary); So. Cal. Meat Cutters Unions v. Investors Research, 687 F. Supp. 506 (C.D. Cal. 1988) (ERISA only applies to those defendants against whom ERISA provides a statutory right of action); Munoz v. Prudential Ins. Co. of America, 633 F. Supp. 564 (D. Colo. 1986) (same findings as previous case).
68. See 29 U.S.C., Section 1132(a)(1)(B); Massachusetts Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 105 S. Ct. 3085 (1985) (emotional distress damages prohibited); Sokol v. Bernstein, 803 F. 2d 532 (9th Cir. 1986) (same findings as previous case).
69. See 29 U.S.C., Section 1132 (a)(3).
70. Id. Section 1132 (a)(3).
71. See, e.g., Blau v. Del Monte Corp., 748 F. 2d 1348 (9th Cir. 1984).
72. 18 U.S.C., Section 1961 et seq.
73. See Marcial v. Coronet Ins. Co., No. 87C 3072 (N.D. Ill., 1987 WL 19532); Unocal Corp. v. Superior Court (Harbor Ins. Corp.), 198 Cal. App. 3d 1245, 244 Cal. Rptr. 540 (2d Dist. 1988), decertified (June 2, 1988).
74. Under the theory of respondeat superior, an employer may be held liable for the torts of its agents or employees acting within the scope of their employment. See Witkin, Agency and Employment, Sections 113 et seq.; California Civil Code, Section 2338.
75. See Witkin, supra, Agency and Employment, Section 61, at 67.
76. See Hughes v. Blue Cross, 199 Cal. App. 3d 318, 245 Cal. Rptr. 273 (1988).
77. See note 24, supra.
78. See, e.g., Restatement (2d) of Tons, Section 411; Elam v. College Park Hospital, 132 Cal. App. 3d 332, 183 Cal. Rptr. 156 (1982) (hospital negligently allowed podiatrist to remain on staff despite malpractice complaints). See Burch 122 Mich. App. 798, 333 N.W. 2d 140 (Mich. 1983); Kendall v. Gore Properties, 236 F. 2d 673 (D.C. Cir. 1956); Giles v. Shell Oil Corp., 487 A. 2d 610 (D.C. 1985) (employer responsible for harm caused by employee in a case in which the employer negligently failed to screen the employee's background).
79. The general rule that parties are not liable for the torts of their independent contractors is fiddled with exceptions. When the plaintiff can show that one party retains control over the enterprise, benefits from it, selects the independent contractor, and is free to require indemnity and insurance from the contractor, that party may be found vicariously liable for the torts of its independent contractor. Also, when the plaintiff can demonstrate a "special relationship" giving rise to an affirmative duty of care owed by the defendant, vicarious liability may result. See Witkin, supra, Tons, Section 997. An insurance company is likely to be found to have a special relationship with its insureds, thus increasing the likelihood of liability for the acts of independent contractor UR organizations.
80. The fact that the contract between the payer and reviewer specifies independent contractor status is not dispositive. The reviewer may be considered an independent
contractor for purposes of its relationship with the payor, and yet be considered an agent of the payor in matters involving the patient. Cf. Arthur v. SL Peter's Hospital, 169 N.J. Super. 575, 405 A. 2d 443 (1979) (physician may be considered an independent contractor in his relations with the hospital, but be deemed an employee of the hospital in his relations with the patient). The principal factor in distinguishing an independent contractor from an employee is the freedom from control by the employer over the details of the work. See Witkin, supra, Agency and Employment, Sections 12, 14, at 28-31; Prosser and Keaton, The Law of Torts (5th ed., 1984) for a discussion of the doctrine generally and a suggestion that it is disfavored.
81. See Restatement (2d) of Agency, Sections 8, 159 (apparent authority of agent); California Civil Code, Section 2300, Quintal v. Laurel Grove Hospital, 62 Cal. 2d 154, 41 Cal. Rptr. 577, 397 P. 2d 161 (1964) (whether the physician was ostensible agent of the hospital is a jury question); Mduba v. Benedictine Hospital, 384 N.Y.S. 2d 527, 52 App. Div. 2d 450 (1976) (emergency room physicians may be named agents of the hospital despite independent contractor language in their contracts).
82. Many of the same dilemmas discussed in this section apply to hospitals as well. Indeed, in a concurrent review situation like Wickline, the hospital has the largest financial stake in the patient's discharge because it is the hospital bills that would remain unpaid. The rights and responsibilities of a hospital are similar to those of a physician and are not treated separately for the purposes of this paper.
83. If the physician is named in a lawsuit, he or she may cross-complain against the review entity for indemnity or contribution. Likewise, a review entity named in a Wickline type of case will consider cross-complaining against the treating physician.
84. See, e.g., Goldman v. Ambro, 512 N.Y.S. 2d 636 (1987); Harper v. Baptist Medical Center-Princeton, 341 So. 2d 133 (Ala. 1976). In Harper, the Alabama Supreme Court held that a doctor and hospital who rendered emergency treatment to the plaintiff, but refused to accept him as a patient because he did not have insurance, were not liable for subsequent injuries because the plaintiff had not been accepted as a patient. Until a professional doctor-patient relationship is established, the physician's only duty is to provide emergency care; there is no duty to accept a patient under other circumstances.
85. See generally, Mains, "Medical Abandonment," Medical Trial Technique Quarterly, at 306 (1985).
86. See, e.g., Meiselman v. Crown Heights Hospital, 285 N.Y. 389, 34 N.E. 2d 367, 217 N.Y.S. 2d 12 (1941) (liability against hospital where the patient was discharged prematurely because he was unable to pay for further care). See generally Lanzafame, supra, note 1, at 1023-1030.
87. Informed consent requires disclosure of all information that the patient would consider material in deciding whether to undergo the treatment. See Canterbury v. Spence, 464 F. 2d 772 (D.C. Cir. 1972). Presumably, economic consequences would be a material consideration for the patient.
88. Physicians should be mindful, however, of the UR organization's legitimate concerns regarding the disclosure of its review criteria and systems, which are usually considered protectable trade secrets.
89. See In Re Quinlan, 70 N.J. 10, 355 A. 2d 647, 649, cert. denied, 429 U.S. 922 (1976) (review would be "inappropriate," not only because that would be a gratuitous encroachment upon the medical profession's field of competence, but because it would be impossibly cumbersome").
90. For a thoughtful treatment of this issue, see Eisenberg and Rosoff, supra, note 1.
91. The implied covenant of medical necessity should not, however, supplant the patient as the final decision maker in matters of medical care. Rather, it obligates the
physician to add a new economic dimension to the physician's determination of medical necessity, which must be communicated to the patient.
92. In one case, the court apparently refused to relieve the patient of payment responsibility, even though the insurer denied coverage because the treatment was not medically necessary. Albert Einstein Medical Center v. Lipoff, No. 3872X (Ct. of Common Pleas, Phila., Apr. 23, 1973), described in Eisenberg and Rosoff, supra, note 1. In that case, the patient sought to hold her physician contractually liable for the hospital bill. The court denied her claim, reasoning that her claim sounded in tort and that she could recover only by proving that the doctor's treatment was medically unsound. That it was economically unsound was irrelevant to a tort claim.