Risk Management

New Liability Exposures and Insurance Needs for Managed Health Care Providers

By Paul Weber, JD

[Digest, Spring, 1997]

Payors’ dependence on managed care organizations (MCOs) has grown rapidly in the past five years as the search continues for ways to slow or reverse rising health care costs. MCOs have evolved into many different forms, including health maintenance organizations (HMOs), preferred provider organizations (PPOs), individual practice associations (IPAs), and physician hospital organizations (PHOs). Although they differ in ownership and services provided, these organizations all attempt to lower costs by managing utilization of health care services and selecting and contracting with providers.

To remain viable in this new health care environment, many ophthalmologists are rapidly forming more sophisticated corporate entities and partnerships to provide services under managed care contracts. The individuals who serve as directors and officers of these entities and the entities themselves face liability exposures when administering managed care activities that are not typically covered under a standard malpractice insurance policy. The staff and employees of these groups also face new potential liability as they carry out and administer managed health care activities within these entities.

In response to these new liability exposures, many professional liability carriers, including OMIC, are adding coverage for Directors and Officers (D&O) Liability, Managed Health Care Errors and Omissions (E&O) Liability and Vicarious Medical Professional Liability.

D&O Liability

D&O insurance provides coverage for claims and lawsuits against the directors and officers of a corporate entity for wrongful acts in their capacity as such. A “wrongful act” is any actual or alleged breach of duty, neglect, misstatement or misleading statement, or other act or omission committed by directors and officers in the discharge of their corporate duties.

Common liability exposures faced by directors and officers that are covered under a D&O liability policy are:

• Corporate mismanagement. Shareholders bring an action on behalf of the insured corporation and seek to hold the directors and officers liable for financial loss due to corporate mismanagement.
• Wrongful termination. A former employee alleges she was terminated because of mental disability.
• Breach of duty, of loyalty and care, or fraud.Shareholders allege that directors and officers are liable for financial loss due to failure to detect and prevent embezzlement or self-approval of bonuses and loans.
• Misrepresentation of financial condition. Insurance regulators allege that the directors and officers misrepresented the financial condition of the corporation to induce new members.
• Unfair exclusion from provider network. A physician alleges that directors and officers failed to renew his provider agreement because of his age.

E&O Liability and Vicarious Medical Professional Liability

Managed health care E&O liability insurance generally covers organizations and their employees for specific tort liabilities associated with the managed care activities conducted by providers in a managed care setting.

Common liability exposures faced by managed care organizations or providers that are typically covered by a managed health care E&O policy are:

• Performance of utilization review. An enrollee holds an MCO liable for bodily injury and/or emotional distress after the MCO withholds pre-authorization of benefits for a glaucoma procedure.
• Performance of peer review. A patient holds an MCO liable for bodily injury allegedly resulting from the MCO’s failure to adequately investigate its healthcare providers.
• Vicarious liability for conduct of affiliated providers. An MCO is held vicariously liable by an enrollee for an employed or network ophthalmologist’s alleged negligence.
• Misrepresentation, unfair competition. A plaintiff alleges that an HMO solicited members through intentional misrepresentations in advertising about the quality of its care or scope of its benefits (e.g., ABC provides the best ophthalmic care in the Southwest).

These are new liability exposures faced by ophthalmic organizations as they carry out and administer managed health care activities within their entities. Unlike D&O insurance, E&O liability insurance can protect the organization as well as its employees, committee members, and medical directors from alleged errors, omissions, and breach of duties made in managed health care administration.

Managed Care Liability Claims

Although D&O and E&O policies provide coverage for claims arising from a number of different activities and operations, the majority of new liability exposures created by MCOs are associated with three activities: (1) employing or contracting with health care providers; (2) selection of providers; and (3) utilization review.

Managed care D&O and E&O claims typically are complex and involve many parties. Pinpointing “pure” managed care related claims is difficult because many claims that name directors and officers and MCO employees include allegations of personal injury, libel/slander, or breach of contract. As such, these claims can be very expensive and time consuming.

Unfair Exclusion from Provider Network

The following is an example of an MCO claim related to unfair exclusion from a provider network:

A corneal specialist, Dr. Smith, sued an ophthalmic-specific IPA, claiming that the IPA was operating under pressure to reduce utilization and excluded him from the IPA because he ordered too many diagnostic tests and made too many referrals to subspecialists. Dr. Smith alleged that the IPA defamed him and interfered with his ability to make a living after his termination by spreading rumors that he was senile, dysfunctional, incompetent, and no longer practicing.

The lawsuit against the IPA, its directors, and CEO included causes of action for termination of contract in violation of public policy, age discrimination, breach of contract, defamation, tortious interference with prospective economic advantage, blacklisting, and intentional and negligent infliction of emotional distress. It sought unspecified economic and punitive damages.

The IPA, which staffs the ophthalmic departments of two prestigious hospitals, denied Dr. Smith’s claims. The CEO refuted Dr. Smith’s allegations and stated that “Dr. Smith, like all physicians in the IPA, worked on the basis of annual contracts, renewable each year.” In light of the lawsuit, the CEO could not discuss the reasons for not renewing Dr. Smith’s contract.

The above scenario is based on an actual claim brought by a California pediatric gastroenterologist against a medical group. Although the specialties and corporate form are different, it is not hard to imagine such a claim being brought against an ophthalmic-specific group.

A physician’s exclusion from a program may trigger claims that economic or other concerns prompted the exclusion or wrongful termination from the program, resulting in a reduction in the physician’s potential patient market and earnings. In these cases, the peer review process can offer grounds for anticompetitive allegations, particularly if the peer review panel includes a competitor who may benefit financially from the denial of member status or removal of the physician from the panel. Given the need to include physicians practicing in the same specialty who can consider the quality of a physician’s care adequately, peer review panels provide fertile ground for these allegations. The risk is increased if a physician’s professional activities need improvement but are not grossly negligent.

Risk management tip: If a physician is to be excluded or removed from a panel, the MCO may wish to have an independent credentialing agency review the case and approve the proposed action. Concurrence of an independent agency improves the MCO’s defense against claims of antitrust or wrongful termination.

Vicarious Liability and Negligent Selection of Provider Claims

The following is an example of a claim brought by a patient-enrollee for vicarious liability and alleged negligent selection of a provider by an MCO:

An individual ophthalmologist and IPA are sued by the husband and child of a deceased patient who participated in an employer-sponsored health plan that directly contracted with the IPA for ophthalmic services. The lawsuit alleges that the patient’s death resulted from the ophthalmologist’s failure to diagnose a pituitary tumor, and the IPA was vicariously liable for its agents’ medical negligence. The patient’s lawsuit also includes breach of warranty and misrepresentation claims against the IPA, specifically citing the marketing materials of the IPA that stated, “We guarantee the highest quality of care and provide the best ophthalmologists in the Northeast.” The facts in the lawsuit further allege that the ophthalmologist who allegedly misdiagnosed the patient had never passed the ophthalmology boards and had been sued five times for medical malpractice.

An IPA spokesperson states that the ophthalmologist was acting independently and that it (the IPA) had no control over and set no guidelines on how to treat patients. Furthermore, the IPA states that the ophthalmologist went through a thorough credentialing process and that the credentialing committee had determined that the five lawsuits brought against the ophthalmologist were vicarious liability claims arising from his former partner’s care.

When there is an unfavorable outcome associated with health care provided by a physician, a patient may allege that the MCO was either vicariously liable and/or negligent in its selection of health care providers. Regarding vicarious liability in the above example, if it is found that the patient reasonably believed that the ophthalmologist was acting as an agent of the IPA, the IPA could be held liable for the ophthalmologist’s actions regardless of whether the IPA actually controlled his actions.

Risk management tip: To minimize vicarious liability exposures arising from an agency relationship, the IPA should eliminate any situations that create the impression of an employer-employee relationship and inform all patients that providers act independently and are not employed or controlled by the managed care system. Advertising and marketing often can create the impression that the ophthalmologist “works for” the managed care organization.

Regarding claims of negligent selection of a health care provider, when a patient is under the “custody” of a health care system, the patient relies on the system to monitor and supervise the quality of care provided. Courts have considered the limitation of a patient’s choice of physicians in a managed care system to be a form of custody. Through its credentialing and recredentialing procedures, the managed care entity arguably assumes a duty to members to ensure that panel physicians are not likely to provide negligent care. The plaintiffs alleging negligent selection in the above scenario must prove that the IPA knew or should have known with reasonable effort that malpractice was likely and that this negligence resulted in injury.

In this case, the IPA may be able to successfully defend itself by demonstrating that it carried out a thorough screening of the defendant ophthalmologist and his past claims history.

Even though its credentialing procedures may be adequate, the advertising claim that the IPA provided the “best ophthalmologists in the Northeast” leaves it open to possible claims of misrepresentation. The fact that one of its member-ophthalmologists did not pass the boards could become a relevant issue for a jury deciding if representations in the IPA’s marketing materials are accurate.

The Health Care Litigation Environment

As the country’s health care industry has moved rapidly toward managed health care, consumer groups, physicians, and other providers have complained that profits, rather than quality of care, too often drive health care decisions. Increasingly, entities such as MCOs and large physician groups and networks are the target of lawsuits.

In April 1997, an Orange County, California, jury awarded a family $10.9 million in a case against Friendly Hills Medical Group of La Habra. Friendly Hills, a large multispecialty group, allegedly failed to perform a diagnostic test on a woman who later died of cervical cancer. Evidence from doctors at three medical centers supported defense arguments that the patient’s cancer was incurable months before she first visited Friendly Hills for tests and treatment. However, the plaintiffs were able to attack the group’s record keeping and to characterize the service the patient received as “depersonalized.” After the verdict, one juror was quoted in the newspaper, “People are being herded through HMOs rather than receiving personalized service.”

Interestingly, no individual physicians were sued in this case, only the medical group. Plaintiff attorneys are using the public’s current negative perception of managed care to inflame juries. Basic problems with record keeping was the real issue in this case, but juries are being hypervigilant about patient management issues and are painting all groups of health care providers (HMOs, IPAs, group practices, etc.) with the same broad brush whenever a plaintiff’s attorney characterizes treatment as “mismanaged.”

Conclusion

Ophthalmologists who are forming corporate entities and partnerships in response to managed care ought to consider carrying D&O and E&O insurance. OMIC and the American Academy of Ophthalmology have developed a comprehensive insurance package that can protect against many of the exposures associated with ophthalmic MCOs. These specially designed D&O and E&O liability coverages can be purchased together or separately. Each policy offers a $1 million limit per claim and in the aggregate (including defense costs) and a $5,000 deductible for each claim. All policies are written on OMIC paper and are reinsured through CNA International RE of London. Contact OMIC’s Underwriting Department for further information.