Court Upholds Right to Sue MCOs and Anti-Retaliation
Provisions, Strikes Independent Review Process

By Ronald L. Scott

As efforts to pass a patientsí bill of rights law flounder in the U.S. Congress, the Court of Appeals for the Fifth Circuit rendered its opinion June 20, 2000 in Corporate Health Insurance Inc. v. Texas Department of Insurance. In this case, the federal district court had previously upheld a patientís right to sue managed care organizations with respect to the quality of medical benefits actually provided, but struck down provisions of a Texas law that allowed "independent review" of decisions denying medically necessary care. The district court held that suits may only be brought that challenge the quality of care received, not a benefit determination. See Court Upholds Right to Sue MCOs, but Independent Review Process Limited.

Texasís Health Care Liability Act (the "Act") became effective on May 22, 1997. The Act allowed patients to sue managed care entities that fail to meet an ordinary care standard for health care treatment decisions. It also created procedures for the independent review of health care determinations to determine whether they were appropriate and medically necessary. The Act also protected physicians from HMO-imposed indemnity clauses and from retaliation by HMOs for advocating medically necessary care for their patients.

The Court of Appeals upheld the district courtís opinion that the federal Employee Retirement Income Security Act of 1974 ("ERISA") does not preempt the Actís provisions allowing patients the right to sue their health plans for malpractice or negligent treatment decisions. ERISA preempts state laws where they "relate to" any employee benefit plan. The Court of Appeals found that "managed care providers operate in a traditional sphere of state regulation when they wear their hats as medical care providers." The Court noted that ERISA preempts malpractice suits against physicians making coverage decisions while administering a plan, but that ERISA does not insulate such physicians from accountability to state licensing agencies such as boards of medical examiners. The Court therefore found that Congress did not intend for ERISA to "supplantÖstate regulation of the quality of medical practice." In upholding the Actís liability provisions, the Court also noted that a suit for medical malpractice against a physician is not preempted simply because the services are arranged by a managed care organization and paid for by an ERISA plan. The Court therefore held that the liability provisions were within the regulatory reach of Texasís police powers.

However, the Court struck down provisions of the Act allowing for independent review of decisions by health plans to deny medical care. The Court found that the independent review provisions establish an administrative procedure for the review of denial of benefits, and bind ERISA plans to decisions made by the independent review organization. ERISA provides an administrative mechanism through which members of an ERISA plan may seek benefits required by the plan. Therefore, the Court held that the independent review provisions conflict with ERISAís exclusive remedy. In spite of the Courtís decision, some managed care organizations may still voluntarily agree to allow for independent review of denial of care decisions.

Finally, the Court overturned the district court's decision that had struck down provisions of the Act designed to protect physicians from HMO-imposed indemnity clauses and from retaliation by HMOs for advocating medically necessary care for their patients. See Two Important Physician-Protection Provisions Struck Down by Court. The Act provides that a health insurance plan may not remove a physician or health care provider from its plan or refuse to renew the physician or health care provider with its plan for advocating on behalf of any enrollee for appropriate and medically necessary health care for the enrollee. The Act further provides that a health plan may not enter into a contract with a physician, hospital, or other health care provider which includes an indemnification or "hold harmless" clause for the acts or conduct of the health plan. The Court held the anti-retaliation and anti-indemnification provisions "better preserve the physicianís independent judgment in the face of the managed care entityís incentives for cost containment" and is therefore the kind of "quality of care" regulation left to the states.

It is disappointing that the Court struck down the independent review process, intended to give patients a quick and easy way to resolve denial of care disputes without the expense of going to court or dealing with corporate bureaucracy. Hopefully, competitive pressures of the marketplace, a chance to resolve disputes out of court, and the threat of federal legislation will encourage managed care organizations to continue using the process voluntarily.