Are Hm Os Crying Wolf?

They say costs will soar if patients can sue them

As the battle heats up in Washington over various versions of a Patients' Bill of Rights, one idea is drawing the most fire. Managed-care organizations are apoplectic over proposals that would give patients the right to sue them for malpractice. Unlike doctors, HMOs and other managed-care companies are largely protected from such suits now.

An unusual alliance of the American Medical Assn., trial lawyers, and consumer groups says HMOs should be held responsible if a patient suffers wrongful injury or death because a doctor-prescribed medical treatment was denied. The managed-care industry has sounded the alarm, saying such a right could lead to skyrocketing health-care costs. But various studies suggest the cost would be minimal. And such suits might encourage HMOs to make better health-care decisions.

ERISA'S EMBRACE. HMOs can be sued for breach of contract, but their malpractice liability is limited by the Employee Retirement Income Security Act of 1974 (ERISA), originally meant to shield employers from suits related to employee benefit plans. Last September, Texas became the only state to allow patients to sue their managed-care providers for malpractice. In response, Texas' managed-care industry predicted huge costs from a spate of multimillion-dollar suits. Ten months later, not one lawsuit has materialized. Nevertheless, Scott & White Health Plan, a large Texas HMO, is making predictions of higher fees come true: It announced a 15% hike in premiums for September and blames the increase largely on costs related to the new law.

The size of the rate hike is surprising, given that patient complaints in Texas have been far below expectations. Before filing suit, patients must appeal to an independent review board. Originally, the Texas Insurance Dept. predicted 4,400 complaints would be received during the first year of the program, which started last November. But by mid-June, only 109 patients had requested review of treatment-denial decisions.

HMOs argue that it's too early to say how many patients will complain. "Once enough time has passed by, we expect to see a dramatic pickup," says Jeff Kloster, general counsel for the Texas Association of Health Plans. But three studies done since 1990 in New York, Colorado, and Utah suggest otherwise. Each found that the number of actual cases of medical negligence is some 10 times higher than the number of malpractice suits filed. There's also a 1997 study by Tulane University professor Dahlia Remler, which looked at 2,000 doctors treating patients enrolled in managed care. It found that the HMOs reversed their initial denials from one-half to two-thirds of the time. The final denial rate of doctor recommendations was no more than 3% overall, and as low as 1% for hospitalization and surgical requests.

"DIFFERENT DYNAMIC." No matter, says the American Association of Health Plans, a Washington-based HMO trade group. It commissioned a study this year by the Barents Group of KPMG Peat Marwick that estimates premiums for consumers will rise by 2.7% to 8.6% if HMOs lose their malpractice exemption. The increases would cover the HMO's own malpractice insurance premiums as well as what Barents assumes will be an increase in the number of medical procedures approved by HMOs to avoid lawsuits. "A different dynamic takes effect if all of a sudden we are exposed to this dramatically broadened liability," says Richard I. Smith, AAHP's vice-president for policy.

Indeed, Scott & White President David Morehead says a July survey of its medical directors found that to avoid suits, they are approving more services faster. "A lot of care that is marginal or questionable is being approved that wouldn't have been approved prior to that law," he says. But Fort Worth attorney George P. Young says Scott & White may now just be "providing coverage that they were supposed to be providing anyway."

Reports commissioned by non-HMO groups are far less alarmed about malpractice suits. A study by Coopers & Lybrand for the Henry J. Kaiser Family Foundation, released on July 6, looked at the records of three large government health-care groups not exempt from lawsuits. All three had negligible rates of litigation, ranging from 0.3 to 1.4 cases per 100,000 enrollees per year.

Coopers & Lybrand won't stick its neck out by estimating costs, but other researchers are less cautious. A study by Muse & Associates for the consumer lobbying group Patient Access to Responsible Care Alliance (PARCA) estimates that the average national premium would rise from zero to 1.2% if HMOs could be sued. The high end of that range assumes increased litigation, which would require malpractice insurance premiums for the providers, and legal and damages costs. However, the study's authors say potential savings could be achieved if health plans permit medically necessary procedures they might otherwise deny, thus limiting the higher costs of litigation.

Another study released in July by the Congressional Budget Office is only slightly less optimistic. It estimates that ending the liability limits would increase HMO premiums by an average of 1.2% to 1.4%, assuming that their liability costs would rise by 60% to 75%. That takes into account all actions an HMO might take to limit risk, including buying malpractice insurance and changing its review and coverage criteria.

The problem with all these studies is that it is hard to predict future behavior. Patricia M. Danzon, professor of health-care systems at the University of Pennsylvania's Wharton School, says many people don't turn to the courts because they don't know they can. "A national standard for liability that's received a lot of publicity will bring out a much greater volume of suits," she says. It could also lead to much more careful assessments of doctors' recommendations by HMOs.

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