Casualty Actuarial Society SEMINAR ON RATEMAKING March 12, 2001

1. Casualty Actuarial SocietySEMINAR ON RATEMAKINGMarch 12, 2001 • Stephen C. Klein • BARGER & WOLEN LLP • 515 S. Flower Street, 34th Floor • Los Angeles, California 90071 • (213) 680-2800 • sklein@barwol.com

2. Patients’ Rights Liability Issues • Case Law Developments • Changes in Legislation • Pending Legislation

3. Recent Cases • U.S. Healthcare v. Bauman,193 F.3d 151 (5th Cir. 9/16/99) • New Jersey state court medical malpractice action removed to Federal Court on the basis of ERISA preemption and dismissal sought • US Healthcare sought to be held liable for negligent failure to authorize in-home visits by a pediatric nurse, which trial court found was preempted as an attempt “to recover benefits due” which are preempted by Section 514(a) of ERISA.

4. US Healthcare v. Bauman • Third Circuit disagreed that the negligence claim was an attempt to get benefits • Under Dukes v. US Healthcare, 57 F.3d 350 (1995), Court rejected contention that complaint raised claims regarding “rights under the terms of the plan” • No ERISA preemption

5. Recent Cases • Hull v. Fallon and Prudential Healthcare,188 F.3d 939 (1999) • Plan participant sued administrator for failure to order stress test - vicarious liability asserted against the plan • Case was removed on grounds of claimed ERISA preemption and dismissal sought

6. Hull v. Fallon and Prudential Healthcare • District court found claims preempted as the administrator was not acting as a treating physician, thus no cognizable claim for malpractice could be asserted • 8th Circuit agreed holding that “[b]ecause the claims related to administration of benefits, they fell squarely within the scope of section 502(a) for which there is complete preemption

7. Recent Cases • Pegram v. Herdrich, 530 U.S. 211 (2000) • Claims asserted against Carle Health Insurance Management on the basis of breach of fiduciary duty under ERISA • Plaintiff alleged that provision of medical services under the terms Carle HMO plan, rewarding its physician owners for limiting medical care, entailed an inherent or anticipatory breach of fiduciary duty, since such terms created an incentive to make decisions in the physicians’ self-interest rather than the exclusive interest of plan participants.

8. Pegram v. Herdrich • District court held Carle was not an ERISA fiduciary • 7th Circuit Court of Appeals reversed holding that Carle was acting as a fiduciary when its physicians made the challenged decisions and that Herdrich’s allegations were sufficient to state a claim • United States Supreme Court reversed finding that no fiduciary duty should be imposed on an HMO because of its structure

9. Pegram v. HerdrichHighlights • All HMOs involve rationing of care • Courts are not in a position to differentiate HMOs • Two types of decisions made by physicians acting on behalf of the HMO: • “eligibility decisions” and “treatment decisions” • Congress did not intend HMOs to be treated as a fiduciary to the extent it makes eligibility decisions acting through its physicians • Questioned value to plan participant of having this kind of ERISA fiduciary action

10. Recent Cases • Maio v. Aetna - US Healthcare, 221 F.3d 472(3d Cir. 2000) • RICO class action for providing an inferior plan compared to what was marketed • Third Circuit agreed with the District Court’s dismissal because plan participants could not establish that they suffered a cognizable injury to business or property - essential to a RICO claim

11. Maio v. Aetna - US HealthcareHighlights • Plaintiffs failed to allege medical injuries, that they received inadequate or inferior care or sought but were denied necessary care as a consequence of the structure of the HMO plan and its plans and practices • Gravamen of claim -- what was delivered was not worth as much as what was marketed • RICO requires injury to business or property by the conduct constituting the violation • Because complaint admits no adverse medical consequence, there can be no proof of overpayment

12. Legislative Changes • Managed Health Care Insurance Accountability Act of 1999 • California Civil Code §3428 • “FOR SERVICES RENDERED ON OR AFTER JANUARY 1, 2001

13. Civil Code §3428 (a) • Health care service plan (H&S §1345) “shall have a duty of ordinary care to arrange for the provision of medically necessary health care service to its subscribers and enrollees, where the health care service is a benefit provided under the plan and shall be liable for any and all harm legally caused by its failure to exercise that ordinary care when both of the following apply:

14. Civil Code §3428 • (a)(1) The failure to exercise ordinary care resulted in the denial, delay or modification of the health care service recommended for, or furnished to, a subscriber or enrollee; • (a)(2) The subscriber or enrollee suffered substantial harm. • (b)(1) Substantial harm means loss of life, loss or significant impairment of limb or bodily function, significant disfigurement, severe and chronic physical pain, or significant financial loss

15. Civil Code §3428 • (b)(2)Health care services need not be recommended or furnished by an in-plan provider, but may be recommended or furnished by any health care provider practicing within the scope of his or her practice • (b)(3)Health care services shall be recommended or furnished at any time prior to the inception of the action, and the recommendation need not be made prior to the occurrence of the substantial harm

16. Civil Code §3428 • (c) Health care plans are not health care providers • (d) Health care plans cannot seek indemnity from a provider for liability imposed under subdivision (a). • (g) This section does not create any new or additional liability on the part of a health care service plan or managed care entity for harm caused that is attributable to the medical negligence of a treating physician or other treating health care provider.

17. Civil Code §3428 • (h) This section does not abrogate or limit any other theory of liability otherwise available by law • (j) Damages recoverable for a violation of this section, include, but are not limited to, those set forth in Section 3333.

18. Civil Code §3333 • Section 3333, referred to in Section 3428, contains the MICRA (Medical Injury Compensation Reform Act) limitations for noneconomic damages against a health care provider. It also recites the damages available for tort as being “for the breach of an obligation not arising from contract, the measure of damages, except where otherwise expressly provided by this code, is the amount which will compensate for all the detriment proximately caused thereby, whether it could have been anticipated or not.”

19. Civil Code §3428Legislative Comment • Health care service plans and all other managed care entities declared to be in the business of insurance in this state per McCarran-Ferguson Act • Nothing in the Managed Health Care Insurance Accountability Act imposes the regulatory requirements of the Insurance Code on health care service plans regulated by the H&S Code • Purpose of these provisions is to avoid ERISA preemption

20. Civil Code §3428Background • California Act modeled after Texas statute • Texas statute was designed to skirt ERISA preemption by providing damages for quality of care violations, which Courts in Texas have upheld as within the state’s province instead of damages for bad faith and other coverage disputes which are clearly preempted by ERISA • Provides a direct cause of action against the HMO

21. Civil Code §3428Background • Proponents assert status quo maintained as MICRA neither expressly included or excluded, leaving the matter to be determined by the courts on a case-by-case basis • Proponents argue (1) that if responsible agent’s liability is capped, the courts will likely find that the principal’s liability is capped and (2) where the principal directs or ratifies the actions of the agent, the principal’s liability it its own and public policy may dictate that it not be limited

22. Civil Code §3428Opponents Concerns • Makes health plans liable for physician malpractice • Undermines MICRA • Erodes physician autonomy • Use of civil actions threatens arbitration • Will increase health care costs

23. California Association of Health Plansstated • “SB 21 allows for lawsuits with unlimited economic damages, unlimited pain and suffering damages and unlimited punitive damages. Multi-million dollar awards, such as the $120 million dollar award against one health plan, would divert important health care resources out of health care delivery and drive up health care premiums. If health plans are subjected to open-ended damage awards, they will become the “deep pockets” of the health care delivery system, vulnerable to every legal assault and unable to maintain affordable health care premiums for employers and individuals.”

24. PENDING LEGISLATION • Proposed amendments to Public Health Service Act, ERISA and the Internal Revenue Code of 1976 “to protect consumers in managed care plans and other health coverage” • The PATIENTS’ BILL OF RIGHTS

25. The Patients’ Bill of Rights • Title I -- Improving Managed Care • Grievance and Appeals • Access to Care • Access to Information • Protecting the Patient-Doctor Relationship

26. The Patients’ Bill of Rights • “Claim for Benefits” is defined as any request for coverage (including authorization of coverage), for eligibility, or for repayment in whole or in part, for an item or service under a group health plan or health insurance coverage • “Denial” means a denial or a failure to act on a timely basis upon, in whole or in part, the claim for benefits and includes a failure to provide benefits (including items and services) required.

27. The Patients’ Bill of Rights • Section 119, dealing with coverage for individuals participating in approved clinical trials, provides that a health plan or insurer may not deny the individual participating in a clinical trial or limit or impose additional conditions on the coverage of routine patient costs for items and services furnished in connection with participation in the trial and may not discriminate against the individual on the basis of the enrollee’s participation in such trial. • An individual is qualified for clinical trial purposes is a participant or beneficiary in a group health plan, or who is an enrollee under health insurance coverage that has a life-threatening or serious illness for which no standard treatment is effective, is eligible for the clinical trial in accordance with its protocol and the trial offers meaningful potential for significant clinical benefit for the individual.

28. The Patients’ Bill of Rights • Subtitle D, Protecting the Patient-Doctor Relationship, provides protection for the health care professional in his or her communication with the patient about treatment. Section 131 prohibits any contract between a health plan or insurer and a health care provider that would restrict a health care professional “from advising such a participant, beneficiary, or enrollee who is a patient of the professional about the health status of the individual or medical care or treatment for the individual’s condition or disease, regardless of whether benefits for such care or treatment are provided under the plan or coverage, if the professional is acting within the lawful scope of practice.”

29. The Patients’ Bill of Rights • Section 301 of the PBR adds Section 714 to ERISA, entitled Patient Protection Standards • In essence, it provides that group health plans and health insurance issuers offering group health insurance coverage in connection with a group plan shall comply with the Patients’ Bill of Rights Act

30. The Patients’ Bill of Rights • Per §302, ERISA §514 is amended • Preemption not to apply to certain actions arising out of provision of health benefits • Limitation on punitive damages - applies in certain instances • State law supersededin limited circumstances

31. CONCLUSIONS • Judicial erosion of ERISA preemption is occurring in limited cases giving rise to greater liability by health care plans, but Federal Courts do not think ERISA can be interpreted to deal with challenges to the business of HMO Structure • Changes in State law, such as California’s Managed Health Care Insurance Accountability Act of 1999, pose uncertain liabilities from direct action against health plans • Pending Federal legislation could dramatically impact ERISA preemption and health plan liability