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Organization & FinancingSAMHSA Managed Care Initiative Training SessionsNovember 1997
Date: November 13, 1997
Title: Legal and Ethical Issues in Managed Behavioral Health Care
Speaker: John Petrila, J.D., Chairman
Summary Mr. Petrila presented a number of legal cases decided in the last several years which suggest an evolution in mental health law and point out potential trends for future litigation. His presentation was based on two premises: (1) the pace of judicial and legislative responses to market events in managed care have been outstripped by developments in the market, and (2) there has been a significant change in the way mental health services are financed and delivered. He provided some background for both observations. The legal and ethical issues that applied to mental health systems 10 or 15 year ago were topics such as the right to treatment, the right to refuse treatment, and civil commitment. These issues are considerably less relevant today than they were previously. Today, in many states, the public mental health system is difficult to identify, due to the blurring of the lines between public and privately financed systems, and because very few people are in publically-operated services. It is only in the last few years that courts and legislatures have looked for ways to respond to some of these changes. Part of the hesitancy of the courts in their response is attributable to a general acceptance or devotion to principle of privatization. This has resulted in a significant amount of ambivalence on the part of legislatures, in particular, in responding to what has been described as abuses that have come up in the context of managed care. Mr. Petrila provided some data from the National Association of State Mental Health Program Directors (NASMHPD) Research Institute to demonstrate this change in public mental health systems. Their data showed that nationally there were 14 state mental health hospitals closed between 1970 and 1990 and 37 closed since 1990. In addition, state mental hospitals are increasingly inhabited by forensic clients who are admitted through the criminal courts, resulting in the hospitals' diminished capacity to treat patients from other sources. This will have great significance when states begin to grapple with the integration of their state hospital systems in managed care settings. The situation is similar with free-standing state mental health agencies. In 1985 approximately 24 states had such agencies; by 1997, the number had been reduced to 13. This suggests that many state mental health agencies no longer have much input into what is happening in their managed care systems, and that the Medicaid official is often the most important state public health official. Another significant shift in the mental health arena is demonstrated by data indicating that by 1993, for the first time, slightly over 50 percent of state expenditures on mental health were spent in the community. Simultaneously, managed behavioral healthcare has become a very big business. For example, Magellan, which two years ago was simply thought of as an investment house, now has a market share of 114 million covered lives in managed behavioral healthcare. This has serious ramifications for states trying to deal with contracted mental health services in that they are dealing with large, multi-focused organizations. As a result, many state health commissioners are hesitant about contracting with private companies, and may not believe that the providers have the infrastructure in place to successfully meet the parameters of the contracts. Mr. Petrila then presented cases that served as examples of liability issues involving providers, payers, and the government as a regulator. There are several theories of litigation that have been applied to the new environment of managed care, which provide the core of legal response to the current situation. Those against the practitioner include: abandonment; malpractice; duty to appeal adverse decisions; and informed consent. Theories against payers include: breach of contract, which has been the major type of litigation to date; tortious interference with clinical relationships, where the payer makes it impossible for providers to act according to their clinical judgement; and failure to disclose/informed consent. Mr. Petrila suggested that anticipated future trends include an increase in litigation in the area of disclosure, and the stretching of the doctrine of informed consent from its current form-where it is mainly devoted to clinical issues-to encompass economic issues, such as financial incentives. Mr. Petrila listed some areas of potential legal vulnerability that providers can face when they become involved with managed care systems. These include: inadequate rates for services; too much/too little volume; acuity (i.e., degree of "sickness" of the patient); lack of coordination of care; misrepresentation of services (which he anticipates will be another major litigation issue); and abuse. Many of these potential vulnerabilities flow from the conditions of the contract. In the legal cases today, there is much interplay between the ethical principles of various professions and the courts' views of which values ought to be preeminent in the hierarchy of emerging legal and ethical values. The American Medical Association's statement on Medical Ethics, which is shared in some manner with most other professions, is becoming increasingly important in terms of civil litigation. In essence, it states that the welfare of the patient takes priority over any economic interest of the hospital. Given the goals of managed care, this principle now takes on a higher level of significance than in previous fee-for-service system environments. Mr. Petrila then provided several examples of court rulings involving providers that influence the current delivery of healthcare in managed care settings. Wickline v. State of California (1986) was the first managed care case brought to litigation. In this case, the court stated that "a physician who complies without protest when his medical judgement dictates otherwise cannot avoid his ultimate responsibility for his patient's care." The court suggested that the physician did not follow the appeals process set forth in his contract, in order to protest the discharge (in four days) of his patient, prior to the provider's own clinical determination (of eight days). This case stated that the physician, by failing to adhere to the terms of the contract, could not shift his liability to someone else. Wilson v. Blue Cross of Southern California (1990) was the first psychiatric managed care case. Its significance lies in the fact that it "breached the wall" between payment and treatment. The court suggested that insurer's managed care company's liability may be assessed, if the processes are so egregious they contribute to an adverse outcome. The process of the provider telling the patient he must be discharged, because the insurer would not pay for continued care, was determined to cause the poor outcome (in this case, suicide). Hughes v. Blue Cross 215 Cal App. 3d 832 (1989) was another psychiatric case where the court found that the application of "medical necessity" was so inconsistent with prevailing community standards that Blue Cross was liable. This principle, that medical necessity generally must be consistent with prevailing professional norms, is the basis for several bills currently before Congress, as well as a number of state legislative initiatives. Muse v Charter Hospital (1996) illustrates the current court position on provider obligations. It also demonstrates the conflict between payment and practices and how policy can interfere with medical judgement. The court agreed with the principle that if money contaminates clinical judgement, the provider is at significant risk for liability. It upheld the findings of negligence on the ground that Charter "had a policy or practice that required physicians to discharge their patients when their insurance expired and that is policy interfered with the exercise of medical judgement," in this case by discharging the patient before the results of a blood test were available. Mr. Petrila then reviewed the key points of the Employee Retirement Income Security Act (ERISA). ERISA, passed by the Congress in 1974, was designed to provide protections for employee benefit packages and originally was viewed as a pro-employee piece of legislation. It has become, however, a barrier to cases in commercially-financed plans, primarily due to its exemption from any state laws which "relate to any employee benefit plan." As a result, most litigation that involves an ERISA-qualified plan (i.e., self-insured with other qualifications, but self-insured is the core requirement) that ordinarily would be filed in state under a malpractice claim automatically reverts to Federal court and becomes a dispute about the benefit that was denied in the contract provision (essentially a breach of contract for benefits). This change in scope affects the compensation awards, as there also are different caps in Federal court. For example, since the scope of the litigation is bound to the terms of the contract-only the cost of the benefit that was denied can be recovered. The following cases were cited involving the ERISA statue and managed care:
Several cases in 1995 suggested that some malpractice claims may be permitted to proceed in state court against an ERISA plan. This is significant because if areas of ERISA statues continue to erode, the result will be increased litigation against managed care companies in state court, under malpractice laws, with different levels of recovery available. One example is Pacificare of Oklahoma v Burrage, which also determined that HMOs which combine treatment and payer functions may be tried in state court without an automatic removal to Federal court. This demonstrates some erosion in the principle that all ERISA cases must go Federal court. Another case, Dukes v US Healthcare, 57 F. 3d. 350 (1995) reached a similar conclusion, stating that quality control of benefits is ordinarily state regulated and, therefore, malpractice claims against an HMO are not preempted. This suggests that there are some instances where the court is willing to let ERISA cases proceed on the state level. Other recent cases have been in the area of fiduciary duties. Shea v Esensten, 107 F. 3d 625 (1997) stated that an HMO must disclose the financial incentives that discourage a treating doctor from providing essential health care referrals-in this case referring to a specialist-and not to do so is a breach of ERISA's fiduciary duties. This is a strong statement suggesting that informed consent includes an understanding of the financial incentives that are a part of the plan's structure, and how they may influence physician behavior. It is expected that this issue will spark much litigation against managed care in the future. Mr. Petrila suggested that how the issue is tried and how the findings are implemented in managed care practices will have significant impact on the delivery of all health care services . Crocco v XEROX, 969 F. Supp 129 (1997) concerned the quality of medical review. The court determined that the denial of benefits ( in this case, when the patient was granted a grounds pass, benefits for psychiatric hospitalization were denied) was based on only a "cursory and one-sided review" that did not meet the requirements of ERISA. The reviewer did not view the entire chart, speak to the patient or therapist, or ask for third party advice. A large portion of the foundation for this case was based on the concept of community standards of medical care. In this case, the lack of adherence to community standards of medical care was overwhelming. It is, however, generally difficult to illustrate that the quality of a review is flawed. For this reason, there are very few of this type of cases, although the importance of quality of review should not be overlooked. Taken together, these cases provide evidence that, while it still stands as a barrier to state litigation, ERISA is beginning to erode in some areas. As governments begin to divest themselves of much of the responsibility of health care delivery, the question that arises is, can government ever be held accountable? Several cases citing examples of government as the defendant suggest that it can. Burns-Vidlak v Chandler 939 F. Supp. 765 (1996) is one. A Hawaiian managed care company, QUEST, determined that people with blindness and other disabilities would not be permitted to enroll in their plan. The Plaintiffs stated that this violated the American with Disabilities Act (ADA) and the Rehabilitation Act. The court ruled that, despite the fact that the Federal government had approved the waiver for the plan implementation, Congress (through the legislation) had mandated nondiscriminatory treatment that must be upheld. This is an example of a state, as a purchaser, being held liable. Grijalva v Shalala 946 F. Supp. 747 (1996) was a recent case where the Secretary of Health and Human Services argued that she was exempt from litigation concerning adequate notice of the denial of claims by Medicare HMOs in the state of Arizona. This was based on the belief that because the HMOs operating the state's Medicare system were private entities, they were beyond the regulatory scope of the Federal government. The court rejected that claim, stating that government (in this case Federal) has continuing core oversight responsibility, regardless of the contracting mechanism that is used. From an advocacy perspective, this case may be helpful in attempting to prove state liability in issues concerning purchase and regulation/oversight of services. The final cases provide examples of legislative responses to managed care issues, initiated through advocacy or prompted by case law. These proposed statues would impose new core principles in the structure of managed care contracts. The Texas SB 386, Chapter 88: Health Care Liability
The Health Insurance Bill of Rights Act of 1997 (Dingell, H.R. 820) requires:
The Managed Care Accountability Act of 1997 (Stark, H.R. 1749) requires:
Patient Access to Responsible Care Act of 1977 (Norwood, H.R. 1415) requires:
Question and Answer Session
17: What are the trends concerning state officials? They used to contract with the managed care companies to deliver the services and do the administration. Now I think the trend is more to contract with the managed care company to do the administration and to use the service delivery system. I think states are getting smarter in terms of how to do that because they were running into the problem that the managed care company didn't have expertise in service delivery, but viewed themselves more as managers and administrators. So that is the question-how do we impact on the administration of the program as well as support the community-based delivery system which may still be under the direction of the mental health agency? A: Your observations are true. The state has become wary of managed care due to the ligation concerning the procurement process. In addition, many mental health commissioners may or may not control what occurs in their states concerning contracting decisions. For these reasons I feel that the person to lobby to establish or maintain an impact on program administration and support community-based systems is often the Medicaid Director and not the state mental health official. Q: The issue always seems to center around what was the effect of the decision. However, the "tension" between the provider and the process revolves around the fact that while the provider can provide all the care he wants, the payer makes it clear they will only pay for "X" amount. The effect of this is that the patient will leave the hospital, rather than incur bills he cannot afford. The case law doesn't seem sufficiently compelling to make that part of the scenario change. 1: That is true. The cases to date have had minimal effect on what you just described. ERISA has been a major barrier to the development of quasi-malpractice cases coming out of the set of transactions you describe. I don't believe that the courts in this environment will have anywhere near the impact in public mental health systems they had-for example in the 70s with right to treatment litigations. There are some principles emerging that will be useful, particularly around fiduciary responsibility. To a degree they will be antidotes; they will not necessarily be traditionally imposed. The courts have been unsympathetic to the argument by practitioners that money or the lack of money "made me do it." The courts' view has been that your obligations as health providers transcend your financial interests. Q: In terms of medical necessity, I'm interested in how you would determine what the "prevailing community medical standards" are? 1: If it were an individual case, such as the case that I described, I would do it exactly as they did, by bringing in expert witnesses. This case (Hughs v. Blue Cross), however, was an egregious case on its facts. There are other questions, such as, are there other strategies that can be employed both at the time that the contract is written and in its administration? For example, Sarah Rosenbaum's work suggests that there are variations in the definition of "medical necessity,"and definition is an area that warrants more attention. There is case law and soon there will be legislation that uses language similar to this, and so this is a potential wedge issue. Q: Following the concept of medical necessity, what about the issue where the physician knows a wide range of options, but chooses to tell the patient only the one or two they think they will be covered by their plan? A: This brings up two types of issues. One are the gag rules-which largely are becoming vestigial as they have been outlawed by courts in states and Congress. The other is the notion of general disclosure at the start of the treatment relationship and what is the extent of the economic parameters bound to treatment that should be included in the discussion. There are some cases that suggest some sympathy on the part of courts to arguments premised on the fact that patients received too little information about the financial landscape to make an informed decision concerning their treatment. I believe there will be continued and increased activity in this area of informed consent. Q: Aren't there companies that are exempt from coverage under ERISA? A: Yes. To be covered by ERISA, a company must be self-insured, and meet other requirements under that statute. Not all commercial or all employee-based plans are ERISA qualified-self-insured is the key requirement. Q: Do you think the finding of the Shalala case will cause states and counties to rethink what they do when they "contract away" health care responsibilities? A: One of the things that may cause some states to rethink what they do is the Supreme Court's case that was decided this year on immunity of private prison guards. There are issues of potential liability that may eventually cause states to think about how much responsibility they give to private parties. I don't see some of these cases having a huge impact on states. States right now are thinking mostly about procurement processes- if they think about legal issues in managed care. Not until there is a managed care equivalent of a "right to treatment" ruling will the landscape change in terms of the state's role.
Question and Answer Session
17: The handout shows that in 1993 state expenditures for state hospitals accounted for 49.5% of their budgets, and community mental health centers accounted for 50.5% of their budgets. How does that reflect on Medicaid expenditures? 1: The percentage of state monies devoted to mental health has declined over the last decade. Medicaid has increased, but non-Medicaid state expenditures generally have declined as a percentage of overall human service spending. 17: How are the states' responding to the enforcement of Medicaid regulations in the area of mental health services and contracted managed care? 1: If the state violates its duties under their Medicaid contracts, the Federal government can legally force the states to comply. There is, however, a lot of leeway given to the states within the boundaries of the Medicaid regulations. As a result, the Federal government has not yet used all its powers to force states to monitor the implementation of Medicaid contracts and oversee and regulate the process. 17: In Wilson v Blue Cross, the plaintiff sued Blue Cross of Southern California, and not the physician. Could the physician have been sued? 1: The reason the physician was not sued was because he had a good relationship with the family; they liked him, although, in reality, he was liable. 17: Could you comment on the American Psychological Association case in New Jersey? 1: Briefly, the Association is suing a large managed care organization arguing that the application of the "at will arbitration" clause for M.D. panels is arbitrary. It has had its struggles, but has survived the usual legal hurdles with about 40 percent of the case still intact. It is being held in Federal court in New Jersey under ERISA. 17: Comment on the abuses in private psychiatric hospitals in Florida. 1: This demonstrates the tremendous abuse that occurs in an invisible manner-where mental health law hasn't yet penetrated. There were examples of judges who were given a "bounty" to send individuals to certain private hospitals for the purpose of receiving state reimbursements. Psychiatrists in nursing homes also were "rewarded" for committing the residents, with no medical reasons, to private psychiatric hospitals. 17: In Grijalva v Shalala, although it was the state of Arizona who was operating the Medicare system, the Federal government was found liable. What if the state had given that responsibility to a county or city? 1: There are precedents for county and city litigation, however, there remains a residual responsibility for care and other obligations of the state that cannot be assigned away. I anticipate that other advocates will follow this theory. Although most states are good at regulating, there most likely will be litigation which holds the state responsible as a regulator. In the 1970s, the states acted as providers of care; now they oversee and regulate and this brings additional (new) responsibilities. 17: Do you see mental health and substance abuse parity issues as an area for potential litigation? 1: Parity, in my opinion, is largely of symbolic importance. It will be interesting to see if there is a way to enforce it or if employers will endorse it strictly for economic reasons (or refuse to endorse it). It may be a way station along the road to excellent health care, however, the issues I'm expecting to emerge are how to administer such programs and how to define the exceptions from the statues that are established. 2: Litigation in managed care is often based on medically "adverse events," such as a heart attack. Is there any information on the use of psychiatric adverse events, such as suicide? 1: Not that I've found. The nationwide surveys currently being conducted by SAMHSA may prove interesting and useful on this subject. 17: What part will the right to community mental health care play in the context of managed care? 1: Community treatment cases that are brought under state statutory claims will encourage the merging of services with managed care organizations. 17: Who is liable if the quality of care of a substance abuse program, for which responsibility that has been passed from the Federal government to the state to the local level, is found inadequate? 1: Primarily the practitioner for the quality of care and the county or state for oversight responsibility. The Federal government is fairly immune, except in cases involving Medicaid, which is recognized as a Federal program.
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