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  • Liability Exposure of Providers
  • Vicarious Liability of Network/MCOs
  • Direct Liability of Network/MCOs


  • Direct Liability of Network/MCOs

    Direct Corporate Liability of Network/MCOs

    Under the theory of corporate negligence, a network/MCO may be liable for its own actions that contributed to a patient-memberís harm. Liability exposure pursuant to this theory can emanate from several network/MCO functions: (1) the selection, supervision, and retention of network/MCO providers; (2) UR activities; and (3) the development of financial incentives and cost-control programs. Typically, when a patient-member brings an action against a network/MCO, the underlying cause of action is a medical malpractice claim. At present, there is an inconsistency in the law as to whether the corporate negligence claim against the network/MCO is "severable" from the underlying malpractice claim. This differentiation is not insignificant; if the case involves an ERISA-regulated plan and the court finds that the corporate negligence claim is "related to" the administration of the health plan itself, the case will be preempted by ERISA. If, however, the court finds that the claim involving corporate negligence is one based on the network/MCOís exercise of medical judgment rather than administrative authority, ERISA arguably would not apply.

    Some courts have found that claims alleging negligent credentialing, negligent UR, and negligence in designing financial incentives do relate to the administration of a health plan and are therefore preempted. However, courts are growing increasingly uncomfortable with this position, as the distinction between negligent treatment by a network/MCO provider and the injury caused by an administrative denial of otherwise necessary care becomes more equivocal. Additionally, many State legislatures have proposed laws imposing upon MCOs potential liability for injuries stemming from negligent treatment. Thus, it is possible that, in the future, liability exposure for the following network/MCO functions may increase.

    Credentialing Liability

    Credentialing is the process of investigating and evaluating provider applicants who want to obtain or renew network/MCO participation status. The purpose of credentialing is to ensure that participating providers are competent and qualified to provide medical care. To the extent that they are not preempted by ERISA, claims based on negligent credentialing are well recognized. In the context of managed care, the duty to properly credential arises from the restrictions imposed by network/MCOs on a patient-memberís choice of provider. Courts have held that there is a foreseeable risk of harm to a patient-member if the network/MCO fails to conduct a reasonable investigation of providersí credentials. The less choice the patient-member has in choosing a provider, the higher the standard of care a network/MCO must exercise in selecting participating providers. The duty to credential is also triggered by gatekeeper systems in which primary care physicians have discretion to determine what care will be provided to a patient-member, whether the patient-member will have access to specialty care (often mental health and substance abuse treatment fall into this category), and whether a UR decision will be appealed.

    Network/MCOs cannot necessarily rely on the credentialing performed by a single network participant, such as a hospital. At least one case has suggested that the duty to credential providers is nondelegable. Additionally, the credentialing process should extend beyond verification of licensure and hospital admitting privileges to include a thorough review of provider qualifications; the network/MCO should verify all the information supplied by a provider as part of the application process. Finally, reappraisal of providers should be conducted as part of a recredentialing process within specified time frames. As noted below, the National Committee for Quality Assurance (NCQA), which accredits MCOs, has promulgated new credentialing standards for mental health MCOs. While only some States require certain network/MCOs to obtain NCQA accreditation, accreditation is increasingly becoming a marketplace requirement for capitation contracting. Compliance with these standards has the additional benefit of being a potential defense to future claims alleging negligent selection/retention of providers.

    Liability for Utilization Review

    Utilization review is a process through which a third-party payor evaluates the medical necessity of a course of treatment. UR generally is conducted either prospectively or concurrently but can also be performed retrospectively. In prospective review, the payor determines whether to pay for treatment before the treatment is initiated. In concurrent review, UR monitors the course of treatment, denying treatment for additional care if it decides that continued treatment is not warranted. Retrospective UR is conducted after treatment has been completed, determining whether the care rendered was appropriate and whether it will or will not be covered. A network/MCO may either conduct UR itself or contract with a utilization review organization to provide these services. Liability for UR can arise from several sources, including failure to gather sufficient information before making a decision as to medical necessity, failure to initiate a meaningful dialogue between UR personnel and the treating provider, and failure to issue a timely UR decision.

    Courts have recognized that network/MCOs have a contractual right to form an independent determination of necessary medical expenses and that managed care entities need not defer this decision to the treating physician. However, to the extent that the conduct of UR affects medical decision-making, potential liability exposure exists. At least one California case has suggested that third-party payors can be held legally accountable when medically inappropriate decisions result from an arbitrary or unreasonable decision to deny a request for care. In this case, a providerís request for authorization for an extension of a Medicaid patientís hospital stay was denied. The patient ultimately had to have her leg amputated, allegedly due to the premature discharge. The court found that the MCO was not liable because the provider had not appealed the adverse UR decision. In a later California case, however, the same court held that the language regarding a providerís duty to appeal was dicta, and that the holding of the prior case was specifically limited to the factual context of a public payor. Therefore, the court reasoned, its holding could not be extended to apply to cases involving patients insured under a private sector insurance policy. Notwithstanding this finding, the court held that where a UR employee refused to authorize additional days for psychiatric inpatient treatment, whether the conduct of a UR contractor was a substantial factor in a patient-memberís suicide was a question of fact precluding summary judgment. In other words, as a matter of law, the MCO in that case could have been held liable for denying the additional care requested by the provider if such denial was found to be a contributing factor to the patient-memberís suicide.

    To limit liability exposure, network/MCOs should (1) ensure that personnel in charge of UR decisions are qualified to make those decisions; (2) ensure that UR claims analysts are not given inappropriate incentives to deny benefits and have no preset quotas concerning the denials of benefits; (3) have in place automatic and efficient appeals procedures to ensure that benefit denials are appropriate; (4) ensure that patient-members are fully informed of the reasons that benefits are denied and of their right to appeal the decision and the mechanism for doing so; and (5) include in provider contracts provisions that patient-members and providers are free to proceed with medical treatment despite the denial of benefits.

    Liability Created by Financial Incentives and Cost-Containment Measures

    Network/MCO financial incentives are designed to encourage providers only to render care that is necessary and appropriate. When a network/MCO designs or administers cost-control systems in a manner that compromises the quality of medical care rendered or affects medical judgment, the network/MCO may be directly liable. Patients seeking to hold a network/MCO liable under this theory, however, often face evidentiary problems in attempting to substantiate the link between cost-containment and a particular benefit denial. For example, in one State case, an appellate court upheld a trial courtís refusal to allow circumstantial evidence of MCO financial policies that would tend to demonstrate how physician profits may be affected by treatment denials because such evidence was prejudicial. However, a recent State appellate decision held that the existence of an HMOís financial incentive scheme designed to influence a treating physicianís specialist referral practices was material to the issue of liability.

    Recent efforts by State and Federal legislators to pass patient rights legislation that would restrict the ability of network/MCOs to control the practice patterns of providers through financial incentives and cost-containment mechanisms may give rise to greater liability exposure for network/MCOs in the future. Another avenue for redress in actions against network/MCOs based on UR denials of treatment is claiming breach of contract of bad-faith causes of action

    This information came from a
    SAMSHA online article.

    *** Any law, statute, regulation or other precedent is subject to change at any time ***

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