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As managed care organizations weave their way into the fabric of our national health care delivery system, they are raising concerns for underwriters.
Primarily as a result of the federal government's failure to find an appropriate balance among quality of care, access to care and controlled costs, managed care organizations have become "de facto health care reform."
Yet managed care systems have produced much controversy over their ability to improve health care delivery. Many say the system has been successful, attributing some of the controversial decisions managed care organizations make in weighing cost vs. care to the industry's "growing pains." Others argue that the health care industry's shift to for-profit from non-profit status is changing the medical community's allegiance from the patient to the stockholder, sacrificing quality of care.
Professional liability underwriters are monitoring the many issues facing managed care organizations and their inevitable effect on liability risks. How these issues play out-particularly vicarious medical professional liability, negative publicity and industry consolidation-will determine how underwriters respond in terms of underwriting philosophy, approach toward coverage and product pricing.
In the past, many underwriters of managed care errors and omissions coverage viewed vicarious liability as something that "just existed" from the potential for managed care organizations to be held liable under the legal theories of ostensible agency or respondeat superior. This is no longer the case, for a number of reasons.
Managed care organizations were thought to be shielded from liability by the Employee Retirement Income Security Act. ERISA's pre-emption clause states that if the complaint "relates to" a benefit plan, the case is automatically pre-empted at the state level, excluding discussion of compensatory and punitive damages.
Recently, courts have more liberally interpreted the "relates to" clause of ERISA with respect to managed care organizations and in a handful of situations have not allowed cases to be pre-empted automatically (BI, July 29, 1996). Therefore, these cases remained at the state level, where damages are not limited as they are under ERISA. The potential erosion of the ERISA protection for managed care organizations increases the risk of medical professional cases being brought against the managed care organization under the theories of ostensible agency and respondeat superior. This is an issue that has not fully matured but one that professional liability underwriters are watching very closely.
A companion issue to the potential erosion of ERISA is that utilization review decisions are becoming more closely related to diagnostic medical care and no longer just a purely administrative function. As underwriters, we look for the controls, contract wording and procedures to be in place that limit an managed care organization's liability as "health care provider" during the utilization review process.
However, this is becoming increasing difficult to do because the power managed care organizations wield in determining payment for care can be viewed as impacting the quality of care a patient receives. The problem is exacerbated when managed care organizations offer bonuses, risk withholdings and other forms of compensation to encourage utilization review decision-makers to control costs. The resulting shift to for-profit status from non-profit means these decision-makers may appear to have a sinister motive for making cost-containment decisions, thus increasing liability exposure that underwriters must take into account.
Another trend complicating liability underwriting for managed care organizations is the creation and evolution of integrated delivery systems, which function as both a health care provider and a managed care organization-that is, an insurance company, risk taker and administrator of benefit plans.
IDSs are emerging from opposite directions. First is the provider side, which is attempting to compensate for the loss of control and profits to managed care organizations by taking on and managing risk themselves. The second is the insurer side, where large managed care organizations such as Aetna, CIGNA and United HealthCare are creating "super" health care organizations by bringing what they know about utilization and cost to the provider side for greater control and to settle some of their disputes with providers.
The resulting organizations no longer can use the defense that they "are not the providers of care, just facilitators," which increases their liability beyond the realm of vicarious liability, as they have actively engaged in the business of providing medical care. This increased liability has a significant impact on pricing, terms and attachment points, closing the gap in pricing between managed care liability vs. medical professional liability.
Large managed care organizations are being aggressively underwritten. More and more, these managed care organizations have components of direct medical professional liability exposure or a much higher level of vicarious liability risk, which underwriters need to take into account when determining pricing and attachment point.
These organizations are growing rapidly through acquisition and attrition and are just beginning to accumulate the higher level of liability exposure, which has yet to show its face to the underwriters of these organizations. In most cases, not only are these entities being underwritten at a low deductible or self-insured retention, but the retention also is being aggregated.
The historical loss data that gave underwriters a certain comfort level in allowing low deductibles and aggregates now is useless in predicting future results, because a new organization with new exposures exists.
Undeveloped liabilities are accumulating, most of which are due to the increase in exposure from more significant vicarious liability and the introduction of direct medical professional liability exposure. This, along with the potential erosion of ERISA pre-emption and the prospect that utilization review is starting to be viewed as "diagnosis" as opposed to "administrative," may make the medical professional liability risks inherent in these organizations outweigh the current attachment point and premium levels.
Managed care organizations are undertaking new functions, causing underwriters to rethink their entire approach to assessing risk and developing a premium. Assigning a premium to a certain type of managed care organization simply by virtue of its type no longer works.
For example, underwriters historically have looked at a PPO as being much less of a risk than an HMO. PPOs traditionally did not get involved in capitating providers, conducting prospective or concurrent utilization review, collecting premiums or paying claims, which are all functions HMOs provide.
But now PPOs are taking on a new role as utilization review contractors and claim handlers to varying degrees. Conversely, many managed care organizations are subcontracting functions such as utilization review that they traditionally performed, hiring contractors who may carry their own liability insurance specific to their function. All of this "cross-functioning" has made the underwriter's evaluation of the risk more challenging.
Despite the managed care industry's efforts to monitor enrollee satisfaction and conduct surveys to help enhance the perception of the quality of care they provide, public scrutiny of managed care organization activities is at an all-time high. Numerous stories about HMOs are reported in the media, such as wrongful denial of benefits to an enrollee and discharge orders for new mothers 24 hours after delivery. The increasing public awareness has put pressure on regulators and lawmakers to react, creating new challenges for the underwriter of managed care liability insurance, including:
The potential for increased claims as enrollees realize they can file grievances under the plan's provisions.
The potential for managed care organizations to be easier targets for plaintiffs attorneys from negative publicity portraying managed care organizations as the profit-seeking "villain."
Increased regulation by lawmakers of managed care organizations, already seen with the issues of "managed care organization gag orders," "drive-through" deliveries and copayment cases.
Liability potential created from more accurately defined protocols, whether they evolve from regulation, accreditation or are self-imposed by managed care organizations.
This last issue is a particular problem, because without these protocols, establishing bad faith on the part of the managed care organization must be egregious to be sufficiently proven. Underwriters need to be concerned that as these industry protocols develop, claim defenses can be weakened by ambiguity of protocol until accepted as a standard for operation and an managed care organization's policies and procedures that differ from established protocols.
Managed care, as well as and the health care industry in general, is experiencing consolidation through mergers, acquisitions and other structural alliances, posing new issues to be addressed by managed care liability underwriters, including:
Antitrust. Not only do mergers and acquisitions create potential antitrust risk from the perspective of market monopolization, price fixing and restraint of trade, but also in ambiguities between the merging organizations' policies on provider credentialing and peer review. These ambiguities can create liability risk from the perspective of deselection of providers in the credentialing and peer review processes.
Utilization review and claims handling.
Ambiguity can result from the merging of entities that have differing policies and procedures for handling utilization review or claims. They may, for instance, have different enrollee plan documents with conflicting definitions.
Any ambiguity, such as in defining "experimental treatment," can be used to sue a managed care organization.
D&O claims. Consolidation can result in claims against directors and officers in their handling of such transactions.
Publicly traded companies are more susceptible to expensive actions by shareholders than privately held companies.
As managed care organizations look for an appropriate balance between quality and cost, underwriters will continue to look for the appropriate balance between premium and risk.
By now it has become clear to underwriters of managed care organizations that the historical profitability of managed care organization professional liability insurance no longer can be relied on to predict profitability, because the nature of the risk has changed so dramatically in recent years.
But, with their evolution in unprecedented directions and the liability risks associated with them, managed care organizations have made these exciting times for underwriters who have the privilege to work in such a fast-paced and dynamic industry.
Steven C. Spina is assistant vp for Zurich-American Specialties, a unit of Zurich-American Insurance Group in Schaumburg, Ill. He is responsible for Zurich's health care professional liability underwriting in the Central Region.
Steven C. Spina is assistant vp for Zurich-American Specialties, a strategic business unit of Schaumburg, Ill.-based Zurich-American Insurance Group. He is responsible for Zurich's professional liability underwriting initiatives for the health care industry in the insurer's Central Region.