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MANAGING CARE BUT NOT RISK

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CHICAGO -- Even as their liability exposures grow, managed care organizations have been slow to develop necessary risk management procedures, executives of companies that insure them say.

But one managed care executive said that in the present litigious environment, risk management is a subject managed care companies might want to avoid.

"I think when we talk about the wonderful risk management process, beware that all of that information can be used against you," said Alan Bloom, senior vp and general counsel of Maxicare Health Plans Inc. in Manhattan Beach, Calif.

Documents detailing problems uncovered in the course of risk management activities also can be discoverable if the organization is sued, noted Mr. Bloom, who said managed care organizations need to be careful about what they put in writing.

"We have a legal system that requires defense, defense, defense," he said. "If you're not out there protecting your organization, you're going to have a $100 million judgment against you."

Mr. Bloom participated in a panel discussion of managed care liability issues during the Professional Liability Underwriting Society's annual conference, held in Chicago earlier this month.

Sandra Berkowitz, senior vp at J&H Marsh & McLennan Inc. in Philadelphia, insisted that now, more than ever, managed care organizations must develop risk management programs -- a call echoed by others on the panel.

"It's hard convincing managed care organizations that risk management is important," she said. "The managed care industry can learn a lot from where the hospital industry was 20 years ago."

Only a relatively small percentage of managed care companies have risk management committees, Ms. Berkowitz said, while even fewer have full-time risk managers.

"It's quite clear" that if managed care companies don't have some way to examine their processes, they will have problems, according to Bruce W. Dmytrow, a vp at CNA HealthPro in Chicago, a unit of CNA Insurance Cos. The underwriters covering these organizations have a responsibility to monitor their efforts to manage their liability exposures, he said.

Paul Romano, vp and health care unit manager at Executive Risk Inc. in Simsbury, Conn., noted that when managed care organizations first were formed, their primary goal was to drive down costs.

As a result, they often are not allocating the resources needed to implement risk management programs, he said.

But the capability is there, he added. Underwriters looking at managed care organizations today typically see that they have the necessary intellectual wherewithal in their administrations for risk management, and they understand what they should be doing, Mr. Romano said.

On the insurance side of the equation, the panelists noted that in the current soft market, rates for managed care liability coverages are moving down and limits are rising. At the same time, however, the managed care liability landscape is becoming more complicated, and the frequency and severity of claims are increasing.

"Let's be honest: Nobody really knows how to underwrite and price this stuff," said Kimber J. Lantry, senior vp for health care at TIG Insurance Co. in Napa, Calif.

Yet despite such uncertainty, the market is very consistent about the pricing that has developed for liability coverage of managed care organizations, Mr. Lantry said. "Is that price right? I don't know."

With underwriters continuing to cut the price of coverage against a rising frequency and severity of claims, "We may see a significant train wreck at the end of the next pricing cycle," Mr. Lantry said, going on to predict a "steep pricing correction" by 2000.

"I think this is still a market share game," said Ms. Berkowitz of J&H Marsh & McLennan. "From an underwriter's perspective, hospital premium is shrinking."

Because underwriters expect those premiums to migrate from hospitals to managed care organizations, "my observation is that underwriters are taking a chance right now to build market share," Ms. Berkowitz said. "I don't see many underwriters turning down managed care risks right now."

"I think, going along with the decision for market share, coverage has broadened," she added.

"The marketplace as it exists today is pushing us into limits and areas of coverage that we're really not comfortable with," said Mr. Romano of Executive Risk. He said he's seen more expansion into new coverage areas in the past 15 months than in the previous 15 years.

Exacerbating the problem is the fact that managed care organizations are facing an ever-expanding array of lawsuits, while their protections are eroding.

The defense that managed care companies are part of employee benefit plans, and therefore immune from state court actions under the pre-emption provisions of Employee Retirement Income Security Act of 1974, is seemingly being reduced, the panelists said.

"It's our view that ERISA is going, going, mostly gone," said TIG's Mr. Lantry, who added that plaintiffs attorneys also are more skillful at filing suits that circumvent the pre-emption issue.

For example, a ruling issued earlier this year in Minnesota, Shea vs. Esensten, was the first case of a managed care organization being found guilty of breach of fiduciary duty to plan participants under ERISA resulting from the denial of care, a course plaintiffs attorneys are increasingly pursuing, according to Mr. Lantry.

"There have been about six cases in the past few years saying, 'No, no fiduciary duty exists,' " he said. "The first one has come down saying, 'Yes, it does.' "

"The garden-variety lawsuit against a managed care organization is wrongful denial of benefits," Mr. Lantry said. "We see that day after day after day."

But underwriters also must look at various other liability exposures that managed care organizations now face, such as marketing material and antitrust claims, he said. With the erosion of the ERISA pre-emption, there is growing concern about the potential for punitive damages, as well, he added.

"Antitrust is a big issue to us because those can generate large-scale damages," said Joseph I. Meli, vp at General Reinsurance Corp. in Stamford, Conn. Business disputes between rival managed care companies are another potential exposure, he said.

"The fact is, we don't know where liability comes from because it's coming from all directions," said Maxicare's Mr. Bloom. "Everybody said 20 years ago we're going to see the same kinds of lawsuits as the hospitals."

In fact, he said, managed care organizations aren't facing vicarious liability claims for the actions of their network physicians as frequently as they are being hit with suits such as those alleging bad-faith negligence for denial of coverage for experimental treatments.

"We don't have any conventional malpractice cases pending against us anywhere in the country right now," Mr. Bloom said, adding that he expects the lawsuits filed against managed care companies to become increasingly complex.

"More and more we're seeing mixed-bag claims that have all kinds of allegations of wrongdoing all along the line and all kinds of parties," agreed Ciara R. Ryan, a partner with the Sedgwick, Detert, Moran & Arnold law firm in Chicago.

"It obviously complicates the coverage issues, because you might definitely have obligations for one portion of the claim but not for other areas," she said.

Mr. Bloom said that from a managed care company's perspective, it is difficult to find liability coverage that truly covers the company's needs.

"What we found is there's no policy out there today that meets our needs. There are too many loopholes," he said. "I have not seen anyone really come up with the kind of policy that covers the cases out there."

Executive Risk's Mr. Romano agreed that one of the challenges facing insurers is shaping managed care liability policies to meet the specific needs of the individual organization.

"The balance we're continually striking is, 'Can we manipulate the features of our product to meet the unique features of these organizations,' " Mr. Romano said. "So our focus really is trying to underwrite to the risk based on its own features."

"Especially in managed care today, if you've seen one organization, you've seen one," Mr. Romano said.

Christopher Kerns, managing partner at the Sedgwick, Detert firm in Chicago, moderated the session.