THE CONCEPT OF MANAGED CARE AND ITS PRACTICAL IMPLICATIONS
9. BALANCING RESPONSIBILITIES
As stated earlier, access to care within a managed care system does not depend exclusively on the notion of medical necessity. Acting responsibly to enhance the well-being of the insured population and to satisfy both the shareholders’ needs and the organization’s need to stay competitive are all part of the equation that determines individual access to care.
The delicacy of balancing the various corporate responsibilities in the managed care industry is illustrated in a newspaper article in USA Today (Mangum 1996). On May 14, 1996, the national newspaper published in its business section an article on the anemic earnings of one of the MCOs that had seen its stock prices drop by 24 percent after reporting lower-than-expected first-quarter earnings and a quarterly medical loss ratio that rose slightly from 77.9 percent to 78.4 percent. Although the MCO’s revenues had more than doubled and its net income had risen by 32 percent, its stock prices fell because stock analysts had expected the company to earn 25 cents a share instead of the actual 2 cents a share that was paid to shareholders. The article demonstrated once again that health care really had evolved into an industry.
But the industrial features of managed care are also reflected in other business activities. For instance, the economic need for corporate growth frequently causes corporate takeovers and buyouts.
The high value placed on profitability is demonstrated by the generous financial compensation packages of senior executive officers at MCOs. The Health Administration Responsibility Project (HARP) reported on its Web site (1999) that the 25 highest paid HMO executives in 1996 received an average annual compensation, exclusive of unexercised stock options, of more than $6 million (range, $2,697,751-$29,061,599). The total compensation package for these captains of the health care industry included a base salary, stock options, and other perks, such as personal use of a corporate jet. In some cases, managed care CEOs earn even more than leaders of other businesses with similar revenues, invested capital, and total employees. Three of the HMOs with these top-earning executives had payroll expenses in 1996 of more than $25 million (range, $25,382,230-$57,374,098) for their top-tier hires (HARP 1999). In addition to the “healthy” growth in compensation averages for executives in the managed care industry in the late 1980s
THE CONCEPT OF MANAGED CARE AND ITS PRACTICAL IMPLICATIONS
and early 1990s, some other extreme financial dealings surfaced that reinforced the image of corporate greed increasingly associated with HMOs. In 1985, when Dr.
Hasan helped form Qual-Med, Inc., a small HMO with no more than 7,000 members in southern Colorado, he had to rely on a handful of physicians who were willing to invest. However, after several acquisitions of small HMOs that the company turned into profitable enterprises by aggressively managing the medical loss ratio (i.e., the percentage of premiums actually spent on medical or hospital expenses vs. HMO administrative costs or profits), Qual-Med went public in 1991.
Dr. Hasan’s modest investment skyrocketed to a market value of $67 million. In 1994, the CEO of Qual-Med collected $3.6 million in salary and bonuses, along with stock options initially valued at $5 million (Anders 1996). All this played out in an environment of public distrust of the managed care system, concerns about access to quality care, and rising health insurance premiums.
9.1 Denial of Liability and Accountability
By 2005, MCOs refused to accept any liability or accountability for distributive decisions or for the quality of care provided. Whereas almost all major businesses have been federally regulated, the managed care industry appears to be largely exempt. For instance, antitrust laws do not apply to MCOs, because the insurance industry is exempted under the 1945 McCarren-Ferguson Act, which places insurance carriers (even those that insure or provide coverage that is national in scope) under state regulatory control. Antitrust regulation is therefore left to the states, which has introduced inconsistency to the system. Providers are not allowed to discuss among themselves the price they charge for an office visit. In contrast, MCOs have expanded their markets and now virtually dictate what reimbursement they will offer to individual providers.
A more important exemption is that MCOs are neither accountable for, nor liable for, acts of medical negligence or unfair insurance practices. The exemption is based on the 1974 Employee Retirement Income Security Act (ERISA), the federal law that applies to companies, labor unions, and trade associations that self-insure. Yet, as Miller (1997) noted, ERISA has not provided for the oversight of self-insurance programs:
ERISA itself imposes few substantive standards for health plans, resulting in a policy vacuum often referred to as the “ERISA vacuum.” (p. 1103)
One of the court cases that addressed the exempt status of MCOs is the Corcoran case from Alabama. In 1989, Florence Corcoran was eight months pregnant.
Because of medical problems related to the pregnancy, her obstetrician admitted her to the hospital and advised her to remain there until delivery. The insurance company’s utilization review managers refused to pay for further hospitalization.
The patient was discharged against medical advice; the fetus went into distress and died. Florence and Wayne Corcoran sued the insurance company in Louisiana state court. The U.S. Court of Appeals for the Fifth Circuit in New Orleans ruled that, although the outcome was not just, under ERISA Corcoran did not have a valid claim. Under ERISA, MCOs enjoy full immunity from liability.
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Proponents of the immunity status of MCOs have argued that these business organizations have not just been able to escape liability by some innovative legal maneuvering but that the immunity is consistent with the fact that MCOs do not provide direct patient care. They point to the additional cost that consumers would have to bear if judgments were levied against managed care enterprises. From this point of view, coverage is insurancea contractual obligation to pay for covered benefitswhereas the actual medical care is delivered by clinicians, despite the presence of population-based health care management techniques. Physicians within the network who are under contract with the MCO are paid to exercise their professional judgment and expertise in the care of MCO members.
Thus, health care plans should perhaps be held accountable for the quality of their credentialing of physicians, just as physicians are held accountable for the quality of care they provide to their patients. However, contracts between individual providers and MCOs are not negotiated on the basis of equal power. In markets with a high density of managed care patients and with several MCOs competing to enhance their market share, providers are under pressure to accept reimbursement rates dictated by the market but oftentimes insufficient to provide the highest quality of care. Yet, termination of the managed care contract could result in a hospital losing a large number of patients. The choice is either to accept little and somehow make it work or to receive nothing and perhaps eventually close the practice. If the level of reimbursement for capitated care to the provider falls below a minimal threshold and the provider is in no position either to refuse or to exit, then it may be unrealistic to expect delivery of a high quality of care.
The exempt status of MCOs regarding liability is not only inconsistent with the regulations imposed on all other major businesses in the United States, it also creates a peculiar situation for the distribution of health care. MCOs have positioned themselves as the ultimate authority for distributive decision making in health care.
Their authority is sometimes direct, sometimes indirect. It is direct when a denial of access to care is based on the interpretation of internal policies and protocols. The authority is indirect when the patient’s access to certain medical procedures is denied on the basis of limited plan coverage.
Yet, MCOs cannot be held legally liable for decisions to deny access to care that patients should be entitled to according to the plan they purchased. This procedural inability of the insured to hold the MCO liable for distributive decisions is not the whole story. Managed care plans are not required to inform enrollees about the details of the plan’s operation. MCOs are not obligated to inform enrollees in detail about exclusions, limited provider choice, copayments, and treatment options. As mentioned before, in the world of managed care, there is no truth in lending, truth in packaging, or truth in labeling laws like those in almost every other major U.S.
industry (Gale 1995). But, while avoiding accountability and liability, MCOs force providers to sign so-called hold harmless clauses. In case anything goes wrong as a result of the management priorities of the MCO, the liability rests with the provider and not with the MCO.
In the spring of 1997, the state of Texas challenged the exempt status of MCOs in what is seen as one of the sharpest moves in the nationwide backlash against the
THE CONCEPT OF MANAGED CARE AND ITS PRACTICAL IMPLICATIONS
power of managed care corporations. The Texas legislature, encouraged by a Virginia federal court ruling that ERISA cannot preempt state claims alleging medical malpractice by physicians and vicarious liability by MCOs, decided that the members of an MCO have the right to sue their health plan for medical malpractice.
Similar measures have been brought forth in several other states.
The reason given for ending the exempt status of MCOs is that MCOs have increasingly interposed themselves in medical decision making. However, in 2004 the U.S. Supreme Court ruled in favor of managed care companies on the basis of federal law that carried greater legal weight. Patients who want to take a malpractice claim to court can only go to state courts, where the awards have historically been much smaller. In fact, awards in many states are now capped at only the costs of any medical services that the MCO did not want to cover.
Federal regulations to redress this inequity are meeting strong opposition from MCOs and seem to be far into the future. In the meantime, the question goes unanswered as to why MCOs have such difficulty accepting accountability for their operational and distributive decisions. From a moral point of view, the repudiation of responsibility, if for no other reason, is problematic because patients have no other option than to rely on the fairness of the distribution system.
In case of disagreement, patients cannot sue the MCO for injustices suffered or for damages. Thus, MCOs appear to enjoy legal and moral immunity. By the same token, the fact that the MCOs have been politically successful in keeping regulatory intervention to a minimum and in avoiding liability and accountability has put clinical providers into an invidious position.
9.2 Responsibility of MCOs to Members
The question of whether MCOs have any responsibility to their individual members seems almost trivial. It is simply a matter of fulfilling contractual obligationsa rather unproblematic premise. However, efforts to define the domain of responsibility in more detail have proven to be more complicated than one might presume and sometimes have even been controversial.
Demarcation of the domain requires clarity on issues such as whether MCOs have an obligation to offer enrollees access to the highest quality of care or whether their responsibility is limited to offering access to the most cost-efficient provider even though efforts to reduce costs may have decimated the quality of care. Do MCOs fulfill their responsibility when they contract with the lowest bidder to perform highly specialized treatmentseven when this provider may not be the most appropriate choice? Is it the responsibility of the MCOs to not negotiate reimbursement schedules down to a level that would convert quality of care into an illusory notion?
From a business management point of view, emphasizing the need for cost reductions would certainly contribute to the goal of improving the medical loss ratio of the organization. Shareholders would most likely reward the executive officers with bonuses. If the primary objective is to maintain or increase profits in a shrinking market, then profiteering within the health care industry is a normal 55
business practice in a traditional market. The market is characterized as traditional because of the goals pursued: short-term returns on investments in a highly privatized market (i.e., with the least number of regulations imposed from entities outside the marketplace).