Understanding managed care organizations' liability exposure

Healthcare Financial Management, Feb, 1998 by Susan Huntington

As managed care has grown, managed care organizations have

faced lawsuits and evolving exposures.(a) These organizations can protect

themselves by understanding their potential exposures, discovering

potential gaps in their insurance coverage, and implementing sound risk

management programs. The majority of managed care organizations face three

general exposure areas: directors and officers (D&O) liability, errors and

omissions (E&O) liability, and financial loss (provider excess).

Directors and Officers Liability

Like other companies with directors and officers, managed care organizations

need traditional D&O-type insurance against exposures associated with the

nonclinical aspects of the organization's internal activities. While a

managed care organization is at financial risk when a D&O claim is made, the

personal assets of the organization's management team are also at risk. D&O

insurance can protect managers against personal liability to investors,

employees, vendors, participating physicians, other provider organizations,

and other parties doing business with the organization. Key D&O exposure

areas include anticompetitive acts, shareholder liability, and

mismanagement.

Anticompetitive acts. If a managed care organization is perceived as trying

to thwart competition, it may be charged with violations of various

antitrust laws. Some examples of anticompetitive violations include unlawful

restraint of trade (eg, merger or acquisition activity between two managed

care companies resulting in an organization that would dominate a particular

market), monopolies (eg, an exclusive IPA comprising more than 25 percent of

the physicians in the geographic area), price fixing and price

discrimination (eg, local PHOs agreeing on behalf of their hospitals to

support one fee schedule for all managed care contracts), group boycotts

(eg, all local IPAs agreeing not to join any managed care plans), and

exclusive dealing (eg, terminating a physician from a network without giving

him or her the ability to join another network).

Shareholder liability. Even if privately held, managed care organizations

face major exposures from shareholder suits, which can result from

allegations such as misuse of funds or failure to disclose material

information. For example, with the increase in Federal investigations into

healthcare fraud and abuse, a government audit that could lead to an

investigation constitutes material information an organization would need to

reveal to shareholders.

Mismanagement. Managed care organizatons may be liable for the waste or

neglect of assets, failure to manage or supervise the organization,

healthcare fraud and abuse, or improper delegation of authority.

Errors and Omissions Liability

Traditional D&O insurance does not address the single largest managed care

exposure area - claims arising from the day-to-day management of the health

care provided to members. Errors and omissions (E&O) liability coverage is

designed to protect organizations when allegations of management negligence

are made. E&O liability for a managed care organization's performance of

professional services is comparable to "organizational malpractice," and

covers the exposure areas of vicarious liability, credentialing/peer

review/provider selection, utilization review, and claims processing.

Vicarious liability. Lawsuits may arise from an allegation of medical

malpractice brought against a managed care organization based upon the

negligence of an employed or contracted physician. For example, in Dunn v.

Praiss, the court found an HMO liable for the malpractice of an independent,

contracted physician under the theory of apparent agency (ie, the physician

was an agent of the HMO) because the physician and his group were paid on a

capitated basis; according to his contract with the HMO, the physician was

not free to accept or reject patients; additional patient referrals were at

the HMO's option; and the physician saw patients at the HMO's offices.(b)

Credentialing/peer review/provider selection. Managed care organizations can

be sued by disgruntled providers who fail to meet the organization's

credentialing standards. These claims include antitrust violation, breach of

contract, interference in the physician-patient relationship, defamation,

and so forth. As illustrated in Delta Dental Plan v. Banasky, however, the

newest claim arising from the termination of a contracted physician is

violation of the implied contract principles of good faith and fair

dealing.(c) Claims also can be made by a member who alleges that the

organization is liable for selecting or credentialing a negligent provider

who harmed the member. The most frequently cited case in this area is

Harrell v. Total Health Care, Inc., in which the appellate court recognized

that HMOs have a duty to investigate the background of contracted physicians

to prevent foreseeable risk of harm to HMO members, particularly when the

organization restricts members' physician selection.(d)

Utilization review. Managed care organizations that rely on utilization