HMO Medical Directors and Professional Sanctions

ONE OF THE ONGOING accomplishments of managed care has been the ability of health maintenance organizations (HMOs) and other managed care plans to reduce health-care costs by curbing unnecessary treatments and tests, shortening inpatient hospital stays, emphasizing outpatient procedures and home care and generally forcing patients to become more knowledgeable about and more responsible for their own care and treatment. These attributes have also been a factor in managed care's phenomenal growth in recent years.

This emphasis on cost containment, however, has led to inevitable abuses, such as missed diagnoses, improper denials of needed care and treatment decisions based on cost criteria rather than objective medical necessity.

In an odd and unexpected alliance, physicians and the plaintiffs' tort bar have joined together in attacking HMOs and managed care organizations, albeit for different reasons.

Physicians complain about HMOs' alleged interference with their medical judgments, arbitrary terminations from panels of approved providers, arbitrary denials of payment that are, in many cases, de facto denials of treatment, and of course, the lower fee schedules set by many plans. The plaintiffs' tort bar senses an opportunity to tap a new "deep pocket" if they can just strip away the existing protections and expose HMOs to malpractice liability not only for payment decisions that result in denial of treatment and/or injury to subscribers, but also vicariously for malpractice committed by their participating physicians.

Both organized medicine and tort lawyers have been lobbying aggressively for changes in state and federal laws. A few states, notably Texas and Missouri, have passed laws extending malpractice liability to HMOs, and similar bills are pending in Congress, the New York State Legislature, and other state legislatures.

HMOs argue that they are simply health insurers, and that they do not make treatment decisions, only payment decisions. In New York, as in many other states, HMOs are statutorily defined as not being engaged in the practice of medicine. New York Public Health Law Sec.4410(1) reads, in part:

The provision of comprehensive health services directly or indirectly, by a health maintenance organization through its comprehensive health services plan shall not be considered the practice of the profession of medicine by such organization or plan.

In addition, HMOs have taken the position, thus far successfully, that malpractice actions against them are barred by the Employee Retirement Income Security Act (ERISA).*1 Thus, HMOs, like traditional health insurers, are generally liable only for contract damages for their payment decisions.*2

'Back Door' Liability

While the political and legal maneuvering to create new malpractice liabilities for HMOs proceeds, an interesting twist has arisen, a kind of "back door" liability, in which the medical directors of managed care plans may be subject to professional discipline for negligence in carrying out their job responsibilities. The specific responsibility involved is in evaluating a particular patient's medical needs and making a determination as to whether the HMO will pay for medical services. This is sometimes referred to as "pre-certification of medical necessity," or "treatment pre-certification," and is part of an HMO's overall utilization review system.

What is apparently the first case to address this issue occurred last year in Arizona. In Murphy et al. v. Board of Medical Examiners et al.,*3 Dr. John Murphy, the medical director of Arizona's Blue Cross and Blue Shield plans, was responsible for making decisions authorizing or denying pre-certification of elective (i.e. non-emergency) medical procedures for the plans' subscribers.

Medical Necessity

In December of 1992, Dr. Murphy refused to authorize payment for gall bladder surgery on a patient, finding it was not "medically necessary" after reviewing the patient's medical records, lab testing results, etc. His decision contradicted the advice of the patient's surgeon, Dr. David Johnson and the referring physician, Dr. Richard Jonas. Dr. Murphy did offer to submit the matter to a third-party specialist for review at Blue Cross's expense, but both the patient and Dr. Johnson refused the offer. Dr. Johnson went ahead with the surgery, and when post-surgery pathology reports substantiated the need for the surgery, Blue Cross reversed itself and paid for the procedure.

The patient filed a complaint with Arizona's Insurance Department alleging that Blue Cross failed to honor its subscriber contract, but after investigation, the Insurance Department dismissed her complaint. The patient's surgeon, Dr. Johnson, went further and filed a complaint against Dr. Murphy with Arizona's Board of Medical Examiners, alleging that Murphy's initial decision to deny payment constituted "unprofessional conduct" and "medical incompetence," interfered with the physician-patient relationship and caused the patient to question the surgeon's own professional judgment.

Over Blue Cross's and Dr. Murphy's objections, the board conducted an investigation, and issued a subpoena for the medical records of 20 cases in which Dr. Murphy had denied payment approvals. After review, the board voted to issue an "advisory letter of concern" to Dr. Murphy that specifically cited "an inappropriate medical decision which could have caused harm to a patient". This letter was to be placed in Dr. Murphy's state license file.

Dr. Murphy and Blue Cross argued that the board had no jurisdiction to take action, since Dr. Murphy, in his capacity as an employed medical director, was not "practicing medicine," and that since this matter involved the actions of an employee of an insurer, the matter was solely within the jurisdiction of Arizona's Insurance Department.

Almost immediately after the board's decision, Dr. Murphy and Blue Cross filed suit in Maricopa County Superior Court seeking a temporary restraining order, a preliminary injunction and a stay of the board's decision to issue the letter of concern and challenging the board's actions on jurisdictional and due process grounds. The board countered with a motion to dismiss, claiming its decision to issue a letter of concern was not reviewable under Arizona law and that plaintiffs had not yet exhausted their administrative remedies.

The trial court held that the board had the limited right to decide whether Dr. Murphy's decision was medically reasonable, and that the decision to issue the letter was subject to judicial review, but the court enjoined the issuance of the letter on due process grounds having to do with Dr. Murphy's absence from some of the Board's proceedings.

An appellate court affirmed that the board did indeed have jurisdiction to review Dr. Murphy's medical decisions, since he was a state-licensed physician performing duties as a medical director for an insurance company.*4 Quoting from Blue Cross' own subscriber contract, the court found:

. . . Dr. Murphy is an employee who makes medical decisions for his employer on whether surgeries or other non-experimental procedures are medically necessary. Such decisions are not insurance decisions but rather medical decisions because they require Dr. Murphy to determine whether the procedure is "appropriate for the symptoms and diagnosis of the condition," whether it is to be "provided for the diagnosis" care or treatment and whether it is "in accordance with standards of good medical practice in Arizona."*5

The court's conclusion was unequivocal:

Here, Dr. Murphy evaluated medical information provided by both the patient's primary physician and her surgeon. He disagreed with their decision that gallbladder surgery would alleviate her ongoing symptoms. [Her] doctors diagnosed a medical condition and proposed a non-experimental course of treatment. Dr. Murphy substituted his medical judgment for theirs and determined that the surgery was "not medically necessary." There is no other way to characterize Dr. Murphy's decision: it was a "medical" decision.*6

The appellate court further vacated the lower court's injunction against the board, finding that the "letter of concern" to be placed in Dr. Murphy's file did not constitute an adjudicative decision of the board, but was merely a non-final "discretionary decision" that ended the investigation that had been initiated by Dr. Johnson's complaint. Even though the letter could be used in future disciplinary actions against Dr. Murphy, the court found that the letter did not deprive Dr. Murphy of any legal rights or privileges and, thus, was not subject either to further review by the board or by the courts.

Accountability

Several states such as California and Maryland have considered laws and regulations to hold HMO medical directors accountable for their payment decisions. In April, Maryland's state senate narrowly defeated a bill supported by that state's Board of Physician Quality Assurance and the state's medical society that would have held HMO medical directors responsible for health plan coverage decisions that adversely affect patient care. Miffed at the senate's failure to pass the bill, the board has threatened to embody in new regulations what the legislature failed to enact.*7

Would complaints to disciplinary authorities in New York be successful? If it has not already happened,*8 it is almost certain that requests for disciplinary action will eventually be brought by subscribers and/or their physicians against medical directors or other licensed professionals who make payment decisions for New York HMOs and other managed care organizations. Whether New York's regulatory agencies will follow Arizona's precedent, however, is questionable.

Under New York law,*9 the practice of medicine is broadly defined as: diagnosing, treating, operating or prescribing for any human disease, pain, injury, deformity or physical condition.

Elsewhere, professional misconduct is defined,*10 among other things, as: [p]racticing the profession . . . beyond its authorized scope, with gross negligence on a particular occasion or negligence or incompetence on more than one occasion.

Physicians serving in medico-administrative positions (e.g., medical directors, clinical department chairs and division chiefs) in facilities such as hospitals and nursing homes sometimes come under criticism in the course of Health Department investigations into incidents involving sub-standard patient care.

While there appear to be no reported court decisions in New York, there have in fact been professional disciplinary actions brought against such physician executives for negligence in the performance of job responsibilities that involved the exercise of their professional medical judgment in the supervision of care but that did not involve direct hands-on care of a patient or patients. What holds true for physician executives in health care facilities, however, may not hold true for physician executives in HMOs.

Faced with a disciplinary action against its medical director, a New York HMO can point to the provisions of the Public Health Law cited earlier as proof that it is not engaged in the practice of medicine and, by extension, neither are its employed physicians who make payment decisions.

The HMO can argue that, unlike in hospitals and nursing homes where medical directors and department chairs are responsible for supervising physicians and for the overall quality of patient care being provided, HMO medical directors are merely reviewing payment decisions. They are neither engaged in nor responsible for the actual patient care that is provided.

The HMO can also point to Article 49 of the Public Health Law, part of last year's Health Care Reform Act (HCRA), which established comprehensive standards and requirements for all those engaged in utilization review and payment determinations, including minimum qualifications for reviewers, appeals mechanisms and so on. If an HMO's medical director commits an error but it is otherwise in compliance with the requirements of Article 49, (the purpose of which was to encourage wider and more effective utilization review procedures by providers and payors) it would seem to make a professional misconduct case harder to sustain.

Lastly, the HMO can argue that the additional HMO grievance procedures outlined in HCRA*11 that allow subscribers to appeal an adverse payment decision and have it reviewed by 'qualified' health care professionals, provide adequate safeguards.

Diagnosing, Prescribing

The complainants in turn will likely argue that the physician making the payment decision was involved in "diagnosing," if payment is denied, and in "prescribing," if payment for alternate treatment is offered, and was at all times making medical judgments that directly affected a subscriber's care.

In fact, it may be difficult for an HMO's medical director to argue that he/she is not engaged in the practice of medicine when his/her job description includes a requirement that the individual be a licensed physician. The decisions of the regulatory agencies and ultimately the courts will hinge on whether they adopt a narrow or a broad view of what constitutes the practice of medicine, and whether the safeguards built into Articles 44 and 49 of the Public Health Law are adequate to protect HMO subscribers.

Depending on the outcome, we may be faced with the interesting juxtaposition that the HMO by law is not engaged in the practice of medicine, but that its employed physicians who review recommended treatments or procedures and make payment decisions on them are engaged in the practice of medicine.

In the current environment of hostility toward HMOs, the disciplining of physicians employed by HMOs for routine payment decisions might seem to be an attractive new line of attack, but such a strategy ignores certain realities. Disciplinary proceedings often take a long time, and the lapses on the part of the physician would probably have to be multiple and rise to a level in which his/her basic medical competence is called into question. That is rarely the case.

Furthermore, a rash of such complaints or a series of disciplinary actions against HMO-employed physicians may end up dissuading capable physicians from serving in these important positions, with attendant negative effects not only upon the HMO's ability to perform its utilization review functions and monitor quality of care, but also on the important public policy of encouraging more comprehensive and effective utilization review.

The balance of good medicine is somewhere between the need to eliminate costly, unnecessary and possibly harmful treatment on the one hand and to assure that patients are not denied needed and medically justifiable treatment on the other. Whether that balance can be reached depends, as it always has, on the diligence, cooperation, good faith and adherence to the highest professional and ethical standards of everyone involved.

Francis J. Serbaroli is a partner at Cadwalader, Wickersham & Taft.

1. 29 USC Sec.1001 et seq. See, e.g. Dalton et al. v. Peninsula Hospital Center, et al., 164 Misc2d 912 (Sup. Ct. N.Y.Cty. 1995).
2. But see, White v. Blue Cross and Blue Shield of Greater New York, 146 Misc2d 125 (Sup. Ct. N.Y.Cty. 1989) an unusual case in which the court held an indemnity health insurer's denial of payment was so unfair as to merit punitive damages.
3. 190 Ariz. 441, 949 P2d 530 (Ct. App. Ariz. Div. 1, Dept. A, July 15, 1997), rev. denied, No. CV 97-0381-PR (Sup. Ct. Ariz. Jan. 21, 1998).
4. Just three months later, however, another court reached an opposite conclusion on somewhat different facts. In Morris v. District of Columbia Board of Medicine, 701 A2d 364 (D.C. Ct. App. Oct. 9, 1997), the D.C. medical board sought to discipline a physician for "practicing medicine without a license" for serving as the Vice President and Medical Director of Blue Cross and Blue Shield of the National Capitol Area. In the Morris case, it was established that the physician's responsibilities were exclusively administrative, and that he was not involved in monitoring or questioning treatment decisions by physicians, nor was he involved in payment determinations. The Court, therefore, reversed the Board's determination, finding that Dr. Morris's activities did not constitute the "practice of medicine."
5. 949 P2d at 536.
6. Id.
7. "Maryland Board: Hold HMO Medical Directors Accountable", American Medical News, April 20, 1998, p.1.
8. Investigations by the New York State Health Department's Office of Professional Medical Conduct are conducted in secrecy. N.Y. Public Health Law Sec.230(9) and (10)(a)(v).
9. N.Y. Education Law Sec.6521.
10. N.Y. Education Law Sec.6509(2).
11. N.Y. Public Health Law Sec.4408-a.

This article is reprinted with permission from the June 3rd issue of the New York Law Journal © 1998 NLP IP Company.