California’s New HMO Liability Law — SB 21 — Effective 2001

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In September 1999, California Governor Gray Davis signed Senate Bill 21 (Figueroa), sponsored by the Foundation for Taxpayer and Consmer Rights, which allows patients to recover damages for HMO corporate negligence. The law takes effect January 1, 2001.

Until then, California patients with employer-paid health coverage in private industry do not have the right to receive damages against HMOs that deny and delay medically necessary treatment, due to the federal Employee Retirement Income Security Act or 1974 or ERISA.

If a patient with private industry coverage tries to take an HMO to court for acting in bad faith (a cause of action under state common law), the HMO hides behind a loophole in ERISA, claiming it cannot be held accountable to state common law or in state courts where damages are available. HMOs that lose the federal ERISA grievance only pay the cost of the procedure they denied, no other damages or penalties. (If ERISA rules applied to bank robberies, convicted thieves would simply have to give back the money.)

SB 21 allows all patients the right to hold HMOs accountable for damages like government employees, not subject to ERISA, can today. SB 21 allows patients to hold HMOs accountable for interfering with the quality of health care benefits delivered. This right is based on a Texas model that has resulted in phenomenal success since the Texas law took effect in September 1997. Approximately six lawsuits has been filed under the Act but doctors report that they are getting their treatment requests approved more readily by HMOs. This deterrent effect is precisely the point of ensuring that HMOs face the same liability as every other type of business in the state. Still, Governor Davis made significant modifications in SB 21 from the version introduced by the Foundation for Taxpayer and Consumer Rights.

SB 21 Initially As Sponsored By FTCR

All harms have remedy.

Allowed for patient remedies in “a civil action” — a court room.

Effective January 2000.

No requirement to submit to independent review process.

Doctor-run medical groups that accept risk (capitated arrangement) and arrange for care are liable.

SB 21 As Amended By Legislature To Meet Gov. Davis’ Request

Only substantial harms have remedy, defined as “loss of life, loss or significant impairment of limb or bodily function, significant disfigurement, severe and chronic physical pain, or significant financial loss.”

Does not preclude HMOs from forcing patients into binding arbitration as condition of health coverage.

Effective January 2001.

Must use review process unless “substantial harm” as defined above will imminently occur.

Doctor-run medical groups that accept risk (capitated arrangement) and arrange for care are liable.

Numerous official studies show HMO liability reform would be both health-enhancing and cost-effective.

In a study of 1 million public employees in California, people who can sue their managed care plans already, the Kaiser Family Foundation found the cost of lawsuits and settlements was minimal- no more than 13 cents per member per month.

The Congressional Budget Office reported that giving patients the right to sue would add up to only 1.2% to health care premiums, including costs of so-called defensive medicine.

Washington D.C. based Muse Associates analyzed a provision in the national HMO reform bill, H.R. 1415, that would end federal preemption of workers’ remedies for personal injury and wrongful death. Muse Associates’ January 1998 study of the provision found no increase to, at most, a 0.2% increase in premiums.

Dr. Troyen A. Brennan of the Harvard School of Public Health found that the health care system wastes $60 billion annually to care for injuries attributable to undeterred medical negligence. The landmark Harvard Medical Malpractice Study found that medical malpractice causes 300,000 injuries annually in hospitals alone. The deterrent effect of patient protection laws can save the health care system such staggering human and financial losses.

Existing HMO liability legislation has not resulted in increased costs and litigation. In Texas, an HMO liability measure, SB 386, which took effect in September 1997, has not raised health care costs or resulted in a “litigation explosion.”

The Texas Department of Insurance reported that between September 1997 and March 1998 the increase in total spending per member per month of full service HMOs was only 0.1%.

In written support of similar HMO liability legislation to California state legislators, the author of the Texas liability bill, Texas State Senator David Sibley, writes “When the state of Texas passed its legislation holding managed care organizations accountable, the managed care industry said it would cost over a billion dollars. When an actuarial analysis by Milliman and Robertson for a Texas HMO was performed on the impact of the bill after it was passed, the cost was estimated to be a mere 34 cents per member, per month (about 0.3 percent).”

Senator Sibley continues, “The law became effective on September 1, 1997 and since then not a single case has been filed.” Since Sibley’s letter, six cases have been filed under the Texas law.

The New York Times reports, “What lessons does Texas offer? The short answer is that the spotty early evidence does not support a lot of the dire warnings on Capitol Hill about a landslide of litigation.”

Unless there are financial consequences to an HMO for denying expensive treatment, the financial calculus of “managing care” will always weight toward withholding and delaying costly care, no matter how sorely the treatment is needed or substantially it is justified by medical science. SB 21’s liability provision is sorely needed.

Consumer Watchdog
Consumer Watchdog
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