‘External review’ of medical claim denials is now the law of the land nearly nationwide. But the system has its fans and foes
Consumer advocates assailed the decision as a seminal step backward for patients’ rights. Health insurers hailed it, saying it would help stem the nation’s soaring healthcare costs.
But now that the dust has settled in the wake of last year’s U.S. Supreme Court decision preventing millions of patients from suing their HMOs for medical negligence, some legal experts say the practical effects of the controversial ruling may not be all that substantial-largely because of the existence of state external-review laws.
After the managed-care backlash of the late 1990s, 42 states have enacted external-review statutes that guarantee aggrieved patients the right to appeal a coverage denial to an independent panel of medical experts, typically chosen by the state’s insurance or health departments. The programs are thought by many to mitigate the number of lawsuits against HMOs by resolving coverage disputes while the patient can still benefit from the treatment in question.
“External review has worked extremely well for us,” says Susan Nestor, director of the North Carolina Department of Insurance‘s Healthcare Review Program. “It’s an efficient, cost-effective method of dispute resolution designed to prevent many of the bad medical outcomes that theoretically can lead to lawsuits.”
External review has once again become a central point of discussion as the debate over a federal patients’ bill of rights-which could potentially open the door to HMO liability-has reignited after the Supreme Court’s ruling. In Aetna Health Inc. v. Davila, the justices unanimously ruled that insurers are shielded from state lawsuits by the Employee Retirement Income Security Act, or ERISA, a 30-year-old federal statute governing private employer-sponsored benefit plans (June 28, 2004, p. 12). The decision effectively voided right-to-sue laws in North Carolina and 11 other states.
Insurers contend that external review’s ability to resolve coverage disputes quickly and cheaply leaves little need for state or federal right-to-sue laws, which they claim would only drive up healthcare costs. But consumer advocates argue that, despite all of its advantages, external review has its own shortcomings and cannot replace the basic right of patients to seek legal recourse when seriously injured by an insurer’s misguided coverage decision.
Useful but underused
Both patient advocates and health insurers agree that external review provides several advantages over litigation. For one, the process is far quicker than going to court: Most state programs require decisions to be rendered within 45 days, or in as little as 24 hours when a patient’s life or health is at imminent risk. The process is also far less expensive, usually costing just $250 to $500, which the insurer is typically required to pay. And statistics show that patients have a good chance of having a coverage denial at least partially overturned.
North Carolina’s appeals process, for example, has helped patients gain access to more than $1 million worth of previously denied medical care since its inception in July 2002, Nestor says. In one of the state’s most costly cases to date, a review panel approved a patient’s $185,000 experimental stem-cell transplant.
In the 24 months ended June 30, 2004, the state’s insurance department received 330 requests for external review involving 20 different insurers, and it accepted 142 of them. (The other 188 cases were deemed ineligible based on a number of criteria.) Of the reviewed cases, 45% were decided in favor of the patient.
In California, 698 medical coverage disputes were resolved through external review in 2004, compared with 800 in 2003 and 689 in 2002, according to the state Department of Managed Health Care, or DMHC. Among last year’s cases, the HMO’s original decision was upheld 61% of the time and overturned 39% of the time.
In one instance, the review panel overturned an insurer’s decision that denied minimally invasive surgery to treat a 54-year-old man’s prostate cancer. In other cases, reviewers helped a handicapped man gain access to an electric scooter, allowed an AIDS patient to receive acupuncture for insomnia and depression, and gave the go-ahead for the controversial treatment of using Botox injections for migraine headaches.
Barbara Reagan, assistant director of the DMHC’s HMO Help Center, says the external-review program has prompted insurers to fine-tune their coverage policies, clarify gray areas in the contracts and, in some cases, expand access to certain drugs and procedures that they used to readily deny.
Bariatric surgery for morbidly obese patients, she says, is one example. Gastric bypass surgery and other bariatric procedures, which typically involve reducing the size of the patient’s stomach, have become a hot-button issue as demand for the $30,000 procedures has soared in recent years (See Web exclusive, Oct. 4, 2004).
“We used to see several disputes stemming from certain insurers refusing to cover bariatric surgery,” Reagan says. “But with all the overturns (by the review panel), those insurers are approving the surgery more often. Instead, what we’re seeing now are disputes over what kind of bariatric surgery should be approved.”
Despite the positive results, statistics show that patients aren’t racing to file appeals. According to the Kaiser Family Foundation, roughly 4,000 to 7,000 external-review cases are heard each year-a minuscule number when compared with the 170 million Americans covered under managed-care plans.
“External-review programs have earned broad support, but they are not being widely used,” says Drew Altman, the foundation’s president and chief executive officer, adding that “the low number of cases suggests that a patients’ bill of rights might not raise insurance premiums as much as some have feared.”
Several states are working hard to spread the word. North Carolina’s insurance department, for example, distributes posters and fliers in doctors’ offices advertising the state’s appeals process. It’s also working with insurers to ensure that their denial notices advise consumers of their external-review rights upfront. And in California, the DMHC has been publishing articles about the state’s external-review program in medical journals and meeting with provider and public health organizations to educate them on the process, Reagan says.
“One area where we believe external review is still underutilized is in mental health,” Reagan says. “We’ve been trying to get the word out to mental health professionals that their patients have another avenue open to them when they believe necessary care has been wrongly denied.”
Of course, there are other theories on why more patients aren’t seeking external review, ranging from criticism that the process is too difficult to the belief that there simply aren’t many patient-plan conflicts in the first place.
Consumer groups contend that many patients never make it past their health plan’s internal-review process, which can be exhausting and ultimately discouraging. All but one of the 42 states with external-review laws require patients to complete their insurer’s internal appeals process before taking their case outside the plan.
“There are several steps you have to go through,” says Lisa McGiffert, a senior policy analyst at the not-for-profit Consumers Union. “A lot of people who make it through (the insurer’s internal-review process) only to get denied again say, ‘Why would I want to do this again?’ Someone has to be really tenacious and focused.”
Other barriers to external review exist: Fourteen states require patients to pay a filing fee of $25 to $50 to apply for a review. Eleven states have a claims threshold, or a minimum dollar amount that must be in dispute for a case to be eligible. And 35 states have filing deadlines, usually within two months of the original coverage denial.
And McGiffert points out that the patient’s doctor or hospital is often reluctant to supply the additional medical records that the review boards typically request. “For some providers, it is just another administrative hassle, another HMO hoop to jump through,” she says.
To sue or not to sue
Even so, some experts say, the benefits of external review have helped make medical-negligence cases against HMOs essentially a nonevent. Only a handful of such lawsuits have been filed in the past several years, with some states seeing no lawsuits at all, according to a September 2003 study published in the policy journal Health Affairs.
Researchers cited a number of possible reasons for the lack of lawsuits, including lawyers’ reluctance to take on such cases and insurers’ recent efforts to cut back on unpopular utilization controls. But Mark Hall, co-author of the study, chalks up the dearth of litigation largely to the perceived fairness of external review.
“From what I’ve been told, patients who prevail with external review feel vindicated, and those who don’t prevail tend to be satisfied that they were at least heard by an impartial panel of medical experts,” says Hall, a professor of law and public health at Wake Forest University, Winston-Salem, N.C.
But insurers and consumer groups remain heavily divided on how to interpret these results.
The trade group America’s Health Insurance Plans contends that external review’s proven ability to resolve coverage disputes outside the courtroom leaves little need for HMO liability laws, which it claims would drive up premiums by exposing insurers to huge damage awards. A report released by the Congressional Budget Office in April 2001 estimated that passage of a federal patient-protection bill that includes the right to sue HMOs would boost the average policyholder’s annual premium by 4.2%, or about $100.
“External review creates an effective, alternative system of dispute resolution so that we don’t have to tie things up in the courts,” says AHIP spokesman Mohit Ghose. “It guts the system if (the panels’) decisions don’t have to be honored and can later be challenged in court.”
Others, however, argue that external review is only part of the equation, because it does little to keep insurers honest and nothing to help patients who have actually been injured by their HMO.
Jamie Court, president of the Foundation for Taxpayer and Consumer Rights, says state right-to-sue laws remain a much-needed protection, even if rarely used, because they are a patient’s only recourse when seriously harmed by a coverage denial. After the Supreme Court’s decision, patients can still sue their insurer in federal court, but they can seek only the cost of the denied treatment, not compensation for pain, suffering or lost wages, nor punitive damages. And if the patient dies because care was wrongly withheld, the federal case vanishes.
“Litigation is an important part of the framework of accountability,” Court says, adding that external review only works in conjunction with HMO liability laws, which create “a form of redress for a patient or their family when he or she is injured or even killed because of a coverage denial that wasn’t initially appealed.”
What’s more, external review cannot replace a courtroom as a stick with which to prod HMOs to make good decisions, Court says. The threat of high damage awards motivated insurers to quickly and fairly resolve disputes; now that no such threat exists, patients may find it more difficult to get needed care, he says.
“A cardiac patient who arrives in an intensive-care unit doesn’t have the time or capacity to appeal a care denial,” he says. “Only the legal threat of damages, should the patient not get appropriate care, will compel the HMO to allow the time-sensitive hospital admission or treatment that can save their life.”
Born of frustration
The concept of external review began to take shape in the 1990s, when most employers were shepherding their workers into HMOs, designed to hold down costs by managing access to care. Often, the plans refused to pay for costly treatments deemed not medically necessary, including those for sick children (April 17, 2000, p. 66).
Patients were outraged to learn that they could not sue their HMOs over questionable coverage denials because their insurers were shielded by ERISA. As public anger grew, lawmakers looked for other ways to protect patients.
In 1997, Congress took up a federal patients’ bill of rights, which would have modified ERISA to allow patients to sue their HMOs, but that legislation stalled. Meanwhile, several states adopted external review, contending that because the process did not involve a lawsuit against an HMO, it did not conflict with the federal benefits law.
States’ ability to enforce their external-review laws was cemented in June 2002, when the Supreme Court upheld an Illinois law that allows patients to seek a review when their doctor and HMO disagree on the best treatment.
The case involved Debra Moran, who sought treatment in 1996 for a painful shoulder problem. After standard treatment failed, her primary-care physician recommended that she receive surgery from an out-of-network specialist. When Moran’s insurer, Rush Prudential HMO, refused to cover the $95,000 procedure, she requested an external review under the Illinois law. The HMO declined to allow the review to be performed.
Moran filed suit in Illinois state court, which ordered Rush to submit to the review. The review panel subsequently determined the surgery was medically necessary, but Rush again denied coverage. Moran, who in the interim had paid for the surgery out of pocket, then sought a court order requiring Rush to reimburse her.
The case was moved to federal court, where Rush argued that it did not have to abide by the Illinois law because it was pre-empted by ERISA. The lower court sided with the HMO, but the 7th U.S. Circuit Court of Appeals in Chicago later reversed the decision and allowed Moran’s lawsuit to proceed. The appellate court ruled that the Illinois law regulated insurance, not employee benefits, and therefore was not quashed by ERISA.
The U.S. Supreme Court upheld the decision, adding that state external-review laws were enforceable because they do not provide financial “remedies” beyond the modest ones allowed under ERISA. In his 5-4 majority opinion, Justice David Souter noted that external review is “akin to a mandate for second-opinion practice in order to ensure sound medical judgments.”
The American Association of Health Plans, now part of AHIP, decried the ruling, arguing that it would make it harder to create regulatory uniformity by “reinforcing a patchwork of state laws.” National and regional payers, the trade group argued, would be left with the costly administrative burden of adapting to each state’s unique external-review requirements.
Some insurers continue to grumble. “It’s an absolute nightmare,” says James Cross, national medical director for medical policy administration at Aetna, which operates in all 50 states. “Every state mandate is different. Each one has different turnaround times, different eligibility requirements, different paperwork to be filed.”
But the industry’s vocal objections soon quieted, largely because insurers were already facing a far bigger threat-litigation. By 1998, Texas had enacted the nation’s first HMO liability law, and Congress was debating passage of a federal patients’ bill of rights that threatened to expose health plans to lawsuits.
To make matters worse, Aetna and Cigna Corp. were sued in 2000 by two Texas patients who claimed they had been seriously injured because of denial of care. By the time the ruling in Rush Prudential v. Moran came down, the lawsuits had been upheld by the 5th U.S. Circuit Court of Appeals in New Orleans, which rejected the insurers’ arguments that ERISA pre-empted the Texas law. A year later, they were consolidated before the Supreme Court in what would be the precedent-setting case of Aetna Health Inc. v. Davila.
Meanwhile, insurers began establishing their own formal appeals programs through contracts with outside companies known as independent review organizations, or IROs. While insurers touted the self-policing move as an effort to build credibility with patients, critics saw it as an attempt to quiet the public demand for state laws creating external-review programs, or worse, allowing patients to sue their HMOs.
“This is not out of the goodness of their hearts. They are facing tremendous pressure,” former Washington state Rep. Judy Uherbelau told the Seattle Times in December 1999 after four of the state’s largest health insurers unveiled their own independent-review programs. At the time, Uherbelau had tried unsuccessfully to pass bills establishing a state-run external-review program and granting the patients the right to sue their HMOs.
Ultimately, however, the industry’s self-policing efforts fell short. Critics complained that insurers’ review programs were fraught with conflicts of interest because the IROs making the decisions were selected and paid by the health plans. Opponents also challenged insurers’ efforts to make the IROs’ decisions “binding” so that patients could not wage further challenges under state external-review laws or in the courts.
Since 2000, 15 additional states-including Washington-went on to pass external-review laws, all but four of which require the panel’s decisions to be binding on the insurer, though not on the patient. Oregon’s law, passed in 2001, even calls for fines of $100,000 if a health plan does not adhere to the review panel’s decision.
Win some, lose some
Insurers have been forced to adapt. Aetna, for instance, now operates a centralized unit in Alpharetta, Ga., where six dedicated staff members manage all the external-review cases involving the insurer nationwide. “It’s helped us keep a handle on the ins and outs of all the different state mandates,” says Cross, who oversees the unit.
But not all insurers have taken their states’ external-review laws sitting down.
Blue Shield of California, for instance, made headlines in January 2002 when it won a lawsuit against the state’s Department of Managed Health Care, arguing that the agency had overstepped its bounds when it required the insurer to pay for a weight-loss drug not covered under a patient’s contract. Blue Shield had sued the DMHC after being fined $270,000 for refusing to pay for Xenical even after external review determined that the diet drug was medically necessary in the treatment of an obese patient.
One of Hawaii’s largest health insurers celebrated an even larger victory last November when it managed to have the state’s 4-year-old external-review law nullified by a state Supreme Court.
The case involved kidney-cancer patient Kevin Baldado, who filed for an external review after his insurer, Hawaii Management Alliance Association, or HMAA, refused to pay for an experimental stem-cell transplant recommended by Baldado’s doctor. The state review panel sided with HMAA but required the insurer to pay the $12,000 in attorney’s fees and other costs Baldado had amassed while pursuing the review. (Unlike most states, Hawaii’s external-review law allows patients to hire lawyers to represent them before a panel hearing.)
The HMAA filed a lawsuit in Hawaii’s 1st Circuit Court, contending that it was not required to cover Baldado’s costs because the state’s external-review law was pre-empted by ERISA. The court ruled in favor of the state, but the decision was later overturned by the Hawaii Supreme Court, which determined that the state’s review process violated ERISA because it allowed patients to recoup something other than the cost of the treatment in question.
Since then, the state’s Insurance Division has stopped hearing appeals and has dismissed about a dozen cases that had been pending, Hawaii Insurance Commissioner Jeffrey Schmidt says. The division receives about 40 requests for external review each year.
Patients who want to challenge an insurer’s coverage denial must submit to binding arbitration or take their grievance to federal court, where they can sue only for the cost of the denied treatment and must cover their own legal expenses, Schmidt says.
“(The ruling) creates a major hole in our system,” says Schmidt, who has asked the state attorney general to appeal the decision to the U.S. Supreme Court. “Many people who believe they have been wrongly denied care may now have no other recourse than to go to court, which is far more expensive and time-consuming.”
Schmidt says he plans to push for a bill that would establish a new state external-review process modeled after Illinois’ program, which contracts with IROs to hear patients’ appeals. Previously, Hawaii’s review panel consisted of Schmidt, a physician and a representative of the insurer who was not involved in the original coverage denial.
Passage of a federal patients’ bill of rights could ultimately create a uniform external-review system, though such legislation has remained stymied by far more divisive issues-namely the right to sue HMOs-addressed in competing proposals.
Both houses of Congress have passed bills that would establish a federal right to independent review of coverage decisions for all privately insured individuals, including those in self-insured employer plans. The Senate bill would create a federal floor for external-review protections, leaving state programs in place, while the House bill would pre-empt all state external-review programs, replacing them with a single federal standard.
These days, the insurance industry is pushing for all external-review panels to base their decisions on “evidence-based medicine,” which relies on peer-reviewed medical studies to suggest the best treatment. Using evidence-based medicine would reduce the variation among state laws, making the review process more manageable for insurers and fairer for patients, says AHIP spokesman Ghose. “Whether it’s on a federal level or state by state, we’d like (external review) to be based on the best available medical practices,” he says.
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