Can an HMO Be Sued For Medical Malpractice Based on Its Coverage Decisions?
A Recent Federal Appeals Case Says Yes

On February 11, the U.S. Court of Appeals for the Second Circuit delivered an opinion addressing an important question: Can an HMO be sued for malpractice on the theory that it acted like a doctor when it made a particular coverage decision?

The court said yes. In so doing, it opened the door for a lawsuit against an HMO that refused to pay for an experimental treatment, and suggested its own alternative treatment instead.

Was the court correct in its conclusion? Or, put another way, does it make sense to say that an insurer practices medicine when it makes coverage decisions?

The Facts of the Cicio Case

In 1998, Carmine Cicio was diagnosed with multiple myeloma in 1998. Because Cicio did not respond to chemotherapy, his oncologist, Dr. Edward Samuels, wrote to Cicio's HMO, Vytra to request approval involving a "tandem stem cell transplant."

Vytra refused this request. The reason it gave was that the treatment was classified as "experimental" for Cicio's illness, and was therefore not covered by Cicio's policy.

Cicio could not afford to pay for the treatment himself, and so Dr. Samuels appealed to Vytra again, by phone and letter. Among other points, Dr. Samuels noted that "single stem cell treatment" had convinced oncologists that tandem stem cell treatment would be effective in cases like Cicio's. In Vytra's final communication with Dr. Samuels, it noted that it would approve a single stem cell treatment for Cicio. But by that point Cicio was, in Dr. Samuels' opinion, no longer a candidate for single stem cell treatment. Cicio died soon after.

Cicio's widow sued Vytra in state court, alleging various state law claims. Then defendant then removed the case to federal district court in the Eastern District of New York.

There, Judge Thomas Boyle dismissed all the claims. He reasoned that they were preempted by the Employee Retirement Income Security Act (ERISA), a federal law designed to regulate employee benefit plans. ERISA was applicable, Judge Boyle held, because Cicio had purchased his health insurance policy through his employer. (For more on ERISA and HMO litigation, see my prior column.)

Under the doctrine of "preemption," a federal law can effectively preclude the application of overlapping state laws. Here, Judge Boyle held that the federal ERISA statute precluded the state law claims Mrs. Cicio was trying to bring. So he applied ERISA's own rules instead. But for Mrs. Cicio, that was a disaster.

ERISA allows only certain remedies. It allows a court to order the terms of a health insurance policy to be performed. Alternatively, it allows the insured to get reimbursed for medical services he'd paid out of his own pocket, and for premiums paid.

The problem was that Mr. Cicio had never ended paying for the tandem stem cell procedure, which he could not afford, so reimbursement was out of the question. Meanwhile, now that he was deceased, a court order forcing Vytra to fund the procedure would be totally useless.

The option of a refund of premiums still remained. But Mrs. Cicio, quite reasonably, hadn't just wanted to get her husband's premium back. She'd wanted to challenge the insurer's decision to deny her husband's the tandem stem cell procedure, and to try to recover for her husband's pain and suffering, and to receive punitive damages.

The Argument on Appeal: Does ERISA Apply In the First Place

So Mrs. Cicio appealed. On appeal, she argued that, although ERISA governed the decisions Vytra made as a health insurer, it did not govern the decisions Vytra made as a health care provider. And when Vytra made the counterproposal that Dr. Samuels treat Mr. Cicio with a single, not tandem, stem cell treatment, it was making just such a decision. Accordingly, with respect to that decision, ERISA did not apply, and Vytra could be sued for medical malpractice (and other torts).

To assess this argument, it's important to know a little bit of background. When an HMO employs a physician, it can be sued for medical malpractice based on the doctrine of respondeat superior, which makes employers liable for torts their employees perform in the course of their duties. ERISA does not prevent that. The twist here, however, was that Dr. Samuels did not work for Vytra. Instead, his only connection to them was that, as Cicio's insurer, they paid him for his services to Cicio.

The Controversy over the Pegram Precedent

Judge Robert Sack wrote the opinion for the two-judge majority of the Second Circuit panel. It accepted Mrs. Cicio's argument. But Judge Guido Calabresi - a former Yale Law School Dean and leading torts scholar - wrote a powerful dissent.

The disagreement between the majority and the dissent turned on the meaning of Supreme Court's recent decision in Pegram v. Herdich. That case, itself, is complex and thus the judges' conflict is understandable.

In Pegram, a plaintiff tried to sue her HMO for breach of fiduciary duty, a state law claim. She alleged the HMO had breached its duty to her when it failed to tell her that it provided financial incentives to doctors for meeting cost-saving goals. And she suggested that these incentives had led her doctor to conclude that her insurance policy did not cover a particular procedure.

The Court rejected the argument that it could be a breach of a fiduciary duty for an insurer to encourage cost-savings. The Court deflected attention away from the insurer by stressing that the plaintiff's treating physician made the mistake that harmed her. If she wanted, the Court suggested, the plaintiff could sue her doctor under the malpractice laws. When a physician makes a decision about whether the terms of a health insurance policy cover the patient's symptoms, the physician is making a medical decision. A bad decision - including a decision whose motive is solely to keep costs down - can thus be medical malpractice on the doctor's part.

None of this, of course, directly resolves the question at issue in Cicio: Does an HMO, like a physician, make a medical decision when it denies coverage, and hence can it, like a physician commit medical malpractice?

Who's Right About Pegram? A Difficult Call to Make.

Judge Sack interpreted Pegram to mean that sometimes, the decision whether an insurance policy covers a medical condition or treatment is a "mixed eligibility and treatment decision." In that instance, no matter who makes the decision, it's a medical decision that can be challenged as malpractice.

In addition, Judge Sack suggested that the decision about Cicio's case was just such an instance of a "mixed eligibility and treatment decision." If it were not, Judge Sack suggested, then why had Vytra responding not just by denying coverage, but by suggesting an alternative treatment? And if eligibility decisions are not frequently also treatment decisions, why are they often the most important decisions seriously ill people face in the U.S.?

If Vytra "treated" Cicio, then so would, for instance, a loan officer trying to decide whether Cicio would live to repay a loan that would have paid for the treatment.

Coverage decisions, Judge Calabresi suggested, are not medical treatment decisions, though they may depend on medical facts. Rather, they are decisions about whether a contract's language covers a particular (medical) set of facts - decisions that often have profound medical consequences, but yet are not treatment decisions.

Who's right? It's difficult to say. And that's because tort law has not yet evolved to reflect a sea change in the nature of medical treatment in modern America - the advent, and influence, of HMOs.

Tort Law Has Failed to Catch Up with Modern Medicine and Medical Insurance

Medical malpractice law was devised in another, simpler, era. It envisioned that patients would trust their doctors; that doctors would have a heightened obligation to look out for the interests of their patients; and that doctors, together with patients, would make treatment decisions will only those interests in mind.

That's no longer true, of course. HMOs play a huge rule in deciding what treatments patients actually receive, based on the way they interpret their policies. They look to their own interests, not just the patients'. They may employ doctors whom they control, and even if they don't, they may try to incentivize non-employee doctors to keep costs down, as allegedly occurred in Pegram.

In either situation, doctors may feel torn in their loyalties - wanting to adhere to the Hippocratic Oath, but feeling their financial interest tug the other way. And HMO employees, too, may want to do the right thing, but feel their own tug, knowing that they may be fired if they pay out too much in claim monies.

It may be time for the foundations of medical malpractice to shift. Once, this area of law was based on the special relationship between doctor and patient. Now perhaps it should be based on the fraught economic relationship between the patient, the doctor, and the insurance company.