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Vernellia R. Randall
17 U. Puget Sound L. Rev. 1 (Fall 1993)
Copyright (c) 1994 by Vernellia R. Randall



The escalation of health care costs has put the words "cost control"(2) on everyone's lips and has forced society to reevaluate the American health care system.(3) Early reimbursement plans rewarded physicians for providing expensive and sometimes unnecessary treatment.(4) Third-party payers and government then developed alternative market-driven plans, which economically penalized physicians for providing what was perceived to be unnecessary care. 

In particular, third-party payers have depended on managed care products, which revolutionize the relationship among third-party payers, physicians, and patients.(5) Under managed care products, the risk of financial loss shifts from third-party payers to physicians. The clear problem with this approach is that physicians, concerned that they will be left to cover costs  for which the third-party payer refuses reimbursement, will cut necessary services and will leave patients almost completely out of the decision-making process.(6)

Without proper controls, the zeal of third-party payers to lower costs encourages physicians not only to eliminate unnecessary care, but to eliminate beneficial care as well. Furthermore, risk shifting has the potential to worsen problems of access to health care service. (7) The actual impact of managed care products on physician behavior is unknown, and the uncertainty makes the product dangerous to the patient. Because the patient is left with significantly less control over health care decisions than was previously available, the danger is unreasonable.(8)

Third-party payers use techniques for risk shifting that are designed to encourage physicians to push their practices to the outer limits of acceptable medical standards.(9) Because quality measurement(10) is difficult at best, such actions may make it hard to decide where acceptable medical practice ends and malpractice begins. Moreover, if managed care products are allowed to determine the standard of care, how can injured patients support claims against those products for physician negligence? In other words, will cost containment efforts imposed by third-party payers constitute a defense to medical malpractice claims? 

While the goal of financial risk shifting is to reduce unnecessary care and so-called "marginally helpful care," without appropriate safeguards the potential exists for withholding necessary and potentially helpful care. If a person is injured because the physician failed to provide marginally helpful care, what legal standard of care applies? Will the standard of care be based on whether the unprovided service was "medically necessary"? Will the definition of "medically necessary" be based on the statistical person or on the individual patient? 

 The courts have not yet allowed financially interested providers to redefine the medical standard of care. There is some risk, however, that such a self-serving redefinition may indeed occur and result in uncompensated injury to patients. It is this potential risk of uncompensated injury from which patients must be protected. Traditionally, the law affords significant respect for the physician-patient relationship, a relationship that must be based on trust. If society chooses to allow third-party payers to tamper with the physician-patient relationship, society must force those third-party payers to take responsibility for the injuries that occur.(11)

It will serve this society little if lower health care costs are achieved by means of uncompensated injuries to individuals. It will serve this society little if-in the interest of reducing government taxes or increasing profits or market share for third-party payers-society adopts a system in which the rule is "caveat patients." It will serve this society little if a market-based system aggravates inherent class differences. 

Managed care products are potentially dangerous to individual patients and to society. The entities that can minimize that danger are the third-party payers who design, plan, and benefit from managed care products. Yet, because of the peculiar nature of the relationships among patient, physician, and third-party payer, current legal theories are inadequate to promote safety, to shift the risk, and to spread the burden.(12) Tort theories put an extraordinary burden on the plaintiff in areas where the defendant has the more complete knowledge, often the only knowledge. Tort theories are also inadequate because of the effect of utilization review and financial risk shifting, which recasts injury-producing decisions that would previously have been analyzed in terms of negligence as nonnegligent judgmental conduct.(13)

The tort system produces a significant element of chance, heavy transactional costs, inadequate compensation recovery, enormous malpractice premiums, and ineffectual deterrents. Furthermore, even if tort theories could provide an adequate remedy, the Employee Retirement Security Act of 1974  (ERISA)(14) restricts or denies coverage for injuries based on utilization review activities and financial risk shifting.(15) Given society's desire to control health care costs through cost containment activities, alternate mechanisms should be developed to compensate the victims who are injured by such activities. A medical injury compensation fund could provide appropriate compensation, not only to the victims of cost containment activities, but also to others receiving medical injuries. 

This Article examines current tort remedies for personal injury claims and explores the problems that arise when these remedies are applied to physicians' actions that are directed by third-party payers. Part II of this Article explores the organization and historical development of managed health care products. Part III considers the past and present uses of the utilization review process and financial risk shifting. Part IV explores the applicability of traditional theories of tort liability to third-party payers, including direct liability of third-party payers who market managed care products. Part V considers the barriers that ERISA presents to compensating patients for cost containment injuries. Part VI proposes a no-fault medical injury compensation scheme as a legislative remedy for cost containment and other medical injuries. 



Endnotes  2. FN2. Each player probably means something different by the term "cost control." Patients mean price; third-party payers mean cost. 

3. FN3. Between 1960 and 1983, per capita health care rose from 5% to nearly 11% of the gross national product (GNP). E. Haavi Morreim, Cost Containment and the Standard of Medical Care, 75 CAL. L. REV. 1719, 1720 (1987). In 1989, health costs consumed 11.6% of the GNP, up from 11.2% in 1988 and up by nearly a point in just three years. HEALTH LAW. NEWS REP., Feb. 1991, at 3; see also Clifford Ossario, Increasing Costs Are Pressuring the Entire Health Care Industry, 9 WHITTIER L. REV. 197, 197 (1987). In 1989, total health care expenditures were $604 billion, up by $60 billion or 11% from 1988. HEALTH LAW. NEWS REP., supra, at 3. For most employers, health care expenditures are approaching 10% of payroll costs. Ossario, supra, at 197. In fact, the total worth of the Fortune 500 today is less than the commitment of those companies to health care expenditures for their retirees. Id. at 197-98. 

These escalating costs have been attributed to several factors including price inflation, the graying of America, new technologies, and the growth in the number of hospitals. Morreim, supra, at 1720; William B. Schwartz, The Inevitable Failure of Current Cost-Containment Strategies, 257 JAMA 220 (1987). 

4. FN4. There are many health care providers (e.g., nurses and chiropractors) to whom this same analysis applies. For the sake of simplicity, this Article refers only to physicians. Similarly, although there are many types of organizations that provide health care (e.g., hospices and nursing homes), this Article refers only to hospitals. 

5. FN5. See infra part II.C. 

6. FN6. See infra part III.C. 

7. FN7. See infra part III.C.3. 

8. FN8. While it is true that patients have never had complete control over health care decisions because of their lack of knowledge of the medical system and treatments available, patients exercise control when there are competing therapies with different risks and different outcomes, or when the cost of the preferred treatment exceeds a patient's financial capabilities. Managed care products would remove from the menu of options available to patients those therapies and treatments that the managed care products view as unnecessary. 

9. FN9. See infra part III.B. 

10. FN10. See infra part III.C.1. 

11. FN11. This Article does not address tort liability for interference with the physician-patient relationship. This Article assumes that there has been no tortious interference but that there has nevertheless been injury. 

12. FN12. See infra part IV. This Article is limited to a discussion of tort theories of liability. It does not discuss contract theories of liability. 

13. FN13. See infra part IV. 

14. FN14. 29 U.S.C. ss 1001-1461 (1988). 

15. FN15. See infra part V. 

Related Pages:
Home ] Up ] Prelude ] [ Introduction ] Historical Background ] Cost Containment Measures ] Traditional Theories of Liability ] ERISA as a Barrier ] Medical Injury Compensation Fund ] Conclusion - Managed Care ]
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Home ] Managed Care and African Americans ] Managed Care and Minorities ] Cost Containment Injuries ]
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Professor Vernellia R. Randall
Institute on Race, Health Care and the Law
The University of Dayton School of Law
300 College Park 
Dayton, OH 45469-2772
Email: randall@udayton.edu


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