Copyright ©1998. Vernellia R. Randall
All Rights Reserved.
107. FN107. One recent study of 222 employers noted
that utilization review efforts can reduce total medical expenditures an
average of 8.3%. Bishoff, supra note 57, at 9 (citing Glenn Ruffenbach,
Employers Can Cut Health-Care Costs With "Utilization Review," Study Finds,
WALL ST. J., May 19, 1988, at A38). In 1988, another study concluded that
nearly 10% of the 800,000 hospital Medicare admissions were not "medically
justified." Id. However, it may be that utilization review can provide
only temporary relief and not a cure for increased costs. Id. at 10. That
position would seem to be supported by employers' perceptions of the major
obstacles to health care cost management: 76%-physician and hospital charges;
70%-costs of sophisticated medical technologies; 59%-an aging population;
49%-an inability to enforce medical performance standards; 42%-a failure
of managed care to achieve projected savings. Only 37% and 30% respectively
believed that utilization of outpatient care and utilization of inpatient
care were major obstacles to health care cost management. Id. at 10. These
perceptions would indicate that utilization review is a minor player in
health care cost containment. Despite what may be a limited effectiveness
of utilization review, the lack of a utilization management program or
an inefficient system without supporting data probably disqualifies an
entity from being a managed care system. Hinden & Elden, supra note
97, at 50-51
108. FN108. Boland, supra note 90, at 503.
109. FN109. Pamela S. Bouey, Peer Review in the
Managed Care Setting, in MANAGED HEALTH CARE 1988: LEGAL AND OPERATIONAL
ISSUES (PLI Commercial Law and Practice Course Handbook Series No. 471,
1988), available in WESTLAW, TP-All File.
110. FN110. Retrospective utilization management
programs analyze data on hospital admissions, patterns of treatment, and
utilization of certain procedures. See Bischoff, supra note 57, at 14-15
(providing examples of retrospective review).
111. FN111. Concurrent review (or length of stay
certification) determines the medical necessity of a continued hospital
stay. Hinden & Elden, supra note 97, at 52. A concurrent review is
conducted by a nurse reviewing the patient's treatment plan. The nurse
conducts the review at the hospital using established medical criteria.
If the nurse judges the treatment plan to be appropriate, she approves
the stay until the next review cycle or the patient is discharged. If she
does not approve the treatment plan, the nurse refers the case to a physician
advisor who either confirms the need for continued treatment or suggests
alternate treatment. Bischoff, supra note 57, at 14.
112. FN112. Under a prospective review system,
most nonemergency hospital admissions must receive prior approval and an
initial approved length of stay is assigned. Hinden & Elden, supra
note 97, at 52.
113. FN113. Preadmission review is a form of prospective
review. Preadmission review determines the medical necessity of a scheduled
inpatient admission, expensive procedures, or outpatient procedures. The
initial determination is made by a nurse review coordinator using established
criteria. A registered nurse usually conducts offsite preadmission certification.
If there is a scheduled admission prior to hospitalization, the patient's
physician completes a review form. She describes the patient's medical
condition and the treatment plan, and forwards the form to the nurse review
coordinator. The nurse notifies the physician, patient, and hospital of
her decision regarding the appropriateness of admission and length of stay.
Bischoff, supra note 57, at 13-14.
114. FN114. Admission review is a form of concurrent
review. Admission review determines the medical necessity of unscheduled
inpatient admissions or other admissions not covered by preadmission review.
Most managed care products use admission review. The primary exception
is hospitals that are paid based on diagnosis related groups.
115. FN115. Except by commercial insurers, second-opinion
surgery is used much less often. In 1985, commercial insurers required
second opinions in nearly twice as many programs as any other sponsor.
De Lissovoy et al., supra note 89, at 11.
116. FN116. See supra note 111.
117. FN117. See supra notes 64-67 and accompanying
118. FN118. Retrospective review disallows payments
of claims for utilization. Because retrospective review disallows payment
after the service has been received, it is not as effective as prospective
or concurrent review. Consequently, the use of retrospective claims review
is declining. However, it is useful as a tool to research provider claims.
For example, it would be useful in determining whether the objective laboratory
data (e.g., biopsy) and subjective data (e.g., surgeon notes) are consistent
with the length of stay or the length of surgery. See Bischoff, supra note
57, at 15. Consequently, retrospective review can be a very important tool
in a managed care product such as an HMO.
119. FN119. See ANNAS et al., supra note 44, at
120. FN120. Id.
121. FN121. 42 U.S.C. ss 1320c to 1320c-12 (1988);
ANNAS et al., supra note 44, at 193.
122. FN122. Interestingly, some commentators believe
that allowing the provider to do the utilization review is letting the
"foxes guard the hen house." Burgess, supra note 94, at 283-84. In reality,
no review organization is independent. All review organizations are directly
or indirectly concerned about encouraging overutilization or underutilization.
Hospitals enter PPOs primarily to remedy a decline in patient volume, so
they may not be inclined to conduct stringent utilization review, which
might further reduce patient volume. De Lissovoy, supra note 89, at 9.
123. FN123. But see Linda L. Kloss, Quality Review
and Utilization Management, in THE NEW HEALTHCARE MARKET 680, 684-85 (Peter
Boland ed., 1988) (identifying potential advantages for a PPO that contracts
with a hospital for utilization review).
124. FN124. While it is possible to have effective
utilization review and high quality health care, without a focus on quality
it is more likely that utilization review will work to the detriment of
quality care. See infra part III.C.2.
125. FN125. Matthew 6:24.
126. FN126. Edmund D. Pellegrino, Rationing Health
Care: The Ethics of Medical Gatekeeping, 2 J. CONTEMP. HEALTH L. &
POL'Y 23, 32-33 (1986).
127. FN127. See generally Capron, supra note 47,
at 725; Paul M. Elwood, Jr., When MDs Meet DRGs, HOSPITALS, Dec. 16, 1983,
at 62-63; E. Haavi Morreim, The MD and the DRG, HASTINGS CENTER REP., June
1985, at 30, 34-35.
128. FN128. Rewards can be a predetermined fixed
dollar amount, a fixed percentage of the surplus distributed among the
risk pool, a bonus based on a physician's productivity, or a combination
of methods. Alan L. Hillman, Financial Incentives for Physicians in HMOs:
Is There a Conflict of Interest?, 317 NEW ENG. J. MED. 1743, 1746 (1987).
The methods also include increasing fee schedules and allowing practitioners
to become investors
129. FN129. Third-party payers often provide for
a portion of payments to providers to be withheld. Other mechanisms used
to place the provider at risk include (1) increasing the percentage of
payment withheld the following year, (2) placing liens on future earnings,
(3) decreasing the amount of the capitation payment the following year,
(4) excluding the provider from the program, (5) reducing the distributions
from surplus, and (6) requiring providers to pay either the entire amount
of any deficit or some set percentage of the deficit. Id. at 1745.
130. FN130. For example, approximately 40% of managed
care products require primary care physicians to pay for outpatient laboratory
tests directly out of their capitation payments. Id. at 1746. HMOs also
use peer pressure as a significant motivator. They develop a reporting
system that informs providers of their performance compared with that of
their peers. The reporting identifies areas of excessive costs and service
intensity. Bischoff, supra note 57, at 12-13.
131. FN131. Powers, supra note 64, at 289-90.
132. FN132. See Alan M. Gnessin, Liability in the
Managed Care Setting, in MANAGED HEALTH CARE 1988: LEGAL AND OPERATIONAL
ISSUES, at 405, 414 (PLI Commercial Law and Practice Course Handbook Series
No. 471, 1988), available in WESTLAW, TP-All File.
133. FN133. A provider, or provider group, is paid
a capitation fee per enrollee. The provider group then provides all necessary
physician services. Primary care physicians are the gatekeepers to specialists
and hospital services and are financially responsible for utilization.
Because the amount of payment to the provider group is independent of the
actual services rendered, the group takes on the risks of an insurer. Powers,
supra note 64, at 298-99; Capron, supra note 47, at 726.
134. FN134. Managed care products can shift the
risk by withholding part of the provider's periodic fee-for-service payments
for a claim period. The managed care products usually withhold from 5%
to 20%. At the end of a claim period, a medical claim trend is determined
and compared to a target medical claim trend. If the actual medical claim
trend is lower than the target, the withheld funds are paid to the providers.
If the actual medical claim trend exceeds the target, the withheld funds
are paid to the third-party payer. Powers, supra note 64, at 283-84, 300-301.
135. FN135. The managed care product assumes the
risk that the third-party payer's premium will be sufficient to cover hospital
charges. However, there is no participation by hospitals in profits of
the managed care products. Third- party payers that contract with hospitals
without a discount may pressure those hospitals for a discount, but discounted
charges may be insufficient to cover the hospital's actual costs. Id. at
136. FN136. Hospitals are paid a flat rate per
patient per day, which must cover all necessary services. The advantage
of per diem payments is that the hospital is not at risk for the length
of stay. However, if the managed care product also has an emphasis on early
discharge, the hospital's total income may be reduced. This reduction can
occur when the predetermined per diem payments are too low for the hospital
to cover its costs and the managed care product requires discharge of the
patient before the hospital can break even by averaging cheaper end-of-stay
days with the more expensive beginning-of-stay days. Id. at 294-95.
137. FN137. Barry S. Scheur & John H. Hoskins,
New Concepts in Physician Reimbursement, in MANAGED HEALTH CARE 1988: LEGAL
AND OPERATIONAL ISSUES, at 167, 177-78 (PLI Commercial Law and Practice
Course Handbook Series No. 471, 1988), available in WESTLAW, TP-ALL File.
138. FN138. Case mechanisms are similar to diagnosis-related
groups. See supra note 60. Based on the diagnosis, a predetermined amount
is paid to the hospital for each admission. The hospital is then at risk
for the treatment and the length of stay. Powers, supra note 64, at 295-96.
139. FN139. A hospital is paid a lump sum per enrollee
in the hospital's service area to provide all covered hospital services
required by those enrollees. Because the hospital's payments are independent
of the actual services rendered by the hospital, the hospital assumes the
role of an insurer. Id. at 296-97.
140. FN140. All methods of payment implicitly involve
financial incentives. The fee for service method provides as much incentive
to overutilize as withholding can provide to underutilize. Alan L. Hillman
et al., How Do Financial Incentives Affect Physicians' Clinical Decisions
and the Financial Performance of Health Maintenance Organizations, 321
NEW ENG. J. MED. 86, 86 (1990).
141. FN141. See supra note 60 and accompanying
142. FN142. See Capron, supra note 47, at 735-36
(noting the wide variations in treatment).
143. FN143. Id. at 749-50.
144. FN144. Id. at 750.
145. FN145. Hillman, supra note 128, at 1744.
146. FN146. Ossario, supra note 3, at 199-200.
147. FN147. Burgess, supra note 94, at 289 (quoting
AMA Council on Medical Service, Quality of Care, 256 JAMA 1032 (1986) [hereinafter
Quality of Care]).
148. FN148. Id. at 289 n.120 (quoting Quality Medical
Care: Empiricism v. The Gestalt, in NATIONAL HEALTH LAWYERS ASSOCIATION
1987 HEALTH LAW UPDATE 1.3 (1987)).
149. FN149. Id. at 289 (citing Quality of Care,
supra note 147, at 1032).
150. FN150. For instance, physicians reviewed the
competence of their peers through state agencies and local medical societies.
Similarly, hospitals monitored medical staff performance to maintain accreditation
and minimize liability. Betsy A. Rosen, Comment, The 1985 Medical Malpractice
Reform Act: The New York State Legislature Responds to the Medical Malpractice
Crisis with a Prescription for Comprehensive Reform, 52 BROOK L. REV. 135,
144-45 n.49 (1986); see Quality of Care, supra note 147, at 1032.
151. FN151. See Wendy Parmet, The Impact of Health
Insurance Reform on the Law Governing the Physician Patient Relationship,
268 JAMA 3468, 3468 (1992); Virendra Sayena, Putting Out the Flames that
Threaten Medicine, AM. MED. NEWS, Mar. 22, 1993, at 31, available in WESTLAW,
152. FN152. See Burgess, supra note 94, at 288-91.
This is in part due to the difficulty of defining and measuring quality.
As a result, managed care products have had substantial flexibility in
setting quality assurance standards. Id. at 292.
153. FN153. Id.
154. FN154. For instance, a California study found
that for-profit hospitals had the highest rate of repeat Cesarean sections.
HEALTH LAW. NEWS REP., supra note 3, at 5.
155. FN155. Burgess, supra note 94, at 292. In
fact, insufficient financial incentives have been connected with the breakdown
of several managed care products including SAFECO's United Health Care
Experiment. See generally Steven S. Sharfstein, Financial Incentives for
Alternatives to Hospital Care, 8 PSYCHIATRIC CLINICS OF N. AM. 449-60 (1985).
156. FN156. Maureen E. Corcoran, Liability for
in the Managed Care Setting, in MANAGED HEALTH CARE 1988: LEGAL AND OPERATIONAL
ISSUES, at 425, 427 (PLI Commercial Law and Practice Course Handbook Series
No. 471, 1988), available in WESTLAW, TP-All File.
157. FN157. Id.
158. FN158. E.g., Morreim, supra note 3, at 1719
(arguing that the presumption of a unitary standard of care be refutable
by appropriate evidence of economic constraints).
159. FN159. See infra part IV.
160. FN160. HMOs are required to administer comprehensive
quality assurance to meet statutory and regulatory requirements. Burgess,
supra note 94, at 289. Consequently, the National Committee for Quality
Assurance (NCQA), incorporated in 1979, has established standards to measure
HMOs. Id. at 289-90. However, those standards tend to be targeted on organizational
issues and administrative and clinical problems. Id. at 289-91. Another
method suggested for monitoring and assessing quality of care is the use
of audit reports. Independent physicians examine the managed care products'
medical records after the patient is discharged. Id. at 290; see Arnold
Milstein et al., Auditing Quality of Care: An Employer Based Approach,
BUS. & HEALTH, July-Aug. 1986, at 10. While audits may provide performance
snapshots of quality of care, they do not necessarily identify what the
quality of care should be. The AMA has proposed that the Joint Commission
on Accreditation of Hospitals be given the sole authority to develop standards
of care for the health care industry. Burgess, supra note 94, at 290-91.
161. FN161. Stevens, supra note 98, at 9 (emphasis
162. FN162. Burgess, supra note 94, at 291-92.
Twenty-two states actually have enacted enabling statutes for PPOs, but
only fourteen have included provisions to protect consumers. Of those fourteen,
only two states, Utah and Michigan, have quality assurance provisions that
require PPOs to establish programs to review care or services. Id.
163. FN163. Managed care products are increasingly
important to providers as more and more of their patients are affiliated
with one plan or another. Hillman, supra note 128, at 1747.
164. FN164. See generally Kenneth R. Wing, The
Right to Health Care, 2 ANNALS HEALTH L. 161 (1993).
165. FN165. Capron, supra note 47, at 739-40.
166. FN166. Geoffrey Modest, Financial Incentives
and Performance of Health Maintenance Organizations, 322 NEW ENG. J. MED.
62, 63 (1990) (letter to editor).
167. FN167. Id.
168. FN168. Capron, supra note 47, at 737-39. Some
authors view trust as a basis for a contractual relationship. E.g., CHARLES
FRIED, CONTRACT AS PROMISE: A THEORY OF CONTRACTUAL OBLIGATION 16 (1981).
Implicit in such a contract is that the physician can be trusted to
treat the patient's health needs and interest as central, thus minimizing
the need for the patient to be defensive or to withhold information. Both
the status of the physician and the ethical bases of his practice facilitate
the patient's willingness to put his health in the hands of the physician
with little demand for detailed explanations or monitoring of the physician's
decisions. This is not to imply that physicians have always conformed to
these ethical mandates or that patients have generally been docile, but
only that the physician's authority has been assumed to be part of the
ordinary understanding of relationships between physicians and patients
and their respective responsibilities.
David Mechanic, Therapeutic Relationship; Contemporary Sociological
Analysis, in ENCYCLOPEDIA OF BIOETHICS 1688 (Warren T. Reich ed., 1978),
quoted in Capron, supra note 47, at 737 n.113. The courts have also recognized
this trust relationship: "The patient's reliance upon the physician is
a trust of the kind which traditionally has exacted obligations beyond
those associated with arms-length transactions. His dependence upon the
physician for information affecting his well-being, in terms of contemplated
treatment, is well-nigh abject." Canterbury v. Spence, 464 F.2d 772, 782
(D.C. Cir. 1972).
169. FN169. Capron, supra note 47, at 738.
170. FN170. See id. at 737-38.
171. FN171. See id. at 738.
172. FN172. At any one time, up to 25 million Americans
lack health insurance. That amounts to about 11% to 12% of the noninstitutionalized
population. Because of loss of coverage or change of employment status,
in any given year over 16% of Americans will not have insurance. Id. at
173. FN173. Individuals and agencies engaged in
utilization review traditionally maintain that they make their decisions
for the limited purpose of determining payment, not for the purposes of
determining the course of treatment or access to care. Hinden & Elden,
supra note 97, at 54. "Just because we refuse to pay for the service,"
the argument goes, "does not mean the patient cannot get whatever treatment
she desires." Even if that argument had any validity, the reality is that
for many people a denial of payment is a denial of treatment. Id. Thus,
a health care system based on third-party payers that ration health care
resources on the basis of ability to pay will exacerbate the problem of
access. Morreim argues that these changes in the health care delivery system
will more heavily burden the indigent. She argues that the problem is not
so much one of "pervasive resource shortage" but of "stratified scarcity."
Morreim, supra note 3, at 1722.
174. FN174. If different cost containment programs
produce markedly different financial rewards for physicians, then physicians
are likely to refuse to participate in programs or to serve the subscribers
of those programs that pay them less. Capron, supra note 47, at 751-52;
Rand E. Rosenblatt, Dual Track Health Care-The Decline of the Medicaid
Cure, 44 U. CIN. L. REV. 643, 644- 45 (1975). Thus, financial risk shifting
will widen the gaps between tiers of a multi-tier health care system. At
the top tier will be those individuals and companies who can afford to
pay top premium for their care. Third-party payers will translate the high
premium into better financial payments to the physicians. Better payments
to physicians will mean more physicians willing to serve the particular
population and, consequently, access to a broader range of health care
services. At the bottom tier will be tax-based systems like Medicare and
Medicaid that severely restrict payments to physicians. These lower payments
will translate into fewer providers and fewer services. Thus, the quality
of care that the patient receives is likely to be influenced by the payment
source. A study of the hospital records of almost 600,000 patients found
a marked difference in outcomes for those who had health insurance and
those who lacked it. The uninsured were 1.2 to 3.2 times more likely to
die than the insured. HEALTH LAW. NEWS REP., supra note 3, at 4. As health
care costs rise, third-party payers will tend to make annual changes to
reflect the previous year's experience. Products with the most effective
utilization review process are likely to make fewer changes. Still, some
programs are likely to make changes frequently. Annual program changes
are disruptive, and physicians are likely to avoid serving the patients
of a plan that changes often or to leave the system entirely. Capron, supra
note 47, at 751-52. For example, the annual program changes that have occurred
in Medicare in recent years as a part of congressional budget-balancing
efforts have seen an exodus of physicians. Id. Programs that serve the
poor are more likely to make annual changes because of smaller profit margins
in the care of that population.
175. FN175. Alternative sources of care cannot
be expected to fill the gaps of access created by the withdrawal of physicians
who do not believe that a particular program rewards them sufficiently.
As noted by one author, "patients with 'substandard' third-party reimbursement
rates have difficulty commanding the attention, much less the loyalty of
many physicians." Id. at 747; see also Peter H. Elias, Physicians Who Limit
Their Office Practice to Insured and Paying Patients, 314 NEW ENG. J. MED.
391 (1986) (letter to editor). Cost containment measures that shift financial
risks of treating patients from the third-party payer to the provider may
have an effect on access to care that other types of cost containment efforts
will not have. Capron, supra note 47, at 751-53. Providers might overcome
price-lowering efforts by increasing the number of service units. However,
they can only beat risk shifting by excluding high risk patients from their
practice. See id. at 728. But see Harold S. Luft, Health Maintenance Organizations
and the Rationing of Medical Care, 60 MILBANK MEMORIAL FUND Q. 268, 299
(1982) (arguing that providers' disinclination to serve certain populations
might be overcome if a higher premium is charged for those enrolled). For
example, some cost containment efforts have disincentives that penalize
the physician for accepting the sickest and poorest patient, "the very
ones who have the hardest time obtaining health care." Capron, supra note
47, at 752.
176. FN176. See Capron, supra note 47, at 742.
177. FN177. Corcoran v. United Healthcare, Inc.,
965 F.2d 1321, 1331 (5th Cir. 1992).
178. FN178. See supra note 110 and accompanying
179. FN179. Corcoran, 965 F.2d at 1332.
180. FN180. See supra notes 111-112 and accompanying
181. FN181. Corcoran, 965 F.2d at 1332.
182. FN182. Id.
183. FN183. Capron, supra note 47, at 753.
184. FN184. Id. at 749.
185. FN185. Soon third-party payers will routinely
withhold (or decline to pay for) interventions that might benefit certain
patients but that simply cost too much because society collectively may
choose not to "check on physicians temptation to place their own interest
ahead of their patients' interests. Instead society [attempts] to use physicians'
selfish motivation to restrain full pursuit of patients' interest." Id.