Statement of

Sharon J. Arkin


Partner, Robinson, Calcagnie & Robinson
Newport Beach, California
on behalf of Association of Trial Lawyers of America

Testimony Before the

Subcommittee on Health


of the

House Committee on Ways and Means

Hearing on Patient Protections in Managed Care
April 24, 2001

TO THE HONORABLE MEMBERS OF THE COMMITTEE:
A. Introduction and Case Histories

My name is Sharon Arkin. I am a partner in the law firm of Robinson, Calcagnie & Robinson, and I am a member of the Association of Trial Lawyers of America. I thank you both personally and on behalf of ATLA for inviting us to testify for you here today. I was chosen to represent ATLA in this hearing because I have extensive experience in litigating actions against health maintenance organizations and managed care entities. Additionally, I was co-litigation counsel in the case of Goodrich v. Aetna US Healthcare of California, in which a San Bernardino County, California jury awarded $116 million in punitive damages (that is punishment for egregious misbehavior) against an HMO for its failure to provide adequate care to its patient. Because of my experience in litigating HMO cases, I am personally acquainted with the devastation and tragedy that have resulted from the fact that HMOs are not legally accountable to their members when they breach their contractual agreement to provide care, when they substitute their judgment in place of a patient's physician, and when they violate their members' trust.

Examining the facts from cases that I have personally been involved in will help you understand why the issue of managed care accountability is so important and compelling:

Mrs. B., a 42-year-old mother of three, was diagnosed with colon cancer. After treatment, she was forced to enroll in a large HMO because of the decision by her husband's employer to change benefit plans. A few months later, the cancer indicators in Mrs. B. 's blood tests signaled a recurrence of her cancer. Without even bothering to find out where the metastasis was -or whether it was treatable - her health plan oncologist told her nothing could be done except to make her "comfortable." In reality, there were several options, but the oncologist -who was also the head of the utilization review committee for the medical group -threw roadblocks up at every turn and considerably delayed her treatment. Ultimately, the cancer metastasized to her liver and her lungs and then her brain. Mrs. B. underwent several rounds of experimental chemotherapy in a desperate effort to live long enough to see her children grown. She did not succeed and died in July 1997.

Mrs. A enrolled in a senior care health plan. Because she lived in an isolated, mountainous area with only very rudimentary health care services available, she specifically questioned the health care plan's sales representative about the availability of air-lift transport in case of a serious illness or injury that the local hospital could not handle. Mrs. A was assured that such transport would be provided whenever needed. When Mrs. A had a mild heart attack, however, and the emergency room doctor in the local hospital -which had no critical care or cardiac care unit -repeatedly requested airlift transport to the nearest medical center, it was denied. Mrs. A died of cardiac arrest several hours later, in the small, unequipped rural hospital.

Mrs. S., an elderly lady, enrolled in a large managed care plan. She went to the primary care physician assigned to her by the HMO, complaining of joint pain. The doctor told her she had degenerative arthritis and referred her for physical therapy. Despite the physical therapy, her pain worsened and her health steadily deteriorated. She returned to the doctor time and time again. Each time, the doctor shrugged off her complaints. Finally, a year and a half after her first visit, and after incessant demands by her family to know what was going on, the doctor admitted that Mrs. S. had metastatic cancer -which, the records show, he had known all along. Mrs. S. died a week later. Her cancer had never been treated.

Mrs. R. also enrolled in a large managed care plan. She began having bladder discomfort and went to her primary care physician. The doctor referred her to a urologist, but the first available appointment was nearly three weeks away. In the meantime, Mrs. R. began bleeding from her urinary tract. She went to the emergency room. The ER doctors wanted to admit her to the hospital and called for authorization from the HMO. Authorization was denied. Mrs. R. went home. She returned to the ER the following day, bleeding even more heavily. Again, the ER doctors requested authorization to admit her. Again, it was denied. Mrs. R. went home. The following day, when Mrs. R went to the emergency room, she was bleeding so heavily that she had to walk with bath towels between her legs. Again the HMO refused authorization to admit her to the hospital. Finally, in desperation, Mrs. R. 's son took her to another hospital. The doctors there discovered a tumor the size of a grapefruit in Mrs. R's bladder, admitted her on an emergency basis and rushed her to surgery. Because of the loss of blood over the preceding days, Mrs. R. suffered a heart attack during the surgery. Although she survived, her health has been seriously compromised.

David was a highly-respected and well-liked career deputy district attorney enrolled in the health care plan purchased by the county. After he collapsed one day in court and was transported to the hospital, he was diagnosed with a rare form of stomach cancer. The plan oncologist admitted that the type of cancer was beyond his scope of experience and ability and requested referral to UCLA -an out-of-plan facility. After battling with the plan and its administrative review organization, the out-of-plan referral for consultation was finally approved, but by the time approval for the actual treatment was obtained, the cancer had metastasized. Then, when another therapy was recommended by another out-of-plan treatment center -and was specifically requested by and approved by the primary care physician and the plan oncologist -the treatment was denied. The HMO denied the treatment despite the fact that the head of the HMO's technology assessment department actually recommended that David receive the treatment. David's death left his wife bereft -and nearly $750,000 in debt.

Mr. L. was diagnosed with lung cancer. His plan oncologist told him that the tumor was too close to his heart and that he could, therefore, only be treated with radiation therapy. After the health plan refused Mr. L. 's request for an outside consultation with a surgical oncologist and because the plan did not have a surgical oncologist available, Mr. L. paid for his own consultation with a USC specialist. The USC specialist told Mr. L. that the tumor was, in fact, operable, although it would be a very delicate and tricky operation. The surgeon also told Mr. L. that the surgery was his only chance for survival because radiation therapy simply could not eradicate the tumor and, in addition, was likely to damage his heart. Even more frightening, the surgeon also informed Mr. L. that the tumor was growing very fast and could double in size within 30 days. As such, it was imperative that the surgery occur as soon as possible. Mr. L. then had to start the referral and review process within the HMO to get approval. He had to go back to his primary care physician for a referral to the in-plan oncologist and then had to go to a consultation with the in-plan oncologist. The in-plan oncologist concurred that surgery was the best possible treatment and that it had to be done immediately, but that the plan had no surgeons qualified to perform the surgery.
Thus, the oncologist recommended, the plan should authorize the out-of-plan treatment. The plan denied the treatment. That process, alone, took one week.
Mr. L. simply did not have the luxury of waiting for the plan's internal grievance process to review the issue and he certainly did not have the time to have an external review process deal with the issue. He had to have the surgery immediately. He disenrolled from the health plan the next day and the day after that had the surgery -which was paid for by Medicare. He is still alive and well, four years later.

The horror stories coming out of the managed care industry are legion. The truly horrible part is that they are not the tortured imaginings of a fevered plaintiffs' bar.
They are real. They are about real people. And there are thousands of them.

B. Why Legal Accountability is Necessary for Managed Care Insurers

The civil justice system in this country is predicated on two guiding principles: (1) For every wrong there is a remedy; and, (2) When the wrongful misconduct of one person causes injuries to another, the wrongdoer must be legally accountable to the injured person and must compensate for the injuries their misconduct has caused. There are, in fact, two underlying public policy purposes for these principles. The first, of course, is to assure that injuries are compensated by the person who caused the injuries so that neither society nor taxpayers through their government is forced to bear that financial burden. The second underlying purpose is akin to one of the goals of the criminal justice system: Deterrence. If wrongdoers, whether criminal or civil, know that they will face no consequences, they have no reason to stop their wrongdoing -especially if their conduct is financially rewarding. Forcing civil wrongdoers to compensate their injured victims for the harm they cause removes any financial incentive that might exist for engaging in that wrongdoing.
ERISA, as it is presently structured and as it has been interpreted by the Supreme Court in Pilot Life v. Dedeaux, lacks this deterrent effect. Under ERISA, an HMO can deliberately and purposely deny a claim which it knows is covered under the plan. The most that can happen to the HMO if the member sues is that the HMO will have to pay for the wrongfully-denied benefit and may possibly have to pay some attorneys' fees to the patient. That's it. If the denial is for life-saving treatment and the patient dies without obtaining that treatment, the HMO is completely free of any potential liability: It will never have to pay for even the treatment because the treatment was never received and the family cannot sue for wrongful death. That, of course, builds in an incentive to the HMO to deny care and take the chance that the patient will never sue and, tragically, may not be alive to do so.

1. Market Forces Cannot Correct the Problem

Some would say that employers and employees would never choose an HMO that wrongfully denied claims and that market forces would put those companies out of business. That is simply not the case. First, remember that in the majority of private sector employment situations, most employees do not have a choice - their employer selects one plan and the employee must take it or leave it.
Second, even when more than one plan is provided as a choice, the consumer/ employee and even the employer often have little or no information on which to base a selection, at least with respect to these issues. That is because HMOs are "graded" on the way they handle routine care rather than the way they handle more serious care requests. When accrediting organizations, like National Committee for Quality Assurance (" NCQA") or URAC, assess HMOs, they generally do it on the basis of how well the HMOs meet standards regarding processes and structure, not whether the HMO determines individual claims fairly and properly. And while both entities rely on customer service surveys in formulating their accreditation criteria, those surveys generally focus, again, on routine services -which most HMOs perform well. Since, fortunately, many HMO patients do not require more than routine services, they are unaware of the problems they may encounter when a health care plan decides that its own financial well-being takes priority over a patient's medical well-being.
Additionally, NCQA's own survey shows that, traditionally, patients rely on family and friends when choosing a health care plan. (See http://www.ncqa.org/Pages/Programs/QSG/reportcards.htm) Obviously, this information source has the least likelihood of providing accurate information about how HMOs respond when care beyond the normal routine care is needed.
Perhaps the most telling statement on the distinction between the standard of care an HMO provides with respect to routine care and that provided with respect to other types of care comes from the primary care physician who treated David Goodrich in the Goodrich case. Dr. Wang encountered David's wife in the hospital waiting room while David was receiving an MRI that had been denied by his HMO. When Mrs. Goodrich asked Dr. Wang -who had requested the MRI - how Aetna could deny that test, Dr. Wang's response tells the whole story:
"HMOs are good if you don't get sick."
Thus, neither employers nor patients/ employees have a good means of determining whether a particular HMO's decision making is going to become problematic once significant or expensive care is needed. Because of that, "market forces" cannot function well to control or limit the abuses.

2. Case Law Evolution Cannot Correct the Whole of the Problem.

Further evidence that market forces cannot -or, at least, do not -factor into this problem is the fact that the federal judiciary has become a catalyst in an attempt to ameliorate the harshness of the ERISA rule. As a whole, federal judges are not activists and are unwilling to step on Congressional prerogatives. But the problems created by ERISA's liability limitations have driven even the most conservative judges to frustration and dismay. For example, J. Spencer Letts, a very conservative judge of the United States District Court, Central District of California, has undergone an epiphany regarding the risks and dangers to insureds where an insurance company decides and administers benefits under its own policy where that policy is part of an ERISA plan. (Dishman v. UNUM, 21 Empl. Bene. Cas. 2941 (C. D. CA 1997) Judge Letts' commentary provides a compelling and insightful demonstration of the type of insurer conduct that occurs because ERISA provides a disincentive for insurers and HMOs to provide promised benefits:

"This Court has always strongly believed in preserving the remarkably successful balance of competing interests struck by Congress when it enacted ERISA. . . . "However, the facts of this case are so disturbing that they call into question the merit of the expansive scope of ERISA preemption. UNUM's unscrupulous conduct in this case may be closer to the norm of insurance company practice than the Court has previously suspected. This case reveals that for benefit plans funded and administered by insurance companies, there is no practical or legal deterrent to unscrupulous claims practices. Absent such deterrents, the bad faith denial of large claims, as a strategy for settling them for substantially less than the amount owed, may well become a common practice of insurance companies.
* * *
"Insurance companies do not have the same practical incentives as employers to administer benefit plans in good faith. For self-administered and even self-insured plans, employers are motivated to act in good faith not only in order to comply with the law, but by the practical considerations of maintaining employee loyalty and morale. . . . For many employers, trying to hold down the costs of employee plans through unscrupulous practices may undermine employee morale and loyalty even more than not having an employee plan at all.
* * *
"Without these practical incentives, there is no counter-balance to insurance companies' interests in minimizing ERISA claims.
* * *
"The fact that most people in the Dishmans' situation would have had to capitulate is the most troubling aspect of this case. The need to deter insurance companies from behaving in this matter is why bad faith liability exists under almost all state laws. ERISA preempts all such laws. Under ERISA, no matter how unfounded the denial of a claim may be, the only recovery permitted to the claimant is the amount of the benefit.
"As this case demonstrates, the reform of shifting the attorney's fees to the insurer is not enough to deter this type of conduct. UNUM's bad faith acts placed pressure on the Dishmans because they were deprived of monthly income which they needed to live. A lump sum benefit after a lawsuit, even with interest and free from legal expense, did nothing to alleviate the pressure upon them at the time the claim was denied and during the course of the litigation. UNUM was not deterred by the prospect of paying the Dishmans' attorneys' fees, because it had every reason to believe that the economic straits in which it had placed the Dishmans would force a favorable settlement long before any substantial fees had been accumulated.
* * *
"[ W] ithout any statutory or other legal deterrent it is entirely predictable that insurers will go overboard to minimize claims." (Emphasis added.)

A similar, though far more lengthy and scholarly, analysis was conducted by District Court Judge William Young of the United States District Court, District of Massachusetts. Writing in a health care case, Andrews-Clarke v. Travelers Insurance Co., 984 F. Supp. 49 (1997), Judge Young issued a stinging indictment of ERISA's preemptive effect. After summarizing the tragic facts of the case and the prior procedural history of the action, Judge Young explained:

"Travelers and Greenspring promptly removed [the widow's] case to this Court and then, just as promptly, asked this Court to throw her out without hearing the merits of her claim [on the basis that the wrongful death claim was preempted by ERISA].
"This, of course, is ridiculous. The tragic events set forth in Diane Andrews-Clarke's Complaint cry out for relief.
* * *
"Under traditional notions of justice, the harms alleged--if true--should entitle Diane Andrews-Clarke to some legal remedy on behalf of herself and her children against Travelers and Greenspring. Consider just one of her claims-- breach of contract. This cause of action--that contractual promises can be enforced in the courts--pre-dates the Magna Carta. It is the very bedrock of our notion of individual autonomy and property rights. It was among the first precepts of the common law to be recognized in the courts of the Commonwealth and has been zealously guarded by the state judiciary from that day to this. Our entire capitalist structure depends on it.
"Nevertheless, this Court had no choice but to pluck Diane Andrews-Clarke's case out of the state court in which she sought redress (and where relief to other litigants is available) and then, at the behest of Travelers and Greenspring, to slam the courthouse doors in her face and leave her without any remedy.
"This case, thus, becomes yet another illustration of the glaring need for Congress to amend ERISA to account for the changing realities of the modern health care system. Enacted to safeguard the interests of employees and their beneficiaries, ERISA has evolved into a shield of immunity that protects health insurers, utilization review providers, and other managed care entities from potential liability for the consequences of their wrongful denial of health benefits."
(Andrews-Clarke, 984 F. Supp. at 52-53.)

The judiciary has not only vocally expressed its dissatisfaction with ERISA's effect on the rights of private sector employees to obtain compensation for their damages, they have begun to chip away at its application. Although it is generally held -in the context of a health care plan subject to ERISA preemption -that contract and tort claims arising from an HMO's refusal to provide approval for referrals, tests and/ or treatments (i. e., a denial of benefits) are preempted, the courts have carved out an exception and have held that malpractice claims against an HMO are not preempted by ERISA.
The lead case on this issue is Dukes v. U. S. Healthcare, 57 F. 3d 350 (3rd Cir. 1995) in which the court determined that the HMO should properly be subject to vicarious liability for the medical negligence of the medical providers arranged for by the HMO under the plan and that such medical negligence is not preempted by ERISA. Essentially, the Dukes court's analysis turns on a distinction between the existence of coverage for the treatment and the quality of the treatment itself.
In other words, if the HMO denies requested care because the treatment is not covered, e. g., the treatment falls under the plan's experimental exclusion, the claim is subject to ERISA preemption because it deals with coverage for benefits.
If, on the other hand, the treatment is covered under the terms of the plan, but the doctor or the HMO want to provide a less effective treatment (usually for reasons of cost) and that injures the patient, it is not preempted because, in fact, benefits were provided, but the benefits were simply of poor quality. The Dukes court pointed out that ERISA was only designed and intended to assure that the promised benefits are, in fact, provided and was never intended to operate beyond that threshold or go into the realm of examining the quality of the benefit provided. Thus, the court concluded, state law acts in that context.
One of the most telling examples of the shift in the courts towards easing the impact of ERISA's remedy preemption is that of the Fifth Circuit. In Corcoran v. United Health Care, Inc., 965 F. 2d 1321 (5th Cir. 1992), cert. denied 113 S. Ct. 812, 121 L. Ed. 2d 684 (1992), the Fifth Circuit held that a wrongful death action based on claims of malpractice brought against the HMO was preempted by ERISA. Seven years later, in Giles v. NYLCare Health Plans, 172 F. 3d 331 (5 th Cir. 1999), the Fifth Circuit upheld the district court's order remanding the action to the state court on the grounds that the malpractice action raised a state-law claim not completely preempted by ERISA.
The Fifth Circuit, however, never addressed the merits of the Corcoran issue at all -i. e., does ERISA preempt the malpractice claims. Rather, the court fashioned its analysis around the procedural question of jurisdiction, and dodged the Corcoran issue by expressly stating that "restraint and comity indicate we should reserve the issue [of whether ERISA does, in fact, preempt the state law claims of malpractice] for resolution in the first instance by the state court."
That the Fifth Circuit would utilize a procedural vehicle to avoid a conflict with its Corcoran decision on the merits of the substantive issue of preemption of malpractice claims provides a telling demonstration of how far the courts will now go to avoid sacrificing victims' remedies on the alter of ERISA preemption.
Even the United States Supreme Court has expressed a growing dissatisfaction with the consequences resulting from the breadth of ERISA preemption and has retrenched to some degree on that issue. In a series of decisions, the Court began to narrow and limit ERISA's preemptive effect: New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U. S. 645, 115 S. Ct. 1671, 131 L. Ed. 2d 695 (1995); De Buono v. NYSA-ILA Med. and Clinical Servs., 520 U. S. 806, 117 S. Ct. 1747, 138 L. Ed. 2d 21 (1997); California Div. of Labor Standards Enforcement v. Dillingham Constr., N. A., Inc., 519 U. S. 316, 117 S. Ct. 832, 136 L. Ed. 2d 791 (1997).
More importantly, in the specific context of insurance and managed care benefits, the Supreme Court has indicated that ERISA preemption should not be so broadly applied. In UNUM Life Ins. Co. of America v. Ward, 526 U. S. 358 (1999), the Court held that a state law claim which might otherwise relate to an ERISA plan is saved from ERISA preemption where the relevant state law regulates the business of insurance. And, even more recently, the Court held in Pegram v. Herdrich, 530 U. S. 211, 120 S. Ct. 2143 (2000) that "mixed" decisions by a managed care doctor that implicated both medical judgment and administrative concerns do not constitute fiduciary actions subject to control under ERISA.
The "sticking point," however, with these judicial efforts to chip away at the devastating effect of ERISA preemption in the insurance or health care context is the second half of the Court's opinion in Pilot Life Ins. Co. v. Dedeaux, 481 U. S. 41, 107 S. Ct. 1549 (1987).). In the first half of the opinion, the Court held that state tort law of general application was not saved from ERISA preemption.
Further, the Court noted, the tort law at issue in that case, Mississippi's bad faith law, was a tort law of general application and was not restricted in its application to the insurance industry. It was not, therefore, saved from ERISA preemption.
In the second half of its opinion, however, the Court went on to express reservations about whether a state law which did, in fact, regulate insurance would still be saved from ERISA preemption. The Court's concern centered around the issue of whether any state law which provided remedies other than those set forth in the ERISA statute should be permitted in light of Congress's apparent intent that all such plans be given similar administrative regulation and protection, even if that state law would otherwise be exempted from ERISA preemption. It is that portion of the Pilot Life case which remains intact and which has not been readdressed by the Court since that decision. And it is that portion of the decision which necessarily hampers any other court from imposing damages against an HMO or health insurance company, no matter how outrageous or egregious the misconduct. It is that portion of the decision which must be addressed -and fixed -by Congress.

C. Accountability Will Not Increase Either Costs or the Number of Lawsuits.

Opponents of permitting liability lawsuits against irresponsible HMOs or health insurers raise two common objections. First that liability provisions will increase costs and that in turn, will require an increase in premiums and a resulting decrease in the number of people who can or will be insured. Second, that public outcry for legislation that would give patients the legal right to hold the HMO industry accountable is somehow nothing more than an attempt by trial lawyers to have another basis for bringing "frivolous" lawsuits. Neither of these criticisms has any merit.

1. Fear of Increased Costs is Unfounded.

The first thing to keep in mind, of course, is that ERISA has granted the managed care industry an extraordinary immunity -absolute immunity from legal accountability for the injuries and deaths their decisions may cause. No other industry has that. Indeed, even the Federal government has not given itself such broad immunity. And there is simply no justification for this immunity. HMOs and insurers are in business just like every other industry. They have been making profits just like every other industry. Despite some massive losses for not-for-profit HMOs, the managed care industry expects profits of more than $3 billion in 2000, a 60 percent increase over 1999 profits, according to a study by the Corporate Research Group Inc., New Rochelle, New York, as reported in the May 2000 edition of Healthcare Finance Management. Revenues are expected to increase about $14 billion to $176 billion this year. Because HMO enrollment will rise only about 1 percent in 2000, most of the increase in industry revenues is expected to come from higher rates, according to the study. More importantly, the claim that costs would increase, that premiums would increase and that the number of uninsured Americans would increase are simply not supportable, either logically or empirically.
First, premiums are already increasing, in part, because premiums during the last decade have been artificially depressed. In addition, huge increases in the cost of prescription drugs are driving medical inflation according to a September 2000 survey by Kaiser Family Foundation and Health Research & Educational Trust.
Second, costs should not increase at all as the result of HMO accountability legislation. If an HMO is providing the care it is contractually required to provide - and is acting in good faith -it will not be sued. Indeed, the best way to avoid litigation is to provide quality services and products that do not endanger the health and safety of consumers. Texas is a good example. In 1997, when the Texas Legislature passed an HMO accountability law, 24.5 percent of Texans had no health insurance. By 1999, the percentage of Texans without health insurance decreased to 23.3 percent according to the U. S. Census Bureau. (Data available online at:
http://www.census.gov/hhes/hlthins/hlthin99/hi99te.html)
Clearly, in Texas, fears of increasing the number of uninsured were unfounded.
Third, if medical costs increase, it will only be because HMOs start paying for services they were contractually obligated to provide, but for which they were unreasonably denying claims. That means that they were receiving a windfall - getting premiums for benefits they previously were not providing. The fact that they will now be providing the benefits for which they have been receiving premiums should not increase costs -since, in fact, they were receiving premiums for those benefits all along. If the cost of providing those promised benefits does drive up premiums, that could only be the result of the fact that the HMOs were deliberately deflating the premiums in order to obtain market share - a very common occurrence during the mid-to-late '90's. None of that economic theory, however, justifies immunizing this particular industry from its own wrongdoing when the health and the lives of Americans are at stake.
That premium costs should not be impacted as the result of the advent of liability provisions is confirmed by empirical analysis as well. In a study conducted by the Kaiser Family Foundation prior to the enactment of California's new HMO liability law, patterned on the Texas legislation, it was estimated that additional liability exposure should have an extremely minimal impact on premiums -on the order of approximately 17 cents per member per month or $2 a year.

2. The Contingency Fee System Deters "Frivolous" Lawsuits.

ATLA and the plaintiffs' bar do not support the inclusion of accountability provisions in order to generate lawsuits for their own sake. We support it, and patients and their families support it, because they want people to receive the care they have been promised and be protected from, not exposed to, serious illness, injury, or death. Our society does not make bank robbery illegal because we want to fill up the jails with prisoners. We make bank robbery illegal because we want people to stop robbing banks. The same is true here. We do not want liability provisions because we want fill of the courts with law suits. We want to make HMOs accountable because we want HMOs to fulfill their contractual promises to provide quality care to the patients who are paying premiums.
Most plaintiffs' attorneys are in reality small business people. No lawyer - especially a contingency fee lawyer, who is paid and reimbursed for expenses only if he or she wins for the client -will take a case that has little merit or a case where it is a "close call" as to whether the HMO's denial of care was unreasonable. It simply does not make financial sense for the lawyer to do so.
Thus, if the HMOs provide the benefits they are supposed to provide, costs will not increase as the result of damages imposed in litigation -because there will be no litigation. And if the HMOs do not provide the care they are supposed to provide, what justification is there for protecting them -unlike anyone else -from the consequences of that misconduct? Again, Texas is a good example.
Although no government entity in Texas officially tracks the number of lawsuits brought under the HMO statute, only 10 lawsuits have been brought against managed care entities even though 4 million Texans are covered by managed care plans.
If frivolous lawsuits are a concern, then that is the concern that should be addressed. The rational approach is to punish lawyers who file frivolous claims.
State court and state bar associations already have mechanisms in place to punish such lawyers. It is never a wise public policy to deal with frivolous lawsuits by taking away the legal rights of people who have been injured through no fault of their own.

D. External Review Cannot Solve the Problem.

The industry asserts that the problems of abuse by the industry can be rectified by the use of the external, or independent, review process. I have several comments with regard to that proposal.
First, in a perfect world, an external review system that is truly fair and prompt could eliminate many -though not all -of the problems engendered by the health care benefits industry's pattern and history of misconduct. And to the extent that even an imperfect system may help, I whole-heartedly support it. But it cannot be embraced as the cure-all for the problems faced by managed care patients. And there are several reasons why:

Because any exhaustion of remedies requirement is necessarily a limitation on access to justice, it should be as narrow as possible. This issue is of particular concern with respect to the suggestion that an external review process be binding.

Essentially, such a provision would deny patients their 7 th Amendment right to a jury trial in cases where an HMO has made a incorrect medical decision that results in injury or death.
That is contrary to 225 years' of jurisprudence in America. The American jury is a uniquely democratic institution. The more than five million Americans called for jury duty each year still serve as the conscience of the community. And it is the only governmental body that is truly neutral, unswayed by electoral pressure, financial self-interest, and blind ambition.

There is no proof that an external review process would not be biased, complicated, or otherwise impose a hardship on a sick patient or a family that has already suffered a loss. I also fear that there would be unfairness at the internal review stage of the process. At both stages, most patients likely would not have counsel to assist them in preparing their case for review or in presenting their case. The HMOs, of course, would have counsel on staff for just that purpose. Thus, many patients would be placed at an immediate disadvantage.
Similarly, most patients at that stage do not have either the access to, or the funds necessary to obtain, expert medical opinions in support of their claims.
Again, the HMOs would and do have those resources. The system is thus skewed in favor of the HMO going in. These problems, of course, raising serious due process concerns for patients.
A major concern would be the issue of who conducts the reviews. In my experience as a litigator dealing with purportedly "experimental" procedures, and denials of care based on that exclusion, I have observed a distinct disparity in the opinions of equally-qualified experts, depending on the nature of their practices.
The clinicians -the doctors who actually treat patients as opposed to merely studying them -tend to be on the cutting edge of medical practice. They are aware of the alternative treatments, what their likelihood of success may be and what the downside risks of the treatment are. More importantly, they are willing to let their patients decide whether they are willing to undergo that treatment in the hope of obtaining relief from illness or disease. These doctors see, up close and personally, on a daily basis what works and what does not.
On the other hand, academics, who may have virtually no hands on experience with real live patients with real health problems, tend to be far more cautious and conservative. They are more tied to the scientific method than they are to the practice of medicine as a healing art. They require stringent standards of scientific proof that may not be realistic when dealing with a particular patient's illness.
This disparity in the way that clinicians versus academics view cutting edge treatments can have a significant impact on the outcome of an external review evaluation process. And the question is, who should resolve that dispute? If the external reviewer deciding the case is a clinician, the HMO may claim the process is not fair. If the reviewer is an academic, the patient may claim the process is not fair. If the process is binding, without recourse to a jury to resolve that dispute, there is no way to assure fairness at all.
These due process and fairness concerns, in fact, led California to provide that its external review process not be binding. Thus, a patient can proceed through the external review process and, even if the reviewer decides that the care need not be provided, the patient still retains his or her Constitutional right to a jury trial to correct the injustice of the HMO's denial of benefits.

For many people, an external review process simply cannot help. In the case history examples provided at the beginning of this testimony, for example, external review could achieve nothing. For Mrs. A, the lady who died of a heart attack in a rural hospital because the HMO would not authorize an air lift for her to a medical center, external review could not bring her back to life or restore her to the bosom of her family. In that context, then, if the only remedy were external review, it would continue to give HMOs the incentive to deny necessary, life-saving emergency care because there would be no consequences resulting from that denial.
Similarly, in the case of Mrs. R -who had the tumor in her bladder and needed immediate surgery -external review alone could not help her get the care in time. Moreover, it could do nothing to compensate her for the heart attack she suffered as the result of the HMO's delay in care.
And what about Mrs. S -who was diagnosed with cancer, but never told about that diagnosis until shortly before she died? What good would external review do her? Or her family?

External review without legal accountability is a sham. As these examples illustrate, the fundamental problem with external review is that it leaves the same loophole as ERISA itself. Where death or injury has already occurred, where damage is imminent or has already happened, external review provides no remedies. All it can do is what ERISA does now -tell the HMO to provide the care it should have provided to begin with. How will that give HMOs the incentive to provide the care willingly, and without forcing patients to go through yet another process? It cannot.
Thus, while external review may be an important adjunct to the liability provisions, it cannot, by itself, solve the problems that have resulted from the HMOs' abuse of ERISA immunity.

E. State Law Should Apply to Control HMO Misconduct.

1. Insurance Law has Historically been Regulated by the States.

Once it is decided that adequate remedies should be included in ERISA, the question becomes whether those remedies should be federally mandated or controlled by state law. The history of insurance regulation and the regulation of health and safety mandate that this issue be controlled by state law.
Many of the courts which have followed the Dukes line of cases have reasoned that malpractice-type claims or "quality of care" claims against HMOs should be governed by state law and not preempted by ERISA on the basis of the standard "police powers" analysis. In other words, the Constitution, and the cases interpreting and applying it, have been very clear that states can and should regulate and control issues relating to the health and safety of their citizens.
Thus, where an HMO makes a determination that impacts the health or safety of a state's citizens, principles of federalism mandate that the state controls the remedies that are to be afforded those citizens.
In addition, the McCarran-Ferguson Act leads irrevocably to the same conclusion. When anti-trust legislation was being passed by Congress in the 1940's, the insurance industry lobbied for and obtained an exemption from that regulation for itself. In the McCarran-Ferguson Act, Congress expressly declared "that the continued regulation and taxation by the several States of the business of insurance is in the public interest." (15 U. S. C. section 1011.) As such, under that Act, no federal legislation of general application is permitted to preempt state regulation of the business of insurance.
And that HMOs are, in fact, in the business of insurance cannot seriously be challenged. The Ninth Circuit, the Wisconsin Supreme Court, the California Supreme Court and the California Legislature have all made express findings to that effect. (See Washington Physicians Service Ass'n v. Gregoire (9 th Cir. 1998) 147 F. 3d 1039, 1045-1046; Sarchett v. Blue Shield of California (1987) 43 Cal. 3d 1, 3, fn. 1; McEvoy v. Group Health Cooperative of Eau Claire (1997) 213 Wis. 2d 507, 570 N. W. 2d 397; California Civil Code section 3428, 1999 ch. 536, section 1.)
Since HMOs are in the business of insurance, and since the McCarran-Ferguson Act -obtained through the insurance industry's own efforts -mandates that state regulation of insurance is in the public interest, state regulation of HMO conduct is demanded.
State regulation of HMO conduct also makes sense on other levels. Each state already regulates HMOs and even nationwide HMOs, like Aetna, incorporate separately in each state. Additionally, state-based regulation of HMOs allows local community standards regarding appropriateness of damages -both as to type and extent -to prevail. State regulation also puts government employees and private sector employees living in the same community on precisely the same footing. As it now stands, the rights and remedies of employees of local and state governmental agencies are regulated by state law while a next-door-neighbor who is a private sector employee is subject to ERISA's limitations. A teacher at a public school who suffers precisely the same injury as a result of an HMO's decision as a private school teacher has a remedy under state law. But the private school teacher has no remedy. If state control of ERISA-based remedies is permitted, both citizens are afforded equal treatment.

2. Federalizing HMO Claims Wastes Limited Judicial Resources.

There is nothing magical about federal court. Federalizing managed care liability denigrates legitimate states' rights. Throughout American history, state courts have always been the arbiter of medical malpractice claims and related lawsuits.
Federalization duplicates the work of state courts and wastes limited judicial resources. Since the mid-1990s, the federal civil dockets have been severely backlogged as the result of unprecedented number of judicial vacancies and the increasing federalization of state and local criminal drug laws. Chief Justice Rehnquist has repeatedly asked Congress not to expand the jurisdiction of the federal judiciary. Federalizing HMO suits only ensures that such cases will go to the back of the line of the federal docket, creating unreasonable delays for injured patients. In contrast, state courts' civil dockets move with much greater speed due to a smaller caseload and greater experience with state-law based injury claims.
Managed care insurers often prefer the federal court system because they have found that it allows them to delay the resolution of claims-and thereby earn investment income on even the most meritorious compensation-and blame the "empty chair"-the doctor or the hospital-for the patient's injuries. Since only managed care insurers, and no other potential defendants, would be under the jurisdiction of federal court, successfully blaming the empty chair lets HMOs off the hook.
In addition, federal court can be extremely expensive, time consuming and inconvenient for patients, who may live hundreds of miles from the nearest federal courthouse. In some of the larger, western states, for example, injured patients often live hundreds of miles from the nearest federal courthouse while the local state court is likely just across town.
Proponents of federal jurisdiction argue that federal regulation of ERISA remedies is necessary in order to assure administrative consistency and efficiency of ERISA plan administration. The reality is that -even under ERISA as it is presently structured -every HMO already operates under both state and federal regulation simultaneously. This is because the vast majority of commercial HMOs offer plans to both private sector employers and government employers. Any time a government or church employee is covered, the entire panoply of state-based regulations -and state remedies -is automatically triggered. That necessarily requires the HMO to be attuned to and prepared for that state regulation. Indeed, state regulation of HMO remedies under ERISA will ease HMO compliance requirements because each HMO in each state will be required to comply only with that state's regulatory scheme and will not be burdened with a continuing dual system of both state and federal regulation.
Thus, for both historical, constitutional reasons and for practical, procedural reasons, state regulation of HMO liability simply makes the most sense.

3. Caps on Damages are Unnecessary and Unfair.

Congress should not federally mandate limitations on damages. A federal mandate would again abrogate and violate the state's interests and the principles underlying the McCarran-Ferguson Act. The issue of limiting damages and whether, in a particular state, such limits are warranted should be left to the each state and its legislature, consistent, of course, with state and federal constitutions. A Washington-knows-best philosophy in an area of the law that has historically been left to the states has no place in our system of government.
Non-economic damages compensate injured patients for very real injuries-such as the loss of a limb or sight, the loss of mobility, the loss of fertility, excruciating pain, and permanent and severe disfigurement. They also compensate for the loss of a child or a spouse. Caps on non-economic damages discriminate against those patients who are not in the workforce-children, seniors, homemakers-and who cannot show substantial economic loss, such as lost wages or salary. There is no reason why the injuries of a stay-at-home mom should be valued less than the same injuries of a corporate executive.
Experience at the state level shows that damage caps have virtually no impact on health care costs. An arbitrary and inflexible cap is inconsistent with the completely unpredictable nature and extent of injuries caused by a managed care insurer's negligence. Fairly compensating victims is not a "one-size-fits-all" proposition. Rather jurors, who are sitting in the courtroom, are in a better position than Congress to determine what damages are justified in cases involving differing injuries and circumstances.
Caps on non-economic damages punish those with the most severe, devastating injuries and do nothing to address concerns regarding frivolous claims. (As I have stated previously in my testimony, if frivolous lawsuits are a concern, then that is the concern that should be addressed-but not by penalizing someone who has been injured.) Caps on damages reward the person or company which caused the injury by limiting liability, while further harming the injured patient by denying full compensation determined by a citizen jury.

I understand there is some confusion over Texas' law on non-economic damages. Texas does not cap non-economic damages in personal injury cases. The only non-economic damage cap in Texas applies in statutorily created medical malpractice actions for wrongful death. That cap is adjusted for inflation and the 2000 cap amount is $1,410,000. This cap does not apply to a cause of action against a managed care insurer.
While non-economic damages are designed to compensate injured patients for very real injuries, punitive damages are very rare and are designed to punish wrongdoers for egregious misconduct. While some states limit or do not recognize punitive damages, that is not the case in California. Indeed, as the California Supreme Court noted, one of the most important factors in determining whether an award of punitive damages is excessive is the wealth of the company: Too small an award will not have the effect of deterring the misconduct while too large an award may risk permanent damage to the company's operations. (Adams v. Murikami (1991) 54 Cal. 3d 105.) Clearly, a rote formula of three times compensatory damages or an overall cap cannot fulfill either the ameliorative deterrent purposes of punitive damages or the protective effect of assuring that the award will not cause excessive harm to the defendant. States which have reached this conclusion -and which have done so on the basis of reasoned logic -should not be hamstrung by a federal mandate limiting the effectiveness of the state's regulation of its businesses.

F. Employers Need Not Fear Accountability Provisions Aimed at HMO or Insurer Activity.

Employers and employer groups are necessarily concerned about potential imposition of liability provisions on them. It is not intended that the current ERISA protections be abrogated with respect to them-so long as they are not the entities making the health care benefit decisions. The practical reality is that once an employer or employer group purchases an HMO or health insurance policy for its employees, the employer is literally "out-of-the-picture" with respect to the benefit determinations. There is simply no reason to impose liability on an employer or employer group when it has fulfilled its ERISA obligation to provide benefits through the purchase of an independent plan or policy. Legislative language limiting employer liability unless there is direct participation in a benefit decision effectively addresses employers concerns.
Opponents of managed care reform seem to forget that employers can be held liable under the current ERISA statute for breach of fiduciary duty. The mere handful of cases in this area occur in situations where the employer deducts a portion of the employee's pay for insurance premiums, but fails to turn that premium over to the insurer, effectively rendering the employee uninsured. In these sorts of situations, employers should continue to be held accountable.
One note of warning must be sounded here. I have been involved in litigation in which the employer purportedly provided the benefits directly with the assistance of a "third party administrator" which was, in fact, an HMO. Under the operative contract, the employer maintained a checking account which the administrator could draw on in order to pay benefits and the contract provided -at least nominally -that the employer had the final right to determine claims. Under normal circumstances, this situation would not impose additional liability on either the employer or the administrator under current ERISA reform proposals. But the reality in the case I litigated was vastly different from the appearances and creates a potential loophole that could be abused by HMOs or health insurers if ERISA is amended to protect patients.
The reality of this case was that, although final coverage decisions were "reserved" to the employer, that was a subterfuge. The employees were issued plan booklets by the HMO that were identical to those issued by the HMO to employees of plans that had been purchased by employers; the exact same health care provider network was established and used by the "third-party administrator;" the claims were administered in precisely the same way as in all the other plans and the net effect of the operation was that the HMO, as the "third-party administrator," in fact, made all the claim determinations and the employer had no actual input into that process, even though the final decision was "reserved" to the employer under the administration contract.
It can be expected that, if HMO liability provisions are amended into ERISA, that this type of subterfuge will be attempted, and it should be made clear that even where the HMO is purportedly operating only as a third-party administrator, it may still be liable for unfair claim decisions. This will protect both the patient and the employer.

G. What Standard of Conduct Should Be Applied?

Once Congress agrees that patients and their families can be protected only if HMOs are -like every other industry and even the government -held accountable for their misconduct, the next concern is the standard of conduct to be applied.
Some may suggest that HMO decisions which implicate medical considerations should be measured against a medical malpractice standard, i. e., the standard of care in the medical community. I would vigorously disagree with that proposal, and I will give you an example provided by a gynecologist to explain why.
I was attending an ERISA seminar in which a gynecologist spoke regarding her experience with the HMO system. She had been practicing for several years in Phoenix, which has a very high HMO penetration. She had, however, just moved to Boise, Idaho, which has very little HMO activity, for the express purpose of escaping HMOs and the problems they bring to the practice of medicine. She explained this situation as one example of why she moved.
The doctor's patient was a woman in her late 30's who had been diagnosed with non-invasive cervical cancer. This type of cancer is very treatable and usually curable. The first treatment of choice is a cryosurgery, in which the cervix is frozen with liquid nitrogen. The freezing destroys the cancer cells and does not impair the woman's fertility. The treatment was provided to this patient without incident. Approximately two years later, however, tests showed a recurrence of the cervical cancer. The cancer was still non-invasive, but a recurrence was, of course, worrisome. The medical standard of care at that point offered two alternatives: Either another cryosurgery or a hysterectomy. The woman was now in her early 40's, had three children and was not interested in having any more. She elected to have the hysterectomy. Her health plan, however, refused to authorize a hysterectomy and forced her to accept the less expensive cryosurgery. Two years later, she was diagnosed with invasive cervical cancer, requiring a complete hysterectomy and other follow-up treatment, long-term care and monitoring and engendering the risk of metastatic cancer. All because the HMO wanted to save money.
The point here is that the medical standard of care permitted either procedure. But the HMO's obligations go beyond what the medical standard of care provides. The HMO contractually obligated itself to provide any medically necessary care needed by the patient. When marketing themselves to employers or employees, HMOs never disclose to those potential purchasers that they intend to provide the minimal care needed, or the least expensive care needed and that they reserve to themselves the exclusive right to make these life-and-death decisions. To the contrary, HMOs market themselves as providing comprehensive care of the highest quality.
When a patient has the choice between two accepted and medically appropriate treatment options, it should be left to the patient to choose what treatment he or she will undergo. That is not a choice that should ever be made by an HMO, let alone a choice made by an HMO solely on the basis of cost.
So, it is not the medical malpractice standard of care that should be applied to an HMO's benefit decisions. Rather, a simple test of reasonableness -the standard test for negligence -should apply. Was the HMO's denial of benefits reasonable under the circumstances? If an HMO's decision is based on monetary self-interest, that should, by definition, be considered unreasonable. This standard has the further benefit of being a common standard for liability in every state and involves a well-developed body of law which can be applied in this context.

H. Conclusion.

The ERISA "experiment" of total tort immunity is a dismal failure. People have suffered and died as a direct result. It is time to call a halt to this unwarranted and unprecedented immunity and to restore balance to the system.
Something must be done about ERISA's remedy limitations. And the need is not just the "superficial" one of fulfilling the fundamental principle of equity that "for every wrong there is a remedy." The need runs much deeper. As noted by Judge Young:

"A further cost of this near absolute immunity is its pernicious effect on our democratic system. Whenever Congress extinguishes a right which heretofore has been vindicated in the courts through citizen juries, there is a cost. It is not a monetary cost. It is a cost paid in rarer coin --the treasure of democracy self."
(Andrews-Clarke, at p. 63, fn. 73.)