Plaintiff, by her undersigned attorneys, for her complaint, alleges upon personal knowledge as to herself and her own acts, and upon information and belief as to all other matters, based upon, inter alia, the investigation made by and through her attorneys, as follows:
NATURE OF THE ACTION
1. Plaintiff is a beneficiary in an employee welfare benefit plan, as defined under and regulated pursuant to the Employee Retirement Income Security Act of 1974, 29 U.S.C. New Hampshire, Inc. ("Healthsource-NH"), a health maintenance organization ("HMO") owned, operated and controlled by Healthsource, Inc. ("Healthsource" or the "Company"), has been retained by the employer of plaintiff's husband to provide healthcare coverage as part of the welfare benefit plan it offers to its employees. Except where otherwise indicated, the use of the term Healthsource refers to Healthsource, Inc. and to its subsidiaries, including Healthsource-NH, through which it offers managed care services.
2. Healthsource is a provider of healthcare services to more than 3 million subscribers nationwide. These subscribers accept Healthsource as their healthcare provider in reliance on the Company's representations that they will receive a high quality of care through physicians whose primary interest is in their patients' medical needs. What the subscribers do not know, however, is that Healthsource provides financial incentives to their doctors specifically designed to encourage them to reduce the level of medical treatment they will offer their patients and that many of the decisions concerning their medical care are not made by their doctors, or, indeed, any qualified medical personnel, but by non-medical clerks who rely on computerized data bases that limit what care can be provided -- data bases that are withheld from public scrutiny, even from the eyes of the doctors purportedly serving the interests of the patients on behalf of Healthsource.
3. Healthsource, for example, has represented to its members that its physicians have a contractual relationship "which does not interfere with the exercise of the physician's independent medical judgment." Yet, at the same time, and unknown to its members, Healthsource provides compensation to its physicians that increases if they reduce the level of care they provide. As one internal memorandum from Healthsource to its physicians declares, the Healthsource compensation scheme offers doctors the "[p]otential to increase total physician compensation through cost containment efforts." In other words, the physicians receive greater compensation if they reduce the number of tests, referrals to specialists and hospitalizations they provide to their patients.
4. The need to provide adequate disclosure concerning the incentives that managed care companies provide their physicians was recently recognized in the January 15, 1996 issue of the U.S. News & World Report, which stated:
While no one can see into a doctor's heart, new physician- payment arrangements with managed-care organizations flip the old doctor-patient pact on its head by creating incentives to deny, rather than provide, care. Formerly, when doctors provided care, they made money. Now, when managed-care doctors order a hospital stay, a referral to a specialist or expensive, high-tech procedures, they stand to lose money. Confusing as the new payment systems are, consumers must begin to understand them by asking their doctors tough -- maybe even embarrassing -- economic questions, because how a plan's doctors are paid could compromise care when it is needed the most.Of course, because of the misrepresentations and omissions by Healthsource, its members are not even aware of the financial incentives that should prompt these "tough questions."
5. Concerns over the conflicts of interest the financial incentives create for doctors has led the American Medical Association ("AMA") to recommend that all managed care companies disclose such incentives to their subscribers, a recommendation which Healthsource has not followed. As Carol O'Brien, a senior attorney in the AMA's Chicago office, told The Boston Globe on January 28, 1996, when summarizing the financial incentives paid by Healthsource to its doctors, "[s]uch arrangements can act as a strong disincentive to provide patients with extra care and can result in ethical conflicts for doctors."
6. Under federal law, it is a crime for a doctor to receive financial remuneration for the referral of a Medicaid patient to a specialist, because such compensation could affect the ability of doctors to make medical judgments unsullied by financial concerns. For similar reasons, Healthsource members should at least have a right to be informed of the fact that their doctors receive financial remuneration for not referring them to specialists.
7. As the provider of healthcare through employee benefit plans, with the authority to grant or deny claims for benefits, Healthsource is a fiduciary under ERISA to the plan participants and beneficiaries. As such, Healthsource owes them the highest fiduciary obligations of good faith, fair dealing and loyalty, as well as the duty of candor and full and fair disclosure. In offering its system of "managed care," however, Healthsource has breached tha hat duty and has thereby interfered with the ability of its plan participants and beneficiaries to make informed medical decisions. In particular, the Company has failed to disclose essential terms and conditions of its healthcare plans which provide its doctors incentives to undertreat their patients, including through
8. Plaintiff brings this action on her own behalf and on behalf of all participants and beneficiaries in employee welfare benefit plans through which healthcare coverage is provided by Healthsource ("Class Members"). She seeks
JURISDICTION AND VENUE
9. The claims herein arise under ERISA, 29 U.S.C. et seq.
10. The jurisdiction of this Court is based on Section 502 of ERISA, 29 U.S.C.
11. This Court has subject matter jurisdiction over the action and has personal jurisdiction over both Healthsource, Inc. and Healthsource-NH, each of which is based in New Hampshire.
12. This Court is a proper venue for this action given that it is the chosen forum of the named plaintiff who receives her Healthsource healthcare benefits in this district and given that it is the location of the defendants' headquarters.
13. Plaintiff Robin Drolet is a resident of Derry, New Hampshire. She is a beneficiary of an employee welfare benefit plan offered by her husband's employer pursuant to which she is entitled to receive healthcare benefits through Healthsource, as specified in the Plan. Her employer pays for a portion of her healthcare costs, while Drolet's family is also responsible for a share of the Healthsource premiums. The Plan is subject to the terms of ERISA, the federal statute designed to regulate employee benefit plans.
14. Defendant Healthsource is a holding company which owns, operates and controls numerous subsidiaries throughout the United States which offer managed care services to more than three million subscribers. The Company's headquarters are located at 54 Regional Drive, Concord, New Hampshire 03302-2041.
15. Defendant Healthsource-NH is a wholly owned subsidiary of Healthsource, Inc. which is licensed to offer healthcare services in New Hampshire and Massachusetts. It shares headquarters with Healthsource, Inc.
16. Healthsource controls the policies and practices of each of its wholly owned HMOs, including Healthsource-NH. Through the exercise of this control, Healthsource has the power to grant or deny, or to order its subsidiaries to grant or deny, healthcare benefits offered to plan participants and beneficiaries. Thus, Healthsource, including Healthsource-NH, is a fiduciar ary under ERISA to the Class Members as participants and beneficiaries of employee benefit plans with which Healthsource has contracted to provide healthcare coverage.
17. Healthsource is a publicly traded managed care company. As a result, its primary goal is to maximize profits for itself and its shareholders. It has thereby structured its healthcare plans around the goal of increasing membership while reducing medical costs. The Company's profit-oriented approach has proven highly successful. On February 14, 1996, Healthsource announced that its revenues doubled in 1995, to $1.17 billion, and that it posted a 44 percent increase in its earnings, to $56.3 million. At the same time, its founder and current President and Chief Executive Officer, Norman C. Payson, has reportedly earned the most of any major managed care executive over the past two years, being awarding annual compensation and stock options worth more than $14 million.
CLASS ACTION ALLEGATIONS
18. Plaintiff brings this action on her own behalf and, pursuant to Rules 23(a) and (b)(1) and (2) of the Federal Rules of Civil Procedure, as a class action on behalf of all participants and beneficiaries in employee welfare benefit plans through which healthcare benefits are provided by Healthsource.
19. The members of the Class ("Class Members") are so numerous that joinder of all members is impracticable. Healthsource offers managed care services to over 3 million subscribers nationwide, including over 180,000 Healthsource-NH members.
20. Common questions of law and fact exist as to all Class Members and predominate over any questions affecting solely individual members of the Class. Among the questions of law and fact common to the Class are whether Healthsource violated ERISA by misrepresenting the nature and extent of the coverage provided by the HMO plans insured by the Company; by violating the express and implied terms of the employee welfare benefit plans to which it provided healthcare coverage; and by interfering with the practice of medicine and creating inherent conflicts of interest in the medical judgments of the Healthsource participating physicians.
21. The plaintiff's claims are typical of the claims of the Class Members because, as a result of the conduct alleged herein, Healthsource has breached its fiduciary obligations to the plaintiff and the Class.
22. The plaintiff will fairly and adequately protect the interests of the members of the Class, is committed to the vigorous prosecution of this action, has retained counsel competent and experienced in class litigation and has no interests antagonistic to or in conflict with those of the Class. As such, the plaintiff is an adequate Class representative.
23. The prosecution of separate actions by individual members of the Class would create a risk of inconsistent or varying adjudications with respect to individual members of the Class which would establish incompatible standards of conduct for the party opposing the Class.
24. Adjudications with respect to individual members of the Class would, as a practical matter, be dispositive of the interests of the other members of the Class who are not parties to the action or could substantially impair or impede their ability to protect their interests.
25. Defendants have acted or refused to act on grounds generally applicable to the Class, making appropriate final injunctive relief or corresponding declaratory relief with respect to the Class as a whole.
26. A class action is superior to other available methods for the fair and efficient adjudication of this controversy since joinder of all members of the Class is impracticable. There will be no difficulty in the management of this action as a class action.
27. As part of its obligation under ERISA, and in an effort to encourage employees who are offered Healthsource as an option to accept its managed care plan, Healthsource disseminates a package of information to employees which purports to describe the material terms and conditions of the benefits offered to them by the Company. As alleged herein, this information is materially false and misleading, in violation of Healthsource's fiduciary obligations under ERISA.
I. Financial Incentives
28. Healthsource's managed care structure revolves around the concept of a "primary care physician" or "PCP." Under this plan, each member must choose one physician from a list provided by the company who shall serve as the member's primary doctor. This doctor will provide the basic medical care for the member, while coordinating any additional medical care that might be needed.
29. Throughout the materials disseminated by Healthsource, including a Membership Guide, an HMO Provider Director and the Group Subscriber Agreement, the Company emphasizes the importance of the PCP to its members. In so doing, Healthsource is also leading the participants and beneficiaries to its plans to believe that the physicians are independent practitioners whose medical judgments will not be manipulated or interfered with by the Company.
30. In the Membership Guide, for example, Healthsource stresses that
"[r]outine medical care must be provided by your Primary Care Physician," adding that "[s]pecialty care will be coordinated through your Primary Care Physician based on medical necessity," and that "[y]our Primary Care Physician determines medical necessity for specialty care." In addition, the HMO Provider Directory, which lists the participating physicians who contract with Healthsource to serve either as PCPs or specialists under the Plan, emphasizes that "[a]ll medical care must be provided or arranged by your [PCP], adding that "[y]our Primary Care Physician (PCP) will determine when specialty care is medically necessary and will help to arrange for a referral to one of the many Healthsource Specialists listed in this directory."The Directory further adds that "[t]he relationship between the Plan and the Provider is a contractual relationship between independent contractors." These representations are clearly designed to make the patient believe that the doctor will serve as his representative, making medical decision and recommendations based on the patient's medical needs.
31. The implication drawn from these materials is underscored in the Group Subscriber Agreement, which specifically defines the PCP as a doctor who provides independent medical judgments on behalf of the patient, stating:
Primary Care Physician (PCP). A Physician who is under contract with the Plan whom the Member has designated as the Member's primary care physician and who is normally engaged in one of the following categories of practice: Family Practice, Internal Medicine, Pediatrics or General Practice. The physician has a contractual relationship with HEALTHSOURCE which does not interfere with the exercise of the physician's independent medical judgment. . . . (Emphasis added.)
32. The Agreement further purports to disclose the material terms of its compensation arrangement with its physicians, stating:
Financial Arrangements with Participating Providers. HEALTHSOURCE contracts with Participating Providers under many different financial arrangements, which include, but are not limited to fee-for-service payments, fixed monthly payments for each Member, and fixed fees for each Referral or case. Participating Providers may also be entitled to additional payments for effectively managing care and/or Member satisfaction.
33. This summary of the Company's contractual and compensatory arrangement with its PCPs is egregiously false, misleading and deceptive. With respect to the description of the PCP, Healthsource has explicitly breached the Agreement by imposing a financial compensation scheme which directly "interferes with the exercise of the physician's independent medical judgment." As for the summary of the compensation packages, it fails to describe the primary focus of the financial arrangements provided to the PCPs -- namely, that they are offered compensation tied inversely to the level of medical care they provide to their patients. By so misstating the financial arrangements, Healthsource has clearly misled the Plan participants and beneficiaries in violation of their fiduciary obligations under ERISA.
34. Each Healthsource participating physician must sign a contract with the Company which summarizes the doctor's duties, obligations and compensation structure. The physician often has little ability to negotiate the terms and conditions of the contract because, if he refuses to sign, Healthsource can simply refuse to accept him as a participating physician and thereby preclude them from any Healthsource patients. In New Hampshire and other regions, Healthsource has such a substantial share of the market that the doctor can be virtually forced out of business if he does not accept the Company's edicts.
35. As set forth in its physician contracts, Healthsource's compensation scheme for its PCPs begins with what is called "capitation" payments, whereby doctors are paid a small monthly stipend per patient, notwithstanding the amount of care that each patient requires. For example, under a basic benefit plan in which the patient is required to make no co-payment for services, the doctor will receive $20 per month for each patient under three years of age, $8.73 per month for each patient between three and 17, and $10.70 per month for each patient who is at least 18 years old. With capitation, a doctor is far better off financially with patients that require little to no medical attention, as the amount paid to the doctor remains the same regardless of the amount of care the patient needs. By itself, capitation therefore encourages the Healthsource PCPs to keep the level of treatment provided to their patients to a minimum. Although Healthsource discloses that one of "many different financial arrangements" it offers to participating physicians includes "fixed monthly payments for each Member," it does not disclose the context by which such fixed payments may affect the incentives doctors have to reduce care.
36. To commit the doctor to Healthsource, the Company has also offered an increase of approximately 14 percent in the capitation rates if the doctor agrees not to contract with any other HMO plan. A majority of the Company's PCPs elected to accept this exclusivity agreement, thereby increasing Healthsource's influence over its doctors' practices.
37. This incentive to reduce treatment, resulting from capitation payments, is exacerbated by Healthsource's policy of withholding a portion of th the PCPs' pay, pending a review of the doctor's medical costs. Pursuant to this provision, Healthsource can unilaterally withhold a percentage of each doctor's capitation payments (set initially at 5%, but subject to possible increases at the discretion of Healthsource) and return it based solely on whether the doctor's use of medical services exceeds that of other doctors in the "risk group" to which the doctor is assigned by Healthsource. As explained in the Contract:
5.02 Shared Risk Withhold Arrangements.The withhold is used by Healthsource to apply pressure on its doctors to keep down medical costs, by minimizing treatment to their patients.
(A) Amounts to be Withheld. At the discretion of PLAN's Board of Directors, the PLAN may withhold a percentage of a PHYSICIAN's compensation as part of the PHYSICIAN's risk sharing for total health care costs. This percentage of PHYSICIAN's compensation that is withheld will be known as "Withhold" or "Shared Risk Withhold." The Withhold shall initially be 5 percent of PHYSICIAN's compensation but shall be subject to change at any time at the discretion of the Board of Directors of PLAN if in the Board's view, PLAN's total health care costs are excessive.
(B) Return of Withhold. For the purposes of returning some or all of amounts withheld, PLAN defines certain accounting risk pools. The estimated claims experience from all patients assigned to each PHYSICIAN in each risk pool shall be a principal factor in determining the amount of any repayments to PHYSICIAN of the amounts withheld. PHYSICIAN will not be subject to uniform repayment of withhold but the repayment of withhold shall vary principally upon the experience of the Risk Pool to which the PHYSICIAN is assigned. Within one hundred and fifty (150) days of the end of each PLAN fiscal year or at more frequent intervals, at the discretion of the Board of Directors of PLAN, the Board of Directors of PLAN shall determine the amount of repayment of funds withheld, if any, to be returned to the PHYSICIAN's in each risk pool. After that determination, the PLAN shall repay any withhold from each risk pool where withhold repayment is indicated within (30) days after determination by PLAN. Any amount withheld from PHYSICIAN's fees and not distributed within one hundred and eighty (180) days of the close of any fiscal year shall be considered a contribution to the PLAN and not a liability of the Plan to PHYSICIAN.
38. As a more explicit means to encourage a reduction in medical costs by its doctors, Healthsource also pays them an additional 33% per patient in compensation through a "Referral Fund," which is specifically designed to compensate doctors who are able to keep the services they provide to their patients to a minimum. Under this provision, a certain sum is set aside in a special fund, from which, with certain limited exceptions, a portion is deducted from each and every referral, laboratory or diagnostic test, emergency treatment and hospitalization that the PCP provides to or authorizes for his patients. Any remainder from the Fund is paid to the doctor, while any deficit (arising from using "too many" tests or referrals) is used to offset the return of any withholds that would otherwise be owed by Healthsource. As a result, whenever a Healthsource doctor authorizes particular treatment for a patient, he is taking money directly out of his own pocket.
39. This portion of the compensation scheme is describe in the doctor's contract as follows:
5.03 Referral Fund Adjustments. In addition to the Shared Risk Withhold arrangements, PHYSICIAN agrees that PHYSICIAN's total compensation otherwise payable under Section 5.01 (A) shall be adjusted (up or down) based upon the Referral Fund Adjustment defined herein. PLAN shall establish an accounting fund for each PHYSICIAN known as a Referral Fund and credit to each fund amounts as provided for in Exhibit C for all Members assigned to PHYSICIAN during the initial term of this Agreement. Amounts credited in subsequent years may be increased as stated in a notice from PLAN to all PHYSICIANS. PLAN shall charge the Referral Fund for each Member assigned to PHYSICIAN, the Referral Fund Amounts at the rates as set out in Exhibit C attached hereto. Within one hundred and fifty (150) days of the end of each fiscal year of the Plan or at more frequent intervals at the discretion of the Board of Directors of Plan, the Referral Fund balance for PHYSICIAN (after deducting reserves for continuing care when appropriate and subject to any Shared Risk Withhold arrangements in section 5.02) shall be reconciled by the PLAN and, within thirty (30) days of such reconciliation: (i) PLAN shall pay to PHYSICIAN any positive balance remaining in his Referral Fund. The amount payable by PLAN to PHYSICIAN under this Section 5.03 shall be limited to thirty-three percent (33%) of capitation amounts for applicable benefit packages payable to PHYSICIAN under Section 5.01 (A) and outlined in Exhibits B and C; and (ii) If the Referral Fund balance is negative (deficit), the PLAN may offset future return of Shared Risk Withhold payments otherwise due the PHYSICIAN as described in Section 5.02. In no event will PHYSICIAN be financially responsible for any deficit that exceeds the Shared Risk Withhold repayments due the PHYSICIAN. (Emphasis in original.)40. Pursuant to Exhibit C to the Contract, $5.30 per month for children under 18 years of age and $10.45 per month for adults is credited to the Referral Fund. There is then a deduction -- or a "debit" -- from this Fund based on the use of medical treatments on behalf of a doctor's patients:
Debits: The amounts listed below shall be debited to the Referral Fund, provided that (i) the costs used to compute the amounts to be debited to the Referral Fund for any Member shall be limited to a debit of $1,000 per Member per fiscal year of the PLAN; (ii) no debits shall be made to the Referral Fund for costs relating to services rendered in the provision of obstetrical care and care during the first thirty (30) days of life of a member.Notably, while Healthsource purportedly does not require its doctors to return any of their capitation payments if the Referral Fund shows a deficit, it will use such deficits to offset payments otherwise due to the doctor under the withhold plan.
(i) Fifty percent (50%) of the cost of all specialty physician or other fee-for- service provider services for Members, plus:
(ii) Fifty percent (50%) of the cost of all laboratory and all radiology and all diagnostic testing costs except mammograms and those laboratory tests that cost under $35.00 per test and are provided as capitated services as described in Exhibit B;
(iii) Fifty percent (50%) of the cost of all Emergency Care provided on an ambulatory basis within the service area; plus,
(iv) Twenty-five percent (25%) of all inpatient hospital costs.
41. Based on the compensation scheme implemented by Healthsource, a doctor who provides minimal treatment to his patients, and thereby receives maximum compensation through his capitation payments and the Referral Fund, will receive 140% of the compensation available to doctors who reach a deficit in the Referral Fund as a result of providing "too much" treatment to their patients. Healthsource thereby provides explicit incentives to its doctors to undertreat patients in order to maximize Company profits. As explained above, these incentives conflict with the Agreement entered into by Healthsource by clearly "interfer[ing] with the exercise of the physician's independent medical judgment."
42. The critical relationship between the Referral Fund and the incentives being given to the Healthsource PCPs to reduce care is demonstrated by a June 5, 1989 memorandum from Paula M. Minnehan, Healthsource's Director of Provider Services, to its physicians. In this memorandum, the Company announced certain "major enhancements" in its 1989 contracts, including a "22% increase in Referral Funds." The memorandum explained that this increase in the Referral Fund provided the "[p]otential to increase total physician compensation through cost containment efforts." In short, if the Healthsource physicians were able to reduce costs through fewer tests, referrals and hospitalizations, they would receive greater compensation.
43. While Healthsource stresses its incentive payments to its PCPs, it intentionally fails to disclose such incentives to plan participants and beneficiaries who believe that the PCPs are making their medical decisions based solely on the needs of their patients.
44. Moreover, Healthsource maintains the right to alter its compensation mix of capitation, withholds and referral funds if necessary to meet Company goals -- i.e., to provide additional pressure to reduce medical care in order to enhance profits. After it pressured its physicians to sign the contracts with the compensation package described above, for example, Healthsource amended the agreement by adding the following provision:
Practice Based Adjustments. Notwithstanding anything else herein, PLAN may adjust capitation and withhold amounts, and determine repayment of withhold and referral fund adjustments, based on indicia relating to PHYSICIAN's practice, including but not limited to case mix data, experience, quality indicators and cooperation with PLAN operations.45. The effect of this provision was to provide Healthsource with virtually unlimited control of the compensation doctors can receive in order to increase the Company's influence over the doctors' treatment options provided to their patients. Healthsource informed their physicians informally that if they did not sign the amendment giving the Company this additional power, it would terminate them from the Plan. As a result, most doctors acceded to the demands.
46. This addition to the contract provides Healthsource with an effective tool to pressure doctors financially who do not limit their care sufficiently. While the original contact specified that a doctor would not be responsible for any deficit in the Referral Fund which exceeded the amount of the withhold, Healthsource in fact uses future adjustments in the capitation rates to absorb any such deficit. Thus, if a doctor has a $1,000 deficit in his Referral Fund because of "too many" referrals, tests or hospitalizations, Healthsource will reduce the doctor's capitation the following year by that amount. In this way, Healthsource makes its doctors financially responsible for any treatments covered under the Referral Fund.
47. In addition to the financial incentives incorporated into the compensation scheme implemented by Healthsource, the Company has also caused another insidious conflict by permitting -- and, indeed, encouraging -- its doctors to become substantial shareholders of Healthsource stock. In particular, when Healthsource was first expanding in New Hampshire it specifically encouraged its doctors to become stockholders in order to give them a further stake in the Company and to provide an additional incentive to contain costs. At least 400 doctors became Healthsource stockholders as a result.
48. As shareholders in Healthsource, doctors may well benefit financially to the extent the Company can increase its profits through a reduction in medical expenses. As a result, the doctor is again in a position of a conflict of interest, where his judgment as to the appropriate level of medical care to provide to his patients is inevitably tainted by his parallel interest in the financial well being of Healthsource and its shareholders.
49. The problem is even more significant when the investment in Healthsource stock is not just by PCPs, but also by Healthsource staff doctors who may be involved in making the decisions whether particular care is medically necessary, and hence covered under the plan. Thus, when these doctors are asked to make judgments that can effect the level of care offered to the Healthsource managed, they suffer from a conflict of interest arising from their financial stake in the profitability of the Company.
50. Healthsource has not disclosed to its members the possible conflict of interest arising from investments by their participating physicians in Company common stock.
51. There can be little doubt that financial incentives which create conflicts of interest in the exercise of medical judgment are facts of substantial materiality to the Healthsource members. The influence of the financial incentives on the Healthsource doctors cannot seriously be questioned. While doctors may, in any event, attempt to use their best medical judgments to treat their patients, it is impossible for them not to consider the financial effects of decisions, particularly when a close call may be involved concerning whether or not a referral to a specialist is necessary. The participants and beneficiaries of healthcare plans administered by Healthsource have a right to know that these incentives are being given to their physicians. As such, in the exercise of its fiduciary obligations to its members, Healthsource is obliged to disclose such facts fully.
52. Doctors themselves have recognized the insidious effects of financial compensation on their own decision-making processes. In the March 11, 1996 issue of the American Medical News, for example, Dr. Michael Greenberg explained how he decided to terminate his contract with an HMO after recognizing that his own decisions were inadvertently being affected by financial considerations. When considering a patient's request for removal of certain moles, for example, Dr. Greenberg wrote:
Thoughts crossed my mind -- mental arguments of which I did not believe myself capable. I realized if I performed the removals this patient requested, the laboratory fees would have to come from my monthly check. It would have cost me. Of course, if there was a chance that the moles were dangerous, I would have removed them immediately. The sudden awareness that money and profit had crept their way into my decision-making process frightened me. I came to grips with the fact I was not a saint -- I was human, and subject to the same self-deception of which we are all capable. * * * * Capitated care is not the same as fee for service. It cannot be. Not at least while we are all human. Not while we have the cultural belief that having more money will make us happier. And not while we feel resentment for highly paid executives diverting dollars from patient care for their fat salaries. Being forced to make patient care decisions based on our own wallets places us in the worst possible moral dilemma. Perhaps capitated offices should be honest and put signs in waiting rooms clearly pointing out how the doctor has a vested financial interest in providing as little care outside his or her office as possible. We should explain how each referral the primary physician grants diminishes their own funds. At the very least, this should be spelled out in the slick advertising propaganda offered by the HMOs. (Emphasis added.)53. Recognizing the concerns expressed by Dr. Greenberg, the American Medical Association Council on Ethical and Judicial Affairs issued guidelines in 1994 entitled "Ethical Issues in Managed Care" which specifically called for the need to provide full disclosure to patients, including disclosure of any financial incentives received by doctors to reduce treatment:
Managed care plans must adhere to the requirement of informed consent that patients be given full disclosure of material information. Full disclosure requires that managed care plans inform potential subscribers of limitations or restrictions on the benefits package when they are considering entering the plan. * * * * When physicians are employed or reimbursed by managed care plans that offer financial incentives to limit care, serious potential conflicts are created between the physicians' personal financial interests and the needs of the patients. Efforts to contain health care costs should not place patient welfare at risk. Thus, financial incentives are permissible only if they promote the cost-effective delivery of health care and not the withholding of medically necessary care. . . . Any incentives to limit care must be disclosed fully to patients by plan administrators on enrollment and at least annually thereafter. . . . (Emphasis added.)Healthsource fails to comply with the AMA's recommendations. In so doing, it ha has breached its fiduciary obligations to the participants and beneficiaries of its plans.
54. In addition to the financial incentives provided to PCPs to reduce the level of care offered to their patients, Healthsource also misleads its members by omitting material facts concerning how medical decisions are made by the Company and its doctors.
55. Under the terms of Healthsource's Group Service Agreement, only "medically necessary" services as determined by the Company is covered. What Healthsource members do not know, however, is that what is "medically necessary" has as much -- if not more -- to do with the costs of treatment as with an independent medical judgment concerning the needs of the patients. Healthsource fails to disclose essential facts concerning how medical necessity is determined so as to permit its Plan participants and beneficiaries to make appropriate decisions concerning the treatment options they may be offered.
56. Rather than making an independent medical decision based on the condition of the specific patient at issue, Healthsource relies on what is known as a "utilization review," a euphemism for a process by which the Company seeks to reduce medical costs -- and, thus, medical care -- through careful reviews of treatment options provided to patients. This utilization review is not performed by independent medical personnel whose sole purpose is to determine whether care is needed. Rather, Healthsource relies on undisclosed guidelines which set forth general standards for care that are based on average or typical treatment scenarios, standards which may not be appropriate in given circumstances. Moreover, the Healthsource bureaucrats who interpret the guidelines so as to make critical treatment decisions never examine the patients, are not required to be specialists in the medical problems at issue and base their decisions on general formulas adopted by Healthsource to minimize medical costs.
57. Indeed, Healthsource subscribers would be shocked if they knew the process by which critical decisions were made concerning their medical care. When a PCP or a specialist requires pre-authorization from Healthsource for tests, surgeries or hospitalizations, they must contact Healthsource by telephone. The doctor then must describe the medical decision requiring the recommended treatment to a Healthsource employee who the doctor does not know, is not a doctor and may have received little to no medical training. This employee is unable to question the doctor concerning the medical treatment at issue and has no connection to the specific circumstances of the patient involved. The Healthsource employee types the medical facts given by the doctor into a computer and, relying on the Company's undisclosed data base, informs the doctor whether or not the treatment is approved or how it should be provided (i.e., the number of days the patient will be permitted to remain in the hospital). The doctor -- let alone the patient -- is not informed of the medical basis for the decision by Healthsource and has no immediate opportunity to contest the recommendations. If the doctor is willing to subject himself to criticism from Healthsource, he can participate in a complicated grievance procedure adjudicated by Healthsource employees, but the patient never is aware of the underlying basis for the medical decision reached by the Company.
58. Without knowing the terms and limits of the guidelines upon which Healthsource bases its medical necessity determinations, the Plan participants and beneficiaries are unable to make fully informed decisions both as to whether to become Healthsource members and how to respond to treatment recommendations. At a minimum, the Healthsource members have a right to know what standards are being used to determine their medical care.
59. As Professor Margaret Gilhooley noted in the Villanova Law Review in 1995: "The determination of medical necessity appeals to the norm of professional judgment, but the criteria employed are not necessarily based on a professional consensus and may not even be based on public information. The criteria can be influenced by cost-benefit factors in various ways." She subsequently concluded that "more information about the general criteria [by which payers determine the level of care that is medically appropriate] should be provided to subscribers with their basic policy," explaining:
The concern with cost containment has created an interest in limiting care. When the plan seeks to limit reimbursement within the realm where reasonable physicians differ, the plan should clearly indicate its standards and the supporting basis. The plan itself should state that claims can be denied as medically unnecessary based not only on criteria that reflect a professional consensus, but also on the plan's criteria for what is medically unnecessary. The nature of the plan's criteria, the general sources of support and the process for the formulation of criteria should be identified. Thus, if the criteria regularly relies on expert opinions, the identify and qualifications of the experts should be identified. If the criteria are developed based on the insurer's experience with similar claims, this source should be identified. If the determination is based on cost factors and cost-benefit determinations, these factors should be clearly stated in the policy and the relevant determinations. When the support relies on medical practice guidelines, the statement should indicate how the guidelines are developed and the type of support used for the guidelines. * * * The health care plans and brochures provided to subscribers should also provide illustrative examples of the level of care considered medically necessary for a representative number of medical conditions. The disclosures should cover not only the most frequent types of procedures, but also the one for which the standards are especially prone to vary.60. This information is critical to participants and beneficiaries in managed care plans, as Professor Gilhooley goes on to explain:
In addition, examples should be listed of the limits on benefits provided for the most common medical emergencies involving hospitalization. The disclosure should indicate the length of hospital stay typically authorized and the availability of post-discharge care, such as physical therapy, in-patient rehabilitation or home health aides. The plan should also explain the basis underlying the illustrative criteria.
This approach to the interpretation of the insurance provisions can promote informed patient choice among plans with respect to this key factor. If the policies clearly identify the basis upon which medical necessity determinations are made and provide illustrative examples, subscribers can consider this factor in exercising whatever choice they may have among plans.61. Despite the materiality of the information relating to underlying criteria used by Healthsource for determining what treatment it will deem to be "medically necessary," Healthsource has not disclosed any meaningful information concerning such criteria to the Plan participants and beneficiaries.
These criteria for determination of what is medically necessary have important consequences for patients and their families. The length-of-stay criteria involve the shifting of the responsibility for providing care during recuperation from an institution to family members. Subscribers who receive better notice of the limits of services can consider what alternative strategies they may need to undertake to deal with the limits, such as making alternative arrangements for home care.
The disclosures, thus, an facilitate planning by patients and help them in choosing among plans. In many cases, though, the choice between plans is limited to those made available by employers, and people with lower incomes may have fewer choices. The disclosures may still be useful in enabling the employees to persuade their employers to seek changes in the plans. In addition, as citizens, subscribers may seek legislation to change restrictions that are not publicly acceptable.
62. An additional factor of perhaps even more importance is that the participating physicians themselves are required to comply with Healthsource's utilization standards. For example, the physician contract provides:
4.07 Compliance with Committees. PHYSICIAN agrees to cooperate with, abide by, and render services to Members in accordance with procedures, protocols and policies of . . . [t]he Utilization Review Committee of PLAN, whose function is to assure the delivery of quality health care services to Members in the most cost-effective manner.63. These procedures, protocols and policies of the "Utilization Review Committee" are critical considerations in the determination of what medical care is provided to the Plan participant and beneficiaries, particularly with respect to determinations based on what is "most cost-effective." Yet, again, Healthsource fails to disclose even the existence of the Utilization Review Committee, to say nothing of the policies and procedures under which it operates.
64. Furthermore, Healthsource does not disclose that the primary goal of the Utilization Review Committee is to apply pressure on the participating physicians to reduce their medical costs, a fact of clear relevance to the Plan participants and beneficiaries.
65. In addition to the financial incentives and the utilization reviews, Healthsource is also able to apply substantial pressure on its physicians to comply with its rules and regulations designed to minimize treatment. Pursuant to the terms of the contracts between Healthsource and its physicians, the Company can terminate them without cause with six months notice. Thus, if a doctor does not cooperate with Healthsource's efforts to minimize treatment in order to maximize profits, the Company can exclude him from the Plan.
66. While being encouraged to select and rely upon PCPs for their primary healthcare providers under the Healthsource plan, the Company never discloses that it has the right to terminate the physician at any time, even if there is no basis for doing so and such a decision could have adverse effects on the care provided to the patient. As a fact of clear materiality to members, Healthsource is obligated to provide such disclosure pursuant to its fiduciary obligations.
67. The financial incentives described herein, as well as the right of Healthsource to terminate its participating physicians without cause, are indeed material facts which Healthsource should disclose to its members pursuant to its fiduciary obligations. In addition, however, these provisions are inherently invalid as they violate public policy. As such, they should be declared null and void.
68. The physician-patient relationship has been specifically recognized for protection under common law and under statutory provisions. In New Hampshire, for example, RSA 329:26 places the confidential relationship between a physician and a patient in the same protected position as the attorney-client relationship. As such, a patient's decision in creating that relationship -- and in understanding the potential conflicts of interest that may exist -- should be entitled to protection similar to a client's freedom of choice in picking a lawyer, as reflected in Rule 5.6 of the ABA Model Code Comments to the Rules of Professional Conduct. In RSA 151:21, XVII, New Hampshire has also entitled patient's in hospitals with the right to be treated by the physician of the patient's choosing, subject only to reasonable rules of the facility regarding credentialling, thus reinforcing the importance of the relationship.
69. Furthermore, the public interest in provider agreements is reflected in the legislative statement of purpose preceding the statute regulating "Preferred Provider Agreements," which are similar in purpose to HMO provider agreements:
The purpose of this chapter is to assure that contracts or agreements between preferred providers and health care insurers are fair and in the public interest. RSA 420-C:1.70. A contractual provision that permits Healthsource to terminate its participating physicians without cause gives the Company undue influence over the doctor's conduct and creates the possibility of a direct interference in the doctor-patient relationship when there is no legitimate basis for doing so. In recognition of the public interest in health care, and in the provisions of contracts entered into between insurers and the providers through whom health care is provided to the public, the Court should therefore hold that any such provision is void as against public policy.
71. In addition, the Court should recognize the inherent conflicts that are created in the doctor-patient relationship when financial incentives ar are paid based, in part, on the amount of care that is offered to the patient. Indeed, under the anti-kickback provisions of the Medicaid- Medicare Anti-Kickback Statute, 42 U.S.C. "kickback" for referring patients to another doctor. By receiving remuneration in return for referring patients, it is clear that the health of patients are not the doctor's only interest, and a doctor's patients deserve medical opinions and referrals unsullied by mixed motives. Moreover, Current Opinions on Ethical and Medical Affairs of the American Medical Association 31-33 (1985) specifically mandates that referrals be made in the best interests of the patient, a result that cannot be guaranteed when the doctor's medical judgment is tainted by financial conditions tied to his decision. Patients deserve medical opinions and referrals unsullied by mixed motives, including financial benefits that might be received by either referring or not referring the patient to a specialist or for some type of treatment.
72. As Professor Vernillia R. Randall noted in the Puget Sound Law Review in 1993:
There is a danger that financial risk shifting will undermine the fundamental ethical basis for the health care system. Historically, the health care system has been based on a belief in the sanctity of the physician-patient relationship. Physicians have had an ethical and legal responsibility to act in the patient's best interest. . . .It is because of this need for trust between the doctor and the patient that Geoffrey Modest concluded in a piece written for the New England Journal of Medicine in 1990 that financial inducements to physicians to reduce the level of care they may provide to patients are "blatantly unethical."
The ethical basis of the health care system is necessarily founded on a certain amount of trust. When a patient seeks care from a physician, the patient must believe that the physician will act in the patient's best interest and will not put other interests before that of the patient. The patient usually does not have the training to judge the reasonableness of the physician's decisions about her health care needs and alternative means of meeting those needs. Thus, the physician, not the patient, combines the components of care into treatment. It is essential that the patient trust that the physician will primum non nocere -- first do no harm.
73. Through the financial compensation scheme established by Healthsource, and the process by which the Company maintains authority to approve or reject the doctor's decisions and recommendations, the participating physicians have been placed into a position whereby they are unable to make independent decisions. Notwithstanding their best efforts otherwise, their judgments have been impaired as a result of these financial agreements and their patients have lost their fiduciary right to medical opinions and referrals unsullied by mixed motives.
74. As recently explained by Drs. Steffie Woolhandler and David U. Himmelstein in the December 21, 1995 issue of the prestigious New England Journal of Medicine:
But the financial incentives for physicians are problematic. The new risk-sharing arrangements [whereby doctors share in the risk of increased medical costs] are not simply the inverse of fee for service. Instead, they are the inverse of fee splitting [which is no longer permitted]. Just as fee splitting allows doctors paid on a fee-for-service basis to profit from referring patients, so doctors under the new arrangement can profit from not referring patients. Profiting from referrals amplifies fee-for-service incentives and distorts clinical judgment. . . . Extreme risk sharing similarly amplifies the incentives of traditional capitation arrangements (i.e., a fixed monthly payment for the physician's own work). Robinson and Casalino ["The Growth of Medical Groups Paid Through Capitation in California," 333 N. Engl. J. Med. 1684 (Dec. 21, 1995)] document extraordinarily low, and rapidly falling utilization rates in risk-assuming groups -- rates far lower than in HMOs with salaried physicians -- though their data do not exclude favorable risk selection as the main explanation. Moreover, outpatient care fell in tandem with inpatient care. In contrast, when HMOs with salaried physicians have pushed down the average number of inpatient days, they have maintained or increased the volume of outpatient visits. We fear a race to the bottom, with research on health consequences lagging years behind. Even most HMO managers believe that large incentives to physicians compromise the quality of care.75. To avoid the conflicts of interest which Healthsource's compensation scheme creates, this Court should hold compensation that is tied to utilization analysis to be void as against public policy.
76. Unless enjoined by this Court, the policies and practices of Healthsource described herein -- which violate the express terms of the Plan, are against public policy, have defrauded the participants and beneficiaries and have induced the breach of fiduciary duties owed by participating physicians to their patients -- will continue, as well as their repercussions. As such, equitable relief to compel specific performance and to enjoin further breaches is required to prevent future violations of law.
(For Violation of ERISA, 29 U.S.C. 1001 et seq.)
77. Plaintiff repeats and realleges the foregoing paragraphs.
78. Healthsource is a fiduciary to plaintiff and the Class Members, as participants and beneficiaries of employee welfare benefit plans for which Healthsource provides healthcare benefits.
79. Healthsource has breached its fiduciary obligations owed to the
plaintiff and the Class Members by intentionally or recklessly
misrepresenting the terms and conditions of its healthcare coverage, for the
purpose of inducing Class Members to join Healthsource and to pay the
required premiums for healthcare benefits. As identified herein, the
Company's representations are fraudulent for, among other things, failure to
(a) that PCPs are paid incentives to reduce medical treatments they will provide or authorize for their patients, thereby creating inherent conflicts of interest in their practice of medicine and the exercise of their independent medical judgments;
(b) that many of its participating physicians own substantial interests in Healthsource and therefore have conflicts of interest between their concern for their patients' medical needs and their concerns over the financial well being of Healthsource;
(c) that Healthsource bases its decisions concerning what is "medically necessary" on utilization review manuals and guidelines, the provisions of which are not disclosed; and
(d) that Healthsource has a right to terminate its participating physicians without cause.
80. Finally, Healthsource has violated public policy, and has breached its fiduciary obligations and its implied covenant of good faith and fair dealing, as a result of the contractual provisions described herein which create the inherent conflicts of interest in the exercise of medical judgments by Company doctors and by assuming the right to terminate them without cause.
81. As a result of the violations of ERISA alleged herein, plaintiffs and the Class Members have suffered injury, for which they are entitled to declaratory and injunctive relief, including restitution of the fair value of the premiums they have paid for inadequate healthcare benefits.
WHEREFORE, plaintiff demands judgment in her favor and in favor of the Class against defendants as follows:
Dated: March __, 1996
Stanton E. Tefft, Esq.
Seven Meetinghouse Road
Bedford, New Hampshire 03110
Telephone: (603) 472-2220
POMERANTZ HAUDEK BLOCK & GROSSMAN
D. Brian Hufford, Esq.
100 Park Avenue
New York, New York 10017
Telephone: (212) 661-1100
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