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Steering clear of HMO/Managed Care "Bad Faith"
Dan Groszkruger, JD, MPH

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Steering Clear of Capitated managed care places physicians in the conflicted role of serving two masters, the patient or the HMO/managed care organization. How can a physician act in the best interests of the patient and still meet fiscal responsibilities imposed by an HMO/managed care organization? The answer is: a physician must advocate on behalf of the patient's best interests. The physician should order what is medically necessary for the patient, regardless of cost constraints. The following trial summary illustrates how advocacy can avoid potential liability for "bad faith" conduct.

In January 1999, a San Bernardino County jury awarded $120.5 million in damages against Aetna-U.S.Healthcare, one of the nation's largest HMOs.1 The widow of a stomach cancer patient sued the HMO for "bad faith" disapproval of cancer therapy that promised to prolong her husband's survival. The verdict included $116 million in punitive damages against the HMO for placing its own financial interests above the needs of the individual patient. (Aetna has appealed.) Significantly, treating physicians were not held liable.

The verdict is a record HMO bad faith award, eclipsing the $89 million verdict in Fox v. HealthNet, decided in December 1993 in nearby Riverside County. Similar to the Fox case, Goodrich was a patient with advanced cancer, referred for high-dose chemotherapy and expensive bone-marrow transplant therapy. The recommended treatment, including surgery, could not cure the underlying cancer, but might prolong the patient's survival. As in Fox, the HMO took the position that the recommended treatment was not a covered benefit, and in any event, that the patient was not an appropriate candidate. In both cases, the patient ultimately received the recommended treatment, but died shortly thereafter. Both patients were governmental employees or spouses, exempt from the ERISA barrier to state court lawsuits against HMOs.

David Goodrich, a 41-year old prosecutor in charge of the District Attorney's gang prosecution unit, was diagnosed in June 1992 with leiomyosarcoma, a rare stomach cancer. His health plan was provided through his employer, San Bernardino County. His in-plan surgical oncologist referred David to the City of Hope for specialized treatment of his rare tumor. The health plan generally provided for such out-of-plan care, if ordered by an in-plan physician. Nevertheless, the treatment request was referred to Aetna's medical director, pursuant to a "terminal illness policy" unknown to the patient or his doctors. In November 1992, Aetna denied the request, indicating that "experimental treatment' was not a covered benefit.

In September 1993, David Goodrich underwent liver cryosurgery and chemotherapy, another segment of his recommended treatment. After the fact, Aetna denied financial responsibility for the cryosurgery, citing lack of prior approval for out-of-plan services. Ultimately, Aetna agreed to pay for the cryosurgery, but not for the follow-up chemotherapy. In January 1995, David Goodrich underwent debulking surgery, followed by more chemotherapy. While the patient recovered in intensive care, Aetna arranged to hand-deliver a denial letter to his wife at the hospital. At that time, David's wife owed $750,000 in unpaid medical and hospital bills. David Goodrich died on March 15, 1995, never having left the hospital after the last surgery.

Following his death, David Goodrich's primary care physician formally requested that Aetna reconsider its denials. In November 1995, Aetna reconfirmed its denials, and the bad faith lawsuit followed. At trial, David's treating surgical oncologist testified that, had cryosurgery occurred in February 1993, as opposed to September 1993, David's survival would have been extended for 15-20 months. Both the surgical oncologist and Goodrich's primary care physicians appeared to act solely upon their medical judgments regarding what care was medically necessary and appropriate.

This huge verdict against an HMO sends two important messages: (1) juries do not like HMOs or physicians who appear to place their own financial interests above the health of their patients, and (2) physicians may avoid "bad faith" liability by advocating appropriate care for their patients. This means: (a) educating patients about the consequences of delayed tests or treatments and identifying out-of-plan options, (b) making out-of-plan referrals where circumstances dictate, and (c) defending your recommendations in the face of cost-containment pressures.

1 Goodrich v. Aetna-U.S.Healthcare, San Bernardino Superior Court Case No. RCV020499.