The Bullet-Proof HMO

How the federal government helps shield health-maintenance organizations from negligence suits

Steve Silen says he learned about health-maintenance organizations (HMOs) the hard way. In January 1998, his 16-year-old daughter, Serenity, went to Silen's HMO doctor complaining of a sore throat. (Silen later sued, and his settlement agreement bars him from naming either the insurance company or the dollar amount.) After several weeks and several more sore-throat diagnoses, Silen's wife pressured doctors to give Serenity a routine blood test. The HMO relented and discovered a white-blood-cell count of 92,000—10 to 15 times higher than normal. Serenity, an Irvine High School sophomore who trained to ride horses in the Olympics, didn't have a sore throat, a cold, or a viral infection. She had leukemia.

Silen's complaint claims the delayed diagnosis reduced Serenity's chances of survival. The HMO placed her in an LA-area hospital, where, according to the complaint, cancer patients like his daughter with weakened immune systems were mixed with infectious-diseases patients. Silen described understaffed hospital wards and undertrained staff. As the Silens watched doctors and nurses stumble around her in something like a cross between Duck Soup and ER, their daughter's condition worsened. It was, Silen recalls, "one miscue after another."

When their daughter went into remission in April 1998, the Silens lobbied the HMO for a bone-marrow transplant—an expensive operation, Silen concedes, but one that "would've saved my daughter's life." But the hospital hesitated and then finally agreed to schedule the procedure for a date in late 1999. Serenity relapsed, closing the briefly opened window of opportunity.

"That's when you find out the HMO isn't your friend," Silen says. "That's when you find out you're dealing with accountants, not doctors."

Desperate, the Silens removed their daughter from the HMO system. They paid for an oncologist in private practice out of their own pockets. "We risked everything we owned to save her life," he says. "Our goal was to save a life, not a bottom line."

Risking everything wasn't enough. On October 11, 1998, just eight months after her leukemia diagnosis, Serenity Silen died.

The Silens had little recourse after their daughter's death, thanks to the federal Employee Retirement Income Security Act (ERISA). The act contains a loophole that treats HMOs as if they were pension programs; that loophole protects HMOs from virtually all lawsuits.

Under the law, the Silens and others like them can sue only for legitimate treatment denied and lost wages. But ERISA prohibits the Silens—and the 125 million other Americans signed onto employer-paid insurance plans—from collecting any money for pain and suffering or damages. They can't claim anything that might encourage HMOs to perform differently in the future.

That's not how ERISA was supposed to work. Passed in 1974, the law was designed to protect employee pension funds from lawsuits that might wipe out the retirement funds of hundreds or thousands of workers. More recently, the law has been interpreted to cover employee health-insurance programs—even if those programs are run by private corporations.

"ERISA was supposed to protect employees, not HMOs," said Jeff Metzger, a Laguna Hills attorney who has been handling bad-faith insurance litigation for 15 years.

California law doesn't recognize HMOs as insurance companies; instead, such companies as Kaiser, PacifiCare, United Health and others fall under the jurisdiction of the Department of Corporations. California also limits damage claims to a few hundred thousand dollars. Except for government workers—whose exemption is clearly stated in ERISA—and some individuals who pay for their own health insurance, anyone who sues an HMO can expect compensation only for the cost of treatment denied them and any lost wages.

Sometimes, an individual plan holder can successfully negotiate the HMO litigation maze. In the summer of 1998, Ventura County attorney Mark Hiepler won a stunning $89 million wrongful-death judgment against Health Net. The HMO had refused to pay for a life-saving procedure for his sister, who was then suffering from breast cancer—a refusal Hiepler successfully argued contributed to her death.

But for the other 14 million Californians who get their health coverage from HMOs, there is no such hope. Bills to restore full litigation rights to them died miserable deaths last year after then-Governor Pete Wilson vowed to veto anything that might, as he put it, make insurance more expensive—a grotesque manipulation developed by the insurance industry to scare consumers into maintaining the status quo. By killing bills designed to increase a patient's right to sue an HMO for full damages, Wilson could claim he was only protecting consumers from the "higher premiums" such legislation might bring.

The latest attempt to close the ERISA loophole for state health-care consumers is Senate Bill 21, which is now working its way through the state Senate. That bill would place HMOs under the jurisdiction of the state insurance commissioner, removing its current special exemptions. It's unknown if Governor Gray Davis will sign the bill, much less whether both state houses will pass it, or whether insurance-industry-friendly Insurance Commissioner Chuck Quackenbush would do anything to act on the bill once it becomes law. Last year, Assembly Bill 2436, which would have given patients the right to sue HMOs, never made it out of the state Assembly.

A federal law rescinding the ERISA exemption would be a far easier approach. Currently, the Kennedy-Dingell bill (the so-called Patients' Bill of Rights) would do exactly that. But that bill faces serious opposition—not merely from the GOP-led Congress, but also from the insanely rich health-insurance industry. In May and July of 1998, the industry lobbying group Health Benefits Coalition (HBC) spent $2 million campaigning against Kennedy-Dingell. Federal Election Commission records show the entire HMO industry spent an incredible $6 million on lobbying in just the last half of 1998.

The industry was so successful last year because it harped on a single message: increased liability equals increased costs. According to HBC literature, earlier and current bills (such as Kennedy-Dingell) "would increase health-care costs for families and businesses, resulting in millions of Americans losing their health-care coverage."

It's a subtle, highly effective argument: allowing patients to sue HMOs will only benefit trial lawyers while forcing employers to jack up health-plan premiums to pay for health-care companies defending "frivolous" lawsuits. In February 1999, the HBC even provided some numbers backing their claim. The group said the Kennedy-Dingell bill would increase premiums by 8.6 percent, although that figure was unsubstantiated. Three months later, the unsubstantiated increase had dwindled—without explanation—to 6.1 percent.

In any case, the HMO industry's argument is completely baseless. A 1998 Congressional Budget Office study of HMO liability legislation found proposals like Kennedy-Dingell would add just $2 per member per month to premium costs for medium and large health plans.

But far more compelling is the fact that Texas has allowed consumers the right to sue HMOs for pain and suffering since 1997. In 1998, a study by the firm Milliman and Robertson determined the liability law cost Texas employers only 34 cents per member per month more. In addition, the Texas Department of Insurance found just 218 people sued an HMO in the law's first year—substantially less than the predicted 4,400.

But most encouraging is the growing number of Texas doctors who say the mere threat of litigation has been enough to increase HMOs' willingness to authorize procedures and medications that a year ago would have been unthinkable.

"In my view, the ERISA exemption gives HMOs the right to steal," said Metzger. "If HMOs were subject to punitive lawsuits, they'd get into line."

Today, the Silens buy their own insurance and pay their own premiums. Silen speaks frequently on behalf of the Patients' Bill of Rights. But his wife "would like to kill [the HMOs' officials] if it were legal."

Research assistance by Michael Manzo.
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