Is a Health Plan Liable for the Negligence of an Unqualified Claims Reviewer?

Sherman, TX Johnson v. UnitedHealthcare raises more questions than it answers about how ERISA protects health plan participants who bring bad faith insurance lawsuits over denied medical claims. Stephen Johnson had more than his share of hardship. The law hasn’t helped him. But it’s a complicated story that will affect claimants and health insurers denying medical claims in California and throughout the country. So hang on.

Boys in Cars

Stevie, as his parents call him, was riding in a car that went off the road. He was 22. He was badly injured and spent weeks in a coma. When he woke up, he could speak – not well – but he could speak. Anyone who knows a stroke patient or has watched Gabby Giffords’s recovery knows how important early and intensive therapy is for people who have suffered a devastating brain injury.

UnitedHealthcare denied coverage for the therapy several times. Stevie went to a nursing home Medicaid bed, was heavily sedated and lost ground. He was, effectively, sent to the vegetable ward. His parents ultimately sought an independent third-party review of UnitedHealthcare’s denial of benefits.

That review was conducted by Spyros Panos who was employed by Advanced Medical Reviews (AMR). Panos, as it turns out, was an imposter. He was using a false identity and had previously lost his medical license because of felony conviction for Medicare fraud. After Panos’s arrest, the Johnson’s claim for rehabilitative services for Stevie was approved. But it seems to be too late for some aspects of recovery. Brain tissue is fragile. It dies. His parents’ optimism aside, it is not clear how much Stevie can come back now.

What is the Law?

There is so much blame to go around here, it is hard to know where to begin. The Johnson family brought a lawsuit against AMR for negligence in hiring Panos. In addition, they sued UnitedHealthcare for wrongful denial of benefits. What the Complaint doesn’t say about their fiduciary duty is very revealing about the limits of the law as it is today.

Was UHC Responsible for Minding what AMR was Doing?

ERISA plans, including health care plans, are usually responsible for monitoring the performance of the third party providers they hire to help them discharge their fiduciary duties. Nonetheless, there has been considerable comment and criticism lately that the delegation of duties to third party functionaries has diluted the accountability intended by the law, at least in practice.

It is not clear, however, that a health care plan has any fiduciary responsibility for the negligence of an independent review organization (IRO), like AMR. Understanding why requires getting into the nuts and bolts of how giant insurers like UnitedHealthcare actually process claims.

Nuts and Bolts of Insurance Claims Denial

When an insured person makes a claim for coverage, an insurer may deny coverage on the grounds that the treatment is investigational, experimental or cannot be expected to yield any beneficial result. It happened with Stevie perhaps because of the severity of his injuries. It also happens with microprocessor-augmented prosthetics and in-hospital emergency room services.

The insured person’s next step is to ask for an internal plan review of the denial. Sometimes there are several layers of internal appeals. Under the provisions of the Affordable Care Act, the insured’s next and final step is to request an external, third-party review. Few people go this far; most give up before then, but Stevie’s parent’s persisted. Their appeal then went to this next step, which required the involvement of AMR, which is an IRO.

IROs are intended to eliminate the conflict of interest that many see in decisions of plan administrators who must also pay claims. When the appeal gets to this level in Texas and California, among other states, a state agency hires a doctor from the IRO’s list to review the evidence. The health insurance plan must pay the doctor, but neither hires nor supervises him or her. It is also bound by the IRO’s decision. It is difficult to see how UnitedHealthcare could be found secondarily liable for failing to detect or prevent AMR’s negligence in hiring Panos.

Does UnitedHealthcare Walk Away Scot Free?

Perhaps not, but it appears that the only recourse Stevie’s parents have relates to the internal review process, which happened before the appeal went to AMR and Panos. That is why the Complaint makes no mention of an additional claim against the health plan for breach of fiduciary duty.

Since the lawsuit will be governed by ERISA, their potential recovery may be limited in ways that hardly seem to address the damage to Stevie’s quality of life that can be expected to persist over the many decades that he may survive.

In a denial of benefits lawsuit, recovery is generally limited to a sum that represents the value of the coverage that should have been provided plus prejudgment interest. Since Stevie’s parents did not pay out-of-pocket for the intensive therapy that might have helped him, presumably because they could not afford it, measuring the value of the lost coverage may be difficult.

There is no possibility of punitive or other damages. It is also not entirely clear that they would win, as courts are often very deferential to the initial decisions of plan administrators. Stevie’s case is very sympathetic, but this will not be a jury trial. Judge’s heartstrings are sometimes harder to tug on. The Johnson family’s lawsuit raises real questions about how effective ERISA is in protecting patients from the wrongful denial of the benefits they are due.