This article reviews the rights and duties of the parties involved in utilization review decisions in an effort to determine what legal guidelines exist and where the law is murky and unsettled. This is an important topic for all physicians practicing medicine and having their decisions on evaluation and treatment reviewed, and those physicians who are involved in the utilization review decision-making process. This article attempts to highlight the risks assumed by physicians involved in the utilization review process.
What is utilization review? The goal of utilization review is to make sure patients get the care they need, and that it’s administered via proven methods, provided by an appropriate healthcare provider, and delivered in an appropriate setting. The process should result in high-quality care administered as economically as possible and in accordance with current evidence-based care guidelines.
Both treating physicians and utilization review physicians would be prudent to understand the legal pitfalls they face in a world where there has been a dramatic increase in the use of utilization review programs in an effort to curb rising healthcare costs.
The Types of Utilization Review
Medicare, private insurers, HMOs, and self-insured employers use utilization review. Some payers perform the review in-house, whereas others contract with independent entities to perform all or part of the review. If the physician’s treatment plan is approved, the patient is fully covered to the limits of the plan; if not, the patient may be denied financial coverage. Many physicians criticize the invasion of utilization review programs into the practice of medicine, whereas most payers claim utilization review reduces healthcare costs. This topic is hotly contested and disputed, and the truth lies somewhere in the middle.
Under traditional indemnity plans, utilization review occurs retrospectively. That is, claims for payment are reviewed after the treatment has been rendered. Recently, prospective and concurrent review programs have become more prevalent. A prospective review program requires the physician to obtain prior certification from the payer before providing treatment. In concurrent review, the payer monitors a patient’s treatment (usually the length of a hospital stay) and specifies the last day for which payment is authorized.
Because these programs can directly affect the medical care of the patient, they increase the potential for adverse outcomes and, consequently, the significant conceivable liability arising out of the utilization review program. Prospective and concurrent utilization review decisions also pose dilemmas for the treating physicians and hospitals. If a treatment plan is disapproved, is the physician free to abandon the plan? To what extent is the physician or hospital obligated to provide the treatment despite the risk of nonpayment? How vigorously must the physician pursue any appeal rights to contest the utilization review decision? These are problematic and unsettled questions that physicians are encountering more frequently than in previous years.
The patient also is left in a catch-22 situation. The patient faces conflicting judgments or recommendations by two medical professionals: the treating physician and the utilization review consultant. Should the patient rely on the treating physician’s opinion, go forward with treatment, and accept the resultant benefit penalties or should the patient limit treatment to that which the payer will cover? Who is ultimately responsible for such decisions, and where should liability fall if the decision results in injury to the patient?
Two leading court decisions regarding liability for utilization review decisions are:
Sarchett v. Blue Shield of California 43 Cal. 3d 1, 233 Cal. Rptr. 76, 729 P. 2d 267, (1987), and
Wickline v. California 192 Cal. App. 3d 1630, 239 Cal. Rptr. 810 (1986).
Sarchett, a retrospective review case, upheld the fundamental right of an insurer to challenge the treating physician’s determination of medical necessity. Wickline, a case involving concurrent review, addressed the reviewer’s potential liability to the patient for harm resulting from prospective or concurrent review decisions.
The Sarchett Decision
The most important aspect of the California Supreme Court’s decision in Sarchett v. Blue Shield of California, supra, was that it affirmed an insurer’s right to disagree with the treating physician’s determination of medical necessity. The decision also made it clear that if coverage is denied, the insurer must inform the insured of any contractual rights to reconsideration, or independent review, such as by arbitration.
The plaintiff, John Sarchett, was hospitalized for three days by his family physician. Blue Shield reviewed the hospital records and determined that the hospitalization appeared to be for diagnostic purposes only. It denied coverage based on two policy exclusions: 1) an exclusion for hospitalization that is primarily diagnostic; and 2) an exclusion for non–medically necessary services.
The California Supreme Court upheld Blue Shield’s right to challenge the medical necessity of hospitalization, even though the patient had relied on the recommendation of the treating physician. The court squarely rejected the plaintiff’s argument that the treating physician is the final arbiter of medical necessity. It found retrospective review to be an implied right of the insurance relationship, even though the policy does not expressly state that the insurer may conduct retrospective review.
In the Sarchett case, the court also commented favorably on the increasing practice of healthcare payers to require preauthorization for elective procedures. However, lest payers become too aggressive in coverage decisions, the decision included a reminder that any doubts and uncertainties in an insurance policy will be construed in favor of coverage for the insured. As a result, the decision of a treating physician rarely will be reversed as being unreasonable or contrary to good medical practice, the court predicted.
The Wickline Decision
Although the decision in Wickline v. California, supra, was only an intermediate appellate ruling in California, it promises to be a seminal decision in the area of utilization review liability. Mrs. Wickline was being treated for problems associated with her back and legs, and her physicians recommended surgery. Although her hospitalization and treatment were covered by Medi-Cal (California’s Medicaid program), Medi-Cal required precertification for hospital admission and assigned an approved length of stay for the admission. Any extension of the approved length of stay had to be authorized. Medi-Cal approved Wickline’s surgery and authorized a 10-day length of stay, with payment approved until January 17, 1977.
Mrs. Wickline suffered complications after the original surgery, and two additional surgeries were performed. Her treating physician determined that she should remain in the hospital eight days beyond her scheduled discharge date and filled out a Medi-Cal form requesting an extension. The Medi-Cal on-site nurse reviewer, after consulting with a Medi-Cal physician adviser, approved only a four-day extension. Although there were appropriate spaces on the form for the on-site nurse’s recommendation and the reason for disapproval by the physician adviser, both were left blank.
The attending surgeon discharged Wickline to her home when the four-day extension period expired. All three of her treating physicians were aware that there was a process whereby the Medi-Cal decision could be appealed, but none of them appealed. A week after discharge one of the physicians examined her and found nothing remarkable. Then, nine days after discharge, Wickline was readmitted to the hospital with severe pain and discoloration of her right leg, which eventually had to be amputated at the hip. Wickline brought an action alleging that her injuries were caused by Medi-Cal’s negligence in failing to authorize the full eight-day extension. A jury awarded her $500,000.
The Court of Appeal reversed the jury verdict, reasoning that although the state’s preauthorization program played a role in the decision to discharge Wickline, this role was not determinative. Rather, the decision to discharge Wickline was made by the attending physicians. The court held that Medi-Cal was not a party to that medical decision and could not be held liable if that decision were negligently made. In refusing to find liability for the review decision, the court placed responsibility for the hospital discharge on the attending physicians and implicitly criticized them for not appealing the Medi-Cal denial decision if they disagreed with it.
The fact that the Wickline court based its holding on the lack of causation by the utilization review decision, rather than on any other available alternative basis, suggests that the court was particularly sensitive to the danger of holding the utilization review organization liable. Viewed in this light, the Wickline decision is not merely an ordinary application of the law of causation, but represents a precedent against utilization review liability. The Wickline case provides judicial recognition of the need for and the importance of utilization review as one of the checks and balances in a system in which healthcare costs typically are paid by third parties rather than by the patient.
At the same time, the court clearly stated that third-party payers could be held liable for ‘‘defects in the design or implementation of cost containment mechanisms’’ that result in the denial of medically necessary services. The decision recognizes that negligent utilization review decisions may result in denial of needed treatment, thereby causing injury to the patient. It thus sets the stage for further development of the allocation of responsibilities in this area.
The Elephant in the Room: The Elusive Concept of “Medical Necessity”
A utilization review decision invariably turns on whether a treatment or service is “medically necessary.” This term not only is difficult to define, but it also is frequently confused with other terms, or limitations of the insurance policy. Failure to isolate the “medical necessity” aspects of a decision can easily result in wrong decisions, and, hence, potential liability for the reviewers. Definitions of “medical necessity” vary greatly. Some policies define medical necessity simply, such as, for example, “such services as are reasonably intended, in the exercise of good medical practice, for the treatment of illness or injury.”
Potential Liability of the Review Organization
Potential liability for the review organization exists under various legal theories. One of the more unsettled areas is the extent to which the Employee Retirement Income Security Act (ERISA) preemption applies. In a case in which ERISA applies, none of the common law claims discussed in this section would be available, and the plaintiff would be limited to ERISA remedies.
Regardless of the legal theory, two factors weigh heavily in any case. The first factor is whether financial considerations influence the decision on medical necessity. A payer who conducts a review in-house may be more susceptible to improper fiscal considerations.
Independent review organizations may be less likely to be influenced by financial considerations, because the relationship between an independent reviewer’s utilization review decision and the reviewer’s compensation is indirect. However, the review organization’s method of compensation may alter this conclusion. Most independent review organizations are compensated on a per-review basis. But if the review organization’s compensation is based on the savings it realizes for its clients, then financial considerations might influence its decisions.
The outcome of any liability case against a utilization review organization is likely to be influenced by the inherent sympathies of the jury, as illustrated by the Wickline case. That is, an injured individual generally will evoke more sympathy than the corporate review organization or insurance company.
The evidence in Wickline was overwhelming that Mrs. Wickline did not require continued hospitalization beyond the date of her discharge. Her bodily functions were all normal. She had commenced rehabilitation treatment. There was no open infection or open wound. No new symptoms had appeared, and she did not appear to be in any danger. Her initial length of stay had been extended for four days for general observation. Her treating physician testified that at the time of discharge, her condition was neither critical nor deteriorating. If it had been, he testified, he would have kept her in the hospital regardless of the Medi-Cal decision. Moreover, she was examined a full week after her discharge by one of her physicians, who noted nothing remarkable in her condition.
How, then, did the jury assess liability against the utilization reviewer for half a million dollars? The answer is easy. The jury system protects the individual against faceless bureaucracies. The jurors were presented with a tragic situation in which, through no fault of her own, Mrs. Wickline lost her leg, suffered greatly, and would continue to suffer greatly for the rest of her life. It should come as no surprise that the jurors who have the legless and tearful Mrs. Wickline and her family sitting before them day after day will be inclined to ignore fine distinctions in the evidence and compensate Mrs. Wickline for her suffering. From this perspective, the $500,000 verdict does not seem so large.
The Standard of Care
The next issue in a negligence action is to define the standard of care. There are two subissues involved here:
First, the review organization may be liable if a defect in its procedures resulted in harm to the patient.
Second, even if the organization’s procedures were adequate, the duty of care may be breached if the decision on medical necessity did not meet proper standards.
The standard of care for the procedural aspects of a utilization review decision is likely to be based on the standards followed by review organizations generally—that is, the standard of care in the community of consultants in the same business. Overall, utilization review procedures must be sufficient to obtain enough information to make an informed decision and to enable a timely dialogue or appeal if the treating physician or patient disagrees.
In Wickline, the physician consultant reviewed only the Medi-Cal form completed by the treating physician. He did not review the patient’s chart or consult with the treating physician or a specialist consultant before rejecting the requested hospital extension. The plaintiff attempted to show that these procedures were insufficient.
The Wickline decision did not criticize the review procedure, thereby implicitly accepting the argument that the reviewer was entitled to rely on the information on the Medi-Cal form and that the burden was on the attending physician to justify the request by including all pertinent information on the form. Nonetheless, there is no doubt that the defendant’s sloppy record keeping, including the failure to document any reasons whatsoever for the denial, played a persuasive role in the trial court.
The procedural safeguards for review organizations are increasingly becoming more apparent. As a result, the industry appears to have developed minimum standards that are consistently suggested for review organizations and would be put forth by plaintiff’s attorneys in a utilization review case. These standards include the following:
Review decisions should be made by qualified medical professionals, and any denial decisions should be made only by licensed physicians;
Reviewers should consult with specialist physicians as appropriate;
Efforts should be made to obtain all necessary information—for example, by reviewing the patient’s charts and consulting with treating physicians as appropriate;
The reasons for decisions should be clearly documented;
There should be a well-publicized and readily available appeal mechanism; and
Decisions and appeals should be made in a timely manner, as required by the exigencies of the situation.
Finally, the review organization should be careful to follow its own procedures. The failure to follow one’s own procedures exposes the entity to potential liability, regardless of whether the particular review decision was correct.
Liability of Consultants and Employees
The consultants and employees of the review organization may be found liable for torts in which they participated, just as is the case for any other individuals who work for a corporation. Their protection lies in proper insurance and in their right to indemnity from the corporation.
Many states have statutes that provide immunity from liability for certain peer review activities. However, these statutes usually do not protect the physician consultants of independent review organizations. The statutes usually are limited to certain types of peer review, such as hospital review committees, medical society committees, and certain committees of HMOs; and they usually focus on peer review of quality of care rather than medical necessity determinations for private payers. The immunity usually is a qualified rather than absolute immunity, meaning that the participant who acts with malice is not shielded from liability.
When a physician provides independent consultant services to a utilization review entity, the physician’s malpractice insurance may or may not cover those services. The utilization review entity’s policy probably does not cover independent contractors and also may exclude claims arising from the provision or failure to provide medical services. Liability insurance needs to be clarified by both the physician consultant and the utilization review entity.
Liability of the Treating Physician
The impact of utilization review has fallen most heavily on practicing physicians. Although physicians are accustomed to having some services questioned by retrospective claims review, the more intrusive forms of prior, or concurrent, review intrude directly in the physician’s course of treatment of the patient. A review consultant, who usually has never seen the patient, is questioning the physician’s judgment as to what is medically necessary. Then, as in the Wickline decision, the judicial system blamed the treating physician for failing to contest strongly enough against the reviewer’s decision.
Utilization review interferes with the essential relationship of trust between the physician and patient. It is “Big Brother” watching and interfering in the patient–physician relationship. Nevertheless, utilization review appears to be firmly entrenched in the U.S. medical system, and the courts will be forced to continue to grapple with the respective obligations of the parties.
Defining the obligations of treating physicians presents the largest area of unanswered questions. A utilization review denial places the physician at risk of nonpayment if he or she proceeds with the proposed treatment. Assuming that the physician appeals the utilization review decision, is he or she safe to defer to the reviewer and withhold treatment if the appeal is denied? Can the physician simply withdraw from treating the patient if the review decision is adverse and the patient cannot pay for the treatment? If the physician withholds treatment and harm results to the patient, does the utilization review decision provide the physician with a defense in a malpractice action?
Wickline suggests that a physician may not avoid a malpractice claim simply by acquiescing in a utilization review decision. Wickline held that the responsibility for the hospital discharge was solely that of the physicians. In that case, of course, the physicians did not protest Medi-Cal’s denial, and by their testimony they agreed that the discharge was appropriate at the time. But Wickline did not say how far a physician must go in appealing a denial decision. Would the court have upheld Medi-Cal liability if the treating physicians had simply requested reconsideration and Medi-Cal had denied the request? Were the treating physicians required to pursue all available avenues of appeal, including an administrative review and even a court challenge to the decision? Was it even possible for these avenues of appeal to be resolved in the limited time before the patient was to be discharged? If, after contesting the decision, the physicians still believed it was unsafe to discharge Mrs. Wickline from the hospital, were they required to keep her in the hospital and risk nonpayment?
Difficult cases will arise when the physician vigorously appeals the denial to no avail. In this situation, the risk of nonpayment is even clearer than it is at the time of the initial decision. At the same time, by protesting the initial decision, the physician may have created substantial evidence that the treatment is medically necessary—evidence that will be used against the physician if he or she then withholds treatment and harm occurs. At some point, if the physician’s appeal is strong enough, a court is likely to hold the review entity responsible for causing at least part of the harm. But the possibility of sharing liability with another defendant is little solace to the treating physician, who still remains a clear potential defendant if he or she withholds treatment.
Most of these questions focus on the physician’s obligation to provide treatment to a patient who cannot pay. When the physician has not commenced treatment, he or she is relatively free to turn the case away. Most utilization review cases, however, involve an established physician–patient relationship. Terminating this relationship may constitute the tort of medical abandonment.
The physician also has increased exposure to claims of lack of informed consent. When a proposed treatment is denied, the physician must be careful to explain to the patient the options and the risks. The patient then must decide whether to go ahead with the treatment and pay for it out of pocket. Even if the risks inherent in the treatment are minimal, the financial pressure on the patient to forego treatment makes it particularly important for the physician to explain carefully the medical risks of foregoing the treatment.
Many physicians complain that they often are unable to learn the basis for a utilization review organization’s denial decision. However, the appeals process should provide a means for obtaining that information. In view of the responsibility placed by Wickline on the physician to appeal adverse decisions, the physician should demand the basis for the utilization review decision on the grounds that he or she needs it to respond adequately in the grievance or appeals process. Also, it usually is good practice for the utilization review appeals committee to prepare a written statement of its decision. A written statement demonstrates a good faith, reasoned approach to the query. Even if the patient or the physician disagrees with the conclusion, a well-reasoned written decision serves to temper the sense of frustration and anger generated by a terse rejection of the appeal.
In any case in which a reviewer denies care, the physician, of course, is free to explain the denial and obtain the patient’s consent to treatment and to paying for the care, notwithstanding the denial. However, a physician should take precautions to ensure that the patient understands fully the financial implications of such consent.
Payment for Unwarranted Medical Services
Another issue for the patient is whether the physician can collect payment from the patient for services that are determined to be medically unnecessary. One solution would be to allocate this risk by recognizing a new implied covenant in the physician–patient relationship obligating the physician to advise the patient on whether the physician’s assessment of the medical necessity of services conforms with, or is defensible under, the insurance company’s definition of medical necessity. As the interpreter of ‘‘medical necessity,’’ the physician is placed at financial risk for the cost of unnecessary services.
The rationale for adopting an implied covenant of medical necessity is to create a disincentive for physicians to overutilize medical services. It also would motivate physicians to appeal questionable utilization review denials out of self-interest, thereby enhancing the protection of the patient. The concept is supported by the disparity in knowledge between the physician and patient regarding medical necessity.
Conclusion
If the current trends continue, the courts eventually will sort out the liability for utilization review decisions. However, many of the issues raised in this writing may not be developed thoroughly enough for judicial review because of the broad sweep of ERISA preemption of common law actions. When a utilization review case does reach the courts, the plaintiff has a range of legal theories to test and several potential defendants—including the provider, the payer, the utilization review physician, and the utilization review organization—to bring into the lawsuit. Given the increased use of utilization review by cost-conscious payers, it is likely that opportunities for testing the various legal theories will be numerous. In anticipation of this uncharted development of the law, the healthcare industry would do well to begin addressing the liability issues internally.
Although utilization review is lauded as an attempt to address the skyrocketing costs of healthcare, it also presents complex and competing liability issues by penetrating the shield of the patient–doctor relationship. This disruptive penetration of the coveted fiduciary relationship between a patient and a physician has resulted in a long list of liability issues discussed in this article. To minimize the chance of liability issues surfacing, the patient, physician, and physician reviewer should work together to maximize the chance that the standard of care will be met when treatment strategies are developed.