The Relevance of Understanding Managed Care after SB 899

Sunday, September 11, 2005 | 0

by Joshua R. Mandell

For years, California's managed care plans and insurers faced unique litigation and risk management issues. Many of these issues stem from the fact that they maintain closed networks of providers. Such issues are now very relevant to workers' compensation carriers in light of California's recent reforms enacted with SB 899 and the creation of medical provider networks. To better understand some of the risks of MPNs, carriers may want to consider the experience of the managed care entities.

On September 19, 2005, a jury trial is schedule to begin in San Francisco superior court in a case of significance to California's workers' compensation carriers and managed care entities alike. Palm Medical Group contends that it was legally entitled to notice and a hearing when its initial application to join State Compensation Insurance Fund's network of preferred providers was rejected. State Fund denies that Palm is entitled to such rights in connection with its application. Although the case predates SB 899, it could set a precedent with respect to the rights of initial non-contracted applicants to a carrier's network, like a MPN.

The Palm case exemplifies the new relevance of managed care to workers' comp. Both Palm and State Fund support their positions with dueling interpretations of the California Supreme Court decision in Potvin v. Metropolitan Life Ins. Co. (2000) 22 Cal.4th 1060. In that case, an individual physician prevailed against an insurer with whom he was contracted to provide medical services when it removed him from its list of preferred providers without offering him notice and a hearing. Although the insurer's actions were objectively consistent with the contract between itself and the physician, a majority of the California Supreme Court held that the termination violated the doctor's common law right to "fair procedure," e.g., notice and a hearing. The physician there complained that his removal from the preferred provider network devastated his practice by reducing it a small fraction of its former size. This impact was allegedly due in part from the fact that the physician was required to reveal the termination to other insurers and managed care companies and that he suffered further rejection by physician groups dependent upon the defendant's credentialing functions.

In Potvin, the Supreme Court held that the "common law right to fair procedure does not apply to an insurer's removal of a physician from its preferred provider list unless the insurer possesses power so substantial that the removal significantly impairs the ability of an ordinary, competent physician to practice medicine or a medical specialty in a particular geographic area, thereby affecting an important, substantial economic interest."

Despite the fact that Palm was not removed from State Fund's network, it nonetheless insists that State Fund possesses this power because it holds a "practical monopoly on coverage for those industries which are the lifeblood" of medical facilities practicing occupational medicine in the Fresno area. Because of the market position State Fund holds and the alleged financial impairment Palm has experienced, Palm contends that it was owed a right to notice and a hearing when its application to State Fund was rejected. Palm relies heavily on the cases the Supreme Court discussed in its Potvin opinion. Two of those older cases recognized common law fair procedure rights where the plaintiffs were excluded from membership in the defendant's organization. One case concerned black laborers who were arbitrarily excluded from a discriminatory union that held monopolistic powers over a local trade. The other concerned an orthodontist who was excluded from a professional association, which held a virtual monopoly over that profession.

State Fund insists that Palm's legal authority is factually and legally distinguishable. Pre-trial papers court filings suggest that much of the jury's focus will center on Palm's financial condition and whether Palm can persuade the jury that it was financially devastated by State Fund's decision not to admit it into its contracted network. While it is well-settled that a contracted provider terminated from a network may be entitled to Potvin's fair procedures, a jury finding against State Fund could mean that workers' compensation carriers and managed care plans will be forced to weigh the additional expense of offering notice and a hearing to unsuccessful non-contracted applicants against the risk of new litigation.

While the outcome of the Palm case remains uncertain, it is clear that the concentration of power in closed networks like MPNs makes managed care issues more relevant to workers' comp carriers than before. Specifically, when it comes to removing a provider from a MPN, strong contractual language protecting the MPN's right to terminate with or without cause will not obviate the need for notice and hearing if the removal significantly impairs the provider's ability to practice medicine or a medical specialty in a particular geographic area. Accordingly, carriers are advised to consult counsel familiar with these unique risks before making network decisions that could expose them to additional liability.

Joshua R. Mandell is an associate at K&R Law Group, a Los Angeles-based law firm dedicated to serving the health care industry. For more information, please go to www.knrlaw.com.-------------------------------

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