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Managed care on trial


A court upholds a suit against an HMO for deciding medical necessity based on Milliman guidelines.


Managed care on trial

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Choose article section...Who decides recovery time: The doctor or the HMO? Fighting back, but this time in court Round one: A legal victory for the plaintiffs

A court upholds a suit against an HMO for deciding medical necessity based on Milliman guidelines.

By Berkeley Rice
Senior Editor

While they may not like it, doctors who participate in managed care plans are accustomed to having their medical judgment questioned. But in a potential landmark decision last March, a New York state appellate court upheld fraud and breach-of-contract claims filed by patients against an HMO for basing medical necessity decisions on Milliman guidelines (see Hospital-stay guidelines: Just plain weird").

Musette Batas and Nancy T. Vogel had sued the Prudential Insurance Company of America and Prudential Health Care Plan of New York. Each plaintiff claimed that the HMO had improperly denied coverage for needed medical care. Rather than defer to the judgment of a qualified physician, they charged, the HMO had determined medical necessity according to guidelines developed by Milliman USA, a Seattle-based actuarial firm formerly known as Milliman & Robertson. Prudential has denied these allegations.

Batas was six months pregnant when she suffered a severe attack of Crohn's disease, a condition she'd endured for many years. According to the suit, her ob/gyn, Jeffrey Miller of Garden City, NY, admitted her to the hospital in March 1996. Although her HMO, PruCare of New York, authorized only a one-day stay, Miller requested approval for several days for evaluation and tests.

After three days, however, a PruCare review nurse determined that further hospitalization wasn't "medically necessary," although Batas was still in pain. The nurse allegedly based her decision on a review of Batas' chart and on Milliman guidelines, without examining Batas or consulting with Miller. Since Batas couldn't afford to pay for further hospital care herself, she insisted on being discharged.

One week later, Batas was rushed to the ER with a high fever and severe abdominal pain. After examining her, doctors there decided she needed an exploratory laparotomy. Miller's office staff called PruCare to request approval for the procedure, stressing its urgency, but got no response. They made several follow-up calls to PruCare, but were told the authorization was "pending."

The following day, with the authorization still pending, Batas' intestine burst. In an emergency procedure, a surgeon removed part of her colon. Two days later, PruCare finally approved the no-longer-relevant exploratory surgery.

Four days after her emergency surgery, while Batas was recovering in the hospital, PruCare's review nurse called Miller's office. She said that further hospitalization wasn't medically necessary and Batas should be discharged immediately. Again, the nurse allegedly based her decision on a review of the chart and on Milliman guidelines, without examining Batas or consulting with her physicians.

Miller's colleague, ob/gyn Angelo Garrido, refused, pointing out that Batas was still seriously ill, pregnant, and recovering from surgery that endangered both her and the fetus. For the moment, the HMO backed down.

One week later, however, the review nurse called again and allegedly said that based on a review of the chart and on Milliman guidelines, further hospitalization was unnecessary and would not be covered. Unable to pay the cost herself, Batas was discharged the following day.

She eventually recovered fully, although her doctors warned her that the intestinal rupture and risk of infection might have caused brain damage in her baby. But Batas gave birth to a healthy girl a few weeks later.

Who decides recovery time: The doctor or the HMO?

Nancy Vogel first learned of her pelvic mass during a routine exam in 1994 conducted by her gynecologist, Patrick F. Vetere, who practiced with Jeffrey Miller in Garden City, NY. When diagnostic tests ruled out a malignancy, Vetere diagnosed a benign fibroid tumor. He monitored its growth over the next 18 months, until the tumor's size became alarming. He decided Vogel needed a total abdominal hysterectomy and told her the procedure would require a five-day recovery in the hospital.

Worried about the impending surgery, Vogel consulted three other gynecologists, who confirmed the need for the procedure and estimated a postoperative stay ranging from five to seven days. According to the suit, Vetere requested preauthorization for the procedure and PruCare approved it, but allowed only a two-day hospital stay.

Vetere admitted Vogel to the hospital in March 1996 and performed the hysterectomy the same day. Because he found two tumors, and because their combined weight exceeded 3.5 pounds, the procedure proved much more difficult than Vetere had expected. As a result, he felt strongly that Vogel should spend at least five days in the hospital to ensure full recovery without complications.

Two days later, however, PruCare's review nurse called Vetere's office at 5:30 pm. According to Vetere, she said that hospitalization was no longer medically necessary and the patient should be discharged. The nurse allegedly based her decision on a review of Vogel's chart and on Milliman guidelines, but without consulting Vetere or any other qualified physician.

Vetere refused the discharge order. When he called PruCare to appeal the decision, though, no one was available to hear his appeal.

The review nurse allegedly informed Vogel that she would be responsible for any further hospital charges if she didn't leave immediately. Vetere persuaded her to stay that night (which PruCare later billed her for), but the next morning, unwilling to pay additional hospital charges herself, Vogel insisted on being discharged.

Although Vogel eventually recovered fully, Vetere remained upset at what he termed PruCare's "reckless" interference. Two months later, he wrote a lengthy protest to the HMO, accusing it of "medical malpractice" for endangering Vogel's health by causing her "premature" discharge. In reply, Deborah Hammond, the HMO's executive director, wrote: "It seems that you are not satisfied with your contracted status as a participating physician in the Prudential network." Vetere interpreted that as a veiled threat of termination.

The fight over Vogel's coverage was only one of many battles Patrick Vetere had endured with PruCare. In fact, his group's office manager had written to the HMO to protest its delays and denials of coverage for several other patients. As she put it in her letter, PruCare's typical response to such disputes was "It doesn't matter how the patient feels, or what the doctor feels is medically necessary. It is what PruCare feels is medically necessary."

Two years later, Vetere decided he'd had enough of such hassles with HMOs. He quit his group, opened a solo practice in Garden City, and dropped all managed care plans except Medicare HMOs. "It wasn't just PruCare," he explains. "All those HMOs were arrogant about overruling our judgment and denying our requests for authorization. Often they just didn't respond at all. They felt they were in charge, and they are. Most doctors are too intimidated to fight back."

Fighting back, but this time in court

In April, 1997, Manhattan attorney Brian Hufford filed a class-action suit against Prudential on behalf of Musette Batas, Nancy Vogel, and all others covered by PruCare HMOs, claiming that they were denied coverage for necessary medical care. At that time, PruCare had about 4.5 million subscribers nationwide, including 90,000 in New York City alone. (Prudential sold its managed care business to Aetna in August 1999.)

The suit accused Prudential of fraud, breach of contract and good faith, and breach of fiduciary duty. It alleged that the company misrepresented the extent of its coverage by "falsely promising to provide all necessary medical care in accordance with prevailing medical opinion" and by failing to determine medical necessity according to that standard.

Instead, the suit charged, decisions on medical necessity are made by PruCare employees "who are not properly trained and experienced physicians," as promised in the contract. In fact, the suit claimed, those decisions are made "mechanically" according to Milliman guidelines that "are not based on proper clinical standards, and do not reflect what is generally accepted in the medical community as the appropriate standard of care."

Although neither Batas nor Vogel suffered permanent physical or financial damage as a result of Prudential's actions, the suit seeks a refund of premiums they and all other PruCare subscribers had paid for contracted coverage not provided, plus punitive damages for the HMO's alleged fraud and bad faith.

Prudential denied all the allegations in the suit, insisting that it did not apply the Milliman guidelines mechanically. Instead, the company claims, it "gave its HMO medical directors discretion to exceed those guidelines as they saw fit." Prudential moved for dismissal on two grounds: that the plaintiffs had not utilized their contractual remedies for appealing a denial of benefits, and that HMO contractual matters are regulated by the New York State Department of Health and therefore aren't subject to such litigation.

In May 1999, the trial judge rejected those arguments. He agreed to hear the claims for fraud and breach of contract, but dismissed the claims for bad faith and breach of fiduciary duty. Both sides appealed.

Round one: A legal victory for the plaintiffs

The American Medical Association and the Medical Society of the State of New York filed a joint amicus brief in support of the suit, claiming that PruCare's "mechanical" reliance on Milliman guidelines "endangers the public health" and "exposes doctors to substantial malpractice liability." The medical groups asked the appellate court to enforce "Prudential's contractual obligation to have medical necessity determinations made in accordance with prevailing medical opinion by licensed physicians with the appropriate specialty training and patient contact needed to properly evaluate the patient."

In a potential landmark decision issued last March, a state appellate court unanimously upheld the fraud and breach-of-contract claims, sending them back for trial. By a 3-2 margin, the judges also confirmed the lower court's dismissal of the bad-faith and breach-of-fiduciary-duty claims.

In a strongly worded dissent, judge David B. Saxe argued against dismissing the latter claims because of the case's "shocking factual allegations." According to Saxe, "medical insurers, even more than most, should be held to a special standard of conduct toward their policyholders, beyond that required of parties to an ordinary commercial contract. . . . When an insurer has unreasonably, and in bad faith, declined to cover necessary medical care, by wrongfully disclaiming coverage," Saxe wrote, "the insured should have available . . . an adequate remedy to redress the wrong."

While the plaintiffs still have to prove their allegations in court, their lawyer, Brian Hufford, calls the appellate ruling a "landmark decision that could have a major effect on the health care industry. It's the first time an appellate court has upheld a class-action complaint focusing on the means by which an HMO controls costs by relying on inappropriate standards for determining medical necessity."


Berkeley Rice. Managed care on trial. Medical Economics 2001;15:111.

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