COVER STORY

We nailed an HMO for $6 million

These Kansas City physicians called foul and a jury agreed–big time.

By Robert Lowes
Senior Editor

Do insurers cheat doctors out of what they're owed? At least 12 jurors in Kansas City think so.

Thanks to them, six Missouri doctors dedicated to serving the poor won a stunning legal victory over a large insurer they'd accused of violating their trust and hiding financial data. Besides heartening other physicians weary of insurance wars, the case provides valuable lessons about the importance of reading and understanding contracts—before signing them.

The doctors, all pediatricians, had signed on with a nonprofit Medicaid HMO launched in late 1983 operated by Blue Cross and Blue Shield of Kansas City. They thought the contract promised a higher capitation rate if the program made money. Over the program's 13-year history, though, capitation lagged behind medical inflation, according to insurance company records.

When doctors sought answers from KC Blues executives in 1991, they were told no money was available for the kind of raises they expected, at least not yet.

"Don't worry, we'll take care of you," promised then-CEO Richard Krecker.

One pediatrician, Frank Vaughters, kept asking questions. Finally, in 1998, two years after the program was replaced by a similar one, he discovered how well he'd been cared for. The Medicaid HMO, called PreventionPlus, had earned a profit during its tenure, including $913,000 the year before Krecker's "trust-me" speech. Furthermore, the KC Blues had dipped into PreventionPlus funds in 1995 and 1996 to create a replacement for-profit Medicaid HMO, artificially putting PreventionPlus in the red and further dashing the doctors' hopes for a better capitation rate.

Incensed, Vaughters and five colleagues sued the insurer for breaching not only the contract, but a fiduciary duty owed to them. The doctors argued that the insurer should have looked after their interests the same way a trustee takes care of a beneficiary, or a lawyer his client. The insurer was obligated to share accurate financial information and handle PreventionPlus money as intended, they said.

A jury agreed, awarding the pediatricians $3 million in actual damages and $3.1 million in punitive damages, a verdict the KC Blues intend to appeal. The insurer declined an interview with Medical Economics, but provided a press release calling the verdict "without a basis in fact or law."

The jurors saw things differently, though, and it wasn't lost on them that the aggrieved doctors epitomize the best of their profession. They practice in the troubled heart of the city, not far from pawnshops and crack houses, where drive-by shootings are an all-too-common occurrence. Vaughters, for one, wouldn't practice anywhere else. "I wanted to work in an area where I'd be useful," he says.

He gives fatherly guidance to kids raised by single mothers and grandmothers, but sometimes that's not enough. "I've followed some children from the cradle, and at age 18, they come into my office wearing an orange prison suit." Three-fourths are insured through Medicaid.

To doctors, the contract looked plain and simple

Hopes had been high for PreventionPlus when it debuted. In theory, capitated primary care gatekeepers would curb Medicaid outlays by discouraging unnecessary visits to the ER and to specialists. Patients would benefit from more preventive care. And gatekeepers would receive more than they did under fee-for-service Medicaid, which paid so poorly that many physicians didn't bother to send in the bills.

PreventionPlus, limited to Jackson County, MO, aimed for a capitation rate that equaled 115 percent of what doctors would otherwise receive in regular Medicaid. But physicians got the impression that raises might be possible. Their contract stated that "any changes in these capitation payments, if any, will be based on a review of the program's actuarial success, inflation, the needs of the contracting primary care physicians, and any other relevant factors not specifically mentioned."

The prospect of higher rates rested on a foundation made shaky by that "if any" phrase, says Steven I. Kern, a health care attorney in Bridgewater, NJ. "And absolutely nothing in the agreement indicated how the rates would be altered if the program made money," he adds. The contract didn't define "actuarial success" either, or require PreventionPlus to disclose program-wide financial results to doctors.

Other provisions were clearer. PreventionPlus withheld 25 percent of a doctor's monthly capitation payment and returned it at year's end if he didn't overspend a separate budget (called a referral fund) for noncapitated services such as hospitalization. If the combined referral funds of PreventionPlus gatekeepers showed a surplus, it was split 50-50 between the program and all physicians whose individual referral funds were in the black.

Vaughters was reluctant to sign on at first, worried that the contract would expose him to giving unlimited care to patients at a fixed rate—the classic risk of capitation. "That's where I could really lose my shirt," he said in deposition testimony. What finally convinced him to participate was the hope of gaining new patients—and the fear of losing current ones who might enroll in the program.

He never consulted an attorney before signing the contract. "I felt that the language was sufficiently plain that I could understand what it meant."

This lack of due diligence doesn't surprise practice management consultant David Scroggins in Cincinnati. "Doctors put more trust in insurance companies in those days."

A magazine article rekindles physician suspicion

The six pediatricians worked hard as gatekeepers not to overspend their referral budgets. They rendered services normally performed by specialists and treated patients in their offices after midnight so they wouldn't go to the ER for a headache.

Their hustle paid off. Because they consistently stayed within their budgets, all but one of the six doctors got back their withheld capitation most years. Plus, they usually received distributions from referral-fund surpluses. Granville Clark, a plaintiff with one of the biggest practices, reaped $252,000 in so-called incentive payments over the program's 13 years. Vaughters collected $107,000. "These people understood very well how to operate in a capitated environment," noted Charles Wells, a CPA specializing in health care who later testified for the Kansas City Blues.

However, the doctors weren't happy with the growth in their capitation rate. By 1990, the per-member per-month payment for children ages 5 through 18 was only $4.43, just 23 cents more than it was in the first year of the program, according to insurance company records. Vaughters asked why. Each time the insurer's answer was identical: We're not making enough money.

Despite their disappointment, the doctors continued to sign yearly contracts with PreventionPlus, partly because they feared losing patients if they dropped out. But distrust lingered and grew stronger in the wake of two discoveries made shortly before the program was discontinued. First, the physicians learned that PreventionPlus patients were receiving letters from the KC Blues inviting them to switch to doctors employed by TriSource, at that time a for-profit joint venture between the insurer and other investors. The pediatricians viewed this solicitation as patient stealing. (They'd later learn that TriSource launched Blue-Advantage Plus, the for-profit Medicaid HMO that replaced PreventionPlus.)

The second event was serendipitous. In 1996, Vaughters was leafing through his state medical society's journal when he saw a chart that showed the financial performance of Missouri HMOs from 1992 through 1994. One HMO was Total Health Care, a KC Blues subsidiary that operated PreventionPlus along with other programs. Total Health Care had posted surpluses each year for a grand total of $39 million, a 15 percent profit margin. Given those numbers, Vaughters suspected that PreventionPlus might be more profitable than the insurance executives were letting on.

"Nobody put a gun to their heads"

Vaughters spent the next two years hounding the KC Blues for profit data just for PreventionPlus and feeling stonewalled. He waded through what he called "tons and tons of irrelevant material" from the insurer, but the big picture didn't emerge until he received a one-page summary of the program's financial history in May 1998. PreventionPlus, he then learned, had a surplus of $563,000 when it was shut down, even though it hadn't posted a profit every year.

What really galvanized Vaughters' attention were losses of $416,000 and $1,579,000 for 1995 and 1996, respectively. They weren't produced by runaway medical costs; in each year, claims amounted only to roughly 80 percent of revenue. Rather, the losses stemmed from administrative costs that jumped to 25 and 45 percent in those last years, after ranging 6 to 10 percent beforehand. If such costs had been 10 percent, the program would have netted $1.5 million over those two years, and final profits would have hit $4 million.

An accompanying letter explained that the hefty expenses in 1995 and 1996 resulted from the startup of Blue-Advantage Plus, the replacement Medicaid HMO. The letter had one more thing to say: "We are . . . disinclined to discuss this matter any further."

Two years later, Vaughters filed suit along with partners Warren Jackson and Jane Pennington, as well as three other doctors: Granville Clark, Starks Williams (now retired), and Tasanaporn Pitiyanuvath. In a court case dominated by spreadsheets and testimony from dueling CPAs, the doctors asserted that the Kansas City Blues should have paid them $1.2 million more in capitation—plus interest—to keep pace with rising practice costs.

What happened those last two years of the program figured heavily in the doctors' argument that the KC Blues had breached its fiduciary duty. Besides concealing profit information, said their attorney Kirk May, the insurer had improperly used Medicaid funds to finance a for-profit business venture, solicit patients to switch to company-owned clinics, and enrich its executives. In the process, he contended, the KC Blues had lied to the pediatricians and Missouri about its stewardship of public money.

The KC Blues countered that instead of looting PreventionPlus, it had actually subsidized the program to help Medicaid patients. And spending PreventionPlus money to help launch the new Medicaid HMO, the insurer argued, was entirely aboveboard.

The company claimed that it had compensated the pediatricians handsomely, on occasion giving them incentive payments when they weren't due. Capitation rates were reasonable and even generous, according to one actuary. Pegging them to inflation would have been fiscally irresponsible, given that the state Medicaid program was not a blank check, noted CPA Charles Wells. The amount Missouri paid PreventionPlus per member per month often decreased from year to year.

But what of the contract's inflation clause? Wells called it nonbinding and meaningless, owing to the "if any" caveat. "There's nothing in the contract that says you will be assured of having x percent increase," he said.

Another key point Wells hammered home: If the capitation rate was so disappointing, why did Vaughters and the other pediatricians renew their contracts year after year?

"These people are rational," he testified. "Nobody put a gun to their heads."

Do insurers really owe doctors a fiduciary duty?

The KC Blues needed to convince only four of the 12 jurors to vote its way to thwart the suit. But the jury unanimously sided with the doctors. The $6 million verdict has rallied local physicians accustomed to accepting whatever payment insurers hand out, says pulmonologist Ann Romaker, past president of the Metropolitan Medical Society of Greater Kansas City.

"Doctors have long had an overwhelming sense that insurers are bigger and unbeatable," says Romaker. "This case has empowered them to challenge insurers on contractual matters. Right is right, wrong is wrong, and you can call them on it."

However, for the verdict to set any precedent for how insurers should treat doctors, it must survive an appellate review. Based on their post-trial filings, the KC Blues are likely to reiterate that the PreventionPlus contract never promised yearly rate increases, and that by renewing their contracts the doctors agreed to the stipulated capitation rates—rates that can't be raised retroactively. Yet another probable argument is that the KC Blues and the pediatricians didn't have a fiduciary relationship—one in which a dominant party has a duty to protect a subservient party—so there was no fiduciary duty to breach.

Philadelphia health care attorney Alice Gosfield is inclined to agree with the insurer on that third point. "Blue Cross Blue Shield and the pediatricians had a contractual relationship, but that doesn't normally set up a fiduciary relationship," she says.

Whichever way the court case plays out, it contains a simple lesson for physicians: Always have an attorney review a health plan contract before you sign it.

"Isn't it interesting that both the pediatricians and Blue Cross Blue Shield say the contract was plain on its face?" says Gosfield. "You have to apply what I call my 'drop dead' approach to contract negotiations. Imagine everybody in the room drops dead. Will someone who's not in the room understand what the contract means? Take every word at face value, and don't impute good intentions to the other side."

In other words, doctors can't assume somebody will take care of them.

 

Robert Lowes. We nailed an HMO for $6 million. Medical Economics 2002;24:60.