Table Of Content

1991 ADVISORY COUNCILS The Influence of Current Judicial Doctrines on the Cost of Purchasing Health Care December 1991 DC Washington, .us* The Influence of Current Judicial Doctrines on the Cost of Purchasing Health Care A Report of the Advisory Council on Social Security December 1991 Washington, DC MEMBERSHIP OF THE 1991 ADVISORY COUNCIL ON SOCIAL SECURITY Chair Deborah Steelman, Esq. Attorney-at-Law Members G. Lawrence Atkins, Ph.D. The Honorable James R. Jones Director of Employee Benefit Policy Chairman and Chief Executive Winthrop, Stimson, Putnam & Officer Roberts American Stock Exchange Robert M. Ball John Meagher Former Commissioner of Partner Social Security LeBoeuf, Lamb, Leiby & McRae Philip Briggs Paul H. O'Neill* Vice Chairman of the Board Chairman and Chief Executive Metropolitan Life Insurance Officer Company Alcoa Lonnie R. Bristow, M.D. Arthur L. Singleton AMA Board ofTrustees Consultant on Government Theodore Cooper, M.D. John J. Sweeney Chairman and Chief Executive International President Officer Service Employees International The Upjohn Company Union Professor John T. Dunlop Donald C. Wegmiller & Harvard University President Chief Executive Officer Health One Corporation Karen Ignagni Director Resigned, replaced by Department of Employee Benefits John Meagher. AFL-CIO ii STAFF OF THE 1991 ADVISORY COUNCIL ON SOCIAL SECURITY Ann D. LaBelle, D.D.S. Executive Director Barbara Cooper Olga Nelson Adele Eley Mary Sue Olcott Robert Lagoyda Teddi Pensinger Arta Mahboubi Virginia Reno Susan V. McNally Nancy Row Brigitta M. Mullican Michael D. J. Zambonato iii iv TABLE OF CONTENTS EXECUTIVE SUMMARY 3 INTRODUCTION 11 COVERAGE LITIGATION 15 When Is Treatment Investigational? 15 Problems for Insurers Caused by Contracts of Adhesion 17 The Use of Injunctive Relief to Avoid the Investigational Exclusion 19 The Employment Retirement Income Security Act 21 Cost Implications 23 Benefits to Patients 25 MALPRACTICE LITIGATION 27 Malpractice, In General 27 The Role of Third-Party Payers 29 The Role of State Statutes 31 The Effect of Malpractice Litigation on Health Care Costs 33 Adverse Outcome as a Cost of Medical Care 34 The Question of "Excess" Cost 36 The Cost of "Defensive" Medicine 37 1 PRODUCT LIABILITY LITIGATION 43 Legal Doctrines 43 Liability Trends 44 Costs of Litigation 45 Direct Costs to the Health Care System 46 Hidden Costs to the Health Care System 47 TERMINATION OF CARE LITIGATION 53 State Judicial Doctrines 53 Federal Constitutional Doctrine: The Cruzan Case 57 Cost Implications 58 . . . . ANTITRUST LITIGATION 61 Health Care Providers and the Antitrust Laws 61 The Concept of Market Power 62 The Justice Department Guidelines 64 Significance for the Hospital Market 68 Mergers and the Cost of Health Care 69 CONCLUSION 73 2 EXECUTIVE SUMMARY — Five sorts oflitigation against the health care industry physicians, hospitals, — health plans, insurers, and product manufacturers bear significantly on the costs of obtaining health care. i. Suits over coverage under contracts ofhealth insurance involve, in the main, a contention by the insured that a treatment is "reasonable and necessary" to alleviate his ailment; the insurer contends, to the contrary, that it falls under a general exclusion for treatments that are "experimental or investigational." — Although the test ofthese contentions is current medical practice whether a — treatment is accepted within the profession some courts have decided these cases on the basis of evidence that the treatment, although not accepted, is effective. An insured may also, in some cases, avoid the issue altogether by suing for a preliminary injunction. If he shows that a refusal to cover treatment would cause him irreparable harm, and that he has at least some argument that the treatment is not experimental (or is effective), the court may require the company to pay for the treatment pending the outcome of the litigation. The insured is aided by several legal doctrines that read insurance contracts for the benefit ofthe insured, and construe ambiguities against the insurer. As a result of a major shift, in 1989, in the doctrines applied by the Federal courts to suits under the Employment Retirement Income Security Act, the 3 Federal courts now decide ERISA suits much like State courts acting under State law. There is no way in which an insurance company can readily anticipate these decisions, which tend to extend coverage for the most expensive technologies, except by building large margins into its premium structure. This has two effects: (1) it increases the costs of health care, as a share of the gross national product, by extending existing insurance to additional services; and (2) it may reduce the availability ofhealth insurance, thereby tending to lower the national costs ofhealth care, as a share of the GNP, because some health care services will no longer be available to persons who can no longer afford to pay for them. Note that the increased insurance premium does pay for a real economic good: broader coverage. Therefore, subject to the fluctuations of supply and demand (to the extent they operate in the health care market), coverage decisions should be relatively neutral in their effect on the base price of services. Malpractice claims are based on a patient's contention that the negligent failure of his health care provider to adhere to current standards of medical — care usually an error in diagnosis, evaluation and treatment, prescribing and — dosing, procedure, or communication caused the adverse outcome of his medical treatment. The most significant malpractice issue of recent years has involved the question of a physician's liability when, against his betterjudgment, he takes 4