Managed care reform?
Sure—but don't look to Washington

With Congress gridlocked over patients' rights, states have once again taken the lead in passing HMO safeguards. Our report shows which of the new laws are most important to you.

By Wayne J. Gugliemo
Senior Editor

States again rushed in this year where Congress fears to tread. In a now familiar scenario, statehouses were awash in health care bills that, among other things, would expand the right of patients to sue their HMOs, ensure prompt payments to physicians, outlaw all-products clauses, and permit doctors to bargain collectively with health plans. A substantial number of these bills have made it onto the books—and many others are likely to be taken up again next year.

"At the state level, health care reform is seen as a populist issue that cuts across political and ideological lines," says Lee Dixon, director of the Health Policy Tracking Service of the National Conference of State Legislatures. "That's why bills are being passed even in states where the governor is from one party, the legislature from another, or there's a divided legislature."

To date, no such bipartisan momentum has pushed Congress to act. Washington lawmakers struggling to reconcile House and Senate versions of a national patients' bill of rights remain split along ideological lines, particularly over the issue of HMO liability. The AMA, which backs the more sweeping House measure, has vowed to punish lawmakers who stand in the way of a strong bill. "If they don't do what's right, we plan to make it a political issue this fall," says Thomas R. Reardon, immediate past president of the AMA. Meanwhile, state lawmakers point with pride to their crazy quilt of health care reforms, many of which, as our report shows, directly affect doctors and their practices.

Prompt pay draws bipartisan and some industry support

Among the measures debated in statehouses during the 2000 legislative sessions, none has a greater impact on doctors' pocketbooks than those requiring insurers to pay clean or undisputed claims in a timely fashion. Of the 21 states considering prompt-payment proposals this year, five—Arizona, Kansas, Kentucky, Minnesota, and New Mexico—enacted laws. This brings to 38 the number of states with such laws or regulations on the books. (For a list of prompt-pay states, see below.)

States mandating prompt pay for physicians

Arkansas

Connecticut

45

Georgia

Kentucky

Maine

Minnesota

Mississippi

New Jersey

New York

^*Applies to HMOs in TennCare only.

Source: Health Policy Tracking Service of the National Conference of State Legislatures, June 1, 2000

In New Mexico, the medical society joined hands with some of the state's biggest health plans to push through a bill. The new law requires plans to pay electronically submitted claims within 30 days or face a penalty. (Existing regulations require plans to pay manually submitted claims within 45 days or face a similar penalty.)

Why were the state's health plans willing to cooperate? One reason was pressure from regulators—along with threatened legal action by physicians. At the same time, "health plans themselves saw late payments as a problem they needed to solve," says G. Randy Marshall, executive director of the New Mexico Medical Society. For one thing, such payments clogged insurers' already burdened computer systems. Just as crucially, they created a climate of ill will among physicians, some of whom reportedly had to wait more than 180 days to be paid.

Industry officials knew a mutually acceptable solution had to be worked out. Together with representatives from the medical society, they hashed out a proposal they could live with, and got it passed. "Even though the law creates some administrative difficulty for us, I've directed our organization to make every effort to comply with it," says internist Martin E. Hickey, president and CEO of Albuquerque-based Lovelace Health Systems.

Though in effect for only a few months, the new law appears to be working, says Marshall: "Based on the monthly updates the plans give us, things have improved significantly from a year ago."

Unlike New Mexico's physicians, Minnesota's didn't team with HMO officials to push through the state's new prompt-payment measure, which takes effect this coming January. But neither did physicians encounter stiff industry opposition. "Our in-state plans usually paid us on time," says internist John Van Etta, president of the Minnesota Medical Association. "The problem we had was with out-of-state payers." An association survey of all payers found that plans dragging their heels pushed the average payment period for a clean claim to 35 days.

The new law requires health plans to pay undisputed claims within 30 calendar days of submission or be slapped with a monthly fine of 1.5 percent of the outstanding amount.

States follow different paths to HMO accountability

In several states this year, medical societies have also pushed to make health plans legally ac- countable for their decisions. Though less of a direct pocketbook issue for physicians than prompt-payment laws, such legislation is necessary, many in the medical community believe, because it extends the scope of malpractice liability beyond the practicing physician to health plans.

To date this year, 32 states have considered such proposals, and four—Arizona, Maine, Oklahoma, and Washington—have passed some form of insurer-liability legislation. (California, Georgia, and Texas have similar legislation already on the books.)

Washington's law, which took effect on June 8 as part of a more comprehensive patient-protection measure, says that a health plan must adhere to the same standard of care as physicians "when arranging for the provision of medically necessary health care services to its enrollees." Plans failing to adhere to this standard are liable for damages.

Interestingly, the state's medical association neither supported nor opposed this particular liability provision. "The ability of consumers to sue their health plans was never our issue," says Thomas Curry, executive director of the Washington State Medical Association. "We weren't thrilled to open up a whole new arena for trial attorneys."

Instead, the group supported another bill provision, one that requires health plan medical directors to be licensed in the state. (Seventeen other states have already enacted similar legislation.) Says Curry: "To us, having medical directors licensed in the state acknowledges that they're practicing medicine, and makes them accountable before the medical board for their decisions, just like any practicing doctor."

In Oklahoma, the medical society did end up endorsing an insurer-liability measure, but only after successfully incorporating amendments to protect physicians. As originally drafted, the measure left standing the right of HMOs to include indemnification or "hold harmless" clauses in their contracts with physicians. Such clauses place the burden of liability for a negligent action on the physician, thereby relieving the HMO of responsibility. In fact, hold-harmless clauses haven't always held up in court. But even when they haven't, physicians have still found themselves mired in a legal action, because patients must sue them first before suing their HMO.

Before it could support the insurer-liability bill, the medical society wanted language inserted that specifically outlawed hold- harmless clauses in physician contracts. (Currently, 26 other states have outlawed such clauses.) "This was a huge issue for us," says Lynne White, chief lobbyist for the society. The bill sponsor, who'd worked with the society on past legislation and badly wanted its support on this bill, made the necessary changes. Additional changes were worked out so the state's trial attorneys could support the bill.

The new law, which took effect July 1, states that a health plan may be sued for punitive damages for failing to exercise "ordinary care" in making treatment decisions. Before filing suit, a patient must first wend his way through an internal and external review process. If a suit is brought and won, punitive damages are subject to an existing liability cap, unless the insurer is found to have acted "intentionally and with malice."

What may be the most interesting aspect of the new Oklahoma law is not what it says explicitly, but what it says between the lines. Indeed, in holding plans to the same standard of ordinary care as physicians, Oklahoma lawmakers have lent their support to the growing notion that health plans are engaged in the practice of medicine. For practicing physicians frustrated by managed care, that may hardly count as big news, but it's one indicator that similar legislation in other states isn't far behind.

Key populist measures win broad support

If states have been slow until now to pass HMO accountability measures, they've moved far quicker on other fronts. Here are a few:

External appeal. To date, 37 states and the District of Columbia, through either legislation or regulation, require health plans to offer patients who've been denied treatment a chance to appeal to an independent reviewer. During this year's legislative sessions, at least 25 states considered proposals that would have either enacted new laws in this area or amended existing ones. Seven states—Alaska, Kentucky, Maine, New Hampshire, Utah, Washington, and Wisconsin—established the right of an independent appeal for the first time.

In Kentucky and Maine, as in 15 other states, the decision of the independent review panel is binding upon the health plan alone. In New Hampshire and Wisconsin, it's binding upon both the insured and the insurer, although New Hampshire permits patients to pursue other remedies as allowed under federal or state law, such as workers' comp claims. In Utah and Washington, the issue of whether appeals are binding on one or both parties isn't addressed.

Maine's law—which is part of a comprehensive managed care bill championed over two sessions by the Maine Medical Association—links external appeal and HMO liability. As in Oklahoma and other states, only patients who have first moved through the appeals processes are entitled to sue their HMOs for damages. This linkage, plus a cap on damages, made the bill palatable finally to Gov. Angus S. King Jr., a political independent in a state dominated by Democrats.

Political comity was also the order of the day in the successful effort to pass Wisconsin's external-review law. Following its passage, officials from the state medical society publicly thanked Republican and Democratic sponsors for their bipartisan effort. "These legislators have been criticized for not cooperating with each other," says State Medical Society of Wisconsin spokesman Eric Jensen. "But on this issue, they were willing to cross party boundaries, because they saw it benefited everyone's constituents."

The bill also made it through with the cooperation of the Wisconsin Association of Health Plans. "Many of our members already had some form of external review process in place," says association spokeswoman Beth Zurbuchen. "The new law standardizes this process, including who can and cannot be reviewers, and also extends the process to other commercial insurers."

Financial incentives. Until the 2000 legislative sessions, 25 states had passed legislation banning physician financial incentives. Typically, such laws make it illegal for health plans to use a system of financial rewards that could encourage physicians to limit medically necessary care. Capitation and other risk-sharing arrangements generally fall outside the scope of this legislation.

This year, at least 21 states considered bills that would have either enacted new laws on financial incentives or amended existing laws. To date, proposals have passed in two states—Maine and New Hampshire. Besides the typical language banning financial incentives in physician contracts, New Hampshire's law, enacted in March, requires a health plan to divulge to enrollees the nature of its financial arrangements with participating physicians.

Drug formularies. By the end of 1999, 33 states had some form of drug formulary legislation in place. Thirteen of those states require that health plans disclose their formulary lists, but not the procedures for obtaining off-list drugs. Three states—Maryland, Ohio, and Oklahoma—require the opposite. Seventeen states have passed laws requiring health plans to do both.

This year, 25 states introduced bills to establish new drug formulary legislation or amend previously enacted measures. To date, legislation has been passed in six of those states—Arizona, Idaho, Illinois, Utah, Virginia, and Washington. More pharmaceutical legislation, including proposals dealing with formularies, is likely on the way next session, according to the Health Policy Tracking Service's Lee Dixon. "Physicians want to be sure their ability to prescribe what's best for their patients isn't being restricted. If they think it is, they're sure to weigh in on this issue," he says. (For a list of states with drug formulary laws in place, see below.)

States regulating drug formularies

Are state legislatures on a roll?

There were other doctor-centered issues that drew attention in statehouses this year—and are likely to draw even more in the months to come. One is joint physician negotiations.

Since Texas passed a law last year exempting self-employed physicians from federal antitrust statutes, 16 states and the District of Columbia have introduced similar legislation.¹ Like the Texas law, which was based on model legislation drafted by the AMA, these new proposals establish antitrust immunity for physicians by invoking "state action doctrine." For this doctrine to override federal antitrust laws, two standards must be met:

• The state must expressly indicate that it intends to permit joint negotiations between physicians and health plans.

• The state must engage in active and ongoing supervision of those negotiations and their outcome.

To date, none of the state bills has passed. California's experience was in some ways typical. On the one hand, opponents linked the bill to congressional legislation (sponsored by California Republican Rep. Tom Campbell and passed by the House) that would grant physicians the right to bargain collectively with health plans under the National Labor Relations Act. Though the comparison was in many ways spurious, the prospect of unfettered antitrust relief scared many California lawmakers, and eventually the bill's chief sponsor gave up. "Health plans labeled our bill OPEC for doctors," says Norman Plotkin, associate director of government relations of the California Medical Association. "That caused a lot of confusion and concern."

On the other hand, CMA members who bought Campbell's central argument—that federal antitrust laws were never intended to apply to a profession—thought the state bill didn't go far enough, and sat on their hands.

The one place where a joint-negotiation bill did take off this year was in the District of Columbia. On June 6, the Council of the District of Columbia voted 10 to 2 to endorse the measure. The bill—which specifically prohibits doctors from striking or boycotting—must now clear several additional hurdles before becoming law.

Another measure that gained momentum this year addressed the divisive issue of all-products clauses. Such clauses compel doctors who participate in one health benefit plan offered by a managed care company to participate in all others. Thus, a physician who wishes to stay in a company's PPO network would also be forced to participate in the same company's HMO. This year, two states—Kentucky and Maryland—banned contracts incorporating such provisions.

Virginia approached the issue somewhat differently. Instead of banning all-products clauses outright, Virginia now requires contracts containing this language to also include language giving physicians the right to "opt out" of other products.

A voluntary agreement reached between Texas and Aetna US Healthcare this spring covers some of this same ground.² Recently, Aetna also agreed to give Connecticut doctors the choice of opting out of its all-products clause starting in January 2001. It's too soon to tell whether these agreements will serve as a template for voluntary agreements in other states.

Finally, in the wake of several spectacular HMO and PPO failures recently, lawmakers this year debated the role of the states in such instances to ensure that physicians and other providers are adequately compensated for outstanding claims. While no proposal to establish a permanent guaranty fund made it into law this year, New Jersey did pass legislation in April to pay for certain claims by individual plan members and providers against HIP Health Plan of New Jersey and American Preferred Provider Plan, two HMO failures that left the state's physicians and hospitals holding the bag for millions of dollars.³ To fund the one-time payout, the state tapped two sources. One was the partial proceeds from the states' multibillion-dollar settlement with the tobacco industry. Another portion of the payout will come from a one-time levy on the state's other health plans, which have vowed to challenge the new law in court.

Meanwhile, physician groups remain elated. "This is the first legislation in the country to create such a fund," says ophthalmologist Walter J. Kahn, president of the Medical Society of New Jersey, one of the groups that pushed hard for the measure. "We think it sets an important precedent that could lead states to set up permanent insolvency funds."

That's an issue for next year's legislative sessions, of course. But if states move as aggressively next year as they have during this legislative round, anything's possible.

¹ See "The Texas law: On target, or firing blanks?" Aug. 23, 1999.

² See "The new, 'improved' managed care: What the Texas-Aetna agreement really means," in our upcoming Sept. 4 issue.

³ See "The HMO graveyard: What caused the biggest HMO failure yet?" and "Why was this doctor allowed to start a health plan?" Oct. 25, 1999.

 

Carol Pincus, ed. Wayne Guglielmo. Managed care reform? Sure--but don't look to Washington. Medical Economics 2000;16:40.