Knowing the Limits of Health Care Law

A Conversation with Steven B. Epstein, J.D.

This pioneering medical legal authority says health plans and physicians should stop fighting over scraps the government throws them.

Steven B. Epstein, J.D., the founding member of Epstein Becker & Green, is a pioneer in health care law. Epstein, the senior health partner in the practice’s Washington, D.C., office, has a broad perspective on managed care that comes from representing pretty much any type of organization that delivers or pays for health care. Clients include managed care plans, hospitals, nursing homes, pharmacy companies, and home health care companies. Epstein Becker & Green employs more than 280 lawyers — including more than 80 who specialize in health law — in nine offices across the country.

A native of New York, Epstein received a bachelor’s from Tufts University in 1965 and his law degree from Columbia Law School in 1968. He has served on the boards of directors of a wide range of health care companies, and includes among his awards an honorary degree of medical director from the American Academy of Medical Directors (now the American College of Physician Executives). Epstein spoke recently with Senior Contributing Editor Patrick Mullen.

MANAGED CARE: What are the biggest legal challenges your clients are bringing to you these days?

STEVEN B. EPSTEIN: With managed care, the challenges aren’t so much legal. They tend to be in terms of politics, legislation, and communications. The major legal issues are plaintiffs’ lawsuits and restrictive state regulatory initiatives. For provider clients, the major challenge is that they’re not receiving enough money to deliver the kinds of quality services they’d like to deliver.

MC: Let’s talk about plaintiffs’ lawsuits. In June, the U.S. Supreme Court ruled in the case of Pegram v. Herdrich. As you know, an Illinois HMO patient, Cynthia Herdrich, sued her plan and doctor after her appendix burst when the plan told her to wait eight days for an ultrasound exam for what was misdiagnosed as an ovarian cyst. The key issue was whether the HMO and its physicians violated the 1974 Employee Retirement Income Security Act (ERISA) by administering a health plan with financial incentives for physicians to deny care. The Supreme Court unanimously ruled in favor of the plan. What is the importance of the decision?

EPSTEIN: The importance is not so much in the narrow holding of the case as it is that the Supreme Court recognized that managed care can, and should, do what it was designed to do. Congress essentially created managed care when it passed the HMO Act in 1973. The goal was to reduce costs, to manage care in the traditional sense. The court called it “rationing care.”

MC: I found it interesting that the court used the term “ration” in a nonpejorative way, as a statement of what HMOs were created to do.

EPSTEIN: Right. They were created as a way to reduce health care costs. In Pegram, the plaintiffs’ lawyers were trying to destroy the very principles that managed care plans stand for and were created for. The overwhelming sentiment that the Supreme Court came down with was that the fate of managed care should be a legislative decision, not a judicial decision. The court basically said, “That’s not our job. The court should stay out of this issue. We’re not going to destroy managed care because plaintiffs’ lawyers decide they don’t like it, or because that might be a politically popular thing.” All these plaintiffs’ cases are not so much about whether an HMO made this mistake or that mistake. These cases go to the fundamental issues of what managed care has to do in order to keep costs down. Plaintiffs’ lawyers are arguing that managed care plans can’t use those cost-control tools. Essentially, they want to destroy managed care. I think the Supreme Court said that should not be a judicial decision. HMOs were created at a time when medical cost inflation was out of control. We had a medical cost index that was separate from the overall inflation index because medical costs were so out of line with the rest of the economy. HMOs were created for the very specific purpose of getting these costs under control. Now, of course, they’re politically unpopular.

MC: To what degree has Pegram settled any issues?

EPSTEIN: It hasn’t. While the court decided that case, plaintiffs’ lawyers are still actively attacking managed care in a variety of federal and state cases. They’re still intent on destroying managed care and I think that’s just very unfortunate. They’re getting support from a variety of sources, including the American Medical Association and state medical associations, which makes no sense in terms of what’s best for providers. The idea that our litigation system should solve what is in essence a major crisis in health care and that the so-called problems with our health care system, like necessary physician incentives, should be solved by plaintiff’s lawyers who will walk away with millions of dollars if they should win, is an abomination. Our litigation system is a national disgrace, as anybody who has been subject to the system knows. The idea that such a severely broken system will determine our health policy is clearly beyond what I think is appropriate.

MC: Are other judges also saying courtrooms are the wrong places to make health policy?

EPSTEIN: So far, but that doesn’t mean that you won’t get one judge in some state court someplace who will decide differently. Plaintiffs’ lawyers shop to find the most favorable locations for their cases. They try and get before a jury because they know that juries don’t like big companies. Their goal is to find just one little place that they can use to destroy managed care, and by the way, make a fortune for themselves.

MC: Have there been any cases where they have found that friendly jury?

EPSTEIN: In terms of the overall structure of managed care, not yet. You’ve got to separate this issue from the very different issue of whether managed care is potentially liable for malpractice. Pegram is about a discrete issue: whether the plan’s incentive arrangements violated ERISA or not. By the way, such arrangements were specifically allowed in the initial HMO Act, which the Supreme Court pointed out. These cases are fundamentally about whether managed care can control costs by means of physician incentives, or if those types of cost controls are violative and fraudulent. Malpractice is a very different issue. There you’re dealing with a specific set of facts as to whether an HMO physician acted appropriately or not in a given situation and, if so, whether the HMO is somehow to blame. In malpractice, you must distinguish coverage from treatment decisions.

MC: Texas was the first state to extend malpractice liability to HMOs. How has that law played out?

EPSTEIN: We don’t have enough experience. So far in Texas, there hasn’t been a flood of injurious litigation to managed care under that law.

MC: As the managed care plans that opposed the law predicted there would be.

EPSTEIN: They were worried about it, and that doesn’t mean the flood won’t come. So far, the cases just might not be there to bring.

MC: Should HMOs be held liable for malpractice?

EPSTEIN: It depends on the situation. There are situations where an HMO is just a payer performing the same function that all the indemnity payers in our long history of insurance have traditionally performed. That shouldn’t lead to a malpractice case. But where an HMO actually inserts itself in clinical decision-making, it’s a much harder case to make that they shouldn’t be liable for malpractice. We also have some HMOs that employ physicians directly. In certain situations, malpractice may be appropriate. But the sense that HMOs are just a deep pocket, so let’s just bring them into every case, will create an enormous problem for managed care and for employers who ultimately pay the bill.

MC: Give me an example of what you’re talking about when you say that providers and managed care plans are fighting over the scraps the government allows them to fight over.

EPSTEIN: Look at the Balanced Budget Act of ’97. It almost destroyed providers and hospitals and, as a practical matter, did destroy the nursing home industry. Since then, Congress has had to pass one relief act, the Medicare Balanced Budget Refinement Act of 1999, and is seriously considering another one. These bills provide relief from what? They’re relief from the government’s incompetence in knowing how to set rates.

MC: Is the government incompetent in setting rates or is it covertly trying to achieve other goals, like reducing overcapacity and closing hospitals? Since closing hospitals is political suicide, the Feds put a financial tourniquet on them, and wait for the inevitable results.

EPSTEIN: I believe the Balanced Budget Act was an example of the government’s incompetence. I don’t think they had any idea of what these cutbacks would do to hospitals. They badly underestimated what such severe cuts would do to the provider industry and hence, the first relief act and now the need for a second relief act. There are other ways to address the broader problems. Providers have to decide what they want. Do they want a government-imposed program? Do they think Medicare is treating them better than managed care? No. If they think it through, they need managed care. There have been a number of articles about the fact that health care costs of the Federal Employees Health Benefits Program are up 36 percent since 1998. That program is often cited as a model. It’s not a bad system, but its costs are up 36 percent in three years. Who’s dealing with that? Right now we’re in an all-you-can-eat buffet in terms of health care coverage, and for now, employers are willing to pay for it. We’re in a system where anybody can have any coverage he wants. With state legislation like any-willing-provider laws and all-encompassing mandated benefits, you won’t be able to refuse any kind of care to anybody. These types of laws are turning managed care into an indemnity-like system, which means that costs get out of control. Once that happens, we’re either going to run into the problem of much tighter employer cost and benefit controls, or employers are going to throw up their hands and say let the government handle it. Once that happens, we’ll have a government-imposed system — HillaryCare all over again. I don’t think anybody really wants to go down that road.

MC: As someone who deals with people on the plan side and the provider side, to what degree are they finally accepting the reality that they have to work together?

EPSTEIN: A number of plans have realized that they have got to be more provider-friendly. Managed care has bashed providers enough and realized they have to do something about this issue. The government and managed care have kicked providers so hard that providers are still angry. They’ve got to come out of that mind-set, and I think they’re beginning to come around. The AMA’s approach, to try to keep everybody angry, is an exception. They’re doing that for political reasons. I’m not saying that it’s unreasonable for physicians to be angry. Medicare has never paid its fair share for anything, ever. Medicaid has been even worse. They’re not getting their fair share, and managed care presented an easy target. Most of the hospitals and physicians that we represent have come to the realization that they have to figure out a better solution than just anger. They’re beginning to come to that reality and I think that’s important.

MC: Some physicians are trying to move toward collective bargaining. What impact do you expect those efforts to have?

EPSTEIN: It’s another thing that the AMA is promoting. Collective bargaining is going to be bad for physicians, bad for patients, and bad for health care costs. Ultimately, it breaks down what doctors are really all about. They’re not getting together for patient care. They’re getting together because they care more about fees. If physicians want to be treated like employees, they’re going to be treated like employees, and they’re not employees. I can’t imagine that the government would allow independent physicians to organize, except for political reasons. It clearly violates current antitrust laws. That’s not where physicians should be headed. That’s not what we need to do now to solve our health care problems.

MC: To what degree have questions related to the privacy and confidentiality of electronic records and the Internet emerged as legal issues?

EPSTEIN: Confidentiality has arrived, not specifically in terms of managed care, but because of the rules related to HIPAA, the Health Insurance Portability and Accountability Act. In my view, the HIPAA rules, when taken as a whole, are going to be of much more concern and much more expensive to implement than Y2K. These rules requiring uniform records are going to affect hospitals and managed care big time. From my standpoint, it is going to be a major issue. People are just beginning to focus on what they have to do and how much it’s going to cost to make electronic transfers uniform and confidential. It is an issue that I think the industry has to face.

MC: Is the current payment system viable? Do you expect that the current private employer-sponsored system will be around in 10 or 20 years?

EPSTEIN: Yes, I do. When we look at other countries, we know that government solutions don’t work. People in this country certainly don’t like government solutions for health care. When we had the HillaryCare proposal, people reacted violently against it. People don’t like having the government tell them whom they can go to, when they can go to them, and how much will be paid for the care. They don’t even like it when it’s done by the private sector, like managed care. So I think we’ll continue with some version of the current system. The system will need to adapt somewhat, because we go through these periods of rising costs. It’s hard to tell what it will be in ten years, but if the alternative is government-controlled health care, I think most people don’t want that in this country. If I were guessing, I’d say that one feature of the next stage in the evolution of health care is much more control of the health care dollar by individuals. Now, they walk into a doctor without having any idea of who is paying what. We’re moving to a point where they will be able to say,”How much does this cost? Is it worth it?”

MC: What might the coverage look like?

EPSTEIN: I expect we’ll see some sort of catastrophic wraparound coverage. Individuals will have much more control over the first $4,000 or $5,000 they spend on health care, which is where the great bulk of money is spent. We would be in much better shape today if we had some kind of catastrophic plan. Certainly, some people can be financially challenged by a $3,000 or $4,000 medical bill. But the great horror stories are always about the person with the $100,000 or $200,000 or $300,000 bill. We can find ways to manage cases with $2,000, $3,000, $4,000 worth of care. Catastrophic coverage is a great way to deal with the uninsured, a great many of whom are not poor or unemployed. Many of the uninsured are voluntarily opting out. They’re employed by small businesses that can’t afford the rising health care costs. The last figure I saw was that more than 30 million people are employed, but not insured. These people are worried about getting financially destroyed by some catastrophic event. They can manage the routine care on their own.

MC: What’s your opinion of the major presidential candidates’ health care proposals?

EPSTEIN: Al Gore has been doing a lot of managed care bashing. It’s very unpresidential. It doesn’t solve the growing problem of cost increases, and it’s not helpful to anybody. He would expand Medicare and the federal employees’ program. The federal employees program is out of control, and no one has ever claimed that Medicare knows how to control costs. Medicare was in crisis until the economy did very well. Gore’s got a terrible proposal while Bush has no proposal at all for any of these issues. Providers and the managed care industry need to work together to figure this out. We’re heading toward a crisis in health care because of cost increases. Nobody is dealing with the issues. As an industry, we have to figure this out for ourselves. Gore isn’t helpful and Bush doesn’t get it. We’re in for a health care cost crisis, I think. I don’t see any of the candidates addressing that issue. It’s way too complicated for a 30-second sound bite.

MC: Thank you.