Title: Angela M. McEvoy v. Group Health Cooperative of Eau Claire

State: wisconsin

Issuer: Wisconsin Supreme Court

Document:

SUPREME COURT OF WISCONSIN 
 
 
Case No.: 
96-0908 
 
 
Complete Title 
of Case: 
 
Angela M. McEvoy, by her Guardian ad Litem 
Stephanie L. Finn and Susan McEvoy, 
 
Plaintiffs-Appellants, 
 
v. 
Group Health Cooperative of Eau Claire, 
 
Defendant-Respondent-Petitioner. 
 
 
REVIEW OF A DECISION OF THE COURT OF APPEALS 
Reported at:  207 Wis. 2d 641, 559 N.W.2d 924 
 
 
 
 
(Ct. App. 1996) 
 
 
 
 
UNPUBLISHED 
 
 
Opinion Filed: 
November 12, 1997 (Corrections made to opinion 
 
  on November 13, 1997) 
Submitted on Briefs: 
 
Oral Argument: 
September 3, 1997 
 
 
Source of APPEAL 
 
COURT: 
Circuit 
 
COUNTY: 
Eau Claire 
 
JUDGE: 
Eric J. Wahl 
 
 
JUSTICES: 
 
Concurred: 
 
 
Dissented: 
 
 
Not Participating:  
 
 
ATTORNEYS: 
For the defendant-respondent-petitioner there 
were briefs by Thomas J. Misfeldt, John P. Richie and Misfeldt, 
Stark, Richie & Wickstrom, Eau Claire and oral argument by John 
P. Richie. 
 
 
For the plaintiffs-appellants there was a brief 
by Matthew A. Biegert, Brian H. Sande and Doar, Drill & Skow, 
S.C., New Richmond and oral argument by Matthew A. Biegert. 
 
 
 
 
 
Amicus curiae brief was filed by Edward E. 
Robinson and Warshafsky, Rotter, Tarnoff, Reinhardt & Bloch, 
S.C., Milwaukee for the Wisconsin Academy of Trial Lawyers. 
 
 
NOTICE 
This opinion is subject to further editing and 
modification.  The final version will appear in 
the bound volume of the official reports. 
 
 
No. 96-0908 
 
STATE OF WISCONSIN               :        
        
 
 
 
 
IN SUPREME COURT 
 
 
Angela M. McEvoy, by her Guardian ad Litem 
Stephanie L. Finn, and Susan McEvoy, 
 
  
Plaintiffs-Appellants, 
 
 
v. 
 
Group Health Cooperative of Eau Claire, 
 
 
Defendant-Respondent-Petitioner. 
 
FILED 
 
NOV 12, 1997 
 
Marilyn L. Graves 
Clerk of Supreme Court 
Madison, WI 
 
 
 
 
 
 
REVIEW of a decision of the Court of Appeals.  Affirmed. 
¶1 
ANN WALSH BRADLEY, J.   Group Health Cooperative of 
Eau Claire, Inc. ("GHC"), a health maintenance organization, 
seeks review of a decision of the court of appeals that reversed 
the circuit court's1 entry of summary judgment dismissing Angela 
and Susan McEvoy's complaint.  The court of appeals determined 
that the tort of bad faith can be applied to health maintenance 
organizations.  GHC asserts that the tort of bad faith pertains 
only to insurance companies.  In addition, GHC argues that its 
patient-related decisions are subject to the medical malpractice 
statute, Wis. Stat. ch. 655 (1991-92),2 which precludes any bad 
faith tort claims.  Because we determine that the common law 
                     
1 Circuit Court for Eau Claire County, Eric J. Wahl, Judge.  
2 Unless 
otherwise 
indicated, 
all 
future 
statutory 
references are to the 1991-92 volume.  
No.  96-0908 
 
 
2 
tort 
of 
bad 
faith 
applies 
to 
all 
health 
maintenance 
organizations making out-of-network benefit decisions and that 
Wis. Stat. ch. 655 does not preclude the McEvoys' claims, we 
conclude that the circuit court erred in granting summary 
judgment.  Accordingly, we affirm the decision of the court of 
appeals. 
I.  Facts and Procedural History 
¶2 
In the fall of 1991, 13-year-old Angela McEvoy began 
to suffer from anorexia nervosa, a potentially fatal eating 
disorder characterized by an aversion to food.  At the time of 
diagnosis, Dr. Lawrence McFarlane of GHC was Angela's primary 
care physician.  GHC insured Angela as a dependent of her 
mother, Susan McEvoy, a government employee and health care 
benefits policyholder.  A portion of that policy required GHC to 
cover up to 70 days of inpatient psychological care. 
¶3 
GHC is a staff model health maintenance organization 
("HMO") organized as a cooperative under Wis. Stat. ch. 185.  It 
offers health care services to network participants through 
staff physicians that operate within GHC's clinics in Eau 
Claire, Wisconsin.  When GHC is unable to care adequately for a 
network subscriber's health care needs, GHC refers its patients 
to out-of-network providers.  Pursuant to the contractual terms 
of its subscriber's policy, GHC will pay for that out-of-network 
care up to the policy's limits. 
¶4 
After confirming his diagnosis of anorexia, McFarlane 
approached GHC's administration about referring Angela to the 
inpatient eating disorder program at the University of Minnesota 
No.  96-0908 
 
 
3 
Hospital ("UMH").  Neither GHC nor its network affiliates had 
previously treated a patient for anorexia nervosa. 
¶5 
Dr. 
Stuart 
Lancer, 
GHC's 
Medical 
Director, 
was 
responsible for GHC's cost containment programs and medical 
management.  His approval was necessary for any staff physician 
referrals to out-of-network providers.  At McFarlane's request, 
Lancer agreed that GHC would cover the cost of a two-week period 
of inpatient treatment for Angela at UMH.  Lancer subsequently 
approved continued coverage that totaled an additional four 
weeks of inpatient care.  He never personally met or treated 
Angela. 
¶6 
After six weeks of treatment by UMH physicians, Lancer 
decided to discontinue coverage of Angela's care at UMH.  This 
decision was based on phone calls Lancer or members of his 
administrative staff had with individuals treating Angela at 
UMH.  As one notation in GHC's records indicated: 
 
SRL [Lancer] OK'ed thru Wed. Jan. 1st 1992 will be 
Angela's last day.  Appt with Lloyd Thrus. (sic)  NO 
MORE EXTENSIONS.  SRL doesn't want to talk to them any 
more.  No excuses.  Discharge, or no payment. 
¶7 
Both Angela's treating physician and her psychiatrist 
at UMH opposed Lancer's decision because Angela had not achieved 
UMH's established eating disorder treatment goals as of the time 
of discharge.  UMH staff also objected to GHC's alternative 
treatment choice, placement in a newly-formed, in-network, Eau 
Claire 
outpatient 
group 
therapy 
session 
for 
compulsive 
overeaters that met only once a week.   At the time of Lancer's 
termination of coverage order, approximately four weeks of 
No.  96-0908 
 
 
4 
inpatient psychological care benefits remained under Angela's 
contract with GHC. 
¶8 
On December 31, 1991, Angela was discharged back into 
the care of GHC's network providers.  Upon discharge she weighed 
95 pounds.  Lancer had no further involvement with Angela's care 
within the GHC network beyond occasionally receiving unsolicited 
copies of progress notes.  Angela relapsed almost immediately.  
On February 27, 1992, GHC readmitted Angela to UMH's inpatient 
eating disorder program.  At the time of readmission, she 
weighed 74 pounds. 
¶9 
GHC's coverage of Angela's inpatient psychological 
care at UMH terminated in late March, 1992.  Upon termination of 
that financial coverage, Lancer's involvement in Angela's case 
ended.  Angela remained at UMH and continued treatment at her 
own personal expense.3 
¶10 Angela and her mother commenced an action against GHC 
in the circuit court of Eau Claire County, alleging that GHC "in 
breach of the policy, and in bad faith, denied and threatened to 
deny Angela McEvoy coverage for her treatment and failed to 
authorize appropriate treatment."  They demanded compensatory 
and punitive damages.  GHC moved for summary judgment, arguing 
for dismissal of the suit on the grounds that the McEvoys' 
action was actually one for medical malpractice governed by Wis. 
Stat. ch. 655.  The plaintiffs, in opposing the motion, pointed 
                     
3 Angela and GHC later disputed whether the terms of her 
contract with GHC required that coverage terminate in late March 
of 1992.  After beginning arbitration of this contract dispute, 
GHC offered Angela a settlement and agreed to pay for the 
remainder of her care during her second stay at UMH.  
No.  96-0908 
 
 
5 
to the dual nature of GHC as both a health care provider and an 
insurer and argued for application of the tort of bad faith. 
¶11 The circuit court granted GHC's motion for summary 
judgment, dismissing the McEvoys' complaint.  The circuit court 
decided that application of the tort of bad faith to HMOs would 
be an "unwarranted extension of the bad faith doctrine."  The 
circuit court then concluded that Lancer's decision to order 
Angela's discharge was a medical decision properly pursued under 
medical malpractice law. 
¶12 The court of appeals reversed the circuit court's 
grant of summary judgment.  In rejecting the circuit court's 
view of ch. 655 preclusion, the court of appeals determined that 
Lancer's medical background did not mean that all challenges to 
his insurance coverage decisions amounted to medical malpractice 
claims.  Instead, the court of appeals characterized Lancer's 
actions as administrative insurance coverage decisions properly 
subject to a bad faith tort claim that should survive summary 
judgment.  GHC petitioned this court for review. 
¶13 When 
reviewing 
a 
grant 
of 
summary 
judgment 
we 
independently apply the same methodology as the circuit court. 
See State ex rel. Auchinleck v. Town of LaGrange, 200 Wis. 2d 
585, 591-92, 547 N.W.2d 587 (1996).  Where there are no material 
facts in dispute, we must determine whether the movant is 
entitled to judgment as a matter of law.  See id. at 592.  In 
this case, we must determine whether the common law tort of bad 
faith applies to HMOs.  We also must interpret the scope of 
application of Wis. Stat. ch. 655.  Both inquiries present a 
question of law that we determine de novo.  See First Nat. 
No.  96-0908 
 
 
6 
Leasing Corp. v. City of Madison, 81 Wis. 2d 205, 208, 260 
N.W.2d 251 (1977); State v. Eichman, 155 Wis. 2d 552, 560, 456 
N.W.2d 143 (1990).  
II. The Common Law Tort of Bad Faith 
¶14  The question of whether HMOs can be sued by 
subscribers under the common law tort of bad faith traditionally 
applied to insurance companies is a question of first impression 
for this court and one that has not received significant 
discussion in other jurisdictions.4 To properly resolve this 
issue, we must consider the rationale underlying our previous 
adoption of the common law tort of bad faith, the nature and 
purpose of HMOs, the legislature's pronouncements concerning the 
regulation and organization of HMOs, and the policy implications 
behind labeling HMOs as insurers under bad faith tort.  These 
considerations convince us that for purposes of the application 
of the common law doctrine of bad faith, HMOs making out-of-
network benefit decisions are insurers. 
¶15 This court explicitly adopted the common law tort of 
bad faith as applied to first party claims under insurance 
contracts in Anderson v. Continental Ins. Co., 85 Wis. 2d 675, 
686, 271 N.W.2d 368 (1978); see also Duir v. John Alden Life 
Ins. Co., 573 F. Supp. 1002 (W.D. Wis. 1983).  Our adoption of 
this doctrine recognized that "bad faith conduct by one party to 
                     
4 See, e.g., Williams v. HealthAmerica, 535 N.E.2d 717, 719-
21 (Ohio Ct. App. 1987)(reversing circuit court's grant of 
summary judgment to HMO based on plaintiff's claims of bad faith 
since 
issues 
of 
material 
fact 
remained); 
Rederscheid 
v. 
Comprecare, 
Inc., 
667 
P.2d 
766, 
767 
(Colo. 
Ct. 
App. 
1983)(reinstating plaintiff's bad faith tort claim against an 
HMO as an insurer).  
No.  96-0908 
 
 
7 
a contract toward another is a tort separate and apart from a 
breach of contract per se" and that separate damages may be 
recovered for this tort.  Anderson, 85 Wis. 2d at 686.  The 
rationale underlying a bad faith cause of action is to encourage 
fair treatment of the insured and penalize unfair and corrupt 
insurance practices.  By ensuring that the policyholder achieves 
the benefits of his or her bargain with the insurer, a bad faith 
cause of action helps to redress a bargaining power imbalance 
between parties to an insurance contract.  See Craft v. Economy 
Fire & Casualty Co., 572 F.2d 565, 569 (7th Cir. 1978)(applying 
bad faith tort to remedy imbalance in bargaining power); Grand 
Sheet Metal Prod. Co. v. Protection Mutual Ins. Co., 375 A.2d 
428, 430 (Conn. 1977)(applying bad faith tort to protect insured 
vulnerable at time of claim). 
¶16 Next we consider the nature and purpose of HMOs.  HMOs 
are modern health care entities that cover over 52.5 million 
Americans.  See Trends in Deaths Reversed, Wash. Post, July 25, 
1997, at A17.  Each HMO is a hybrid entity encompassing 
characteristics of both traditional health care providers and 
traditional insurers in such a way as to encourage a restrained 
use of available health care resources. 
¶17 HMOs currently exist in three forms.  Under a staff 
model HMO, the HMO employs its own doctors as salaried employees 
and runs its own delivery facilities such as hospitals and 
clinics.  In a group model HMO, alternatively known as a network 
HMO, the HMO owns its own facilities, but establishes network 
health care delivery contracts with individual physicians and 
physician practice groups that continue to provide fee-for-
No.  96-0908 
 
 
8 
services 
care 
to 
nonplan 
participants. 
 
Finally, 
in 
an 
Independent Practice Association ("IPA") HMO, the HMO contracts 
with an Independent Practice Association (a partnership or 
cooperative composed of physicians) which in turn has contracted 
with groups of individual physicians. See Sharon M. Glenn, 
Comment, Tort Liability of Integrated Health Care Delivery 
Systems: Beyond Enterprise Liability, 29 Wake Forest L. Rev. 
305, 311-12 (1994). 
¶18  The individual providers affiliated with an HMO are 
part of its health care network.  Where such network physicians 
are not equipped to provide necessary medical care to a 
subscriber, the HMO, pursuant to its contract, may authorize 
coverage for payment for out-of-network treatment.  HMOs, like 
insurance companies, may also place contractual limits on their 
liability for unapproved care.  
¶19 In the course of the contractual relationship between 
the HMO and subscriber, a power imbalance similar to that 
between a classical insurer and policyholder exists.  An HMO 
subscriber has little effective negotiating power since policy 
terms, 
like 
those 
in 
insurance 
contracts, 
are 
usually 
prepackaged and subject to a significant number of regulations 
and rules.  When faced with a problem, HMO subscribers, like 
many insurance policyholders, may encounter bureaucratic or 
procedural hurdles in asserting their contractual health care 
rights.  As a practical matter, HMO subscribers are similarly 
situated vis-a-vis their HMOs as insurance policyholders are to 
their more traditional insurance companies. 
No.  96-0908 
 
 
9 
¶20 A review of legislative declarations in the Wisconsin 
statutes specifically applicable to GHC supports our general 
characterization of HMOs as insurers for bad faith purposes.  
Like traditional insurance companies, HMOs are required to 
establish contracts with subscribers with set terms of coverage. 
 See Wis. Stat. § 185.981(2).  While staff model HMOs organized 
under Wis. Stat. ch. 185 may not be organized for the sole 
purpose of providing insurance, and may not enter indemnity 
contracts, those same HMOs may be authorized to engage in the 
insurance business.  See Wis. Stat. §§ 185.981 & 601.04.  Such 
HMOs are also subject to many of the same regulations as 
insurance companies.  See Wis. Stat. § 185.983(1).5  Moreover,  
Wis. Stat. § 600.03 defines "insurer" to include some HMOs.  See 
Wis. Stat. § 600.03(23), (27).  Wis. Stat. ch. 609 also gives 
the Office of the Commissioner of Insurance the power to 
regulate HMOs.  Accordingly, based on the practical and legal 
similarities of HMOs and traditional insurance companies, we 
determine that the common law tort of bad faith applies to HMOs 
making out-of-network benefit decisions. 
                     
5 While these HMOs are excused from compliance with many 
statutory insurance provisions, they are subject to significant 
regulation that parallels the insurance industry.  They must 
comply with insurance statutory mandates concerning (but not 
limited to) certificates of authority, deposits and financial 
services, fees paid to and powers of the Commissioner of 
Insurance, required reports, and examination of affairs by the 
Commissioner of Insurance.  For a list of provisions from which 
such HMOs are not exempt, consult Wis. Stat. § 185.983(1).  For 
a comprehensive description of HMOs operating in Wisconsin, 
visit State of Wisconsin, Office of Commissioner of Insurance, 
Information About Wisconsin Health Maintenance Organizations 
(visited 
October 
19, 
1997) 
. 
No.  96-0908 
 
 
10
¶21 Public policy also supports our decision to equate 
HMOs and insurers for purposes of applying bad faith tort to 
HMOs.  Research on the benefits of particular medical treatments 
to patient communities supports contentions by health care 
financing entities such as HMOs that some medical practices are 
wasteful.  See Jack K. Kilcullen, Groping for the Reins: ERISA, 
HMO Malpractice, and Enterprise Liability, 22 Am. J.L. & Med. 7, 
23 (1996)(citing Committee on Utilization Management By Third-
Parties, Division of Health Care Service, Institute of Medicine, 
Controlling Costs and Changing Patient Care? The Role of 
Utilization Management 14 (Branford H. Gray & Marilyn J. Field 
eds. (1989)).  Through contractual arrangements with physicians 
and patients, HMOs are able to exert significant influence on, 
if not outright control over, the costs of treatment regimens 
administered to patients, thereby limiting waste.  The fears 
attendant with such arrangements, however, revolve around the 
economic model of health care financiers focusing on reducing 
aggregate costs while failing to recognize and to protect 
adequately the medical needs of individual subscribers.   
¶22 This fear is particularly acute in the present high-
cost medical economy where an adverse benefits ruling means not 
just that the financier will not provide payment, but also that 
the medical care itself is effectively denied.  The tort of bad 
faith was created to protect the insured from such harm.  See 
DeChant v. Monarch Life Ins. Co., 200 Wis. 2d 559, 570, 547 
N.W.2d 592 (1996).  As one court noted in the insurance context, 
the application of bad faith tort is a means of leveling the 
No.  96-0908 
 
 
11
playing field when a dispute between an insurer and a subscriber 
arises.  The application of bad faith tort: 
 
is necessary because of the relationship between the 
parties and the fact that in the insurance field the 
insured usually has no voice in the preparation of the 
insurance policy and because of the great disparity 
between the economic positions of the parties to a 
contract of insurance; and furthermore, at the time an 
insured party makes a claim he may be in dire 
financial straits and therefore may be especially 
vulnerable to oppressive tactics . . . . 
Battista v. Lebanon Trotting Ass'n, 538 F.2d 111, 118 (6th Cir. 
1976).  Because HMO subscribers are in an inferior position for 
enforcing their contractual health care rights, application of 
the tort of bad faith is an additional means of ensuring that 
HMOs do not give cost containment and utilization review such 
significant weight so as to disregard the legitimate medical 
needs of subscribers.   
¶23 Based on the observations discussed above, and the 
fact situation as alleged in this case, we recognize that HMOs 
making out-of-network benefit decisions are insurers for purpose 
of application of the tort of bad faith.  The question then 
becomes how to best distinguish between decisions made by an HMO 
employee that create liability for medical malpractice and those 
that place liability on HMOs for bad faith tort.  Because HMOs 
by their nature are an amalgamation of characteristics from 
health care providers and insurers designed to reduce medical 
costs, this inquiry does not adhere well to bright line rules, 
particularly since cases will exist where a particular HMO 
action 
or 
omission 
may 
constitute 
both 
bad 
faith 
and 
No.  96-0908 
 
 
12
malpractice. 
 
However, 
despite 
this 
difficulty, 
several 
boundaries can be applied to the inquiry. 
¶24 First, we emphasize that it is not the case that all 
malpractice cases against HMO physicians may also be pursued 
under the guise of the tort of bad faith.  The tort of bad faith 
is not designed to apply to classic malpractice cases arising 
from mistakes made by a health care provider in diagnosis or 
treatment.  If a surgeon amputates the wrong leg, no claim for 
bad faith is established.  If a primary care physician fails to 
order an effective diagnostic procedure through negligence or 
medical mistake, no claim for bad faith arises. 
¶25  Second, the bad faith cause of action is not limited 
to decisions made by an HMO's medical director.  The official 
capacity of the decision maker is not the touchstone of our bad 
faith inquiry.  Rather, we are concerned with the underlying 
basis for any decision made by an HMO employee that effectively 
denies coverage for out-of-network care under a subscriber's 
contract where the weight of internal financial considerations 
overcomes concern for the subscriber's reasonably necessary 
medical care.   
¶26 Third, the facts as alleged in this case present an 
excellent example of where a bad faith claim should survive a 
summary judgment motion.  Where a staff model HMO refers a 
subscriber to an out-of-network provider pursuant to that 
subscriber's needs and contract with the HMO, and it is alleged 
that the HMO then denies reimbursement for that out-of-network 
care without an established reasonable basis (i.e., due to 
internal financial considerations), the HMO is acting purely as 
No.  96-0908 
 
 
13
an insurer.  Because the referral passes primary medical 
responsibility to the out-of-network provider, the HMO staff 
member reviewing coverage requests, absent a sufficient showing 
of participation in treatment, is making a nonmedical, coverage- 
related decision.  Thus, the HMO should be held to the same 
level of responsibility for its actions as a traditional 
insurance company.  The more closely a particular decision made 
by an HMO or HMO employee resembles coverage decisions made by 
traditional insurers, the more appropriate the tort of bad faith 
becomes. 
¶27 Fourth, bad faith tort claims cannot arise in out-of-
network provider situations unless an HMO unreasonably refuses 
to provide a service or cover payments to outside providers for 
which it is contractually obligated.  See Duir, 573 F. Supp. 
1002.  Thus, an HMO insurer that denies payment for care because 
contractual coverage of such care is reasonably debatable cannot 
be held liable for bad faith tort.  See Anderson, 85 Wis. 2d at 
691; Poling v. Wisconsin Phys. Serv., 120 Wis. 2d 603, 608, 357 
N.W.2d 293 (Ct. App. 1984).   
¶28 Having acknowledged that reasonably debatable claims 
are not subject to bad faith, we find unconvincing GHC's 
contention that it was not required to pay for Angela's extended 
care since its contract required GHC's prior authorization for 
expenditures.  Such unilateral authority would give GHC the sole 
power to determine when and to what extent it would be bound by 
its subscriber contracts.  This unbridled discretion may subject 
such contracts to the argument that they are illusory.  The HMO 
is under a contractual duty to provide or pay for reasonable 
No.  96-0908 
 
 
14
services to remedy the subscriber's condition up to the 
subscriber's policy limits.  Where an HMO authorizes a referral 
to an out-of-network provider, the HMO may not end that referral 
against the recommendation of the treating physicians solely on 
the basis of cost-containment concerns when the subscriber has 
not reached the contractual coverage limits.  Thus, such an 
improper denial can constitute a bad faith denial under Anderson 
and the boundaries set out above. 
¶29 Accordingly, in certain factual circumstances, bad 
faith claims may properly be maintained against HMOs.  To 
prevail on a bad faith tort claim asserted against an HMO, a 
plaintiff must plead facts sufficient to show, upon objective 
review, i) the absence of a reasonable basis for the HMO to deny 
the plaintiff's claim for out-of-network coverage or care under 
his or her subscriber contract; and ii) that the HMO, in denying 
such a claim, either knew or recklessly failed to ascertain that 
the coverage or care should have been provided.  See Anderson, 
85 Wis. 2d at 691; Alt v. American Fam. Mut. Ins. Co., 71 
Wis. 2d 340, 237 N.W.2d 706 (1976).  A plaintiff must make this 
showing by evidence that is clear, satisfactory, and convincing. 
 See Baker v. Northwestern Natl. Cas. Co., 26 Wis. 2d 306, 316-
17, 132 N.W.2d 493 (1965), overruled on other grounds by DeChant 
v. Monarch Life Ins. Co., 200 Wis. 2d 559, 547 N.W.2d 592 
(1996); and Wis JICivil 205.   
¶30 An HMO, regardless of its organizational format, may 
be liable in bad faith when it has denied a request for out-of-
network care or coverage without a reasonable basis.  Such a bad 
faith cause of action may arise when an HMO refuses to consider 
No.  96-0908 
 
 
15
a patient or physician request for care or coverage, if the HMO 
makes no reasonable investigation of a request for care or 
referral put to it, if the HMO conducts its evaluation of a care 
or coverage request in such a way as to prevent it from learning 
the true facts upon which the plaintiff's claims are based, or 
if, as the plaintiffs allege in this case, the HMO conducts its 
evaluation of a request and bases its decision primarily on 
internal cost-containment mechanisms, despite a demonstrated 
medical need and a contractual obligation.  See Anderson, 85 
Wis. 2d at 692-93; Weiss v. United Fire & Cas. Co., 197 Wis. 2d 
365, 541 N.W.2d 753 (1995); and Wis JICivil 2761. 
¶31 When a bad faith breach occurs, the HMO is liable for 
any damages which are the proximate result of that breach.  See 
DeChant, 200 Wis. 2d at 571 (citing Gruenberg v. Aetna Ins. Co., 
510 P.2d 1032, 1037 (Cal. 1973)).  Unlike in medical malpractice 
cases, punitive damages may be demanded for bad faith where the 
defendant is guilty not only of bad faith, but also of 
"oppression, fraud, or malice."  Anderson, 85 Wis. 2d at 697 
(quoting Mid-Continent v. Straka, 47 Wis. 2d 739, 178 N.W.2d 28 
(1970)).  But see Lund v. Kokemoor, 195 Wis. 2d 727, 537 N.W.2d 
21 
(Ct. 
App. 
1995)(barring 
punitive 
damages 
in 
medical 
malpractice cases). 
¶32 We do not apply the bad faith tort doctrine to HMOs so 
as to give HMO subscribers carte blanche authority to demand 
out-of-network treatments or diagnostic procedures beyond what a 
physician, in exercising his or her medical judgment, finds 
reasonably necessary.  Rather, because bad faith actions are 
designed to give a weaker party to a contract the benefit of the 
No.  96-0908 
 
 
16
bargain, we think bad faith actions may arise where the 
plaintiff is able to show by clear, satisfactory, and convincing 
evidence that an HMO acted improperly and that financial 
considerations were given unreasonable weight in the decision 
maker's cost-benefit analysis.6  The plaintiffs allege a bad 
faith cause of action against an HMO for failure to cover 
payments for out-of-network services.  Because we recognize the 
similarity 
between 
HMOs 
and 
insurance 
companies 
and 
the 
protective benefits of the bad faith doctrine, we apply the bad 
faith doctrine to HMOs making such out-of-network benefit 
decisions. 
III.  Scope and Application of Wis. Stat. ch. 655 
Preclusion 
                     
6 In rendering this decision, we are cognizant of the 
limitations placed upon the scope of our ruling by the Employee 
Retirement Income Security Act (ERISA), 29 U.S.C. §§ 1001-1461 
(1988).  ERISA specifically preempts all state court claims that 
"relate to" covered employee benefit plans (which include most 
private employer health care plans).  See 29 U.S.C. § 1144. 
The Supreme Court, in Pilot Life Insurance Co. v. Dedeaux, 
481 U.S. 41, 51 (1987), held that state common law causes of 
action, such as the insurance tort of bad faith, sufficiently 
"relate to" employee benefits plans to fall under ERISA 
preemption.  Thus our conclusion that the tort of bad faith is 
applicable to HMOs reaches only a small portion of Wisconsin's 
populace-–those HMO subscribers who either receive health care 
benefits as part of an ERISA-exempt plan or else purchase their 
subscription plans individually.  The McEvoys' claims are not 
preempted in this case because Mrs. McEvoy receives her 
insurance plan as an employee benefit from a government 
employer.  See 29 U.S.C. § 1003(b).  Nevertheless, because we 
recognize the similarity between HMOs and insurance companies 
and the protective benefits of the bad faith doctrine, we apply 
the common law doctrine of bad faith tort to those HMO contracts 
that we can reach.  
No.  96-0908 
 
 
17
¶33 Having recognized that a cause of action for bad faith 
may be maintained against an HMO for out-of-network benefit 
decisions, we next address the issue whether Wis. Stat. ch. 655 
precludes the plaintiffs' bad faith cause of action.  When 
conducting statutory interpretation, our primary objective is to 
ascertain and effectuate the intent of the legislature.  See 
Ball v. District No. 4, Area Bd., 117 Wis. 2d 529, 537-38, 345 
N.W.2d 389 (1984).  When determining legislative intent, we 
first examine the language of the statute and will resort to 
extrinsic aids only if the language is ambiguous.  See id. at 
538.  
¶34 Wisconsin Stat. ch. 655, "Health Care Liability and 
Patients Compensation," regulates claims made against individual 
health care providers and entities providing health care 
services 
through 
their 
employees. 
 
Section 
655.002, 
"Applicability," sets forth those medical actors covered by the 
chapter.  This list includes physicians, nurse anesthetists, 
partnerships, and corporations organized to provide services 
through physicians 
and 
nurse anesthetists, 
hospitals, and 
cooperative sickness care associations like GHC.7 
¶35 GHC would have us read ch. 655 as controlling all 
suits brought against HMOs, whether for medical mistake or for 
                     
7 Wisconsin Stat. § 655.002 holds in pertinent part: 
(1) MANDATORY PARTICIPATION.  Except as provided in s. 
655.003, this chapter applies to all of the following: 
. . . . 
(f) A cooperative sickness care association organized 
under ss. 185.981 to 185.985 that operates a nonprofit 
sickness care plan in this state and that directly 
provides services through salaried employes in its own 
facility. 
No.  96-0908 
 
 
18
disputed coverage decisions.  However, an examination of the 
language of chapter 655 reveals that the legislature did not 
intend to go beyond regulating claims for medical malpractice.  
Wis. Stat. § 655.007 provides: 
 
On and after July 24, 1975, any patient or the 
patient's representative having a claim or any spouse, 
parent or child of the patient having a derivative 
claim for injury or death on account of malpractice is 
subject to this chapter.  (emphasis added) 
 
Wis. Stat. § 655.009 states: 
 
An action to recover damages on account of malpractice 
shall comply with the following. . . . (emphasis 
added) 
 
Wis. Stat. § 655.23(5) specifies: 
 
[T]he health care provider . . . [is] liable for 
malpractice . . . . (emphasis added) 
 
Wis. Stat. § 655.27 states: 
 
There is created a patients compensation fund for the 
purpose 
of 
paying 
that 
portion 
of 
a 
medical 
malpractice claim which is in excess of the limits 
expressed in s. 655.23(4) . . . . (emphasis added). 
¶36  Thus, the language of ch. 655 consistently expresses 
the legislative intent that the chapter applies only to medical 
malpractice claims.  While "malpractice" is not defined within 
the statute, the term is traditionally defined as "professional 
misconduct or unreasonable lack of skill," or "[f]ailure of one 
rendering professional services to exercise that degree of skill 
and learning commonly applied under all the circumstances in the 
community by the average prudent reputable member of the 
profession."  See Black's Law Dictionary 959 (6th ed. 1990).   
No.  96-0908 
 
 
19
¶37 We conclude that ch. 655 applies only to negligent 
medical acts or decisions made in the course of rendering 
professional medical care.  To hold otherwise would exceed the 
bounds of the chapter and would grant seeming immunity from non-
ch. 655 suits to those with a medical degree.  Thus, while 
certain HMOs may properly be sued for medical malpractice under 
ch. 655, claims not based on malpractice, such as a bad faith 
tort action, survive application of that chapter.8 
¶38 The defendant contends that the McEvoys' allegations 
based on Lancer's decision to deny further coverage for Angela's 
treatment at UMH are really claims for medical malpractice.  If 
this assertion is accurate, ch. 655 controls this case and we 
need not proceed further in our analysis.  Because the 
plaintiffs admittedly failed to comply with the mediation 
requirements of § 655.445,9 a grant of summary judgment for the 
defendant would be appropriate.  However, as discussed above, 
this opinion applies the bad faith cause of action to out-of-
network coverage decisions by HMOs.  Because such actions are 
                     
8 The defendant also briefly references an equal protection 
argument.  Because the argument is undeveloped and the defendant 
fails to cite to any authority in support of its position, we 
decline to address this argument.  See State v. Flynn, 190 
Wis. 2d 31, 58, 527 N.W.2d 343 (Ct. App. 1994); State v. Pettit, 
171 Wis. 2d 627, 647, 492 N.W.2d 633 (Ct. App. 1992).  
9 Wisconsin Stat. § 655.445 provides in part: 
(1) . . . [A]ny person listed in s. 655.007 having a 
claim or a derivative claim under this chapter for 
bodily injury or death because of a tort or breach of 
contract based on professional services rendered or 
that should have been rendered by a health care 
provider 
shall 
. 
. 
. 
file 
a 
request 
for 
mediation. . . . 
No.  96-0908 
 
 
20
based on a "breach of duty imposed as a consequence of the 
relationship established by contract," and not on an improper 
medical action or decision resulting from negligence, the causes 
of action are distinct.  Anderson, 85 Wis. 2d at 687.   
¶39 The McEvoys do not allege a malpractice action.  
Rather, they allege that GHC breached its contract and in bad 
faith denied and threatened to deny coverage for Angela's out-
of-network treatment.  Because we recognize that a bad faith 
cause of action is properly extended to HMOs making out-of-
network benefit decisions and that Wis. Stat. ch. 655 does not 
preclude a bad faith cause of action against an HMO as an 
insurer, we conclude that the circuit court erred in granting 
summary judgment to GHC.  The defendant is not entitled to 
judgment as a matter of law and issues of material fact remain. 
 Accordingly, we affirm the decision of the court of appeals. 
By the Court.—The decision of the Court of Appeals is 
affirmed.