Opinion ID: 1692653
Heading Depth: 1
Heading Rank: 2

Heading: The Common Law Tort of Bad Faith

Text: ¶ 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. [3] ¶ 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 a contract toward another is a trot 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-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. [4] ¶ 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. ¶ 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. [5] ¶ 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 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. [6] ¶ 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 malpractice. However, despite this difficulty, several boundaries can be applied to the inquiry. [7] ¶ 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. [8] ¶ 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. [9, 10] ¶ 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 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. [11] ¶ 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). [12] ¶ 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 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. [13] ¶ 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. [14] ¶ 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 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. [15] ¶ 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 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.