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State Court Declines To Act On Medicare HMO Denial Of Care

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Gilbert Levy, like many Medicare beneficiaries, was attracted by the promise of HMO coverage for his Medicare benefits. The California man shopped carefully, and only signed up with PacifiCare Health Systems after he was sure that he would be able to choose his own primary care physician, and that he would be entitled to all treatment recommended by that doctor. Mr. Levy chose Empire Physicians Medical Group, and particularly Dr. Frankel, to be his primary physician. Then Mr. Levy got sick.

In October, 1996, Mr. Levy was diagnosed with lung cancer. Dr. Frankel referred him to PacifiCare’s oncology expert. That physician, Dr. George, advised Mr. Levy that the tumor was too close to his heart, and was therefore inoperable. According to Dr. George, the only choice for Mr. Levy was chemotherapy and radiation.

Dr. George was an oncologist, not a surgeon, and so Mr. Levy requested a second opinion. He chose Dr. Morton, a thoracic surgeon at John Wayne Cancer Institute. His primary care physician, Dr. Frankel, prepared the necessary paperwork for the consult. Empire Physicians denied the request, saying that Mr. Levy must see a local physician associated with the plan instead.

Mr. Levy paid Dr. Morton out of his own pocket for an evaluation, and got both good and bad news. Dr. Morton believed the cancer was operable, but insisted that the surgery be performed immediately, since the tumor could be expected to double in size within thirty days. Mr. Levy returned to his primary care physician, who obligingly prepared the paperwork to request approval for Dr. Morton to operate.

Mr. Levy’s HMO once again refused, insisting that the surgery must be performed by an in-group physician. Since the group’s oncologist had already told Mr. Levy there was no physician in the group who would perform the surgery, he instead chose to disenroll from the HMO and return to regular Medicare coverage. Dr. Morton operated successfully the day after the disenrollment was effective.

Mr. Levy not only sued PacifiCare and Empire Physicians for damages, but also asked the California state court to enjoin both groups from continuing the same behavior. In his lawsuit, he raised several of the most common criticisms of Medicare HMO policies and practices:

  • Because of the way Medicare pays HMOs, there is a built-in incentive for denial of coverage in circumstances like Mr. Levy’s. For example, PacifiCare is reimbursed for care it provides its Medicare customers based not on how much medical care they need, but strictly on how many of them there are. PacifiCare receives approximately $570 per month for each Medicare beneficiary it signs up, regardless of how many are sick, or how much medical care they require. When a Medicare beneficiary becomes ill, the HMO does not receive any additional income to help pay the cost of caring for that member.
  • The arrangement between PacifiCare (the HMO) and Empire (the doctor’s group) compounded this problem, according to Mr. Levy. Like PacifiCare, Empire received its income based only on how many PacifiCare members it enrolled, not on the basis of how much care they needed. When outside services (such as Mr. Levy’s second opinion and the proposed surgery itself) are called for, Empire must pay for those services from its share of the $570 per patient per month. Consequently, according to Mr. Levy’s lawsuit, Empire has the same built-in incentive to deny authority for the referral to a non-participating doctor, especially when there is some prospect that the doctor might recommend treatment that is not provided within the Empire group.
  • Because of those built-in conflicts, alleged Mr. Levy, PacifiCare and Empire withheld the outside referrals, denied authorization for testing, failed to provide adequate diagnosis, testing and treatment, and failed to pay for treatment Mr. Levy needed. All of that, argued Mr. Levy, was a breach of the duty of good faith and fair dealing owed by the medical providers to their patients. That denial, according to Mr. Levy, went further—it caused him substantial emotional distress, which PacifiCare and Empire knew (or should have known) would flow from their denials of coverage.
  • Because both PacifiCare and Empire knew that they would behave the way they did if a claim like Mr. Levy’s was made, he alleged that PacifiCare had made serious misrepresentations to him when it first signed him up for the HMO program. He had been told that he would receive all the treatment he needed, and that his primary care physician would be able to access that care for him. As it turned out, Mr. Levy alleged, that wasn’t true, and PacifiCare knew it wasn’t true when they recruited him.

Both PacifiCare and Empire vigorously denied that they had mistreated Mr. Levy in any way. Although medical providers often complain about the cost and difficulty of operating in the legal system, both also took full advantage of that system. PacifiCare first caused the case to be transferred to federal court, and then agreed to return it to the California state courts. Both providers then moved to dismiss, alleging that Mr. Levy’s only recourse was to pursue an administrative proceeding under federal Medicare law.

The California trial court agreed, and last week the Court of Appeals concurred. Although the judges were not unsympathetic to Mr. Levy’s plight, the message is clear: he (and other Medicare HMO beneficiaries) must make their claims within the Medicare system, not in the state courts. “The conduct about which plaintiff complains is a serious matter,” wrote the court. “However, redress for the disquieting issues raised by the complaint does not lie with this court. The Legislature has created a scheme by which the senior and disabled citizens of this country, who are of more modest means, receive their medical care. That scheme leaves state courts no avenue to rectify the concerns raised by the plaintiff.” Levy v. PacifiCare, December 22, 1999.

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Robert B. Fleming


Robert Fleming is a Fellow of both the American College of Trust and Estate Counsel and the National Academy of Elder Law Attorneys. He has been certified as a Specialist in Estate and Trust Law by the State Bar of Arizona‘s Board of Legal Specialization, and he is also a Certified Elder Law Attorney by the National Elder Law Foundation. Robert has a long history of involvement in local, state and national organizations. He is most proud of his instrumental involvement in the Special Needs Alliance, the premier national organization for lawyers dealing with special needs trusts and planning.

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Matthew is a law clerk who recently earned his law degree from the University of Arizona James E. Rogers College of Law. His undergraduate degree is in psychology from the University of California, Santa Barbara. Matthew has had a passion for advocacy in the Tucson community since his time as a law student representative in the Workers’ Rights Clinic. He also has worked in both the Pima County Attorney’s Office and the Pima County Public Defender’s Office. He enjoys playing basketball, caring for his cat, and listening to audiobooks narrated by the authors.