State Justices Rule Against Kaiser in Arbitration Case

In a major blow to the state’s--and the nation’s--largest health maintenance organization, the California Supreme Court ruled Monday that there is substantial evidence that Kaiser Permanente committed fraud and deliberately delayed arbitrating the case of a patient dying of lung cancer to save hundreds of thousands of dollars.

The decision, which legal experts say could affect millions of Californians relying on HMOs for medical care, may raise the basic standards for all arbitration in California.

The ruling also was hailed by consumer advocates as representing a rare review by the state’s highest court of binding arbitration, a system that has become increasingly common in many commercial and professional disputes in California.

HMOs, securities brokerages, banks and other institutions regularly insert binding-arbitration clauses into their contracts with consumers--many of whom may be unaware of the terms until a disagreement arises.

Under binding arbitration, disputes are taken to a panel of arbitrators, often retired judges, for a decision, with all parties agreeing to abide by the decision instead of going to court.

“This is the first time that the California Supreme Court has really looked at how arbitration has worked in fact,” said Norman Brand, adjunct professor of law at the University of California’s Hastings College of Law and a full-time arbitrator.

The court found that “there may be situations where, if you behave badly enough procedurally, we’re not going to compel arbitration,” Brand said.

Jay Folberg, dean and professor at the University of San Francisco School of Law, applauded the Supreme Court decision, saying that it will affect arbitration only for the better--at a time when more cases than ever before are going to private arbitration.

“Arbitration can only fulfill its purpose if there are minimal levels of integrity and protection from self-serving administrators of arbitration programs,” Folberg said. “That was lacking in the Kaiser arbitration program.”

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In its 6-1 decision, the court found that Kaiser misleadingly portrayed its arbitration system as fair and efficient, when in fact it manipulated the process for its own benefit.

Kaiser officials, however, contended that the decision--which sends a malpractice case brought by the lung cancer patient’s family back to a lower court--actually upholds the value of arbitration and will allow the lower court to decide whether there was fraud in the case.

“We believe the facts when they’re presented would show that we didn’t do anything to intentionally delay arbitration in this case,” said Tom Debly, Northern California spokesman for Kaiser Permanente.

To David Rand, the attorney for the cancer patient, the decision “was a clear victory for consumers in California” and sends an unambiguous signal to HMOs that “you had better be fair and you better not manipulate” the arbitration process.

Monday’s ruling stems from a claim filed by the family of Wilfredo Engalla, who was 51 when he died in 1991, against Kaiser, which has 4.5 million California members. The case shined a spotlight on the HMO’s delay-filled arbitration program.

Engalla’s family alleged that Kaiser doctors failed to recognize that his persistent cough and shortness of breath were caused by lung cancer, not a cold or an allergy.

After Engalla and his family filed for arbitration, his lawyer reminded the HMO that the patient was mortally ill and specifically asked that it comply with the commitment in its service contract that a three-member panel of arbitrators be appointed within 60 days.

The family argued that Kaiser purposely delayed bringing their medical malpractice claim to a hearing, stalling until Engalla died and eliminating their ability to receive the maximum from Kaiser for his pain and suffering.

“I just wish that he was alive to hear this,” said a tearful Patricia Engalla, 21, before collapsing into her brother’s arms during an emotional news conference in San Francisco. “I don’t want my dad to be remembered as somebody who just had cancer. I am so angry at Kaiser. I just wish that they were able to understand how important our father was to us.”

All Kaiser patients sign a statement that requires them to go to binding arbitration in the event of a dispute instead of suing the giant organization in a public court.

Unlike many companies that use arbitration to decide disputes, Kaiser does not rely on an outside third party to run its arbitration; instead, it runs its own program. As a part of that program, Kaiser promises a rapid resolution of all disputes between patients and the HMO.

On average, however, it takes nearly 2 1/2 years for patients filing malpractice claims to reach a hearing under Kaiser’s program.

In this process, Kaiser picks one arbitrator to settle the claim, the patient picks one arbitrator and together they pick a neutral arbitrator. Kaiser promised in its literature that the neutral arbitrator would be appointed within 60 days.

In reality, the Supreme Court justices said in their decision, a neutral arbitrator is picked on time in only 1% of all Kaiser cases; on average that process takes nearly two years. It took Wilfredo Engalla nearly five months for Kaiser to agree on a neutral arbitrator.

He died the next day, and his death reduced the amount of damages that his family could receive from $500,000 to $250,000. When Kaiser refused to waive the $250,000 damage limit, the family sued in Alameda County Superior Court.

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A state appeals court ordered the case returned to arbitration, saying the timetables in Kaiser’s brochures were not binding promises and had not been relied on by Engalla.

But the state Supreme Court said the case could remain in court if the family could show that Engalla’s employer was fraudulently induced to sign up with Kaiser.

There is evidence, the justices wrote, that Kaiser may have delayed the selection process so it could ensure hiring an arbitrator “it thought would best serve its interests.”

In addition, the justices said, Kaiser promised speedy hearings in its literature, guarantees that were “made with knowledge of their likely falsity,” and concealed an “unofficial policy or practice of delay.”

As a result, the Supreme Court ruled that the Engalla case must go back to a lower court.

“We conclude that there is indeed evidence to support the trial court’s initial findings that Kaiser engaged in fraudulent conduct justifying a denial of its petition to compel arbitration,” Justice Stanley Mosk wrote in the court’s decision, “but we further conclude that questions of fact remain to be resolved by the trial court before it can be determined whether Kaiser’s conduct was actually fraudulent.”

The decision comes at a difficult time for Kaiser, which is facing increasing criticism nationwide that patients are being harmed by its efforts to cut costs. In April, authorities in Texas threatened to shut down the HMO’s operations there. Kaiser executives have called the Texas allegations absurd.

A month earlier, federal and state authorities began reviewing complaints surrounding the deaths of several patients treated at Kaiser facilities in the Bay Area. The company has said it is cooperating with the investigation.

What consumer advocates say in part gives the decision such impact is the scope of Kaiser’s reach. The medical organization has just under a third of the 15.2 million patients in California’s 47 full-service medical HMOs.

The group also does 10 times more medical malpractice arbitration than any other health care organization, said Brand of Hastings College of Law.

In recent years, the courts have seen arbitration as a way of relieving the huge caseloads that burden California’s courts. Some critics argue that the courts have in fact abdicated their role in regulating arbitration and protecting citizens.

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Fred Main, general counsel for the California Chamber of Commerce, said his organization is relieved that the state Supreme Court upheld the efficacy of arbitration as a whole.

“Whether arbitration was seriously jeopardized was what we were concerned about, and that did not happen,” Main said.

As for the increased court oversight of arbitration, Main contends that courts will not “watch so much over arbitration as a system, but that they’re going to prevent people from using fraud to make a contract.”

Attorney Rand praised the decision as “the first time that the Supreme Court of California--or for that matter, any other court in the country--has issued such a stern warning against such unfair manipulations of arbitration processes.”

“I think that this will be a message not simply to other HMOs but to other large institutions that mandate arbitration, whether they be banks, employers, stockbrokerages and the like.”

Jamie Court, director of an advocacy group called Consumers for Quality, called the Supreme Court decision a comeuppance for Kaiser. “The ruling is a real shot . . . [to] every HMO in the state that they must respect and not toy with [patients’] 7th Amendment right to a trial,” he said.

Times staff writers Mary Curtius in San Francisco and Michael Hiltzik in Los Angeles contributed to this story. La Ganga reported from San Francisco.