Close the HMOs’ Favorite Loophole

Jamie Court is the director of Consumers for Quality Care, a Santa Monica-based health care watchdog group. E-mail:

For years, health maintenance organizations have played hide and seek with the law. HMOs deny treatment and overturn doctors’ decisions, then claim in court that they don’t practice medicine, only provide coverage, so that they cannot be sued for medical malpractice. When patients dispute coverage denials, HMOs duck behind the curtain of binding arbitration to avoid juries.

If an employee tries to take an HMO to court, the HMO hides behind a loophole in the Employee Retirement Income Security Act, the federal law governing employee-employer benefits, claiming that they cannot be held accountable to state laws or in state courts where damages are available. (An HMO that loses a federal grievance pays only the cost of the procedure denied, no other damages or penalties.)

Unfortunately, the latest HMO reform schemes putting politicians from President Clinton to Gov. Pete Wilson in the headlines allow HMOs to continue to evade accountability.


For instance, Wilson’s HMO Improvement Task Force, dominated 80% by the industry itself, failed to approve specific suggestions for greater HMO liability. At its final meeting earlier this month the group even voted against including in its recommendations this general statement: “All entities which contribute to medical decisions affecting health care should be accountable for their impact on medical decisions.”

President Clinton’s HMO Commission, with an executive director, Janet Corrigan, who was an HMO lobbyist, failed to call for closing the ERISA loophole. Even judges, witnessing injustice in their courts, have called for ending it’s invalidation of state laws. One judge calls the acronym for the Employee Retirement Income Security Act “Every Rotten Idea Since Adam.” And ruling in a Massachusetts case involving Travelers Insurance denying coverage, federal Judge William G. Young said ERISA “has evolved into a shield of immunity that protects health insurers, utilization review providers and their managed care entities.”

If solutions to the problems patients face are to be real and enforceable, HMO reform must include accountability. Legislators must recognize that it is a cruel hoax to pass reforms that are unenforceable for the 80% of those Americans who receive their health care through their employer.

Texas recently became the first state in the nation to offer its citizens a way around ERISA, to protect themselves against poor quality medical care, by allowing HMOs to be taken to court for medical negligence. California legislators seek to replicate the Texas law (supported by Republican Gov. George W. Bush) under which HMOs are liable when they have “exercised influence or control which result in the failure to exercise ordinary care.” Such efforts deserve bipartisan support, despite lacking the California task force’s seal of approval. In Washington, Rep. Charlie Norwood (R-Ga.) and Sen. Al D’Amato (R.-N.Y.) are sponsoring legislation to close the decades-old ERISA loophole and allow state laws to prevail for all HMO patients who suffer injury or wrongful death. Proving that this is the medicine that HMO patients really need, the industry announced last week a $1-million advertising campaign to oppose these two bills.

Our representatives must not limit the scope of reform to HMO-promoted fixes like greater data disclosure and external review procedures. Disclosure is of little use to a cancer sufferer who cannot get an expensive, life-saving procedure because the HMO claims the surgery will only prolong the patient’s life by a few years so its price tag is not justified. A cardiac patient who arrives in an intensive care unit has no time or capacity to appeal a care denial.

Unless there are consequences to an HMO for denying expensive treatment, the financial calculus of “managing care” will always weigh toward withholding and delaying costly care, no matter how sorely the treatment is needed or substantially it is justified by medical science.


Genuine HMO reform efforts must create consequences for wrongdoing. Patients deserve more from their HMOs and their politicians than the game of hide and seek that has been going on for too long at too great a toll.