Consumers Hit Back as HMOs Covet Damages
Susan DeGarmo, who stands a commanding 6 feet, 2 inches, with broad shoulders and a full head of red-blond hair, is clearly no one to be trifled with. But she almost met her match in her family’s health maintenance organization.
After her son was paralyzed from the waist down when a pickup truck ran over his bicycle, she won nearly $1 million from the negligent driver--only to have her HMO demand nearly 25% of her take.
When she refused to pay, the HMO sued. DeGarmo countersued. After five bitter years, she prevailed.
“What they were doing infuriated me,” DeGarmo said. “Stephen won this minimal amount of money that he’s going to need to take care of himself for the rest of his life . . . and they were trying to take it away.”
As HMOs resort to increasingly aggressive business practices in the face of ever-shrinking profit margins, consumers at both the local and the national levels are banding together to challenge them. DeGarmo’s saga and others like it offer a glimpse of what lies ahead in the bigger class-action lawsuits filed recently against such health care giants as Aetna U.S. Healthcare, Humana Inc. and California-based Pacificare Health Systems and Foundation Health.
Particularly upsetting to DeGarmo was that she had believed people bought insurance so that someone else would assume the risk of large medical bills. Why should she have to pay for her son’s medical costs out of the award, which was designed primarily to compensate him for future economic losses and pain and suffering?
Then she discovered something few consumers know: Buried deep in the fine print of most insurance contracts is language giving insurers the right to a share of damage awards.
HMO’s Recovery Practices Scrutinized
Stymied by that provision, DeGarmo and her lawyer began to scrutinize the HMO’s recovery practices. What they found was that Health Plan of the Upper Ohio Valley actually had ordered her to pay back more than the HMO had spent for Stephen’s care. That business practice became the heart of her challenge in state court.
Consumers in some other parts of the country, however, have had less success in taking on their HMOs for the same practice.
In a Minnesota case, the U.S. 8th Circuit Court of Appeals ruled against consumers. And in California, state courts have upheld the right of HMOs to recover more than they’ve paid.
In the larger class-action suits recently filed against the industry giants, plaintiffs and their lawyers are questioning other widespread HMO practices, such as paying bonuses to doctors who cut down on costly patient treatments, mandating that patients use prescription drugs on a limited list even when their doctor recommends an alternative medication and unilaterally altering physicians’ contracts and payment schedules. As with the practice challenged by the DeGarmos, there are no federal laws directly governing such activities, and the courts have yet to rule on them.
The DeGarmos’ HMO is the largest in the region. Its 100,000 customers in West Virginia and eastern Ohio are the sons and daughters of coal and steel workers who scrape together a living in the few remaining steel plants, the LaBelle nail plant in Wheeling, the Bayer aspirin plant in nearby Marshall County and the shipping yards along the river.
DeGarmo is a business manager in a doctor’s office; Michael, her husband, runs his own business remodeling homes and building additions. His skills came in handy when their own doors had to be widened for Stephen’s wheelchair.
Stephen was riding his bike to flag football practice one September afternoon in 1990 when a pickup truck smashed into him. For three months, his life hung in the balance. When the crisis had passed, Susan DeGarmo applied her considerable energy to getting the rehabilitation he would need.
To the DeGarmos, their $950,000 settlement with the driver--reduced by legal fees and court costs to just over $500,000--seemed like the bare minimum Stephen would need.
To the Health Plan of the Upper Ohio Valley, however, it seemed like a windfall. And the HMO wanted $128,000 of it.
The HMO’s position was that it had paid for Stephen’s health care while the family had paid nothing more than the monthly premiums and small co-payments required for each doctor’s office visit or hospital stay.
“We said we had the right to the money,” said Dave Mathieu, the health plan’s vice president for marketing. “She 1/8Susan DeGarmo 3/8 said, ‘Tough.’ So the only way to get it was to sue her.”
Most consumers in DeGarmo’s position simply pay whatever the HMO asks, usually after receiving strongly worded letters from collection agencies hired by the HMO. When consumers don’t pay up, the HMO often sues.
The DeGarmos found it bad enough that their own health care provider would sue when their son faced the rest of his days in a wheelchair. What turned their distress into a major court case was that the HMO demanded payment of the full amount that Stephen’s doctors and hospital had billed, not just the discounted amount that the health plan actually had paid them.
A 40%-50% Discount in Service Fees
Like most HMOs, the Health Plan of the Upper Ohio Valley pays considerably less to the doctors and hospitals in its network than those doctors and hospitals bill non-HMO patients. This is one reason HMOs are so much cheaper than traditional fee-for-service medicine.
The amount paid by the health plan for Stephen was said by the DeGarmos to have been discounted 40% to 50%. That meant the HMO was seeking nearly twice as much from the DeGarmos as it had paid.
As Kresen prepared the DeGarmos’ case, he discovered that Susan was just one of hundreds of people who had received letters from the HMO requesting repayment of part of their court awards and out-of-court settlements.
So he sought to turn the DeGarmo case into a class action on behalf of all the others. Ultimately, Kresen divided the case into four class actions, each on behalf of plaintiffs with somewhat different insurance contracts.
The first of the four suits to go to trial did not directly involve the DeGarmos, but Susan DeGarmo and other HMO members testified about their experiences at the hands of the health plan. One of the most effective witnesses was Dora Pitt.
Pitt, now 49, was a pediatric nurse until she suffered an incurable back injury when her car was rear-ended in 1991.
The accident not only cost Pitt her job, but it also meant that she could no longer lift and cradle her adopted daughter, Missy, a 3-year-old with multiple disabilities from abuse she suffered as an infant.
Her settlement with the other driver was $25,000, and her lawyer’s fee left her with barely $15,000.
Then the HMO said it was owed $9,000 of that to recoup the cost of her care. Pitt, a quiet, petite woman, came out swinging.
“Because I couldn’t lift anymore, I needed someone to come and help me take care of Missy, and she needed adaptive toys and durable medical equipment,” Pitt said. Missy had to do without for many years as Pitt tried to make ends meet with Missy’s adoption allowance and federal assistance for the disabled poor.
At the conclusion of the trial, state Circuit Judge John T. Madden ruled that the Health Plan of the Upper Ohio Valley owed $68,000--the difference between billed and paid amounts--to the roughly 80 HMO members who had brought the suit.
“There is something offensive to a proposition that permits an entity to profit by its members’ misfortune,” Madden wrote. He called the HMO’s practice of recovering from injured patients more than had actually been paid for their care “neither fair nor equitable nor right.”
He turned over to a jury the decision of whether to award compensatory damages for pain and suffering, or punitive damages. The jury came back with a verdict of $4 million as compensation for the plaintiffs’ “aggravation, annoyance and inconvenience” and $6 million in punitive damages.
The verdict forced the health plan to change its ways. “We just recover the paid charges now,” Mathieu said.
The HMO also decided to cut its losses and settle the other three class actions pending against it. In the end, the Health Plan of the Upper Ohio Valley agreed to pay $9 million to the plaintiffs in the four suits combined. Kresen accepted, to avoid lengthy appeals and to ensure that every plaintiff got something.
DeGarmo got $10,000 for being a class representative and the same $118 as every other member of her class in the lawsuit. But most important to her, she did not have to pay back any of the money from Stephen’s settlement.
Asking consumers injured in accidents to pay their health plan a portion of the money they recover from third parties turns out to be commonplace. Of the 635 HMOs nationwide, 311--nearly half--get some of their revenue through such recoveries, said Mark Driggs, a consultant in Salt Lake City who tracks HMO business practices.
HMOs received $765.7 million through this practice in 1998--not a trivial sum, Driggs said--although several HMOs said not even 1% of their revenue came from this source.
It is unknown how many health plans attempt to recover the billed amounts rather than the smaller amounts that they actually paid. But the DeGarmo case is not the first time the issue has arisen.
Health plans operated by Blue Cross/Blue Shield in a number of states have paid millions of dollars to settle legal proceedings brought by state health insurance commissioners who accused the plans of charging consumers the amounts billed by doctors.
The legality of the practice remains far from settled by the courts, however.
In California, Kaiser Permanente has persuaded courts that recovering billed amounts is a legitimate practice for its kind of HMO, where all doctors are on salary and the company does not keep track of how much it pays a doctor for each operation or treatment.
Kresen is planning to bring at least six more suits similar to the one he tried in West Virginia, naming both HMOs and their collection agencies.
Although that victory may embolden other lawyers to file class-action suits attacking a variety of largely unexamined HMO business practices, the road ahead looks far from smooth. The suits take years to come to completion and test both the lawyers’ and the plaintiffs’ staying power.
Furthermore, the issues in the larger class-action cases involve complex interactions of federal and state law.
The plaintiffs’ lawyers are gambling that eventually their clients will win the sympathies of jurors and judges.
