02.12.10

Could Health Reform Create “A Litigation Explosion”?

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Nothing apparently excites the readers of the Wall Street Journal more than a threatened “litigation explosion.” Perhaps this is because so many of their readers are lawyers. It was only a matter of time, therefore, before they published an opinion column ominously titled, “Health-Care Reform Could Create a Litigation Explosion.” (See the February 11 issue, but you will need an online subscription). The column is written by Curl Levey, described as “the executive director of the Washington-based Committee for Justice.” The Committee for Justice is an organization apparently founded by Republican Senators to promote President Bush’s judicial nominees,, which recently attacked the Obama administration for discriminating against white Southern males in judicial appointments. The kind of justice they are for is clear.

Mr. Levey’s op ed paints a dystopia in which “new federally enforceable rights and obligations, layers of complex federal regulations, and dozens of new programs and agencies—not to mention 50 newfangled “exchanges”–… would guarantee a flood of litigation.” Levey predicts that the legislation will initially be met by litigation challenging its constitutionality, a possibility that the Wall Street Journal has been actively promoting through a series of opinion columns making specious assertions about constitutional defects in the legislation. He further predicts that “thousands of pages” necessarily generated by “federal bureaucrat” to implement the legislation will result in countless procedural and substantive APA challenges by “trial lawyers—as well as attorneys for industry, the medical professions, and countless interest groups.” The greatest number of lawsuits, he predicts, will come from “individuals flexing their new-found right to essential health benefits by challenging insurance companies in court after internal appeals are exhausted.” Health reform will also release a flood of constitutional litigation, including equal protection challenges “limited only by the human capacity to feel discriminated against,” due process challenges when the federal government denies end-of-life care (“death panels or not”), and privacy challenges brought on by statutory provisions allowing insurance premium reductions for those who engage in wellness programs (e.g.. federal bureaucrats determining whether you smoke in your home.) Levey ceremonially invokes that eternal, though badly dated, right-wing bugaboo of “activist judges.” The dangerous left-wingers who run our judiciary will create “a panoply of judge-made entitlements, “rights,” and federal obligations that will themselves trigger a further expansion of health-care litigation.” Apparently Levey has failed to follow recent Supreme Court decisions and thus to notice whose side “activist judges” are currently on. Levey even claims that HHS will be sued for medical malpractice as the federal government inserts “itself between you and your insurance company.”

This is what comes of fulminating against health care reform without actually reading and understanding the statute. The Senate bill, which will be the vehicle for health reform if reform is adopted, directs HHS to promulgate rules through notice and comment rulemaking to implement the Act, including the definition of “essential health services,” which must be covered by insurers in the nongroup and small group market (but not the large group market or by self-insured plans). The states are then supposed to adopt laws to implement these regulations, which will in large part happen through the exchanges. Individuals and small group employers will then purchase plans that must comply with the federal regulations implemented through the states. If an individual is denied services by an insurer, the individual has the right under the legislation to both internal and external review. The Senate bill does not provide for judicial review of the external review decision, but presumably individuals would still have whatever rights they have under state law and employees would still have access to the courts under section 502 of ERISA.

Right-wing advocacy groups will almost certainly bring constitutional challenges against the reform legislation, in particular the individual mandate. For reasons that Mark Hall and I have fully explored in earlier blog posts, this litigation is certain to fail, unless “activist” conservative judges abandon decades of precedent. The individual mandate issue may reach the Supreme Court, which is likely to reject it by a lopsided margin, unless again recent activist appointees decide to break new ground. The other constitutional issues that I have seen raised to date are likely to thrown out quickly by the federal courts, possibly with Rule 11 sanctions for frivolous litigation.

It is very possible that interest groups will challenge some of the rules promulgated by HHS or other entities that have rulemaking authority under the statute, such as the United States Preventive Services Task Force, which will decide what preventive services must be covered without cost sharing obligations. Plaintiffs are likely to include drug or device manufacturers, provider groups, and specialty or patient disease groups, who often receive support from manufacturers. These challenges are most likely to be brought under 5 U.S.C. section 706, claiming that the rules are “(A) arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” How common this litigation becomes will depend in part on how specific the regulations are. If Medicare litigation is any guide (and I think it is), Chevron deference will weight heavily in these cases. The courts will realize that an intricate web of interrelated “polycentric” decisions are at stake, and are unlikely to second-guess the agency. Notice and comment rulemaking will give interest groups ample opportunity to weigh in on coverage issues and HHS has ample experience though its annual prospective payment rules with the proper handling notice and comment rulemaking. The courts will leave it at that. No one can stop interest groups from resorting to the courts if they fail to get their way with the agency, but they will quickly conclude that money spent on litigation is better spent elsewhere.

Some individuals denied coverage by their insurers may well contest the denial in the state courts under the federal law, which presumably will be read into insurance contracts by the courts. Individuals will need first to exhaust both internal and external review, which should dispose of most of the cases. Individuals will sue, moreover, only when large sums of money are involved and where they either have money to pay a lawyer or can find a lawyer to take the case on a contingent fee basis. These cases are not currently that common, and I see no reason why they should increase after health reform. Cases involving employment-related insurance, even where sold through an exchange, will probably still be handled under ERISA, which is not generally regarded as a plaintiff-friendly statute.

One does not know what to make of Mr. Levey’s constitutional arguments. He seems to be caught in a time warp in the 1970s. I suppose one can file a constitutional claim over anything, but unless one has a wealthy patron and an ideologically-committed lawyer, one does have to expect some prospect of success to take the chance. Every law student learns that social and economic legislation not involving a fundamental right or suspect class is subject to rational basis review in equal protection cases, which means that the plaintiff loses. Apparently Mr. Levey is the last person in the country to realize that the proposed legislation does not actually provide death panels. Who else in the federal government is going to be denying people their right to life without due process? And employers and insurers, not the federal government, will have to determine if people are cheating on their wellness incentives by sneaking a smoke now and then. But they already do this. As to suing the federal government under state law for malpractice, good luck in finding an attorney to bring this one (and check out the Supremacy Clause). Of course, one never knows what novel constitutional arguments the activist conservative judges that now populate our federal courts will find persuasive, but under current law constitutional challenges against the health reform statute will be dismissed as frivolous. Again, one can learn from the history of Medicare litigation, where early on constitutional challenges were common, but they quickly disappeared as they failed to gain traction.

Although Mr. Levey’s opinion column is by and large the kind of hysterical commentary that plays well in the Wall Street Journal but has little to do with the real world, it does point up an important problem with the reform legislation. Procedural protections are largely missing from the Senate bill. The bill only provides for individual internal and external appeals of insurer determinations, for appeals by individuals denied premium and cost-sharing subsidies or access to the interim high risk pools, and by employers who face exactions for failing to adequately cover employees who end up collecting subsidies. Nowhere does it provide for judicial review.

By contrast, the Medicare statute explicitly permits judicial review for both beneficiaries, and under some circumstances, providers. In most instances, however, it only permits review once layers of administrative appeals are exhausted, a requirement rigorously enforced by the courts. Further, the various Medicare statutes establishing coverage and payment policy explicitly and specifically exempt from administrative and judicial review legislative-type decisions, including, for example, the establishment of diagnosis-related groups, DRG classification methodology, and DRG weights. Apparently judicial review was too hot a topic to handle in the negotiations that produced the Senate bill, but if we are to minimize costly and pointless administrative review actions brought by provider and manufacturer groups challenging rules made under the Act, Congress would be well advised to here, as under the Medicare program, simply make many of these decisions unreviewable. Mr. Levey’s opinion piece suggests that an amendment to address this issue might attract bipartisan support.

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Comments

richardjohnston says:

“Cases involving employment-related insurance, even where sold through an exchange, will probably still be handled under ERISA, which is not generally regarded as a plaintiff-friendly statute.”

Certainly ERISA does not provide a plaintiff-friendly environment. I think, in fact, without fixing ERISA the disincentives for insurers to treat people fairly would render any “reform” we might achieve illusory. As long as ERISA precludes any meaningful remedy for an insurer’s bad conduct (and they are immune under the current regime from liability for anything up to and including outright fraud and wrongful death) then any “reform” we might achieve would be largely illusory.

As Third Circuit Judge Becker put it in 2003:

“ERISA preempts the state tort of bad-faith claim denial, … so that if an HMO wrongly denies a participant’s claim even in bad faith, the greatest cost it could face is being compelled to cover the procedure, the very cost it would have faced had it acted in good faith. Any rational HMO will recognize that if it acts in good faith, it will pay for far more procedures than if it acts otherwise, and punitive damages, which might otherwise guard against such profiteering, are no obstacle at all. Not only is there an incentive for an HMO to deny any particular claim, but to the extent that this practice becomes widespread, it creates a ‘race to the bottom’ in which, all else being equal, the most profitable HMOs will be those that deny claims most frequently.”

See http://problemiserisa.blogspot.com/2009/08/rising-judicial-chorus-judge-becker.html

That said I think there’s a good chance (based on the provisions of the Senate bill) that any exchange-purchased coverage would be free of ERISA’s malignant effects, even if there is some employer contribution. See my previous comment here:

http://oneillhealthreform.wordpress.com/2009/11/15/erisa-preemption-redux/#comments

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