Commentary

Litigate or Regulate

By Tom Miller
This article was first published in National Review Online, July 3, 2001.
The managed-care political debate was lost when representatives of market advocates failed to address feelings of disempowerment by individual consumers. Fundamental reforms that put individual consumers more in charge of their health-care decisions remain unexplored political options.

On Capitol Hill, the grim choices presented are litigate or regulate. Just about everyone’s either prosecuting, or confessing to, the health-insurance industry’s political crimes and economic misdemeanors. What’s left is plea-bargaining over the sentence.

Expect a final “compromise” law that extends the tentacles of federal regulation more tightly over health-insurance arrangements and health-care delivery. This uncreative political destruction of employer-controlled managed care will clarify the ultimate choice ahead — between real consumer-driven health care and government-controlled medicine that remains private in name only.

In the Senate last week, Democrats were adamant about expanding liability for health insurers. They refused to take “Yes, but” for a final answer. Senate Republicans merely offered up a host of regulatory concessions within the fallback bill sponsored by Sen. Bill Frist. Even the “consensus” federal regulatory standards supported by Republicans carried the usual vague, undefined terms and weasel words that inevitably would expand bureaucratic discretion and federal micromanagement through future rounds of reinterpretation. Those rules alone would provide the foundation for lawsuits based on alleged violations of mandatory standards, even without more explicit rights to sue health plans over coverage denials per se.

Bipartisan consensus also extended to guaranteeing independent external review of health plans’ medical fact determinations in claims decisions. Again, both sides of the aisle initially signed on to the proposition that legislation should require “de novo” review. Under that standard, expert reviewers may consider, but they won’t be bound by, the terms of insurance-plan contracts in determining what’s medically necessary, experimental, or otherwise appropriate in medical-coverage decisions. A last-gasp Senate amendment belatedly tried to reclaim some of this surrendered ground last Wednesday, but it offered too little and came too late. Apart from a narrow exception for explicit benefits exclusions, the final Senate legislation still invites independent review panels to override the medical coverage standards of private health plans.

Saying that “only independent doctors should make health-care decisions” really provides the pretext for the wholesale rewriting of private contracts to pay whatever a spare-no-expense medical community orders. The likely result will be a more expensive, centralized, and uniform standard of care, but neither a better one nor a more affordable one.

The costly strategic retreats by defenders of private health insurance did not even achieve their main political goal — heading off increased tort liability exposure by insurers and health-plan administrators when patients are unhappy with coverage and treatment decisions under employer group plans. Crude efforts to limit remedies (pain and suffering recoveries, punitive damages) or restrict jurisdiction to less-plaintiff-friendly federal courts didn’t make much headway in the Senate. They face equally steep odds in the House later this month.

Hard evidence for the likelihood of an exploding litigation lottery may be mixed, but it’s beside the point. The real problem is that businessmen and insurers believe plaintiffs will win many cases and receive large damage awards from juries. Health-plan administrators will overreact to the small possibility that they may have to pay large penalties — by authorizing unnecessary care. Corporate decision makers fearing worst-case scenarios will adopt similar defensive behavior and consider cutting back their role in employer-sponsored insurance. Misperception becomes reality all too quickly.

Like a retreating army, the Republican generals on Capitol Hill have given away a lot of market-based ground in order to defend a tort-free peninsula. While trading regulatory arms for damage-cap hostages, they remain reluctant at best to affirm that consumers should expect to get what they are promised, and pay for, in health-plan documents, but neither more nor less.

Congressional opponents of federal managed-care regulation abandoned the high-ground theme of market-based consumer empowerment. Instead of offering consumers a new set of unreliable third-party guardians (regulators, independent medical reviewers, and courts), they should have emphasized greater tax equity for all health-care purchasers, expanded pooling options outside the workplace, adequate disclosure, and prompt contract enforcement. Disgruntled consumers then could choose and control the types of health plan and benefits packages for which they are willing to pay. Other deregulatory alternatives were ignored in the race to regulate.

A policy environment friendlier to value-driven consumer choice would hold managed-care insurers and self-insured employers more accountable to their true customers. Consumers would rely on voluntary contracts and competitive markets, instead of random lawsuits, to stimulate better service, relevant disclosure, benefits flexibility, and health-care innovation. They could hire and fire their own insurers.

If we ask consumers to be more responsible for weighing the costs and benefits of their health-purchasing decisions, we still need to enforce the promises that health plan sponsors make to plan subscribers. But the patients’ bill of rights options on Capitol Hill blur the lines between tort and contract. Disputes over denials of coverage under employer-sponsored plans are matters of benefits administration, not medical malpractice. They are ill suited for tort cases. However, the contract remedies available at the federal level under ERISA (the Employee Retirement Income Security Act) could be streamlined and improved. Adding early offer settlement incentives or adopting a worker’s compensation-like schedule of recoveries tied to the cost of denied benefits are the better litigation-reducing options.

On the other hand, insurers and employers that still choose to more actively manage health-care decisions or supervise in-network providers should be exposed to vicarious liability for medical malpractice and other negligent treatment decisions. Ideally, this tort liability would be an initial “default” setting. It need not even apply to most employers or even to the many insurers that offer “managed care light.” The respective parties to an insurance contract should be free to transfer or modify this liability for negligent medical treatment in subsequent rounds of bargaining.

Most of all, if the public is to accept after-the-fact results in health care, individuals must have before-the-fact opportunities to choose. Many consumers may not want to manage personally most details of their health-care decisions, but they should get to decide who will decide for them. Public policy could make that goal easier, not harder, to accomplish by ending preferential tax treatment of third-party insurance arrangements and streamlining procedural mandates.

Later this year, Congress will cobble together compromise legislation, President Bush will declare a small victory against excessive punitive damages, everyone will smile at the bill-signing ceremony, and we will have moved another step backward by crippling market-based approaches to health insurance. More employers then will head for the exit doors or — more likely — shed perceived liability risks, bypass regulatory nitpicking, and transfer the risk of health-cost volatility to employees. When they resort to greater cost sharing, leaner benefits, and defined contribution-style options, the ultimate choices will become clearer for consumers. Stay behind on the health-care plantation managed by the new bosses — bureaucrats, lawyers, courts, and politicians — or take greater control on your health care through medical savings accounts, high-deductible insurance, individual insurance, and/or e-health-insurance alternatives. We won’t have as many HMO scapegoats to kick around much longer.

Tom Miller is director of health policy studies at the Cato Institute.