Court Finds Kaiser Breached Its Contractual Obligation
HMO marketers should make certain that the advertising and marketing claims they make to actual and potential subscribers are accurate, that management understands them and that they are consistent with management's actions. If this is not the case, the claims or the HMO's responsiveness to the claims should be changed.
Changing the claims themselves can make attracting or retaining subscribers more difficult in a competitive environment. On the other hand, as Kaiser discovered, a divergence between promises and reality can be costly from the HMO's point of view.
The Supreme Court of California recently issued a decision demonstrating this risk. The court found that a Kaiser health plan failed to abide by its stated commitment to expeditiously arbitrate medical malpractice claims.
The case involved Wilfredo Engalla, who was enrolled through his place of employment in a Kaiser health plan operated by the Permanente Medical Group, Inc., Kaiser Foundation Hospitals, and the Kaiser Foundation Health Plan.
Engalla, his wife and their four children contended that Kaiser's healthcare professionals had been negligent in failing to diagnose lung cancer in Engalla until it was inoperable. The Engallas demanded arbitration of their claim as provided under the agreement that Engalla's employer had signed with Kaiser.
The Engallas' lawyer sent numerous letters to Kaiser requesting that arbitrators be appointed and that hearings be commenced. It nevertheless took about 144 days after the Engallas' had served their claim for a neutral arbitrator to be appointed. Engalla died the next day, and his wife and children filed a medical malpractice lawsuit against Kaiser in a California state court.
When Kaiser filed a petition to compel arbitration, the Engallas contended that Kaiser had lost its right to demand arbitration because Kaiser had made material misrepresentations in the arbitration agreement relating to the timely appointment of arbitrators and the expeditious progress that would be made toward an arbitration hearing. A California trial court agreed with the Engallas, but an appellate court reversed that decision; the case then reached the California Supreme Court.
Upholding 'Third Party' Arbitration Claims
In its decision, the state's top court noted that the administrative functions of Kaiser's arbitration program were performed by outside counsel that Kaiser retained to defend it in an adversarial capacity. The court added that this was somewhat unusual in that HMOs typically use third party organizations to settle arbitration disputes.
More important, the court said that although Kaiser had designed and administered its arbitration program from an adversarial perspective, it did not disclose this fact to its members or subscribers in any publications or disclosures it made about the arbitration program. To the contrary, the court emphasized that the agreement that Engalla's employer had signed with Kaiser represented that each side "shall" designate an arbitrator within 30 days of service of a claim, that the two party arbitrators "shall" designate a third, neutral arbitrator within 30 days thereafter, that there would be a hearing within several months' time, and that Kaiser's members would find the arbitration process to be a fair approach to protecting their rights.
In addition, it said, there were facts to support the Engallas' allegations that Kaiser had entered into the arbitration agreement with knowledge that it would not comply with its own contractual timelines. (One study showed that delays occurred in 99 percent of all Kaiser medical malpractice actions.) "Kaiser nonetheless persisted in its contractual promises of expedition," the court emphasized.
The court pointed out that Kaiser's misrepresentations were made not only in the contract it had with Engalla's employer but in subscriber newsletters that touted the virtues of Kaiser's arbitration program. The court found that these claims were made by Kaiser to encourage these subscribers to believe that its program would function efficiently. One such newsletter stated: "In the jury trial system, a malpractice complaint takes at least three years - and frequently longer - to reach court and a typical trial lasts ten to fourteen days. Arbitration proceedings don't involve a judge or jury, and can be concluded in several months time, and a typical hearing lasts only two days."
The Court then found that there was ample evidence to support the Engallas' contention that Kaiser had breached its arbitration agreement by repeatedly delaying the timely appointment of an available party arbitrator and a neutral arbitrator.
'Non-response and Delay' Ruling
In the court's view, Kaiser had "engaged in a course of non-response and delay and added extra-contractual conditions to the arbitration selection process, such as the requirement that the claimant name a party arbitrator first." The court then declared that "strong evidence supported the conclusion that Kaiser did not fulfill its contractual obligations in this case to appoint arbitrators in a timely manner."
As this case shows, HMO marketers have to be careful what they say to attract subscribers. If they are not completely accurate when making claims - on topics as diverse as the scope of available coverage to the competency of an HMO's primary care physicians and the availibility to subscribers of consultation and treatment of medical specialists - courts may impose liability on the HMO.
Erica B. Garay and Alan S. Rutkin are partners in the national law firm of Rivkin, Radler & Kremer, based in Long Island, NY. They represent a wide range of entities involved in the health care industry. They can be reached at (516) 357-3000.