Liability of MCOs for contracted services

By Elizabeth E. Hogue, Esq., Burtonsville, MD. Elizabeth is an editorial board member for Hospital Home Health.

Many providers and case managers remain concerned about low rates paid for services by managed care organizations (MCOs) and the effect of these rates on the quality of care rendered by providers.

In a recent case, an appellate court decided that MCOs have a duty of care not to contract with organizations that they know or should have known would provide deficient care. In addition, MCOs have a duty not to set payment rates in their contracts so low that they are likely to result in the provision of substandard services to patients.

In other words, MCOs may be held liable for the actions of their contractors, including organizations that provide case management and utilization review services and providers who render care to patients, especially when rates are so low that they encourage substandard care.

In Pagarigan v. Aetna U.S. Healthcare of California Inc., Johnnie Pagarigan died while she was a patient in a nursing home. Her family claimed in a subsequent lawsuit that the care Pagarigan received in the nursing home was substandard. She became malnourished, dehydrated, developed a huge pressure sore on her lower back, and a severe infection and abscess at the site of the gastric tube insertion. Her abdomen became protuberant and discolored.

Despite the nature of her condition, she was not transferred to a hospital for several months. By the time she was hospitalized, her condition could not be effectively treated.

Pagarigan's family claimed that she was not transferred from the nursing home to a hospital for economic reasons. As long as Pagarigan remained in the nursing home, her care was paid for by the Medicaid or MediCal program, as it is called in California. But if she was hospitalized, Aetna was responsible to pay for her care.

The court in this case decided that MCOs have a duty of due care when contracting with health care providers who render services directly to patients and who provide other services on behalf of MCOs such as case management and utilization services. They must choose contractors who render appropriate care or decisions. MCOs also have a duty to avoid executing contracts with providers and other organizations containing terms, especially low levels of payments, which may require or encourage substandard care.

First, health care providers and other entities that contract with MCOs may be tempted to conclude that they have no liability for substandard care if they are paid low rates. On the contrary, the Pagarigan case makes it clear that the direct providers of services share liability for substandard care with MCOs. So providers and other types of organizations that provide services on behalf of MCOs cannot avoid liability for poor quality of services because the rates MCOs pay are low.

Don't trade volume for low reimbursement

The bottom line is, of course, that providers of services to MCOs should not contract with them for rates that do not permit them to provide appropriate care. Providers must be very careful to avoid trading volume of patients for reimbursement that is so low that they cannot possibly provide care consistent with applicable national standards. The risks of low rates and resulting poor quality of care cannot be shifted to MCOs but the risks can be shared with them.

It may be helpful to utilize this point in negotiations with MCOs. This court decision should put MCOs on notice that they should provide reimbursement to all of their contractors at levels that are likely to support quality of care.

But if rates are inadequate, the best course of action may be to refuse to contract at all. In fact, the more providers that refuse to contract with MCOs, the more likely it may be that MCOs will offer higher rates.

Providers must be very careful, however, to avoid possible antitrust violations. When providers or others who provide services on behalf of MCOs get together and decide to refuse to provide services unless rates are raised, they may violate state and federal antitrust laws. Specifically, this conduct may constitute so called "group boycotts," which are usually determined to be illegal.

Providers and case managers are once again grappling with problematic relationships with MCOs. Recognition of potential liabilities should provide MCOs with incentives to provide reasonable payments. If not, providers and others have a clear obligation to avoid being squeezed between low rates of payment and applicable standards of care.