Can an HMO be liable for bad faith-denial of coverage?

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Thirteen-year-old Angela was diagnosed with a potentially fatal eating disorder. As her mother’s dependent, Angela received care from a health maintenance organization (HMO). When her HMO doctor determined that her HMO could not provide the treatment Angela needed, he referred her to an “out-of-network” program. Under the applicable policy, the HMO would pay for this care up to the policy’s limits if the HMO’s medical director gave his approval. That approval was initially obtained, but it was withdrawn after six weeks of treatment even though the policy limits had not been reached.

Angela’s treating physician and psychiatrist opposed cutting off coverage because she had not reached the goals of the treatment program. When she left the program, Angela weighed 95 pounds. Two months later, she was down to 75 pounds, at which point she was readmitted to the out-of-network program. She soon exhausted the policy limits of coverage and thereafter continued treatment at her own expense.

On Angela’s behalf, her mother sued the HMO for failing to provide treatment. Reasoning that HMOs are part health-care provider and part insurer, Angela’s attorneys used the theory of bad-faith denial of coverage. This type of claim is commonly used against insurance companies, but up until now it has not often been raised against HMOs.

The state supreme court that considered Angela’s use of the bad-faith theory was deciding the issue for the first time, and it commented that few other courts in other states had discussed the question. That may change soon, because the court in Angela’s case ruled that she could take her bad-faith claim against the HMO to a jury.

In Angela’s case, the court explained that, as in the relationship between an insurer and the insured, an HMO possesses substantially more power than its subscribers. Prepackaged policy terms offer little real opportunity for negotiating but plenty of built-in rules and regulations. Whether they do it intentionally or not, HMOs also can effectively diminish the subscriber’s right to covered treatment with bureaucratic or procedural hurdles. Given this imbalance of power, the court concluded that a cause of action for bad-faith needs to be available against HMOs to encourage fair treatment of the insured and to penalize unfair or corrupt practices in connection with decisions about out-of-network benefits.