In the Lancaster case, [Lancaster by Lancaster v. Kaiser Found. Health Plan, 958 F. Supp. 1137 (E.D. Va. 1997).] the court reviewed the legality of hidden MCO provisions in a Kaiser health plan that provided financial incentives for physicians to deny patients care. In 1991, an 11- year-old child was taken to a physician complaining of nausea and severe, daily headaches on the right side of her head. She was examined, but no diagnostic tests were performed. The physician prescribed adult-strength narcotic painkillers. Her condition did not resolve and she continued to see the physician through 1995. During this time, the prescriptions were continued but the primary care physician never consulted with a neurologist. In 1996, the school psychologist, alarmed at the child’s “intense, localized headaches, vomiting, and blood-shot eyes,” persuaded the parents to demand that the child receive a proper neurologic workup and diagnostic testing. The child was found to have a tumor that had displaced 40% of her brain. After extensive surgeries, she still had substantial impairment and the prospect of more surgery in the future.

It appeared, under the facts of this case, that this systematic malpractice might have been financially motivated because there was evidence that throughout the nearly five-year period defendant physicians treated Lancaster, Kaiser and the Permanente Medical Group had in place a financial incentive program that paid physicians bonuses for avoiding treatments and tests.

The first counts of the plaintiff’s complaint are simple malpractice allegations against the patient’s treating physicians and a vicarious liability claim against the plan. As the court ruled, the malpractice claims against the treating physicians pose no ERISA questions because ERISA does not apply to medical care decisions made by the treating physicians, even if they are employees of the MCO. More interestingly, the court also found that ERISA did not preempt the vicarious liability claim against the plan. The plaintiff also asserted a claim against the plan “for negligently establishing the Incentive Program and for intentionally and knowingly concealing its existence from plaintiffs.” This goes to the heart of the gag rule controversy: may a plan and its physicians agree to contractual terms that impact the patient’s care, and then agree to hide these from the patient?

The court characterized this claim as attacking an administrative decision of the plan, not a medical decision by a plan physician. Because the court maintained that this was a case of first impression, it sought precedent in related cases involving utilization review decisions under ERISA. These cases involve claims that the utilization review organization denied the patient medical care or was involved in medical care decisions when it refused to certify that the plan would pay for the needed care. Because these decisions affect the benefits available to the patient, courts have found that they are administrative decisions and are thus preempted by ERISA. Having chosen this precedent, the court was driven to its decision on ERISA preemption:

The Lancaster court’s ruling is clear: there is no remedy for an ERISA plan using an improper incentive plan or even hiding the incentive plan from its patients. The only recourse is a malpractice action against the treating physicians and a vicarious liability action against the plan, if the necessary agency relationship can be proven. In previous times, when a malpractice action was seen as perhaps the worst thing that could happen to a physician, this ruling might provide solace to the plaintiffs and ERISA health plan beneficiaries in general. In today’s market, potential malpractice liability is much less threatening to physicians than the risk of deselection by the health plan, with the very real risk that there will be no other jobs available. Under Lancaster, improper physician incentives pose no risk to the plan as long as it properly distances itself from the physicians.