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Who’s Responsible If The Capitated Payor Can’t Or Won’t Pay? By Richard Lovich, Esq. Let’s say you have a contract with a large commercial health plan. You feel confident that at the very least, the plan will be around and viable for many years to come, (or at least as long as the contract is effective), and you make your fiscal decisions at least in part on the expected revenue from the contract. Now let’s say the plan unilaterally delegates its payment obligations to a medical group. It didn’t discuss this with you. It didn’t obtain your permission to do so; yet now the payment obligation rests with the medical group, an entity that may not be as financially sound as the party with whom you contracted. Can they do that? Can you contract with one party and then be stuck looking to another for performance? The answer is yes, and this can lead to significant problems. California law not only permits health plans to delegate payment obligations for medical services, including emergency and non-emergency services, to medical groups through capitation arrangements, it encourages the practice. In addition, absent an agreement to the contrary, California law generally absolves a health plan of its financial responsibility to a provider when the plan enters into a capitation agreement with a medical group. That means not only can the plan delegate its obligation, it can walk away with no financial responsibility if the capitated entity refuses or cannot pay for the services provided. The only way to hold a plan financially responsible after they have delegated the duty to pay is to rely on that “in the absence of an agreement to the contrary” language. Some older HSA’s included language stating that no party to the contract could delegate its obligations without the written consent of the other party. That is consistent with general contract law and the California Civil Code. It also makes sense. Why should a party be allowed to enter into an agreement and then walk away from its responsibilities? The courts have found that

within the context of healthcare contracts, the public interest is served by capitation agreements and holding the plans financially responsible would discourage them from using them. Most newer contracts are either silent on the ability to delegate obligations, or they expressly permit delegation. Thus if you have a contract with a large commercial payor and they delegate their obligation to a medical group that goes bankrupt, you cannot seek payment from the health plan unless your contract allows you to do so. Although the court in Ochs v. PacifiCare of California, 115 Cal. App. 4th 782 (2nd Dist. 2004) suggested there might exist a potential claim for “negligent delegation”, the court did not address what specific facts would give rise to a duty owed by a health plan to a provider. Under a negligent delegation theory, a provider is essentially arguing the health plan breached its duty to the provider by continuing to delegate its financial obligations to the medical group when it knew or should have known the medical group was in financial trouble. Thus while the possibility exsts this will be expanded, the current state of the law remains in favor of allowing plans to avoid responsibility when their capitated payors fail to pay.

Medical Necessity From A Legal Perspective By George Colman, Esq. Medically necessary services or supplies are those that we determine to be appropriate and necessary for the symptoms, diagnosis, or treatment of the medical condition, and within the standards of good medical practice within an organized medical community.

In addition, there are other elements that are sometimes written into contracts which are subject to interpretation (what the courts look at) all depending upon the facts, the laws in the particular states, and the decision of the treating physician. The reason we earmark the decision of the treating physician is that most decisions by carriers to deny based on medical necessity is a retroactive denial, what we might call “Monday morning quarterbacking.” They review the file after the fact, wherein the treating physician had to make a decision that was immediate, and weighs many factors, but not the expense. Whereas the insurance company has the ability, retroactively, to look at the cost factor, and from time to time weighs the costs as a determination of medical necessity. Sometimes carriers have written in their policies (subject to question by the courts) where they say the procedure is not medically necessary if it is primarily for the convenience of the member, the member’s physician, or another provider. They then look at the situation where the physician makes a decision to hold off treatments, or let the patient remain in a facility longer than might be appropriate. The other issue related to medically necessity is whether the procedure is experimental or is it just a study. In the execution of an informed consent document, the insurance company may spot terminology that the procedures being done are cataloged as part of a study. They look at this as experimental when in fact it is not; it is a validated procedure, but it has just come under a research study grant or FDA oversight. This does not mean that it is experimental; sometimes a wrongful denial can be questioned under that circumstance. A further element of medical necessity is that it is the most appropriate supply or level of service which can be safely provided. For hospital stays, this means that acute care as an inpatient is necessary due to the kind of services the members are receiving or the severity of the member’s condition, and that safe and adequate care cannot be received as an outpatient or in a less intensified setting. Again, this last qualification is subject to interpretation, both by the treating physician who must make that immediate decision and, of course, can certainly be looked at and overturned in a retroactive review. It is always important to remember that courts give greater weight to the diagnosis and decision of a treating physician.


The Dangers of Agreeing To The IRO Requirement In HSA By Richard Lovich, Esq. In February of last year, we pointed out the dangers presented to recoveries in the proposed contractual language related to Independent Review Organizations. Unfortunately our concerns were well founded in that the proposed language has now begun to find its way into hospital services contracts. It is essential you be aware of these dangers and it is our strong recommendation that the payor community not be allowed to get away with this.

What are IRO’s? Independent Review Organization are private vendors who offer clinical review services allegedly as an impartial third party. The idea, on paper, is to provide an expedited, fair, impartial resolution of clinical denials. Instead of placing all such disputed claims into arbitration, these companies offer the provider and payor the opportunity to have a professional review the records and make a determination, to which both sides are bound. Sounds, if not good, at least workable. Of course it is wrought with problems and at the end of the day your chances of recovery on medical necessity cases will go down significantly and immediately. Here is a breakdown of reasons why you should not agree to include this requirement in your contract.

1. There is nothing “independent” about these organizations. The manner in which they are chosen and seek to be used in the future stacks the deck in favor of the provider. How so? The language we have seen popping up in contracts allows providers to choose the IRO- from a list created and maintained solely within the discretion of the payor. Thus the “choice” can only be to use one of their organizations. Because the payor is in charge of the list, an IRO would be silly not to favor the payor in its decisions . Too much fairness leads to a lack of work.

2. There is no guarantee of an appropriate reviewer. The contracts often indicate only that a licensed physician will do the actual reviews. What if the treatment involved was rendered by a specialist. Shouldn’t it be reviewed by a specialist? Of course, but providers are giving up the right to demand such.

3. The reviews are based only on the medical records submitted with the claim. You cannot supplement the records. Cases involving denials for investigational

treatment thus will not have the supporting documentation such as peer reviewed articles and governmental approvals for the treatment proving they are not investigational.

4. You may have no say at all if the patient beats you to the punch. Some contracts indicate that if the patient has previously appealed a clinical decision through an IRO, the provider is bound by the result of that review—one the provider had no connection with.

5. The reviewer will not be competent to make the legal determination of medical necessity. Medical necessity is both a clinical and a legal determination. Whether certain treatment should be considered to fall within a contractually defined level of care is both a medical and a legal issue. The interpretation of the language of the contract is a matter of law. SAC’s arguments in trial and arbitration often rest upon a legal interpretation of the contractual language. Under the typical IRO clause, there is no guarantee the reviewer will even see the contract. And if they do, how are they going to interpret it?

6. The Provider’s advantage in advocating the superiority of the treating physician’s decisions is eliminated. The language eliminates all advocacy. We will not have the opportunity to cross examine the reviewer who originally made the determination to deny, and we cannot present the case to the IRO. This is extremely important because by case law, the treating physician‘s opinion should be given great weight in determining whether the treatment provided was medically necessary. This makes infinite sense because the treating physician is in the best position to make the determination as to what treatment is necessary given the information known at the time. The treating physician directly examines the patient, interacts with the patient, and makes decisions at the time the treatment is being provided. This is in contrast to the payor’s medical reviewer who is basing the determination solely on a review of the medical records; no examination or interaction with the patient, and many months, if not years after the treatment is provided; all with the benefit of hindsight. SAC argues effectively at arbitrations and trial that “Monday Morning Quarterbacking “is virtually irrelevant to the determination of medical necessity. The inquiry is not retrospective-- once you know the outcome

of the treatment, was it necessary? The inquiry is: “Given the information known at the time, does the treatment provided fit within the contractual definition of medical necessity?” The IRO process robs the provider of this key advantage.

7. There are more arbitrary deadlines. New deadlines, or as we refer to them “traps for the unwary” are also built into the new language. Under the new language, claims denied or underpaid based upon medical necessity have an additional separate deadline from claims that can be sent to arbitration. There may be a deadline to fikle arbitration within 365 days of denial, but for clinical denials, the contracts require submission to the IRO within 180 days of the denial. A failure to do so timely allows the payor denial to become final.

8. The IRO process makes pursuit of smaller claims economically unfeasible. Now, if the first seven points were not enough to illustrate the unfairness of this language, let’s talk costs. The contract language we have seen does not delineate the costs involved, nor does it limit the amount that can be charged by the IRO. In addition, this is a winner take all proposition. If the IRO decides Blue Cross was correct in denying the claim based on medical necessity, level of care or investigative treatment, the provider is solely responsible for paying the IRO’s fee. With the stacked deck created by the language this will be a common result. Blue Cross pays only if the IRO reverses the denial completely. If there is a split in the decision, such as where several days are denied and a few are overturned, the fee is split. Thus if you have a claim that is relatively small is it worth the gamble that not only will you not recover on the claim, but will have to pay out the fee for the IRO? In contrast to this unfair system, if the claim is handled by SAC, our staff of in house physicians and nurses review the claim; provide opinions on the clinical issues; and testify at trial or arbitration, all at no additional cost to the provider.

DON’T DO IT! The new approach is obviously directed at severely limiting the provider’s revenue in medical necessity cases. The deck is completely stacked against the provider when this IRO requirement is included in the contract. It is our strong recommendation that providers refuse to agree to this language.

Do you have family and/or pets you would like to tell us about?

GARY LAHENDRO This quarter’s Spotlight is on attorney, Gary Lahendro.

Spotlight Q&A

What is your area of expertise within SAC? Working at SAC has afforded me the opportunity to assist hospitals in obtaining proper reimbursement from health plans. Much of my time has been spent pursuing self-funded employee health plans, which are governed by the Employee Retirement Income Security Act (“ERISA”). ERISA is a federal law that sets minimum standards for self-funded health and pension plans and is designed to ensure plan participants are properly receiving benefits. Disputes between ERISA plans and hospitals usually arise when the plans pay claims below the applicable contract rates or fail to fully pay the hospitals’ billed charges when no written contract exists between the parties. ERISA plans argue the hospitals’ claims for reimbursement are governed by ERISA, and therefore the hospitals are subject to the plans’ administrative remedies and limitations. Fortunately, we have been successful arguing that California state-law contract principles apply to the hospitals’ claims, and therefore the terms of the agreements between the hospitals and the plans govern the claims, as opposed to the terms of the patients’ health plans.

What piece of sage advice can you offer to our clients that can help them in the future? When a hospital contacts a health plan to verify a patient’s eligibility and benefits, the health plan usually only verifies that the patient is a member of the plan and provides the limit of his or her lifetime benefits. To get a more complete financial picture, the hospital should also obtain information regarding the plan’s annual and transplant limits, as well as other plan limits and exclusions. The hospital should also obtain information regarding how much remains with respect to the patient’s lifetime, annual and transplant benefits. For instance, even though a patient may have $1,000,000 in annual benefits, the patient may have already used $990,000 in benefits by the time he or she arrives at the hospital for additional care. With that information up front, the hospital can timely explore whether other financial sources are available to the patient to help pay for the care that exceeds the patient’s annual limit.

Can you talk about a recent success story of yours? What was the challenge and how were you able to overcome it? I recently had a case where a union underpaid a large claim using a sum it determined to be the “reasonable and customary” value of the hospital’s services rather than the applicable network contract rate the hospital was expecting. Needless to say, the union’s payment was significantly lower than the contracted rate. The hospital sued the union for breach of the written network agreement. The union defended the action by asserting it was not bound by the network agreement because it did not have an agreement with either the hospital or the network. Consequently, the union showed no interest in making a further payment on the claim. With respect to this particular claim, the only evidence we had tying the union to the network agreement was a computer note entered by a hospital staff member that indicated the union was part of the network. None of the documents produced by the union, including the explanation of benefits, referenced the network agreement. With the assistance of the hospital, I conducted a search of the hospital’s records to determine the union’s payment methodology for the patient’s prior hospitalizations. Fortunately, we found an explanation of benefits for a small claim where the union took a contractual adjustment using the network agreement. By comparing the two claims, it became apparent the union was happy to benefit from the network contract rates when the claim was small. However, the union did not want to be bound by the network contract when the claim reached the stop loss level of reimbursement. Faced with this evidence, the union chose to pay additional money toward the claim.

Do you have any hobbies or interests outside of work?

Much of my time outside of work is devoted to my family. I enjoy being one of the coaches of my son Steven’s little league team, and watching the players improve their skills and understanding of the game. My daughter Nicole takes dance lessons and she can easily coax me into dancing with her in our living room to the songs of the day, most of which are new to me. My family and I live in a beautiful area so my wife Lisa and I enjoying taking our family and friends on hikes in the nearby mountains.

Do you have any guilty pleasure television shows, movies or other activities to tell us about? Recently, I have been watching some television classics from the past. I really enjoy the clever comedy writing and acting on the Dick Van Dyke show from the 1960’s. Other favorites of mine include the Twilight Zone and Bonanza. I also enjoy a number of today’s shows, including Mad Men and Modern Family.

What are your favorite foods? That’s a tough question because I enjoy many different types of food, especially Italian, French and Mexican. Sometimes, however, a simple peanut butter and jelly sandwich with a glass of milk hits the spot.

SACLINK GETS RAVE REVIEWS In case you missed the announcement, we have created a new and improved client online reporting system, SACLINK, to provide up-to-date status on referred accounts. The positive response has been overwhelming. SACLINK provides real-time case status, account information, improved analytics, document transfer capabilities and search features. This cutting edge technology makes collaborating more efficient and effective and as always, SACLINK provides a fully HIPAA compliant and secure environment for all your account information. You should have received our email update regarding how to get set-up, if not, please contact please us at websupport@sacfirm. com or contact Deborah in client services at 818.559.4477.

I enjoy reading biographies because I find I am often inspired by other people’s journeys. I also enjoy playing tennis, baseball and guitar.

You can access SACLINK via the firm website in the footer –

Do you have any charitable causes that interest you and events you have participated in recently?

If you haven’t already, we encourage you to get familiar with our new system and provide us feedback about how it’s helping you.

My wife and I donate to a variety of charities each year, including a number of children’s hospitals who treat children and conduct research for cures.

Onsite or webinar training is available by request for you and your staff.

Important Note: SAC Connect is being phased out and will no longer be updated. Live access to files and reports will be only be available via our new extranet portal, SACLINK.


Q: Have ACS’ transitional errors abated? A: Not really. Over a year has passed and

ACS is still failing to deduct medicare part B paid amount from inpatient Medi-Cal payments in what we see as majority of cases where medicare part B information is reported. ACS’ system continues to deny claims for RAD 314 or 002 even when patient is fully eligible and eligibility information is correctly reported. We have seen revenue code information corrupted so claims process incorrectly... the list goes on. We welcome provider community to chime in; let us hear your problems – sometimes, what you may think is your isolated problem may be shared by other providers.

QUESTIONS / COMMENTS We would love to hear from you! If you have questions, comments or feedback please email us at


Q: Why is it taking so long to get a RAC case in front of an Administrative Law Judge? A: We are observing that the Office of

Medicare Hearing’s and Appeals is struggling to keep up with the volume of appeals they are receiving from hospitals all over the country. Many judges have started remanding cases to QIC (an entity in charge of reviewing second level appeals - in California, Maximus) asking for specific findings regarding treatment qualifying as observation rather than inpatient. Given that the QIC reviewers are backlogged as well, appeals process in RAC cases are becoming appreciably longer.

May 23-34, 2013 - AAHAM Western Region Conference “Sailing the Right Course” The Dana on Mission Bay 1710 W Mission Bay Drive, San Diego, CA Go to for more information George Colman will be lecturing on Managed Care at the event.

June 16-19, 2013 - HFMA ANI Orange County Convention Ctr. - Orlando, FL Go to for more information June 2013 - SAC Program “The Good, The Bad & The Ugly of Managed Care Contracting” October 4, 2013 - 2nd Annual HFMA Vince Acquisto Memorial Golf Tournament Wente Vineyards - Livermore, CA Register online at

DISCLAIMER: This newsletter is for general educational and informational purposes only. You should not act upon this information without seeking your own independent professional advice. Southern California Office 303 North Glenoaks Boulevard Suite 700 Burbank, CA 91502 (818) 559-4477 - Main (818) 559-5484 - Fax

Northern California Office 5700 Stoneridge Mall Road Suite 350 Pleasanton, CA 94588 (925) 734-6101 - Main (925) 463-1805 - Fax

SAC Review #7- Spring Edition  

The Law Offices of Stephenson, Acquisto & Colman. Representing Hospitals for more than 20 years.