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Providers are advised to beware of insurers' misrepresentations of coverage

By: Theodore J. Folkman

If you are a physician or other health care provider who routinely relies on authorization numbers from health insurers as guarantees of payment, you may want to think again.

In fact, there are a number of reported "misrepresentation of coverage" cases in which providers have sued insurers who provided authorization numbers or otherwise told them that patients had coverage and then refused to pay.

Such lawsuits might claim either that the insurer breached a contract, which means they broke an express or implied promise to pay, or that the insurer defrauded or deceived the provider. But in either case, the insurer is sure to raise several defenses that may make it difficult for the provider to prevail.

Providers should become aware of the risk of relying on insurers' representations of coverage, take note of some of the difficulties they may face when pursuing insurers for damages and take action to decrease the risk that the physicians themselves - or the public - will end up bearing the cost of the care they provide.

What insurers may argue

Insurers sometimes do, and always should, confirm that a patient has coverage before they provide an authorization number for treatment.

Nevertheless, insurers make mistakes, and sometimes they wrongly believe a patient is covered. This danger is especially acute because insurers, whether acting as administrators for large, self-insured companies' health plans or as group health plan insurers, must rely on their patients' employers for coverage information.

If an insurer makes a coverage mistake and a lawsuit ensues, there are several potential arguments:

Federal law bars misrepresentation of coverage claims.

The insurer may argue that ERISA, the federal law governing employee benefits, bars any state law claim, including fraud, misrepresentation or breach of contract. However, nationwide, almost every court that has considered this argument has rejected it.

That said, Massachusetts providers need to be aware that one of the few cases accepting the insurer's argument was decided by a federal magistrate judge in our state. Therefore, providers here are at somewhat greater risk of losing this argument than providers in other states, particularly if the provider is suing in federal court.

Authorization numbers don't relate to coverage.

The insurer may be able to point to caveats in its contract with the provider or in whatever paperwork accompanies the authorization number indicating that the authorization is not a guarantee of payment, but merely the insurer's agreement that a particular treatment is medically necessary.

This argument might be raised despite the likelihood that the insurer would have refused to issue the authorization at all had it known the patient lacked coverage.

Depending on the circumstances of a particular case, a provider may be able to argue successfully that the representation of coverage was really an implied promise to pay and therefore a contract. This argument is important because casting a claim as a breach of contract claim, rather than a claim for fraud or another tort, may help the provider avoid some of the defenses discussed below.

The provider would have treated the patient anyway.

The insurer might argue that the provider would have treated the patient for charitable reasons even if it had known the patient was uninsured, and thus that the hospital did not rely on the insurer's misstatement.

Insurers may make a similar argument in cases where a provider is required by law (by EMTALA, the patient anti-dumping law, for example) to treat the patient.

This argument, though mean-spirited, may have legal merit because, as a general rule, an insurer can't be held liable for fraud or misrepresentation unless the victim actually took action in reliance on the misstatement.

While these arguments may overcome tort claims such as fraud or misrepresentation, they should have no bearing on claims for breach of contract, which do not require proof of reliance on the insurer's statements.

The insurer was not aware that the patient lacked coverage when it gave the authorization number.

The insurer may argue that it made an innocent mistake rather than a negligent or fraudulent mistake. In other words, it might say that it couldn't reasonably have known that the patient lacked coverage at the time it issued the authorization number.

Particularly in cases where the insurer is relying on third parties such as employers for information, this argument may have merit against tort claims, since negligence or intent to harm is generally a prerequisite to liability.

On the other hand, courts have often strived to place the risk of loss on the party best able to avoid that loss. Between the provider and the insurer, clearly the insurer has superior knowledge and is therefore in the better position to avoid the loss. Courts seeking to fashion rules to minimize coverage mistakes may stretch the precedents to put the cost of a mistake on the insurer regardless of the insurer's state of mind.

The provider received reimbursement from another source.

The insurer may argue that it is not liable because the provider received reimbursement from Medicaid, the Uncompensated Care Pool or another source.

This may be a sound defense to contract claims (although the third party that reimbursed the provider may be able to sue the insurer to claim the funds, standing in the provider's shoes), but it is probably not a defense to a tort claim such as fraud or negligent misrepresentation.

Why? In tort law, courts usually reason that it is fairer to allow the injured plaintiff to receive damages and reimbursement from a third party than to allow the defendant who committed wrongdoing to escape liability merely because of third party reimbursement.

Negotiating insurance contracts

The above list of potential defenses doesn't mean you can't win a misrepresentation of coverage case. Providers can, and have, obtained large settlements from insurers in such cases.

But there is no doubt that litigating them can be expensive and risky. When a provider negotiates its contracts with insurers, it should give some thought to contractual terms aimed at protecting itself from the misrepresentation of coverage trap and avoiding litigation altogether.

The most favorable term a provider can hope for is the insurer's contractual acknowledgement that its authorization numbers are representations of coverage as well as of the medical necessity of particular treatments. Such a provision would make it clear that the provider has a contractual claim against the insurer that would help avoid dealing with many of the defenses discussed above.

A typical provider may not have the necessary leverage to obtain such an agreement. On the other hand, in light of the information asymmetry between insurers and providers regarding patients' insurance status, it is doubtful whether insurers can provide compelling principled reasons why the provider, rather than the insurer, should bear the costs of coverage mistakes.

A provider might also attempt to negotiate shortened, retroactive disenrollment periods in contracts.

Suppose, for example, the contract provides that the insurer will not retroactively disenroll a patient more than three months after the date of service, and that the provider received an authorization number and treated the patient on Jan. 1. After April 1, if the insurer discovers that the patient wasn't actually entitled to coverage on Jan. 1, it, not the provider, would bear the loss. From the provider's perspective, the shorter this period, the better. Negotiations on this point can at least put a time limit on the provider's risk.

Finally, providers should use contract negotiations to make sure they understand how the insurer issues authorization numbers.

For instance: does the insurer check on the patient's coverage before issuing an authorization number? What happens if the insurer issues an authorization number and later discovers that the patient is uninsured? How can you be sure that a patient is insured before you spend time and money treating him or her?

At best, these questions could prompt the insurer to reevaluate its practices. At the least, such questions can help you understand the risks you take in participating in today's Byzantine health care payment system.

Theodore J. Folkman is an associate at Hanify & King, P.C., where he concentrates his practice in complex business and commercial litigation.

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