After reform, Kaiser still in spotlight

Six years ago, the California Supreme Court ruled that Kaiser Foundation Health Plan’s system for arbitrating legal disputes was poorly regulated, prone to long delays and generally stacked against the best interests of Kaiser’s members.

The court’s harshly worded decision came in the landmark case of Wilfredo Engalla, a 51-year-old Filipino immigrant who claimed in a malpractice lawsuit that Kaiser doctors misdiagnosed him with colds and allergies for years before finally informing him he had terminal lung cancer.

The case went to private arbitration because Kaiser’s policies require that all such disputes be settled outside public courtrooms. The giant HMO then took five months to select an arbitrator. Engalla died the next day. Soon after the Supreme Court ruling, Kaiser announced plans to overhaul its arbitration process in an effort to address criticism of its system. In 1999, the company created the Office of Independent Administrator, or OIA, to oversee the revamped program. The company promised the changes would dramatically speed up the resolution of cases, provide safeguards to ensure fair hearings, and address what some critics said was Kaiser’s undue influence over the state’s private arbitration system.

The question today is whether the reforms have made a difference. Are Kaiser patients who file malpractice claims better off today than they were six years ago?

The answer is more important than it may initially appear. Kaiser now covers 6 million Californians, or nearly a third of all privately insured people in the state. Roughly 1,000 Kaiser members file malpractice claims each year, alleging serious errors from surgical mistakes to misdiagnoses like Engalla’s.

What’s more, Kaiser is one of the nation’s most influential health-care companies. To help cope with the rising malpractice insurance rates, more California insurers and physician groups are moving toward the insurer’s binding arbitration model. And several states, including Texas and Florida, are studying Kaiser’s program as they seek to revamp their medical malpractice systems.

Nearly everyone who follows such issues -- including consumer groups, medical providers, attorneys and state officials -- agrees that Kaiser has made significant progress in rectifying some of the issues highlighted in the Engalla case. For example, one of the harshest accusations made in the case was that Kaiser intentionally stalled the arbitration process because company lawyers knew that the potential judgment would be smaller if Engalla died before the case was heard. (Kaiser had denied that allegation.)

Compared with the old system, cases now move at lightning speed. According to the OIA’s most recent annual report, released this spring, nearly all arbitrators are now appointed within two months; in the mid-1990s, according to Kaiser figures, it took nearly two years -- specifically, 674 days -- on average to appoint an arbitrator. Today, most cases are completed within a year.

There have been gains on other fronts too. Annual surveys by the OIA show that the majority of Kaiser members who have gone through the revamped arbitration process are satisfied with the process. And most observers agree that the OIA office operates without interference from Kaiser.

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Monetary difference

But some critics, including consumer group officials, arbitration experts, plaintiffs’ attorneys and regulators, say the changes have not gone far enough. Also, a 2000 report issued by the state’s independent auditor, the California Research Bureau, was highly critical of Kaiser’s progress in addressing most of the problems identified in the Engalla case.

“I give Kaiser credit for the strides they have made so far,” says Daniel Zingale, the former head of the California Department of Managed Health Care, who is now deputy chief of staff for Gov. Gray Davis. But “there’s no question problems remain and that those problems need to be addressed.”

Kaiser’s mandatory arbitration system has been around since the 1970s. It requires that a private panel of up to three arbitrators, rather than a judge and jury, hear all claims. And, unlike courtroom procedures, hearings are held in a conference room and decisions cannot be appealed.

In general, more patients are likely to win a case in arbitration than in the courtroom. But plaintiff and defense attorneys estimate that monetary judgments in arbitration are only 50% to 60% as much as they might be in court. That’s why companies like Kaiser defend the arbitration process so strenuously.

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More arbitrators sought

One of the biggest lingering concerns for Kaiser critics is that a relative few number of arbitrators continues to oversee a disproportionate number of cases. And because Kaiser is one of the state’s biggest sources of employment for private arbitrators, it continues to wield considerable influence over the arbitration system, critics complain.

The majority of arbitrators are retired judges and lawyers, and the income they earn from Kaiser arbitration cases can easily outstrip their earnings from other sources. By some estimates, arbitrators can earn several hundred thousand dollars annually by working on Kaiser cases alone.

According to the 2000 report by the state’s independent auditor, about a third of the arbitration awards in the first 18 months after the reforms went into effect were decided by eight arbitrators, meaning each of them oversaw five or more arbitrations. In those cases, six of the arbitrators ruled in favor of Kaiser 80% of the time.

The OIA reports that, between 2002 and the reform program’s launch in 1999, the 10 most active arbitrators had been involved in 500 of the approximately 3,000 Kaiser cases. The OIA report did not provide information about the outcomes of the cases.

“Even for those arbitrators who strive to be fair, it’s hard not to believe that the idea of who is footing the bill doesn’t enter into their mind,” says David Rand, a Mill Valley, Calif., lawyer who represented Wilfredo Engalla’s family.

Kaiser officials contend that the company does not exert any undue influence over the arbitration process. Lawyers for Kaiser and the plaintiff have an equal opportunity to select four potential arbitrators from a list provided by the OIA, which then randomly selects the final arbitrator. (Because of the expense, normally only one arbitrator is used, though patients can have up to three.)

“How can this be a problem if [plaintiffs’ lawyers] can remove anyone they don’t 100% believe will be impartial?” asks Michael Hawkins, a senior attorney for Kaiser.

But not everyone has a lawyer to rely on. Critics of the Kaiser system point to the high percentage of cases in which the HMO’s members go through the process without legal representation (or pro pers, as it is known in legal jargon). In 2002, OIA records show that nearly one in four patients who arbitrate was not represented by an attorney; in 2001, one in three plaintiffs in Kaiser arbitrations had no lawyer. In comparison, about 1% to 4% of plaintiffs making similar medical malpractice claims in courtroom cases represent themselves, according to both plaintiff and defense attorneys.

Why the difference? Several plaintiffs’ attorneys acknowledge that they are reluctant to take medical arbitration cases when the potential monetary awards are small. A California law that places a $250,000 cap on noneconomic damages in medical malpractice cases is another deterrent, they say.

Many people who represent themselves in arbitration hearings are overwhelmed by the process. Indeed, most make the perilous decision not to hire medical experts to support their cases. Such experts are expensive, often demanding fees of more than $1,000 a day. But without such experts, cases are frequently summarily dismissed.

For example, of the 12% of cases that are summarily dismissed, meaning the arbitrator didn’t believe there was enough evidence to warrant a hearing, 70% are pro pers cases.

Hiram Ash, a 57-year-old South Gate paralegal, says his recent arbitration hearing went badly largely because he couldn’t initially find a lawyer to take his case.

Three years ago, Ash says he was turned away from a Kaiser Permanente clinic for unknown reasons and later passed out in his car from the pain. He filed an arbitration claim, and began the case on his own. He quickly felt overwhelmed, he says. Eventually, Ash hired a lawyer for whom he once had worked, but he now believes that effort was too little too late. The arbitrator awarded Ash $2,700.

“I have a graduate degree and 20 years of legal experience. If I have a problem with this, imagine how bad it is for other people,” he says.

Reform may be bubbling. Patient rights groups have advocated providing free medical experts for pro pers, although there is little agreement on who would pay for such a thing. Another proposal suggests putting a limit on the number of cases each arbitrator can take at one time.

One hurdle to reform is that public information about Kaiser’s new arbitration system is somewhat limited. Kaiser reports information only on cases that are resolved in an arbitration hearing -- or about 15% of the total malpractice claims against the health plan. Similar to the outcomes of cases filed in public courts, the majority of Kaiser arbitrations are settled before they reach a hearing.

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Settlement follow-up

The state’s Department of Managed Health Care has asked Kaiser for more information about settlements reached outside hearings, but has been unsuccessful in getting the HMO to provide such data. Kaiser officials say that such a request singles out the company, and that any resolution should be handled by the Legislature not that department.

“Right now, the way Kaiser is interpreting the reporting requirements, we don’t have enough information to know if and where any systemic problems are,” says Zingale, of the governor’s office. “That isn’t acceptable.

“I am confident we will get access to that information, whether Kaiser agrees to it or not.”