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HMOs Slammed By Court

In what could be a major blow to HMOs, a federal appeals court has ruled millions of Medicare recipients are entitled to court-like appeals when they are denied benefits.

A unanimous three-judge panel on the 9th U.S. Circuit Court of Appeals in San Francisco also said that federal regulators have been dragging their feet enforcing those rights.

The court's ruling on Wednesday requires the HMO industry to provide specific reasons that care was denied, and to inform patients of appeal options, in as little as five working days. It also requires HMOs to provide, at the patient's request, informal hearings, in person with decision makers, for all service denials.

Of the 38 million Americans who receive Medicare benefits, about one in six receive treatment through an HMO.

Earlier this week, the Department of Health and Human Services issued a critical report accusing HMOs of inflating administrative costs charged to Medicare to the tune of more than $1 billion a year.

Industry spokesmen downplayed the importance of the decision, saying 1997 government regulations, supported by the HMO industry, cleaned up the appeals process.

"We have been operating with rules that comply with the court decision," said Don White, spokesman for the American Association of Health Plans, which represents 1,000 HMOs and other managed care groups.

But a side-by-side comparison of the government rules and the new court requirements show some sharp differences:

  • The court allowed appeals for reduction in service as well as denial. Current regulations don't address service reduction.
  • The court indicated expedited appeals should be granted on request of the beneficiary. The regulations leave it up to the HMO whether to expedite an appeal.
  • The court imposed shorter time frames for dealing with some appeals. For example, denial of service should be reported in as little as five working days under the court version; current regulations allow two months.
Vicki Gottlich, a staff attorney at the National Seniors Citizens Law Center, says the differences are "pretty crucial" and include "major differences with the regulations ordered in the court ruling." The appeals court said in its ruling it's up to the Arizona trial judge to order enforcement of his appeals framework or to go with the government regulations.

Although private businesses aren't generally required to provide the same constitutional due process rights demanded of government agencies, the appeals court said HMOs act as government proxies. When an HMO denies Medicare coverage that is essentially a federal action, it triggers Medicare patients' rights to a fair hearing process, the court said.

In what may be more trouble for the industry, the judges ordered Secretary of Health & Human Services Donna Shalala to begin investigating HMO compliance with the appeals process demands. The government must terminate any contract with an HMO or refuse to grant necontracts to any HMO that has not satisfied the law or agency regulations.

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