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Health insurers and health maintenance organizations can not be sued for bad-faith denial of coverage in refusing to authorize treatment, the New York Appellate Division, 1st Department, ruled in a split decision. Five justices voted 3-2 against adopting a cause of action for a tortious breach of an implied covenant of good faith between the HMO and its subscribers. But Justice David B. Saxe said that New York courts should recognize such a cause of action, arguing that subscribers face the possibility of catastrophic medical outcomes if health insurers and HMOs place their financial position ahead of medical need. The three-justice majority said the class action before the court did not require the imposition on health insurers and HMOs of “some special, tort duty of good faith toward their policyholders.” All five justices left in place Manhattan Supreme Court Justice Herman Cahn’s 1999 decision to allow a class action to go forward on the issue of whether the plaintiffs’ health plan committed fraud and breached contractual obligations by assigning to non-doctors the task of making decisions on medical necessity of treatment. In Batas v. Prudential Insurance Co., 1102, Musette Batas and Nancy T. Vogel brought a suit on behalf of themselves and all other persons who subscribed to health plans offered through Prudential Insurance Co. or its subsidiary, Prudential Health Care Plan of New York Inc. Batas was admitted to a hospital in March 1996 after her Crohn’s disease flared up. She alleges that her doctors wanted her to stay in the hospital for further tests, but that course of action was rejected by Prudential, whose personnel — a “concurrent review nurse” — decided the patient should be sent home immediately. ACTUARIAL STANDARDS Ten days later, Batas was readmitted with a high fever and severe pain. During exploratory surgery (which had not been authorized by Prudential), Batas suffered a burst intestine, and had to have a portion of her colon removed. Also in March 1996, Vogel, who had a uterine tumor, was admitted to a hospital for a hysterectomy. After the operation, the patient’s doctors recommended a four-day stay for recovery. Two days later, a Prudential nurse said further hospitalization was unnecessary. The nurses allegedly relied on standards developed by an actuarial firm, and not on any doctor’s recommendations. The lawsuit charged Prudential with deceptive trade practices, breach of contract, breach of an implied covenant of good faith and fiduciary duty, common law fraud and tortious interference with contractual relations. The plaintiffs also sought to have portions of the Prudential contracts declared void as against public policy. Justice Cahn dismissed causes of action for breach of an implied covenant of good faith and fiduciary duty, tortious interference and the request for declaratory relief. The panel affirmed Cahn’s decision in all but one respect. It restored a claim for tortious interference with the contractual relationship between Vogel and a non-party health care insurer whose responsibilities Prudential was discharging under an agreement among the two plans and Vogel’s employer. DUTY OF GOOD FAITH The disagreement between the dissenters and the majority centered on the issue of the duty of good faith. Justice Saxe, in dissent, said that the relationship between a health plan and its subscribers was analogous to that between a liability insurance carrier and its policyholders. “[T]he position of the medical insurer is, like that of the liability insurer in the context of claim settlement, one of total control; that of the insured patient is one of powerlessness,” Saxe wrote. That power relationship, the dissenters said, provided a solid public policy basis for the finding of a duty of good faith. “When we consider the nature of the health insurance industry, it becomes apparent that medical insurers, even more than most, should be held to a special standard of conduct toward their policyholders, beyond that required of parties to an ordinary, commercial contract,” Saxe said. The majority said that remedies for breach of contract provided adequate protection for HMO and health insurance subscribers. They further noted that the plaintiffs did not allege a bad faith denial of payment. They alleged that their health was jeopardized by premature discharges, determined by a review based on actuarial, not medical, standards. That cause of action is a claim for breach of contract, since the plaintiffs said that Prudential misrepresented its review procedures, according to the majority. “[T]he valid concerns expressed by the dissent and its well intentioned proposal of a brand new cause of action would grant relief not asked for by any party,” said the majority. The majority consisted of Justices Milton L. Williams, Richard T. Andrias and Alfred D. Lerner. Joining Saxe in dissent was Justice Richard W. Wallach. The plaintiffs are represented by D. Brian Hufford, of Pomerantz Haudek Block Grossman & Gross, in Manhattan. Lead defense counsel to Prudential is Daly D.E. Temchine, of Epstein Becker & Green in Washington, D.C. The American Medical Association and the Medical Society of the State of New York, which participated in the appeal as amicus curiae on the side of the plaintiffs, were represented by Roy W. Breitenbach, of Garfunkel, Wild & Travis in Great Neck, N.Y. The AMA and Medical Society argued in a brief that a bad faith cause of action should be recognized in New York State.

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