Absent a Contract With the Provider, HMOs Are Not Liable for Unpaid Services


On April 19, 2013, the Texas Supreme Court handed down its opinion in Christus Health Gulf Coast, et al. v. Aetna, Inc. et al. [2013-04-19 Christus Opinion] The court’s ruling put an end to the so-called “double pay” theory of liability by downstream medical providers against HMOs. The question for the court was whether Aetna, which had made capitation payments to a delegated entity (that contracted with the providers), would have to pay a second time for medical services covered by the capitation payment. The court’s answer was a resounding “no”:

The Prompt Payment Statute by its terms decides this case, and it requires HMO-provider contractual privity. . . . At bottom, this is not about HMOs not paying providers, but about providers not paying providers—here a physician-owned entity not paying hospitals. The Prompt Payment Statute requires HMOs to honor their own contracts with providers, but here, there are no such contracts. These sophisticated providers opted for a different contractual model, and the resulting lack of privity between the Hospitals and Aetna precludes the Hospitals’ suit. 

The crisis giving rise to this case started around 2000, when many delegated entities operating under the capitated-delegated model went into bankruptcy, leaving many Texas medical providers unpaid. To try to get paid, the providers crafted various legal arguments as to why the HMOs should be liable to the providers for unpaid claims, even though the provider’s only contract was with the delegated entity, not the HMO.

Aetna’s victory was a long time in coming, as this was not the first time the case was before the Texas Supreme Court. Initially, Aetna obtained a summary judgment on the grounds that the providers had failed to exhaust their federal administrative remedies. The appellate court, in a unanimous opinion (3-0), affirmed the trial court’s summary judgment.[1] But the Texas Supreme Court, also in a unanimous opinion (9-0), reversed and remanded the case back to the trial court.[2] Back in the trial court, Aetna filed a second summary judgment, this time on the grounds that there was no contractual privity between Aetna and the providers. Again, the trial court granted Aetna’s summary judgment. Again, the appellate court, in a unanimous opinion (3-0), affirmed the trial court’s summary judgment.[3] Because of the supreme court’s previous reversal of a unanimous appellate court, the stage seemed set for a similar fate. But this time, the supreme court affirmed the appellate court, although once again in a unanimous (9-0) opinion.

Although the supreme court ruled in Aetna’s favor, the prospective effect of the victory is somewhat muted by the fact that, in 2001, the Texas Legislature passed H.B. 2828 as a statutory “fix” to the problem of an insolvent delegated entity. H.B. 2828 gave the Texas Commissioner of Insurance the discretionary power to issue an administrative order requiring an HMO to reassume the function of claims payment of a delegated entity.[4] In other words, the statute gave the commissioner the power to order an HMO to “double pay.” This enactment was significant to the court’s holding: “There would be no need for the Legislature to impose such a duty on HMOs (notably, one triggered solely by discretionary administrative action) if the pre-2001 [Prompt Payment] statute already imposed that duty. . . .”[5]

This case of “double pay” liability was an issue of first impression in Texas. However, as far back as 2001, two California appellate courts considered the question of whether a similarly worded California prompt pay statute imposed “double pay” liability,[6] and concluded that it did not.[7]       

Sedgwick attorneys Michael Klein and Lisa Magids filed an amicus brief in this case on behalf of the Texas Association of Health Plans (TAHP), in support of Aetna. [TAHP Amicus Brief] TAHP is the state’s largest managed care association and leading resource on key information affecting the health insurance industry.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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