Merritt Personal Lines Manual: HMOs Emphasize Arbitration Which Isn't Always Good for Insureds

In June 1998, the Second District Court of Appeals upheld an earlier ruling that it had made against Cigna HealthCare of California, a unit of Philadelphia-based Cigna Corp., allowing the mother of a baby born with brain damage to sidestep arbitration and sue the HMO in court.

The reasoning? The mother, Keya Johnson, wasn't alleging medical malpractice by Cigna -- the type of claim that would have been relegated to arbitration. Rather, she said that her baby was denied the quality of care promised in Cigna's advertising and thus those ads were "deceptive and misleading."

Cigna spokesman Jim Harris said the HMO was disappointed by the unanimous decision but was pleased when the state Supreme Court agreed to hear the company's appeal. Arbitration "is under attack by the trial lawyers and more cases challenging it have reached the courts," Harris said. But Cigna would continue to defend it as "a fair and equitable process."

The chief justice of the California State Supreme Court, Ronald George, appointed a task force in the early 2000s to conduct a study of the impact health care arbitration and other so-called "private judging" was having on the state courts and the public. While "a lot of it is very good," George said, "there's a dark side to it, too." He was particularly worried about "the gross disparity in bargaining power" between large health care companies and individual consumers.

Despite the agreements they sign, "people don't know they are agreeing to arbitration in fine print," George said. "I do feel that we need to make some adjustment to it."

So did Elizabeth Farquhar. Toward the end of her pregnancy in 1996, Farquhar began thinking in a "morbid way." Though her first pregnancy had been uneventful, the California homemaker began wondering whether she would develop some complications this time. Nothing too serious, she hoped. Just something like a Caesarean delivery, something that would save her thousands of dollars.

How? Her insurance company, Blue Cross of California's Prudent Buyer Plan, had agreed to cover those kinds of costs. But it wouldn't pay for a routine delivery; Farquhar would have to take care of that out of her own pocket -- something she says she didn't realize initially when she had signed her contract with Blue Cross several months earlier.

In fact, the contract featured two clauses that denied certain coverage to new enrollees: One was for pre-existing conditions, including pregnancy; the other required a 12-month waiting period for 10 common procedures, including the normal delivery of babies.

In December 1995, a healthy Lukas Farquhar arrived with no complications. That left Farquhar and her husband with nearly $8,000 in prenatal, maternity and nursery bills.

As it turned out, the Prudent Buyer Plan contract was silent on the question of whether a class-action arbitration could be brought. An associate at Ivie, McNeill & Wyatt interpreted that silence as a green light. But Blue Cross saw it as just the opposite: Since there was no express provision for a class action, it petitioned the Court of Appeals to compel individual arbitration.

But in a unanimous decision, the court ruled that a class-action arbitration is indeed permitted under state law and is not preempted by the 73-year-old Federal Arbitration Act.

"It's a boomerang that has come back and hit Blue Cross in the back of its head," said Jamie Court of Consumers for Quality Care. "By forcing people into arbitration, under the pretense of expediency and judicial economy, Blue Cross now has a hard time arguing that patients shouldn't be able to arbitrate these cases in the most economical and expedient ways."

Though there was still a long way to go before any ruling emerged on the merits of their case, the Farquhars felt emboldened by the appellate court's decision. It shows "you can stand up for your own rights," Farquhar said. "You have to -- or somebody will take advantage of you."