What Has Happened to the Rule of Law?

No, I am not talking about rendition or signing statements or warrantless wiretapping of American citizens. I am concerned about the fact it has become acceptable for corporations to welsh on their agreements.

Exhibit 1: a page one story in yesterday’s Wall Street Journal, “Fights Over Health Claims Spawn a New Arms Race.” The article goes through a range of tricks, whoops, procedures that health insurance companies use to reduce their claims payments, from haircutting reimbursements to denying entire procedures in the hope that the payee will either miss the underpayment or won’t find it worth their while to fight (my insurer resorts to failing to enter claims into their system. It started suddenly and now occurs with such high frequency that it’s clear it’s policy, not error). The practice is called “denial management” and it is so pervasive that 30% of doctors’ claims are denied upon their first submission.

But these are old-fashioned, comparatively amateurish ways to avoid payment. The Journal brings us up to speed on some of the new techniques:

What particularly riles doctors, who often still use paper records, is how insurers’ claims-processing software periodically re-interprets the national standardized coding system used to file and reimburse medical claims. The set of 7,000 five-digit codes, each for a different medical service or procedure, was devised by the American Medical Association in 1966 and adopted by Medicare. Private health plans followed suit.

The coding system incorporates hundreds of thousands of payment rules to prevent doctors from claiming for medically incompatible services or double billing. If, say, a physician bills for removing a gallbladder and opening and closing a patient’s abdomen, it rejects the second charge because it’s inherent in the first.

Well, that’s the party line. In reality, as the “arms race” in the article title suggests, the software often requires new coding for established procedures (meaning the insurers are essentially rewriting the AMA’s own diagnosis and procedure codes) and implementing rules, which are often dubious, for rejecting certain treatments or patterns of treatment. The medical industry made some headway with a frontal assault:

Physicians first tried to fight the insurers’ software in the courts. A class-action suit in 2001 charged that the country’s biggest insurers were conspiring to use the McKesson software to systematically bilk them. Aetna Inc., followed by all but UnitedHealth and Coventry Health Care Inc., eventually settled, and agreed to contribute hundreds of millions of dollars into a fund to pay doctors who win judgments from an independent review board on previously denied claims. A U.S. district judge in Miami dismissed racketeering claims from the suit last June, and some medical groups say insurers have moved away from more egregious practices. But regional pockets of doctors such as those in Kansas City are still suing the insurers without the racketeering claim.

In the latest phase of this battle, doctors engage specialist software firms like athenahealth to analyze their rejected or underpaid claims and reprocess them, taking a percentage of the recoveries.

Harnessing the collective claims experience of so many doctors at once lets athenahealth’s software engineers spot new “denial patterns” and quickly program an alert into the system. Usually the culprit is a new coding rule that an insurer has introduced into its software.

Why is this of concern? It isn’t just that this effort by insurers to evade payment is worsening the very problem – escalating health care costs – that it is allegedly trying to combat. The US has considerably higher health care administrative costs than other OECD countries, without achieving notably better outcomes.

No, it’s that the efforts of the health insurers are a blatant and well known effort to minimize payment of health care claims. Their programs go well beyond a legitimate initiative to combat fraud and error.

There is a concept in the law known as “good faith and fair dealing,” which law.com defines as:

a general assumption of the law of contracts, that people will act in good faith and deal fairly without breaking their word, using shifty means to avoid obligations, or denying what the other party obviously understood. A lawsuit (or one of the causes of action in a lawsuit) based on the breach of this covenant is often brought when the other party has been claiming technical excuses for breaching the contract or using the specific words of the contract to refuse to perform when the surrounding circumstances or apparent understanding of the parties were to the contrary.

Conditions have devolved so much in Corporate America that the claims-avoiding behavior of health insurers is accepted as business as usual, when in fact it is a fraud. Consumers buy insurance with the expectation that it will provide the level of coverage presented by the insurer, when that’s a best case scenario. What the consumer actually gets depends on how persistent and skilled he is in fighting for what he should have gotten anyhow had the insurer operated in good faith and lived up to his side of the agreement.

And fraud has become an acceptable way of doing business. Manufacturers have begun to stop offering rebates because consumer know, by painful experience, that they are designed so that the consumer is likely to fail the paperwork requirements. Even though corporate accounting has improved post Sarbox, it is still common for companies to have periodic writedowns, which means that expenses in earlier periods were understated and hence profits were exaggerated. CEOs take whatever they can get even though they have a duty of care to the corporation, the options backdating scandal being the latest example.

Public companies function as if this behavior won’t catch up with them, but collectively it will. However, when it does, just as with the Sarbox regime, the innocent will suffer along with the guilty.

One of the reasons that the US continues to attract capital from abroad is that it is perceived to be a safe place to invest, and one of the elements of “safety” is a relatively low level of corruption. Having integrity in government and business has long been a source of competitive advantage. As economic historian Niall Ferguson recounted in his book The Cash Nexus, his study of the role of finance in the conduct of war, one of the reasons England was able to prevail over France despite England’s smaller economy was that England had a professional, salaried tax administration, which by virtue of being perceived as honest, was able to secure a good level of compliance. France, by contrast, used what amounted to local tax entrepreneurs who took a percentage of what they collected. Corruption was widespread and tax receipts flagged as a result. England’s more stable finances gave them a much better credit standing and corresponding ability to borrow.

Now America is a long way from being seen as corrupt (although the Bush Administration is doing a lot of damage in this regard). However, one of the reasons that New York is declining as a financial center relative to London is that the UK has a principles based system of law, while ours is rule based. Think of the insurance example above. The UK system would look at the principles (like good faith and fair dealing), while US courts rely heavily on the contract. The result of rules based law is that it yields more unpredictable outcomes, and investors don’t like uncertainty. And the kind of gamesmanship we see in the health insurance makes the shortcomings of our system all too evident.

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