Carveout Can’t Deny Coverage Months After Treatment, Judge Rules

A Vermont court has told a major mental health carveout company that taking its time to decide whether to approve a psychiatric patient’s inpatient treatment is not an option under state law.

A Superior Court judge in Washington County, Vt., dismissed a case brought by Merit Behavioral Care, now part of Magellan, the country’s largest carveout firm, in which the company charged that a review panel had no legal basis on which to overturn a Merit decision to deny coverage to a patient who had already completed inpatient treatment.

Merit, and now Magellan, has a contract with the state to manage the mental health care of state employees who receive their health care insurance through the state. Its agreement with Vermont sends care denials to “an independent panel of mental health professionals.”

The case that led to Merit’s lawsuit against the state of Vermont involved a patient who was admitted for psychiatric care to the Austen Riggs Center, a private, nonprofit psychiatric hospital in Stockbridge, Mass. The suit also named the hospital as a defendant.

As required by its contract with the state, Merit was promptly notified of the patient’s admission to the hospital, and the company then conducted an inquiry of the circumstances of her illness and proposed treatment. In the early phases of the patient’s treatment, however, Merit elected to defer a determination of the appropriateness of the patient’s care and whether it fell within the scope of its contractual duty to pay for the treatment, according to court documents. It told administrators at Austen Riggs that such a decision was “pending” until an unspecified later date.

After several months had gone by and the patient had been discharged, the managed care company decided that the treatment the hospital provided was not medically necessary or reimbursable under the terms of its contract with the state government.

Merit’s denial decision was overturned by the independent review panel, which the state legislature established in 1994 “to adjudicate disputed mental health managed care decisions,” explained Jonathan Weker, M.D., the Vermont psychiatrist who chairs the review panel.

That panel’s determination is what led the company to file its lawsuit calling on the court to reverse the panel’s order that Merit was required to pay for the patient’s hospital care. Neither Merit nor the state disputed the facts of the case.

Merit did originally authorize a five-day hospitalization, but this ran up against the Riggs Center’s minimum 30-day requirement, Magellan spokesperson Erin Somers told Psychiatric News. When the five-day authorization expired, and the hospital declined to participate in a concurrent review of the patient’s treatment, Merit’s options, she said, were to deny authorization for a longer hospitalization or “approve an unlimited stay, which would have been a violation of our contract” with the state government, Somers said.

The solution, she explained, is that “we decided along with Riggs that the [patient] could stay and we would review the treatment at a later date.” By “pending” the final review until after discharge, “we were acting in the patient’s best interest,” Somers said. This post-discharge review and subsequent denial when Merit decided the hospitalization was “not medically appropriate” brought the issue to the review panel, which overturned the denial.

After reviewing Merit’s objections, the court ruled against the managed care company and entered a summary judgment on behalf of Vermont and Austen Riggs Center, which terminated Merit’s suit.

The court cited a state law governing insurance companies that says reviews of medical care must be concurrent with treatment or conducted before treatment begins. It acknowledged that while managed care companies are not identical to insurance firms, the two are similar enough that the state statute on the obligations of insurance companies to their beneficiaries should apply in this case.

Superior Court Judge Matthew Katz cited a previous ruling from the same court that “simple fairness requires” that an insurance company “should point out any defects” in a claim it is reviewing if that review could result in a denial of payment. Quoting that decision, Katz ruled that “there was a statutory duty on the part of Merit as review agent to speak—it is the duty to make its decision prospective or concurrent with the treatment” for which it is being asked to pay.

By failing to make that decision until months after treatment had commenced, Merit “waived its objections to the request for coverage,” the ruling states.

The judge also examined the language of the applicable state law and the legislature’s intent in passing it. While the wording does emphasize the need for cost-effectiveness in insurance review decisions, he maintained that “the legislature quite clearly is reluctant to see mental health care proposals of individual clinicians denied.”

Magellan has filed a request for the judge to reconsider his decision, but by press time had not received a response.

[Merit Behavioral Care v. State of Vermont, et al., Superior Court for Washington County, Docket No. 713-99 WnCiv] ▪