‘Kaiser Justice’ System’s Fairness Is Questioned : Health: HMO says arbitration is speedier, cheaper than courts. Critics claim that the deck is stacked.

The family of Wilfredo Engalla says Kaiser medicine doomed him to death from inoperable lung cancer. Then, they say, “Kaiser justice” made matters worse.

That’s what Engalla’s widow and four children allege happened when they tried to press a malpractice claim against Kaiser Foundation Health Plan, the nation’s largest health maintenance organization.

For his family members, the tragedy of Engalla’s death was deepened by their encounter with the mandatory system of binding arbitration through which Kaiser deals with malpractice claims and coverage disputes that arise among its 4.5 million members in California.

The HMO’s officials say the system--which bars members from suing it in court--has been designed to be fair, as well as cheaper and faster than bringing lawsuits.

The Engallas disagree. In their experience, “Kaiser justice,” as the system is called by lawyers up and down the state, is dominated and manipulated by the giant health plan with the aim of obstructing fair settlements. In Engalla’s case, the family contends, Kaiser lawyers delayed the process long enough to ensure that Engalla would die before a hearing could be held on his claim.

After listening to the family’s story and Kaiser’s defense, Alameda County Superior Court Judge Joanne C. Parrilli declared the HMO’s arbitration system fraudulent, “unconscionable” and “corrupt . . . in general.”

The case began on May 31, 1991, when the Engalla family filed a claim charging that Kaiser doctors for five years had misdiagnosed Wilfredo’s shortness of breath and coughing as symptoms of colds and allergies. By the time Kaiser recognized his illness as lung cancer, the 51-year-old Filipino immigrant, an accountant for a Hayward tire company and father of four children, was terminally ill.

“Mr. Engalla has very little time left in his life,” family lawyer David S. Rand noted in his filing, making a special appeal for Kaiser to comply with the requirement in its service contract that a three-member panel of arbitrators be appointed within 60 days.

For the next 4 1/2 months, the family later charged in court, Kaiser’s attorneys stalled. The reason, they say, is that by law the family’s damages would be cut in half if Engalla was no longer alive when the case was heard.

As the appeals judges found, Kaiser’s lawyers selected an arbitrator they knew would be unavailable to hear the case for at least six months. They were slow in answering Rand’s letters. They dickered endlessly over minor issues. During one session to take Engalla’s deposition, complains Aina Engalla, his eldest daughter, a Kaiser lawyer badgered her father relentlessly.

“The man was dying,” she recalls. “It wasn’t necessary to jump all over him. I was thinking, ‘These people don’t care. They want us to just go away.’ ”

Not until Oct. 22 did the parties reach an agreement on the arbitrators. By then, 144 days had passed since the claim had been filed--nearly three months beyond the contractual deadline.

Wilfredo Engalla died the next day.

‘Don’t Tolerate Delays’

Kaiser officials deny that the Engallas’ experience is characteristic of how they conduct arbitrations. “I don’t tolerate delays like that,” said Pauline Fox, a senior Kaiser counsel who oversees arbitration cases in Northern California.

Fox assumed her responsibilities in November, long after the events alleged by the Engallas. She said she would review the record to determine if her lawyers acted improperly.

But interviews with lawyers and claimants and a review by The Times of thousands of pages of court records suggest that the obstacles, delays and difficulties faced by the Engallas are far from unusual in Kaiser arbitrations.

Nor are these problems surprising, given that the system--as a panel of state appeals court judges in Oakland concluded this month in reviewing the Engalla case--”is not only designed, written and mandated by Kaiser,” but supervised by lawyers “obliged to act zealously and exclusively in [Kaiser’s] best interests.”

(Despite that, the Engallas lost their quest to overturn the arbitration clause when the appeals judges ruled that Kaiser’s behavior only suggested “bad faith,” which is not grounds for revoking arbitration rights and is not fraud.)

Kaiser officials staunchly defend mandatory arbitration as a useful method of keeping routine disputes out of the overburdened court system. Arbitration, they say, provides swift and inexpensive justice for the giant health plan, its patients and their families.

“I hear a lot of stories of six- or 12-week [jury] trials,” said Trischa J. O’Hanlon, the senior staff counsel who heads the Oakland-based HMO’s arbitration program. “In arbitration, we have three-day or five-day hearings. [The process] really can move at the speed the plaintiff wants it to move. You can’t do that in court.”

But adversaries say that Kaiser arbitrations tend to be neither fast-moving nor cheap. They say the HMO--a nonprofit company with $12.2 billion in revenues last year--is fully aware that while it stretches out routine proceedings over months, even years, medical and legal bills for the injured may be climbing relentlessly higher.

“Time is on Kaiser’s side,” said Nathaniel Friedman, a Los Angeles lawyer who has battled Kaiser in dozens of cases.

Even plaintiffs who prevail in Kaiser arbitrations can count on smaller checks than they might have won in a court of law; arbitration awards in malpractice cases generally run from 20% to 50% less than jury awards in comparable cases, according to lawyers on both sides of the issue. And injured patients generally cannot recover their legal costs, as they often can in court.

Those costs are often higher than in conventional arbitrations. The reason: Kaiser’s contract requires the appointment of three arbitrators, one each selected by Kaiser and the plaintiff (the so-called “party” arbitrators) and a third “neutral” arbitrator whose vote settles any split decisions.

Each side pays its own arbitrator and half of the third judge’s fees. Since arbitrators charge as much as $500 an hour, “that represents an ante of thousands of dollars on every claimant,” said Rand, the Engallas’ lawyer. Yet in all but the most trivial cases, Kaiser has rebuffed efforts to dispense with the costly party arbitrators, saying three-judge panels help preserve both sides’ rights.

Harry T. Shafer, a retired Los Angeles County Superior Court judge often selected as a plaintiff’s arbitrator in Kaiser cases, said: “I tell plaintiffs it’s very difficult to win against Kaiser. You’ve got to be prepared to spend $25,000 and upward for experts. It’s intended as a stacked deck, and the unwary get caught in it.”

As for the speed of the process, O’Hanlon says she has a “strict policy that we want these cases over as quickly as possible because . . . early resolution is in everyone’s best interest.”

But the appeals court in the Engalla case found that typical Kaiser arbitrations often take longer than equivalent cases in state court.

A statistical survey of 196 Kaiser Northern California arbitrations completed between 1984 and 1988--and entered into evidence in the Engalla case--found that in only 1% was a neutral arbitrator appointed within the 60 days specified by the arbitration agreement. On average, that step took 677 days, or more than 22 months, according to the survey.

Reaching a final resolution of these claims, the study found, took an average of 863 days, or nearly 29 months. In comparison, the Oakland appeals court noted that getting to trial in Alameda County during the same period took 15 to 19 months.

Delays Decried

These sorts of delays, complain patients and family members who have arbitrated against Kaiser, only magnify the grief they already have suffered from what they consider botched treatment.

“There’s no downside for them to dragging out [the arbitration] as long as possible,” said Linda D. Ross, whose mother died of a pulmonary embolism in a Kaiser hospital in Fontana in 1991.

Barbara Roberts, 56, a Lake Elsinore civic activist, had gone to the hospital’s emergency room in pain and with signs of having suffered a dangerous blood clot in her leg. Although nurses classified her as an urgent case, she was not seen by a doctor until four hours after her arrival; two hours later she died.

Kaiser, Ross says, rebuffed all efforts to settle the case, right up to the day the arbitration hearing convened--even though Riverside County health authorities had cited the HMO for violating basic emergency medical standards in connection with Roberts’ treatment.

As a result, Roberts’ survivors had to pay for extensive depositions from medical staff and independent experts. Including three years of legal fees, their total costs came to nearly $22,000.

When the case was heard, the arbitrators judged Kaiser’s liability so clear that they entered a rare unanimous verdict against the health plan--for $150,000.

“The whole thing is immoral, unethical and a horrendous process to put people through after they’ve suffered a terrible loss,” said a furious Ross, a Los Angeles businesswoman.

Kaiser’s handling of patient disputes raises many issues beyond whether its patients get swift and efficient justice.

One is the HMO’s domination of the very infrastructure of private arbitration in California; according to some estimates, Kaiser is the largest single user of the arbitration process in California.

Although O’Hanlon declined to give figures, one legal officer from Kaiser’s Northern California offices said in a 1993 deposition that her district received about 350 arbitration claims a year and had about 1,000 pending at any one time. Given that Northern California represents about half of Kaiser’s statewide membership, that would suggest that Kaiser as a whole opens 700 arbitration cases a year in California, or about two a day.

“You and I might have one arbitration claim in our lives, but Kaiser . . . will have thousands,” said Richard C. Reuben, a lawyer who has written extensively about arbitration for California legal journals.

Critics say fear of retribution by Kaiser chills the entire process because Kaiser arbitrations can account for as much as half the annual income of an active arbitrator. (Even a part-time arbitrator can earn close to $200,000 in annual fees, according to those familiar with the system.)

In fact, Kaiser and its network of outside lawyers keep close tabs on the records of arbitrators who have sat in their cases, according to attorneys who have worked for the health plan.

“If you don’t see it the way Kaiser’s attorneys do, there’s a good chance you won’t be chosen again,” said a prominent retired judge whose Kaiser-related business dried up after he hit the organization with several large awards--including one in the case of a young girl whose cancer was missed by physicians who misread her Pap smear.

“I can’t use the word ‘blacklisted,’ ” said the judge, who asked not to be identified. “But I certainly had more numerous Kaiser cases before my pattern of voting turned that way. Now I don’t sit on very many anymore.”

The volume of Kaiser’s repeat business is evident from a sheaf of questionnaires assembled by James S. Marshall, an Orange County attorney representing a child who lost two fingers and a foot to gangrene when a Kaiser doctor allegedly misdiagnosed a serious viral infection.

Most of the retired judges proposed by Kaiser had participated in scores of arbitrations in which it was the defendant. One, Arthur K. Marshall of Los Angeles, said he had served as a neutral arbitrator in “over a hundred cases against Kaiser and Cigna” and once as Kaiser’s own party arbitrator. Another, Robert C. Nye, said he had arbitrated “probably 20 or more” cases in which Kaiser was a party.

“You have to be smart enough to say ‘no’ to the first few names they send you,” James Marshall remarked after reviewing the questionnaires. “You know these guys are in their stable.”

Kaiser’s O’Hanlon disputes that the HMO’s size gives it any undue advantage over plaintiffs. If that were the case, she says, “we would expect to win more cases than we do.” Instead, in arbitration “we still lose cases we feel are highly supportable.”

Another issue raised by Kaiser’s ironclad arbitration clause is the public’s access to important information about medical practices and quality.

Patient advocates and consumer activists say the spread of arbitration has the potential to restrict public access to information about HMOs, doctors and hospitals. Arbitration rulings are private, and unlike trial and appeals court rulings, they do not establish legal precedent, are subject to appeal only in cases where a conflict of interest is alleged and are never published.

The result is that less can be learned via the court system about medical quality at Kaiser than about almost any other major medical institution in California, critics say. As long as Kaiser refuses to disclose how many arbitrations it participates in, no one can fix the number of malpractice claims filed by its members, much less their nature.

Moreover, where Kaiser goes other institutions often follow. Mandatory arbitration clauses are appearing in other HMO contracts, including those of Cigna, the state’s sixth-largest HMO. Many medical groups and individual physicians now routinely ask new patients to sign a form giving up their right to a jury trial for malpractice claims. (State law says the doctor may not refuse service because a patient refuses to sign.)

Kaiser officials argue that the publicity surrounding malpractice lawsuits serves little purpose other than to feed public prurience.

“In terms of individual medical malpractice cases, I don’t understand what benefit the public would get from having these cases public,” O’Hanlon said.

But others contend that the threat of publicity can powerfully influence the behavior of a doctor or medical organization.

“Because people in HMOs lack access to the courts, we’ve lost one check on medical quality,” said Geraldine Dallek, executive director of the Los Angeles-based Center for Health Care Rights.

That is especially important because by giving up much of their freedom to choose individual doctors and hospitals in exchange for lower health insurance premiums, HMO patients have less opportunity to address problems with their medical care by switching doctors.

Many lawyers say that the real danger from Kaiser’s conduct in arbitration lies in its potential for undermining the system’s integrity.

In several recent cases, state appeals courts have overturned decisions in Kaiser arbitrations after discovering the plan’s lawyers concealed an arbitrator’s conflict of interest.

The arbitrator was Ralph Drummond, a former Monterey County Superior Court judge who had retired in 1983 to become a full-time arbitrator.

For years, Kaiser offered him to plaintiffs as a fair, experienced judge who had once practiced as a malpractice lawyer with a prominent Los Angeles plaintiffs’ law firm.

What they did not say was that Drummond on at least five occasions had sat as Kaiser’s own arbitrator--a business relationship that clearly suggested an ethical conflict.

“They slipped him past me,” said James Marshall, the Orange County attorney, noting that he accepted Drummond as a neutral arbitrator before learning of his record.

For his part, Drummond regards himself as a paragon of evenhandedness. “You sit as a judge, and you call it the way you see it,” he said in an interview. As a neutral arbitrator, he said, he probably has ruled “60-40 in favor of the claimant,” or plaintiff.

But in at least three recent cases, state courts have overturned Drummond’s pro-Kaiser rulings on grounds that he and Kaiser withheld disclosure of their relationship; one judge even commented from the bench that he was “shocked” by what he saw as a deliberate attempt by Kaiser’s lawyers to mislead the plaintiff’s side on the issue.

Arguably, those court rulings amounted to Pyrrhic victories for the plaintiffs; the decisions gave them only the right to start the arbitration process anew--at their own expense. Despite finding evidence of unfairness in the Kaiser system, state judges up to now have been unwilling to overturn its mandatory arbitration clause.

That was true even in the Engalla case.

After Judge Parrilli denied Kaiser’s right to arbitrate the family’s claim on grounds of fraud, Kaiser appealed.

A three-judge panel of the state Court of Appeal ruled Aug. 3 that it is “possible to infer” from the evidence that lawyers for Kaiser “attempted to delay” appointing a neutral arbitrator and took “full advantage of its dominant position.” That behavior, the panel ruled, would be “morally reprehensible if undertaken by Kaiser and its attorneys simply to stall the litigation until the claimant died.”

But because it falls short of “the stuff of which a claim of fraud is made,” the appellate judges upheld Kaiser’s right to compel the Engallas to arbitrate.

The Engallas say they will appeal the case to the California Supreme Court.

“It’s blatantly inconsistent to allow one party’s attorneys to write the rules and administer the system,” attorney Rand said. “It’s the fox guarding the henhouse.”

About This Series:

SUNDAY: Medical care is being rationed in California. That’s one of the keys to “managed care.”

By imposing restrictive policies and erecting bureaucratic obstacles, health maintenance organizations have accumulated the power to override doctors’ decisions and act determine the nature and extent of the care 17 million Californians receive.

HMOs fall short on some preventive care measures.

HMOs say they are more oriented toward preventive care than traditional fee-for-service medicine, noting that the healthier they keep their members, the more money they’ll save. In fact, the fee structure of many HMOs has the effect of discouraging such basic preventive programs as child immunization. Moreover, many California HMOs score consistently low on measures of preventive care.

MONDAY: The state’s HMOs are regulated by a toothless watchdog.

Although HMOs function as insurance companies and as health care providers, their primary regulator isn’t the Department of Insurance or the Department of Health Services. Instead, they are overseen by the Department of Corporations, a notoriously weak agency whose other duties include regulating escrow companies and mortgage lenders. In 20 years, it has levied just one fine against an HMO.

TUESDAY: Key decisions about your medical care have been taken out of your doctors’ hands.

Doctors across California feel they’ve been deprived of their role as patient advocates. That, compounded by a clamp-down on fees that has sharply reduced their income, has some doctors fleeing the state or the profession.

TODAY: If something goes terribly wrong, you may not be able to sue.

Many HMOs require patients to pursue medical claims thorugh arbitration processes rather than the courts.

HMO cost-cutting transfers millions of dollars from medical care to corporate coffers.

The “upstreaming” of medical dollars to HMO shareholders has become an issue with the employers and governments that pay the medical bills.

Your HMO may not pay for your trip to the emergency room.

Emergency room physicians say HMOs impose obstacles to patients getting urgently needed care--and then resist paying for the care that’s provided.

THURSDAY: The system can be improved.

Patient-care advocates and some HMO executives agree that much can be done to improve members’ access to care and information. Among the proposals are creation of a statewide HMO ombudsman, improvement of patient surveys and increasing resources for state regulators.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Loyalty Quotient

Q. If you could change from the health care plan you currently have to another one, would you do so?

*--*

HMO Other* Traditional** Yes 25% 41% 28% No 63% 47% 63% Don’t know 12% 12% 9%

*--*

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Coverage Denied

Q. Has your health insurance provider ever denied you coverage for treatment or tests you thought were necessary?

*--*

Yes No Non-Medicare HMO 11% 88% Medicare HMO 6% 91% Other* 13% 83% Traditional** 14% 83%

*--*

****

Know Your HMO

Q. How would you rate your health plan when it comes to providing you adequate knowledge of how it works and what it covers?

*--*

HMO Other* Traditional** Excellent 38% 27% 32% Good 49% 48% 49% Not so good 8% 16% 9% Poor 2% 7% 5%

*--*

* Other managed care

** Traditional insurance

Source: Los Angeles Times telephone poll of 3,297 adult Californians, June 17-25. May not add to 100% because of “not sure” and declined responses.

****

Voices

“HMOs restrict services and choices and reduce the quality of care in order to raise profits . . . . By the time you get approval for tests and receive an appointment to see an appropriate specialist, the disease metastasizes. Time passes, and if you are not fortunate enough to get approval for a necessary treatment--then what?”

Sharon Roberts, daughter of HMO member in Oak Park

****

“[Those people] who have the ingenuity and creativity and skills to solve these problems . . . ought to be compensated and rewarded in any way the free market will bear. . . . We are being innovative, and we are helping to solve some very difficult and knotty problems. And if we are successful at that, then I think we deserve not only this, but more.”

Malik Hasan, CEO of Health Systems International in Woodland Hills, whose cash compensation last year was more than $1.4 million.