American Journal of Law & Medicine

Medicare+Choice appeal procedures: reconciling due process rights and cost containment.


By signing the Balanced Budget Act of 1997 (BBA) on August 5, 1997, President Clinton made the most significant changes to Medicare,(1) since its inception in 1965,(2) by adopting market-driven reforms(3) in an effort to balance the federal budget.(4) One of the most significant Medicare reforms in the BBA was the creation of the Medicare+Choice program that provides Medicare beneficiaries access to a wide array of private health plan choices(5) as well as traditional fee-for-service (FFS) Medicare.(6) In addition, Medicare+Choice enables Medicare to further utilize delivery innovations,(7) including preferred provider organizations (PPOs),(8) open-ended health maintenance organizations (HMOs), point-of-service plans, provider sponsored organizations (PSOs),(9) integrated delivery systems (IDSs)(10) and primary care case management,(11) that have helped the private sector contain costs and expand health care delivery options.

By encouraging growth of Medicare managed care, Congress hopes beneficiaries will switch to Medicare+Choice and thereby reduce federal health care expenditures.(12) Empirical evidence shows that while enrollment of Medicare beneficiaries in managed care has increased, the movement has not been as quick as Congress had hoped.(13) "Contrary to all the media hype, [in 1996] only a third of all HMOs offered a Medicare product, and the twenty-five biggest Medicare plans held sixty percent of beneficiaries."(14) However, "Medicare HMO contractors are greatly expanding geographically and the fastest-growing plans are no longer in a few counties...."(15) One factor inhibiting the movement of the Medicare beneficiary population to managed care is the variability in payment that Medicare pays risk contractors.(16)

Other factors possibly causing the slowdown in Medicare risk contractor enrollment, and likely inhibiting beneficiaries' switch to other Medicare+Choice options, are concerns over quality of care and access to medical services. Some beneficiaries do not want to enroll in Medicare managed care(17) because they fear that services will be substandard or denied(18) or they lack knowledge about appeal rights.(19) Even if beneficiaries know about appeal rights, many of those who do file appeals believe that their complaints were handled unfairly.(20) However, as a result of recent litigation in an Arizona federal district court, the Health Care Financing Administration (HCFA) and the managed care industry are currently addressing beneficiaries' fears.(21) New regulations developed by HCFA attempt to increase a beneficiary's access in resolving disputed claims and service denials in a timely fashion.(22) However, the issue of striking the appropriate balance between appeal rights and cost containment still exists for Medicare+Choice options and needs to be addressed before the switch from FFS to Medicare+Choice will become a permanent structural change in the delivery of health care to Medicare beneficiaries.

Part II of this Article outlines the historical approach to Medicare risk contractor appeal rights, which was based primarily on the traditional model developed for the FFS context. Part III presents the growing demand beneficiaries have exhibited for more comprehensive and quicker grievance and appeal procedures. Subpart A describes how this demand culminated in Grijalva v. Shalala,(23) a 1996 case in which a federal district court ordered the Secretary of Department of Health and Human Services (HHS) to develop, enforce and monitor notice requirements and an administrative reconsideration process for all adverse decisions. Subpart B describes the rulemakings the HHS promulgated in response to this situation. These rulemakings sought to balance beneficiaries' demands and the desire to develop a rational regulatory scheme that would not be so burdensome on commercial HMOs as to deter their participation in the Medicare managed care market. Subparts C and D discuss the arguments advanced by the parties to the United States Court of Appeals for the Ninth Circuit and its affirmance of the district court's Grijalva decision.

Part IV presents the current regulatory structure for grievance and appeals procedures from the managed care perspective. Subpart A describes the new BBA requirements for Medicare+Choice organizations and its implementing regulation, the Final Rule on the Establishment of the Medicare+Choice Program (Mega-Reg).(24) Subpart B examines two state regulatory schemes on grievance and appeals procedures, those of Florida and Pennsylvania. Subpart C presents the New York Medicaid managed care appeal and grievance procedures as an example of public contracting requirements. Finally, subpart D examines the additional complexity brought on by the Employee Retirement Income Security Act(25) (ERISA) and other proposed federal legislation.

Part V discusses some of the costs HMOs and other Medicare+Choice MCOs face in attempting to comply with these various schemes. It presents the National Association of Insurance Commissioners' (NAIC) model grievance and appeals procedures and the National Committee for Quality Assurance's (NCQA) accreditation and performance measurement standards. If a relatively uniform system of government regulation can be established to monitor Medicare+Choice options through the Quality Improvement System for Managed Care (QISMC) along with providing consumers useful information about grievance and appeal procedures, Medicare beneficiaries' fears concerning service denials will likely be mollified. The resulting regulatory structure should encourage, rather than hinder, the switch to Medicare+Choice. This approach is advantageous in that it is cost efficient and it also can evolve organically to protect Medicare beneficiaries' due process rights as new delivery systems emerge in the marketplace.


Prior to the passage of the BBA, the Medicare statute permitting HHS to contract with HMOs as health care providers(26) required HMOs to provide the same range of services to plan enrollees as Medicare generally provides for beneficiaries.(27) Medicare Part A generally provides beneficiaries with inpatient hospital services up to 150 days and post-hospital extended care services up to 100 days.(28) Medicare Part B provides beneficiaries with home health care services; medical and other health services, such as physicians' services; outpatient physical therapy; certain health clinic services; outpatient rehabilitation facility services; and facility services furnished in connection with certain surgical procedures.(29) In addition to these general benefits, HMOs are required to:

   (A) make the services described in paragraph (2) (and such other health 
   services as such individuals have contracted for) (i) available and 
   accessible to each such individual within the area served by the 
   organization, with reasonable promptness and in a manner which assures 
   continuity, and (ii) when medically necessary, available and accessible 
   twenty-four hours a day and seven days a week, and (B) provide for 
   reimbursement with respect to services which are described in subparagraph 
   (A) and which are provided to such an individual other than through the 
   organization, if (i) the services were medically necessary and immediately 
   required because of an unforeseen illness, injury, or condition and (ii) it 
   was not reasonable given the circumstances to obtain the services through 
   the organization.(30) 

Toward these ends, HMOs "must provide meaningful procedures for hearing and resolving grievances between the organization ... and members enrolled with the organization under [the Medicare program]."(31)


The regulatory scheme adopted by the HHS to implement the mandates of 42 U.S.C. [sections] 1395mm prior to the litigation in Grijalva v. Shalala was very similar to that set out for initial FFS Medicare coverage denials rendered by fiscal intermediaries or carriers.(32) For instance, the reconsideration and appeal procedures for intermediary decisions on Part A claims, covered by 42 C.F.R. [subsections] 405.701-.730 (1992), requires notice of an initial determination and gives an individual the right to a hearing.(33) Reconsideration procedures for HMO denials, set out in 42 C.F.R. [subsections] 417.600.-694 (1992), also require notice of an adverse organization determination and grant a right to a hearing before a Social Security Administration (SSA) administrative law judge (ALJ).

An HMO must establish grievance and appeals procedures(34) for Medicare enrollees who are dissatisfied because they believe that: (1) they did not receive health care services to which they were entitled;(35) or (2) their costs are too high. These enrollees have the right to an administrative hearing if the amount in controversy is $100 or more,(36) or have the right to judicial review if the amount exceeds $1000.(37) "For any claimant whose disagreement with the [HMO] at this stage does not amount to more than $100, that is the end of the process, according to the Secretary's procedures. There is no further review, and there is al: no time an opportunity to present one's case personally to the decision-maker."(38)

An HMO must establish and maintain appeal procedures for issues that involve initial determinations such as:

   (1) Reimbursement for emergency or urgently needed services; 
   (2) Any other health services furnished by a provider or supplier other 
   than the [HMO] that the enrollee believes-- 
      (i) Are covered under Medicare; and 
      (ii) Should have been furnished, arranged for, or reimbursed by the 
   (3) The [HMO's] refusal to provide services that the enrollee believes 
   should be furnished ... by the [HMO] and the enrollee has not received the 
   services outside the [HMO].(39) 

Once the enrollee's request for payment is received, the HMO has sixty days to notify that person of any adverse initial determination.(40) The notice must state the specific reasons for the determination and inform the enrollee of his or her right to reconsideration.(41) Failure to provide timely notice constitutes an adverse initial determination, which the enrollee may appeal.(42)

The initial determination is final and binding unless reconsidered by the HMO.(43) An enrollee who is dissatisfied with an initial determination may file a written request for reconsideration within sixty days of the determination.(44) "The [HMO] must provide the parties to the reconsideration reasonable opportunity to present evidence and allegations of fact or law, related to the issue in dispute, in person as well as in writing."(45) "If the [HMO] can make a reconsidered determination completely favorable to the enrollee, [the HMO] issues a reconsidered determination."(46) On reconsideration, the HMO partially or wholly affirms its denial, the HMO must prepare a written explanation and send the entire case to HCFA, which then makes its independent determination.(47)

HCFA or the HMO must mail a notice of the reconsideration determination to the enrollee.(48) If the HMO issued the notice, it must send a copy of the determination to HCFA.(49) The notice must state the reasons for the reconsidered determination and inform the party that if the claim is for $100 or more, he or she has a right to a hearing before an ALJ.(50) The notice must also describe the procedures for obtaining a hearing.(51) A reconsidered determination is final and binding(52) unless the enrollee files a written request for a hearing within sixty days of the date of notice of the reconsidered determination.(53) Any party to the administrative hearing may request that the SSA's Appeals Council review the case.(54) The regulations allow judicial review of the Appeals Council decision if the amount in controversy is $1,000 or more.(55)


Federal complaints about managed care are rare; only about 0.1% of Medicare risk contractor beneficiaries file a federal complaint each year.(56) Complaints that are filed usually request substantial sums and/or allege egregious situations. Table 1 lists the grievance and appeals track record of several HMOs for their Medicare population.

Table 1: How Medicare Risk Contractors Rate.(57) 
Health Plan/Area                  Medicare Members 
                                 as of December 1995 
Aetna/Southern California               52,948 
Humana/Florida                         213,669 
PacifiCare/Los Angeles                 274,247 
FHP/California                         208,432 
Share & Medica/Minneapolis              40,957 
Kaiser/Southern California             148,093 
Health Net/Northern California          50,374 
HIP/New York                            48,174 
Group Health/Puget Sound                45,848 
Oxford/New York                         43,073 
All U.S.                             3,443,216 
Health Plan/Area                 Complaints per 1000 
                                 Members (1994-1995) 
Aetna/Southern California               3.88 
Humana/Florida                          2.65 
PacifiCare/Los Angeles                  1.33 
FHP/California                          1.29 
Share & Medica/Minneapolis              1.09 
Kaiser/Southern California              0.61 
Health Net/Northern California          0.56 
HIP/New York                            0.45 
Group Health/Puget Sound                0.30 
Oxford/New York                         0.28 
All U.S.                                1.29 

Due to the infrequency of federal complaints, it is unclear whether the variations in complaint rates reflect real differences in the quality of care or differences in the accessibility of internal grievance procedures. If the latter, HMOs that make filing grievances easier may be penalized by appearing to have lower quality of care plans than plans with substantial barriers to filing grievances. Of the Medicare risk contractor complaints adjudicated at the federal level in 1995, patients won 32% of cases in full and another 4% in part.(58) Health plans prevailed in the other 64% of cases.(59) In 1995, some 3,151 managed care Medicare beneficiaries filed federal complaints about their managed care health plan's coverage.(60) This number is down slightly from 3,271 in 1994 even though total national enrollment in managed care Medicare surged 54% in 1995 to 3.4 million.(61)

Data collected by HCFA for 1993 and 1994 reveal the types of events that managed care Medicare beneficiaries appeal.(62) Table 2 shows that during 1993 and 1994 the highest number of cases appealed and forwarded for reconsideration involved services provided by nonplan providers, emergency room (ER) services and inpatient hospital services. The most common reason for an initial coverage denial was that the managed care Medicare beneficiary received services from a nonrisk contractor plan practitioner (1929 times) with the plan winning on reconsideration just over 50% of the time. This occurs when Medicare beneficiaries continue to see their regular physician after switching to an HMO. The second most common reason for initial coverage denials resulted from managed care Medicare beneficiaries seeking ER treatment for a recurring or nonemergency situation (1416 times) with the plan again winning on reconsideration roughly 64% of the time. An example of this type of denial is a beneficiary who receives ER treatment and then returns to the ER days later for follow-up treatment that an HMO could have provided.(63) Another example is a beneficiary who had a recurring problem of throat swelling and visited the ER instead of waiting for her scheduled appointment later that day.(64)

Table 2: medicare Risk HMO Reconsideration Case Data, 1993-1994.(66) 
    Type of        No. of      No. of        No. of 
    Service        Cases        Cases         Cases 
   Appealed        Upheld    Upheld for     Partially 
                  for Plan   Beneficiary   Upheld for 
Nonplan             1028         570            93 
Emergency            999         373            23 
Inpatient            268         345            50 
Nursing Home         250         208           134 
Clinic (e.g, X-      251         152            28 
Ambulance            266         139             5 
Medical              322         138            16 
Therapies             79          53            14 
Non-Medicare         175          50            10 
Home Health           86          49             8 
Mental Health          7           6             1 
Hospice Care           2           1             0 
Total of All        3733        2084           382 
                  No. of Cases    Total No. 
                  Beneficiary     of Cases 
                       Was        Appealed 
Nonplan                238          1929 
Emergency               21          1416 
Inpatient              144           807 
Nursing Home            24           616 
Clinic (e.g, X-         72           503 
Ambulance                2           412 
Medical                 13           489 
Therapies                7           153 
Non-Medicare             0           235 
Home Health             30           173 
Mental Health            1            15 
Hospice Care             0             3 
Total of All           552          6751 

Table 2 also shows that retroactive disenrollment occurred 238 times when a beneficiary obtained services from a nonplan practitioner and 144 times when a beneficiary had an inpatient procedure. Retroactive disenrollment(67) often occurs when a beneficiary is not aware of his enrollment in an HMO, did not understand the lock-in provision,(68) or received services from a non-HMO provider within the covered area. When a beneficiary retroactively disenrolls from a Medicare risk contractor, he is then covered by traditional FFS Medicare for the time period in question.(69) Prior to Medicare+Choice, beneficiaries enrolled in Medicare risk HMOs could terminate enrollment at any time by submitting a disenrollment request to their HMO or the local SSA office.(70) Disenrollment takes effect on the first day of the month following the month when the request is filed.(71)

In addition, the data in Table 2 show that Medicare beneficiaries were almost twice as likely as managed care plan beneficiaries to be found responsible for costs associated with a questionable use of a nonplan practitioner. Beneficiaries were also nearly three times as likely as managed care plan beneficiaries to be found responsible for costs associated with the improper use of ER treatment. Overall, beneficiaries were almost twice as likely as managed care plan beneficiaries to be found responsible for costs associated with all health care services for categories related to appealed and subsequently reconsidered cases in the sample.

These data have several implications. First, 552 beneficiaries enrolled in Medicare managed care plans were retroactively disenrolled, indicating that some beneficiaries do not belong in managed care. One possible reason for the disenrollment may be that beneficiaries are unable to adjust their health care consumption to the style of managed care. Another may be that instead of using grievance and appeal procedures to contest the denial of an expensive specialist service, beneficiaries disenroll, get the service from the FFS system the next month, and then rejoin the Medicare risk contractor.(72) Second, some beneficiaries may need more information regarding what services are covered. For example, ER visits for follow-up treatments are not covered. Also, some beneficiaries may not be contacting the plan early enough when they obtain out-of-network services. Last, the data indicate that some beneficiaries are using services appropriately and are being improperly denied coverage and/or payment by otherwise responsible plans.


Differences in the delivery of health care under traditional FFS and managed care have revealed that the use of FFS grievance and appeals procedures in Medicare risk contracting would be less than perfect.(73) Several characteristics of managed care highlight the problems of inadequate grievance and appeal procedures. First, in FFS, health care is delivered before denial of coverage occurs; in managed care, denial of coverage occurs before health care is delivered.(74) Second, FFS physicians act as patient advocates for additional services, but managed care physicians act as gatekeepers who restrict the provision of services.(75) Third, unlike indemnity insurers, managed care insurers have the "financial incentive to encourage patients needing expensive medical treatment to leave the plan ... and [have] no incentive to provide patients with an effective way to voice their objections to denial of treatment...."(76)

This Part first demonstrates the inadequacies of grievance and appeal procedures in the context of Medicare risk contractors and then describes HHS's regulatory response to these inadequacies by creating an expedited review mechanism. Section C examines the tension that remains among due process procedural rights, consumer demand for improved procedures, operational considerations and business objectives while section D examines the Ninth Circuit's affirmance and issues to be raised on certiorari to the United States Supreme Court.


In Grijalva v. Shalala,(77) Gregoria Grijalva and other Medicare beneficiaries sued HHS, alleging that the Secretary abdicated her responsibility to monitor HMOs and to ensure that HMOs provide benefits covered by Medicare.(78) Plaintiffs petitioned the court to order the Secretary to implement and enforce effective notice, hearing and appeals procedures for HMO service denials, claiming that HMOs currently fail to provide adequate notice for such denials.(79) Plaintiffs further argued that the U.S. Constitution mandates an expedited hearing prior to the denial of HMO services and that HMOs carry the burden of proof on Medicare denials.(80) In response, the HHS Secretary, Donna Shalala, argued that HMOs were privately owned entities and that their actions could not be imputed to the federal government.(81) Second, the Secretary argued that the court could not review HHS's enforcement activities regarding HMOs because these activities were committed to her discretion.(82)

The district court first found that the plaintiffs' claims hinged on whether Medicare-based denials of service by HMOs constituted state action.(83) The court found that these denials were state action because the HMOs performed essentially the same duties as fiscal intermediaries, entities that act as agents for the Secretary in handling Medicare claims administration.(84) The court then dismissed the Secretary's claim that she had discretion over enforcement because Congress had expressly prohibited the Secretary from entering into arrangements with HMOs that fail to meet the requirements for service and continuity of care standards, notice and hearing procedures, and appeals rights contained in the Medicare statute.(85)

The court stated that "what [due] process [rights are] owed the Medicare beneficiary by the HMO [are] determined by a test established in Matthews v. Eldridge which balances"(86): (1) the private interest, (2) the risk of an erroneous deprivation through the procedures used and (3) the government's interest, including the fiscal and administrative burdens that the additional or substitute procedural requirements would entail.(87) The court applied the Eldridge test to the facts of Grijalva and found that Medicare beneficiaries had a substantial interest because of the "astronomical nature of medical costs."(88) "The HMO's initial adverse coverage determination in many cases prevents receipt of medical care."(89) Second, the court stated that the risk of an erroneous deprivation was high.(90) The court based this determination on an examination of ten of the denial notices sent to plaintiffs.(91) These notices failed to provide adequate reasons for the denial. The court noted that eight of the denials it reviewed failed to inform the claimant that he or she had the right to present additional evidence to the HMO for reconsideration and failed to direct claimants to their attending physicians as a primary means for obtaining substantiating evidence of medical necessity to rebut a denial.(92) Additionally, the HMO notices failed to describe any procedures for securing direct communication with the HMO representative who was reconsidering the claim,(93) and the notices routinely failed to include any reference to the peer review organization (PRO) appeal process.(94) Under the third prong of Eldridge, the court considered only the cost to the federal government of increased procedural safeguards.(95)

In performing its Eldridge analysis on these facts, the court noted that nothing in the Medicare statutes or legislative history suggested that Congress intended no less than full benefits and rights to apply when it embraced HMOs as Medicare providers.(96) The court held that a Medicare beneficiary must receive notice and a hearing when an HMO denies services based on Medicare coverage determinations because of congressional intent and the result of the Eldridge balancing test.(97) The existing reconsideration procedures followed by HMOs failed to secure the minimum due process for Medicare beneficiaries.(98) The court also established a list of notice and hearing requirements and instructed the Secretary to comply by not entering into contracts with any HMOs that failed to meet those requirements.(99)

The court further ordered that "Shalala require her Medicare contracting ... [HMOs] to give their enrollees written notice whenever a coverage determination results in a service or referral requested by a health care provider, enrollee, or person acting on his or her behalf, being denied, or an ongoing course of treatment being reduced or terminated."(100) The requirements of the written denials are as follows:

   (a) Notice shall be given promptly, but no more than five working days 
   after written or oral request for a service or referral by a health care 
   provider, enrollee, or person acting on his or her behalf, and at least one 
   working day before reduction or termination of a course of treatment. 
   (b) It may be delayed in exceptional circumstances for up to 60 days, if an 
   HMO needs additional information to make a responsibly considered medical 
   determination. To obtain an extension of the five-day notice requirement, 
   the HMO must notify the enrollee that it needs additional information, 
   specifically: what additional information it needs, the steps necessary to 
   acquire the information, and the time estimated for completing the 
   (c) It shall be on a clear, readable form designed by the Defendant, in at 
   least 12-point type, and include the following information: 
      (i) an explanation in lay language of the coverage rule upon which the 
   adverse decision was based, sufficiently detailed to allow the enrollee to 
   understand the decision and argue his or her case; 
      (ii) a description of the regular and expedited appeal processes, and an 
   explanation of the [PRO] complaint and quality review process; 
      (iii) a description of the additional evidence that would support the 
   enrollee's position; instructions on how to obtain doctor's letters and 
   medical records in support of the enrollee's position--which shall be 
   freely provided by the HMO; and how and when the enrollee may submit such 
   evidence (in-person, if desired); 
      (iv) the procedures for securing an informal hearing before the 
    decision-maker for reconsideration.(101) 

The court also ordered the Secretary to monitor HMOs' compliance with these notice requirements.(102) If a contracting HMO fails to comply, "the Secretary is prohibited from renewing or entering into a subsequent Medicare contract with the HMO."(103)

HMO enrollees are entitled to an administrative reconsideration process for all adverse service decisions that meet the following requirements:

   (a) First level reconsideration by the HMO shall include informal, 
   in-person communication with the reconsideration decision-maker; 
   (b) An expedited reconsideration process shall be made available when 
   services are urgently needed, such as where acute care services are being 
   denied or terminated: certain types of nursing facility care, certain types 
   of home health and therapy services, and denials of certain types of 
   non-cosmetic surgery. 
      An enrollee can establish that services are urgently needed by providing 
   a written explanation of urgency from his or her doctor. Plan doctors shall 
   be free to give supporting documentation without fear of retaliation or 
   reprisal from the HMO. 
      A doctor's statement is not required to trigger expedited 
   reconsideration. Under certain circumstances, especially where acute care 
   services are being denied or terminated, lay testimony may suffice to 
   establish that the care is urgently needed. 
   (c) An expedited decision by the HMO must be issued within three working 
   days of the request for expedited reconsideration. Either the HMO or the 
   enrollee may request up to ten additional working days to obtain evidence; 
   (d) Upon denial of an expedited reconsideration by the HMO, the independent 
   HCFA review agency (currently NDG) shall complete review, as provided by 
   law, within ten working days of the request for HCFA review; 
   (e) When acute care services are denied, so as to trigger the expedited 
   reconsideration process, services must continue until a final 
   reconsideration decision has been issued; 
   (f) Any HMO policy or procedure that impedes an enrollee from obtaining 
   supporting evidence, including medical records and letters from health care 
   providers, is prohibited.(104) 

The court retained jurisdiction over the case for three years to ensure that the Secretary implemented and monitored its order.(105)


HHS appealed the decision in Grijalva to the U.S. Court of Appeals for the Ninth Circuit.(106) The district court stayed its order pending the disposition of the government's appeal.(107) While the appeal was pending, several significant events occurred. First, the Health Insurance Portability and Accountability Act of 1996(108) (HIPAA) amendments to 42 U.S.C. [sections] 1395mm gave HHS the authority to impose intermediate sanctions on Medicare risk contractors for noncompliance with the Act and the Secretary's regulations.(109) With this authority, HHS may impose a civil fine of $25,000 per occurrence or $10,000 per week or suspension,(110) Second, HHS promulgated two new rules: Medicare Appeals of Individual Claims,(111) ("Individual Appeals") and Establishment of an Expedited Review Process for Medicare Beneficiaries Enrolled in Health Maintenance Organizations, Competitive Medical Plans, and Health Care Prepayment Plans(112) ("Expedited Review").

1. Appeals of Individual Claims

In the Individual Appeals rulemaking, HHS states that its ultimate intention is to develop a "rule establishing in title 42 all Medicare hearings and appeals procedures.... As an interim measure, to ensure uniform application of the Part A and Part B appeals regulations, this rule, for the most part, amends subparts G and H of part 405 to incorporate the various appeals provisions" found in the Budget Acts of 1986 and 1987. …

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