Chapter 6Introduction to LawLearning Objectives (1 of 2)

Chapter 6
Introduction to Law
Learning Objectives (1 of 2)
Understand the meaning and objectives of tort law.
Describe the elements of negligence.
Explain how the commission and omission of an act differ.
Describe the importance of foreseeability in a negligence case.
Describe intentional torts and how they might occur in the
healthcare setting.
2
Learning Objectives (2 of 2)
Describe the various crimes and give examples of how they
might occur in the healthcare setting.
Explain the various elements of a contract.
Describe the pretrial and trial process.
Tort Law
A tort is a wrong, other than a breach of contract,
committed against a person or property for which a court
provides a remedy, generally in the form of monetary damages.
Objectives of Tort Law
Preservation of peace between individuals
Fault-finding for wrongdoing

Deterrence to wrongful acts
Indemnify injured person(s)
Negligence
Commission or omission of an act that a reasonably
prudent person would or would not do under given
circumstances.
Commission of an Act
Administering wrong medication
Administering wrong dosage of a medication
Administering medication to the wrong patient
Performing a procedure without patient consent
Performing procedure on wrong patient
Surgically removing the wrong body part
Failing to assess and reassess a patient’s nutritional needs
Omission of an Act
Failure to administer medication(s)
Failure to order required diagnostic tests
Failure to follow up on abnormal test results
Failure to perform “time-out” prior to the start of surgery to
ensure the correct procedure is being conducted on the correct
patient at the correct site
Malpractice
Negligence of a professional person:
Surgeon who conducts surgery on the wrong body part.
Nurse who administers wrong medication, injuring patient.
Pharmacist who mislabels a medication and the patient is

harmed.
Forms of Negligence
Malfeasance
Misfeasance
Nonfeasance
Malfeasance
Execution of an unlawful or improper act.
Performing a partial birth abortion when prohibited by law.
Performing a procedure without having the appropriate
credentials.
Misfeasance
Improper performance of an act.
Wrong-sided surgery.
Leaving an instrument in the patient’s body.
Nonfeasance
Failure to act when there is a duty to act.
Failure to prescribe antibiotics when indicated.
Failure to respond to emergency call.
Four Elements of Negligence
Duty to care
Breach of duty
Injury
Causation

Duty to Care
Legal obligation of care imposed on one to safeguard rights of
others.
Duty created by statute:
Defendant must have been within specified class of persons
outlined in the statute.
Plaintiff must have been injured in a way statute was designed
to prevent.
Plaintiff must show that injury would not have occurred if the
statute had not been violated.
Standard of Care
Actual performance of an individual in a given situation will be
measured against what a reasonably prudent person would or
would not have done.
Duty to Hire Competent Staff
A nurse was hired sight unseen over the telephone. The
applicant falsely stated in his application that he was a licensed
LVN. In reality, he was not an LVN and he had committed 56
criminal offenses of theft. He eventually assaulted a resident.
Court ruled for plaintiff as nursing center failed in its duty to
care by not validating the nurse’s license.
Breach of Duty
Must be a deviation from recognized standard of care.
Must be failure to adhere to an obligation.
When a physician fails to respond to on-call emergency room
duties.

Failure to perform an adequate history and physical in the
emergency department.
Example: Failure to properly diagnose a patient at risk for
Ebola and discharging that patient back into the community.
Injury/Actual Damages
Actual damages must be established.
Without injury, damages cannot be awarded.
Causation/Proximate Cause (1 of 2)
Must be a reasonable, close, and causal connection between the
defendant’s negligent conduct and resulting damages suffered.
Example: In the Hastings case, a person does not bleed to death
in a hospital emergency department over a 2-hour period
without some surgical intervention.
Causation/Proximate Cause (2 of 2)
Test for foreseeability is whether a person of ordinary prudence
and intelligence should have anticipated danger to others caused
by a negligent act.
In the Hastings case, it was highly probable that the patient
would die if the bleeding was not stopped.
“The broad test of negligence is what a reasonably prudent
person would foresee and would do in the light of this foresight
under the circumstances.”
Intentional Torts

Assault and battery
False imprisonment
Defamation of character
Invasion of privacy
Infliction of mental distress
Assault and Battery
Assault: Deliberate threat, coupled with apparent ability to do
physical harm to another. Actual contact not necessary.
Battery: Intentional touching of another’s person in socially
impermissible manner without person’s consent.
Assault
Person attempting to touch another unlawfully must possess
apparent present ability to commit battery.
Person threatened must be aware of or have actual knowledge of
an immediate threat of a battery and must fear it.
False Imprisonment
Unlawful restraint of individual’s personal liberty or
unlawful restraining or confining an individual.
Defamation of Character
Involves communications to someone other than the person
defamed that tends to hold that person’s reputation up to scorn
and ridicule.
Slander (verbal defamation)
Libel (written defamation)
Invasion of Privacy
Right to

Be left alone
Be free from unwarranted publicity
Be free from exposure to public view
Be free from unwarranted intrusions into a one’s personal
affairs
Personal privacy
Have records/kept confidential
Infliction of Mental Distress
Conduct that is so outrageous that it goes beyond bounds
tolerated by decent society.
Criminal Law
A crime is any social harm defined and made punishable by law.
Purpose of criminal law:
Maintain public order and safety.
Protect the individual.
Use punishment as a deterrent to crime.
Rehabilitate the criminal for return to society.
Classification of Crimes
Misdemeanor: An offense punishable by less than 1 year in jail
and/or a fine.
Example: Petty larceny
Felony: A much more serious crime that is generally punishable
by imprisonment in a state or federal penitentiary for more than
1 year.
Examples: Rape, murder
Criminal Procedure
Arrest

Arraignment
Indictment
Conference
Prosecutor
Defense attorney
Criminal trial
Healthcare Fraud
Unlawful act, generally deception for personal financial gain.
Schemes to Defraud (1 of 3)
Billing for services not rendered.
Falsifying a patient’s diagnosis to justify tests, surgeries, or
other procedures that are not medically necessary.
Misrepresenting procedures performed to obtain payment for
services not covered.
Upcoding services (billing for a more costly service than the
one actually performed).
Upcoding medical supplies and equipment (billing for more
expensive equipment than delivered to the patient).
Unbundling (billing each stage of a procedure as if it were a
separate procedure).
Billing for unnecessary services not medically indicated.
Accepting kickbacks for patient referrals.

Waiving patient copays or deductibles and overbilling the
insurance carrier or benefit plan.
Billing a patient more than the copay amount for services that
were prepaid or paid in full by the benefit plan under the terms
of a managed care contract.
Overbilling the insurance carrier or benefit plan.
Billing for Unnecessary Procedures
Physician receives 45-year prison sentence for fraud.
The U.S. Supreme Court refused to hear Dr. Fata’s appeal of his
conviction for running a scheme that involved billing the
government for medically unnecessary cancer and blood
treatments.
Home Care Fraud
On the rise
Not easy to detect
Pharmacist Billing Scam
A pharmacist dispensed the generic equivalent of a drug and
billed for the higher-cost brand name.
Discuss the ethical and legal issues.
Self-Referrals
Dr. L ordered unnecessary highly expensive esoteric lab tests
for his patients. Dr. L referred his patients to a private lab, in
which he had 30% ownership.

Discuss the ethical and legal issues.
Ethical and Legal Issues
Ethical issues
Truthfulness
Professional codes of ethics
Legal issues
Fraud
Other Criminal Acts
Manslaughter
Murder
Theft
Medical identity theft
Contracts
A contract is a special kind of agreement, either written or oral,
that involves legally binding obligations between two or more
parties.
Elements of a Contract
Offer/Communication
Consideration
Acceptance
Kinds of Contracts
Employment contracts
Exclusive contracts

Commercial ethics and noncompetition agreements
Trial Procedure: Pleadings
Summons and complaint
Answer
Bill of particulars
Trial Procedure: Discovery
Process of investigating the facts of a case before trial.
Obtain evidence that might not be obtainable at the time of trial.
Isolate and narrow the issues for trial.
Gather knowledge of the existence of additional evidence that
may be admissible at trial.
Obtain leads to enable the discovering party to gather further
evidence.
Trial Procedure:
Preparation of Witnesses
The manner in which a witness handles questioning at a
deposition or trial is often as important as the facts of the case.
Each witness should be well prepared before testifying.
Preparation should include a review of all pertinent records.
Trial Procedure: Participants
The court
Decides questions of law
The jury
Determines questions of fact

Trial Procedure: Subpoenas
Subpoena: A legal order requiring the appearance of a person
and/or the presentation of documents to a court or
administrative body.
Subpoena ad testificandum: Orders the appearance of a person
at a trial or other investigative proceeding to give testimony.
Subpoena duces tecum: A written command to bring records,
documents, or other evidence described in the subpoena to a
trial or other investigative proceeding.
Trial Procedure: Opening Statements
Opening statements are provided by:
The plaintiff(s)
The defendant(s)
Trial Procedure: Burden of Proof
The plaintiff is required to show that the defendant violated a
legal duty.
The case is dismissed if the evidence does not support the
defendant’s allegations.
Trial Procedure: Kinds of Evidence
Direct evidence
Demonstrative evidence
Documentary evidence
Examination of witnesses
Expert witnesses

Defense of One’s Actions
Assumption of a risk
Comparative negligence
Contributory negligence
Good Samaritan laws
Defenses Against Recovery
Ignorance of fact and unintentional wrongs
Statute of limitations
Sovereign immunity
Trial Procedure
Closing statements
Judge’s charge to the jury
Jury deliberation
Damages
Appeals
Review Questions
Describe the objectives of tort law.
Discuss the distinctions among negligent torts, intentional torts,
and strict liability.
Explain the difference between a commission and omission of a
negligent act.
Explain the difference between negligence and malpractice.
What are the elements that must be proven in order to be
successful in a negligence suit? Illustrate your answer with a
case. (The facts of the case can be hypothetical.)
Describe the categories of intentional torts.

How does slander differ from libel? Give an example of each.
Describe the objectives of criminal law.
Review Questions
Describe the difference between a misdemeanor and a felony.
Give an example of each.
Discuss why physicians have been so reluctant to remove a
patient’s life-support systems.
Describe a scheme to defraud.
Explain the elements of a contract.
Describe why exclusive contracts are so controversial.
Review Questions
Describe the trial process, including pretrial motions and the
functions of the judge, jury, and attorneys.
Describe the kinds of evidence that a plaintiff can present in
order to establish a negligent act.
What defenses can a defendant present in order to refute a
plaintiff’s evidence?
Review Questions
Describe how statutes of limitations favor defendants in a
lawsuit.
Describe the various types of damages that can be awarded a
plaintiff.
Explain why either the plaintiff or defendant may wish to
appeal a jury’s verdict.
Review Questions

Underwriting & Rate Making
Chapter 6
OverviewPremium computationsMedical Loss Ratio under the
ACAUnderwritingRate MakingCommunity ratingExperience
ratingSelf-insuringCombining dissimilar groupsUnderwriting
and the ACA
Premium Computations & Loading FeesGross premium = Pure
premium/(1-loading percentage)Pure premium is the expected
lossLoading percentage is the markup to cover objective risk,
profit and costs of marketing, adjudicating and processing
claims, coordinating benefits and providing access to networks.
Pauly & Percy (2000) estimated that the loading percentage was
~ 10% for group coverage and 50% for non-group coverage
Karaca-Mandic et al. (2011) used data from the MEPS-IC and
concluded that loading fees were: Similar for firms with <100
workers at ~ 34%Firms with 100 to 10,000 workers had loading
fees of about 15%Firms with >10,000 workers had loading fees
of about 4%
Loading Fees & Loss RatiosTraditionally insurers have used
their own approaches to defining which costs were claims and

which belonged in the loading fees.Unless there were state
insurance regulations to the contrary, it made little difference,
the market was usually concerned with the gross premium
The ACA changed this with a requirement for a minimum loss
ratio
Medical Loss Ratios in the ACA
MLR =
(Medical Claims + Quality Enhancing Efforts)
(Premiums – Taxes)
ACA requires individual plans and group plans offered to
groups up to 100 workers have an MLR of at least 80%
Larger group plans are to have an MLR of at least 85%
If these thresholds are not met, insurers must rebate premiums
Abraham & Karaca-Mandic (2011) estimate that in nine states at
least half of individual insurers would likely fail to meet the
80% threshold if the ACA were then in effect.
UnderwritingIdentifying the determinants of claims
experienceEstablishing risk pools with known expected losses
and minimum varianceMatching new members to the
appropriate risk pool
Objective Risk
Objective Risk = σ/(μ √N)
= variance/(expected loss times square root of covered

lives)
o Risk increases with variance
o Risk decreases with the size of the expected loss
o Risk decreases with the number of covered lives
Rate MakingCommunity RatingManual RatingAdjusted
Community RatingCommunity Rating by ClassExperience
RatingProspective RatingRetrospective Rating
Community and Manual RatingCommunity RatingAll covered
lives are in the same risk pool
Manual RatingIndividuals are placed in risk pools based upon
common characteristicsAge, gender, location, occupation,
industry, etc.Health status
Prospective Experience RatingBased upon prior claims of the
group
Credibility factorWeight of pool vs. group claims experience
Risk borne by the insurerRate is quoted for the forthcoming
period
Retrospective Experience RatingBasic premium covers
administration, claims adjudication, and any stoploss
features.The firm is charged for each dollar of actual
claims.Stoploss features limit a firm’s risk:Aggregate
stoploss—If total claims exceed a negotiated dollar maximum,
the firm pays no additional cost.Specific stoploss—If a specific
claim exceeds a negotiated dollar maximum, the firm pays no

additional cost.Typically, the firm makes quarterly payments
and pays a “retro” fee at year-end to reconcile quarterly
payments with actual experience.
Self-Insured Status and the ACAIt is relatively rare for smaller
firms to be self-insured due to the objective risk issues we
discussed earlier.One can buy stoploss coverage to reduce the
risk of unexpectedly high claims costsMany have suggested that
smaller firms with low claims costs may buy stoploss coverage
as a means of avoiding being mixed in with higher cost firms in
the exchanges.
Manual Methods Used by HMOs
Adjusted Community Rating
Community Rating by Class
Adjusted Community RatingUse the claims experience of the
entire pool.Use “contract mix” (i.e., proportion of single,
couple, family) within each group.Define “contract size” (i.e.,
people in family) based upon group’s data.Define “charging
ratios” (i.e., ratio of couple and family to single rate) based
upon group’s data.
Community Rating by ClassPremium typically based upon
adjusted community rating factors.Plus:Age and gender mix of
the groupIndustry classification of the group

Effect of State Policies on the Market for Private Nongroup
Health Insurance
Objective:To identify the effects of state nongroup insurance
reforms of the 1990s on the purchase of insurance coverage by
“more healthy” and “less healthy” individuals.
Source: LoSasso and Lurie (2009)
BackgroundBetween 1993 and 1996, eight states enacted
legislation that limited the factors that insurers could use in
setting premiums in the nongroup (i.e., individual) insurance
market.
These states also had “guaranteed issue” provisions.
Kentucky, Massachusetts, Maine, New Hampshire, New York,
New Jersey, Vermont, and Washington
Enacted “Community Rating”The states all disallowed the use
of health status or medical underwriting.New Jersey: Pure
community ratingNew York: Geographic differentials
allowedVermont: +/– 20 percent for demographics (except Blue
Cross and HMOs)New Hampshire: 3 to 1 ratio for ageOthers:
age, geography, family composition, gender
Data and MethodsSurvey of Income and Program Participation
(SIPP)Nationally representative panel surveys of
individuals1990 to 2000Those age 18 to 64 in 41 identifiable
statesApproximately 35,750 observations per yearProbit
regression:
Non-group Coverage = f(law, individual characteristics,

state, and year fixed effects)
Results for “Healthy”“Healthy” are men age 22 to 35 with self-
reported health status of excellent or very good.Adoption of
community rating resulted in:2.0 percent decline in nongroup
coverage 37 percent decline relative to the mean3.9 percent
increase in probability of being uninsured13 percent increase
relative to the mean
Results for “Unhealthy”“Unhealthy” are all those age 40 to 64
with self-reported health status of poorAdoption of community
rating resulted in:4.5 percent increase in nongroup coverage50
percent increase relative to the mean7.4 percent decline in
probability of being uninsured50 percent decrease relative to
the mean
ConclusionCommunity rating had the effect of lumping
dissimilar risks into the same poolRaised the premium for low -
risk folks relative to what they used to paySome of whom now
dropped out of the health planLowered the premium for high-
risk folks relative to what they used to paySome of whom now
joined the health plan
Underwriting in the ACAUnder the ACA insurers may not use
health status in establishing rates
The may not use gender
Age rating is limited to a 1 to 3 band

Society of Actuaries StudyMEPS data on use and cost of
services
Suppose there are an equal number of men and women in each
age group.
Moving the ACA from 1 to 3 rating band to 1 to 5Suppose the
age range of health care spending is closer to 1 to 5 rather than
1 to 3
The ACA 1 to 3 rule raises premiums to young adults and
encourages them to forgo coverage
What would happen to premiums if the rule was changed to
allow a 1 to 5 band?
Discussion QuestionsSuppose your insurance competitor begins
to use information from genetic testing to set insurance rates in
the nongroup market. Suppose further that these tests do
identify meaningful differences in claims experience. You
choose not to implement such a model. Discuss what is likely to
happen to your enrollee mix and to the premiums
you charge. Suppose federal law prevents the use of generic
data to set rates (as the Genetic Information Nondisclosure Act
of 2008 does). Does this mean that as an insurer you can ignore
the effects of generics data?

Discussion QuestionsThose who frequently watch late-night TV
have undoubtedly seen commercials that say “no health
questions.” In what way is this phrase relevant to the purchase
of insurance? Who is likely to be attracted to the policies being
offered? What do you expect about the premiums of these
policies relative to policies that do ask health questions?
Discussion QuestionsSuppose your small, general medicine
physician group is offered a capitated managed care contract.
Through this contract, the group will be paid on a capitated
basis. This means that the group will be responsible for all of
the costs of each patient’s care. What does the concept of
objective risk tell you about the desirability of this
contract?
Discussion QuestionsTerhune (2002) described
“reunderwriting” in the nongroup market. In this process,
individuals are reclassified into a higher-risk group once they
have a significant illness or claim. Discuss the effects of such a
model on premiums and enrollment. If healthcare claims were
essentially random over time in each of an insurer’s established
risk pools, how would this affect your conclusions?

Discussion QuestionsGiven the discussion of self-insured health
insurance plans, under what conditions would you expect a
small employer to become self-insured?
Discussion QuestionsThe available data suggest that experience
rating (together with self-insurance) is by far the most common
underwriting method used for large employers. The avoidance
of state insurance regulations and premium taxes may explain
why firms tend to self-insure, but why do you think experience-
rated approaches are more common than manual
rating?
Discussion Questions
The ACA prohibits medical underwriting in the non-group
market. Other things equal, what effect will this prohibition
have on the premiums of healthy and unhealthy enrollees? Who
are likely to be the healthy? The unhealthy? The ACA also
prohibits gender differences in premiums in the exchanges.
What effect is this likely to have on premiums?
Chapter 5
Development of Law
Chapters 5 and 6 go well together.
Learning Objectives
Understand the development and sources of law.
Describe how the government is organized through the three
branches of government.

Explain the principle of separation of powers.
Describe what is meant by conflict of laws.
Describe the functions of the Department of Health and Human
Resources and its various operating divisions.
Law
A system of principles and processes by which people in a
society deal with their disputes and problems, seeking to solve
or settle them without resorting to force.
General rules of conduct enforced by government.
Development of Law
Tradition
Culture
Customs
Beliefs
Why Laws Change
Political climate
Social change
Religious beliefs
Values change
Categories of Law
Public law: The laws that control relationships between
individuals and the government.
Private law: The laws that control relationships between
individuals.

Sources of Law
Common law
Statutory law
Administrative law
Common Law (1 of 2)
Derived from judicial decisions.
Origins in English common law.
Responds to issues beyond written law.
Often differs from state to state.
Common-law principles prevail unless a statute governs.
Judicial decision in one state does not set precedent for another.
Common Law (2 of 2)
Principles of common law:
Precedent
Res judicata
Stare decisis
Statutory Law
Written law that emanates from legislative bodies.
Courts often interpret how various statutes apply to each set of
facts.
U.S. Constitution is highest in hierarchy of enacted law.
http://constitutionus.com/?t=Bill%20of%20Rights

Bill of Rights
Amendments to the U.S. Constitution added to protect the rights
of citizens.
Freedom of religion
Right to keep and bear arms
Freedom of speech
First Amendment
The First Amendment guarantees freedoms concerning religion,
expression, assembly, and the right to petition.
It forbids Congress from both promoting one religion over
others and also restricting an individual’s religious practices.
It guarantees freedom of expression by prohibiting Congress
from restricting the press or the rights of individuals to speak
freely.
It also guarantees the right of citizens to assemble peaceably
and to petition their government.
Administrative Law
Public law is issued by administrative agencies to direct enacted
laws.
Administrative Procedures Act states the procedures under
which federal agencies operate.
Rules and regulations are administered within intent of law.
Regulations are subject to judicial review.
Government Organization:
Legislative Branch
Enacts laws.
Amends or repeals existing legislation.
Creates new legislation.

Judicial Branch
Resolves legal disputes.
Supreme Court
Nation’s highest court
Eight Associate Justices and one Chief Justice
As I have said in the past, when government bureaus and
agencies go awry, which are adjuncts of the legislative or
executive branches, the people flee to the third branch, their
courts, for solace and justice.
—Justice J. Henderson, Supreme Ct. of South Dakota
Executive Branch
Administers and enforces the law.
Executive power vested in the president.
Cabinet advises the president.
Separation of Powers
System of checks and balances.
No one branch of government dominant over the other two.
Each may affect and limit the activities, functions, and powers
of the other branches of government.
Conflict of Laws
Article VI, Paragraph 2 of the U.S. Constitution is commonly
referred to as the Supremacy Clause.

It establishes that the federal constitution, and federal law
generally, take precedence over state laws, and even state
constitutions.
It prohibits states from interfering with the federal government's
exercise of its constitutional powers, and from assuming any
functions that are exclusively entrusted to the federal
government.
It does not, however, allow the federal government to review or
veto state laws before they take effect.
U.S. Department of Health
and Human Services
Cabinet-level department.
Responsible for carrying out national health and human services
policy.
Main source of regulations affecting the healthcare industry.
Department of Health and Human Services: Divisions and
Agencies (1 of 2)
Administration on Aging
Centers for Medicare and Medicaid Services
Public Health Service
National Institutes of Health
Centers for Disease Control and Prevention
Food and Drug Administration
Department of Health and Human Services Divisions and
Agencies (2 of 2)
Substance Abuse and Mental Health Services Administration
Health Resources and Services Administration

Agency for Healthcare Research and Quality
Agency for Toxic Substances and Disease Registry
Indian Health Service
Review Questions
Define the term law and describe the sources from which law is
derived.
Describe and contrast the legal terms res judicata and stare
decisis.
Describe the function of each branch of government.
What is the meaning of separation of powers?
What is the function of an administrative agency?
Describe the various operating divisions and agencies within the
DHHS.
Review Questions

Chapter 6Introduction to LawLearning Objectives (1 of 2)

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