Why do HMOs have such a bad reputation?

HMO FAQs: Are HMOs bad? Why are there so many HMO horror stories?

Why HMOs Have a Bad Reputation

HMO is the acronym for “health maintenance organization.” In California, HMOs are called “health care service plans.” HMOs make more money by not providing care to patients.  A common example of bad faith HMO insurance occurs in situations where a patient is not given diagnostic tests because the “odds” are that their problem is not serious.

Why do HMOs have such a bad reputation?

In the pursuit of profit, HMOs have negotiated ever-declining rates with their providers. As a result, many medical groups and hospitals have gone bankrupt in the last few years. Doctors are ultimately human, and may succumb to the economic incentive that the HMO structure provides to withhold care.

The kind of HMO horror stories that make the newspapers occur when the economic incentives that HMOs create to withhold care end up harming patients. For example, it was recently reported that Kaiser Permanente was facing criticism for refusing to pay for organ transplants performed at non-Kaiser facilities. Instead, it required its members to obtain their transplants at a new Kaiser hospital, where the waiting list for organs was the longest in the country.

An Example of HMO bad faith

Another common example of HMO bad faith occurs in situations where a patient is not given diagnostic tests because the “odds” are that their problem is not serious.

We are currently working on a case where an HMO member sought care from her PCP for recurring headaches. The PCP believed that the headaches were caused by anxiety, so he prescribed anti-anxiety medications and eventually referred the patient to a psychiatrist.

Even after the symptoms persisted for months, the PCP refused to authorize an MRI. Finally, the patient was referred to a neurologist, who authorized the MRI, which showed that the patient had a golf-ball sized tumor behind her left eye. Had the PCP been less resistant to ordering the expensive MRI, the tumor would have been diagnosed long before it had grown so large.

This pattern is something we have seen time and again with HMOs.

Can HMOs / Health Care Service Plans be sued for bad faith damages?

Yes. We are proud that two of our cases, Smith v. Pacificare and Kotler v. Pacificare, confirmed that regardless of the differences between HMOs and insurers, HMOs are “in the business of insurance,” and can be sued for bad faith damages.

Kotler v. Pacificare of California (2005) 105 Cal.App.4th 573, 129 Cal.Rptr.2d 526
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Smith v. Pacificare Behavioral Health of California (2002) 93 Cal.App.4th 139, 113 Cal.Rptr.2d 140.
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How we help consumers and insurance policyholders

While much of our practice involves work we do for other lawyers, we also handle cases for people and businesses involved in disputes with their insurance companies. If you, your business, or a member of your family is involved in an insurance-related dispute, we might be able to help.

Our analysis of insurance issues is so well respected that we are sometimes consulted by insurance companies themselves. We were recently asked by a major insurer to advise it on whether to make a $17 million claim to its own insurance company.

We do not handle litigation on a high-volume, assembly-line basis, and we are therefore very selective about the cases we take. But when we do take a case, we devote considerable thought, care, and attention to it, so that it moves as quickly through the courts as the judicial system permits.

To find out more about what we can do for you read “Our Litigation Practice for Policyholders.”


For Consumers and Policyholders


Southern California civil appeals attorney, Jeffrey I. Ehrlich, is an appellate specialist certified by the State Bar of California’s Committee on Legal Specialization.