Fourth-party audit organizations (FPAOs) conduct utilization review and control programs, usually on behalf of employers that provide health benefits programs to employees. The existence of FPAOs and their increasing range of activity reflect the business community's great concern about the rising cost of health care. Over the past decade the business community has taken an increasingly active role in seeking to influence federal and state policies regarding health services, and in stimulating the development of new mechanisms of health delivery, with the goal of making its expenditures for health benefits more costeffective. Businesses rely on FPAOs to assist them in controlling the costs of health benefits programs for employees.

As desirable as cost containment in the health field is, however, the various means used to help reach that goal must be evaluated in terms of their practical effects and the relevant legal considerations. This article will (1) describe the functions performed by FPAOs; (2) provide an illustration of the impact of an FPAO in a patient care situation; (3) examine some of the practical problems created by the use of FPAOs; (4) indicate some of the legal questions presented by the activities of FPAOs; and (5) assess the role and likely impact of FPAOs in the future.

The largest single group of hospitals in the country is composed of private nonprofit hospitals, which are exempt from taxation under the Internal Revenue Code. The second largest group of hospitals consists of for-profit hospital corporations. The third and fourth largest groups are, respectively, municipal hospitals and state and federal specialty hospitals, such as mental health facilities and public health hospitals.

Although the idea of hospitals engaging in business activities used to arouse scorn, the concept has now gained acceptance. This change began in the late 196Os, when the enactment of the Medicare and Medicaid programs forced hospitals to become more so phisticated in handling reimbursement issues, certification-of-need, unrelated business income, and productivity.

By 1981, the percentage of hospital charges reimbursed by the Medicare system had declined to 68.7 percent, from its 1974 level of 75.4 percent. In 1982, with the signing of the Tax Equity and Fiscal Responsibility Art (TEFRA), hospitals were essentially told that they must find their own solution to the problem of inadequate funding.

By now nearly everyone knows about the liability crisis. Municipalities, doctors, businesses, and others are paying soaring premiums for their liability insurance. The unlucky ones cannot find coverage at any price. The result is that services are becoming increasingly scarce and expensive. Curiously, the causes sound even more familiar. A new booklet being circulated by the Insurance Information Institute puts them succintly: “While our judicial system is basically a good one, it has been handicapped by unnecessary lawsuits, … exorbitant awards, and unpredictable results.”

Thus, the liability crisis is seen as a lawsuit crisis. The press and industry lobbyists overflow with stories of frivolous lawsuits, out-of-control damage awards, and a nation turned litigious. Accordingly, state legislatures around the country are preparing to solve the problem by modifying the laws that permit injured plaintiffs to seek compensation for their injuries through the courts.

If the lawsuit crisis exists, serious evidence of it should not be too difficult to find. in fact, the more awful the problem, the more plentiful and glaring should be the evidence. I have begun such an inquiry, but so far the hard evidence has been, to put it mildly, elusive.

By now nearly everyone knows about the liability crisis. Municipalities, doctors, businesses, and others are paying soaring premiums for their liability insurance. The unlucky ones cannot find coverage at any price. The result is that services are becoming increasingly scarce and expensive. Curiously, the causes sound even more familiar. A new booklet being circulated by the Insurance Information Institute puts them succintly: “While our judicial system is basically a good one, it has been handicapped by unnecessary lawsuits, … exorbitant awards, and unpredictable results.”

Thus, the liability crisis is seen as a lawsuit crisis. The press and industry lobbyists overflow with stories of frivolous lawsuits, out-of-control damage awards, and a nation turned litigious. Accordingly, state legislatures around the country are preparing to solve the problem by modifying the laws that permit injured plaintiffs to seek compensation for their injuries through the courts.

If the lawsuit crisis exists, serious evidence of it should not be too difficult to find. in fact, the more awful the problem, the more plentiful and glaring should be the evidence. I have begun such an inquiry, but so far the hard evidence has been, to put it mildly, elusive.

Most legislative proposals to solve the so-called malpractice crisis have been viewed by lawyers as attacks on lawyers and the legal system. Consequently, little thought has been given to whether we can find support for these proposals within the tort system. What I would like to suggest is that some of these proposals, including the increasingly popular cap on recovery for pain and suffering, are supported by the way the tort system has begun to look at injuries with several causes.

Initially, the legal system refused to recognize that the damages resulting from an injury could be apportioned among the various causes. Although we always recognized that every event has several causes, the law placed responsibility on “the proximate cause,” often the cause closest to the injury.

One of the first steps toward division of damages among causes was the replacement of contributory negligence with comparative negligence. Contributory negligence provided that if defendant and plaintiff were both negligent causes of the injury, plaintiff collected nothing.