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ERISA & disclosure of financial incentives

By Anna Bamonte Torrance, Esq.

The United States Supreme Court has recently granted certiorari and will determine whether a jury could decide if ERISA was violated when an HMO paid undisclosed financial incentives to physicians who contain patient costs. This article will review the opinion of the Seventh Circuit for the U.S. Court of Appeals in Herdrich v. Peagram now under consideration by the Supreme Court, look at some of the case law developments with respect to financial incentive plans and disclosure obligations, and consider the impact of these decisions on physicians and their practices.

In the Herdrich case, a health insurance plan beneficiary filed an action based upon professional medical negligence, state law fraud and breach of fiduciary duty under ERISA. It was alleged that Herdrich suffered a ruptured appendix due to the negligence of the defendant doctor in failing to provide her with timely and adequate medical care. Herdrich claimed that her doctor discovered an inflamed mass in her abdomen but required her to wait eight days before undergoing a necessary diagnostic ultrasound at a plan facility more than 50 miles away.

In addition to the doctor, Herdrich also sued Carle Clinic Association, P.C. (Carle), Health Alliance Medical Plans, Inc. (HAMP), and Carle Health Insurance Management Company, Inc. (CHIMCO), which operated a pre-paid health insurance plan that provided medical and hospital services. Herdrich was covered under a plan subscription through her husband’s employer. Carle was allegedly owned by physicians who where also the officers and directors of HAMP and CHIMCO. These physicians, Herdrich claimed, received a year-end distribution, based in large part on supplemental expense payments made to Carle by HAMP and CHIMCO. The owner-physicians had the exclusive right to decide all disputed and non-routine claims under the Plan as well as exercise discretionary authority and discretionary control of claims management, property and asset management, and administration of the plan.

In determining whether Herdrich had properly stated a claim for breach of fiduciary duty under ERISA, the Seventh Circuit held that the complaint must allege facts which set forth that:

• The defendants were plan fiduciaries.

• The defendants breached their fiduciary duties.

• A cognizable loss resulted.

Recognizing that Congress intended ERISA’s definition of “fiduciary” to be broadly interpreted, the Court held that a corporation operating a pre-paid health insurance plan, and physicians who owned the plan, provided medical services to it and were members of the plan’s administrative review board, were “fiduciaries” as defined under ERISA. The Court noted that the board of directors, consisting exclusively of the Plan physicians, was in control of each and every aspect of the HMO’s governance. The corporation and physicians had discretionary authority to decide disputed claims.

A deeply divided Seventh Circuit Court concluded that a jury could decide whether the financial incentive scheme provided by the HMO to its owner-physicians to contain costs violated ERISA. The Court held that, where there are incentives for physicians who administer a medical plan to limit medical care and treatment, such incentives could rise to the level of a breach of fiduciary duty under ERISA where the fiduciary trust between participants and fiduciaries no longer exists. This breach of fiduciary duty occurs when physicians delay providing necessary treatment to or withhold administering proper care to plan beneficiaries for the sole purpose of increasing their bonuses. The Court held that Herdrich had sufficiently alleged that the Plan suffered a loss as a result of the defendants’ actions as it was deprived of the supplemental medical expense payment amounts in controversy.

The Court stressed that its decision does not mean that the existence of incentives will automatically give rise to a breach of fiduciary duty. It recognized that a fiduciary may have dual loyalties, i.e., the duty to act with an eye to the interest of the participants and beneficiaries versus the duty to conserve the plan’s assets by encouraging efficiency. The Court noted a “flaw” in the structure of the incentive program at issue which arose from the authority of owner-physicians of Carle to simultaneously control the care of patients and reap the profits generated from the HMO through the limited use of tests and referrals.

This case was submitted on petition for rehearing before the Seventh Circuit in March of 1999 at which time the petition was denied. The case was then appealed to the United States Supreme Court. The Supreme Court accepted the case for review and was scheduled to hear oral argument in late February.

The Herdrich opinion does not provide much guidance as to precisely which incentive programs disturb the balance of interests. The Court seems to advocate the sentiments of certain health care critics who argue that physicians should be removed from direct financial interest in patient care. Though the Seventh Circuit Court’s opinion is not the law in Pennsylvania, a decision from the U.S. Supreme Court affirming the opinion would impact managed care plans and physicians nationally. The courts would be placed in the position of scrutinizing financial arrangements in managed care and making assessments as to appropriate incentive levels. This task should arguably be left to regulatory and legislative efforts.

There are also recent decisions from other jurisdictions concerning the duty under ERISA to disclose financial incentive arrangements. The Eighth Circuit Court of Appeals held in Shea v. Esensten that a decedent’s widow stated a claim under ERISA against an HMO for breach of fiduciary duty to disclose all material facts affecting her husband’s health care. The decedent in Shea had experienced symptoms of heart disease but his primary physician had discouraged a referral to a cardiologist. The decedent died soon thereafter of heart failure. It was alleged that the HMO had an undisclosed financial incentive agreement with its physicians that rewarded the physicians for not making referrals to specialists and docked physicians a portion of their fees if they made too many referrals. The Eighth Circuit Court held that, “when an HMO’s financial incentives discourage a treating doctor from providing essential health care referrals for conditions covered under the plan benefit structure, the incentives must be disclosed and the failure to do so is a breach of ERISA’s fiduciary duties.”

The Appellate Court of Illinois in Neade v. Portes more recently held that a patient could bring a cause of action against his physician for breach of fiduciary duty for the failure to disclose a financial incentive to refrain from ordering tests or make referrals. The case was brought on behalf of a patient who had suffered classic symptoms of coronary artery blockage. His physician twice refused to authorize an angiogram or hospitalization. The patient had a massive myocardial infarction and died. The physician was president of the primary care center. He had entered into a contract with an HMO that provided a “Medical Incentive Fund” which was to be used for certain tests and referrals. Under the contract, 60 percent of the monies left in the Medical Incentive Fund at the end of the year was to go to the physicians.

Conversely, in January of this year, the U.S. Court of Appeals for the Fifth Circuit in Ehlmann v. Kaiser Foundation Health Plan of Texas, ruled that HMOs do not have a “generalized” duty under ERISA to disclose physician financial incentives. The case was a class action filed by HMO members against several HMOs. The Fifth Circuit distinguished this claim from claims that involve a specific patient inquiry or present “special circumstances,”such as in Shea, where disclosure might be required. The Court went on to state that it should be up to Congress to decide whether to impose a duty of disclosure.

Though these cases do not have precedential value in Pennsylvania, HMOs and physicians alike should be cognizant of patients’ rights to have the necessary information to make informed decisions about their care. Managed care plans should adequately communicate to enrollees and prospective enrollees which health services are covered, which are not and the extent of coverage. Likewise, managed care plans should disclose financial incentives that could impact the level or type of health care patients receive prior to enrollment.

Physicians have an ethical obligation to inform their patients of medically appropriate treatment options, regardless of their cost or whether they are covered under a plan. According to the Current Opinions of the Counsel on Ethical and Judicial Affairs of the American Medical Association, physicians too must assure disclosure of any financial incentives that could limit the diagnostic and therapeutic alternatives that are offered to patients or that may tend to limit a patient’s overall access to care. Physicians may satisfy this obligation by assuring that adequate disclosure has been made to patients by the managed care plan. Physicians can also, through an office brochure or a mailing sent to new patients, remind patients that they can contact their benefits coordinator or employer to obtain additional information about their health plan and the arrangement the plan has with its providers.

Anna Bamonte Torrance, Esq., is an attorney with the Pittsburgh law firm of Houston Harbaugh, concentrating her practice in health law and litigation.

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