HMO liability set back by Supreme Court ruling

By Anna Bamonte Torrance, Esq.

An HMO and its physicians cannot be sued in federal court for breaching their fiduciary duties to patients when they implement a managed care program in which the physicians receive financial incentives to contain costs, the U.S. Supreme Court recently ruled.

In Pegram et al vs. Herdrich, decided June 12, 2000, the Supreme Court, reversing a decision of the Seventh Circuit Court of Appeals, held that treatment and eligibility decisions made by HMOs through their physician-employees are not “fiduciary acts” within the meaning of the Employee Retirement Income Security Act (ERISA). Had the Supreme Court upheld the decision of the Court of Appeals, all physician incentive arrangements and other managed care operations would have been open to claims for breach of fiduciary duties under ERISA, threatening the future of the managed care industry.

Opinion of the Court of Appeals

In the underlying case, the patient, Cynthia Herdrich, sought treatment for abdominal pain at her HMO, the Carle Clinic, located in Bloomington, Illinois. Dr. Pegram, her physician at the Carle Clinic, discovered an inflamed mass in her abdomen and scheduled Herdrich for an ultrasound eight days later at a clinic in Urbana, 50 miles away. In the interim, prior to the ultrasound, Herdrich suffered a ruptured appendix which resulted in peritonitis.

Herdrich sued her physician and HMO for negligence, claiming that her HMO physician delayed treatment due to the adverse influence of the physician’s financial interest in containing costs. She later amended her claim to allege that the HMO had breached its fiduciary duty under ERISA by rewarding its physician owners for limiting patient care. In this case, the Carle HMO was a professional medical corporation owned by a group of physicians that provided year-end bonuses to physicians who, by rationing medical care, reduced costs to the clinic. Herdrich claimed that decisions to limit care should be made only in the best interest of the plan participants rather than in the physicians’ self-interest.

Though the District Court dismissed the ERISA claim, the Court of Appeals for the Seventh Circuit reversed and held that the Carle HMO had acted as a fiduciary because its physician owners had allegedly made medical decisions that were influenced by their own financial interest. The Court of Appeals found that Herdrich’s allegations were sufficient to support a claim, thus creating a federal cause of action for fiduciary malpractice. The United States Supreme Court granted certiorari and unanimously reversed the decision of the Court of Appeals.

Issues Before the Court

What Herdrich was asking the Supreme Court to consider was the acceptability of financial incentives as part of HMO cost containment. This would have required the Court to make judgements about the reasonableness of financial incentives within a particular managed care program. The Supreme Court chose instead to focus upon whether the decisions made by HMO physicians were in fact fiduciary decisions under ERISA.

In his opinion, Justice David Souter differentiated between decisions made by HMO physicians and those made by traditional common law trustees where the primary concern is the distribution of assets to rightful beneficiaries. HMO physicians, like common-law trustees, also distribute financial resources held for others in accordance with the terms of the HMO insurance plan. What distinguishes the HMO physician from the common law trustee is that the physician is also making diagnostic and treatment decisions that actually consume these financial resources.

The Role of “Mixed Criteria”

Most care decisions made by HMO physicians are based on “mixed” criteria which consider both diagnostic and treatment choices as well as eligibility issues such as whether or not the plan covers a particular condition or medical procedure. According to the Court, Herdrich’s care involved such a “mixed” decision. Herdrich’s condition did not, Dr. Pegram had decided, warrant immediate treatment. As a result, Dr. Pegram also made an eligibility determination that the HMO would not cover immediate care. In the Court’s opinion, it was not the intention of Congress to assign fiduciary responsibility to mixed medical and treatment decisions made by physicians.

Elimination of For-Profit HMOs?

The recovery sought by Herdrich in this case was the “return of profit from the pockets of the Carle HMO owners” to be used by the HMO plan for the benefit of the plan participants. Such a remedy would put for-profit and possibly not-for-profit HMOs out of business, the Court determined, negating nearly 30 years of effort by Congress promoting the formation and development of HMOs. It would be up to Congress, the Court noted, to “restrict its approval of HMO practice to certain preferred forms” if it wished. Intervention by the Federal Courts on such issues would, Justice Souter wrote, be contrary to congressional policy.

No New Remedies

The Supreme Court acknowledged the inherent challenges found in extending a fiduciary duty to HMO decisions when physicians are accused of delaying or withholding treatment to increase financial rewards. The litigation would focus on whether the physician’s medical and eligibility decisions were based on sound medical judgment within the standards of reasonable medical care. This cause of action is really nothing more than a common law medical negligence claim in Federal Court. As negligence claims against HMOs are already recognized in many states including Pennsylvania, allowing an action for breach of fiduciary duty would afford little in the way of new remedies other than the collection of attorneys fees.

The Supreme Court also recognized that Herdrich’s claim would create further problems by extending liability beyond the HMO to the physician employee. This would raise a “puzzling” legal question as to whether a breach of fiduciary duty claim against a physician, evaluated under an ERISA standard of reasonable medical care, would “preempt” or take precedence over a state medical malpractice claim. The Supreme Court chose not to venture into that legal quagmire, noting again that there was not much to be achieved by opening the federal courts to fiduciary claims under ERISA, other than perhaps a more favorable court schedule and more ability to collect attorneys’ fees. Congress, the Court concluded, “had no such haphazard boons in mind when it defined the ERISA fiduciary.”

Impact on PA Law

Since the Pegram decision, the U.S. Supreme Court on June 19,2000 set aside the decision of the Pennsylvania Supreme Court in Pappas v. Asbel and sent the case back to the Pennsylvania Supreme Court for further consideration of the preemption of state-law claims under ERISA in light of the Pegram decision (see United States Healthcare Systems of Pennsylvania, Inc v. Pennsylvania Hosp. Ins. Co.). The Pennsylvania Supreme Court in Pappas had ruled unanimously that ERISA did not preclude a claim against U.S. Healthcare. The patient in that case alleged that U.S. Healthcare’s refusal to authorize a patient’s transfer to a certain hospital, resulting in a three-hour wait in an emergency room, contributed to his becoming quadriplegic. The Pennsylvania Supreme Court found that lawsuits against HMOs for negligence were not barred by ERISA since it was not the intention of Congress, in enacting ERISA, to “preempt state laws which govern the provision of safe medical care.”

The U.S. Supreme Court has not yet directly addressed the issue of whether individuals can sue their HMOs in state court for negligently administering health care benefits. In the Pegram decision, the Supreme Court acknowledged that there are certain states that do recognize malpractice actions against HMOs. The Supreme Court noted that in its previous decision in New York State Conference of Blue Cross and Blue Shield Plan v. Travelers Insurance Company, it held that in the field of health care, which is the subject of traditional state regulation, there was no ERISA preemption without clear manifestation of congressional purpose.

The U.S. Supreme Court declined on June 19 to review the decision of the U.S. Court of Appeals for the Third Circuit decision in U.S. Healthcare, Inc. v. Bauman. The Third Circuit Court held that an HMO could be sued in state court for failing to provide an in-home nursing visit for the claimants’ newborn daughter that should have been covered under their insurance plan. The baby developed meningitis and later died. The Third Circuit determined that the Bauman’s claim raised a question about the adequacy of care that the newborn received and was therefore “directed toward the HMO’s action in its capacity as a medical provider, rather than a benefits administrator.” In choosing not to hear this case, the U.S. Supreme Court allows this decision of the Pennsylvania Supreme Court recognizing a state-law malpractice claim against an HMO to remain the law.

Anna Bamonte Torrance, Esq., is an attorney with the Pittsburgh-based law firm of Houston Harbaugh.

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