Mark D. Abruzzo, J.D.

Mark D. Abruzzo, J.D.

On June 12, the United States Supreme Court, in unanimous fashion, held that treatment and eligibility decisions by physicians under contract with an HMO are not fiduciary decisions under the Employee Retirement Income Security Act. More specifically, the court stated that the breach of fiduciary duty claims predicated on the existence of risk-sharing or financial incentives to provide cost-effective care do not state a claim under ERISA.

To you and me, the court's holding means that patients cannot sue HMOs under ERISA for giving doctors financial incentives to hold down costs. However, as is typical with many court decisions, this one wonder whether it doesn't take on a much greater meaning.

The facts of Pegram v. Herdrich are simple: Pegram, an HMO physician, examined Herdrich, who was experiencing groin pain. Six days later, Pegram discovered an inflamed mass in Herdrich's abdomen. Despite the noticeable inflammation, Pegram did not order an ultrasound diagnostic procedure at a local hospital, but decided that Herdrich would have to wait eight days for an ultrasound, to be performed at a network facility more than 50 miles away. Before the eight days were over, Herdrich's appendix ruptured, causing peritonitis.

Herdrich sued Pegram and the HMO in state court for malpractice. She also sued the HMO under ERISA for breaching its fiduciary duty by financially rewarding physicians who limit medical care in their self-interest rather than in the exclusive interests of the plan participants. (ERISA requires health plan managers to act in patients' best interests.) It's this latter issue that was addressed by the Supreme Court. Pegram would have been eligible for a bonus if the HMO had been profitable by controlling the total cost of health care paid by the plan.

Pegram is clearly the most important court decision to date relating to managed care. It is telling not solely for the court's decision, but for its reasoning as well. The court deferred to Congress's "promotion" of managed care plans over the 27 years since the enactment of federal HMO law, and thus generally endorsed the necessity of rationing health care.

"Proprietary organization"

The court recognized HMOs as "risk-bearing organizations" that are structured to control costs, and said that the "provision of profit is what makes the HMO a proprietary organization." The court stated that if it were to give remedy to a patient suing on the basis of the HMO's offering financial incentives to physicians, then that "in effect would be nothing less than the elimination of the for-profit HMO."

The court acknowledged, but played down, the HMO's fiduciary duty to its participants: "Congress did not intend an HMO to be treated as a fiduciary to the extent that it makes mixed eligibility decisions acting through its physicians. Congress is unlikely to have thought of such decisions as fiduciary." It also noted that an "ERISA fiduciary may also have financial interests adverse to beneficiaries" — i.e., to stakeholders.

Also noteworthy was the court's response to the Seventh Circuit's prior attempt to confine fiduciary cases against HMOs to situations where the sole purpose of delaying or withholding treatment is to increase the physician's financial reward. Critical of the Seventh Circuit's position, the court warned that the HMO's defense would be that its physician acted for good medical reasons, and then every such claim would boil down to a question of malpractice. The fiduciary standard, thus, would be nothing but the traditional malpractice standard.

Sorting it out

So, where does this leave us?

Well, we know for sure that the court's ruling means that patients cannot sue HMOs under ERISA for giving doctors financial incentives to hold down costs. Further, while it's uncertain whether the court would protect HMOs for plan design outside the scope of physician payments and incentives, you cannot help but feel — gauging its response to the Seventh Circuit — that it would not support other actions against HMOs that claim breach of fiduciary duty.

We also know that this case does not affect the right to file malpractice suits against physicians in state courts. Nor does it affect state laws that prohibit malpractice suits against HMOs.

But there's much that we do not know.

We don't know, for example, how the case is likely to affect the current wave of anti-HMO class action lawsuits. Pegram was only one of a number pending cases. Other suits accuse HMOs of violating racketeering laws by concealing doctors' financial incentives to hold down treatment costs. How would this Supreme Court act in those cases?

In a footnote, the high court indicated that, although the issue was not relevant to Pegram, an argument could be made that the HMO is a fiduciary insofar as it has discretionary authority to administer the plan, and so it is obligated to disclose characteristics of the plan and of those who provide services to the plan.

In the end, the Supreme Court's decision was the right one — so too was most of its rationale. We need HMOs. Patient care is all about risk and awareness. Just how much risk a patient is willing to take on is a function of awareness. It's the awareness part that we need to work on. This should be addressed in the form of patients rights legislation.

Mark D. Abruzzo, J.D., specializes in health care law at the Berwyn, Pa.-based law firm of Wade, Goldstein, Landau & Abruzzo.

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