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HMO and Managed Care Law

Supreme Court Rules on Suing MCOs Under ERISA - Pegram v. Herdrich, 530 U.S. 211, 120 S.Ct. 2143, 147 L.Ed.2d 164 (2000).



Pegram v. Herdrich is the United States Supreme Court's first decision to directly consider a plaintiff's claim that standard MCO business practices violated the ERISA standards for fiduciary conduct. This is an unusual case, in that the defendant MCO won, but paradoxically the holding may make it much easier to sue MCOs in the future because in dismissing plaintiff's claims the court may also have greatly narrowed the scope of ERISA preemption of state court claims against MCOs.

The Lower Courts

Cynthia Herdrich filed suit against her physician and Carle Clinic for breach of fiduciary duty, arising from medical care provide by an ERISA qualified plan. Herdrich's theory is an extension of Shea v. Esensten, 107 F.3d 625 cert. denied 118 S.Ct. 297 (1997) that, under ERISA, an action for breach of fiduciary duty is a valid remedy for bodily injury arising from plan administrative malfeasance, and then proceeds to the next step of defining the allowable damages under ERISA.

Defendant Carle Clinic "operate[d] a pre-paid health insurance plan which provides medical and hospital services" and employed Ms. Herdrich's physician Dr. Pegram. Although examination of Ms. Herdrich by Dr. Pegram identified a six by eight centimeter abdominal mass, which was inflamed, Dr. Pegram allegedly "delayed instituting an immediate treatment of Herdrich", per the policies of the plan. To make matters worse:

"During this unnecessary waiting period, Herdrich's health problems were exacerbated and the situation rapidly turned into an "emergency" - her appendix ruptured, resulting in the onset of peritonitis. In an effort to defray the increased costs associated with the surgery required to drain and cleanse Herdrich's ruptured appendix, Carle insisted that she have the procedure performed at its own Urbana facility, necessitating that Herdrich travel more than fifty miles from her neighborhood hospital"

As such, the delay "subjected [Ms. Herdrich] to a life threatening illness, a longer period of hospitalization and treatment, more extensive, invasive and dangerous surgery, increased hospitalization costs, and a greater ingestion of prescription drugs." Like Shea, Herdrich's complaint alleged "the intricacies of the defendants' incentive structure [provided for] an incentive [to] existed for [physicians] to limit treatment." Moreover, such incentives mean that:

"[a] doctor who is responsible for the real-life financial demands of providing for his or her family sending four children to school (whether it be college, high school or primary school), making house payments, covering office overhead, and paying malpractice insurance might very well "flinch" at the prospect of obtaining a relatively substantial bonus for himself or herself."

In the appeals court decision, Herdrich v. Pegram, 154 F.3d 362 (7th Cir. 1998), the court took notice that "defendants had the exclusive right to decide all disputed and non-routine [and thus where] in fact, [ERISA] fiduciaries." In fact, Dr. Pegram owed fiduciary duties not only to Ms. Herdrich due to the nature of the doctor-patient relationship, but also to her employer Carle Clinic and to the ERISA plan itself. Dr. Pegram's multiple fiduciary duties were not mutually exclusive and frequently lead to conflicts of interest, as the doctor attempted to serve multiple masters. Herdrich concluded the incentive plan could reasonably have corrupted the fiduciary duty owed by the physicians and plan to the patient beneficiary.

The appellate court then remanded the case for a determination of damages along guidelines outlined by the court. Herdrich directed that determination of damages for breach of ERISA fiduciary duty was to be indexed to the unnecessary medical expenses incurred by the plan. Requiring that damages be structured in such a manor was clearly within a literal reading of the determinations of damages to an ERISA pension plan. The United States Supreme Court granted cert. No. 98-1949 (U.S. September 8, 1999). While the appeal was pending, the trial court tried the plaintiff's medical malpractice claims against the defendant physician to a plaintiff's verdict for $35,000.

The United States Supreme Court Decision

Justice Souter, speaking for a unanimous court, clearly stated the court's holding in this first paragraph:

"The question in this case is whether treatment decisions made by a health maintenance organization, acting through its physician employees, are fiduciary acts within the meaning of the Employee Retirement Income Security Act of 1974 (ERISA), 88 Stat. 832, as amended, 29 U. S. C. 1001 et seq. (1994 ed. and Supp. III). We hold that they are not."

The defendant won - or did it? In this instant case defendant clearly prevailed and will not have to face a trial in federal court on plaintiff's claim that it breached its ERISA fiduciary duty. The key to understanding the court's ruling is that the plaintiff's claim against the defendant is for breach of its fiduciary duty under ERISA for not informing plaintiff of its physician incentive scheme, and, more broadly, for having an incentive scheme which compromised patient care. As plaintiff admitted at oral argument, it is the scheme's violation of ERISA, not the particular malpractice, that is at issue. Plaintiff would have been injured if she had been healthy and had never sought medical care from the plan. The appeals court accepted this claim and was prepared to allow plaintiff to litigate the claim under ERISA. In ruling for the defendant, however, the Supreme Court appears to broadly rule that defendant's actions are not covered at all by ERISA, which would mean that they are not protected by ERISA preemption from state court lawsuits.

In explaining its decision, the court discussed the nature of rationing in health care and that while such rationing might have been done poorly in this case, it was fundamental to managed care. Thus the court concluded that since the legislature had endorsed such rationing, it was not for the courts to decide which forms better suited the legislature's public policy goals. If these incentive schemes are in violation of ERISA, then all of the are in violation. The court then looked at the extent of ERISA's fiduciary obligations to determine whether they include these schemes. This analysis was predicated on a careful separation of ERISA and non-ERISA duties. The court noted that the defendant HMO, and that MCOs in general, are not ERISA plans, they are contractors who implement the employer's benefits plan, which is the ERISA plan. Through this contract the HMO can assume ERISA fiduciary status, but only to the extent that it is asserting that status as delegated by the employer.

The court divided the HMO's responsibilities as regards patient care into "eligibility decisions", which are whether a given condition is covered by the plan, and "treatment decisions" which involve diagnosing the patient condition and deciding how to manage it. What the court termed pure eligibility decisions are clearly covered by ERISA, while treatment decisions are clearly not covered. The employer's design of the plan involves pure eligibility decisions. The HMO's decisions, however, are almost always either treatment decisions or, most commonly, mixed eligibility and treatment decisions. The court is unwilling to allow plaintiffs to sue for these mixed decisions under ERISA because the court believes that this just duplicates remedies already available in state courts:

"What would be the value to the plan participant of having this kind of ERISA fiduciary action? It would simply apply the law already available in state courts and federal diversity actions today, and the formulaic addition of an allegation of financial incentive would do nothing but bring the same claim into a federal court under federal-question jurisdiction. It is true that in States that do not allow malpractice actions against HMOs the fiduciary claim would offer a plaintiff a further defendant to be sued for direct liability, and in some cases the HMO might have a deeper pocket than the physician. But we have seen enough to know that ERISA was not enacted out of concern that physicians were too poor to be sued, or in order to federalize malpractice litigation in the name of fiduciary duty for any other reason."

The most interesting comment is the reference to "... States that do not allow malpractice actions against HMOs." If allowing the plaintiff to sue under ERISA for these decisions only duplicates state law in states that do not bar litigation against MCOs is only duplicative, then the court is saying that there is no ERISA bar to these claims in state court, under state law, including state fiduciary law. Thus this decision calls into question where there is any ERISA protection left for MCOs and their physicians, especially their administrative physicians and medical directors, except for the pure eligibility decisions, which are almost never at issue in plaintiff malpractice actions.

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