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| [1] | SUPREME COURT OF THE UNITED STATES |
| [2] | No. 98-1949 |
| [3] | 2000.SCT.0042126 <http://www.versuslaw.com> |
| [4] | June 12, 2000 |
| [5] | LORI PEGRAM, ET AL., PETITIONERS V. CYNTHIA HERDRICH |
| [6] | SYLLABUS BY THE COURT |
| [7] | OCTOBER TERM, 1999 |
| [8] | PEGRAM v. HERDRICH |
| [9] | NOTE: Where it is feasible, a syllabus (headnote) will be released, as
is being done in connection with this case, at the time the opinion is issued.
The syllabus constitutes no part of the opinion of the Court but has been
prepared by the Reporter of Decisions for the convenience of the reader.
See United States v. Detroit Timber & Lumber Co., 200 U. S. 321, 337. |
| [10] | SUPREME COURT OF THE UNITED STATES |
| [11] | PEGRAM et al. v. HERDRICH |
| [12] | Certiorari To The United States Court Of Appeals For The Seventh Circuit |
| [13] | No. 98-1949. |
| [14] | Argued February 23, 2000 |
| [15] | Decided June 12, 2000 |
| [16] | Petitioners (collectively Carle) function as a health maintenance organization
(HMO) owned by physicians providing prepaid medical services to participants
whose employers contract with Carle for coverage. Respondent Herdrich was
covered by Carle through her husband's employer, State Farm Insurance Company.
After petitioner Pegram, a Carle physician, required Herdrich to wait eight
days for an ultrasound of her inflamed abdomen, her appendix ruptured, causing
peritonitis. She sued Carle in state court for, inter alia, fraud. Carle
responded that the Employee Retirement Income Security Act of 1974 (ERISA)
preempted the fraud counts and removed the case to federal court. The District
Court granted Carle summary judgment on one fraud count, but granted Herdrich
leave to amend the other. Her amended count alleged that the provision of
medical services under terms rewarding physician owners for limiting medical
care entailed an inherent or anticipatory breach of an ERISA fiduciary duty,
since the terms created an incentive to make decisions in the physicians'
self-interest, rather than the plan participants' exclusive interests. The
District Court granted Carle's motion to dismiss on the ground that Carle
was not acting as an ERISA fiduciary. The Seventh Circuit reversed the dismissal. |
| [17] | Held: Because mixed treatment and eligibility decisions by HMO physicians
are not fiduciary decisions under ERISA, Herdrich does not state an ERISA
claim. Pp. 5-25. |
| [18] | (a) Whether Carle is a fiduciary when acting through its physician owners
depends on some background of fact and law about HMO organizations, medical
benefit plans, fiduciary obligation, and the meaning of Herdrich's allegations.
The defining feature of an HMO is receipt of a fixed fee for each patient
enrolled under the terms of a contract to provide specified health care
if needed. Like other risk bearing organizations, HMOs take steps to control
costs. These measures are commonly complemented by specific financial incentives
to physicians, rewarding them for decreasing utilization of health-care
services, and penalizing them for excessive treatment. Hence, an HMO physician's
financial interest lies in providing less care, not more. Herdrich argues
that Carle's incentive scheme of annually paying physician owners the profit
resulting from their own decisions rationing care distinguishes its plan
from HMOs generally, so that reviewing Carle's decision under a fiduciary
standard would not open the door to claims against other HMOs. However,
inducement to ration care is the very point of any HMO scheme, and rationing
necessarily raises some risks while reducing others. Thus, any legal principle
purporting to draw a line between good and bad HMOs would embody a judgment
about socially acceptable medical risk that would turn on facts not readily
accessible to courts and on social judgments not wisely required of courts
unless resort cannot be had to the legislature. Because courts are not in
a position to derive a sound legal principle to differentiate an HMO like
Carle from other HMOs, this Court assumes that the decisions listed in Herdrich's
count cannot be subject to a claim under fiduciary standards unless all
such decisions by all HMOs acting through their physicians are judged by
the same standards and subject to the same claims. Pp. 5-9. |
| [19] | (b) Under ERISA, a fiduciary is someone acting in the capacity of manager,
administrator, or financial adviser to a "plan," and Herdrich's
count accordingly charged Carle with a breach of fiduciary duty in discharging
its obligations under State Farm's medical plan. The common understanding
of "plan" is a scheme decided upon in advance. Here the scheme
comprises a set of rules defining a beneficiary's rights and providing for
their enforcement. When employers contract with an HMO to provide benefits
to employees subject to ERISA, their agreement may, as here, provide elements
of a plan by setting out the rules under which beneficiaries will be entitled
to care. ERISA's provision that fiduciaries shall discharge their duties
with respect to a plan "solely in the interest of the participants
and beneficiaries," 29 U. S. C. 1104(a)(1), is rooted in the common
law of trusts, but an ERISA fiduciary may also have financial interests
adverse to beneficiaries. Thus, in every case charging breach of ERISA fiduciary
duty, the threshold question is not whether the actions of some person providing
services under the plan adversely affected a beneficiary's interest, but
whether that person was performing a fiduciary function when taking the
action subject to complaint. Pp. 9-13. |
| [20] | (c) Herdrich claims that Carle became a fiduciary, acting through its
physicians, when it contracted with State Farm. It then breached its duty
to act solely in the beneficiaries' interest, making decisions affecting
medical treatment while influenced by a scheme under which the physician
owners ultimately profited from their own choices to minimize the medical
services provided. Herdrich's count lists mixed eligibility and treatment
decisions: decisions relying on medical judgments in order to make plan
coverage determinations. Pp. 13-18. |
| [21] | (d) 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. The
common law trustee's most defining concern is the payment of money in the
beneficiary's interest, and mixed eligibility decisions have only a limited
resemblance to that concern. Consideration of the consequences of Herdrich's
contrary view leave no doubt as to Congress's intent. Recovery against for-profit
HMOs for their mixed decisions would be warranted simply upon a showing
that the profit incentive to ration care would generally affect such decisions,
in derogation of the fiduciary standard to act in the patient's interest
without possibility of conflict. And since the provision for profits is
what makes a for-profit HMO a proprietary organization, Herdrich's remedy
-- return of profit to the plan for the participants' benefit -- would be
nothing less than elimination of the for-profit HMO. The Judiciary has no
warrant to precipitate the upheaval that would follow a refusal to dismiss
Herdrich's claim. Congress, which as promoted the formation of HMOs for
27 years, may choose to restrict its approval to certain preferred forms,
but the Judiciary would be acting contrary to congressional policy if it
were to entertain an ERISA fiduciary claim portending wholesale attacks
on existing HMOs solely because of their structure. The Seventh Circuit's
attempt to confine the fiduciary breach to cases where the sole purpose
of delaying or withholding treatment is to increase the physician's financial
reward would also lead to fatal difficulties. The HMO's defense would be
that its physician acted for good medical reasons. For all practical purposes,
every claim would boil down to a malpractice claim, and the fiduciary standard
would be nothing but the traditional medical malpractice standard. The only
value to plan participants of such an ERISA fiduciary action would be eligibility
for attorney's fees if they won. A physician would also be subject to suit
in federal court applying an ERISA standard of reasonable medical skill.
This would, in turn, seem to preempt a state malpractice claim, even though
ERISA does not preempt such claims absent a clear manifestation of congressional
purpose, New York State Conference of Blue Cross & Blue Shield Plans
v. Travelers Ins. Co., 514 U. S. 645. Pp. 18-25. |
| [22] | 154 F. 3d 362, reversed. |
| [23] | Souter, J., delivered the opinion for a unanimous Court. |
| [24] | Court Below: 154 F. 3d 362 |
| [25] | On Writ Of Certiorari To The United States Court Of Appeals For The Seventh
Circuit |
| [26] | Justice Souter delivered the opinion of the Court. |
| [27] | 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. |
| [28] | I. |
| [29] | Petitioners, Carle Clinic Association, P. C., Health Alliance Medical
Plans, Inc., and Carle Health Insurance Management Co., Inc. (collectively
Carle) function as a health maintenance organization (HMO) organized for
profit. Its owners are physicians providing prepaid medical services to
participants whose employers contract with Carle to provide such coverage.
Respondent, Cynthia Herdrich, was covered by Carle through her husband's
employer, State Farm Insurance Company. |
| [30] | The events in question began when a Carle physician, petitioner Lori Pegram,*fn1
examined Herdrich, who was experiencing pain in the midline area of her
groin. Six days later, Dr. Pegram discovered a six by eight centimeter inflamed
mass in Herdrich's abdomen. Despite the noticeable inflammation, Dr. Pegram
did not order an ultrasound diagnostic procedure at a local hospital, but
decided that Herdrich would have to wait eight more days for an ultrasound
, to be performed at a facility staffed by Carle more than 50 miles away.
Before the eight days were over, Herdrich's appendix ruptured, causing peritonitis.
See 154 F. 3d 362, 365, n. 1 (CA7 1998). |
| [31] | Herdrich sued Pegram and Carle in state court for medical malpractice,
and she later added two counts charging state-law fraud. Carle and Pegram
responded that ERISA preempted the new counts, and removed the case to federal
court,*fn2 where they
then sought summary judgment on the state-law fraud counts. The District
Court granted their motion as to the second fraud count but granted Herdrich
leave to amend the one remaining. This she did by alleging that provision
of medical services under the terms of the Carle HMO organization, rewarding
its physician owners for limiting medical care, entailed an inherent or
anticipatory breach of an ERISA fiduciary duty, since these terms created
an incentive to make decisions in the physicians' self-interest, rather
than the exclusive interests of plan participants.*fn3 |
| [32] | Herdrich sought relief under 29 U. S. C. §1109(a), which provides that |
| [33] | "[a]ny person who is a fiduciary with respect to a plan who breaches
any of the responsibilities, obligations, or duties imposed upon fiduciaries
by this subchapter shall be personally liable to make good to such plan
any losses to the plan resulting from each such breach, and to restore to
such plan any profits of such fiduciary which have been made through use
of assets of the plan by the fiduciary, and shall be subject to such other
equitable or remedial relief as the court may deem appropriate, including
removal of such fiduciary." |
| [34] | When Carle moved to dismiss the ERISA count for failure to state a claim
upon which relief could be granted, the District Court granted the motion,
accepting the Magistrate Judge's determination that Carle was not "involved
[in these events] as" an ERISA fiduciary. App. to Pet. for Cert. 63a.
The original malpractice counts were then tried to a jury, and Herdrich
prevailed on both, receiving $35,000 in compensation for her injury. 154
F. 3d, at 367. She then appealed the dismissal of the ERISA claim to the
Court of Appeals for the Seventh Circuit, which reversed. The court held
that Carle was acting as a fiduciary when its physicians made the challenged
decisions and that Herdrich's allegations were sufficient to state a claim: |
| [35] | "Our decision does not stand for the proposition that the existence
of incentives automatically gives rise to a breach of fiduciary duty. Rather,
we hold that incentives can rise to the level of a breach where, as pleaded
here, the fiduciary trust between plan participants and plan fiduciaries
no longer exists (i.e., where physicians delay providing necessary treatment
to, or withhold administering proper care to, plan beneficiaries for the
sole purpose of increasing their bonuses)." Id., at 373. |
| [36] | We granted certiorari, 527 U. S. 1068 (1999), and now reverse the Court
of Appeals. |
| [37] | II. |
| [38] | Whether Carle is a fiduciary when it acts through its physician owners
as pleaded in the ERISA count depends on some background of fact and law
about HMO organizations, medical benefit plans, fiduciary obligation, and
the meaning of Herdrich's allegations. |
| [39] | A. |
| [40] | Traditionally, medical care in the United States has been provided on
a "fee-for-service" basis. A physician charges so much for a general
physical exam, a vaccination, a tonsillectomy, and so on. The physician
bills the patient for services provided or, if there is insurance and the
doctor is willing, submits the bill for the patient's care to the insurer,
for payment subject to the terms of the insurance agreement. Cf. R. Rosenblatt,
S. Law, & S. Rosenbaum, Law and the American Health Care System 543-544
(1997) (hereinafter Rosenblatt) (citing Weiner & de Lissovoy, Razing
a Tower of Babel: A Taxonomy for Managed Care and Health Insurance Plans,
18 J. Health Politics, Policy & Law 75, 76-78 (Summer 1993)). In a fee-for-service
system, a physician's financial incentive is to provide more care, not less,
so long as payment is forthcoming. The check on this incentive is a physician's
obligation to exercise reasonable medical skill and judgment in the patient's
interest. |
| [41] | Beginning in the late 1960's, insurers and others developed new models
for health-care delivery, including HMOs. Cf. Rosenblatt 546. The defining
feature of an HMO is receipt of a fixed fee for each patient enrolled under
the terms of a contract to provide specified health care if needed. The
HMO thus assumes the financial risk of providing the benefits promised:
if a participant never gets sick, the HMO keeps the money regardless, and
if a participant becomes expensively ill, the HMO is responsible for the
treatment agreed upon even if its cost exceeds the participant's premiums. |
| [42] | Like other risk-bearing organizations, HMOs take steps to control costs.
At the least, HMOs, like traditional insurers, will in some fashion make
coverage determinations, scrutinizing requested services against the contractual
provisions to make sure that a request for care falls within the scope of
covered circumstances (pregnancy, for example), or that a given treatment
falls within the scope of the care promised (surgery, for instance). They
customarily issue general guidelines for their physicians about appropriate
levels of care. See id., at 568-570. And they commonly require utilization
review (in which specific treatment decisions are reviewed by a decisionmaker
other than the treating physician) and approval in advance (precertification)
for many types of care, keyed to standards of medical necessity or the reasonableness
of the proposed treatment. See Andreson, Is Utilization Review the Practice
of Medicine?, Implications for Managed Care Administrators, 19 J. Legal
Med. 431, 432 (Sept. 1998). These cost-controlling measures are commonly
complemented by specific financial incentives to physicians, rewarding them
for decreasing utilization of health-care services, and penalizing them
for what may be found to be excessive treatment, see Rosenblatt 563-565;
John K. Iglehart, Health Policy Report: The American Health Care System
-- Managed Care, 327 New England J. Med. 742, 742-747 (1992). Hence, in
an HMO system, a physician's financial interest lies in providing less care,
not more. The check on this influence (like that on the converse, fee-for-service
incentive) is the professional obligation to provide covered services with
a reasonable degree of skill and judgment in the patient's interest. See
Brief for American Medical Association as Amicus Curiae 17-21. |
| [43] | The adequacy of professional obligation to counter financial self-interest
has been challenged no matter what the form of medical organization. HMOs
became popular because fee-for-service physicians were thought to be providing
unnecessary or useless services; today, many doctors and other observers
argue that HMOs often ignore the individual needs of a patient in order
to improve the HMOs' bottom lines. See, e. g., 154 F. 3d, at 375-378 (citing
various critics of HMOs).*fn4
In this case, for instance, one could argue that Pegram's decision to wait
before getting an ultrasound for Herdrich, and her insistence that the ultrasound
be done at a distant facility owned by Carle, reflected an interest in limiting
the HMO's expenses, which blinded her to the need for immediate diagnosis
and treatment. |
| [44] | B. |
| [45] | Herdrich focuses on the Carle scheme's provision for a "year-end
distribution," n. 3, supra, to the HMO's physician owners. She argues
that this particular incentive device of annually paying physician owners
the profit resulting from their own decisions rationing care can distinguish
Carle's organization from HMOs generally, so that reviewing Carle's decisions
under a fiduciary standard as pleaded in Herdrich's complaint would not
open the door to like claims about other HMO structures. While the Court
of Appeals agreed, we think otherwise, under the law as now written. |
| [46] | Although it is true that the relationship between sparing medical treatment
and physician reward is not a subtle one under the Carle scheme, no HMO
organization could survive without some incentive connecting physician reward
with treatment rationing. The essence of an HMO is that salaries and profits
are limited by the HMO's fixed membership fees. See Orentlicher, Paying
Physicians More To Do Less: Financial Incentives to Limit Care, 30 U. Rich.
L. Rev. 155, 174 (1996). This is not to suggest that the Carle provisions
are as socially desirable as some other HMO organizational schemes; they
may not be. See, e.g., Grumbach, Osmond, Vranigan, Jaffe, & Bindman,
Primary Care Physicians' Experience of Financial Incentives in Managed-Care
Systems, 339 New Eng. J. Med. 1516 (1998) (arguing that HMOs that reward
quality of care and patient satisfaction would be preferable to HMOs that
reward only physician productivity). But whatever the HMO, there must be
rationing and inducement to ration. |
| [47] | Since inducement to ration care goes to the very point of any HMO scheme,
and rationing necessarily raises some risks while reducing others (ruptured
appendixes are more likely; unnecessary appendectomies are less so), any
legal principle purporting to draw a line between good and bad HMOs would
embody, in effect, a judgment about socially acceptable medical risk. A
valid conclusion of this sort would, however, necessarily turn on facts
to which courts would probably not have ready access: correlations between
malpractice rates and various HMO models, similar correlations involving
fee-for-service models, and so on. And, of course, assuming such material
could be obtained by courts in litigation like this, any standard defining
the unacceptably risky HMO structure (and consequent vulnerability to claims
like Herdrich's) would depend on a judgment about the appropriate level
of expenditure for health care in light of the associated malpractice risk.
But such complicated factfinding and such a debatable social judgment are
not wisely required of courts unless for some reason resort cannot be had
to the legislative process, with its preferable forum for comprehensive
investigations and judgments of social value, such as optimum treatment
levels and health care expenditure. Cf. Turner Broadcasting System, Inc.
v. FCC, 512 U. S. 622, 665-666 (1994) (opinion of Kennedy, J.) ("Congress
is far better equipped than the judiciary to `amass and evaluate the vast
amounts of data' bearing upon an issue as complex and dynamic as that presented
here" (quoting Walters v. National Assn. of Radiation Survivors, 473
U. S. 305, 331, n. 12 (1985))); Patsy v. Board of Regents of Fla., 457 U.
S. 496, 513 (1982) ("[T]he relevant policy considerations do not invariably
point in one direction, and there is vehement disagreement over the validity
of the assumptions underlying many of them. The very difficulty of these
policy considerations, and Congress' superior institutional competence to
pursue this debate, suggest that legislative not judicial solutions are
preferable" (footnote omitted)). |
| [48] | We think, then, that courts are not in a position to derive a sound legal
principle to differentiate an HMO like Carle from other HMOs.*fn5
For that reason, we proceed on the assumption that the decisions listed
in Herdrich's complaint cannot be subject to a claim that they violate fiduciary
standards unless all such decisions by all HMOs acting through their owner
or employee physicians are to be judged by the same standards and subject
to the same claims. |
| [49] | C. |
| [50] | We turn now from the structure of HMOs to the requirements of ERISA. A
fiduciary within the meaning of ERISA must be someone acting in the capacity
of manager, administrator, or financial adviser to a "plan," see
29 U. S. C. §§1002(21)(A)(i)-(iii), and Herdich's ERISA count accordingly
charged Carle with a breach of fiduciary duty in discharging its obligations
under State Farm's medical plan. App. to Pet. for Cert. 85a-86a. ERISA's
definition of an employee welfare benefit plan is ultimately circular: "any
plan, fund, or program ... to the extent that such plan, fund, or program
was established ... for the purpose of providing ... through the purchase
of insurance or otherwise ... medical, surgical, or hospital care or benefits."
§1002(1)(A). One is thus left to the common understanding of the word "plan"
as referring to a scheme decided upon in advance, see Webster's New International
Dictionary 1879 (2d ed. 1957); Jacobson & Pomfret, Form, Function, and
Managed Care Torts: Achieving Fairness and Equity in ERISA Jurisprudence,
35 Houston L. Rev. 985, 1050 (1998). Here the scheme comprises a set of
rules that define the rights of a beneficiary and provide for their enforcement.
Rules governing collection of premiums, definition of benefits, submission
of claims, and resolution of disagreements over entitlement to services
are the sorts of provisions that constitute a plan. See Hansen v. Continental
Ins. Co., 940 F. 2d 971, 974 (CA5 1991). Thus, when employers contract with
an HMO to provide benefits to employees subject to ERISA, the provisions
of documents that set up the HMO are not, as such, an ERISA plan, but the
agreement between an HMO and an employer who pays the premiums may, as here,
provide elements of a plan by setting out rules under which beneficiaries
will be entitled to care. |
| [51] | D. |
| [52] | As just noted, fiduciary obligations can apply to managing, advising,
and administering an ERISA plan, the fiduciary function addressed by Herdrich's
ERISA count being the exercise of "discretionary authority or discretionary
responsibility in the administration of [an ERISA] plan," 29 U. S.
C. §1002(21)(A)(iii). And as we have already suggested, although Carle is
not an ERISA fiduciary merely because it administers or exercises discretionary
authority over its own HMO business, it may still be a fiduciary if it administers
the plan. |
| [53] | In general terms, fiduciary responsibility under ERISA is simply stated.
The statute provides that fiduciaries shall discharge their duties with
respect to a plan "solely in the interest of the participants and beneficiaries,"
§1104(a)(1), that is, "for the exclusive purpose of (i) providing benefits
to participants and their beneficiaries; and (ii) defraying reasonable expenses
of administering the plan," §1104(a)(1)(A).*fn6
These responsibilities imposed by ERISA have the familiar ring of their
source in the common law of trusts. See Central States, Southeast &
Southwest Areas Pension Fund v. Central Transport, Inc., 472 U. S. 559,
570 (1985) ("[R]ather than explicitly enumerating all of the powers
and duties of trustees and other fiduciaries, Congress invoked the common
law of trusts to define the general scope of their authority and responsibility").
Thus, the common law (understood as including what were once the distinct
rules of equity) charges fiduciaries with a duty of loyalty to guarantee
beneficiaries' interests: "The most fundamental duty owed by the trustee
to the beneficiaries of the trust is the duty of loyalty... . It is the
duty of a trustee to administer the trust solely in the interest of the
beneficiaries." 2A A. Scott & W. Fratcher, Trusts §170, 311 (4th
ed. 1987) (hereinafter Scott); see also G. Bogert & G. Bogert, Law of
Trusts and Trustees §543 (rev. 2d ed. 1980) ("Perhaps the most fundamental
duty of a trustee is that he must display throughout the administration
of the trust complete loyalty to the interests of the beneficiary and must
exclude all selfish interest and all consideration of the interests of third
persons"); Central States, supra, at 570-571; Meinhard v. Salmon, 249
N. Y. 458, 464, 164 N. E. 545, 546 (1928) (Cardozo, J.) ("Many forms
of conduct permissible in a workaday world for those acting at arm's length,
are forbidden to those bound by fiduciary ties. A trustee is held to something
stricter than the morals of the market place. Not honesty alone, but the
punctilio of an honor the most sensitive, is then the standard of behavior"). |
| [54] | Beyond the threshold statement of responsibility, however, the analogy
between ERISA fiduciary and common law trustee becomes problematic. This
is so because the trustee at common law characteristically wears only his
fiduciary hat when he takes action to affect a beneficiary, whereas the
trustee under ERISA may wear different hats. |
| [55] | Speaking of the traditional trustee, Professor Scott's treatise admonishes
that the trustee "is not permitted to place himself in a position where
it would be for his own benefit to violate his duty to the beneficiaries."
2A Scott, §170, at 311. Under ERISA, however, a fiduciary may have financial
interests adverse to beneficiaries. Employers, for example, can be ERISA
fiduciaries and still take actions to the disadvantage of employee beneficiaries,
when they act as employers (e.g., firing a beneficiary for reasons unrelated
to the ERISA plan), or even as plan sponsors (e.g., modifying the terms
of a plan as allowed by ERISA to provide less generous benefits). Nor is
there any apparent reason in the ERISA provisions to conclude, as Herdrich
argues, that this tension is permissible only for the employer or plan sponsor,
to the exclusion of persons who provide services to an ERISA plan. |
| [56] | ERISA does require, however, that the fiduciary with two hats wear only
one at a time, and wear the fiduciary hat when making fiduciary decisions.
See Hughes Aircraft Co. v. Jacobson, 525 U. S. 432, 443-444 (1999); Varity
Corp. v. Howe, 516 U. S. 489, 497 (1996). Thus, the statute does not describe
fiduciaries simply as administrators of the plan, or managers or advisers.
Instead it defines an administrator, for example, as a fiduciary only "to
the extent" that he acts in such a capacity in relation to a plan.
29 U. S. C. §1002(21)(A). In every case charging breach of ERISA fiduciary
duty, then, the threshold question is not whether the actions of some person
employed to provide services under a plan adversely affected a plan beneficiary's
interest, but whether that person was acting as a fiduciary (that is, was
performing a fiduciary function) when taking the action subject to complaint. |
| [57] | E. |
| [58] | The allegations of Herdrich's ERISA count that identify the claimed fiduciary
breach are difficult to understand. In this count, Herdrich does not point
to a particular act by any Carle physician owner as a breach. She does not
complain about Pegram's actions, and at oral argument her counsel confirmed
that the ERISA count could have been brought, and would have been no different,
if Herdrich had never had a sick day in her life. Tr. of Oral Arg. 53-54. |
| [59] | What she does claim is that Carle, acting through its physician owners,
breached its duty to act solely in the interest of beneficiaries by making
decisions affecting medical treatment while influenced by the terms of the
Carle HMO scheme, under which the physician owners ultimately profit from
their own choices to minimize the medical services provided. She emphasizes
the threat to fiduciary responsibility in the Carle scheme's feature of
a year-end distribution to the physicians of profit derived from the spread
between subscription income and expenses of care and administration. App.
to Pet. for Cert. 86a. |
| [60] | The specific payout detail of the plan was, of course, a feature that
the employer as plan sponsor was free to adopt without breach of any fiduciary
duty under ERISA, since an employer's decisions about the content of a plan
are not themselves fiduciary acts. Lockheed Corp. v. Spink, 517 U. S. 882,
887 (1996) ("Nothing in ERISA requires employers to establish employee
benefit plans. Nor does ERISA mandate what kind of benefit employers must
provide if they choose to have such a plan").*fn7
Likewise it is clear that there was no violation of ERISA when the incorporators
of the Carle HMO provided for the year-end payout. The HMO is not the ERISA
plan, and the incorporation of the HMO preceded its contract with the State
Farm plan. See 29 U. S. C. §1109(b) (no fiduciary liability for acts preceding
fiduciary status). |
| [61] | The nub of the claim, then, is that when State Farm contracted with Carle,
Carle became a fiduciary under the plan, acting through its physicians.
At once, Carle as fiduciary administrator was subject to such influence
from the year-end payout provision that its fiduciary capacity was necessarily
compromised, and its readiness to act amounted to anticipatory breach of
fiduciary obligation. |
| [62] | F. |
| [63] | The pleadings must also be parsed very carefully to understand what acts
by physician owners acting on Carle's behalf are alleged to be fiduciary
in nature.*fn8 It
will help to keep two sorts of arguably administrative acts in mind. Cf.
Dukes v. U. S. Healthcare, Inc., 57 F. 3d 350, 361 (CA3 1995) (discussing
dual medical/administrative roles of HMOs). What we will call pure "eligibility
decisions" turn on the plan's coverage of a particular condition or
medical procedure for its treatment. "Treatment decisions," by
contrast, are choices about how to go about diagnosing and treating a patent's
condition: given a patient's constellation of symptoms, what is the appropriate
medical response? |
| [64] | These decisions are often practically inextricable from one another, as
amici on both sides agree. See Brief for Washington Legal Foundation as
Amicus Curiae 12; Brief of Health Law, Policy, and Ethics Scholars as Amici
Curiae 10. This is so not merely because, under a scheme like Carle's, treatment
and eligibility decisions are made by the same person, the treating physician.
It is so because a great many and possibly most coverage questions are not
simple yes-or-no questions, like whether appendicitis is a covered condition
(when there is no dispute that a patient has appendicitis), or whether acupuncture
is a covered procedure for pain relief (when the claim of pain is unchallenged).
The more common coverage question is a when-and-how question. Although coverage
for many conditions will be clear and various treatment options will be
indisputably compensable, physicians still must decide what to do in particular
cases. The issue may be, say, whether one treatment option is so superior
to another under the circumstances, and needed so promptly, that a decision
to proceed with it would meet the medical necessity requirement that conditions
the HMO's obligation to provide or pay for that particular procedure at
that time in that case. The Government in its brief alludes to a similar
example when it discusses an HMO's refusal to pay for emergency care on
the ground that the situation giving rise to the need for care was not an
emergency, Brief for United States as Amicus Curiae 20-21.*fn9
In practical terms, these eligibility decisions cannot be untangled from
physicians' judgments about reasonable medical treatment, and in the case
before us, Dr. Pegram's decision was one of that sort. She decided (wrongly,
as it turned out) that Herdrich's condition did not warrant immediate action;
the consequence of that medical determination was that Carle would not cover
immediate care, whereas it would have done so if Dr. Pegram had made the
proper diagnosis and judgment to treat. The eligibility decision and the
treatment decision were inextricably mixed, as they are in countless medical
administrative decisions every day. |
| [65] | The kinds of decisions mentioned in Herdrich's ERISA count and claimed
to be fiduciary in character are just such mixed eligibility and treatment
decisions: physicians' conclusions about when to use diagnostic tests; about
seeking consultations and making referrals to physicians and facilities
other than Carle's; about proper standards of care, the experimental character
of a proposed course of treatment, the reasonableness of a certain treatment,
and the emergency character of a medical condition. |
| [66] | We do not read the ERISA count, however, as alleging fiduciary breach
with reference to a different variety of administrative decisions, those
we have called pure eligibility determinations, such as whether a plan covers
an undisputed case of appendicitis. Nor do we read it as claiming breach
by reference to discrete administrative decisions separate from medical
judgments; say, rejecting a claim for no other reason than the HMO's financial
condition. The closest Herdrich's ERISA count comes to stating a claim for
a pure, unmixed eligibility decision is her general allegation that Carle
determines "which claims are covered under the Plan and to what extent,"
App. to Pet. for Cert. 86a. But this vague statement, difficult to interpret
in isolation, is given content by the other elements of the complaint, all
of which refer to decisions thoroughly mixed with medical judgment. Cf.
5A C. Wright & A. Miller, Federal Practice and Procedure §1357, pp.
320-321 (1990) (noting that, where specific allegations clarify the meaning
of broader allegations, they may be used to interpret the complaint as a
whole). Any lingering uncertainty about what Herdrich has in mind is dispelled
by her brief, which explains that this allegation, like the others, targets
medical necessity determinations. Brief for Respondent 19; see also id.,
at 3.*fn10 |
| [67] | III. |
| [68] | A. |
| [69] | Based on our understanding of the matters just discussed, we think Congress
did not intend Carle or any other HMO to be treated as a fiduciary to the
extent that it makes mixed eligibility decisions acting through its physicians.
We begin with doubt that Congress would ever have thought of a mixed eligibility
decision as fiduciary in nature. At common law, fiduciary duties characteristically
attach to decisions about managing assets and distributing property to beneficiaries.
See Bogert & Bogert, Law of Trusts and Trustees, §§551, 741-747, 751-775,
781-799; 2A Scott, §§176, 181, 3 id., §§188-193, 3A id., §232. Trustees
buy, sell, and lease investment property, lend and borrow, and do other
things to conserve and nurture assets. They pay out income, choose beneficiaries,
and distribute remainders at termination. Thus, the common law trustee's
most defining concern historically has been the payment of money in the
interest of the beneficiary. |
| [70] | Mixed eligibility decisions by an HMO acting through its physicians have,
however, only a limited resemblance to the usual business of traditional
trustees. To be sure, the physicians (like regular trustees) draw on resources
held for others and make decisions to distribute them in accordance with
entitlements expressed in a written instrument (embodying the terms of an
ERISA plan). It is also true that the objects of many traditional private
and public trusts are ultimately the same as the ERISA plans that contract
with HMOs. Private trusts provide medical care to the poor; thousands of
independent hospitals are privately held and publicly accountable trusts,
and charitable foundations make grants to stimulate the provision of health
services. But beyond this point the resemblance rapidly wanes. Traditional
trustees administer a medical trust by paying out money to buy medical care,
whereas physicians making mixed eligibility decisions consume the money
as well. Private trustees do not make treatment judgments, whereas treatment
judgments are what physicians reaching mixed decisions do make, by definition.
Indeed, the physicians through whom HMOs act make just the sorts of decisions
made by licensed medical practitioners millions of times every day, in every
possible medical setting: HMOs, fee-for-service proprietorships, public
and private hospitals, military field hospitals, and so on. The settings
bear no more resemblance to trust departments than a decision to operate
turns on the factors controlling the amount of a quarterly income distribution.
Thus, it is at least questionable whether Congress would have had mixed
eligibility decisions in mind when it provided that decisions administering
a plan were fiduciary in nature. Indeed, when Congress took up the subject
of fiduciary responsibility under ERISA, it concentrated on fiduciaries'
financial decisions, focusing on pension plans, the difficulty many retirees
faced in getting the payments they expected, and the financial mismanagement
that had too often deprived employees of their benefits. See, e.g., S. Rep.
No. 93-127, p. 5 (1973); S. Rep. No. 93-383, p. 17 (1973); id., at 95. Its
focus was far from the subject of Herdrich's claim. |
| [71] | Our doubt that Congress intended the category of fiduciary administrative
functions to encompass the mixed determinations at issue here hardens into
conviction when we consider the consequences that would follow from Herdrich's
contrary view. |
| [72] | B. |
| [73] | First, we need to ask how this fiduciary standard would affect HMOs if
it applied as Herdrich claims it should be applied, not directed against
any particular mixed decision that injured a patient, but against HMOs that
make mixed decisions in the course of providing medical care for profit.
Recovery would be warranted simply upon showing that the profit incentive
to ration care would generally affect mixed decisions, in derogation of
the fiduciary standard to act solely in the interest of the patient without
possibility of conflict. Although Herdrich is vague about the mechanics
of relief, the one point that seems clear is that she seeks the return of
profit from the pockets of the Carle HMO's owners, with the money to be
given to the plan for the benefit of the participants. See 29 U. S. C. §1109(a)
(return of all profits is an appropriate ERISA remedy). Since the provision
for profit is what makes the HMO a proprietary organization, her remedy
in effect would be nothing less than elimination of the for-profit HMO.
Her remedy might entail even more than that, although we are in no position
to tell whether and to what extent nonprofit HMO schemes would ultimately
survive the recognition of Herdrich's theory.*fn11
It is enough to recognize that the Judiciary has no warrant to precipitate
the upheaval that would follow a refusal to dismiss Herdrich's ERISA claim.
The fact is that for over 27 years the Congress of the United States has
promoted the formation of HMO practices. The Health Maintenance Organization
Act of 1973, 87 Stat. 914, 42 U. S. C. §300e et seq., allowed the formation
of HMOs that assume financial risks for the provision of health care services,
and Congress has amended the Act several times, most recently in 1996. See
110 Stat. 1976, codified at 42 U. S. C. §300e (1994 ed, Supp. III). If Congress
wishes to restrict its approval of HMO practice to certain preferred forms,
it may choose to do so. But the Federal Judiciary would be acting contrary
to the congressional policy of allowing HMO organizations if it were to
entertain an ERISA fiduciary claim portending wholesale attacks on existing
HMOs solely because of their structure, untethered to claims of concrete
harm. |
| [74] | C. |
| [75] | The Court of Appeals did not purport to entertain quite the broadside
attack that Herdrich's ERISA claim thus entails, see 154 F. 3d, at 373,
and the second possible consequence of applying the fiduciary standard that
requires our attention would flow from the difficulty of extending it to
particular mixed decisions that on Herdrich's theory are fiduciary in nature. |
| [76] | The fiduciary is, of course, obliged to act exclusively in the interest
of the beneficiary, but this translates into no rule readily applicable
to HMO decisions or those of any other variety of medical practice. While
the incentive of the HMO physician is to give treatment sparingly, imposing
a fiduciary obligation upon him would not lead to a simple default rule,
say, that whenever it is reasonably possible to disagree about treatment
options, the physician should treat aggressively. After all, HMOs came into
being because some groups of physicians consistently provided more aggressive
treatment than others in similar circumstances, with results not perceived
as justified by the marginal expense and risk associated with intervention;
excessive surgery is not in the patient's best interest, whether provided
by fee-for-service surgeons or HMO surgeons subject to a default rule urging
them to operate. Nor would it be possible to translate fiduciary duty into
a standard that would allow recovery from an HMO whenever a mixed decision
influenced by the HMO's financial incentive resulted in a bad outcome for
the patient. It would be so easy to allege, and to find, an economic influence
when sparing care did not lead to a well patient, that any such standard
in practice would allow a factfinder to convert an HMO into a guarantor
of recovery. |
| [77] | These difficulties may have led the Court of Appeals to try to confine
the fiduciary breach to cases where "the sole purpose" of delaying
or withholding treatment was to increase the physician's financial reward,
ibid. But this attempt to confine mixed decision claims to their most egregious
examples entails erroneous corruption of fiduciary obligation and would
simply lead to further difficulties that we think fatal. While a mixed decision
made solely to benefit the HMO or its physician would violate a fiduciary
duty, the fiduciary standard condemns far more than that, in its requirement
of "an eye single" toward beneficiaries' interests, Donovan v.
Bierwirth, 680 F. 2d 263, 271 (CA2 1982). But whether under the Court of
Appeals's rule or a straight standard of undivided loyalty, the defense
of any HMO would be that its physician did not act out of financial interest
but for good medical reasons, the plausibility of which would require reference
to standards of reasonable and customary medical practice in like circumstances.
That, of course, is the traditional standard of the common law. See W. Keeton,
D. Dobbs, R. Keeton, & D. Owens, Prosser and Keeton on Law of Torts
§32, pp. 188-189 (5th ed. 1984). Thus, for all practical purposes, every
claim of fiduciary breach by an HMO physician making a mixed decision would
boil down to a malpractice claim, and the fiduciary standard would be nothing
but the malpractice standard traditionally applied in actions against physicians. |
| [78] | 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.
It is difficult, in fact, to find any advantage to participants across the
board, except that allowing them to bring malpractice actions in the guise
of federal fiduciary breach claims against HMOs would make them eligible
for awards of attorney's fees if they won. See 29 U. S. C. §1132(g)(1).
But, again, we can be fairly sure that Congress did not create fiduciary
obligations out of concern that state plaintiffs were not suing often enough,
or were paying too much in legal fees. |
| [79] | The mischief of Herdrich's position would, indeed, go further than mere
replication of state malpractice actions with HMO defendants. For not only
would an HMO be liable as a fiduciary in the first instance for its own
breach of fiduciary duty committed through the acts of its physician employee,
but the physician employee would also be subject to liability as a fiduciary
on the same basic analysis that would charge the HMO. The physician who
made the mixed administrative decision would be exercising authority in
the way described by ERISA and would therefore be deemed to be a fiduciary.
See 29 CFR §§2509.75-5, Question D1; 2509.75-8, Question D-3 (1993) (stating
that an individual who exercises authority on behalf of an ERISA fiduciary
in interpreting and administering a plan will be deemed a fiduciary). Hence
the physician, too, would be subject to suit in federal court applying an
ERISA standard of reasonable medical skill. This result, in turn, would
raise a puzzling issue of preemption. On its face, federal fiduciary law
applying a malpractice standard would seem to be a prescription for preemption
of state malpractice law, since the new ERISA cause of action would cover
the subject of a state-law malpractice claim. See 29 U. S. C. §1144 (preempting
state laws that "relate to [an] employee benefit plan"). To be
sure, New York State Conference of Blue Cross & Blue Shield Plans v.
Travelers Ins. Co., 514 U. S. 645, 654-655 (1995), throws some cold water
on the preemption theory; there, we held that, in the field of health care,
a subject of traditional state regulation, there is no ERISA preemption
without clear manifestation of congressional purpose. But in that case the
convergence of state and federal law was not so clear as in the situation
we are positing; the state-law standard had not been subsumed by the standard
to be applied under ERISA. We could struggle with this problem, but first
it is well to ask, again, what would be gained by opening the federal courthouse
doors for a fiduciary malpractice claim, save for possibly random fortuities
such as more favorable scheduling, or the ancillary opportunity to seek
attorney's fees. And again, we know that Congress had no such haphazard
boons in prospect when it defined the ERISA fiduciary, nor such a risk to
the efficiency of federal courts as a new fiduciary-malpractice jurisdiction
would pose in welcoming such unheard-of fiduciary litigation. |
| [80] | IV. |
| [81] | We hold that mixed eligibility decisions by HMO physicians are not fiduciary
decisions under ERISA. Herdrich's ERISA count fails to state an ERISA claim,
and the judgment of the Court of Appeals is reversed. |
| [82] | It is so ordered. |
|
|
|
| Opinion Footnotes | |
|
|
|
| [83] | *fn1 Although Lori
Pegram, a physician owner of Carle, is listed as a petitioner, it is unclear
to us that she retains a direct interest in the outcome of this case. |
| [84] | *fn2 Herdrich does
not contest the propriety of removal before us, and we take no position
on whether or not the case was properly removed. As we will explain, Herdrich's
amended complaint alleged ERISA violations, over which the federal courts
have jurisdiction, and we therefore have jurisdiction regardless of the
correctness of the removal. See Grubbs v. General Elec. Credit Corp., 405
U. S. 699 (1972); Mackay v. Uinta Development Co., 229 U. S. 173 (1913). |
| [85] | *fn3 The specific
allegations were these: "11. Defendants are fiduciaries with respect
to the Plan and under 29 [U. S. C. §]1109(a) are obligated to discharge
their duties with respect to the Plan solely in the interest of the participants
and beneficiaries and "a. for the exclusive purpose of: "i. providing
benefits to participants and their beneficiaries; and "ii. defraying
reasonable expenses of administering the Plan; "b. with the care, skill,
prudence, and diligence under the circumstances then prevailing that a prudent
man acting in a like capacity and familiar with such matters would use in
the conduct of an enterprise of a like character and like aims. "12.
In breach of that duty: "a. CARLE owner/physicians are the officers
and directors of HAMP and CHIMCO and receive a year-end distribution, based
in large part upon, supplemental medical expense payments made to CARLE
by HAMP and CHIMCO; "b. Both HAMP and CHIMCO are directed and controlled
by CARLE owner/physicians and seek to fund their supplemental medical expense
payments to CARLE: "i. by contracting with CARLE owner/physicians to
provide the medical services contemplated in the Plan and then having those
contracted owner/physicians: "(1) minimize the use of diagnostic tests;
"(2) minimize the use of facilities not owned by CARLE; and "(3)
minimize the use of emergency and non-emergency consultation and/or referrals
to non-contracted physicians. "ii. by administering disputed and non-routine
health insurance claims and determining: "(1) which claims are covered
under the Plan and to what extent; "(2) what the applicable standard
of care is; "(3) whether a course of treatment is experimental; "(4)
whether a course of treatment is reasonable and customary; and "(5)
whether a medical condition is an emergency." App to Pet. for Cert.
85a-86a. |
| [86] | *fn4 There are,
of course, contrary perspectives, and we endorse neither side of the debate
today. |
| [87] | *fn5 They are certainly
not capable of making that distinction on a motion to dismiss; if we accepted
the Court of Appeals's reasoning, complaints against any flavor of HMO would
have to proceed at least to the summary judgment stage. |
| [88] | *fn6 In addition,
fiduciaries must discharge their duties "(B) with the care, skill,
prudence, and diligence under the circumstances then prevailing that a prudent
man acting in a like capacity and familiar with such matters would use in
the conduct of an enterprise of a like character and with like aims; "(C)
by diversifying the investments of the plan so as to minimize the risk of
large losses, unless under the circumstances it is clearly prudent not to
do so; and "(D) in accordance with the documents and instruments governing
the plan insofar as such documents and instruments are consistent with the
provisions of this subchapter and subchapter III of this chapter."
29 U. S. C. §1104(a)(1). |
| [89] | *fn7 It does not
follow that those who administer a particular plan design may not have difficulty
in following fiduciary standards if the design is awkward enough. A plan
might lawfully provide for a bonus for administrators who denied benefits
to every 10th beneficiary, but it would be difficult for an administrator
who received the bonus to defend against the claim that he had not been
solely attentive to the beneficiaries' interests in carrying out his administrative
duties. The important point is that Herdrich is not suing the employer,
State Farm, and her claim cannot be analyzed as if she were. |
| [90] | *fn8 Herdrich argues
that Carle is judicially estopped from denying its fiduciary status as to
the relevant decisions, because it sought and sucessfully defended removal
of Herdrich's state action to the Federal District Court on the ground that
it was a fiduciary with respect to Herdrich's fraud claims. Judicial estoppel
generally prevents a party from prevailing in one phase of a case on an
argument and then relying on a contradictory argument to prevail in another
phase. See Rissetto v. Plumbers & Steamfitters Local 343, 94 F. 3d 597,
605 (CA9 1996). The fraud claims in Herdrich's initial complaint, however,
could be read to allege breach of a fiduciary obligation to disclose physician
incentives to limit care, whereas her amended complaint alleges an obligation
to avoid such incentives. Although we are not presented with the issue here,
it could be argued that Carle 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, if that information
affects beneficiaries' material interests. See, e.g., Glaziers and Glassworkers
Union Local No. 252 Annuity Fund v. Newbridge Securities, Inc., 93 F. 3d
1171, 1179-1181 (CA3 1996) (discussing the disclosure obligations of an
ERISA fiduciary); cf. Varity Corp. v. Howe, 516 U. S. 489, 505 (1996) (holding
that ERISA fiduciaries may have duties to disclose information about plan
prospects that they have no duty, or even power, to change). But failure
to disclose is no longer the allegation of the amended complaint. Because
fiduciary duty to disclose is not necessarily coextensive with fiduciary
responsibility for the subject matter of the disclosure, Carle is not estopped
from contesting its fiduciary status with respect to the allegations of
the amended complaint. |
| [91] | *fn9 ERISA makes
separate provision for suits to receive particular benefits. See 29 U. S.
C. §1132(a)(1)(B). We have no occasion to discuss the standards governing
such a claim by a patient who, as in the example in text, was denied reimbursement
for emergency care. Nor have we reason to discuss the interaction of such
a claim with state law causes of action, see infra, at 24-25. |
| [92] | *fn10 Though this
case involves a motion to dismiss under Federal Rule of Civil Procedure
12(b)(6), and the complaint should therefore be construed generously, we
may use Herdrich's brief to clarify allegations in her complaint whose meaning
is unclear. See C. Wright & A. Miller, Federal Practice and Procedure,
§1364, pp. 480-481 (1990); Southern Cross Overseas Agencies, Inc. v. Wah
Kwong Shipping Group Ltd., 181 F. 3d 410, 428, n. 8 (CA3 1999); Alicke v.
MCI Communications Corp., 111 F. 3d 909, 911 (CADC 1997); Early v. Bankers
Life & Cas. Co., 959 F. 2d 75, 79 (CA7 1992). |
| [93] | *fn11 Herdrich's
theory might well portend the end of nonprofit HMOs as well, since those
HMOs can set doctors' salaries. A claim against a nonprofit HMO could easily
allege that salaries were excessively high because they were funded by limiting
care, and some nonprofits actually use incentive schemes similar to that
challenged here, see Pulvers v. Kaiser Foundation Health Plan, 99 Cal. App.
3d 560, 565, 160 Cal. Rptr. 392, 393-394 (1979) (rejecting claim against
nonprofit HMO based on physician incentives). See Brody, Agents Without
Principals: The Economic Convergence of the Nonprofit and For-Profit Organizational
Forms, 40 N. Y. L. S. L. Rev. 457, 493, and n. 152 (1996) (discussing ways
in which nonprofit health providers may reward physician employees). |
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