Court to Consider HMO Duty to Patients

The pain in Cynthia Herdrich’s abdomen was so sharp she could hardly move. She couldn’t reach into her 2-year-old son’s crib to pick him up. She was nauseated and feverish, and knew she had to get to a doctor.

But then--in a turn of events that patients lawyers and other critics of managed health care say occurs far too frequently--Herdrich’s physician in Bloomington, Ill., failed to arrange for critical tests that would have revealed an inflamed appendix.

Herdrich’s appendix ruptured and, after undergoing drastic surgery, she discovered something that enraged her: Her HMO paid bonuses to doctors who ordered fewer diagnostic tests.

Nine years later, Herdrich’s lawsuit against the Carle Clinic Assn. is the first Supreme Court challenge to the managed-care plans that have proliferated in the past decade. The case, to be argued later this month, presents a major test of whether injured patients can sue HMOs for putting costs concerns ahead of patient care.

“It wasn’t right that they would use my case to hold down their operating costs,” and Herdrich, now 42. “Most people don’t know . . . they’re saving money in diagnostic tests and the money is going into the pockets of their physicians.”

The dispute comes before the nation’s highest court as Congress enters final negotiations over how far the federal government should go in regulating managed care. The question of whether patients should be granted broader rights to sue their health plans has emerged as by far the most contentious aspect of the legislative debate.

The court’s ultimate ruling in Pegram vs. Herdrich won’t directly, affect what Congress decides, turning instead on the narrower question of whether federal law prevents HMOs from giving financial incentives to doctors to stint on care. But both the court case and the “patients’ rights” battle in Congress will have a profound effect on how much power HMOs will have in the future to dictate Americans’ health care.

And both disputes evoke the same fundamental tension: the drive to hold down skyrocketing medical costs vs. the frustration of patients who feel they’re being denied proper care.

FEDERAL LAW IS BASIS OF CASE

Herdrich believes financial incentives for doctors create an improper conflict of interest that drives a wedge between physicians and patients. She’s trying to use a federal law that regulates employer-sponsored health plans to halt the practice of rewarding physicians for ordering fewer tests.

HMOs say such physician incentives keep costs in check and enable them to treat more people, including those with little means. Further, they say that being forced to defend themselves against lawsuits would drive up insurance costs and ultimately leave more people uninsured.

“Ten years ago, everyone was shrieking about how we were overtesting everyone, and the medical profession was being pilloried,” said Carter Phillips, attorney for Carle Clinic. “Managed care was designed so that we could more rationally keep costs down and provide health care to more people’.”

The precise legal issue concerns an arcane federal employee benefits statute, but as Congress considers legislation that would explicitly allow patients to sue their HMOs, Herdrich’s case tests whether judges can permit some of those cases to proceed under the law as written.

In a strongly worded indictment of HMOs, a Chicago-based federal appeals court ruled for Herdrich.

“An increasing number of Americans believe that dollars are more important than people in the evolving (HMO) system,” the U.S. 7th Circuit Court of Appeals wrote.

Concentrating on America’s health care dilemmas, Judge John L. Coffey denounced HMOs and referred to the “deleterious effects of managed care” on the medical profession. “With a jaundiced eye focused firmly on year-end bonuses, it is not unrealistic to assume that the doctors rendering care under the plan were swayed to be most frugal when exercising their discretionary authority to the detriment of their membership.”

The court ruled that an HMO run by physicians can be sued for violating its duty to patients when it gives bonuses to doctors for postponing tests and cutting medical costs.

Herdrich, now an environmental planner at Colorado State University, was a part-time legal secretary in Bloomington when her appendix became inflamed in March 1991. She called Lori Pegram, the physician who had done routine exams for her under the HMO the family belonged to through her husband’s employer, State Farm Insurance.

According to case records, Pegram detected a “mass” of about seven centimeters in Herdrich’s abdomen. Herdrich said Pegram first told her she had a urinary tract infection but then on a later visit said she thought she has a cyst on her ovary and told her to schedule an ultrasound for eight days later. Carle Clinic policy was to wait eight days for any ultrasound exam not required by an emergency, in the interest of conserving resources and waiting to see if a patient’s conditions changed and an exam proved unnecessary.

By the time Herdrich was able to see a radiologist, it was clear her appendix had burst. She had immediate surgery to repair the rupture and the damage it cause to her abdominal wall.

“It wasn’t until months later that my husband and I sat back and looked at what had happened,” Herdrich said. She said that it was only when she decided to sue that she discovered that Pegram had an incentive not to order the immediate sonogram. “Until that point, I had only blamed her for making a mistake in the diagnosis,” Herdrich said. “Then I saw that (the decision to postpone the ultrasound) was for other reasons.”

In a separate medical malpractice lawsuit filed under Illinois law, Herdrich won $35,000 in compensatory damages. In the federal claim now before the high court, she says that when a physician-run HMO rewards its doctors based on cost savings, it necessarily compromises their loyalty to the patient and violates the HMO’s obligations under federal law. If Herdrich prevails, she will win no money damages, but she would force the HMO to end its incentive practice.

Phillips, who spoke on behalf of Pegram and Carle Clinic, said Pegram didn’t realize Herdrich was in dire condition and would have been able to order the test immediately if she knew it was an emergency. He defended physician incentives as a legitimate took in nonemergency situations to keep costs down.

In addition to her malpractice claim, Herdrich contended that the Carle Clinic and its doctors breached their fiduciary duty to plan participants under a federal law that regulates private employee benefits plans. The 1974 law is the Employee Retirement Income Security Act, known as ERISA.

A trial judge dismissed her claim, but in 1998 the appellate court reversed that decision. Finding that the HMO and physicians had a fiduciary duty to Herdrich, the judges noted that the Carle Clinic physicians controlled every aspect of the HMO, including their own year-end bonuses.

“We hold that incentives can rise to the level of a branch (of that duty) where . . . physicians delay providing necessary treatment to . . . plan beneficiaries for the sole purpose of increasing their bonuses,” the court said.

The appeal by Carle Clinic says managed costs are largely the point of managed care. “A substantial majority of HMOs use financial regards and penalties for health care professionals to provide incentives for cost-effective treatment,” the HMO says. It contends that the federal benefits law imposes no duty on health plans to avoid such cost-effective treatment,” the HMO says. It contends that the federal benefits law imposes no duty on health plans to avoid such cost-cutting policies.

The HMO is backed, predictably, by the American Association of Health laws and the Health Insurance Association of American. But it also is supported by the Clinton administration, which has championed legislation that would allow lawsuits against HMOs. In this case, however, it believes the appellate court too broadly interpreted the obligations of the HMO.

Among those on Herdrich’s side are 18 states and a group of health law and ethics scholars who express concerns that managed care plans have undermined candid discussions between patient and doctor about care options.

Herdrich is no longer in an HMO but said that if she ever returned to one she would not so readily trust the physicians. “I would want to know first how their incentive programs were set up. Most people understand that HMOs want to hold down costs, and they think physicians are trying to keep operating costs down to keep premiums down. But no, they might be holding down costs for their bonuses.”