Doctors’ Bonuses at Crux of HMO Suit

The Supreme Court will hear a case Wednesday that goes to the heart of the current national furor over managed care: Can patients trust doctors who are paid bonuses by their health plans to cut medical costs?

The outcome may determine whether the 125 million Americans who are in group health plans have legal recourse when they suspect that their doctors have denied them care because of a financial incentive paid by the managed care company that employs them.

Until now, aggrieved HMO patients have found little relief in federal courts. But the case of Cynthia Herdrich may change all that.

Herdrich, an environmental planner in Loveland, Colo., was 33 years old in 1991 when she went to her Illinois HMO doubled over in pain. Her doctor diagnosed her with a urinary tract infection and sent her away with an antibiotic.

When Herdrich returned nearly a week later, still in pain, her physician, Lori Pegram, said that she had an ovarian cyst and recommended an ultrasound.

But before Herdrich could have the ultrasound at a hospital in her HMO’s network, which was 50 miles away, her appendix ruptured and sent a severe peritonitis infection through her body. Treatment required a weeklong hospital stay, plus five days of intravenous antibiotics at home.

Her lawyer says that this was not merely a case of medical error.

“They had hidden incentives that basically say you can receive an annual bonus for not ordering diagnostic tests and not making referrals to specialists,” said the attorney, James P. Ginzkey. “That creates a blatant conflict of interest. And it explained what happened here. At every step, they took the cheap way out.”

Herdrich sued her doctor and her HMO. Among other things, she alleged that, because her doctor was paid a year-end bonus for limiting referrals for tests and treatments at out-of-network hospitals, the HMO had violated its responsibilities under a federal law that requires administrators of a benefit plan to put first the interests of people covered by the plan.

The fight over the Herdrich case--many of the biggest players in the health care industry have filed briefs--is part of a growing political and legal battle over the rights of patients.

If the Supreme Court rules in Herdrich’s favor, the decision is likely to have huge financial and legal consequences for the managed health care system, which uses incentive payments to encourage doctors to hold down costs.

It also could unleash a firestorm of lawsuits against managed health care plans and boost prospects for more than a dozen class-action lawsuits filed against some of the nation’s largest plans.

“It would open the door to a tremendous amount of litigation against every managed care plan,” said Carter Phillips, the prominent Washington-based lawyer who is representing Carle Clinic, the HMO sued by Herdrich.

Karen Ignagni, president of the American Assn. of Health Plans, an HMO trade group, predicted that the result could be even more dire.

“If the court rules in her favor, it would potentially unravel the entire health care system because these incentives are used not just by private health care plans but in the federal Medicare and Medicaid programs and in state employee benefit plans,” Ignagni said.

Law Seen From Two Perspectives

Trial lawyers and patient advocates see it differently. Because of the way the federal law has been interpreted until now, most patients who are injured by health plans have had little recourse in either state or federal courts. A ruling in favor of Herdrich, or even partly in her favor, would begin to right the inequities, they say.

“Up to now, what federal law has done . . . is to insulate managed care from liability, from judicial oversight and from state regulatory oversight,” said Peter Jacobson, a law professor at the University of Michigan.

“If the court rules in Herdrich’s favor, it won’t be the end of managed care. Liability didn’t undermine hospitals, and it’s not likely to destroy managed care,” he added.

Jacobson, signer of a legal brief supporting Herdrich’s position, said he worries that, if the court rules against her, it could give HMOs even greater license to offer bonuses to physicians for keeping down costs.

The threshold legal question to be decided by the court is whether an HMO or managed health care plan--like the employer that sponsors the overall benefits plan--functions as a fiduciary of the benefits plan. If so, HMOs likely would have to live up to the same trustee-type responsibilities expected of employers.

Those responsibilities include disclosure of the plan’s operations, loyalty to plan members and a prohibition against enriching the plan’s administrators at the expense of those who are participating in the plan.

In the case of HMOs, that implies a duty to act in the sole interest of patients.

HMOs have argued that their systems to hold down costs, including physician incentives, benefit all members because they lower the overall cost of the plans.

“Everything has a price, and as a matter of fiduciary duty, a plan has to conserve the plan’s assets,” said Stephanie Kanwit, a health care lawyer at the Washington firm of Epstein, Becker and Green.

“If a plan has to pay $600,000 to take care of a low-birth-weight baby, those resources will not be available to the plan,” Kanwit said.

But Herdrich’s lawyers argue that some of those cost-saving measures conflict with the interests of patients because they compromise their access to care.

The legal question is further complicated, some legal scholars say, by the dual and hard-to-separate roles played by managed care plans. As plan administrators responsible for making benefit decisions, health plans are covered by the Employment Retirement Income Security Act; as deliverers of health care, they are not.

Yet it is the law itself--and the fact that it was not written to cover HMOs--that has created the legal difficulty at the center of Herdich’s case. When ERISA was enacted in 1974 to safeguard employees’ pension benefits, managed health care and HMOs barely existed. By relieving employers of the burden of following the laws in every state where they operated, the law encouraged the formation of larger benefit plans that covered all the employees of a business, regardless of where they worked. And as managed health care began in the 1980s to transform the nation’s traditional health insurance system, HMOs that were part of employer-sponsored health plans fell under ERISA.

Until recently, courts interpreted the law to mean that, even when an HMO patient was injured because of a doctor’s negligence, the HMO was shielded from liability both in federal and state court. Judges reasoned that since ERISA does not deal with negligence or malpractice and because the HMO was serving a plan regulated under the federal law, it was shielded from malpractice suits in state courts. Patients can, however, sue a specific doctor under state malpractice laws.

The only exception to this shield was if an HMO wrongly denied a patient a benefit covered by the plan. In that case, the patient could recover damages under the federal law but only the cost of the benefit that was denied.

Thus a woman denied a mammogram, which the plan was supposed to cover, and whose breast cancer then progressed undetected could be reimbursed only for the cost of the mammogram. Few lawyers took such cases because so little money could be recovered.

Now, however, courts are revising some of those rulings and opening the door to some lawsuits by injured patients and doctors against managed care plans.

The cases fall into two categories.

In the first are lawsuits alleging that an HMO doctor or the HMO itself committed malpractice by delivering health care in a negligent way. Several federal appeals courts have ruled that ERISA does not shield an HMO from state tort claims in such cases and that patients can bring such cases in state court just as they do malpractice claims against doctors.

The House version of legislation now pending in a House-Senate conference committee would give patients a clear right to sue their health plans in state court under state malpractice laws.

The second group, into which Herdrich’s case and the class-action lawsuits fall, is largely untested. In these cases, patients and their lawyers are turning ERISA into a sword to go after the business practices of managed health care companies.

In 1996, a jury heard Herdrich’s malpractice claim in an Illinois state court and awarded her $35,000 in damages against her physician. But the trial judge tossed out her federal employee benefit claim against her HMO.

However, the U.S. Court of Appeals in Chicago, in a ruling that stunned the health care industry, revived Herdrich’s claim against the clinic and said that the allegations, if true, would justify a damage verdict against the HMO itself.

Doctors cannot work “solely in the interest” of the patients if they receive “yearly kickbacks” for denying care, said Judge John L. Coffey for the U.S. 7th Circuit Court.

Before the case could go to trial, the HMO, backed by the health care industry, persuaded the Supreme Court to rule squarely on whether HMOs in this type of case are acting as fiduciaries and can be sued under federal employee benefits law for using financial incentives.

But Herdrich did not wait for the ruling to make a different decision about her health care. “We’re no longer with an HMO,” she said recently. “I know HMOs are set up differently in different places across the country, and I can’t say every HMO has incentive programs. But I felt I just couldn’t take the risk and go through it again.”

Ruling Against Herdrich Urged

Among those who have weighed in with the court on the side of the insurance industry are the American Medical Assn. and the American Assn. of Health Plans, which represents about 1,000 managed care plans.

The Clinton administration filed a brief urging the high court to rule against Herdrich, saying that her HMO’s bonus plan did not appear to violate the federal benefit law. But it also argued that other types of financial incentives could violate ERISA and said that the court should not close the door to such suits.

Filing briefs on behalf of Herdrich are health care scholars and ethicists as well as a number of public-interest health groups. A decision in the case (Pegram vs. Herdrich, 98-1949) will be handed down by the court within a few months.