High Court Sides With HMOs in Suit Over Cost-Cutting

The Supreme Court closed the federal courthouse door Monday to employees who want to sue their health maintenance organizations for putting cost concerns ahead of the quality of medical care.

The 9-0 ruling sides squarely with employers and HMOs in rejecting federal lawsuits as a way to reform the nation’s health care system. It also brushes aside complaints from angry patients who say that their health care has been sacrificed by cost cutters.

Monday’s decision does not shield individual HMO doctors from being sued for malpractice in state courts. And patients in some states can still sue HMOs for malpractice over medical decisions that lead to injury. Nor does the ruling prevent Congress from changing the law and allowing patients to sue their HMOs.

Nonetheless, health industry lawyers touted the ruling as a major victory because it blocks broad lawsuits targeted at how HMOs operate.

The very purpose of an HMO, the court said, is to hold down costs by “rationing” medical care.

In essence, employers and their workers enter into a bargain. Employers pay for health care as a benefit for their employees. In return, federal law shields them and their health care plans from being sued for general damages.

Employees who accept the health insurance offered by their employers have no guarantee that they will receive all the care that unlimited money could provide, the court said.

The justices said they were unwilling to upset this cost-containment system by allowing “wholesale attacks” on HMOs.

If these health care plans could be sued and forced to pay millions of dollars in damages for being too cost-conscious, the “effect would be nothing less than the elimination of the for-profit HMO,” Justice David H. Souter said for the court.

“This means the survival of HMOs,” said Washington attorney Carter G. Phillips, who represented the Illinois health care plan that was sued by a woman whose appendix had ruptured.

The plaintiff, Cynthia Herdrich, was doubled over from abdominal pain when she went to see her HMO physician. Dr. Lori Pegram said that Herdrich had a urinary tract infection and sent her home.

Though Herdrich’s pain worsened, the doctor scheduled her for an ultrasound test at an affiliated hospital even though it meant an eight-day delay.

After her near brush with death from the burst appendix, Herdrich sued the doctor and won a $35,000 malpractice verdict in state court.

Her lawyer wanted to go further, claiming that the HMO’s cost-cutting practices were at the root of the problem. He learned that the doctors in the Carle Clinic, Herdrich’s HMO, received annual bonuses for holding down costs, including for diagnostic tests.

Herdrich’s case gained a national spotlight last year when a U.S. appeals court in Chicago ruled that her claim, if true, would justify a federal lawsuit against the HMO itself.

If the Supreme Court had agreed, it would have opened most HMOs to attack, since the vast majority of managed health care plans rely on some form of financial incentive in their payment arrangements with physicians.

But Monday’s decision (Pegram vs. Herdrich, 98-1949) blocks the lawsuit against the HMO.

Souter’s opinion makes clear that cost controls are essential to the success of HMOs, not a hidden flaw.

“Whatever the HMO, there must be rationing. . . . [It] goes to the very point of any HMO scheme,” he wrote. “Rationing necessarily raises some risks while reducing others (ruptured appendixes are more likely; unnecessary appendectomies are less so),” he said.

Judges and courts are in a poor position to decide whether these health care plans are good social policy or bad, Souter said. That is a decision better left to lawmakers, he concluded.

An attorney representing the major health insurance associations in the case praised the decision.

“It’s one of the first good discussions on rationing health care,” said Stephanie Kanwit, a partner at Epstein Becker & Green. Among the industry groups represented by the Washington law firm was the American Assn. of Health Plans, which represents more than 1,000 HMOs and other managed care plans nationwide.

“Health care financing is a zero-sum game: You have a pot of money that has to take care of everyone in that particular health plan . . . and there’s only so much we can spend it on. And the question is how do we allocate health care resources,” Kanwit said.

Other industry experts said that the decision will have a limited real-world impact because patients did not have a general right to sue their HMOs. Courts have said that HMOs can be sued for not providing the benefits they had promised but not for using cost-control strategies.

About 125 million Americans are in employer-provided health plans that are similar to the one at issue in the case.

Some advocates for patients had harsh words for the court’s decision. “Most people agree that it’s a pretty terrible practice to give a physician a financial incentive to deny medical care, and for the court to put a stamp on that practice is pretty alarming,” said William M. Shernoff, a Claremont, Calif., attorney specializing in bad-faith insurance claims.

Other lawyers for patients, however, saw a silver lining, saying that the court had explicitly left undecided a number of crucial questions that are at the center of most disputes between managed care plans and patients, such as whether a patient can make a malpractice claim in state court when he or she is injured as a result of a medical decision by an HMO.

“The court . . . is strongly hinting that, if an HMO turns down a medical treatment based on a medical judgment and the patient is injured, [it is] liable under state law,” said Marc Machiz, a partner in Cohen, Milstein, Hausfeld & Toll, a Washington law firm that represents plaintiffs in managed care cases.

Machiz, a former associate solicitor in the Department of Labor, which regulates employee benefit plans, also pointed to the justices’ explicit language leaving open the question of whether HMOs must disclose financial incentives.

Several class-action suits naming the nation’s largest health insurers have been brought on the grounds that the health insurers’ failure to disclose financial incentives is a breach of the federal employee benefits law. Although the court clearly said in Monday’s ruling that such incentives are legal, the justices did not decide whether they ought to be disclosed, giving hope to trial lawyers who are pushing those cases.