Treatment decisions made by HMO physician-owners are not fiduciary acts under ERISA.

The U.S. Supreme Court has held that treatment decisions made by HMO physicians are not fiduciary acts under the Employee Retirement Income Security Act of 1974 (ERISA). (Pegram v. Herdrich, No. 98-1949, 2000 WL 743301 (June 12, 2000).) The act requires that fiduciaries act "solely in the interest of" plan participants and beneficiaries when providing benefits and defraying the reasonable expenses of administering the plan.

The case was brought by Cynthia Herdrich, who suffered a ruptured appendix and peritonitis after a physician at her doctor-owned HMO allegedly delayed ordering tests so they could be scheduled at a hospital owned by the HMO. Herdrich sued the physician and the company that owned the HMO for malpractice.

She later amended her complaint to allege that the company had violated its fiduciary obligations under ERISA by providing services under terms that rewarded its physicians for limiting care. Under the plan, doctors received bonuses at the end of the year for money not spent on patient care. Herdrich contended these terms created a conflict of interest for physicians by giving them an incentive to make decisions in their self-interest, rather than in the exclusive interests of plan participants.

Herdrich's ERISA claim sought the return of the doctors' bonuses to the plan. She did not attempt to recover damages for herself.

A jury awarded damages to Herdrich in her state law malpractice case, but the federal district court dismissed her ERISA fiduciary claim, finding that the HMO was not acting as an ERISA fiduciary. The Seventh Circuit Court of Appeals reversed.

Writing for a unanimous Court, Justice David Sourer noted that in every case alleging breach of ERISA fiduciary duty, the threshold question is whether a person employed to provide services under a plan was performing a fiduciary function when taking the action subject to complaint. Here, the Court said, the kinds of decisions claimed to be fiduciary are mixed eligibility and treatment decisions--which involve not only eligibility for coverage but also choices about how to diagnose and treat a patient's condition.

Souter wrote, "We think Congress did not intend ... an[y] ... HMO to be treated as a fiduciary to the extent that it makes mixed eligibility decisions acting through its physicians." The Court observed that at common law, fiduciary duties characteristically attach to decisions about managing assets and distributing property to beneficiaries. The Court reasoned that when Congress took up the subject of fiduciary responsibility under ERISA, it concentrated on fiduciaries' financial decisions, not the mixed eligibility determinations at issue here.

Further, the Court noted, if the fiduciary standard were applied against HMOs that make mixed decisions, recovery would be warranted simply on a showing that the profit incentive to ration care would generally affect these decisions. Since the provision for profit is what makes the managed care company a proprietary organization, the Court explained, Herdrich's remedy--the return of profit from the company's owners--would effectively eliminate the for-profit HMO.

Congress has promoted the formation of HMO practices for more than 27 years, the Court observed. By refusing to dismiss Herdrich's ERISA claim, the Court concluded, it would be acting contrary to Congress's policy.

ATLA Immediate Past President Richard Middleton emphasized that the decision does not affect either malpractice lawsuits against HMOs or the Patients' Bill of Rights currently under consideration in the U.S. Congress. The bill would eliminate ERISA preemption of state causes of action for managed care insurers' delay or denial of care that results in injury or death. "The Court left open the possibility that Congress could legislate otherwise, and it did not address the right of patients to sue HMOs or their doctors in state courts, if allowed by the law of a particular state," Middleton said.