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High Court hears arguments on HMO's fiduciary role.

The U.S. Supreme Court heard arguments in February on whether physician-owners of an HMO that gives its physicians financial incentives to contain costs are fiduciaries under the Employee Retirement Income Security Act of 1974 (ERISA). (Pegram v. Herdrich, No. 98-1949 (U.S. argued Feb. 23, 2000).)

ERISA imposes fiduciary duties on those with discretionary authority over the management or administration of private employee benefit plans. To fulfill this duty, a fiduciary must act "solely in the interest of" plan participants and beneficiaries when providing benefits and defraying the reasonable expenses of administering the plan.

The decision, expected by July, could dramatically affect the legal accountability of managed care organizations.

The case was brought by Cynthia Herdrich, who went to her HMO, CarleCare, with severe abdominal pain. She suffered a ruptured appendix and peritonitis after Lori Pegram, a physician at doctor-owned CarleCare, allegedly delayed ordering tests to save money by scheduling the exams at a hospital owned by the HMO.

Herdrich sued Pegram and Carle Clinic Association, which owned CarleCare, for malpractice. She later amended her complaint to allege that Carle had violated its fiduciary obligations by failing to inform her that the compensation of the CarleCare physicians would be increased to the extent that they did not use non-HMO facilities.

A jury awarded damages to Herdrich in her state law malpractice case, but the federal district court dismissed her ERISA fiduciary claim, finding she had failed to show either Carle or its parent company, Health Alliance Medical Plan, was a fiduciary to the plan.

The U.S. Court of Appeals for the Seventh Circuit reversed, holding that Herdrich had adequately alleged that the HMO administrators were fiduciaries since her complaint charged that CarleCare's physician-owners had the exclusive right to decide all disputed and nonroutine claims under the plan. This level of control met ERISA's requirement that a fiduciary maintain control and authority, the court found.

The court also held Herdrich's allegations demonstrated that defendants breached their fiduciary duty to her because they were alleged to have acted in their own interest rather than the interest of the plan's participants and beneficiaries.

Carter Phillips, arguing in the Supreme Court on behalf of the HMO administrators, said this case will influence the future of managed care. "If Carle violates ERISA, all HMOs do," he said.

James Ginzkey, arguing on behalf of Herdrich, countered by distinguishing the HMO involved in this case from the standard managed care organization. In the standard HMO, Ginzkey explained, the owners, the company that hires the claims reviewers and medical directors, and the doctors who provide care are separate entities. By contrast, Carle's physicians--whose income depends on claims denials --are also responsible for claims administration and plan interpretation.

Ginzkey cited a survey of doctors in California that indicated that the type of incentives involved in Herdrich's suit have a significant, deleterious effect on health care for patients.

Justice Sandra Day O'Connor asked, "Why should courts get into the slippery-slope process of deciding what scheme is bad for health care when Congress has designed a scheme for private plans to provide health care and keep costs down while relying on doctors to abide by their ethical obligations?" Ginzkey responded, "Ethics are not enough to counteract strong financial incentives."
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Author:Levy, Stephanie
Geographic Code:1USA
Date:Apr 1, 2000
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