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Read Making a Killing

home / healthcare / in the media

New York Times
Feb 24, 2000

by Robert Pear

Justices Seem Skeptical Over Letting Patients Sue H.M.O.'s That Offer Bonuses to Cut Costs

The Supreme Court raised a blizzard of questions today about a patient's challenge to the fundamental principle of managed health care that rewards doctors who hold down costs.

After hearing arguments for an hour on issues that could affect more than 160 million Americans, the court appeared skeptical about letting patients sue health maintenance organizations in federal court for offering such bonuses.

James P. Ginzkey, the lawyer for the patient, Cynthia Herdrich, said, "I am not asking this court to outlaw financial incentives," the payments doctors receive for holding down costs. Rather, Mr. Ginzkey said, the court should prohibit H.M.O.'s from offering financial incentives that have "an undue influence" on a doctor's decisions and can hurt the quality of care.

The questions raised today by most of the justices echoed a broader political debate over what role the government should play in regulating health plans. The justices asked, for example, whether Congress, which has encouraged the development of H.M.O.'s since 1973, meant to limit the techniques they use to control costs.

Through her husband's employer, Ms. Herdrich received health coverage from the Carle Care H.M.O., a doctor-owned health plan in Illinois. In 1992 she suffered abdominal pain, sought treatment from Lori Pegram, a doctor at the H.M.O., who scheduled her for an ultrasound procedure eight days later at a distant hospital affiliated with the H.M.O. While Ms. Herdrich was waiting for the test, her appendix ruptured and she developed a life-threatening infection.

She filed a medical malpractice suit in Illinois state court and won damages of $35,000. She came to the Supreme Court seeking permission to challenge her health plan in a federal suit that attacked the financial incentives given to doctors to control costs. She contends that the H.M.O. violated its legal duty to act solely in the interest of workers and their dependents participating in an employer-sponsored health plan.

The arguments in the case, Pegram v. Herdrich, No. 98-1949, came as Congress is considering legislation that would set new standards for managed care and make it easier for patients to sue H.M.O.'s. President Clinton strongly supports such legislation.

In addition, lawyers across the country have filed at least 16 class-action suits accusing H.M.O.'s of skimping on care and misleading patients by failing to disclose the techniques they use to control costs.

The task facing the Supreme Court is not to design a national health policy, but to decide whether federal law, as it stands now, opens the federal courts to Ms. Herdrich and patients like her. The issue before the Supreme Court is whether Ms. Herdrich, having won a jury verdict in state court, may pursue her claim that the H.M.O. violated its duty to her under federal law.

In court today, Mr. Ginzkey, the lawyer for Ms. Herdrich, had an answer to every question asked of him. But he sometimes seemed to lose his way in the legal swamp surrounding the statute at the heart of the case, the Employee Retirement Income Security Act of 1974, known as Erisa.

The law, prompted by abuses in the operation of pension plans, also defines the obligations of the people who manage employer-sponsored health plans for more than 160 million Americans. Under the law, such decision-makers must act "solely in the interest of the participants and beneficiaries" of a health plan.

Mr. Ginzkey said Ms. Herdrich's H.M.O.'s was riddled with conflicts of interest. The same doctors own the health plan, treat patients, decide whether to pay claims and are eligible to receive year-end bonuses as a result of cost savings, he said.

"We don't have a standard plain vanilla H.M.O.," he declared.

Ms. Herdrich and her lawyer contend that the H.M.O. and its doctors had "a fiduciary duty" to her under federal law. But, several justices asked, do the managers of an employee benefits plan also have a legal duty to conserve its assets for the benefit of all the people who get coverage through the same group?

"Sometimes," said Justice Ruth Bader Ginsburg, "what's in the best interest of a particular plaintiff could be against the interest of a class of beneficiaries."

Chief Justice William H. Rehnquist said that "other beneficiaries are going to suffer" if the health plan decides every issue in favor of the person filing claims.

Justice Sandra Day O'Connor asked Mr. Ginzkey, "Why should the courts get involved in this messy business" of deciding whether some financial incentives go too far. "Why should the courts get into this slippery slope problem?" she asked.

Mr. Ginzkey conceded that some financial incentives to doctors were acceptable, but he said they should not be allowed if they had "an undue influence" on a doctor's decisions and adversely affected patient care. Chief Justice Rehnquist called this standard "extremely vague."

A decision in the case is expected by early summer. Jamie Court, a leading advocate for patients' rights, said: "Even if Ms. Herdrich loses, the patients' rights movement may win. The Supreme Court may not be willing to expand the scope of federal law, but may allow patients to pursue remedies in state court, where they have recently had more success in recovering damages for their injuries."

Mr. Court is the advocacy director at the Foundation for Taxpayer and Consumer Rights, in Santa Monica, Calif.

In 1973, at the suggestion of the Nixon administration, Congress passed legislation to foster the development of H.M.O.'s. Justice Stephen G. Breyer said today that he found it "hard to believe" that Congress "wanted to gut its own H.M.O. legislation" when it passed Erisa in 1974.

In a typical H.M.O., Mr. Ginzkey said, there is a managed-care company owned by stockholders, doctors treat patients and employees of the company decide whether to pay claims. But in Ms. Herdrich's case, he said, "all three groups are one."

Under federal law, Mr. Ginzkey argued, "you have to have somebody making claims decisions who isn't receiving money to deny the claims."

But Justice David H. Souter said that in any H.M.O., the health plan and its employees had a strong financial interest to hold down health costs. "Unless they do so," he said, "the H.M.O. will go out of business."

Carter G. Phillips, a lawyer for the Carle Clinic H.M.O., said that if its financial incentives violated Erisa, "then all managed care does so as well," because most health plans use financial rewards and penalties to promote cost-conscious behavior by doctors.

Mr. Phillips acknowledged that "an error in judgment" had occurred in Ms. Herdrich's case. But he said she had "a perfectly valid remedy" under state law, filing a malpractice suit. And he said there was no evidence that Congress intended to expand the right to sue under federal law.

The Justice Department opposed Ms. Herdrich's effort to pursue her case in federal court. The H.M.O. provides medical services to an Erisa plan, but is not itself subject to the "standards of fiduciary duty" set by federal law, so the H.M.O.'s compensation scheme does not violate those standards, it said.        


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