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Jun 14, 2000
by Julie Appleby
Ruling Raises HMO Stock, But More Cases In WingWall Street gave the Supreme Court's decision on managed care
a thumbs up Monday, but HMOs' legal battles are far from over.
Managed care stocks rose on news that the court did not rule against
the use of bonuses and other financial incentives paid to doctors
who limit spending.
"The decision was saying you can't punish a managed care company
for managing," says Stuart Gerson, an attorney who represents
health care plans for Epstein Becker & Green in Washington.
The court acknowledged that managed care came in to solve the
problem of rapidly rising health care costs caused, in part, by
a lack of checks on doctors.
Financial incentives -- and disincentives -- play a key role in
managed care's cost-control efforts. Doctors are often paid a
set amount per patient, per month, whether or not that patient
needs treatment. Proponents say that gives doctors an incentive
to keep patients healthy, while critics say it means patients
Bonuses are sometimes offered to doctors or medical groups for
meeting annual financial goals.
The case, known as Pegram vs. Herdrich, was brought by Cindy Herdrich,
who went to her doctor complaining of abdominal pain. Her doctor
told her she had to wait eight days for an ultrasound; her appendix
burst while she waited, requiring emergency surgery.
Herdrich argued that financial incentives caused her doctor to
delay the test.
The case was the first addressing managed care's financial incentives
to make it to the Supreme Court.
However, more than a dozen class-action cases against managed
care companies are now in lower courts, challenging financial
arrangements and health plans' responsibility to tell their customers
about such incentives.
Most of those cases were brought under federal anti-racketeering
laws. Because the Supreme Court did not rule against the use of
financial incentives, it undermines part of the arguments in those
lower court class-action cases.
"It takes the legs out from under a lot of the class-action lawsuits,"
says Andy Bressler, an analyst with Bank of America. "But there's
a lot of other things on the table to be worried about."
For one thing, Monday's ruling could result in more cases challenging
managed care in state courts.
"The managed care industry lost by winning," says Gregg Bloche,
co-director of the Georgetown/Johns Hopkins joint program in law
and health policy.
"The door is now open, perhaps wide open, for an influx of state
cases against HMOs for withholding treatment," Bloche says.
And in state courts, "the hurdles are lower and the damage awards
greater," says Jamie Court of the advocacy group Consumers for
Quality Care in Santa Monica, Calif.
The court ruling also left open the question of whether health
plans need to do a better job of informing consumers about such
"We are going to have decisions saying HMOs must be honest and
straightforward," says Marc Machiz, whose Washington law firm
has brought class-action cases against managed care companies.
HMOs rise on news
HMO (ticker) close Change
Humana (HUM)$5.13 0.13
Healthcare Systems (PHSY) $68.06 1.31
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