Breach of fiduciary duty lawsuits against MCOs: What's left after Pegram v. Herdrich?

Journal of Legal Medicine

Volumn 22, Issue 1, 2001, Pages 55-75

  Rosoff, Arnold J ^a  

^a UNIVERSITY OF PENNSYLVANIA   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

ARTICLE; HEALTH CARE PLANNING; HEALTH CARE POLICY; HEALTH INSURANCE; HEALTH MAINTENANCE ORGANIZATION; LAW; LAW SUIT; MANAGED CARE; MEDICOLEGAL ASPECT;

CONFLICT OF INTEREST; EMPLOYEE RETIREMENT INCOME SECURITY ACT; HEALTH MAINTENANCE ORGANIZATIONS; HUMANS; ILLINOIS; MALPRACTICE; PATIENT ADVOCACY; TRUTH DISCLOSURE; UNITED STATES;

EID: 0035054202     PISSN: 01947648     EISSN: None     Source Type: Journal    
DOI: 10.1080/019476401750171133     Document Type: Article

References (76)

1. 1 James L. Brooks, dir., As Good as It Gets, with Jack Nicholson, Helen Hunt, and Greg Kinnear, Sony Pictures, 1997.
2. 2 120 S. Ct. 2143 (2000).
3. 3 29 U.S.C.A. § 1001.
4. 4 Meinhard v. Salmon, 164 N.E. 545, 546 (N.Y. 1928), quoted in Pegram, 120 S. Ct. at 2152.
5. 5 ERISA's specific language on this point is: "[F]iduciaries must discharge their duties . . . with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims ...." 29 U.S.C. § 1104(a)(1).
6. 6 See generally MARC A. RODWIN, MEDICINE, MONEY, AND MORALS: PHYSICIANS' CONFLICTS OF INTEREST (1995); Alan L. Hillman et al., How Do Financial Incentives Affect Physicians' Clinical Decisions and the Financial Performance of Health Maintenance Organizations?, 321 NEW ENG. J. MED. 86 (1989); Marc A. Rodwin, Physicians' Conflicts of Interest: The Limits of Disclosure, 321 NEW ENG. J. MED. 1205 (1989); David Mechanic & Menachem Schlesinger, The Impact of Managed Care on Patients' Trust in Medical Care and Their Physicians, 275 J.A.M.A. 1693 (1996).
7. 6 See generally MARC A. RODWIN, MEDICINE, MONEY, AND MORALS: PHYSICIANS' CONFLICTS OF INTEREST (1995); Alan L. Hillman et al., How Do Financial Incentives Affect Physicians' Clinical Decisions and the Financial Performance of Health Maintenance Organizations?, 321 NEW ENG. J. MED. 86 (1989); Marc A. Rodwin, Physicians' Conflicts of Interest: The Limits of Disclosure, 321 NEW ENG. J. MED. 1205 (1989); David Mechanic & Menachem Schlesinger, The Impact of Managed Care on Patients' Trust in Medical Care and Their Physicians, 275 J.A.M.A. 1693 (1996).
8. 6 See generally MARC A. RODWIN, MEDICINE, MONEY, AND MORALS: PHYSICIANS' CONFLICTS OF INTEREST (1995); Alan L. Hillman et al., How Do Financial Incentives Affect Physicians' Clinical Decisions and the Financial Performance of Health Maintenance Organizations?, 321 NEW ENG. J. MED. 86 (1989); Marc A. Rodwin, Physicians' Conflicts of Interest: The Limits of Disclosure, 321 NEW ENG. J. MED. 1205 (1989); David Mechanic & Menachem Schlesinger, The Impact of Managed Care on Patients' Trust in Medical Care and Their Physicians, 275 J.A.M.A. 1693 (1996).
9. 6 See generally MARC A. RODWIN, MEDICINE, MONEY, AND MORALS: PHYSICIANS' CONFLICTS OF INTEREST (1995); Alan L. Hillman et al., How Do Financial Incentives Affect Physicians' Clinical Decisions and the Financial Performance of Health Maintenance Organizations?, 321 NEW ENG. J. MED. 86 (1989); Marc A. Rodwin, Physicians' Conflicts of Interest: The Limits of Disclosure, 321 NEW ENG. J. MED. 1205 (1989); David Mechanic & Menachem Schlesinger, The Impact of Managed Care on Patients' Trust in Medical Care and Their Physicians, 275 J.A.M.A. 1693 (1996).
10. 7 Bush v. Dake, Cause No. 86-25767 NM-2 (Circuit Court, Saginaw County, Mich., 1989).
11. 8 See infra text accompanying note 41 (discussion of Moore v. Regents of Univ. of California).
12. 9 See, e.g., Weiss v. CIGNA HealthCare, Inc., 972 F. Supp. 748 (S.D.N.Y 1997).
13. 10 For a detailed consideration of whether the duty to disclose incentives should rest with the physician or the managed care organization, see Neade v. Portes, 2000 Ill. LEXIS 1691 (Ill. Oct. 26, 2000). The spirited dissent by Chief Justice Harrison is particularly thought-provoking.
14. 11 The word "likely" is used throughout this discussion because the case law on ERISA preemption is, despite its volume, spotty, inconsistent and, ultimately, inconclusive. One of the reasons why ERISA preemption is so problematic is that the rules for its application are unclear.
15. 12 See Ciara R. Frost & Carol J. Gerner, The Rise in Breach of Fiduciary Duty Claims Against Managed Care Organizations Based upon Healthcare Provider Financial Incentives, HEALTH TREK (2d qtr. 1999), reprinted at (visited Oct. 13, 2000). See also Note, Sacrificing Patients for Profits: Physician Incentives to Limit Care and ERISA Fiduciary Duty, 77 WASH. U.L. QTLY. 1323 (1999).
16. 12 See Ciara R. Frost & Carol J. Gerner, The Rise in Breach of Fiduciary Duty Claims Against Managed Care Organizations Based upon Healthcare Provider Financial Incentives, HEALTH TREK (2d qtr. 1999), reprinted at (visited Oct. 13, 2000). See also Note, Sacrificing Patients for Profits: Physician Incentives to Limit Care and ERISA Fiduciary Duty, 77 WASH. U.L. QTLY. 1323 (1999).
17. 13 See, e.g., Wendy Mariner, What Recourse? - Liability for Managed-Care Decisions and the Employee Retirement Income Security Act, 343 NEW ENG. J. MED. 592 (2000); Wendy Mariner, State Regulation of Managed Care and the Employee Retirement Income Security Act, 335 NEW ENG. J. MED. 592 (1996).
18. 13 See, e.g., Wendy Mariner, What Recourse? - Liability for Managed-Care Decisions and the Employee Retirement Income Security Act, 343 NEW ENG. J. MED. 592 (2000); Wendy Mariner, State Regulation of Managed Care and the Employee Retirement Income Security Act, 335 NEW ENG. J. MED. 592 (1996).
19. 14 United States Healthcare Sys. of Pa., Inc. v. Pennsylvania Hosp. Ins. Co., 120 S. Ct. 2686 (2000).
20. 15 See generally Donald Bogan, Protecting Patient Rights Despite ERISA: Will the Supreme Court Allow States to Regulate Managed Care?, 74 TULANE L. REV. 951 (2000).
21. 16 29 U.S.C.A. § 1144(a).
22. 17 15 U.S.C. § 1011.
23. 18 29 U.S.C.A. § 1144(b)(2)(A). An interesting and significant case putting a narrow reading on "state regulation of insurance" is Anderson v. Humana, Inc., 24 F.3d 889 (7th Cir. 1994).
24. 19 29 U.S.C.A. § 1144(b)(2)(B). Courts generally have construed the deemer provision broadly, finding plans to be self-funded, which limits the application of the saving clause and ultimately leads to a broader scope for preemption of state law. See authorities cited in BARRY R. FURROW ET AL., HEALTH LAW 815 n.4 (3d ed. 1997).
25. 20 De Buono v. NYSA-ILA Med. & Clinical Servs. Fund, 520 U.S. 806 (1997); California Div. of Labor Standards Enforcement v. Dillingham Constr., N.A., Inc., 519 U.S. 316 (1997); New York State Conf. of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645 (1995).
26. 21 See, e.g., Boyd v. Albert Einstein Med. Ctr., 547 A.2d 1229 (Pa. Super. 1988) (vicarious liability); Decker v. Saini, 14 Employee Ben. Cas. 1556, 1991 WL 277590 (Mich. Cir. Ct. 1991) (vicarious liability); McClellan v. Health Maintenance Org. of Pa., 604 A.2d 1053 (Pa. Super. 1994) (direct liability).
27. 22 29 U.S.C. § 1132(a) "Persons empowered to bring a civil action: A civil action may be brought (1) by a participant or beneficiary ... (B) to recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan ...." Note that there is no provision here for recovery of consequential damages.
28. 23 29 U.S.C. § 1132(g)(1). The section states: "In any action under this title ... by a participant, beneficiary, or fiduciary, the court in its discretion may allow a reasonable attorney's fee and costs of action to either party ...."
29. 24 See supra text accompanying notes 16-20.
30. 25 57 F.3d 350 (3d Cir. 1995). Note that Justice Souter relies, in part, on the reasoning in Dukes, specifically its recognition of the dual medical/administrative roles of HMOs, in crafting the distinction between "treatment" decisions and "eligibility" decisions that forms an important basis of the opinion in Pegram.
31. 26 See PacifiCare of Oklahoma, Inc. v. Burrage, 59 F.3d 151 (10th Cir. 1995); Rice v. Panchal, 65 F.3d 637 (7th Cir. 1995).
32. 27 Ingersoll-Rand v. McClendon, 498 U.S. 133, 145 (1990); Metropolitan Life Ins. Co. v. Taylor, 481 U.S. 58, 63 (1987).
33. 28 Under section 502(a), state law is blocked but the federal law provides a remedy, albeit a limited one. Under section 514(a), the state law might be "displaced" without being "replaced"; in other words, a state remedy would be blocked without a federal law being provided in its place, creating a wrong without any remedy. Rice v. Panchal, 65 F.3d 637, 639-41 (7th Cir. 1995).
34. 29 Rice, 65 F.3d at 639 (quoting Caterpillar, Inc. v. Williams, 482 U.S. 386, 398-99 (1987)).
35. 30 The 10th Circuit's opinion in PacifiCare, supra note 26, cites five cases holding that ERISA preempts state court claims and eight cases holding that it does not. PacifiCare, 59 F.3d at 153 n.2.
36. 31 Bogan, supra note 15, at 951.
37. 32 See, e.g., Mariner, supra note 13.
38. 33 Long v. Great West Life & Annuity Ins. Co., 957 P.2d 823 (Wyo. 1998). See generally J. Scott Andresen, Is Utilization Review the Practice of Medicine? Implications for Managed Care Administrators, 19 J. LEGAL MED. 431 (1998).
39. 34 Long, 957 P.2d at 826-28. The opinion contains a good overview of the issues and a useful compilation of current literature on the subject. See also Frost & Gerner, supra note 12; Note, supra note 12, at 1323.
40. 35 See, e.g., D.A.B. v. Brown, 570 N.W.2d 168 (Minn. App. 1997); Spoor v. Serota, 852 P.2d 1292 (Colo. App. 1992).
41. 36 The recent decision by the Illinois Supreme Court in Neade v. Portes, cited supra note 9 for a related point, provides a detailed and thoughtful, if not entirely convincing, analysis of this issue. Note especially the dissent by Chief Justice Harrison.
42. 37 These other features include close monitoring of physicians with the implied, or even explicit, threat that if they are identified as "heavy utilizers" of services they may not be continued as providers under the plan. Being dropped from the plan is often termed "deselection" and has spurred court challenges by affected physicians. See, e.g., Harper v. HealthSource New Hampshire, Inc., 674 A.2d 962 (N.H. 1996); Bryan A. Liang, Deselection under Harper v. Healthsource: A Blow for Maintaining Patient-Physician Relationships in the Era of Managed Care?, 72 NOTRE DAME L. REV. 799 (1997).
43. 38 See Canterbury v. Spence, 464 F.2d 772 (D.C. Cir. 1972).
44. 39 See infra text accompanying note 45 (discussion of Drolet v. Heahhsource, Inc.).
45. 40 American Medical Association Council on Ethical and Judicial Affairs, Code of Medical Ethics: Current Opinions with Annotations § 8.132 (2000-2001).
46. 41 793 P.2d 479 (Cal. 1990).
47. 42 Id. at 483.
48. 43 See, e.g., Garcia v. Coffman, 946 P.2d 216 (N.M. 1997); D.A.B., 570 N.W.2d at 168; Spoor, 852 P.2d at 1292.
49. 44 There has been at least one (unsuccessful) challenge based on ERISA's § 102 (29 U.S.C. § 1022), requiring an ERISA plan administrator to prepare and distribute a Summary Plan Description (SPD) to plan members. Weiss, 972 F. Supp. at 748.
50. 45 968 F. Supp. 757 (D.N.H. 1997).
51. 46 Id. at 758.
52. 47 Id.
53. 48 972 F. Supp. 748 (S.D.N.Y. 1997).
54. 49 Id. at 754.
55. 50 107 F.3d 625 (8th Cir. 1996).
56. 51 198 F.3d 552 (5th Cir. 2000).
57. 52 120 S. Ct. 2143 (2000).
58. 53 Specifically, ERISA § 404, 29 U.S.C. § 1104 provides: "(a) a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and - (A) for the exclusive purpose of: (i) providing benefits to participants and their beneficiaries; and (ii) defraying reasonable expenses of administering the plan...."
59. 54 Pegram, 120 S. Ct. at 2147.
60. 55 Id. at 2154 n.8. "The fraud claims in Herdrich's initial complaint, however, could be read to allege breach of a fiduciary obligation to disclose physician incentives to limit care, whereas her amended complaint alleges an obligation to avoid such incentives."
61. 56 The Court noted, however, that she stood to recover attorney fees and costs if her ERISA lawsuit was successful. See supra note 23 and accompanying text. This supplemental award likely would have increased substantially her take-home amount from the case.
62. 57 Pegram, 120 S. Ct. at 2143 (transcript of oral argument at 53-54).
63. 58 Id. at 2150.
64. 59 The Seventh Circuit had concluded that Carle was a fiduciary in this context.
65. 60 See supra note 25 and accompanying text.
66. 61 Pegram, 120 S. Ct. at 2147 n.2. "Herdrich does not contest the propriety of removal before us, and we take no position on whether or not the case was properly removed. As we will explain, Herdrich's amended complaint alleged ERISA violations, over which the federal courts have jurisdiction, and we therefore have jurisdiction regardless of the correctness of the removal."
67. 62 See, e.g., United Mineworkers v. Gibbs, 383 U.S. 715 (1966).
68. 63 Pegram, 120 S. Ct. at 2158.
69. 64 120 S. Ct. 2686 (2000).
70. 65 724 A.2d 889, 893 (Pa. 1998).
71. 66 Then, again, one would not have thought the limits of ERISA preemption were explored by Pegram either - that is, until one read the Supreme Court's opinion in United States Healthcare Systems, 120 S. Ct. at 2686.
72. 67 Pegram, 120 S. Ct. at 2154 n.8 (citing Glaziers and Glassworkers Union Local No. 252 v. Newbridge Securities, Inc., 93 F.3d 1171 (3d Cir. 1996)). Cf. Varity Corp. v. Howe, 516 U.S. 489, 505 (1996).
73. 68 See supra text accompanying notes 45-51.
74. 69 For negative views on the advisability of patient bills of rights, see David A. Hyman, Regulating Managed Care: What's Wrong with a Patient Bill of Rights, 73 SO. CAL. L. REV. 221 (2000); Marcia Angell, Patients Rights Bills and Other Futile Gestures, 342 NEW ENG. J. MED. 1663 (2000).
75. 69 For negative views on the advisability of patient bills of rights, see David A. Hyman, Regulating Managed Care: What's Wrong with a Patient Bill of Rights, 73 SO. CAL. L. REV. 221 (2000); Marcia Angell, Patients Rights Bills and Other Futile Gestures, 342 NEW ENG. J. MED. 1663 (2000).
76. 70 Corporate Health Ins., Inc., v. Texas Dep't of Ins., 215 F.3d 526 (5th Cir. 2000).