Death of a Remedy: the Supreme Court's Ill-fated Decision to Foreclose an Avenue of Liability Against Managed Care Organizations Under Erisa Inpegram v. Herdrich, 530 U.s. 211, 120 S. Ct. 2143 (2000)

• Jurisdiction: United States,Federal
• Citation: Vol. 79
• Publication year: 2021

79 Nebraska L. Rev. 762. Death of a Remedy: The Supreme Court's Ill-fated Decision to Foreclose an Avenue of Liability Against Managed Care Organizations Under ERISA inPegram v. Herdrich, 530 U.S. 211, 120 S. Ct. 2143 (2000)

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Note*

Sara L. Broyhill

Death of a Remedy: The Supreme Court's Ill-fated Decision to Foreclose an Avenue of Liability Against Managed Care Organizations Under ERISA in Pegram v. Herdrich, 530 U.S. 211, 120 S. Ct. 2143 (2000)

TABLE OF CONTENTS

I. Introduction .............................................. 763
II. Background ................................................ 766
A. The Emerging Conflict Between ERISA and
Managed Care ........................................... 766
B. Case-in-Point .......................................... 774
III. Analysis: The Supreme Court's Decision in Pegram .......... 777
A. ERISA's Text and Legislative History Manifests
Congress' Intent for Courts to Hold MCOs Liable
as ERISA Fiduciaries ................................... 778
1. MCOs Constitute Fiduciaries Under ERISA ............. 778
2. Financial Incentive Schemes Imposed on Physicians
Constitute a Breach of MCOs' Fiduciary Duties ....... 780
B. Fiduciary Obligations Apply to MCOs Whose Physicians
Make Mixed Eligibility Decisions as a Result of
Financial Incentive Schemes ............................ 781
C. ERISA's Broad Preemptive Effect Undermines the Court's
Justification for Immunizing MCOs from Liability ....... 783

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IV. The Effect of the Supreme Court's Abdication on the
Future of the Medical Industry ............................ 786
A. Immunizing MCOs from Liability Will Reduce the
Quality of Healthcare Services ......................... 786
B. Allowing MCOs to Administer Financial Incentives
to Their Physicians Will Lead to Adverse Selection
of Patients ............................................ 789
C. Allowing Financial Incentive Arrangements Threatens
the Physicians' Duty of Loyalty to Their Patients ...... 791
V. Conclusion ................................................ 793

I. INTRODUCTION

The United States health care system is under attack. Patients are fed up with the low quality of care they receive from their health care providers due to managed care's cost-cutting consequences. Today, health care costs are so high that most people can only afford to receive medical care through an employee benefit plan. While costs have escalated, however, the quality and variety of medical services covered has declined. Society is enraged that the medical system allows health care providers to limit the types of medical services covered in a health care plan while it tolerates a lower standard of quality for the services actually provided.

This trend toward a decrease in the quality of health care began when the nation's health care system moved from the traditional "fee-for-service" care to "managed care."1 In 1973, Congress passed the Health Maintenance Organization Act (the "HMOA"), which promoted managed care organizations ("MCOs").2 Congress initially intended the HMOA to "maintain" the country's good health in a preventative manner, rather than to treat the country's failing health. Eventually, employers recognized managed care as an effective system to reduce the escalating costs of health care because of the limited services it provided.

Only months after Congress passed the HMOA, Congress enacted the Employee Retirement Income Security Act of 1974 ("ERISA"), designed to "promote interests of employees and their beneficiaries in employee benefit plans."3 Thus, at the time Congress enacted ERISA, the system of "managed care" was new and relatively rare.4 No one

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anticipated the long-term ramifications that resulted when the two acts inevitably became entangled.5

These ramifications, however, eventually became evident. In the late 1980s and early 1990s, large numbers of providers switched to managed care to contain costs.6 Managed care successfully reduced costs because it primarily seeks to reduce utilization of health care services.7 Tension soon developed, however, between managed care's goal to reduce utilization with ERISA's goal to protect beneficiaries.8 Quality soon gave way to physicians' financial self-interest as MCOs developed procedures to induce physicians to substantially reduce and even deny patient care.9 To limit utilization, primary care physicians served as gatekeepers to limit specialist services, outpatient procedures reduced hospitalization, prospective utilization reviews screened covered services, and coverage was denied for any experimental treatments.10 Most significantly, MCOs implemented capitation requirements, offering physicians a fixed amount per patient regardless of how much or how little care the patient needed, encouraging physicians to limit the amount of care they delivered.11 Unfortunately, some patients were denied necessary care and sustained serious injury; some even died.

While the American health care system transformed rapidly, patients struggled to redress their grievances against the MCOs. Ten

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sions mounted between the traditionally high medical malpractice standard and the cost control methods of managed care. A vast majority of MCOs qualify as employee benefit plans under ERISA, and ER-ISA preempts all state law claims that "relate to" an employee benefit plan.12 A broad reading of ERISA's preemption clause would, therefore, grant managed care entities protection from most state law tort claims. Once in federal court under ERISA, however, many patients find that ERISA does not grant them a viable alternative remedy against their MCO.13 To make matters worse, many courts have interpreted ERISA to preclude patients from bringing federal actions directly against MCOs.14 As a result, ERISA has left patients no recourse while it has left MCOs free to make treatment decisions in the interest of profit rather than in the interest of their patients.15

Recently, the United States Supreme Court in Pegram v. Herdrich16 further insulated HMOs from liability under ERISA when it denied a beneficiary's claim for breach of an ERISA fiduciary duty against her HMO based on the HMO's use of financial incentive arrangements with its providers. In rendering its decision, the Supreme Court failed to utilize the statutory resources Congress provided when it enacted ERISA, resources that would have enabled the Supreme Court to find an MCO liable for breach of its fiduciary duty. Consequently, the Court's decision in Pegram reinforced - unnecessarily and unfortunately - the protections from liability afforded to financially self-interested MCOs.

This Note advocates changing that result. MCOs, as fiduciaries, should be liable when MCO physicians fail to provide patients the quality of care they deserve as a result of the MCOs' cost-cutting efforts. Part II provides essential background of ERISA and explains the tensions between ERISA and managed care, and provides a description of the facts and legal analysis in Pegram. Part III examines the Supreme Court's decision in Pegram and explains how the Court blatantly abdicated its judicial law-creating authority by failing to recognize the fiduciary obligation as a legitimate avenue of ERISA liability against MCOs. Finally, Part IV discusses the effect that the Court's abdication will have on the future of the medical industry.

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II. BACKGROUND

A. The Emerging Conflict Between ERISA and Managed Care

The increase in malpractice lawsuits against health care entities occurred relatively recently in the United States.17 For decades, the health care market consisted mainly of self-employed physicians running their own practices or practicing in small groups.18 These physicians provided fee-for-service care, by which physicians received direct payments for every procedure they deemed medically necessary.19 Physicians had direct control over the health care services provided to patients, and malpractice lawsuits therefore focused on the physician rather than the hospital.20

Fewer physicians continued to practice independently after Congress passed the HMOA.21 This change, however, did not occur overnight. It was not until the 1980s that the market recognized managed care organizations as an effective system to drive down the escalating price of health care.22 Managed care organizations reduced costs because they competed within the health care market to drive down the high price of health care.23 Over time, the escalating costs for health

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care drove employers, who understood the value of maintaining a healthy workforce, to utilize managed health care.24 As enrollment in managed care increased,25 physicians relinquished their independence to work collectively for the MCOs.26

The HMOA cut costs by changing the medical industry's payment system from fee-for-service to fixed-fee.27 Unlike the fee-for-service system, the fixed-fee system limits reimbursement for medical care services to the fixed amount received for each patient.28 MCOs, therefore, take steps to control costs, such as issuing reports to their physicians about appropriate levels of care.29 In addition, many MCOs have implemented utilization reviews30 and financial incentives as means to reduce the cost of providing care.31 MCOs make coverage decisions when they compare the requested services against the plan's

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contractual terms to ensure that the request falls within the scope of covered events.32

While the high price of health care concerned Congress in the early 1970s, the improvident management of employee pension plans was also of concern.33 Thus, less than a year after Congress adopted the HMOA, Congress passed ERISA.34 Congress hoped that ERISA would protect employees and their families from pension funding abuses.35 Congress planned to establish standards of conduct for...