Litigating Around Erisa to Quality Managed Healthcare: an Hmo Can Breach Fiduciary Duties

• Publication year: 2021

79 Nebraska L. Rev. 149. Litigating Around ERISA to Quality Managed Healthcare: An HMO Can Breach Fiduciary Duties

149

Jack E. Karns*

Litigating Around ERISA to Quality Managed Healthcare: An HMO Can Breach Fiduciary Duties

TABLE OF CONTENTS

I. Introduction .......................................... 149
II. ERISA in an HMO Litigation Shield ..................... 153
III. Common Law Claims ..................................... 155
A. Negligence ......................................... 155
B. Agency Theory ...................................... 161
C. Breach of Fiduciary Duty ........................... 162
IV. Americans with Disabilities Act ....................... 164
V. RICO .................................................. 166
VI. State Actions ......................................... 167
VII. Conclusion ............................................ 169

I. INTRODUCTION

Health maintenance organizations ("HMOs") have been broadly accepted across the country as a tactic to keep healthcare costs under control. The key issue emerging from widespread HMO adoption is what happens to the individual patient who suffers negligent medical assistance or surgery? This exact situation occurred when Patrick Shea died of heart failure at the age of forty, and his wife, Dianne, decided that the HMO that provided his medical coverage should be held responsible.1 The family physician, who was under contract with the HMO, ruled out sending Patrick to a cardiologist even though he

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had complained of chest pains and shortness of breath.2 Dianne, however, contended during litigation that the HMO was legally liable for her husband's death since it provided financial incentives for the general practitioners not to refer patients to expensive specialists.3

The HMO in this case, Minnesota-based Medica, responded with a familiar litigation strategy. Medica contended that since Patrick received his insurance from an employer-sponsored health plan via the HMO, Dianne could only proceed in federal court pursuant to the Employee Retirement Income Security Act of 1974 ("ERISA").4 This seemingly trivial argument was an absolute catastrophe to Dianne Shea's legal cause of action. It meant that the damages she could recover would be limited to the cost of treatment denied her husband, as opposed to compensation for wrongful death as tort law would typically allow. The key difference arises in that under state law, ERISA would not preempt the allowance of unexpected death damages. However, if the court concluded that ERISA controlled, then the damages would be limited significantly.5

As a result, Mrs. Shea's only option was to file a claim based on the argument that a fiduciary responsibility was created by the HMO's

2. See id. at 626. Medica's primary care doctors received payments for not making referrals to expensive specialists. Mrs. Shea argued that had her husband known this, he would have paid for the cardiologist at his own expense and probably saved his life by doing so. See id. at 627.

3. See id. at 627. The issue of financial incentives was a focal point of the pleading battle between the two parties, as Mrs. Shea amended her initial complaint to uncover this fact and thereby argue the breach of fiduciary duties emanating from Medica as a result of ERISA. See Employment Retirement Income Security Act (ERISA) of 1974, 29 U.S.C. §§1002 (21), 1104(a)(1) (1994). The district court dismissed the amended complaint holding that the undisclosed, behind-the-scenes compensation arrangements were not " `material facts affecting a benefici-ary's interests.' " See id. at 627.

4. See id. at 627. In language used in a number of similar HMO cases that involved the ERISA removal issue, the Eighth Circuit stated that "ERISA supersedes state laws insofar as they `relate to any employee benefit plan.'" Id. (quoting ERISA, 29 U.S.C. §1144 (a). This language from the ERISA statute has been used in a number of cases to support similar HMO immunity arguments.

5. Mr. Shea's damage recovery under ERISA would have been limited to the actual cost of the specialist treatment denied with no consideration of state tort claims, such as wrongful death. However, the district court was far more focused on the nature of the fiduciary relationship between Medica and the patients. The circuit court stated that "the duty of loyalty requires an ERISA fiduciary to communicate any material facts which could adversely affect a plan member's interests." Id. at 628 (quoting Varity Corp., 36 F.3d 746, 754 (8th Cir. 1994)). Quoting Eddy v. Colonial Life Ins. Co. of Am., 919 F.2d 747, 750 (D.C. Cir. 1990), the same court stated, "[t]he duty to disclose material information is the core of a fiduciary's responsibility, animating the common law of trusts long before the enactment of ERISA." Id.

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relationship with the physician and the patient.6 The chances of winning on this argument in state or federal court are not nearly as good as on a simple state tort claim because a fiduciary stands in high regard. Mrs. Shea, however, refused to let her lawsuit die. Medica settled the claim after the Eighth Circuit Court of Appeals set aside the District Court's decision upholding Medica's motion to dismiss on the bases of ERISA preemption and that the fiduciary issue was too novel a legal theory on which to base a claim.7

A similar case, Herdrich v. Pegram,8 unfolded in the Seventh Circuit with a final decision rendered on August 18, 1998. In Herdrich, the patient, Cynthia Herdrich, complained to physician Pegram of abdominal pains.9 Pegram worked as a providing physician under the Carle Clinic Association, P.C., ("Carle"), an HMO that paid its participating physicians annual "cost containment" payments for keeping the total cost of medical care low.10 In Ms. Herdrich's case, Dr. Pegram made a grave malpractice error and elected to delay immediate further treatment that would have diagnosed her impending appendix rupture. Instead, Dr. Pegram sent Ms. Herdrich home where her appendix ruptured, and she contracted peritonitis as a result of Dr. Pegram's negligence.11

Ms. Herdrich sued Dr. Pegram for negligence and malpractice. She also sued Carle for breach of fiduciary duty under the ERISA statute, since the HMO provided a cash incentive to its physicians. She ultimately received a malpractice settlement against Dr. Pegram.12 Carle chose to whisk the case into safe arms of an ERISA defense similar to that faced by Mrs. Shea in the case mentioned above, and to keep low-key the counter-argument that cost containment payments

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do not constitute grounds for a breach of fiduciary cause of action.13 While little mention was made of the incentive nature of the program by Carle, Seventh Circuit Judge John L. Coffey saw the case differently and ruled that the "specter" of doctors receiving yearly kickbacks for withholding medical treatment cast a great shadow of doubt on whose interest the physician represented.14 The Herdrich case was argued before the United States Supreme Court on Wednesday, February 23, 2000, and promises to be a critical opinion in the managed care debate.

Clearly, the area of health law is increasingly becoming something of the Wild West with regard to coverages and whether or not healthcare organizations are doing what they promised to do when they entered the scene ten to fifteen years ago. First, this article will examine the ERISA statute as a shield to HMO litigation and review a number of the common law tort theories used in various courts in medical malpractice cases against a managed care organization ("MCO").15 In these latter cases, courts held that ERISA did not apply or could not be relied upon to restrict damages, thereby wrecking the absolute first-line HMO defense. Finally, some discussion will be offered regarding actions filed under the Americans With Disabilities Act ("ADA"), the Racketeer Influenced and Corrupt Organizations Act ("RICO") and state legislative action taken to deal with this problem on an individual basis.16 To conclude, the HMO patients' fear that with a patchwork of case law and statutes put forward by legislatures and individual plaintiff's attorneys, the likelihood increases that what will emerge is a hodgepodge of solutions geared strictly to get around the ERISA preemption clause. As a result, this article theorizes that ERISA should be held as inapplicable to managed healthcare programs. This goal could be achieved either through an appropriate decision by the United States Supreme Court in Herdrich, a decision comparable to that in Morales v. Trans World Airlines, Inc.,17 or an outright Congressional codicil to ERISA more strictly prohibiting its application to MCOs. Any of these would strip MCOs of their two

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most formidable defenses: removal to federal court and reliance on the preemption clause of ERISA.

By removing a cap on damages, HMOs will be held accountable for all malpractice actions, forcing them to realize that they are in a "life and death" business. The ERISA statute essentially works as a shield that must be stripped away in order to insure equity and fairness of care in the medical field. Medical professionals need to understand that HMO-provided health coverage does not protect against the gar-den-variety medical malpractice claim.

II. ERISA AS AN HMO LITIGATION SHIELD

ERISA's critical problem is that Congress did not pass it to deal with healthcare cases at all. Instead, Congress designed it to regulate retirement programs and ensure that individual companies properly funded and provided fair vesting requirements for employees' retirement programs.18 However, skillful lawyers have found ways to use the damages cap in the ERISA statute in ways in which Congress did not intend when it passed ERISA in 1974.19

Why should Congress be so reluctant to pass...