To preempt or not to preempt: HMO liability pre and post Pegram v. Herdrich.

AuthorGlassman, Adam D.
PositionHealth maintenance organizations
  1. INTRODUCTION II. BACKGROUND III. THE EMPLOYEE RETIREMENT INCOME SECURITY ACT ("ERISA") IV. "FIDUCIARY" AS DEFINED UNDER ERISA V. FEDERAL PREEMPTION UNDER ERISA VI. THE FIDUCIARY STATUS OF AN HMO UNDER ERISA PRE-PEGRAM A. The Fifth Circuit's Approach; Remedy Sought B. The Seventh Circuit's Approach; Remedy Sought C. The Eighth Circuit's Approach; Remedy Sought VII. THE SUPREME COURT RECTIFIES A CIRCUIT SPLIT: PEGRAM V. HERDRICH A. The Facts B. The Issue Presented C. The Court's Holding D. The Court's Rationale E. Justice Souter's Footnote VIII. THE IMPACT OF PEGRAM A. Miller v. Health America Pennsylvania, Inc B. The Second Circuit's First Look Post-Pegram: Cicio v. Does C. Drawing Distinctions: Rubin-Schneiderman v. Merit Behavioral Care Corp D. The Third Circuit Has a Look at HMO Liability Under ERISA Post-Pegram: Lazorko v. Pennsylvania Hospital E. Pappas v. Asbel F. One Court's Refusal to Apply the Principles Set Forth in Pegram: Rosenkrans v. Wetzel G. Pryzbowksi v. U.S. Healthcare, Inc. IX. CONCLUSION I. INTRODUCTION

    Should consumers have the right to sue their HMOs (health maintenance organizations) for the way they deliver medical care?

    In recent years, the federal courts have focused their attention upon, inter alia, the issue of whether HMOs have a duty to reveal financial incentive provisions contained in contracts between the HMO and plan physicians to plan members and beneficiaries under a health plan. In fact, on June 12, 2000, the United States Supreme Court, in Pegram v. Herdrich, (2) pondered whether HMO physicians and administrators are fiduciaries under the Employee Retirement Income Security Act (ERISA) (3), and if so, must they exercise their authority solely to benefit the interests of the patient?

     Moreover, both houses of Congress recently passed bills, that together, make up the BPPA of 2001. (4) For either bill to become law, however, "depends largely on its ability to endure House-Senate conference committee discussions, as well as President George W. Bush's staunch refusal to place his signature on a bill that would ultimately serve as a boon for trial lawyers." (5) 

    While the sponsors of the Senate bill appear to favor greater consumer protection, advocates in the House of Representatives are somewhat more restrained in their support of consumers' rights. (6) Perhaps it should come as no surprise that the less consumer oriented House bill is favored by President Bush, since it negates advantageous opportunities for trial lawyers. (7)

    At this juncture, it is expected that a conference committee will work to develop a compromise bill that can be sent to the President. (8) Should this compromise bill become law, it will function as the long-awaited Patients' Bill of Rights. (9)

  2. BACKGROUND

    Historically, medical care in the U.S. has been delivered "on a fee-for-service basis:" (10)

     Under this type of arrangement, a patient makes a payment to the provider selected for the services provided. Likewise, if the patient had insurance and the provider was willing, the provider submitted the patient's bill to the insurance plan for reimbursement subject to the terms of the insurance agreement. Therefore, under a fee-for-service arrangement, a provider's financial incentive is to provide more care, not less, so long as payment is forthcoming. The check on this incentive is a provider's obligation to exercise reasonable medical skill and judgment in the patient's interest. Beginning in the late 1960's, insurers and others developed new models for health-care delivery, including HMOs. In turn, HMOs

    developed from managed care, theories of reducing costs and providing the best value for both the provider and the patient. Generally, an HMO is any of a variety of types of health plans that contract with a defined group of providers (usually on a capitated basis) to provide health care to a defined population. Capitation involves providing a monthly payment per enrollee regardless of what care the individual actually receives. The HMO thus assumes the financial risk of providing the benefits promised: if a participant or enrollee never gets sick, the HMO keeps the money regardless, and if a participant or enrollee becomes expensively ill, the HMO is responsible for the treatment agreed upon even if its cost exceeds the participant's or enrollee's premiums. (11)

    Accordingly, in an HMO system, less is more, so to speak, and "a [provider's] financial interest lies in providing less care, not more." (12) However, covered services must be rendered with "a reasonable degree of skill and judgment in the patient's interest." (13)

    Today, HMOs may function both as medical providers and insurers. (14) Moreover, there are two general varieties of HMOs. (15) "The first type, the staff model, hires providers directly to work out of its facilities. The second type, the group model, contracts with provider groups to provide health care at discounted rates." (16)

    In 1973, the Health Maintenance Organization Act of 1973 ("HMOA") became law. (17) In an effort to encourage the creation of HMOs, HMOA "offer[ed] loans and loan guarantees to those wishing to establish and operate federally qualified HMOs, and for grants for such things as the training of HMO administrators." (18)

    Additionally, and perhaps more crucially, HMOA insulated HMOs from "restrictive state laws" by preempting them. (19)

    It bears noting that other "managed care entities" were created to serve as "substitutions to conventional systems of health care to reorganize risk assumption and medical decision-making." (20)

     Two of the managed care models that evolved included preferred provider organizations ("PPOs") and point-of-service ("POS") plans. PPOs are health plans that offer full or high coverage for a defined panel of providers (who accept discounted fees) and more limited coverage for care outside of the plan. A POS, on the other hand, is a "hybrid plan with features of managed care and insurance, thereby making it a traditional HMO that also partially reimburses care received outside the plan. (21) 

    In an effort to conserve resources, and thus, enhance their bottom line, HMOs and other managed care organizations (MCOs):

     primarily use two ways to encourage providers to engage in "costconscious decision making." One way is through capitation. The second way is by salary. Salary exists when an HMO hires a group of providers as employees or contracts with a provider group, and each provider receives a salary for providing health care to a group of individuals in a particular health plan. Both of these payment plans discourage providers from spending more time with their patients, because there is no additional compensation available for doing so. Further, use of ancillary health care services like experimental treatments, diagnostic test, and referrals are not encouraged. This is because there is often a certain amount of money set aside for these services, and anything remaining goes to the provider as a bonus. These payment arrangements have, therefore,

    either directly or indirectly impacted providers' decision-making

    regarding their patients and their patients' medical care needs. (22)

    III. THE EMPLOYEE RETIREMENT INCOME SECURITY ACT ("ERISA")

    As noted above, the Employee Retirement Income Security Act ("ERISA") was enacted into law by Congress in 1974. ERISA was enacted primarily to protect employee pension funds from mismanagement and looting by administrators, for the ultimate protection of employees reliant upon such plans for retirement benefits. (23) Over time, ERISA has come to insulate most providers of employee benefits under employee benefit plans from lawsuits.

    ERISA imposes certain fiduciary responsibilities for the protection of employee benefit rights, (24) and it has been held to preclude state law claims for the recovery of benefits or the enforcement or clarification of rights under an ERISA qualified health plan as well as preclude state law claims that "relate to" the statute under the statute's preemption provisions. (25)

  3. "FIDUCIARY" AS DEFINED UNDER ERISA

    ERISA sets forth the circumstances under which a person is a fiduciary with respect to an employee benefit plan. (26) The definition includes one who "exercises any discretionary authority or discretionary control respecting the management of such plan" and one who "has any discretionary authority or discretionary responsibility in the administration of such plan." (27)

    ERISA also imposes a duty upon plan fiduciaries to "discharge duties with respect to a plan solely in the interest of the participants and beneficiaries," (28) and for the exclusive purpose of providing benefits and defraying reasonable expenses of administering the plan with the "care, skill, prudence, and diligence under the circumstances then prevailing that a prudent" (29) person would use under similar circumstances.

    ERISA's provision that fiduciaries shall discharge their duties with respect to a plan "solely in the interest of the participants and beneficiaries" (30) is rooted in the common law of agency, but an ERISA fiduciary may also have financial interests adverse to beneficiaries. Thus, in every case charging breach of ERISA fiduciary duty, the threshold question is not whether the actions of some person providing services under the plan adversely affected a beneficiary's interest, but whether that person was performing a fiduciary function when taking the complained of action. (31)

  4. FEDERAL PREEMPTION UNDER ERISA

    ERISA imposes certain fiduciary responsibilities for the protection of employee benefit rights (32) and has been held to preclude state law claims for the recovery of benefits or the enforcement or clarification of rights under an ERISA qualified health plan as well as state law claims that "relate to" ERISA under the statute's preemption provision. (33) ERISA's preemption provision is found at 29 U.S.C. [section] 1144, and it provides that ERISA supersedes state...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT