Requiring Managed Care to Disclose the Use of Financial Incentives: Shea v. Esensten, 107 F.3d 625 (8th Cir. 1997)

JurisdictionUnited States,Federal
CitationVol. 77
Publication year2021

77 Nebraska L. Rev. 588. Requiring Managed Care to Disclose the Use of Financial Incentives: Shea v. Esensten, 107 F.3d 625 (8th Cir. 1997)



Requiring Managed Care to Disclose the Use of Financial Incentives: Shea v. Esensten, 107 F.3d 625 (8th Cir. 1997)


I. Introduction .......................................... 588
II. Background ............................................ 591
III. Analysis of Shea v. Esensten .......................... 593
A. Managed Care Organizations Traditionally Have
Not Been Held Accountable for Cost-Containment
Mechanisms ......................................... 593
B. The Role of ERISA in Claims That Attack Physician
Incentives in Managed Care ......................... 597
C. Fiduciary Duty to Disclose Physician Incentives
Under ERISA ........................................ 604
D. Remedy for Breach of Fiduciary Duty to Disclose
Under ERISA ........................................ 610
IV. Conclusion ............................................ 615


The American health care system is in the midst of a transformation from a traditional fee-for-service system to a managed care system. (fn1) Under the traditional fee-for-service system, physicians were insulated from the cost of care they administered to their patients because the patient's insurer simply paid the bill that the physician submitted to them.(fn2) Due to the rising costs of health care, however, policymakers and employers created managed care (fn3) as an alternative


to the traditional fee-for-service arrangement. Unlike the traditional fee-for-service system, managed care organizations (MCOs) both deliver and finance health care for their enrollees. Enrollees pay premiums, and in return, are entitled to receive a complete menu of medical services from the physicians in the MCO. Because the premiums are fixed, an MCO's ability to turn a profit is dependent on its ability to reduce the amount of care that it administers under its plan.

MCO's put much of the burden of reducing unneeded, expensive care on the physicians under their plan through the use of financial incentives. Primary care physicians serve as "gatekeepers" who decide whether a patient requires expensive care, such as referral to specialists, laboratory tests, or in-patient hospital stays. Most financial incentives discourage the use of expensive treatment by holding the physicians financially responsible for expensive care.(fn4) Such arrangements sharply contrast traditional fee-for-service arrangements, where it is in the physician's financial best interests to provide more care because they will be compensated by the insurer for whatever care they administer.

The main criticism of financial incentive arrangements is that they create a conflict of interest between the physician's duty to provide treatment to his/her patient and the physician's financial well-being.(fn5)


However, because there is a clear legislative intent to allow the use of such incentives to reduce the costs of care, courts have, for the most part, been unwilling to consider claims that attack financial incentives. (fn6) In addition, the Employee Retirement Income Security Act of 1974 (ERISA)(fn7) acts as a shield that insulates MCOs from claims for compensatory and punitive damages in state courts.(fn8)

Claims against MCOs for harm that results from their use of financial incentives face an especially hostile judicial and legislative environment. The Eighth Circuit decision in Shea v. Esensten,(fn9) illustrates just how hostile the environment is. In Shea, a widow brought an action in state court for the wrongful death of her husband. She alleged that her husband's Health Maintenance Organization was fraudulent in its nondisclosure and misrepresentation about its physician incentive programs, and this limited her husband's ability to make an informed choice about life-saving health care.(fn10) In its decision, the Eighth Circuit Court of Appeals found that ERISA preempted Mrs. Shea's state law claim, and that the Health Maintenance Organization had a fiduciary duty under ERISA to disclose its financial incentive structure. The court, however, failed to address the fact that under ERISA Mrs. Shea would not be able to receive punitive or compensatory damages for the death of her husband.

The holding in Shea that MCOs have a fiduciary duty to disclose their use of physician incentives under ERISA does not overcome the judicial reluctance to consider claims which attack physician incentives. Shea instead held that there is a fiduciary duty to disclose such incentives. The court appeared only to address the hidden nature of such incentives and did not discuss the conflict such incentives create between the physician's duty to care for his/her patient and the physician's own financial interests. Therefore, plaintiffs who allege that physician incentives are the cause of injuries or malpractice will continue to face a judicial environment that is hostile to their claims.

In addition, the holding in Shea maintains an ERISA preemption structure which continues to insulate MCOs from compensatory and punitive damages.(fn11) Under ERISA, plaintiffs who allege that their MCO's financial incentive arrangements caused their injury will only be able to collect equitable damages. The court failed to address that under ERISA, a plaintiff like Mrs. Shea will not be able to collect any damages for the breach of the fiduciary duty to disclose financial incentive arrangements to reduce care.


This Note first presents the factual background and procedural history of Shea. Next, this Note analyzes the judicial and legislative reluctance to hold MCOs accountable for the results of their use of financial incentives. This Note then examines: 1) the impact of ERISA preemption on cases like Shea that attack the use of financial incentives to reduce care; 2) the court's solution to the "problem" presented in Shea, holding that there is a fiduciary duty to disclose such incentives under ERISA; and 3) the fact that despite the court's holding, Mrs. Shea cannot receive compensatory damages for the death of her husband. This Note concludes by finding that despite the court's interest in protecting patients from the "hidden nature" of financial incentives, the holding does little to address the larger problems which are implicit in such arrangements.


Shea v. Esensten (fn12) began as a wrongful death action in Minnesota state court. The plaintiff's husband was an employee of Seagate Technologies, Inc. Seagate provided health care benefits to its employees by contracting with a Health Maintenance Organization (HMO) known as Medica. Medica required Seagate employees to select a primary care physician from its preferred provider list. Mr. Shea selected his family doctor, who happened to be on the list.(fn13) After being hospitalized with severe chest pains during an overseas business trip, Mr. Shea visited his family doctor. During these visits, Mr. Shea informed his physician that he was suffering from chest pains, shortness of breath, muscle tingling, and dizziness. Mr. Shea, who was forty years old at the time, also revealed that his family had an extensive history of heart disease.(fn14) Despite all the warning signs, Mr. Shea's doctor insisted that a referral to a cardiologist was unnecessary. When his condition did not improve, Mr. Shea offered to pay for the cost of the specialist out of his own pocket. Mr. Shea's doctor, however, persuaded him that he was too young and did not have enough symptoms to justify a visit to a cardiologist. A few months later, Mr. Shea died of heart failure.(fn15)

Unknown to Mr. Shea, Medica provided financial incentives to its physicians to not refer their patients to specialists. Specifically, physicians under the plan were docked a portion of their pay if they referred too many of their patients to specialists, and were rewarded bonus pay for making fewer referrals.(fn16) In Mrs. Shea's wrongful death action against Medica, she alleged that if her husband had


known that his physician had a financial incentive not to refer him to a specialist, he would have disregarded his physician's advice, and he would have sought the opinion of a cardiologist at his own expense.(fn17)

Medica removed Mrs. Shea's claim to federal court, contending that Mrs. Shea's claims were preempted by ERISA.(fn18) After her motion to remand was denied, Mrs. Shea amended her complaint to allege that Medica's "behind-the-scenes" efforts to use financial incentives to reduce referrals to specialists violated Medica's fiduciary duties under ERISA.(fn19) The district court dismissed Mrs. Shea's amended complaint for failure to state a claim, finding that the HMO was not required to disclose its physician compensation arrangements because such arrangements are not "material facts affecting the beneficiary's interests."(fn20)

The Eighth Circuit reversed the district court's dismissal of Mrs. Shea's case. The court found that: 1) the district court correctly held Mrs. Shea's original state law claim was preempted by ERISA; 2) under ERISA, there is an affirmative duty to disclose material information "which could adversely affect a plan member's interests; "(fn21) and 3) financial incentives to reduce care are indeed material facts which required disclosure under ERISA's fiduciary provisions.(fn22)

The court's finding that Mrs. Shea's state law claims were pre-empted by ERISA was clearly in keeping with past case law.(fn23) Such claims are preempted by ERISA because the outcome of such a case would clearly affect how the health plan would be administered.(fn24) The preemption of Mrs. Shea's state law claims was in line with Congress's intent to ensure the "nationally uniform administration of employee benefit...

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