The serpent in the garden of Eden: (1) a look at the impact of physician financial incentive programs and a reconsideration of Herdrich v. Pegram (2).

AuthorCralam, Amy L.

    When you are sick, you call your doctor. As the patient, you believe that your doctor will examine you and make a decision on the best course of treatment for you. You trust that your medical interests are at the forefront of their mind. Simply stated, this is the age old patient-doctor relationship.

    However, modern health care systems have blurred this otherwise straightforward relationship. (4) More money is spent on health care per person in the United States than anywhere else in the world, and each year the costs grow higher. (5) Americans spend greater than $1 trillion annually on medical care forcing the use of cost containment programs in order to curb these costs. (6) Thus came the birth of the Health Management Organization (HMO). HMOs use financial incentives to prompt physicians to recognize the cost consequences of their treatment decisions and thus reduce the amount of care subject to insurance reimbursement. (7) Financial incentives place physicians in a tempting situation by encouraging them to order less treatment and reap greater financial reward. (8) Financial incentive programs have taken the place of the "serpent of temptation" in a modern day medical Garden of Eden. (9)

    The cutting of costs comes with a price to the patient. Sixty-one percent of managed care patients surveyed stated they were very or somewhat worried that if they became sick, their insurer would be more concerned about saving money than about their medical care. (10) In addition, many of the methods of cost-containment commonly used are found to be ethically objectionable by physicians themselves. (11) The Proverb stands true, "He who pays the piper calls the tune." (12)

    This Note will begin by examining the emergence of managed care starting with the "fee-for-service" system and moving to the modern HMO. Section IIIA. of this article explore several types of HMOs, compared with the different types of physician reimbursement mechanisms utilized by HMOs. Physician reimbursement programs often contain direct financial incentives. The main types of financial incentives utilized by HMOs will be discussed. These incentive programs place the physician in a dilemma when attempting to determine a patient's best course of treatment. In addition, Section IIIB. of the background addresses the Employee Retirement Income Security Act (ERISA), focusing on the state action preemption clause and the roadblock that ERISA creates for patients who want to bring claims against their HMO.

    The impact of physician incentive programs is at the heart of the recent Supreme Court case Herdrich v. Pegram. In Herdrich, the patient, Cynthia Herdrich, challenged the use of a common incentive structure that allowed physicians to profit from decreased utilization of expensive medical procedures. (13) Ms. Herdrich alleged that the use of these incentive programs created a conflict of interest for her treating physician and that conflict of interest caused a misdiagnosis of her appendicitis. (14) The Seventh Circuit Court of Appeals agreed with Ms. Herdrich but was later overruled by the Supreme Court. (15)

    This article suggests that Herdrich v. Pegram was wrongly decided. It will be shown that the case should have been remanded to the District Court for further review. In Section IVA., this article suggests that a fiduciary duty exists between the HMO and it's membership. Even under an ERISA standard a fiduciary duty could be perceived.

    In Section IVB., this article establishes that physician financial incentive agreements implemented by an HMO can rise to the level of a breach of fiduciary duty. The article will show that the bonus distribution utilized by the HMO in Herdrich could cause a breach by improperly influencing the physician decisionmaking process.

    This Note will attempt to persuade the reader that the U.S. Supreme Court decision in Herdrich v. Pegram was a missed opportunity. "[I]nstead of establishing a clear rule about the legality of financial incentives paid to physicians, the justices found a host of problems with the case itself...." (16) The unanimous Supreme Court decision handed down June 12, 2000, established that neither physicians nor HMOs can be sued under federal benefits law for using,cost containment and physician financial incentives to limit care. (17) Herdrich was an opportunity for the Court to fully explore the effect that incentive programs used by HMOs have on the patient treatment decisions made by physicians.

    In Section IVC., this Note concludes by suggesting that there are three solutions that would assist in preventing a situation like the one in Herdrich from happening again: (1) cases like Herdrich v. Pegram must be remanded for continued fact-finding regarding the details of the financial motives involved, (2) ERISA must be amended in order to acknowledge a fiduciary relationship between HMO members and the HMO itself, and (3) physician financial arrangements must be disclosed to HMO patient members.


    1. The Facts

      On March 1, 1991, Cynthia Herdrich, was experiencing pain in the middle area of her groin. (18) Ms. Herdrich was examined by Carle Clinic Association (Carle) physician, Dr. Lori Pegram. (19) Six days later on March 7, upon examination of Ms. Herdrich, Dr. Pegram discovered a six by eight centimeter inflamed mass in Herdrich's abdomen. (20) Cynthia Herdrich was suffering from appendicitis. (21) Dr. Pegram determined that an ultrasound should be performed in order to take a closer look at the mass. (22) An ultrasound procedure would be needed in order to determine the nature, size, and exact location of the mass. (23) Ideally, Herdrich should have had the ultrasound administered promptly after the inflamed mass was discovered so her condition could be diagnosed and treated before becoming more serious. (24) However, Ms. Herdrich's insurance provider, Carle, required that plan patients receive medical care from Carle facilities in what they classify as non-emergent situations. (25)

      Despite the noticeable inflammation of Ms. Herdrich's abdomen during the examination, Dr. Pegram did not order the ultrasound procedure to be promptly conducted at a local hospital in Bloomington, Illinois. (26) Dr. Pegram decided Ms. Herdrich would have the ultrasound procedure performed at a hospital more than fifty miles away in Urbana, Illinois. (27) In addition, Ms. Herdrich would need to wait eight days until the procedure could be performed at the second hospital. (28) While waiting to have the ultrasound procedure at the Carle facility, Herdrich's appendix ruptured, causing peritonitis, a life-threatening illness. (29)

      Cynthia Herdrich had medical coverage through Carle. (30) Carle functions as a Health Maintenance Organization. (31) Carle operates as a pre-paid health insurance plan which provides both medical and hospital services to its members. (32) Prepaid medical services are provided to patients whose employers contract with Carle to provide medical coverage. (33) Ms. Herdrich was covered under Curie through her husband's employer, State Farm Insurance. (34) State Farm Insurance provided Carle's health insurance plan as a fringe benefit. (35)

      Carle's owners are physicians. (36) Dr. Pegram was a Carle physician. (37) Like other HMO systems, Carle collects its payment in advance of the medical care actually being provided. (38) Thus, the less medical care that is provided by Carle, the more profit that Carle's physicians, who are the HMO's owners, have left at the end of the period. (39)

      Like any business, Carle looks to hold down its costs. (40) Carle accomplishes this through devices called "managed care." (41) Carle members must receive their medical care from Carle's own physicians, if at all possible. (42) Ms. Herdrich contended that this rule was the cause of the eight-day delay for her ultrasound examination, which resulted in her ruptured appendix. (43)

    2. United States District Court for the Central District of Illinois

      Herdrich filed a complaint in the Circuit Court of McLean County, Illinois, on October 21, 1992, against Dr. Lori Pegram and Carle. (44) The first two counts of the complaint were based upon a theory of professional medical negligence, alleging that Ms. Herdrich suffered a ruptured appendix and, in turn, contracted peritonitis due to Dr. Pegram's negligence in failing to provide her with timely and adequate medical care. (45) Herdrich was granted leave to amend her complaint, which she amended to include two counts of state law fraud. (46) Carle and Pegram responded by stating that ERISA preempted the new counts and removed the case to federal court. (47) ERISA subjects employee benefit plans to federal regulation. (48) ERISA preempts "any and all state laws insofar as they may now or hereafter relate to any employee benefit plan" covered by ERISA. (49)

      The District Court granted Carle's and Pegram's motions for summary judgment as to the second fraud count. (50) Summary judgment on this count was granted because Ms. Herdrich relied on an ERISA provision as a basis of monetary relief, as opposed to a basis for equitable relief, and the provision does not provide for extracontractual damages. (51)

      However, the District Court did grant Herdrich leave to amend her complaint on the remaining fraud count. (52) The trial judge concluded ERISA preempted the fraud count because Herdrich's claim was for fraud under state law that involved an employee benefit plan. (53) The district court granted Herdrich the opportunity to submit an amended complaint which clearly sets forth her basis for proceeding under ERISA, including the applicable civil enforcement provision. (54) Herdrich sought relief under 29 U.S.C. § 1109(a), which provides that:

      Any person who is a fiduciary with respect to a plan who breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries by this subchapter shall be personally liable to make good to such...

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