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Health Care Reform:

Health Insurance & Affordable Care Act

WebMD Health News

U.S. Supreme Court Debates Key HMO Case

Feb. 23, 2000 (Washington) -- Is offering doctors a bonus for withholding treatments a violation of an HMO's most basic legal responsibility under federal law? That question came before the Supreme Court Wednesday in a controversial case, and several justices seemed reluctant to get involved. Sandra Day O'Connor called the issue a "messy business."

During the hour-long hearing, Justice David Souter said, "The interest of every HMO is told to hold down costs or it goes out of business." Justice Stephen Breyer said he found it "hard to believe" that Congress had intended to "gut" HMO legislation.

"I'm not asking this court to outlaw physician incentives," responded James Ginzkey, representing Cynthia Herdrich, whose experience with an HMO ultimately led to the Supreme Court's taking the case. Although the matter started as a malpractice claim, it's moved far beyond that to encompass the basic way HMOs do business. This is the first case of its kind to reach the Supreme Court.

The dispute arose in 1991 when Cynthia Herdrich suffered an attack of appendicitis. However, her doctor allegedly waited eight days to order tests that would have revealed the problem. In the meantime, Herdrich's appendix ruptured, requiring emergency surgery.

That led to a malpractice suit against Lori Pegram, MD, and the CarleCare HMO in Bloomington, Ind., where Herdrich was getting treatment. When Herdrich discovered CarleCare had a bonus scheme, the case was later broadened to allege the plan violated its "fiduciary responsibility," or its responsibility to act in patients' best interests. The HMO did this, the case alleged, by giving doctors incentives to withhold treatment.

Herdrich won a $35,000 malpractice judgement but lost on the fiduciary responsibility issue and appealed the case to the Seventh Circuit. A divided appellate court ruled in her favor, saying that under ERISA -- the Employee Retirement Income Security Act of 1974 -- CarleCare had violated its fiduciary duty. ERISA regulates pension and insurance programs and limits suits against health plans.

However, Carter Phillips, arguing for CarleCare and, ultimately, the HMO industry, said conceding that HMOs had this kind of fiduciary responsibility would be disastrous. "If this arrangement [CarleCare's bonus plan] is illegal, then all managed care is illegal ... managed care can't survive in that environment," says Phillips. He called CarleCare a "plain vanilla" HMO.

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