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Can You Sue Your HMO?

New hope for patients.

Incentives Create a Conflict of Interest continued...

In a 1999 survey conducted by the Kaiser Family Foundation and the Harvard School of Public Health, 87% of doctors said that health plans had denied coverage for medical services they felt were medically necessary. Another 1998 study by the University of California at Berkeley estimates 480,000 Californians were denied health care by their HMO in 1996. Forty-two percent of those denied care reported suffering adverse health consequences as a result, including pain and suffering, worsening of the health condition, or permanent disability.

HMOs have for the most part been protected from patient lawsuits by a 1974 federal law called ERISA, the Employee Retirement Income Security Act. The law regulates employer-sponsored health plans, which provide medical coverage to 160 million Americans. (Herdrich was insured through her husband's employer.)

When Herdrich sued in state court, Carle Clinic successfully moved the claim to federal court to come under ERISA's protection. Herdrich then turned ERISA into a weapon by arguing that the HMO violated ERISA's legal obligation to act for the benefit of patients, known as its fiduciary duty.

"What's going on here is wrong," says Herdrich's attorney, James Ginzkey. "Doctors are being paid more to do less; there's an absolute conflict of interest. If this isn't a violation of ERISA, then HMOs are completely insulated from liability."

A trial judge initially threw out Herdrich's case, but in 1998 the 7th Circuit Court of Appeals reinstated it. In a scathing opinion highly critical of HMOs, the court ruled that financial incentives undermined patient care and could be the basis for a lawsuit under ERISA. (The court also noted an additional conflict of interest: The clinic's physicians owned the plan and controlled every aspect of the HMO, including which claims get paid and their own year-end bonuses.) The HMO appealed to the U.S. Supreme Court. If the Supreme Court rules for Herdrich, the case can go to trial in Illinois federal court.

Cost-Cutting Essential to Managed Care

Carter G. Phillips, the attorney representing Carle Clinic, says financial incentives are necessary to keep costs in check, but they should not prevent doctors from carrying out their professional duty to patients. "It seemed pretty clear under the 7th Circuit decision any managed care program would have a hard time surviving. If we lose, it will affect how managed care does business in a very fundamental way," he says.

Judging from their questions during oral arguments, the Supreme Court justices appeared to side with the HMO. Ginzkey, for one, attributes the justices' leanings to their lack of judicial ?- and personal -- experience with managed care. Justice Sandra Day O'Connor asked pointedly: "Why should the courts get involved in this messy business" of deciding whether some financial incentives go too far? Justice David H. Souter noted that HMOs and their employees have a strong financial interest to hold down costs. "Unless they do so, the HMO will go out of business," he said.

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