Incentives Create a Conflict of Interest
Herdrich's lawyer argues that financial incentives create a dangerous conflict of interest between doctors and their patients. The majority of HMOs currently use an assortment of financial rewards and penalties for physicians and executives to achieve cost-effective treatment -- which, they argue, is the fundamental premise of managed care.
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.