U.S. Supreme Court Debates Key HMO Case

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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.


While the Clinton administration strongly advocates legislation creating a bill of rights for HMO patients, it is arguing on the managed care side in this case, saying that such treatment issues can be handled by state law.

Although Herdrich won't get any more money if victorious, she still sees the purpose in the case. "Probably what we're accomplishing the most is making more and more HMO members aware that their physicians might have incentive clauses in the contracts that they hold. So that they may not have your best interests at heart," she says.

One of the vexing issues in the case is to figure out how an HMO can offer incentives without it becoming a conflict of interest. Ginzkey says it's a matter of whether the bonus creates an "undue influence" -- something that would have to be decided on a case-by-case basis.

"I don't think you should shy away from [investigating] these plans when you have, in my opinion, incentives that essentially encourage malpractice," says Ginzkey.

Gregg Bloche, MD, JD, and co-director of the Georgetown/Johns Hopkins Program on Law and Public Policy, filed a brief supporting Herdrich's case. He describes the CarleCare incentives as "crude rewards for denying care. ... These are not incentives that reward frugal practice, efficient practice. You're paid more if you deny care," he tells WebMD.

Bloche says the courts are struggling with the problem now because Congress has failed to respond to the complexities in balancing treatment and plan administration.

A decision on the case is expected by July.

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