Wednesday, October 1, 2008

Hey Congress - reign in HMOs before adopting "universal health care"

Before the United States goes anywhere near "universal health care," our Congress must address the issue of the extent to which Health Maintenance Organizations (HMOs) can engage in cost containment decisions at the expense of proper patient care.

This Blog is certainly not the first time that the practices of Carle Clinic Association and its physician-owned HMO (Health Alliance Medical Plans) have been questioned. Indeed, there is inherent difficulty when a physician has dual loyalties.

The United States Supreme Court became acquainted with Carle Clinic Association's physician-owned HMO (Health Alliance Medical Plans) and the issue of dual loyalties in the case of Herdrich versus Pegram.

The Herdrich case is instructive because it explains why the courthouse is not the proper place to seek relief from HMOs that focus on dollars over patients. Instead, we as patients should stay on our United States congressmen to enact legislation that will specifically rein in the egregious excesses of managed care.
Carle Clinic Association physicians own the managed care company Health Alliance Medical Plans (HAMP). In Central Illinois, Carle Clinic Association is a relatively large physician practice, including many clinics and Carle Foundation Hospital in Urbana, Illinois.

The ownership of the managed care company (HAMP) by the very physicians that HAMP members rely upon reveals the problem of dual loyalty. The conflicting loyalties are:

(1) The physician's duty to the patient to provide timely, appropriate and competent medical care and treatment, and

(2) The physician's duty to his or her fellow board members and shareholders to minimize costs and maximize revenues of the physician-owned Health Alliance Medical Plans.

The plaintiff was Cynthia Herdrich, an Illinois woman whose husband's employer provided health insurance through a local health maintenance organization (HMO) that was owned by the physicians' group (Carle Clinic Association). Ms. Herdrich went to her Carle Clinic Association physician, Dr. Lori Pegram, and complained of abdominal pain. No workup was done at the first visit.

Six days after her initial clinic visit with Dr. Pegram, Ms. Herdrich returned to the clinic complaining of worsening pain. At that point, Dr. Pegram discovered a six-by-eight centimeter inflamed mass in Ms. Herdrich's lower abdomen. Dr. Pegram decided that an ultrasound examination was indicated. However, rather than ordering the ultrasound test immediately at the local (non-Carle Clinic affiliated) hospital, Dr. Pegram scheduled the procedure for eight days later at a Carle Clinic facility (Carle Foundation Hospital) 50 miles away.

Before the ultrasound could be performed, the mass (which was actually Ms. Herdrich's inflamed appendix) ruptured, resulting in peritonitis and a prolonged hospital stay.

Ms. Herdrich's frustration and anger over her care and treatment was compounded when she learned that the physician-owners of her HMO (including Dr. Pegram) received a year-end distribution that was based upon the money they saved from reducing expenditures on patient care. One such means of saving money was to make referrals only to facilities operated by the Carle Clinic.

Ms. Herdrich filed a lawsuit setting forth several allegations, including:

1. malpractice against Dr. Pegram and

2. breach of fiduciary duty against the HMO (Health Alliance Medical Plans) and its physician-owners.

The malpractice claim was litigated in Illinois state court and a jury returned a verdict in the amount of $35,000. But her claim relating to the breach of fiduciary duty against the HAMP HMO, which was at issue when the case reached the United States Supreme Court, was removed from state court to the federal court system.

In order to properly understand the Herdrich case, it is crucial to understand the influence of the federal "Employee Retirement Income Security Act of 1974" (ERISA) over managed care liability issues.

1. ERISA was primarily intended to remedy problems with workers' pensions. However, the language of ERISA allows its extension to all nongovernmental employer-provided benefit plans, including health insurance.

2. ERISA established uniform standards and procedures and thereby preempted state law on many issues. Among those issues that must be resolved in federal court included most questions of liability.

(a) Therefore, even in the drastic case of an HMO refusing to authorize medical care that is clearly necessary (i.e. negligence), the ERISA plan administrators can only be sued to recover the actual benefits that were denied.

(b) Compensatory damages and punitive damages are excluded.

(c) All claims that are preempted by ERISA must be litigated in federal court (as opposed to state court with the medical malpractice action).

3. In addition to ERISA's protections, the federal statute imposes specific obligations on plan administrators. Among those obligations include the obligation that the ERISA plan administrators act as a fiduciary for the plan's beneficiaries.

(a) According to the ERISA statute, a "fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries"

(b) This duty applies to any person "to the extent . . . he exercises any discretionary authority or discretionary control respecting management of such plan"

Ms. Herdrich alleged that the Health Alliance Medical Plans HMO and its Carle Clinic Association physician-owners (i.e. the ERISA plan administrators) violated the fiduciary obligation by creating a system in which the physician-owners were given financial incentives to minimize the use of diagnostic tests, emergency consultations, and referrals to physicians and facilities outside Carle Clinic's system. And, further, that system operated to the detriment of the ERISA plan beneficiaries (such as Ms. Herdrich).


The federal district court (trial level) dismissed Ms. Herdrich's claim on the grounds that she had failed to establish the existence of a fiduciary duty. The Seventh Circuit Court of Appeals (Illinois) reversed the district court and sent the case back down to the federal trial level. In effect, the federal court said that the case should go to trial.

The federal appellate court judges held:

1. The Health Alliance Medical Plans HMO and its physician-owners were fiduciaries of the employee health plan that covered Ms. Herdrich because they exercised "discretionary authority in deciding disputed claims."

2. Since the Carle Clinic Association physician-owners "simultaneously control the care of their patients and reap the profits generated by the [Health Alliance Medical Plans] HMO through the limited use of tests and referrals," Ms. Herdrich satisfied her burden of asserting that "the self-dealing physician-owners in this appeal were not acting 'solely in the interest of the participants' of the Plan."


The defendants appealed to the United States Supreme Court and that court agreed to hear the case. The defendants argued (among other things) that:

1. Ms. Herdrich's claim was an attack on HMOs as part of the health care delivery system, since all HMOs have incentives to contain costs at the expense of patients' needs.

2. Congress sought to encourage the growth of Health Maintenance Organizations (when it adopted the HMO Act of 1973) and Congress obviously recognized that risk-sharing mechanisms might be used to provide physicians and facilities incentives to minimize expensive treatment.

3. The courts were being used in an attempt to subvert the clear intent of Congress by threatening the existence of all Health Maintenance Organizations.

It was evident from the oral argument in this case that the United States Supreme Court justices were very concerned that they were being asked to overturn an existing policy choice already made by Congress.

Justice David Souter authored the unanimous decision. Justice Souter began his analysis by asserting that "no HMO organization could survive without some incentive connecting physician reward with treatment rationing" Justice Souter was concerned that this case could open the door to claims that would result in the end of Health Maintenance Organizations (HMOs). He could identify no legal principle that could distinguish the end-of-year distribution of profits to the physician-owners of the Carle Clinic plan from any other incentive structure.

Justice Souter concluded that if this was the direction in which health policy were to move, it should be Congress and not the courts that made this decision.

After announcing the policy considerations that would keep the court from endorsing Ms. Herdrich's claim, Justice Souter moved to lay out the court's views of the major legal issue:
whether the defendants were operating as ERISA fiduciaries.

According to the United States Supreme Court, the decisions made by Dr. Pegram and the other Carle Clinic Association physicians were inextricably tied to choices about the nature of the treatment patients should receive. These "mixed eligibility decisions" were not the kind of administrative choices that Congress had in mind when it described the extent of fiduciary duties under ERISA. As such, Ms. Herdrich's claim could not succeed.

The Supreme Court expressed its concern that to adopt the requested rule would transform every claim of malpractice by an HMO physician into a federal claim that could be litigated under ERISA. Clearly this was not the intent of Congress.

Ms. Herdrich's attempt to hold her HMO (as opposed to simply her treating physician) liable for the negligent care that she received failed because she had to work within the statutory framework of ERISA. With Congress having endorsed HMOs as cost-saving systems of care, and with ERISA's definition of a fiduciary duty not clearly applying to the behavior in question, the Supreme Court was no willing to take a step that seemed to be "portending wholesale attacks on existing HMOs."

Ms. Herdrich was unable to devise an approach that would limit the impact of the relief she requested. For example, she could not identify a set of incentive practices that could still be retained as consistent with fiduciary duties. This inability effectively destroyed Ms. Herdrich's case.


Patients' rights advocates were never completely comfortable with Ms. Herdrich's argument.

1. If claims regarding harms that occurred because of an HMO's incentive structure were subject to review under ERISA's fiduciary standard, then all of the claims would all be removed to federal court and litigated under ERISA's rules.

In that event, no compensatory damages would be allowed. Moreover, any payment of funds judged to have been misused for incentives rather than patient care would revert to the employee health plan rather than to the plaintiff. As such, ultimately, there would be little motivation for injured patients such as Cynthia Herdrich to ever bring this type of case.

2. In contrast, if, as in this case, the Supreme Court held that the design and implementation of physician-owner HMOs' incentive structures was not subject to ERISA, then presumably individual states could choose to create their own rules about permissible approaches.

Indeed, a number of states have already legislated in this area, including banning incentive schemes that seem too likely to distort physicians' judgment. The
Herdrich court's decision seems to suggest that such state regulation is permissible. And, therefore, where the state legislature has spoken, those states could enable patients who have been harmed to bring suit against HMOs by alleging that their injuries were due to an illegitimate incentive scheme.


So what exactly can we take from Ms. Herdrich's inability to maintain a claim against the Health Alliance Medical Plans HMO?

1. The Supreme Court's reference to the HMO Act of 1973 as indicating a congressional desire to promote HMOs seems to lend credence to the argument that this law, rather than ERISA, preempts any state action that might affect HMOs. Indeed, the HMO Act itself preempts "state laws which impair the formation or operation of health maintenance organizations . . . "

2. Unlike the Seventh Circuit, the Supreme Court managed to write an opinion without criticizing the entire concept of Health Maintenance Organizations. Justice Souter warns of potential upheavals if HMO incentive schemes were limited and "rationing" of health care were impaired.

Justice Souter acknowledges that Congress is subjected to heavy lobbying from insurers and large employers and warns that this type of litigation might cause legislatures to stay away from this area.

The sad truth is that the current statutory structures (such as ERISA) make it extremely difficult for injured parties to recover against managed care entities. Resorting to litigation may be helpful in some situations. However, Congressional legislative action is by far the most direct route to reining in the egregious excesses of managed care. And this is precisely where the efforts of those who are concerned about the damage being wrought by managed care should be focused.


My situation with Dr. Chris Dangles differs from the Herdrich case. ERISA would not apply for me because I obtained my own health insurance with HAMP. Although many people obtain health insurance through their employer, there are many like me that contracted directly with the physician-owned insurance company.

And, therefore, the question becomes whether physicians such as Dr. Chris Dangles can utilize cost containment measures (such as avoiding diagnostic testing that would have demonstrated there was no injury requiring surgery and avoiding referral to a non-Carle Clinic Association/non-network orthopedic specialist) to the direct detriment of my health.

CCA relied upon the statutory language in ERISA to protect it from liability in Herdrich. There is no similar statututory protection Dr. Chris Dangles.

But, liability should not be a function of whether the patient obtained his or her own health insurance. Congress should establish statutory restrictions to protect all patients from what amounts to unethical business practices.

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