Supreme Court ruling leads battle from federal court to state

The recent Supreme Court decision that narrows litigation possibilities against managed care facilities in the federal courts leaves the state courts open as an option for those with grievances.

The unanimous ruling, announced June 12, is a complex piece of turf on the battleground of managed care that has been quarreled over for more than 25 years. The Supreme Court’s decision firmly upholds the belief that the managed care system is running as it should on the federal level and that if consumers want change, that change must come from somewhere else, preferably individual states.

The ruling essentially confirms financial incentives for doctors to hold down costs in managed care organizations are proper, and HMOs are not necessarily liable in federal court for putting the organization before patients.

"The Supreme Court was very smart about this case," Steven Epstein, leader of the health practice group of the law firm Epstein Becker & Green, in Washington, DC, tells State Health Watch. "It’s not better medicine to have a system that says more care is better care."

The court ruled on Pegram v. Herdrich, which originated in 1991 when Cynthia Herdrich complained to her managed care company of severe pain in her abdomen. The pain grew worse while she waited for her doctor to schedule an ultrasound of her inflamed abdomen. Eight days after her original complaint, her appendix burst and peritonitis set in. Her condition was eventually brought under control, and she survived. She sued Carle Clinic Association of Urbana, IL, contending her peritonitis could have been prevented if the doctors had conducted tests on her sooner. She alleged that the financial incentives the clinic offered for doctors to hold down costs had caused her harm.

Ms. Herdrich sued Carle in state court for fraud, and Carle contended that the Employee Retirement Income Security Act of 1974 (ERISA) pre-empted the counts of fraud. The case moved to federal court, which granted Carle summary judgment on one count of fraud but also allowed Ms. Herdrich to move ahead with another count alleging that ERISA had been breached. The breach came, she contended, by creating an incentive for doctors to make money-saving decisions in their own interest rather than for participants in the HMO.

Nine years after Ms. Herdrich’s appendix scare, the Supreme Court upheld the clinic’s strategy to hold down costs. Karen Ignagni, president of the American Association of Health Plans in Chicago, termed the ruling a victory for maintaining affordable care. "It is an equally resounding defeat for suit-happy trial lawyers who seek through class-action suits to destroy the country’s private health care system. The court’s decision today validates the principle that the legal system is not the place to make health care work."

But the Supreme Court left the door open for legal action in state courts, shifting the battle to where the high court says the fight should be waged.

"If such suits are filed, state courts should employ the same two pillars of wisdom the Supreme Court used in reaching its decision," The Plain Dealer, a Cleveland newspaper, wrote in its June 16 editorial pages. "First, HMOs exist to cut medical costs and they do a marvelous job, just as the legislative branch intended. Second, though the problem of HMOs so zealous about cutting costs that they damage patients cannot be ignored, a legislative body is the proper venue to tackle that problem, not a courtroom."

ERISA, which pre-empts state law, is the dividing line between the federal and state courts, Mr. Epstein contends, and that’s the best place to view fights that may come along later.

"Financial incentives to contain costs are inherent in HMOs," Mr. Epstein tells SHW. "If you take that away and allow the decision to overturn, that leaves open questions, like maybe it’s not an ERISA violation but the failure to disclose that there are incentives that may be improper. What is adequate for disclosure is separate, and that gives plaintiffs’ lawyers a lot of heart."

ERISA disallows damage awards in federal court for the improper allowance of benefits by HMOs. Speaking for the Supreme Court, Justice David H. Souter wrote, "Recovery against for-profit HMOs for their mixed decisions would be warranted simply upon a showing that the profit incentive to ration care would generally affect such decisions, in derogation of the fiduciary standard to act in the patient’s interest without possibility of conflict. And since the provision for profits is what makes a for-profit HMO a proprietary organization, Ms. Herdrich’s remedy-return of profit to the plan for the participants’ benefit would be nothing less than elimination of the for-profit HMO."

Allowing health plans to be sued isn’t the issue, contends Susan Pisano, spokeswoman for the American Association of Health Plans, but the number of reasons and ways HMOs can be sued is the issue.

"There has been this myth on which an entire argument about adding more liability bills has been based," Ms. Pisano tells SHW. "In fact, as a recent Fifth Circuit Court decision suggests, you can sue your health plan.

"The court must make the decision about the quality of care or about if a particular benefit is a covered benefit or not. A lot of analysts and policy-makers suggest that employers will be liable under expanded liability provisions that have been proposed in Congress, that it’s difficult to craft a decision to carve employers out of expanded liability," she adds.

It is time for Congress to make changes to federal laws that do not address emerging managed care issues, according to The New York Times June 13 editorial page.

"Several states have enacted laws barring financial incentives for HMO doctors to deny patients necessary medical care," The Times wrote. The court’s decision "underscores the need for Congress to set standards for how the managed care industry operates and to expand the rights of patients who have been harmed by managed care decisions, including the denial of care."

In its June 17 editorial page, the Dayton Daily News wrote that "the ruling correctly sends the right-to-sue debate back to Congress and the state legislatures."