January 4, 2000 New York Times
By MILT FREUDENHEIM
Windy Herdrich, a part-time legal secretary, said she suspected all along that the sharp pain in her lower abdomen was appendicitis. But Lori Pegram, a doctor at her husband's H.M.O. in Bloomington, Ill., did not agree.
Fourteen painful days later, the health maintenance organization finally authorized an ultrasound scan. Too late. Ms. Herdrich's appendix ruptured. She contracted peritonitis and required emergency surgery.
Ms. Herdrich, by then 35, sued the H.M.O. in 1992. And what began as a simple malpractice claim has grown into the first direct challenge to managed care to be accepted by the United States Supreme Court, which has been asked to decide whether her challenge merits a trial.
But it is by no means the only challenge. Managed-care companies -- like makers of cigarettes, lead paint and guns -- are under growing legal attack. This includes at least 16 recent class-action suits, most filed by some of the same lawyers who won huge settlements from the tobacco industry. Several new state laws and measures in Congress could open the industry to still more suits. And the Federal law that has long protected many managed-care companies is being whittled away in a series of judicial decisions in malpractice cases.
"Managed care is under a very fundamental attack in the judicial system right now," said William G. Schiffbauer, a Washington lawyer who advises insurance companies and employer health plans.
The issue in many of these cases comes down to this: Does an H.M.O., by linking what it pays its doctors with their success in holding down costs, ignore the best interest of patients in a way that violates its legal duty as defined by a federal law governing employer-sponsored health plans.
The legitimacy of financial incentives, and whether health plans have a legal obligation to disclose them, is at the heart of a number of recent suits against big managed-care companies filed by prominent class-action lawyers. The H.M.O. industry itself urged the Supreme Court to resolve this matter, hoping that a ruling in its favor would undermine the class-action suits. The Supreme Court has agreed to hear arguments in the case in February, and a decision is expected by early summer.
The federal law is the same one that has effectively barred state jury trials and huge awards for punitive damages in malpractice suits by transferring most cases to federal courts. A related question is whether this will be changed.
Lawyers on both sides see the Herdrich case as a fundamental test of the underpinnings of managed care. Those in favor of the insurers warn of dire consequences for health maintenance organizations if the Supreme Court upholds the idea that companies can be sued on this basis. And insurance executives say that financial incentives are a crucial method of preventing wasteful practices and do not interfere with necessary care.
"The nation's employer-based health care system simply cannot function or indeed survive if every treatment decision made while implementing a managed-care program is treated as a fiduciary decision," an industry group argued in a brief in the Supreme Court case.
Managed-care executives said they did not intend to let plaintiffs' lawyers determine their policies. "This is the way the industry has worked for some years," said Richard Huber, chief executive of Aetna, the biggest managed-care company. "To allege that practicing according to the norms of the industry is criminal strikes us as absurd."
Aetna is the defendant in six class-action and 40 other cases. Similar class-action suits have been filed against Humana, Cigna, United Healthcare, Foundation Health Systems, PacifiCare Health Systems, Kaiser Permanente, a number of Blue Cross/Blue Shield plans and the Prudential unit of Aetna.
Ms. Herdrich won $35,000 in damages in federal district court in Peoria, Ill., a paltry amount compared with recent multimillion-dollar state court awards. The judge rejected the argument that her health plan had not met its obligations under the federal law. But an appeals court, while not resolving the matter, ordered a trial on that issue in 1998.
Ms. Herdrich refused all requests for interviews, her lawyer, James P. Ginzkey, said. Dr. Pegram also did not respond to requests for comment. L. J. Fallon, a lawyer for her group, the Carle Clinic Association of Urbana, Ill., said there had been no clear signs of appendicitis at first, and a sonogram did not seem appropriate until a mass in her abdomen became apparent a week later.
Judge John L. Coffey of the federal appeals court in Chicago suggested in 1998 that doctors at Ms. Herdrich's H.M.O. might have been caught in a conflict of interest between safeguarding her health and protecting their chances of getting a year-end bonus as a reward for keeping down medical costs.
"Where physicians delay providing necessary treatment, or withhold administering proper care to plan beneficiaries for the sole purpose of increasing their bonuses," Judge Coffey said, a managed-care company may be breaching a "fiduciary duty" to serve its members and patients.
A three-judge panel voted 2 to 1 to order a trial on the issue. The full appeals court declined to review that ruling, and lawyers for the managed-care industry persuaded the Supreme Court to take the case.
One widely accepted theory is that market forces will ultimately result in the best care at the lowest cost, because health plans and providers of care will compete to attract business. But Judge Coffey took a dim view of such reasoning, writing, "Market forces are insufficient to cure the deleterious effects of managed care on the health care industry."
In a dissenting opinion, Judge Joel M. Flaum said that he shared those concerns, but that judges should not "pre-empt legislative and regulatory efforts."
Financial incentives are among a weakening arsenal of cost-control tools as managed-care companies maneuver to calm criticism. A number of companies have eased requirements for previous approval of medical treatments and for established external review boards that can reconsider the denial of care.
Some lawsuits also made claims of fraudulent marketing, accusing the providers of advertising that their care met high standards but not making clear that financial incentives might undercut those standards. Some suits seek triple damages under the federal antiracketeering law, based on claims that the companies engaged "in a nationwide fraudulent scheme" to mislead the public about the essential nature of their business.
The same lawyers have filed suits in state courts in California contending that the companies violated provisions of the state's business code.
The attacks may grow more intense. California, Georgia and Missouri have passed laws permitting suits against the managed-care companies. A two-year-old Texas law permitting such suits is being tested in the courts. And the attorneys general of Connecticut and Missouri also jumped in recently with separate suits against managed-care companies.
In Washington this past October, the House passed a bill that would permit malpractice suits in state courts against managed-care plans; such suits could not, however, be class actions. A House-Senate conference is expected to take up the House measure this year, said John Stone, a spokesman for Representative Charlie Norwood, a Georgia Republican and a principal sponsor of the measure.
Richard F. Scruggs, the lead lawyer in several recent suits, is a Mississippi-based specialist in class-action suits who played a big role in winning huge awards against tobacco companies in 1997 and 1998.
The dozens of class-action lawyers in various managed-care suits include such well-known names as David Boies of Armonk, N.Y., who is also assisting in the Justice Department's antitrust case against Microsoft; Ronald L. Motley of Charleston, S.C.; John Eddie Williams of Houston; Fred Furth of San Francisco; Russ Herman of New Orleans; and Edith Kallas, of Milberg, Weiss, Bershad, Hynes & Lerach in New York.
In an interview, Mr. Scruggs predicted that the new lawsuits would force managed-care companies to agree to change their business practices in exchange for legal protection against potentially ruinous suits.
Investors drove down the share prices of H.M.O. companies when the latest suits were filed in October, which Mr. Scruggs interprets as adding to the pressure for a settlement.
In a brief for the Supreme Court, insurance industry trade associations and lobbyists for employers laid out the arguments the companies are likely to use there and elsewhere.
The brief was signed by the American Association of Health Plans, the Health Insurance Association of America, the United States Chamber of Commerce and the Association of Private Pension and Welfare Plans. It said that doctors, when making medical decisions, were not acting as administrators and therefore were not subject to the fiduciary-duty provisions of the Employee Retirement Income Security Act, known as Erisa, the federal law that governs employer health plans and requires that the plans act in the best interests of patients.
The Clinton administration, in a brief by the Labor Department, agreed with the industry argument. But in December, 18 state attorneys general urged the Supreme Court to uphold the appellate bench's order for a trial on whether Ms. Herdrich's H.M.O. placed its own financial interests ahead of the interests of its members.
More broadly, industry lawyers said that if the door was opened wide to malpractice suits against H.M.O.'s, companies would have to charge higher premiums, driving away customers and adding to the 43 million people without insurance.
Taking another tack, the industry argued that encouraging managed care was a public policy legislated and regulated by Congress and the states. Changing such a policy should be left to legislatures and to commercial decisions that reflect market forces, not decreed by courts.
Legal experts cautioned against trying to predict how the Supreme Court might resolve this issue. It could shore up the Erisa shield, or it could weaken it. The court could also issue a narrow opinion without addressing larger policy issues.
Since the 1980's, the law has protected health plans by requiring that most malpractice suits be heard in federal courts, where damages are strictly limited. But in a number of recent cases, federal courts made exceptions that permitted suits in state courts.
A federal appeals court in Philadelphia ruled in 1998 that a New Jersey couple had the right to bring medical negligence charges in state court against their H.M.O., doctor and hospital. Steven and Michelle Bauman blamed the plan when their baby died in 1995, the day after Mrs. Bauman and the baby were sent home under a 24-hour maternity policy then in effect.
"The courts are human; they want to be generous," said Clark Havig-hurst, a health law expert at Duke University Law School.
But the outlook is murky for class-action cases. Legal experts say that, for one thing, it may be difficult to persuade judges that health plan members have enough in common to be certified as a class.
Lower courts ruled against class-action lawyers in two recent decisions. On Sept. 29, a federal district judge in Philadelphia denied class- action status in a suit accusing Aetna of fraudulently advertising that its primary concern was quality of care, not cost controls. The judge said the plaintiffs could not sue because they had advanced "a vague allegation" and failed to show that they had been harmed.
On Dec. 1, a district judge in Houston denied a request for class-action status in a suit against Nylcare that also argued that advertising to consumers was misleading. The judge suggested it was not clear whether "a particular consumer saw a particular advertisement" and was misled by that advertisement or induced by it to join a Nylcare H.M.O.
"What the Supreme Court says in the Herdrich case will make a big difference,"
said Peter D. Jacobson, an associate professor of health policy at the
University of Michigan's School of Public Health.