The Supreme Court heard oral arguments last month in a high-profile case that turns on whether financial incentives to limit or deny care violate a plan’s fiduciary duties under the federal Employment Retirement Income Security Act (ERISA). A decision is expected in June.

The case, known as Pegram v. Herdrich, was accepted by the Court after a federal appeals court ruled in favor of Cynthia Herdrich of Illinois. She alleged that her HMO and its health plan violated their fiduciary responsibilities under ERISA by giving its physicians financial incentives to deny care.

ERISA law states that fiduciaries are required to act "solely in the interest of the participants and beneficiaries. . . ," according to an article in the February 5 Preview of U.S. Supreme Court Cases.

Herdrich’s attorney argued that the Court must decide where to draw the line in allowing managed care organizations to devise financial schemes limiting or denying care.

"I am not asking this court to outlaw [all] financial incentives, only those that unduly influence health care decisions," said James Ginzkey, Herdrich’s attorney, last month.

Justice Sandra Day O’Connor questioned whether this was a matter for judges to decide. "Why should the courts enter this slippery slope when Congress already allows HMOs to develop a scheme to hold down financial costs?"

She was referring to the 1972 HMO Act, which authorizes HMOs to "enter into contracts that financially reward their physicians for minimizing expensive treatment," according to the article.

Justice Stephen Breyer also disputed Ginzkey’s argument. "It’s hard to believe that when Congress adopted ERISA in 1974, it would undermine the 1972 HMO Act allowing physician incentives."

Ginzkey responded that the practice of giving bonuses to physicians for denying or limiting care is a recent development.

He mentioned that a 1986 GAO report found that financial incentives have "a deleterious effect on the health care of patients enrolled in HMOs."

APA joined a coalition of consumer, health law, and health care organizations in submitting a friend-of-the-court brief in support of Herdrich. Richard Ciccone, M.D., chair of APA’s Commission on Judicial Action, told Psychiatric News, "Congress never intended when it enacted the HMO Act or ERISA to make managed care organizations exempt from legal accountability. The petitioners want the unprecedented goal of immunity from state and federal oversight, which should be rejected by the Court."

Herdrich filed a malpractice claim in 1992 in an Illinois court against her CarleCare physician, Lori Pegram, M.D., and CarleCare, her HMO at the time, alleging that Pegram had unreasonably delayed obtaining a medically necessary test for her abdominal pain, which resulted in a ruptured appendix.

Herdrich was later awarded $35,000 when a state court ruled in her favor. In the meantime, she amended her complaint alleging that CarleCare and its affiliated Health Alliance Medical Plans had engaged in state-law fraud and bad-faith dealings. Herdrich argued that the entities failed to disclose to her that CarleCare physicians owned the HMO and were compensated financially when they did not order diagnostic tests or make emergency or specialty consultation referrals.

The defendants claimed ERISA preemption, and the case was moved to a U.S. District Court. Herdrich added to her complaint that the defendants had breached their fiduciary duties under ERISA. The district court dismissed her complaints on the grounds that she had failed to identify how the defendants were fiduciaries.

Herdrich appealed her ERISA claim to the U.S. Court of Appeals for the 7th Circuit, which ruled she did have a claim under ERISA. The judges stated that the HMO physicians, through their wholly owned entities (CarleCare and Health Alliance Medical Plans), had the exclusive right to decide all disputed and nonroutine health plan claims.

Carter Phillips, the attorney for the petitioners (CarleClinic Association and Health Alliance Medical Plans), warned the justices that "the future of managed care is implicated in their decision."

"The justices should be loath to expand ERISA when Congress did not intend for the law to extend to medical treatment decisions and financial schemes," said Phillips.

To apply an ERISA mechanism here would interfere in the relationship between HMOs and their physicians and the relationship between physicians and their patients, warned Phillips.

The U.S. Department of Justice supported the petitioners, and James Feldman, the assistant to the solicitor general, told the justices, "Our position is that treatment decisions should be decided by state law. The petitioners did not breach their fiduciary responsibility because they denied coverage which represented a cost-savings or because they have some financial interest in the HMO."

Members of Congress are now debating a bill in conference that would allow patients to sue their HMOs under limited circumstances.