In a victory for the managed care industry, the U.S. Supreme Court unanimously decided last month that HMOs cannot be sued under federal law for giving financial incentives to physicians even if it results in patient harm.

Justice David Souter wrote for the Court, "To rule otherwise would be to undermine the intent of Congress, which for over 27 years has promoted the formation of HMO practices."

Souter was referring to a 1972 law that authorized HMOs to "enter into contracts that financially reward their physicians for minimizing expensive treatment".

The case, Pegram et al. v. Herdrich, reached the Supreme Court last year after a federal appeals court ruled in favor of Cynthia Herdrich of Illinois. The Court decided that her HMO physicians were fiduciaries under ERISA because they had the exclusive right to decide all disputed claims as owners of the HMO and the health plan.

Herdrich alleged that her appendix ruptured in 1991 because her HMO physician, Lori Pegram, M.D., delayed obtaining an evaluation of whether treatment for Herdrich's condition met the HMO's medical-necessity criteria.

Souter also wrote in the decision that an HMO does not have a fiduciary responsibility under ERISA in part because its physician employees must make "mixed decisions" involving not only eligibility for coverage under a health plan but also treatment of individual patients for specific ailments.

"Dr. Pegram's decision was one of that sort. She decided (wrongly as it turned out) that Herdrich's condition did not warrant immediate action. . . . The eligibility decision and the treatment decision were inextricably mixed, as they are in countless medical administrative decisions every day."

The Court's ruling was a blow to APA and its coalition members who submitted a friend-of-the-court brief supporting Herdrich in the case, which the Supreme Court heard in February.

Richard Ciccone, M.D., immediate past chair of APA's Commission on Judicial Action, commented to Psychiatric News, "I disagree with the Court's opinion that Congress intended when it enacted the HMO Act in 1972 and ERISA in 1974 that HMOs would never be held legally accountable."

The implications of the decision are far reaching. If the Court had ruled in favor of Herdrich, patients could use ERISA to sue their HMOs and managed care plans for punitive damages (pain and suffering) in federal court.

The ruling is also a setback for the legal strategy used by numerous class-action suits filed in recent months against HMOs. Their arguments, like the one used by Herdrich's lawyer, were that HMOs are fiduciaries under ERISA.

Several states are considering legislation that would allow patients to sue their HMOs for limited damages in medical malpractice cases, which some lawmakers believe are not covered by the limits of ERISA. At press time only seven states-Texas, California, Georgia, Arizona, Maine, Oklahoma, and Washington-had enacted such laws. The remaining states allow medical malpractice claims against physicians and hospitals but not HMOs.

Souter also recognized in the Court's opinion that Congress can choose to restrict its approval of HMO practices.

In fact, the House passed a comprehensive patients' bill of rights last year that would allow patients to sue their HMOs under certain circumstances among other rights. Last month, the Senate passed a narrower version with several differences including extending the right to sue only to beneficiaries whose plans are covered by ERISA.

The Senate had previously blocked passage of the House's Norwood-Dingell bill when it was offered as an amendment to a defense spending bill. The Senate voted 51 to 48 to table the amendment offered by Senator Edward Kennedy (D-Mass.).

At press time, the prospects for this Congress passing the bill appear to be fading.