PERSPECTIVE: THE IMPACT OF HEALTH MAINTENANCE ORGANIZATIONS ON HEALTH CARE COVERAGE

The well-established federal policy requiring employers to offer their employees health insurance has been the dominant policy for supplying health care coverage in the United States.

The Health Maintenance Organization Act of 1973 promoted the development of Health Maintenance Organizations (HMOs) to meet the demands of supplementing the health needs of those insured. The Act allowed the formation of HMOs as an alternative to traditional health care by introducing a new payment model for the delivery of health care services.

Historically speaking, managed health care plans arose with the aspiration of focusing on prevention. They incorporated more disease prevention strategies in line with payment mechanisms. However, this objective has not been fully attained. Health care providers and facilities within HMOs are contractually obligated to adhere to terms set by the HMO. These terms instruct how health care coverage is disbursed.

Generally, a managed health care plan provides a pre-determined fee for health care services in a structured delivery system with a primary care provider as the principal point of contact and any specialist to be determined by those enrolled in the plan.

In Pegram v Herdrich, the question presented was whether treatment decisions made by a HMO, acting through its physicians, are fiduciary acts within the meaning of the Employee Retirement Income Security Act (ERISA).  ERISA is a federal statute designed to protect employee and beneficiary interests in employee benefit plans.

The facts in this case determined that the patient (beneficiary) was covered by a HMO through her husband’s employer. The HMO required the patient to wait several days for an ultrasound at an HMO-contracted facility per HMO requirements. It was later determined that the patient was experiencing an inflamed abdomen that ruptured her appendix, causing peritonitis.

As a result of her injury, the patient filed a lawsuit alleging medical malpractice and two counts of fraud in state court. The HMO-contracted physician removed the case from state to federal court. The physician argued ERISA preempted the state fraud counts and requested a motion for summary judgment. The motion for summary judgment was granted as to one fraud count and a motion to leave to amend the complaint was granted to the other count.

The patient amended her complaint in federal court to allege that the HMO requirement of receiving an ultrasound at an HMO-contracted facility limited her medical care.  The complaint further alleged the care she received resulted in an inherent or anticipatory breach of an ERISA fiduciary duty because the physician is rewarded for making medical decisions in the interest of the HMO rather than in the exclusive interests of their enrollees.

The District Court dismissed the ERISA claim for failure to state a claim for which relief could be granted. It cited that the physician’s actions did not amount to a fiduciary duty under ERISA. The patient appealed the case to the Seventh Circuit Court of Appeals and the court determined a valid claim was stated; ruling in favor of the patient. The physician appealed the case to the Supreme Court.

The Supreme Court in Pegram v Hendrich noted:

“A fiduciary within the meaning of ERISA must be someone acting in the capacity of manager, administrator of financial advisor to a plan. Congress did not intend an HMO to be treated as a fiduciary to the extent that it makes mixed eligibility decisions acting through its physicians. In a fee-for-service system, a physician’s financial incentive is to supply more care, not less, so long as payment is forthcoming. The check on this incentive is a physician’s obligation to exercise reasonable medical skill and judgment in the patient’s interest [1]”.

The Supreme Court unanimously held that mixed treatment and eligibility decisions by HMO physicians are not fiduciary decisions under ERISA, ruling in favor of the physician.

This case established that managed care companies are shielded from federal liability for medical malpractice under ERISA. There is no fiduciary duty between patient and HMO because ERISA does not regulate treatment decisions made within HMOs . This precedent has strengthened the development of managed care companies into what they are today-an established way of how health care is delivered in the United States.

[1] Pegram v Hendrich, 530 U.S. 211 (2000).