Law Feature --August 2000
By Walt Borges
Organized medicine, managed care organizations, state
regulators, and consumer groups all found something to praise in a
pair of recent decisions by the US Supreme Court and the US 5th
Circuit Court of Appeals. But the decisions issued in late June
were less a victory for any one interest group than a prescription
for continued legal and legislative challenges to managed care.
Together, the Supreme Court's unanimous ruling in
Pegram v Herdrich
and the decision of a three-judge 5th Circuit panel in
Corporate Health Insurance Inc v
Texas Department of Insurance
have moved the federal judiciary closer to overturning
long-standing interpretations of the Employment Retirement Income
Security Act of 1974 (ERISA) that keep injured patients from suing
managed care organizations in state courts.
The decisions also prompted renewed calls from the Texas Medical
Association and the American Medical Association for Congress to
set national standards for patient protection by passing a
Patients' Bill of Rights.
TMA President Jim Rohack, MD, of Temple, said the 5th Circuit
ruling "highlights the need for Congress to act quickly to
establish national patient protection standards including
independent review of health plan decisions to delay or deny
medically necessary care."
The high court issued its
decision on June 12 as AMA was holding its annual summer meeting in
Chicago. In a statement by the AMA Board of Trustees, Trustee
Donald Palmisano, MD, called the
decision "a compelling argument for a strong Patients' Bill of
Rights. We urge Congress to pass appropriate legislation and
protect America's patients now."
For Texas physicians and patients, the 5th Circuit case
(commonly called the Aetna case because the four entities that
challenged the Health Care Liability Act of 1997 [HCLA] were
subsidiaries of Aetna US Healthcare) has the greater impact. A
three-judge panel, with 5th Circuit Judge Patrick Higginbotham, of
Dallas, writing, held that ERISA did not preempt the state law that
allows patients to sue health maintenance organizations (HMOs) that
negligently delay or deny medically necessary treatment. That part
of the decision adopted many of the positions advocated by TMA and
AMA in a friend-of-the-court brief filed in the case, Dr Rohack
said in a statement released June 21.
Jerry Patterson, the former state legislator who is now
executive director of the Texas Association of Health Plans, says
the two cases are part of a trend in the courts to narrow ERISA
preemption of state laws. But he noted that the 5th Circuit panel
sent a message to plan members that "coverage decisions should not
be confused with decisions regarding medical necessity."
Elizabeth Rogers, JD, a lawyer with the Austin office of Vinson
& Elkins who represents both health care plans and physicians,
said the Aetna case will force Texas courts handling HMO negligence
claims to determine "whether the complaint is about a pure coverage
decision by [the] HMO, which would be preempted by federal law, or
if it's a health care treatment decision affecting the quality of
care. The problem is, as history has shown, there was no black or
white, either-or test under the treatment versus coverage decision
The Texas statute did not escape 5th Circuit review unscathed.
The panel knocked out the independent review process that provided
patients with a means to challenge HMOs for failure to exercise
ordinary care in making adverse treatment decisions. Lawyers in the
Texas Attorney General's Office have asked for a rehearing of the
case by the full complement of 5th Circuit judges.
While the unanimous panel essentially upheld the 1999 ruling of
a federal district judge in Houston, it did reverse her rulings on
two key points. The 5th Circuit panel held that ERISA preempted
provisions of HCLA that prevented managed care organizations from
retaliating against physicians and health plan members who
challenged HMO decisions. It also overturned a ruling that
prohibited managed care organizations from requiring physicians to
indemnify the managed care companies for the costs of legal
In upholding the HCLA provisions against retaliation and
indemnification, the court stated, "Together, the provisions thus
better preserve the physician's independent judgment in the face of
the managed care entity's incentives for cost containment."
The Aetna decision was rife with implications for Texas
physicians, but the Supreme Court's decision in
was a narrow one, says TMA General Counsel Donald P. Wilcox,
, the high court unanimously rejected a patient's claim that
physician owners of an HMO breached a fiduciary duty under ERISA to
act solely in her interests by providing incentives to its
physicians to ration care.
Financial incentives to ration care are key to the nature of the
HMO to reward the rationing of care, wrote Justice David Souter.
The justice wrote that the court would not reach a decision that
might result in "the elimination of the for-profit HMO."
But in language explaining the court's decision, Justice Souter
undermined the scope of managed care's victory, suggesting that
Congress needed to address policy questions surrounding HMOs. The
court also strongly hinted that state courts were the proper
setting for deciding whether HMOs and other managed care
organizations had intruded on medical decision-making and the
quality of care.
is a very limited case that says there is no ERISA relief for
breach of a fiduciary duty by a physician who has a financial
interest in an HMO," Mr Wilcox explained. "That's because the
definition of fiduciary under ERISA does not include physicians
making medical decisions."
The Litigation Center, which includes AMA and state societies
such as TMA, filed an amicus brief in the case arguing the position
that the court ultimately adopted, Mr Wilcox says. He says the rest
of the case was extraneous language that supports the need for a
Patients' Bill of Rights in Congress.
Cynthia Herdrich, of Bloomington, Ill, sued her HMO in 1992,
claiming its incentives caused her physician, Lori Pegram, MD, to
forego an ultrasound scan of Ms Herdrich's inflamed abdomen at a
local hospital so she could schedule the scan 8 days later at an
HMO-owned facility 50 miles away. Ms Herdrich's appendix ruptured
before the scan could be performed, causing peritonitis.
Dr Pegram was a physician owner of three entities, collectively
known as "Carle," which function as an HMO. Dr Pegram and Carle
were sued by Ms Herdrich, who won damages of $35,000 in a state
medical malpractice suit.
Ms Herdrich also sued Carle for fraud under state law. Carle and
Dr Pegram responded that the fraud counts were preempted by ERISA,
which is often interpreted by the courts to exclude any lawsuits
filed under state law if the suit involves the delivery of benefits
to employees. Carle and Pegram successfully moved the case into
federal district court.
A federal district judge then threw out one of the two fraud
counts, but allowed Ms Herdrich and her lawyers to reformulate the
other. In amending her pleadings, Ms Herdrich alleged that the
owners of the Carle HMO breached or anticipated breaching their
fiduciary duty under ERISA by structuring the HMO with incentives
to ration care. In doing so, Ms Herdrich argued, the HMO physician
owners placed their economic self-interest before the exclusive
interests of the health plan participants.
A federal district court dismissed Ms Herdrich's remaining
count, but the US 7th Circuit Court of Appeals reversed the
decision, holding that the Carle HMO was acting as a fiduciary when
its physicians made the challenged decisions.
Justice Souter, writing for a unanimous Supreme Court,
disagreed. HMO physicians often make "inextricably mixed" decisions
regarding necessity of treatment and eligibility of coverage for
treatment, Justice Souter argued. These decisions differentiate
fiduciary duties under ERISA from traditional fiduciary duties of
financial trustees who must always put client interest above
personal interest, the court said.
The court also declined to give HMOs fiduciary responsibility
for their mixed decisions because of the impact such a decision
would have. Ms Herdrich sought to have her for-profit HMO return
all of its profits to the plan for the benefit of the covered
patients. Such a ruling could eliminate for-profit HMOs, and
possibly nonprofit HMOs, Justice Souter explained.
AMA was comfortable with the high court decision. Dr Palmisano
said the decision "is consistent with AMA's view that ERISA is not
the proper legal avenue for addressing medical decisions that harm
or injure patients. ERISA was never intended to apply to medical
treatment decisions and, therefore, does not contain appropriate
Under ERISA suits brought in federal court, injured patients who
sue HMOs can recover only the value of lost benefits, plus
attorneys' fees in some cases. In state court, the injured patients
can recover damages for pain and suffering, which often gives them
additional leverage in settlement negotiations with HMOs.
knocked out one legal avenue of challenging HMO decisions, some
plaintiff's lawyers and consumer advocates concede that Ms
Herdrich's claim in
was stretching the common interpretation of the law.
Jan Woodward Fox, JD, a former president of the Texas Trial
Lawyers Association, is representing two physicians suing Millliman
& Robertson, a company that published guidelines widely used by
HMOs to limit authorization and payment for health care. The
decision "is understandable in its limited context," she said.
"The issue was a very narrow one involving a creative use of
ERISA in the face of limited medical injuries and procedural
jockeying around between the state and federal courts," Ms Fox
said. "It leaves wide open many avenues to attack the multiple
mischiefs within the HMO system, such as the undisclosed use of
treatment guidelines to deny care."
A leading Texas advocate for consumer rights concedes that the
high court was on target in its legal reasoning, even if it
produced a result harmful to consumers of medical services. "In all
fairness, the Supreme Court may have gotten the law part right,"
said Reggie James, JD, director of the Southwest Regional Office of
Consumers Union. Mr James says Congress needs to take the court's
hint and change ERISA, which offers little protection to the
employees it was supposed to benefit.
AMA agrees. "ERISA should not be used as a shield to prevent
health plans from being held accountable under applicable state law
when they make medical necessity decisions that harm patients," Dr
Palmisano noted in the AMA statement.
The court's apparent preference for having state courts handle
suits involving HMO liability for medical decisions was reiterated
a week later on June 19 when it disposed of two cases involving
HMOs, rejecting an attempt to try one case in federal court and
ordering the Pennsylvania Supreme Court to handle the other by
Upholding Texas law
The Supreme Court decisions gave the 5th Circuit's ruling in the
Aetna case the highest level of importance, since Texas' HCLA is
the only law currently on the books that allows negligence suits
against HMOs in the state courts. Six other states have passed
similar laws that have yet to go into effect, and eight other
states have such laws under consideration.
In the circuit court opinion handed down on June 20, Judge
Higginbotham wrote that the panel agreed with Texas' interpretation
that HCLA, enacted in 1997 as Senate Bill 386, is not preempted by
"The provisions do not encompass claims based on a managed care
entity's denial of coverage for a medical service recommended by
the treating physician: that dispute is one over coverage," which
is specifically excluded from preemption by HCLA, Judge
Higginbotham wrote. "Rather, the [HCLA] would allow suit for claims
that a treating physician was negligent in delivering medical
services, and it imposes vicarious liability on managed care
entities for that negligence."
The court is suggesting that HMOs can be indirectly targeted for
negligence under HCLA only when a physician has been sued for
negligence, Ms Rogers says. But Mr Wilcox says he thinks the court
will allow some direct suits against HMOs.
Mr Wilcox says Texas suits against HMOs for negligence in
approving care will fail through preemption if the HMO can get a
judge to agree that it simply denied coverage, even if the denial
of coverage harmed the patient.
But the door remains open for patients who can get the courts to
agree that a physician was acting as an agent of the health plan
when he or she provided poor medical care, that the health plan
influenced the quality of care through financial incentives or
other means, or that the plan improperly screened or supervised
physicians admitted to its network.
The 5th Circuit panel also gave the state a bonus by
differentiating ERISA preemption of malpractice suits against
doctors in managed care organizations for coverage decisions and
preemption of state attempts to regulate and police medical
ERISA "does not insulate physicians from accountability to their
state licensing agency or association charged to enforce
professional standards regarding medical decisions," he wrote.
"Such accountability is necessary to ensure that plans operate
within the broad compass of sound medicine. We are not persuaded
that Congress intended ERISA to supplant this state regulation of
quality of medical practice."
Mr Wilcox says the decision gives a strong boost to the current
effort by the Texas State Board of Medical Examiners to assert
jurisdiction over UnitedHealthcare's medical director for North
Texas, whom United is challenging in a current suit in federal
The court also knocked out the process of independent review,
which allows patients access to reviewers outside the managed care
organization to appeal denials of treatment because the health plan
regards the treatment as medically unnecessary.
Judge Higginbotham wrote that it is apparent that HCLA's
provisions for independent review included "determination by
managed care entities as to coverage, not just negligent decisions
by a physician. The provisions allow a patient who has been denied
coverage to appeal to an outside organization. Such an attempt to
impose a state administrative regime governing coverage
determinations is squarely within the ambit of ERISA's preemptive
Mr Patterson says many health plans are already voluntarily
complying because they like the independent reviews, but he says
the Aetna decision raises new questions about how the process
should be used. Ultimately, the independent review process should
be designated by contract or by legislation that eliminates
conflicts with ERISA, he says.
The elimination of independent review disappointed many backers
of outside review, including Texas Atty Gen John Cornyn, LLM, Texas
Insurance Commissioner Jos
J Montemayor, Consumers Union,
and plaintiff's lawyers.
In the wake of the decision,
Attorney General Cornyn encouraged all managed care operations to
continue using the independent review process, which the Texas
Legislature made voluntary in 1999. The attorney general said he
would seek specific commitments from HMOs that are currently
being sued by his office.
Lisa McGiffert, a health
issues advocate for Consumers Union, says she is pleased by the
panel's decision on preemption, but she deplored the preemption
of mandatory independent review.
"A right guaranteed by Texas
law has been taken away and replaced with review that is entirely
up to insurers," Ms McGiffert said.
George Parker Young, JD, a
Fort Worth plaintiff's attorney who is involved in several suits
against HMOs on the part of doctors, says the 5th Circuit
decision is likely to lead managed care organizations to pick and
choose which cases they want to send to independent
Currently, Texas Department
of Insurance statistics show that HMO decisions are upheld in
roughly 50% of the reviewed cases. Mr Young says that Aetna HMOs
may choose to submit to independent review only in cases where
they feel they have an excellent chance of winning, giving the
appearance that their decision-making is valid.
Court decisions at a
Key impacts of the
- The Employment Retirement
Income Security Act of 1974 (ERISA) does not preempt state
efforts to regulate and police the quality of medical
- Managed care organizations
cannot be compelled to participate in the independent review
process used to appeal health maintenance organizations'
(HMOs') refusal to pay for care that patients and their
physicians believe is appropriate or medically
- HMOs cannot drop
physicians for advocating medically necessary treatment.
- Physicians cannot be
required by contract to indemnify managed care organizations
for legal costs of the organizations' wrongful
Key impacts of the
- Physician owners of HMOs
cannot be sued under ERISA by health plan members for providing
and receiving incentives to ration care. State remedies, such
as the Texas Insurance Code, and other federal remedies,
including the Americans with Disabilities Act and the Racketeer
Influenced Corrupt Organization Act, are still
- Challenges to managed care
decisions affecting quality of care are more appropriately
tried in state courts.
The future of the
independent review process was thrown into doubt by the US
5th Circuit Court of Appeals
decision in the Aetna case, which ruled that health
maintenance organizations (HMOs) and other managed care entities
could not be compelled to participate. But the Texas Association
of Health Plans and Texas Atty Gen John Cornyn both are urging
managed care organizations to continue voluntary use of the
independent review organization (IRO).
Physicians may feel more
comfortable helping their patients initiate the independent
review process to challenge HMO decisions because the circuit
court ruled that managed care organizations cannot retaliate
against physicians who challenge decisions involving medical
But here are a few things
for physicians to keep in mind:
- It doesn't cost anything,
and if the IRO rules that the treatment is necessary, the
health plan must pay for your patient's care. But IRO appeals
can be used only to contest treatment denials relating to care
that may be medically necessary or appropriate.
- Before seeking an IRO
appeal, complete the health plan's appeals process. That may
entail a direct appeal through the plan or through the
utilization review agent (URA) used by some plans to make
- If the plan denies the
internal appeal, you or your patient may request information
and forms for an IRO review. Keep in mind that the plan does
not have to participate in the process.
- If the health plan is
willing to voluntarily undergo IRO review, return the completed
forms, making sure the patient or his or her guardian signs a
medical release form.
- The health plan or URA is
required to immediately inform the Texas Department of
Insurance (TDI) of the request, and TDI has 1 business day to
assign the appeal to one of three Texas IROs. TDI will inform
all parties of the assignment.
- From the time the health
plan or URA receives a request, it has 3 business days to
supply information to the IRO. The IRO may take up to 15
business days to make its decision after receiving the records
or up to 20 business days after receiving the TDI review
request. In life-threatening situations, the IRO has 8
days to make a decision.
- The decision notice will
provide the clinical basis for the decision, a description of
criteria used to guide the decisions, the qualifications of IRO
staff who did the review, and a certification that there is no
conflict of interest between the IRO and health plan.
For more information on the
process, call TDI's IRO Information Line at (888) TDI-2IRO
(834-2476). In Austin, the line can be reached at 322-3400. The
information is available online at
August 2000 Contents