By Mary Anderlik
Health Law & Policy Institute
The Employee Retirement Income Security Act of 1974 (ERISA) is the federal law that governs virtually all private employer-sponsored benefit plans, including plans that provide health benefits. Approximately 125 million people obtain health care through plans covered by ERISA. One significant aspect of ERISA is its preemption of a variety of state law causes of action, and managed care organizations (MCOs) have successfully used ERISA as a "shield" from liability. See ERISA Preemption Plagues Courts and Individuals: the Need for Congressional Action and Proposed Patient’s Rights Legislation—Understanding the ERISA Preemption.
Plaintiffs are now seeking to use ERISA as a sword in their legal battles with MCOs, asserting that MCOs are fiduciaries under ERISA and can be held liable for failure to meet the stringent standards ERISA imposes on fiduciaries. Generally, the term "fiduciary" refers to a person has been entrusted with the money, property or welfare of another. Fiduciaries are held to a higher standard of care than ordinary business associates. The duties imposed on fiduciaries typically include good faith and candor.
Two cases decided in August show how courts are diverging in their response to this strategy. In the most recent case, Ehlmann v. Kaiser Foundation Health Plan, 1998 U.S. Dist. LEXIS 13326 (N.D. Tex. August 24, 1998), the plaintiffs argued that the defendants’ failure to disclose physician compensation arrangements violated the general standards of conduct for fiduciaries. The court interpreted congressional silence on disclosure of compensation arrangements as a decision not to require disclosure, regardless of the materiality of the information, and dismissed the case.
In a case decided less than a week earlier, Herdrich v. Pegram, 1998 LEXIS 20189 (7th Cir. August 18, 1998), the U.S. Court of Appeals for the Seventh Circuit ventured in the opposite direction. The majority held that use of a compensation arrangement in which physicians benefit financially from limiting care to plan participants may constitute a breach of fiduciary duty under ERISA.
The majority opinion offers a thorough review of the ERISA provisions addressing the nature and duties of a fiduciary, including the requirement that a fiduciary discharge its duties with respect to a plan "solely in the interest of the participants and beneficiaries." The court found a number of facts compelling on this point. First, the story of the plaintiff, Cynthia Herdrich, exemplified the "deleterious effects of managed care on the health care industry." Herdrich’s physician discovered an inflamed mass in her abdomen. Because this condition was classified as non-emergency, Herdrich was required to have the follow-up diagnostic test at a clinic affiliated with her HMO. That requirement meant an eight-day delay, and in the meantime Herdrich’s appendix ruptured and she developed peritonitis. Second, the conflict of interest was very direct. The physicians providing care to plan participants were also the administrators and owners of the medical practice and the officers and directors of the entities that controlled the HMO, and their year-end bonuses were keyed to their success in holding down costs.
In a comparison of the two cases, the difference in judicial philosophy is striking. The judge in Ehlmann stated that it was not his role to fill in any gaps in the law. The two judges in the majority in Herdrich were outraged by an injustice and found room in a statute for a remedy. They were apparently undaunted by the thought that they might be making law. (They also had a philosophical disagreement with the dissenting judge over the role of the market versus the courts in discouraging and policing bad behavior.) Another difference between the two cases is the presence in Herdrich of a plaintiff who had suffered a serious health problem, arguably as a result of the defendants’ conduct. The opinion in Ehlmann makes no mention of any injury to the plaintiffs, beyond the rather abstract injury of a denial of information.
In assessing the import of Herdrich, and the other cases recognizing a claim for breach of fiduciary duty under ERISA, it is important to remember that virtually all these cases involved a motion to dismiss, meaning that the facts before the court were typically limited to those set forth in the complaint. In a case such as Herdrich, where the nature and effects of a compensation arrangement are at issue, evidence at trial concerning an HMO’s counterbalancing incentives or vigorous quality assurance program might yet result in a verdict in favor of the defendants. Further, even if plaintiffs survive a motion to dismiss and go on to establish a breach of fiduciary duty at trial, the remedies available under ERISA may be very limited.