Should managed-care organizations be accountable to patients injured by the company's negligence or wrongdoing? The general rule is that all organizations, including managed-care organizations, are legally liable for causing personal injury as a result of their own negligence or the negligence
of their employees or agents. (1,2,3,4) However, as most observers of the U.S. health care system know by now, there is an exception to this basic legal rule of accountability. The Employee Retirement Income Security Act of 1974 (ERISA) has been interpreted to grant health benefit plans provided by employers or unions (and the managed-care organizations that sell or administer them) immunity from ordinary tort liability for their own negligence with respect to members of the plan. (5,6) Whether to end that immunity is the chief point of contention in the debate in Congress about a
patients' bill of rights.

The U.S. Supreme Court, in the case of Pegram v. Herdrich, gave the managed-care industry protection from one form of liability, but the June 2000 decision may intensify public demand for an end to immunity under ERISA. (7)

Liability and ERISA
The ERISA Industry Committee, a lobbying group for large employers and insurance companies, has said, "The power to define legal liability is the power to regulate." (8) Of course, this is why liability appeals to patients. With no voice in the governance of managed-care organizations, as Rodwin has noted, consumers have been unable to change managed care from the inside. (9)
With health plans tied to employment and the consolidation of the managed-care industry, consumers are frequently unable to choose or change plans. In the absence of a meaningful response to their complaints from industry, consumers have turned to the legislatures and the courts to force
managed-care organizations to be accountable to their patients. (10,11)

ERISA protects employer-provided health plans (known as ERISA plans) from liability for negligent injury to patients under state laws because ERISA prohibits the application of state law in any form, including the common law of torts, to ERISA plans if the law "relates to" an ERISA plan. (12,13)
(However, claimants who are not patients, such as vendors, landlords, and employees, remain entitled to sue, because their claims do not "relate to" an ERISA plan. (6)) Activities that "relate to" an ERISA plan include determining eligibility for claims, calculating and paying benefits,
monitoring available funds, and keeping records. (14,15) A claim that an ERISA plan negligently denied benefits relates to the ERISA plan because it is necessary to interpret the terms of the plan in order to determine whether the patient was eligible for the benefits. Thus, as a general rule, an ERISA plan and an organization that administers the plan on behalf of the employer cannot be sued under state law by a patient claiming that the ERISA plan or the administrator was negligent in administering the terms of the plan. In contrast, patients who belong to a government-sponsored health plan (such as government employees) or who buy individual health insurance policies are
entitled to sue the plan or its administrators under the general laws of tort liability.

Since 1995, a growing number of federal circuit courts have carved out an exception to the immunity exception itself. (16,17,18) They have allowed patients to sue managed-care organizations that serve ERISA plans if the physician who provided care to the patient both was negligent in providing that care and acted as an employee or agent of the managed-care organization. All corporations are liable under state law for the negligent acts and omissions of their employees and agents. (19) The rationale for allowing liability in this type of case is that employees' medical judgments are decisions that determine the quality of care and therefore do not "relate to" an ERISA plan -- that is, they do not involve the terms of an ERISA plan. (6) This is also why ordinary medical-malpractice claims against a physician can be brought in state court even when the patient is a member of an ERISA plan. Few physicians, however, are actually employees of managed-care organizations, even though they contract with a health plan to provide care to enrolled patients. This leaves physicians as the primary target of medical-malpractice claims.

Courts have generally refused to allow claims under state law against a managed-care organization for the organization's own negligence in administering an ERISA plan or in denying benefits or treatment entirely. (20,21,22,23) Unlike decisions involving the quality of care, denials of benefits "relate to" the ERISA plan, and claims based on such denials are therefore preempted by the federal statute. Thus, the patient cannot sue a managed-care organization under state law for wrongdoing or negligence in determining eligibility for benefits, denying benefits, paying claims, or otherwise administering the plan.

ERISA grants beneficiaries of ERISA plans a statutory remedy for denials of benefits, but not for negligent decisions about medical treatment. Patients may sue the plan or administering managed-care organization to recover a wrongfully denied benefit. (24) However, patients are entitled to recover only the dollar amount of the benefit that was denied, such as the cost of a
diagnostic test or surgical procedure. Compensation is not permitted for losses resulting from personal injuries, such as medical expenses or lost wages, or for the death of a patient who died for lack of treatment.

Given the limitations of these remedies, it is not surprising that patients with serious injuries seek alternative remedies, especially when those remedies are available to people who are not members of ERISA plans. A controversial alternative is to sue managed-care organizations for violating
the federal Racketeer Influenced and Corrupt Organizations (RICO) Act, which was originally enacted to stop organized-crime activities. (25) The Supreme Court has allowed patients to bring a treble-damage claim that a company used fraudulent schemes to reap profits by collecting copayments from their members that were based on usual hospital charges when the company actually paid lower, discounted prices. (26) Class-action suits have also been brought under RICO, challenging financial arrangements between managed-care organizations and physicians that create incentives for the physicians to withhold medical care. (27)

Another alternative is to attack managed-care practices as a violation of ERISA's statutory requirements for the fiduciaries of ERISA plans. ERISA requires the fiduciaries who control plans to act "solely in the interest of the participants and beneficiaries, and... for the exclusive purpose of (i)
providing benefits to participants and their beneficiaries, and (ii) defraying reasonable expenses of administering the plan." (28) Several cases have claimed that managed-care organizations violate their fiduciary duty by making financial arrangements with physicians that create incentives for
physicians to withhold necessary care or by failing to disclose to plan members the existence of such incentives. Some courts have allowed such claims (29); others have not. (30) It was this issue that the Supreme Court addressed in Pegram v. Herdrich.

Background of the Case
Cynthia Herdrich was a member of CarleCare HMO, a health maintenance organization (HMO) in Illinois that was offered by her husband's employer. Herdrich saw her primary care physician, Lori Pegram, for abdominal pain on March 1, 1991. On March 7, Pegram found an inflamed mass in Herdrich's abdomen. Pegram ordered that an ultrasound examination be performed eight days later at a Carle facility 50 miles (80 km) away, although a local hospital could have done it right away. Before the week passed, Herd rich's appendix ruptured, causing peritonitis. Emergency surgery was required, and Herdrich survived.

CarleCare HMO was owned by a group of physicians who also provided care to the HMO members, including Herdrich. The same physicians also owned their professional medical-practice corporation and the management company that administered all their companies. The CarleCare physicians received year-end bonuses based on the HMO's profits after payments for the care of their patients.

Herdrich sued Pegram and the Carle companies for medical malpractice and won a $35,000 award. She also claimed that CarleCare HMO and its physician owners were fiduciaries of her ERISA plan and had violated their fiduciary obligations to the plan under ERISA by rewarding the physicians for limiting medical care to plan members. Herdrich argued that the financial and ownership ties between the CarleCare companies and the owner physicians created a conflict of interest -- one that pressured Pegram to choose between personal profit and her patient's health. Although most managed-care organizations use financial incentives to discourage physicians from excessive spending on medical services, the CarleCare HMO structure was unusual because the physicians who made the decisions about patient care also owned the HMO. Thus, they directly profited or lost money as shareholders as a result of their own decisions about patient care as physicians.

The Supreme Court's Decision
In a unanimous decision written by Justice David Souter, the Court rejected the idea that "treatment decisions made by a health maintenance organization, acting through its physician employees, are fiduciary acts within the meaning of [ERISA]." (7) ERISA defines a fiduciary as someone who acts in the capacity of manager, administrator, or financial advisor to the benefit plan. (31) The Seventh Circuit Court of Appeals had found that CarleCare HMO and its physicians were fiduciaries because they had the "exclusive right to decide all disputed and non-routine claims under the plan," a right that gave them fiduciary control over the administration of the plan. (32) The Supreme Court, however, found that the actions of CarleCare HMO and its physicians were not fiduciary acts within the meaning of ERISA. Therefore, their decisions could not be challenged as a violation of a fiduciary duty, no matter who made them.

The Court found that, in enacting ERISA, Congress's primary concern was with the financial decisions of fiduciaries. After all, ERISA was enacted to protect employees from losing their pension benefits -- specifically, monetary payments. Its fiduciary provisions were designed to protect against
financial mismanagement such as investing in risky stocks or spending pension funds on company operations. Until the enactment of the federal Mothers and Newborns Protection Act in 1996, ERISA contained no substantive requirements for health benefit plans. (33) The problem with Herdrich's claim, in the Court's opinion, was that it resulted from decisions that were primarily
about medical services, not financial decisions, and that therefore these decisions were not fiduciary decisions.

The Court distinguished between exclusively medical judgments (about the quality of care), which it called "treatment decisions," and exclusively financial decisions (or decisions about benefits), which it called "eligibility decisions": "'Eligibility decisions' turn on the plan's coverage of a particular condition or medical procedure for its treatment. 'Treatment decisions'... are choices about how to go about diagnosing and treating a patient's condition." (7) The Court defined fiduciary acts as effectively
limited to eligibility and financial decisions. Financial decisions might include "rejecting a claim for no reason other than the HMO's financial condition." (7) The only example given of an eligibility decision was "whether a plan covers an undisputed case of appendicitis." (7)

The Court recognized that in many cases, "the treatment decision and the eligibility decision [are] inextricably mixed.... The more common coverage question is a when-and-how question." (7) For example, the eligibility decision whether to pay for emergency care often depends on a medical
judgment of whether a patient's condition requires emergency care. Similarly, whether a patient is covered for hospital care may depend on whether the medical condition requires inpatient services or can be treated adequately on an outpatient basis. The Court described Pegram's decision as "mixed." The physician's judgment that Herdrich's condition did not require immediate care meant that Herdrich was not covered for that care, whereas it would have been covered if her doctor had made the proper diagnosis.

The Court apparently feared that allowing Herdrich's claim to stand would threaten the continuation of managed care itself. Because the remedies for violating one's fiduciary duty can include repaying wrongful profits to the ERISA plan, Herdrich asked that CarleCare HMO physicians return their profits to the plan. (34) The Court said that this "in effect would be nothing less than elimination of the for-profit HMO." (7) The Court recognized that "no HMO organization could survive without some incentive connecting physician reward with treatment rationing." (7) In a footnote, the Court suggested that a fiduciary may have an obligation to disclose its financial arrangement with
physicians. Given the ubiquity of such arrangements, however, disclosure merely alerts patients to a risk they can neither change nor avoid.

The Court did not endorse CarleCare HMO's financial arrangements. Although it found them permissible under ERISA, it added: "This is not to suggest that the Carle provisions are as socially desirable as some other HMO organizational schemes; they may not be." (7) Rather, it found it impossible to state a legal principle "purporting to draw a line between good HMOs and bad HMOs," because such a principle "would embody, in effect, a judgment about socially acceptable medical risk." (7) This, it believed, was the prerogative of Congress, not the courts.

Implications of the Decision
In my view, the Supreme Court was correct to recognize that many managed-care decisions contain medical judgments imbedded in determinations about benefits. These "mixed" decisions include decisions about using a diagnostic test, seeking consultations, making referrals outside the HMO network, proper standards of care, the experimental character or reasonableness of proposed
therapy, and whether a medical condition constitutes an emergency. When coverage depends on whether a particular treatment is "medically necessary," deciding whether the treatment is a covered benefit necessarily entails deciding what medical care is necessary or appropriate. However, the Court characterized all decisions as nonfiduciary if they contain any element of medical judgment. Virtually all mixed decisions were swept outside the scope of fiduciary acts for which fiduciaries could be held accountable. This means that managed-care organizations cannot be held liable as fiduciaries of ERISA plans for wrongful conduct in making these mixed decisions.

The decision in Herdrich did not address the issue of federal ERISA preemption of ordinary state negligence law. But lower courts may apply the Supreme Court's reasoning in negligence cases nonetheless. For example, Souter's opinion could be read as implicitly agreeing with lower-court
decisions that ERISA does not preempt state tort claims against managed-care organizations for negligence in quality-of-care decisions. Only days after the Herdrich decision, the federal Fifth Circuit Court of Appeals held that a Texas statute allowing patients to sue their HMOs for negligence in "making health care treatment decisions" was not preempted by ERISA. (35) Health care treatment decisions, said the court, are medical judgments that do not relate to ERISA plans. Thus, the Texas statute did not go beyond what the Fifth Circuit believed that ERISA already permitted.

In a few recent cases, courts have allowed claims that managed-care organizations can be liable under state law for negligence in making mixed decisions, even though it was the HMO and not the physician that made the decision. (15,36) In Pappas v. Asbel, a patient sued his HMO under
Pennsylvania negligence law for causing his paralysis by requiring his transfer to a network hospital and delaying appropriate emergency treatment. (36) A Pennsylvania court held that ERISA did not preempt this claim, even though the decision was made by the HMO itself. The decision was considered a medical judgment, not a decision about coverage. However, on June 19, the
Supreme Court vacated the Pappas decision without explaining its reasons and sent the case back to the Pennsylvania court for reconsideration in the light of the decision in Herdrich. (37) If mixed decisions include a component of eligibility or coverage, as in Pappas, then such decisions may relate to the ERISA plan after all. If so, claims about such decisions under state law would be preempted. Indeed, the Supreme Court's description of mixed decisions may encourage the judiciary to expand federal preemption and narrow the category of claims that can be brought by patients against managed-care organizations under state law. Some courts have already found that delaying
authorization for treatment or requiring treatment or surgery in a specific hospital is a benefit decision for which the patient has no recourse. (38)

Options for Holding Managed-Care Organizations Liable for Negligence
The Supreme Court did not address the question of whether or how to hold managed-care organizations liable for their own negligence. It merely removed one cause of action under ERISA for a broad category of decisions. Thus, the decision encourages patients to search for alternative remedies, even as it narrows the field of alternatives.

Indeed, it is the complexities of ERISA that increasingly define how and where cases are brought. Patients' attorneys try to present a claim that avoids preemption by ERISA, whereas defense attorneys argue that a claim is preempted by ERISA in order to avoid addressing its merits. Tremendous amounts of time and money are wasted in jurisdictional and procedural
maneuvering and legal technicalities. Instead of trying to force problems with managed care into (or out of) the Procrustean bed of laws designed for very different reasons, it would be better to change the law to address the real issue -- whether a managed-care organization has acted responsibly. For
patients, this means some form of legal liability on the part of managed-care plans and administrators for deliberate or negligent wrongdoing.

Ultimately, Congress must decide whether to preserve or eliminate the exception it has given to ERISA plans from the general rule of legal liability. One option is to amend the law to permit plan members to sue HMOs for negligence in making all types of decisions -- decisions regarding
eligibility, medical decisions, and mixed decisions -- in state court. (6) This would allow all claims arising from the same problem to be heard together. State courts are the appropriate forum for claims under state common law; such courts also hear claims regarding denials of benefits in
cases not involving ERISA. However, claims based on denials of benefits by ERISA plans have so far remained under exclusively federal jurisdiction. Moving such claims to state courts would undermine the goal of uniform administration of benefits, which ERISA, as currently interpreted, furthers.

Alternatively, ERISA could be amended to allow all claims against ERISA plans and managed-care organizations to be heard in federal court and to provide the same types of compensation that are available to plaintiffs in malpractice cases in state courts, including repayment of medical expenses
and lost wages. (6) This strategy is consistent with the uniform administration of benefit plans and also with the goal of having all related claims decided together. It would, however, saddle federal courts with claims under state common law that they might not welcome.

Another alternative is for Congress to amend ERISA to codify the trend in the lower courts of allowing claims under state law for negligence in making medical judgments and mixed decisions, while reserving claims regarding denials of benefits and improper administration for federal courts to decide under ERISA. (6) This approach, however, would split one incident into two or
more different claims that would have to be pursued in different courts, thereby increasing the time and expense of litigation.

This analysis suggests that it may be ERISA itself that is hindering the development of an efficient mechanism for enforcing accountability. Managed-care plans raise both financial and medical issues, which are often too closely intertwined to permit credible separation for purposes of regulation. I believe that what is needed is a separate federal statute and an agency to set minimum uniform standards for all health plans -- whether or not they are provided by an employer -- with no link to pension plans. Such a system could delegate authority to state agencies to enforce basic
administrative requirements and to state courts to hear all claims of liability. The Supreme Court's decision in Herdrich underscores the need to rethink the entire legal structure governing health plans. (39)

Conclusions
Liability is part of any responsible health care system. Without liability for wrongdoing, ERISA plans have a financial incentive to deny care. At worst, as the law is currently interpreted, they will be obliged to pay the cost of a denied benefit. Of course, managed-care organizations do not always
act in their own financial interest. But, without liability, there is nothing in the law to counterbalance the financial incentive to deny care. This lack of balance is precisely what worries patients. It is unlikely that patients will long tolerate health plans that refuse to accept responsibility for their own errors. The only alternative is detailed regulation of the way in which managed-care organizations operate. (40)

Liability must be part of comprehensive reform, but liability can also be addressed separately and immediately. In the absence of any principled reason for granting ERISA plans immunity from liability, it is time to decide not whether but how to structure the legal system for managed-care liability. Managed-care organizations may discover that accepting liability is preferable to micromanagement by Congress. Paradoxically, accepting liability may free the plans to engage in more innovation and to operate with fewer constraints than would be possible with pervasive regulation.

Professor Mariner was a signatory to an amicus brief of the Health Law, Policy, and Ethics Scholars to the Supreme Court in support of Herdrich.

Source Information
From the Health Law Department, Boston University School of Public Health,
Boston, MA 02118.