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HMOs Win as Supreme Court Throws Out Patient Lawsuit (Update1)

Washington, June 12 (Bloomberg) -- Health maintenance organization patients can't invoke a federal employee-benefits law to sue their plans for allegedly putting profits ahead of proper medical care, the U.S. Supreme Court ruled.

In a unanimous decision, the high court threw out a lawsuit by a patient who said her Illinois HMO's cost-containment system was to blame for her ruptured appendix.

The ruling eliminates one of the legal avenues -- though not the most common one -- used by patients and their lawyers to sue health plans. It could help such insurers as Humana Inc., Aetna Inc. and Cigna Corp., which are facing similar claims as part of class-action suits.

Writing for the court, Justice David Souter said courts generally aren't institutionally able to ``draw a line between good and bad HMOs.''

The decision sent HMO stocks higher. Shares of Aetna Inc., the largest U.S. health insurer, rose 3 3/8, or 5 percent, to 70 3/4. Humana Inc. shares rose 1/4 to 5 1/4 and Wellpoint Health Networks Inc. shares rose 2 15/16 to 72.

Cynthia Herdrich's suit claimed Carle Clinic Association, a physician-owned HMO that serves east-central Illinois, has a fiduciary duty under the Employee Retirement Income Security Act to act in the best interests of its patients. ERISA, as that law is known, governs health plans provided by employers.

Herdrich said a plan doctor violated that duty by requiring her to wait eight days before undergoing an ultrasound to diagnose a mass in her abdomen. Herdrich's appendix burst during the delay, causing her to contract peritonitis, an inflammation of the abdominal wall.

Bureaucratic Whim?

A federal appeals court in Chicago said the suit could proceed, lambasting the incentives that HMOs give doctors to limit expensive procedures. The court said HMOs breach their fiduciary duties when doctors withhold or delay treatment ``for the sole purpose of increasing their bonuses.''

``Medical care should not be subject to the whim of the new layer of insurance bureaucracy now dictating the most basic, as well as the important, medical policies and procedures from the boardroom,'' Judge John Coffey wrote for the 2-1 court.

Carle Clinic and other critics of that ruling pointed to Congress' repeated endorsements of HMOs and other forms of managed care. They said plans have wide discretion to set up structures that limit expenses.

The insurer drew support at the high court from several business groups, including the Chamber of Commerce; the American Association of Health Plans, which represents more than 1,000 managed-care plans; and the Health Insurance Association of America, another insurance industry trade group that has 225 members.

More Legal Threats

HMOs aren't off the hook. Some courts have permitted patients to sue their plans using traditional state-law theories, such as malpractice and negligence. The high court could decide next week whether to consider a separate case that raises that issue.

Some plaintiffs also have sought to use ERISA at least to force HMOs to disclose details of their doctor-reimbursement policies.

And Congress ultimately could open the way for more suits. The House has passed legislation letting patients invoke state malpractice laws when HMOs deny them needed medical care. The Senate voted down a similar bill on June 8.

The high court decision at least temporarily slows the trend toward more lawsuits by reaffirming the validity of HMO cost- containment efforts.

Herdrich already has won $35,000 in compensatory damages for related claims against the doctor and clinic. That damage award wasn't at issue in the Supreme Court case.

The case is Pegram v. Herdrich, 98-1949.

-- David L (, June 12, 2000


Managed care is a sham in this country. Who do we blame? Why does it cost so much that managed care plans have to routinely deny claims to stay afloat? Is it the doctors? Is it the pharmaceutical companies? The medical equipment manufacturers? All of the above?

I just do not remember this being an issue when I first joined the work force in the early 80's. I wish I knew a solution, short of becoming a millionaire and not having to worry about getting the proper care. You are literally taking your life in your hands when you seek treatment today from overstressed medical personnel.

This is bad news for patients. So what is new?


-- FutureShock (gray@matter.think), June 12, 2000.

Actually, there's nothing in that case (Pegram vs. Herdrich) that prohibits patients for suing the doctor involved for good old fashioned medical malpractice.

The issue was whether providing incentives to doctors to hold costs down somehow violates the Employee Retirement Income Security Act (ERISA). In my opinion, these are the types of lawsuits that should lose; the question presented here is political, not judicial. As Judge Souter's opinion observed, the result of a contrary decision would be to "federalize malpractice litigation."

Cite to the Supreme Court's web site version of the opinion: Alternative site:

-- E.H. Porter (Just, June 12, 2000.

Darn good work here clarifying what this is all about, EH, you should write summaries for all legal cases. Are you a lawyer?

-- FactFinder (, June 12, 2000.

Yes, I recall E.H. mentioning being an attorney.

Regarding this case, I had surmised what E.H. subsequently confirmed, but I nonetheless elected to post the article because it exceeded the Andy Ray standard, meaning that I found it more interesting than Andy Ray's posts.

-- David L (, June 13, 2000.

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