By MILT FREUDENHEIM
indy Herdrich, a part-time legal
secretary, said she suspected all
along that the sharp pain in her lower abdomen was appendicitis. But
Lori Pegram, a doctor at her husband's H.M.O. in Bloomington, Ill.,
did not agree.
Fourteen painful days later, the
health maintenance organization finally authorized an ultrasound scan.
Too late. Ms. Herdrich's appendix
ruptured. She contracted peritonitis
and required emergency surgery.
Ms. Herdrich, by then 35, sued the
H.M.O. in 1992. And what began as a
simple malpractice claim has grown
into the first direct challenge to managed care to be accepted by the
United States Supreme Court, which
has been asked to decide whether her
challenge merits a trial.
But it is by no means the only
challenge. Managed-care companies
-- like makers of cigarettes, lead
paint and guns -- are under growing
legal attack. This includes at least 16
recent class-action suits, most filed
by some of the same lawyers who
won huge settlements from the tobacco industry. Several new state
laws and measures in Congress
could open the industry to still more
suits. And the Federal law that has
long protected many managed-care
companies is being whittled away in
a series of judicial decisions in malpractice cases.
"Managed care is under a very
fundamental attack in the judicial
system right now," said William G.
Schiffbauer, a Washington lawyer
who advises insurance companies
and employer health plans.
The issue in many of these cases
comes down to this: Does an H.M.O.,
by linking what it pays its doctors
with their success in holding down
costs, ignore the best interest of patients in a way that violates its legal
duty as defined by a federal law
governing employer-sponsored
health plans.
The legitimacy of financial incentives, and whether health plans have
a legal obligation to disclose them, is
at the heart of a number of recent
suits against big managed-care companies filed by prominent class-action lawyers. The H.M.O. industry
itself urged the Supreme Court to
resolve this matter, hoping that a
ruling in its favor would undermine
the class-action suits. The Supreme
Court has agreed to hear arguments
in the case in February, and a decision is expected by early summer.
The federal law is the same one
that has effectively barred state jury
trials and huge awards for punitive
damages in malpractice suits by
transferring most cases to federal
courts. A related question is whether
this will be changed.
Lawyers on both sides see the Herdrich case as a fundamental test of
the underpinnings of managed care.
Those in favor of the insurers warn
of dire consequences for health
maintenance organizations if the Supreme Court upholds the idea that
companies can be sued on this basis.
And insurance executives say that
financial incentives are a crucial
method of preventing wasteful practices and do not interfere with necessary care.
"The nation's employer-based
health care system simply cannot
function or indeed survive if every
treatment decision made while implementing a managed-care program is treated as a fiduciary decision," an industry group argued in a
brief in the Supreme Court case.
Managed-care executives said
they did not intend to let plaintiffs'
lawyers determine their policies.
"This is the way the industry has
worked for some years," said Richard Huber, chief executive of Aetna,
the biggest managed-care company.
"To allege that practicing according
to the norms of the industry is criminal strikes us as absurd."
Aetna is the defendant in six class-action and 40 other cases. Similar
class-action suits have been filed
against Humana, Cigna, United
Healthcare, Foundation Health Systems, PacifiCare Health Systems,
Kaiser Permanente, a number of
Blue Cross/Blue Shield plans and the
Prudential unit of Aetna.
Ms. Herdrich won $35,000 in damages in federal district court in Peoria, Ill., a paltry amount compared
with recent multimillion-dollar state
court awards. The judge rejected the
argument that her health plan had
not met its obligations under the
federal law. But an appeals court,
while not resolving the matter, ordered a trial on that issue in 1998.
Ms. Herdrich refused all requests
for interviews, her lawyer, James P.
Ginzkey, said. Dr. Pegram also did
not respond to requests for comment. L. J. Fallon, a lawyer for her
group, the Carle Clinic Association of
Urbana, Ill., said there had been no
clear signs of appendicitis at first,
and a sonogram did not seem appropriate until a mass in her abdomen
became apparent a week later.
Judge John L. Coffey of the federal
appeals court in Chicago suggested
in 1998 that doctors at Ms. Herdrich's
H.M.O. might have been caught in a
conflict of interest between safeguarding her health and protecting
their chances of getting a year-end
bonus as a reward for keeping down
medical costs.
"Where physicians delay providing necessary treatment, or withhold
administering proper care to plan
beneficiaries for the sole purpose of
increasing their bonuses," Judge
Coffey said, a managed-care company may be breaching a "fiduciary
duty" to serve its members and patients.
A three-judge panel voted 2 to 1 to
order a trial on the issue. The full
appeals court declined to review that
ruling, and lawyers for the managed-care industry persuaded the Supreme Court to take the case.
One widely accepted theory is that
market forces will ultimately result
in the best care at the lowest cost,
because health plans and providers
of care will compete to attract business. But Judge Coffey took a dim
view of such reasoning, writing,
"Market forces are insufficient to
cure the deleterious effects of managed care on the health care industry."
In a dissenting opinion, Judge Joel
M. Flaum said that he shared those
concerns, but that judges should not
"pre-empt legislative and regulatory
efforts."
Financial incentives are among a
weakening arsenal of cost-control
tools as managed-care companies
maneuver to calm criticism. A number of companies have eased requirements for previous approval of
medical treatments and for established external review boards that
can reconsider the denial of care.
Some lawsuits also made claims of
fraudulent marketing, accusing the
providers of advertising that their
care met high standards but not
making clear that financial incentives might undercut those standards. Some suits seek triple damages
under the federal antiracketeering
law, based on claims that the companies engaged "in a nationwide fraudulent scheme" to mislead the public
about the essential nature of their
business.
The same lawyers have filed suits
in state courts in California contending that the companies violated provisions of the state's business code.
The attacks may grow more intense. California, Georgia and Missouri have passed laws permitting
suits against the managed-care companies. A two-year-old Texas law
permitting such suits is being tested
in the courts. And the attorneys general of Connecticut and Missouri also
jumped in recently with separate
suits against managed-care companies.
In Washington this past October,
the House passed a bill that would
permit malpractice suits in state
courts against managed-care plans;
such suits could not, however, be
class actions. A House-Senate conference is expected to take up the House
measure this year, said John Stone, a
spokesman for Representative Charlie Norwood, a Georgia Republican
and a principal sponsor of the measure.
Richard F. Scruggs, the lead lawyer in several recent suits, is a Mississippi-based specialist in class-action suits who played a big role in
winning huge awards against tobacco companies in 1997 and 1998.
The dozens of class-action lawyers
in various managed-care suits include such well-known names as David Boies of Armonk, N.Y., who is
also assisting in the Justice Department's antitrust case against Microsoft; Ronald L. Motley of Charleston,
S.C.; John Eddie Williams of Houston; Fred Furth of San Francisco;
Russ Herman of New Orleans; and
Edith Kallas, of Milberg, Weiss, Bershad, Hynes & Lerach in New York.
In an interview, Mr. Scruggs predicted that the new lawsuits would
force managed-care companies to
agree to change their business practices in exchange for legal protection
against potentially ruinous suits.
Investors drove down the share
prices of H.M.O. companies when the
latest suits were filed in October,
which Mr. Scruggs interprets as adding to the pressure for a settlement.
In a brief for the Supreme Court,
insurance industry trade associations and lobbyists for employers
laid out the arguments the companies are likely to use there and elsewhere.
The brief was signed by the American Association of Health Plans, the
Health Insurance Association of
America, the United States Chamber
of Commerce and the Association of
Private Pension and Welfare Plans.
It said that doctors, when making
medical decisions, were not acting as
administrators and therefore were
not subject to the fiduciary-duty provisions of the Employee Retirement
Income Security Act, known as
Erisa, the federal law that governs
employer health plans and requires
that the plans act in the best interests of patients.
The Clinton administration, in a
brief by the Labor Department,
agreed with the industry argument.
But in December, 18 state attorneys
general urged the Supreme Court to
uphold the appellate bench's order
for a trial on whether Ms. Herdrich's
H.M.O. placed its own financial interests ahead of the interests of its
members.
More broadly, industry lawyers
said that if the door was opened wide
to malpractice suits against
H.M.O.'s, companies would have to
charge higher premiums, driving
away customers and adding to the 43
million people without insurance.
Taking another tack, the industry
argued that encouraging managed
care was a public policy legislated
and regulated by Congress and the
states. Changing such a policy should
be left to legislatures and to commercial decisions that reflect market forces, not decreed by courts.
Legal experts cautioned against
trying to predict how the Supreme
Court might resolve this issue. It
could shore up the Erisa shield, or it
could weaken it. The court could also
issue a narrow opinion without addressing larger policy issues.
Since the 1980's, the law has protected health plans by requiring that
most malpractice suits be heard in
federal courts, where damages are
strictly limited. But in a number of
recent cases, federal courts made
exceptions that permitted suits in
state courts.
A federal appeals court in Philadelphia ruled in 1998 that a New
Jersey couple had the right to bring
medical negligence charges in state
court against their H.M.O., doctor
and hospital. Steven and Michelle
Bauman blamed the plan when their
baby died in 1995, the day after Mrs.
Bauman and the baby were sent
home under a 24-hour maternity policy then in effect.
"The courts are human; they want
to be generous," said Clark Havig-hurst, a health law expert at Duke
University Law School.
But the outlook is murky for class-action cases. Legal experts say that,
for one thing, it may be difficult to
persuade judges that health plan
members have enough in common to
be certified as a class.
Lower courts ruled against class-action lawyers in two recent decisions. On Sept. 29, a federal district
judge in Philadelphia denied class-
action status in a suit accusing Aetna
of fraudulently advertising that its
primary concern was quality of care,
not cost controls. The judge said the
plaintiffs could not sue because they
had advanced "a vague allegation"
and failed to show that they had been
harmed.
On Dec. 1, a district judge in Houston denied a request for class-action
status in a suit against Nylcare that
also argued that advertising to consumers was misleading. The judge
suggested it was not clear whether
"a particular consumer saw a particular advertisement" and was misled by that advertisement or induced
by it to join a Nylcare H.M.O.
"What the Supreme Court says in
the Herdrich case will make a big
difference," said Peter D. Jacobson,
an associate professor of health policy at the University of Michigan's
School of Public Health.
