HMOs Protected From Suit by Patients for Breach of Fiduciary Duty Under the Employee Retirement Income Security Act of 1974 (ERISA)

Are treatment decisions made by a health maintenance organization (HMO), acting through its physician employees, fiduciary acts within the meaning of ERISA? In a decision issued on June 12, 2000 the United States Supreme Court held that they are not. In Pegram v. Herdrich, a patient filed an ERISA claim against her HMO as the result of a physician’s failure to order a diagnostic test, in a timely manner, that could have prevented the patient’s appendix from rupturing. The patient alleged that an HMO incentive plan which rewarded her physician for limiting the number of tests ordered for patients was, in fact, a breach of the HMO’s fiduciary duty under ERISA.

The Supreme Court did not agree. It was the Court’s thinking that Congress did not intend HMOs to be treated as a fiduciary when making mixed eligibility and treatment decisions acting through its physicians and that no HMO organization could survive without some incentive connecting physician reward with treatment rationing. In fact, when Congress provided for the fiduciary responsibility under ERISA, it focused on a fiduciary’s financial decisions in such matters as pension plans and financial management.

The Court thus concluded that claims such as those raised by the patient were not within the intent of a fiduciary’s duty under ERISA. The Court addressed the issue as follows: The Judiciary has no warrant to precipitate the upheaval that would follow a refusal to dismiss Herdrich’s ERISA claim.

The fact is that for over 27 years Congress has promoted the formation of HMO practices. If Congress wishes to restrict its approval of HMO practice to certain preferred forms, it may choose to do so. But the Federal Judiciary would be acting contrary to the Congressional policy of allowing HMO organizations if it were to entertain an ERISA fiduciary claim portending wholesale attacks on existing HMOs solely because of their structure, untethered to claims of concrete harm.

In conclusion, it is patently clear that the Supreme Court intended for the legislature, "...with its preferable forum for comprehensive investigations and judgments of social value, such as optimum treatment levels and health care expenditures", to grapple with this issue. Currently, legislation is pending in more than 30 states, including New Jersey, which would permit patients to sue managed care organizations for denying treatment to patients.