Managed Care Liability for Breach of Fiduciary Duty after Pegram V. Herdrich: The End of Erisa Preemption for State Law Liability for Medical Care Decision Making?

Abstract

When the Supreme Court announced its unanimous verdict in Pegram v. Herdrich, a case concerning the rights of a plaintiff to sue an HMO in federal court under the Employee Retirement Income Security Act (ERISA), the media haled it a victory for the managed care industry. The plaintiff, Cynthia Herdrich, alleged that the HMO bribed its physicians with a financial incentive plan that induced them to deny her needed care to save the plan money. She sued the HMO for breaching its ERISA fiduciary duty. In finding for the defendant HMO, the Court held that the HMO was not the ERISA plan and that it's medical treatment decisions were not governed by ERISA fiduciary duty provisions. HMO stocks immediately soared because the court's opinion took notice that while there are risks associated with rationing medical care; . . . no HMO organization could survive without some incentive connecting physician reward with treatment rationing and that the court was not prepared to adjudicate the wisdom of medical care rationing.

While Pegram is the first decision by the Supreme Court to directly consider a plaintiff's claim that the routine business practices of the HMO industry violate ERISA standards for fiduciary conduct, we question whether the stock market analysts are correct that the Supreme Court has immunized HMO business practices. It is the premise of this article that in doing so, the court also removed the ERISA preemption bar to state law claims for medical malpractice and breach of state fiduciary law. Paradoxically then, although the defendant HMO in Pegram won, the managed care industry lost.

Keywords: managed care, HMO, ERISA, malpractice, torts, insurance law, fiduciary duty

JEL Classification: K2, K4, K32