LIABILITY OF
MANAGED CARE PLANS FOR MEDICAL MALPRACTICE
& CREDENTIALING/QA/UM EXPOSURE
(CONTINUED)
by Brock
D. Phillips
Introduction
Theories
of Malpractice Liability Arising Directly Out of Plan Activities
Indirect
or Vicarious Liability of Plan For Malpractice of Panel Members
End
of ERISA Preemption for Claims of Malpractice
Liability
Under ERISA For Treatment Disincentives or Failure to Disclose Treatment Disincentives
Strategies
to Reduce Liability for Malpractice Claims
Suits
by Providers Against Plans for Wrongful Exclusion Expulsion
5. Liability
Under ERISA For Treatment Disincentives or Failure to Disclose Treatment Disincentives
In early 1997 the eighth
circuit shocked followers of managed care law with its decision in Shea v. Esensten.
In that case plaintiff Dianne Shea, the widow of decedent Patrick Shea sued
Medica, an HMO
provided to Mr. Shea through his employment at Seagate Technologies. Mr. Shea had various
cardiovascular symptoms and complaints, but his primary care physician repeatedly
reassured Shea that no referral to a cardiologist was necessary. Shea could not see a
cardiologist without the consent of his gatekeeper primary care physician. Shea died of a
heart attack shortly after his request to be referred to a cardiologist was turned down by
his primary care physician. Pleaded in the complaint are allegations that Medica’s
contracts with its primary care physicians provided financial incentives not to refer
patients to specialists.
Medica invoked ERISA
preemption of the Shea complaint and removed the matter to federal court, where the case
was later dismissed for lack of an actionable ERISA claim. Shea appealed to the third
circuit, urging that her suit should not be deemed preempted by ERISA, and even if it is,
that she stated claims actionable under ERISA.
The third circuit ruled
(somewhat reluctantly) that ERISA does govern Shea’s claim, but went on to hold that
Ms. Shea had framed a legitimate claim against the plan for failing to disclose its
financial incentives designed to discourage referrals to consultants. The court found that
the plan had a fiduciary duty to disclose such financial incentives to all plan
participants in its plan documents. The ruling was petitioned to the U.S. Supreme Court,
which declined to grant certiorari.
It seems certain that an
enormous number of managed care plans have financial incentives regarding referrals (and
perhaps other relevant care issues) which, under Shea, they are required to
affirmatively disclose to all plan members in the plan documents. It seems equally certain
that this newly announced fiduciary duty is presently universally breached by plans across
the country. This state of affairs invites smart and aggressive plaintiffs attorneys to
bring claims based upon Shea for breach of fiduciary duties against plans which
have not disclosed plan financial incentives to providers as required by Shea.
Two cases have come down
since Shea that build on this issue of liability for failure to disclose treatment
disincentives or liability for the very existence of such incentives. The first such case
is Herdrich v. Pegram. In this case the 7th Circuit held that a
physician owned HMO may be sued for breach of fiduciary duty under ERISA for adopting a
financial incentive structure which rewarded the physician-owners for limiting medical
treatment, tests and referrals for the HMO’s subscribers.
Patient was enrolled in a
physician owned HMO and brought suit related to allegations of delayed diagnosis of
appendicitis. She suffered a ruptured appendix and consequent peritonitis arising out of
an alleged 8 day delay in her diagnosis. The district court granted summary judgment to
the HMO, but the circuit court reversed, holding that the plaintiff had stated a viable
cause of action under ERISA for breach of fiduciary duty. The court observed that ERISA
requires plan fiduciaries to act solely in the interest of plan beneficiaries. It held
that the HMO’s physician owners were plan fiduciaries as they had the exclusive right
to control every aspect of the HMO’s governance, including resolution of claims for
benefits made by subscribers. The court ruled that the plaintiff had adequately pled a
breach of fiduciary duty by alleging that the HMO’s financial incentive structure
created a conflict of interest which encouraged the HMO’s physician owners to
maximize their incomes by limiting subscribers’ medical treatment, testing and
referrals.
This decision builds on
the 8th Circuit case of Shea v. Esensten. It moves one step further by
stating that such a scheme in the context of a physician owned HMO like the instant one
was per se a breach of fiduciary duty, regardless of whether the scheme was disclosed. For
a contrary view see below.
Trial counsel for
plaintiff reports that the defendants moved for reconsideration by the 7th
Circuit; the motion was ultimately denied. The HMO has retained new appellate counsel who
have indicated they will seek certiorari in the U.S. Supreme Court on the case.
The second post-Shea
case of interest is Ehlmann v. Kaiser Foundation Health Plan. In that case a
U.S.D.C. judge in Texas granted dismissal to multiple health plans which were all named as
defendants in a lawsuit charging the plans with breach of fiduciary duty for not
disclosing physician compensation arrangements. Plaintiffs conceded that there is no
express duty under ERISA to disclose provider compensation schemes, but argued that a duty
to do so is implied under ERISA’s fiduciary duties. The court rejected this argument.
This ruling seems in conflict with the 1997 Shea v. Esensten decision out of the
eighth circuit. Interestingly, the opinion of the district court judge does not cite or
address Shea or Herdrich. Trial counsel report that Shea was
extensively briefed to the court. The case is on appeal to the 5th Circuit.
The attorneys who
represented the plaintiffs in the Ehlmann case have filed a new action invoking the
Texas Managed Care Liability Act. Filed in March of 1999, the case of Dudley v.
Hardwick, M.D. is filed in Texas state court in Tarrant County. The case charges that
financial disincentives to treatment caused Dr. Hardwick to fail to properly manage Ms.
Dudley’s on-going breast cancer.
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