On June 12, two significant U.S. Supreme Court decisions - relating to HMOs and age discrimination in employment - were announced.

Pegram v. Herdrich

In Pegram v. Herdrich, the Supreme Court ruled that a for-profit HMO does not violate the federal Employment Retirement Income Act (ERISA) when its doctors who provide care also share in the profits as owners-administrators of the HMO. As a result, plan beneficiaries may not sue to force the administrators to repay the plan for the incentives.

The Court suggested, however, that a managed care plan might violate those rules if it does not disclose to patients their doctors' financial interest that may provide an incentive for them to deny or minimize care.

The Court left open the possibility that Congress could legislate otherwise, and it did not address the right of patients to sue HMOs or their doctors in state courts, if allowed by the law of a particular state.

The case before the Court was not a medical malpractice action, although its origins were in a malpractice case.

Illinois resident Cynthia Herdrich was a beneficiary of an employer health care plan, which provided care through Carle Clinic Association. Herdrich went to the HMO nine years ago after experiencing abdominal pain. When her HMO doctor found an inflamed mass in Herdrich's abdomen, the doctor did not order diagnostic procedures at a local hospital, but required Herdrich to wait 8 days for the procedure to be performed at an HMO facility 50 miles away. During that time, Herdrich's appendix ruptured, causing peritonitis.

Herdrich brought suit for medical malpractice in state court. The action was removed to federal court where she added a count under ERISA.

Herdrich pointed out that the HMO owners received year-end bonuses which represented a distribution of the HMO profits (difference between revenues and costs). But this particular HMO was owned and administered by the same doctors who treated patients. The result, she claimed, was a conflict inviting physicians to delay or withhold proper care for the sole purpose of increasing their bonuses.

Herdrich's ERISA count was based on 29 U.S.C. 1109(a), which provides that "any person who is a fiduciary with respect to a plan who breaches any of the [fiduciary] responsibilities" shall be personally liable to make good any losses caused by the breach and "restore to such plan any profits of such fiduciary...."

The district court separated the malpractice counts from the ERISA count. The malpractice action proceeded to trial and resulted in a $35,000 verdict for Herdrich, which was paid. The ERISA claim went up on appeal to the 7th Circuit, which held that plaintiff's claim stated a cause of action under the federal statute.

The Supreme Court reversed. Speaking for a unanimous Court, Justice David Souter declined to view the physician-owned HMO in this case as requiring a different standard than HMOs generally.

The key issue, Justice Souter stated, is not whether the HMO physicians are fiduciaries. A person may be a fiduciary when involved in one activity, and not when performing a different function. ERISA requires only that the physician-owners "wear the fiduciary hat when making fiduciary decisions."

When making decisions regarding diagnosis and treatment for a patient, the doctor is not performing a fiduciary function. Nor did Congress intend the HMO to be treated as a fiduciary when it makes determinations through its physicians in which medical decisions are mixed with eligibility decisions (whether a treatment is covered). This is the type of decision complained of by Herdrich.

Because the likely defense to such a claim would be that the physician adhered to standards of reasonable and customary medical practice, the end result would be a federal malpractice claim which duplicates the cause of action already available under state law. Souter remarked, "we can be fairly certain that Congress did not create fiduciary obligations out of concern that state plaintiffs were not suing often enough."

To rule otherwise, Souter argued, "federal judiciary would be acting contrary to the congressional policy of allowing HMO organizations if it were to entertain (a claim) portending wholesale attacks on existing HMOs solely because of their structure." This policy maintains the fact that HMOs operate for profit, and have since their creation - aided by legislation passed by Congress in 1973.

The Court concluded that HMO was not performing a fiduciary function in making decisions such as that involving Herdrich. Plaintiff therefore failed to state a claim under ERISA.

AAJ and its allies continue to work for the enactment of a real Patients' Bill of Rights, such as that passed by the U.S. House and now stalled in a House-Senate conference committee, which would eliminate the ERISA preemption of state causes of action against managed care insurers' delay or denial of care which results in injury or death.

For the decision in Pegram v. Herdrich, see: http://supct.law.cornell.edu/supct/html/98-1949.ZS.htm.

Reeves v. Sanderson Plumbing Products

The Supreme Court, in Reeves v. Sanderson Plumbing Products, made it easier for workers who suffer discrimination to sue their employers.

The Court unanimously held that if an employer lies about the reason for a firing, the jury can simply infer that the real reason was discrimination. In other words, the plaintiff doesn't have to show direct evidence of discriminatory intent. The Court ruled that the Appeals Court erred in reversing the trial court jury's finding of age discrimination.

Writing on behalf of the Court, Justice O'Connor stated that "a plaintiff's prima facie case, combined with sufficient evidence to find that the employer's asserted justification is false, may permit the trier of fact to conclude that the employer unlawfully discriminated."

In its amicus brief to the Court, AAJ argued that the appellate court's decision usurped the jury's constitutional role as factfinder.

The Court agreed, emphasizing that matters of weight and credibility of evidence are reserved for the jury.

A court must accept all reasonable inferences in favor of the verdict winner and may not credit defense evidence that the jury is not required to believe, the Court stated. That is, the court should give credence only to the movant's evidence "that is uncontradicted and unimpeached, at least to the extend that the evidence comes from disinterested witnesses." In this case, "the Court of Appeals impermissibly substituted its judgment concerning the weight of evidence for the jury's."

For the decision in Reeves v. Sanderson Plumbing Products, see: http://supct.law.cornell.edu/supct/html/99-536.ZS.htm.