American Journal of Law & Medicine

Pegram's regress: a missed chance for sensible judicial review of managed care decisions.

I. INTRODUCTION

Managed care was designed to bring stability and balance to healthcare delivery in the United States, but its experience in the legal system has involved only moderate stability and very little balance. There has been a trend toward broad deference to the industry, so that managed care organizations (MCOs) are largely immune from liability. (1) At the same time, some courts have suggested that the entire managed care model rests on sketchy legal ground. (2) Meanwhile, commentators have disagreed on such fundamental questions as whether legal disputes arising under managed care should be resolved according to contract law or tort law. (3) Moreover, the extent to which the Employee Retirement Income Security Act of 1974 (ERISA) (4) governs, or moots, patients' claims against MCOs has never been entirely clear--and because ERISA controls a vast number of health insurance plans, (5) this legal issue is extremely significant.

Given this atmosphere of uncertainty and debate, many observers awaited anxiously--in every sense of that word--the Supreme Court's decision in Pegram v. Herdrich. (6) The plaintiff in that case, Cynthia Herdrich, had complained of abdominal pain to her physician, Lori Pegram, who practiced under Herdrich's managed care plan with Carle Clinic Association. (7) Pegram noticed a large inflammation, but instead of ordering an immediate ultrasound test at a local hospital, decided to arrange for the test to be performed eight days later at a more distant hospital overseen by Carle. In the interim, Herdrich's appendix ruptured, causing peritonitis.

Herdrich sued Carle and Pegram in state court for medical malpractice and fraud. After the defendants removed the case to federal court and successfully asserted that ERISA preempted Herdrich's fraud claims, Herdrich added a new claim under ERISA. She argued that she was not provided with an ultrasound diagnosis in a timely manner because the plan's financial incentives gave physicians a financial stake in limiting care, thus breaching the plan's and the physician's fiduciary duty to act in the patient's best interests. Herdrich won a jury award of $35,000 on her malpractice claims, but the district court dismissed her ERISA claim. She appealed, and the Seventh Circuit Court of Appeals reversed and remanded for trial, rejecting Carle's argument that allowing patients to challenge the use of financial incentives would destroy managed care. (8) Judge Flaum's vigorous, and rigorous, dissent (9)--and later, Judge Easterbrook's even more vehement dissent from denial of a rehearing en banc (10)--practically begged the Supreme Court to review and overturn the decision. The Court obliged, granting certiorari (11) and ultimately reversing the Court of Appeals. (12)

Justice Souter's opinion, written on behalf of a unanimous Court, offers preliminary discussions as to three categories of relevant background, and then analyzes the legal question before the Court. The first background discussion relates to the managed care industry. The opinion describes how managed care operates and outlines its rise as a common model for American healthcare delivery. The opinion then notes the specific nature of the Carle HMO, (13) in which Herdrich was enrolled, but finds that it would be inappropriate to make a specific judgment "purporting to draw a line between good and bad HMOs," (14) as "courts are not in a position to derive a sound legal principle to differentiate an HMO like Carle from other HMOs." (15)

The second background discussion deals with the relevant law, ERISA, as elucidated by underlying trust-law principles and as interpreted by prior Court decisions. ERISA defines "fiduciary" to include someone who acts as an administrator for a plan; (16) ERISA fiduciaries are required to act "solely in the interest of the participants and beneficiaries" of the plan. (17) The Supreme Court previously had read this language to incorporate the duties imposed on fiduciaries under the common law of trusts. (18) The Pegram opinion points out, however, that "Beyond the threshold statement of responsibility ... the analogy between ERISA fiduciary and common law trustee becomes problematic." (19) The ERISA fiduciary may have a more complex relationship with beneficiaries than would a traditional trustee; for example, the fiduciary may also be the beneficiaries' employer. Partly for this reason, ERISA's "fiduciary" label does not truly relate to persons so much as to acts. When and "to the extent" (20) that a person engages in specified acts, such as plan administration, ERISA's fiduciary duties will apply; in other situations, they will not.

The final background discussion focuses on the nature of Herdrich's claim, which the opinion describes as "difficult to understand." (21) Herdrich did not base her claim on any specific act or decision. (22) Rather, Herdrich asserted that Carle's general incentive scheme created an inherent conflict of interest that amounted to a breach of fiduciary duty.

All this left the Court, therefore, with two questions to answer: which specific acts was Herdrich alleging to be fiduciary acts under ERISA, and was that allegation accurate? The Court characterizes the decisions in question as "mixed" decisions, involving elements of both plan administration and patient care, and concludes that "Congress did not intend Carle or any other HMO to be treated as a fiduciary to the extent that it makes mixed eligibility decisions acting through its physicians." (23) The Court concludes that Pegram's decision regarding Herdrich's care was not fiduciary and therefore did not fall within ERISA's ambit; accordingly, Herdrich's claim must be rejected.

We have argued elsewhere that, as a general matter, a legal regime rooted in the concept of fiduciary duties might provide a useful model for analyzing managed care disputes. (24) In doing so, we noted, but did not explore, the possibility of reading ERISA to employ such a model. (25) Part II of this essay argues that a proper interpretation of ERISA does place fiduciary duties at the heart of its framework for judicial review, and that Pegram was therefore wrongly decided. In doing so, Part II explains the practical and conceptual difficulties that may have led the Pegram Court to hold as it did.

Part III discusses the negative implications of Pegram. Essentially, the Supreme Court missed an opportunity to enable the use of ERISA to resolve managed cafe's serious allocative tradeoffs using a fiduciary-duty model of the kind we have proposed. Indeed, the decision effectively eliminates the possibility that federal courts can, or will, review MCOs' decisions about such tradeoffs at all, as Pegram found that such decisions do not fall within ERISA.

Part IV considers what, if anything, can be done after Pegram to maintain a balanced and significant role for the government, specifically the courts, in overseeing MCOs' decisions. Most obviously, because Pegram resolved only the federal ERISA question, there remains the possibility of using substantive state law--such as state common law regarding fiduciary duties--to develop a model for sound judicial review. In fact, because ERISA's remedies are extremely limited vis-a-vis the remedies that might be available under state law, (26) it may well be more desirable for such review to develop under state law--assuming, that is, that ERISA does not preempt states' potential to develop such models. Part IV also explores other methods that might enable development of a fiduciary-duty-based model such as we have proposed.

II. PITFALLS

It is hard to argue with Pegram's direct judgment rejecting Herdrich's argument on appeal. Before the Supreme Court, Herdrich put forth a claim that challenged the entire HMO structure rather than any specific decision. (27) Such a generalized allegation clearly does not make out a legitimate claim. It might make sense to argue that a particular decision reflected unlawful disloyalty or lack of care, but Herdrich's claim would require a determination that any mixed decision under Carle's scheme was a breach of fiduciary duty per se. Under such a broad rule, any decision to deny, delay or limit care--even if completely medically justified--would potentially subject a physician or plan to liability. (28)

Although the Pegram Court quite possibly reached the right final disposition--a reversal of the Seventh Circuit's holding in Herdrich's favor--various aspects of its underlying reasoning are questionable. Section II.A contends that the Court failed to apply ERISA's own definition of what decisions are fiduciary in nature. Instead, the Court looked beyond ERISA to general trust-law principles, doing so in a way that contravened both ERISA and a previous Court decision. Section II.B argues that, although the facts may support the ultimate judgment in Pegram, the Court went further than was necessary to reach that result, thereby--perhaps inadvertently--addressing important but peripheral issues without exploring their implications fully.

A. WHAT ACTS ARE FIDUCIARY? NEGLECTING ERISA AND VARITY

Normally, the law imposes fiduciary duties on certain actors who stand in a particular relation to someone else. For example, agents have a fiduciary duty to their principals, (29) and lawyers have a fiduciary duty to their clients. (30) But as noted above, because ERISA plan administrators sometimes have complicated relationships with plan participants, some aspects of which do not entail fiduciary obligations, ERISA imposes fiduciary duties on the performance of certain enumerated actions. Specifically, ERISA says that acts are fiduciary when they involve exercise of "discretionary authority or discretionary responsibility in the administration of a plan." (31)

Accordingly, in Pegram, the Court correctly noted that the first step in addressing Herdrich's claim for breach of fiduciary duty was to decide whether the acts she challenged were subject to ERISA's fiduciary rules in the first place. In ascertaining which managed care decisions should be considered fiduciary for ERISA purposes, the Court first drew a distinction between two types of decisions that managed care entities must routinely make:

 
   What we will call pure "eligibility decisions" turn on the plan's coverage 
   of a particular condition or medical procedure for its treatment. … 

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