NCPA - National Center for Policy Analysis

Probing The Fiduciary Duty Of HMOs

February 22, 2000

Tomorrow, the U.S. Supreme Court will consider a case that health maintenance organizations (HMOs) claim will threaten their very existence if the plaintiff wins. At the heart of the issue is the concept of "fiduciary duty."

The plaintiff, Cynthia Herdrich, claims that the doctor-owners of her HMO breached their fiduciary duty to act solely in the interests of plan patients, as required under the 1974 Employee Retirement Income Security Act (ERISA).

  • In 1991, Herdrich went to her managed-care facility, complaining of severe abdominal pains.
  • Although her condition worsened during the ensuing days, her doctors didn't schedule tests for another eight days -- during which her appendix burst and she developed a life-threatening infection.
  • She contends her tests were delayed so they could be done at the plan's affiliated hospital, rather than at another hospital which could have done them sooner.
  • She now charges that because the doctors owned the health plan and paid themselves bonuses based on cost savings, they had a huge conflict of interest.

A U.S. district court in Illinois ruled against her in 1997. But the Seventh U.S. Circuit Court of Appeals in Chicago subsequently found in her favor. The opinion said: "It is not unrealistic to assume that the doctors rendering care under the Plan were swayed to be most frugal when exercising their discretionary authority to the detriment of their membership."

Health-care industry representatives fear that if she prevails, the decision would greatly expand the number of people deemed to be fiduciaries -- and thus expand the number and scope of lawsuits.

Source: Robert S. Greenberger, "Case Spotlights HMO Fiduciary Duty," Wall Street Journal, February 22, 2000.


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