NCPA - National Center for Policy Analysis

Supreme Court Limits Managed Care Liability

June 16, 2000

Last year, a group of plaintiffs' lawyers calling themselves the REPAIR team filed a massive number of lawsuits against managed care organizations. Like the tobacco and gun suits, say analysts, these class action cases strike at the heart of how an industry does business.

The suits claim managed plans violate two federal laws -- ERISA, the federal law governing employer sponsored health plans, and RICO, the federal racketeering law used against mob family -- by failing to disclose financial incentives to physicians in their marketing.

  • Managed care organizations lower costs by giving financial incentives in the form of profit sharing and bonuses to physicians to ration care and penalize them for excessive use.
  • Federal ERISA law requires that whoever administers a health plan, whether the employer or a managed care group, has to administer the plan for the benefit of the employees, called a fiduciary duty.
  • However, ERISA law only requires this fiduciary duty with regard to discretionary parts of the plan such as benefits -- not the plan's design.

On June 12, 2000, the U.S. Supreme Court ruled on a similar case. In Pegram v. Herdrich plaintiffs argued that a managed care plan member could sue the organization under ERISA because financial incentives were given to physicians to cut costs which resulted in injury. The Court ruled unanimously plaintiffs did not have that right, saying that would allow "wholesale attacks on [them] solely because of their structure."

This decision further diminishes the likelihood of a win by the REPAIR team. Legal experts warn that such cases are unlikely to win against managed care under RICO alone. However, the ruling does not prevent suits under state law.

Source: Richard Raskin, "The Legal Assault on Managed Care: HMO Class Actions and Herdrich," May 29, 2000, BNA's Health Care Policy Report, and Pegram v. Herdrich, United States Supreme Court, June 12, 2000.


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