Managed Care, Conflicts of Interest, and Quality

By Gostin, Lawrence O. | The Hastings Center Report, September 2000 | Go to article overview

Managed Care, Conflicts of Interest, and Quality


Gostin, Lawrence O., The Hastings Center Report


The Supreme Court case of Pegram v. Herdrich,[1] decided in June 2000, refocused the debate on the nature of the managed care system in America. The legal issue before the Court was whether beneficiaries of an employer-sponsored health care plan can sue the plan on the theory that, in failing to provide adequate health care to its members, the plan breached its fiduciary duty under the Employee Retirement Income Security Act (ERISA). The facts of Pegram highlight the extent to which managed care organizations (MCOs) provide economic incentives for physicians to provide less care. In particular, physicians may receive greater compensation for fewer hospitalizations, diagnostic tests, and referrals to specialists.

The plaintiff in Pegram suffered a ruptured appendix as a result of her physician's decision that an inflamed mass in her abdomen didn't constitute an emergency. Her physician's medical group was structured to "reward" doctors for cutting costs by passing on the funds saved from such procedures in the form of a year-end bonus. The plaintiff argued that this plan created a built-in conflict of interest and that the financial incentives to withhold care violated ERISA.

The Supreme Court held that no federal cause of action exists under ERISA on the theory that the MCO, through its treating physician, limited medical treatment to the employee's detriment in order to increase physician bonuses for reducing costs. In particular, the Court found that mixed medical treatment and health plan eligibility decisions made by MCOs acting through their physicians are not fiduciary decisions under ERISA. The result is that MCOs are now virtually immune from federal judicial review even if they provide the most flagrant economic incentives not to provide quality care.

I am an advocate for properly run managed care because cost is an important factor in the health care system. Cost-consciousness can enhance the population's health by eliminating unnecessary care and making more resources available to those in need. Reducing medical costs reduces premiums, thereby increasing access to health care.

However, there are powerful ethical reasons for requiring that MCOs, like other businesses, be held legally accountable for their actions.[2] Accordingly, there should be a judicial process to sort out which economic incentives create conflicts of interest that undermine the provision of quality medical services. As the Court itself recognized, Dr. Pegrams decision to wait before getting an ultrasound, and her insistence that the ultrasound be done at a distant facility owned by the HMO, "reflected an interest in limiting the HMO's expenses, which blinded her to the need for immediate diagnosis and treatment."

While cost-consciousness in managed care is important, there is a line beyond which MCOs cannot go without causing harm, or at least the perception of harm. Consider two problems that can result from a conflict of interest. The first involves treatment decisions by physicians and the second involves physician advice. MCOs provide structural incentives to deny care both at the point of delivery (that is, treatment decisions) and at the point of entry (coverage decisions). As explained above, physicians' compensation may be substantially increased in exchange for providing less treatment. Administrators' determinations of coverage for "medically necessary" treatment may be made with an eye toward their own compensation. Those directly responsible for determining coverage and recommending treatment have a clear economic incentive to do less. The problem is exacerbated in health care plans owned and operated by physicians. In such cases, the physicians own the health care plan, treat patients, decide whether to pay claims, and receive year-end bonuses based on cost savings. The decisionmaking process in these kinds of managed care systems is thoroughly entangled.

All parties agree that such compensation arrangements provide an incentive for cost-conscious behavior and create conflicts of interest. …

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