Employer Sponsored Health Benefit Plans under ERISA after Pegram V. Herdrich: The Fiduciary Duty Argument and Mixed Eligibility versus Treatment Decisions

By Karns, Jack E. | Journal of Law and Health, Spring 2000 | Go to article overview

Employer Sponsored Health Benefit Plans under ERISA after Pegram V. Herdrich: The Fiduciary Duty Argument and Mixed Eligibility versus Treatment Decisions


Karns, Jack E., Journal of Law and Health


I. INTRODUCTION AND BACKGROUND

On June 12, 2000, a unanimous Supreme Court quietly rendered what will almost certainly become a landmark decision in healthcare law relative to the interpretation and application of fiduciary duties in an Employer Sponsored Benefit Plan [hereinafter "ESBP"] as regulated by the Employee Retirement Income Security Act of 1974 [hereinafter "ERISA" or the "Act"]. (2) In Pegram v. Herdrich (3) the Court rejected patient Herdrich's claim that a cost containment plan whereby annual payments were made to physicians rose to the level of imposing a fiduciary duty on an HMO pursuant to ERISA. (4) Such a duty would require the providing company to manage the ESBP funds in accordance with the statute and traditional common law principles. (5) Carle Company, a large Health Maintenance Organization, maintained a policy of making annual kickback payments to physicians who cordoned costs at a pre-determined level. (6) The corporation's rationale was that the payments were an incentive to keep costs down, the very essence of the HMO industry. (7)

Plaintiff Herdrich had been treated by Doctor Pegram who failed to make a referral to a specialist despite patient complaints of severe abdominal pains. Medication was prescribed and the patient sent home. (8) Eventually, Herdrich suffered a ruptured appendix along with the typical resulting complications. (9) She sued Carle Company under the theory that the kickback payments violated the ESBP clause of the ERISA statute in that the company stood as a fiduciary of the funds over which it presided. (10) Specifically, Section 1109(a) of ERISA provides that:

   Any person who is a fiduciary with respect to a plan who breaches any of
   the responsibilities, obligations, or duties imposed upon fiduciaries by
   this subchapter shall be personally liable to make good to such plan any
   losses to the plan resulting from each such breach, and to restore to such
   plan any profits of such fiduciary which have been made through use of
   assets of the plan by the fiduciary, and shall be subject to such other
   equitable or remedial relief as the court may deem appropriate, including
   removal of such fiduciary. (11)

The monies in question had been collected from the employer and the worker, and as such, Herdrich claimed that Carle Company had a higher duty to insure their protection and proper use. (12) She also filed a negligence malpractice claim against the individual physician, Dr. Pegram. That suit eventually resulted in a jury verdict in favor of Herdrich with monetary damages. (13) Carle Company, on the other hand adamantly stood by its position that the ESBP did not impose any fiduciary obligation relative to its handling of employee health care plan premiums. (14) The issue as to whether ERISA preempted the claim against the company was not the focal point of the Circuit level dispute regardless of its growing importance amongst members of the managed care industry to keep states and class litigants from initiating any type of legal action comparable to that seen recently in the tobacco cases. (15)

Previous to the issuance of the Court's opinion in June 2000, the author prepared an article based on the Seventh Circuit's opinion holding in favor of Herdrich. (16) That article agreed in every respect that the managed care industry is insufficiently controlled in this country, or in the alternative, is controlling health care costs at the expense of one patient at a time. (17) More specifically, arguments were made supporting the Seventh Circuit's decision as to the fiduciary application of ERISA against the Carle Company. (18) Although accepted for publication prior to the Supreme Court's opinion hand-down date, the article was not available for circulation until subsequent to June 2000. (19)

Accordingly, this Article is a rebuttal to the Supreme Court's opinion in Pegram v. Herdrich on the strength of two primary arguments. …

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