Academic journal article American Journal of Law & Medicine

Pegram's Regress: A Missed Chance for Sensible Judicial Review of Managed Care Decisions

Academic journal article American Journal of Law & Medicine

Pegram's Regress: A Missed Chance for Sensible Judicial Review of Managed Care Decisions

Article excerpt


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, dissent9-and later, Judge Easterbrook's even more vehement dissent from denial of a rehearing en banc10-practically begged the Supreme Court to review and overturn the decision. The Court obliged, granting certiorari11 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. …

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