U.S. Supreme Court Grants Review in Two Health Law Cases


© 1999 - Haynes and Boone, LLP

It is early in the 1999 Term for the U.S. Supreme Court and already the Court has granted writs of certiorari in two high-profile cases.  One case involves the question whether common financial incentives typically provided by HMOs and other managed care organizations might violate the federal Employee Retirement Income Security Act (ERISA).  The second case will consider whether Medicare payments to a hospital for services provided to Medicare patients qualify as "benefits" for purposes of the United States Criminal Code, which prohibits theft or bribery concerning programs that receive federal benefits.

1.  Managed Care Financial Incentives

Cynthia Herdrich obtained health care coverage from a physician-owned and -operated HMO through her husband's employer.  On March 1, 1991, she was examined by an HMO physician after she complained of pain in the midline area of her groin.  Six days later her physician discovered an inflamed mass in her abdomen.  Herdrich was then scheduled for a diagnostic ultrasound procedure to be performed eight days later at a clinic operated by the HMO more than 50 miles away, even though the diagnostic procedure could have been performed at a local hospital in her hometown.  During the eight-day delay, Herdrich's inflamed appendix ruptured, resulting in peritonitis.

Herdrich sued -- and ultimately won a $35,000 judgment -- for her physician's  medical malpractice.  Her state-law fraud claims against the HMO and the physicians' group practice that owns the HMO were deemed to be pre-empted by ERISA, and she was given an opportunity to replead her claims against the HMO and the physicians in straightforward ERISA language.  In this amended count, Herdrich asserted that the physicians were "fiduciaries" within the meaning of that term in ERISA, and that they had breached their fiduciary duty to her as a plan beneficiary.  Specifically, she asserted that the physician group had "the exclusive right to decide all disputed and non-routine claims under the Plan," and that the physicians "exercise discretionary authority and discretionary control of claims management, property and asset management, and administration of the Plan."  According to this count, the defendants breached their fiduciary duty to her because of financial incentives that encouraged the physicians to minimize (i) the use of diagnostic tests, (ii)  the use of facilities not owned by the physician group, and (iii) the use of emergency and nonemergency consultation and referrals to noncontracted physicians.

The trial court dismissed the amended ERISA count on the ground that HMO physicians are not "fiduciaries" of an ERISA plan as that term is defined in the statute.  On appeal, however, the United States Court of Appeals reversed and remanded for a trial on the amended ERISA claim.  The court relied on the statutory definition of fiduciary, which states that "a person is a fiduciary with respect to a plan to the extent (i) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority of control respecting management or disposition of its assets . . . or (iii) he has an discretionary authority or discretionary responsibility in the administration of such plan."  Relying heavily on the fact that the HMO's "board of directors consisted exclusively of the Plan physicians who were thus in control of every aspect of the HMO's governance, including their own year-end bonuses, [and] had the exclusive right to decide all disputed and nonroutine claims."  On those facts, plaintiff's allegations that the defendants' incentive system depleted plan resources so as to benefit physicians to the detriment of their patients entitled her to a trial.

On September 28, 1999, the Supreme Court agreed to review the Seventh Circuit's decision.  Pegram v. Herdrich, U.S. No. 98-1979.  The question accepted for review is: "Do health maintenance organization and its physicians breach fiduciary duty under Section 404(a)(1) of ERISA by implementing managed care program in which physicians receive financial incentives to provide medical care to HMO's enrollees in cost-effective manner?"

Click on the highlighted links to read the Seventh Circuit's original panel opinion (including a strong dissent by Judge Flaum), and the denial of rehearing, which includes a stinging dissent by Judge Easterbrook.

2.  Federal Crimes of Theft or Bribery Involving Programs that Receive Federal "Benefits"

Federal law makes it a crime for an agent of an organization to embezzle or accept a bribe worth $5,000 or more if the organization "receives, in any one year period, benefits in excess of $10,000 under a Federal program involving a grant, contract, subsidy, loan, guarantee, insurance, or other form of Federal assistance."  18 U.S.C. § 666(a)-(b).  In U.S. v. Fischer, the U.S. Court of Appeals for the Eleventh Circuit affirmed the conviction of Jeffrey Allan Fischer on thirteen counts, including two counts under section 666 and a related conspiracy count.

The facts of the case were that Fischer paid a $10,000 bribe to the chief financial officer of the West Volusia Hospital Authority and that the CFO in turn approved a $1.2 million loan by the hospital authority to a company owned an controlled by Fischer.  The loan was a questionable one, at best, and the government established that the loan constituted a fraud on the hospital authority.

The key question on appeal was whether the hospital authority received "benefits in excess of $10,000 under a Federal program."  The court of appeals held that it did -- in the form of $10-15 million in Medicare payments to two hospitals owned and operated by the hospital authority in 1993, the year the fraud and bribery took place.  The Court of Appeals held that it was irrelevant for purposes of section 666 whether the "benefits" took the form of direct payments from the federal government or the assignment of payments by Medicare beneficiaries.  The Eleventh Circuit's holding directly conflicts with the decision of the Tenth Circuit, handed down 19 days later, in U.S. v. LaHue.  The court in LaHue looked beyond the plain meaning of section 666, which it found to be ambiguous, and reviewed the legislative history of the statute.  On the basis of that review, the Tenth Circuit concluded that section 666 was concerned only with preventing the diversion of federal funds out a federal programs and away from intended beneficiaries.  Once the "benefits" are received by the actual beneficiaries -- the patients or their assignees -- the purpose of section 666 has been fulfilled.  By contrast, the Eleventh Circuit held that the plain meaning of the statute covered precisely the situation presented in the Fischer case, even though the fraud and the bribery occurred with respect to hospital funds already received from Medicare.

The Supreme Court granted review on November 1 in Fischer v. U.S., U.S. No. 99-116, presumably to resolve the conflict between the Eleventh and Tenth Circuits.  Click on the highlighted links to read the Eleventh Circuit's decision in Fischer and the Tenth Circuit's opinion in LaHue.

Both cases will probably be argued in later winter or early spring of 2000, with a decision expected before the end of June.  If you have questions regarding this update or any of the materials discussed in it, please contact one of our attorneys who are listed at the top of the page. We will welcome the opportunity to work with you in obtaining information about current health law developments as well as determining the impact these and related developments may have on your business.

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