Feature Archive

Can You Sue Your HMO?

New hope for patients.

WebMD Feature

June 5, 2000 -- When Cynthia Herdrich dragged herself to Carle Clinic in Bloomington, Ill., with searing abdominal pain, she was told by her doctor that she had no choice but to wait eight more days before she could undergo an ultrasound exam at a clinic-owned facility 50 miles away.

In the meantime, on two separate visits in March 1991, her doctor, Lori Pegram, MD, misdiagnosed the inflamed mass in Herdrich's abdomen as a urinary tract infection and later an ovarian cyst. While Herdrich was waiting for the diagnostic test, her appendix ruptured, requiring emergency surgery and causing a life-threatening infection.

Herdrich sued Pegram for medical malpractice and won $35,000 in compensatory damages. During the fact-finding, however, she discovered that her HMO paid cash bonuses to doctors who ordered fewer diagnostic tests and referrals and used only network facilities. Infuriated, Herdrich also sued her physician-owned HMO, Carle Clinic Association, and its insurance company, Health Alliance Medical Plans, for fraud.

"We were amazed," says Herdrich, 42, who now lives in Colorado. "I felt strongly that the way my HMO was set up and structured -- with incentive clauses written in the doctors' contracts -- really did affect the care and treatment I received. I fault the HMO as much as my doctor."

The Case That Could Dismantle HMOs?

Some experts say this may be the case that could lead to the dismantling of HMOs. After a series of legal maneuverings, the case was argued in February before the U.S. Supreme Court, which is expected to issue its ruling this month.

Herdrich's case is the first challenge to managed care plans that the high court has agreed to hear. The court's decision will determine whether Herdrich and other injured patients can sue HMOs by claiming that cost-cutting incentives that compromise patient care violate federal law.

Health care experts say that with legal actions mounting against HMOs, a decision in favor of Herdrich will be one more salvo in the escalating backlash against managed care. "A favorable ruling would open the floodgates to a rash of lawsuits around the country," says Peter Boland, a Berkeley, Calif., health management consultant and author of numerous books on the health care industry. "It would send a profound signal that HMOs are vulnerable to a sustained legal challenge, and before they weren't."

At least 16 class action suits have been filed against HMOs by the same attorneys who brought down the tobacco companies. And Aetna U.S. Healthcare recently settled a lawsuit in Texas by agreeing to stop paying financial incentives to doctors who hold down costs.

Incentives Create a Conflict of Interest

Herdrich's lawyer argues that financial incentives create a dangerous conflict of interest between doctors and their patients. The majority of HMOs currently use an assortment of financial rewards and penalties for physicians and executives to achieve cost-effective treatment -- which, they argue, is the fundamental premise of managed care.

In a 1999 survey conducted by the Kaiser Family Foundation and the Harvard School of Public Health, 87% of doctors said that health plans had denied coverage for medical services they felt were medically necessary. Another 1998 study by the University of California at Berkeley estimates 480,000 Californians were denied health care by their HMO in 1996. Forty-two percent of those denied care reported suffering adverse health consequences as a result, including pain and suffering, worsening of the health condition, or permanent disability.

HMOs have for the most part been protected from patient lawsuits by a 1974 federal law called ERISA, the Employee Retirement Income Security Act. The law regulates employer-sponsored health plans, which provide medical coverage to 160 million Americans. (Herdrich was insured through her husband's employer.)

When Herdrich sued in state court, Carle Clinic successfully moved the claim to federal court to come under ERISA's protection. Herdrich then turned ERISA into a weapon by arguing that the HMO violated ERISA's legal obligation to act for the benefit of patients, known as its fiduciary duty.

"What's going on here is wrong," says Herdrich's attorney, James Ginzkey. "Doctors are being paid more to do less; there's an absolute conflict of interest. If this isn't a violation of ERISA, then HMOs are completely insulated from liability."

A trial judge initially threw out Herdrich's case, but in 1998 the 7th Circuit Court of Appeals reinstated it. In a scathing opinion highly critical of HMOs, the court ruled that financial incentives undermined patient care and could be the basis for a lawsuit under ERISA. (The court also noted an additional conflict of interest: The clinic's physicians owned the plan and controlled every aspect of the HMO, including which claims get paid and their own year-end bonuses.) The HMO appealed to the U.S. Supreme Court. If the Supreme Court rules for Herdrich, the case can go to trial in Illinois federal court.