On June 12, 2000, the U.S. Supreme Court made one of its rare forays into the field of health care law. The case, Pegram v. Herdrich, involved a misdiagnosed appendicitis resulting in a ruptured appendix and peritonitis. The plaintiff was enrolled in an HMO plan provided as a health benefit by her husband's employer. She alleged that the reason her physicians failed to diagnose her appendicitis in time was that they were under financial pressure from the HMO to withhold care - in her case, a timely ultrasound. The patient sued the HMO, claiming that these financial pressures violated a "fiduciary duty" that the plan owed her as an enrollee. The suit was argued in federal court under ERISA, the Employee Retirement Income Security Act, which governs employer health benefit plans and which contains language making the plan administrators "fiduciaries," and requires them to discharge their duties "solely in the interest of the participants and beneficiaries" of the plan. [29 U.S.C. sec. 1104(a)(1)(A)]

The Court dismissed the lawsuit, holding that the action of withholding the ultrasound in this case did not trigger fiduciary duties under ERISA. The problem is not the Court's result, but some of the arguments the Court used to reach it.

Fiduciary Law

To appreciate the mischief created by the Court's decision, you need a little background on fiduciary law, and how it relates to the provision of health care.

For the most part, the law takes the position that ordinary business transactions in our society occur at "arm's length," under the general rubric of "caveat emptor" - or "buyer beware." A salesman cannot lie to a customer, but apart from that, the customer is stuck with the results of the deal. (Federal and state laws have changed this rule in some situations, for example, by imposing disclosure requirements on sellers of real estate, securities, and cars.)

There are certain transactions or relationships, however -- such as those between the directors of a corporation and the shareholders, between trustees and the beneficiaries of a trust, and between lawyers and clients -- in which maintaining this arm's length stance would seriously undermine the value of the relationship. This is the case when one party necessarily has much less bargaining power than the other, much less information, or much less control over the situation. In these instances, the weaker parties must trust the stronger parties not to take advantage of them. By trusting the stronger parties, the weaker parties avoid having to expend substantial resources to keep tabs on the stronger parties, which would reduce the value of the relationship, perhaps to the point that it made no sense to enter into it in the first place.

In each of these relationships, the stronger parties -- directors, trustees, and lawyers -- are required to behave in such a way that they deserve the other parties' trust. The precise way in which they must behave differs depending on the type of relationship, but the principle is the same: They may not place their financial self-interest above the interests of the other party. To make the stronger parties adhere to this principle, the law punishes them severely if they violate their trust, such as by making them pay what are called "punitive damages," which can be huge.

The stronger parties are called "fiduciaries."

About twenty years ago, legal scholars first began in earnest to apply the fiduciary concept to the relationship between physicians (and other health care professionals and provider institutions) and their patients. Imposing fiduciary duties on health care providers became important around that time because of the growth of new kinds of organizations and financing arrangements, such as HMOs, which seemed to place providers at odds with the interests of their patients in new and disturbing ways. Some judges and legal scholars were reluctant to recognize providers as fiduciaries, but eventually the principal became generally accepted, and attention turned to figuring out exactly how providers could and could not behave and still fulfill their fiduciary duties to their patients. This task is still underway.

The Court's Misunderstanding

Unfortunately, the Supreme Court's decision in Pegram may set these efforts back substantially. Why? For one thing, the Court misunderstands the special problems patients face under managed care. The justices repeated the oft-heard argument that, in terms of the patients' ability to trust their providers, managed care is really no different from traditional, fee-for-service care: "The adequacy of professional obligation to counter financial self-interest," said the Court, "has been challenged no matter what the form of medical organization. HMOs became popular because fee-for-service physicians were thought to be providing unnecessary or useless services." In other words, the Court is saying, physicians under fee-for-service have a financial incentive to do too much, while under managed care, they have a financial incentive to do too little, and either way the patients are equally in peril.

But the patients are not equally in peril. The reasons why are complicated, but they can be glimpsed by considering the case of a well-insured patient who is seriously ill with an as-yet undiagnosed acute condition. Let's assume that the patient's physician does not want to hurt her patients if she can help it. (The Court is correct that an unscrupulous physician willing to make money by intentionally harming her patients will be able to do so quite successfully under either regime.) The physician will not provide a service that produces net harm to the patient, like knowingly performing an invasive test for a condition that the physician has ruled out. But, since fee-for-service creates an incentive for the physician to provide as many tests as she can, she will not only provide services that yield a lot of benefit to the patient, like tests with a great deal of diagnostic utility, but also services that yield somewhat less benefit, like tests for less likely or less serious conditions. She will only halt testing when she reaches the point that further services, like the invasive test above, would produce no expected benefit, but rather, net harm.

Now consider the way the incentives work in the same case under managed care. The physician will not give the patient tests that cause net harm, or tests that provide no expected benefit. But the physician still faces financial incentives to cut care. So she has an incentive to withhold services that provide net benefit. She may start by withholding tests for rare conditions, but since she still faces an incentive to withhold care, she may go on to withhold services that provide more benefit, and so on.

Which regime would the patient prefer? The answer seems clear: the fee-for-service system, since its incentives maximize the patient's chances of having her illness correctly diagnosed, while under managed care, the patient risks being denied the test. This comparison is oversimplified, of course, since I haven't considered the question of who's paying for the patient's care, but the analysis turns out to hold true for the patient under most common health insurance schemes.

Too Much Health?

Why did the Court get this wrong? Probably because it mistakenly assumed that, from a patient's standpoint, having too much health benefit is just as bad as having too little. This is true of some things, like being too hot or too cold, but it is not true of health, or, for that matter, money. We don't worry that we'll become too rich. But we do need to worry about dying from an undiagnosed ailment.

This misunderstanding led the Court to be overly approving of managed care, to feel a need to protect it from what the Court predicted would be "wholesale upheaval," including the "elimination of the for-profit HMO," if the plaintiff's suit were allowed to go forward. This is the Court's second mistake: its assumption that regarding providers or plans as fiduciaries for their patients makes managed care impossible. It may make certain kinds of managed care arrangements illegal, such as hinging a large proportion of physician income on withholding care, or placing physicians under "gag clauses" (which purport to limit their ability to communicate with patients), but fiduciary principles are varied and flexible enough to accommodate many effective managed care techniques and still give patients a good measure of the protection they need.

The Court went on to make an even more serious error. It asserted that there is no reason to impose fiduciary duties on physicians because patients can always sue physicians for malpractice: "[I]n an HMO system, a physician's financial interest lies in providing less care, not more. The check on this influence (like that on the converse, fee-for-service incentive) is the professional obligation to provide covered services with a reasonable degree of skill and judgment in the patient's interest. "[E]very claim would boil down to a malpractice claim." But the duty of care at issue in a malpractice case is very different from a fiduciary duty:

• The duty of care may vary depending on the patient's insurance status and ability to pay, so that patients in cut-rate HMOs may not be due the same level of care as patients in Cadillac plans. [For a discussion of this point, see Mark Hall's "The Malpractice Standard Under Health Care Cost Containment" in volume 17 of the journal Law, Medicine and Health Care (1989), and Haavi Morreim's "Cost Containment and the Standard of Care" in volume 75 of the California Law Review (1987).] The fiduciary duty owed these patients, however, does not change.
• In contrast to a fiduciary duty, which requires loyalty solely to the interests of patients, the duty of care is a utilitarian standard, meaning that patient interests can be subordinated to the interests of others.
• Unlike fiduciary rules, the duty of care says nothing about how providers should handle conflicts of interest between themselves and their patients.
• A number of remedies, such as punitive damage awards, are available for breach of fiduciary duty but not in an ordinary malpractice action.
• It is more difficult for a plaintiff to prove wrongdoing in a malpractice case than in a case for breach of fiduciary duty.

In short, if patients are forced to sue for malpractice rather than for breach of fiduciary duty, they would be stripped of essential legal protections.

Fidcuiary Rules Benefit Patients AND Providers

OK, so the Court's approach shafts patients. But what about physicians (and other providers)? They're better off if they do not owe their patients fiduciary duties, right? Wrong. Fiduciary rules benefit both parties in a fiduciary relationship. By encouraging patients to trust their health care professionals, these rules give professionals greater freedom to apply their professional judgment. Trust also tends to be characteristic of better patient-physician relationships, and it is well-known that the better the relationship, the less the patient is likely to sue for malpractice.

So what should the Court have done? The justices clearly wanted to dismiss the plaintiff's suit under ERISA. They did not want to say that, by creating financial incentives for physicians to withhold services, managed care automatically violates fiduciary duties under that law, nor that managed care physicians necessarily violate their fiduciary duties to their patients. But the Court could have accomplished this simply by reading the statute correctly. As quoted earlier, the fiduciary language in ERISA does not require a plan to act "solely in the participant's and beneficiary's interest," as the plaintiff (the patient) would have it, but "solely in the interest of the participants and beneficiaries."

In other words, the plan owes a fiduciary duty to the entire group of enrollees, not to the individual, just as trustees owe a fiduciary duty to all of the beneficiaries of a trust, rather than to just one. In this type of fiduciary relationship, the interests of the individual may have to be sacrificed in order to preserve the interests of the group as whole, such as preserving the fiscal integrity of the plan by withholding health care that provides little net benefit but that costs a great deal. This reading of the statute is consistent with Congress' intent in passing ERISA. Its target was plan administrators who looted plan assets at the expense of the fiscal integrity of the plans, such as employers who prior to passage of the act stripped employee pensions of their assets.

So What Happens Now?

Patients and their advocates must seek protection from Congress and state legislatures, rather than from the courts. Some may feel that this is appropriate, since legislatures ought to be setting the rules, rather than judges. But so far, Congress has been unable to enact meaningful protections for patients under managed care. And the Court's lack of enthusiasm for fiduciary principles in ordering the relationship between patients and physicians will further commercialize medicine rather than help restore trust between patients and their care-givers.