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HMOs won another major court victory this week when a federal judge ruled that they do not have an affirmative duty under ERISA to disclose financial “incentives” they pay to primary care doctors to “ration” health care by limiting referrals to specialists. In Horvath v. Keystone Health Plan East, U.S. District Judge Ronald L. Buckwalter of the Eastern District of Pennsylvania found that while the 3rd U.S. Circuit Court of Appeals has never squarely addressed the question of physician incentives, it has outlined a standard that must be met by the plaintiff when alleging a breach of fiduciary duty. Analyzing a line of 3rd Circuit decisions, Buckwalter found that the appellate court has held that “a breach of fiduciary duty occurs when harm results from information not disclosed to the beneficiary that is material.” Buckwalter found that plaintiff Donna Horvath failed the test for several reasons. Horvath couldn’t show that she asked for information about the incentives and was denied access to it, Buckwalter found. She also couldn’t show that she paid higher rates than she would have been willing to pay since her employer paid for the plan, Buckwalter noted. And since Horvath’s employer didn’t offer any other health plan, Buckwalter found that the information about physician incentives could not be considered legally material to her decision. The ruling is a victory for attorneys Edward F. Mannino, David L. Comerford and James Lewis Griffith of Akin Gump Strauss Hauer & Feld, who filed the summary judgment motion on behalf of Keystone Health Plan East. According to the suit, Horvath is the benefits administrator for Kelly Dubrow & Herron. The suit was filed by four Berger & Montague lawyers — H. Laddie Montague, David Langer, Jonathan Auerbach and Jerome M. Marcus. In the suit, Horvath alleged that Keystone violated its fiduciary duty imposed by § 404 of ERISA. Buckwalter found that under the general scheme of managed health care, HMOs use primary-care doctors as “gatekeepers” who direct patients to more expensive specialists only when necessary. Typically, Buckwalter said, HMOs enter into contracts with their physicians and pay member doctors a set amount every month for each patient in the program under the doctor’s care, regardless of how much care the physician provides to the patient. Quoting from the U.S. Supreme Court’s decision in Pegram v. Herdrich, Buckwalter found that primary-care doctors often receive financial incentives or bonuses “rewarding them for decreasing utilization of health care services, and penalizing them for what may be found to be excessive treatment.” HMOs contend that physician incentives are cost-controlling measures kept in check by the physicians’ “professional obligation to provide covered services with a reasonable degree of skill and judgment in the patient’s interest,” Buckwalter wrote. But Horvath alleged that Keystone’s physician incentives created a system whereby doctors are paid more when they provide less care and are paid less when they provide more care. As a result, Horvath argued, the incentives compromise the independent medical judgment of primary-care physicians. Horvath’s lawyers argued that Keystone misrepresented the scope of insurance coverage it was selling when it told subscribers they were covered for medically necessary treatments, tests and hospitalizations and that physicians exercise independent medical judgment in prescribing medical treatment. The information was misleading, false or at least incomplete, they argued, because Keystone’s contractual relationships with its physicians impose an array of restrictions which are intended to, and in certain instances do in fact, discourage physicians from providing optimal medical care. Keystone’s contract with its doctors, they argued, makes the doctors gatekeepers for coverage while paying them more to prescribe less care. That system, the plaintiff’s team said, necessarily means that the scope of insurance is not based purely on medical factors, but instead is based upon a combination of medical and financial factors. Horvath asked the court to compel Keystone to disclose its physician compensation scheme and to award her restitution for the losses she has suffered in the form of the difference between what she actually paid for the insurance benefits she obtained from Keystone and the smaller amount she would have paid had the incentives been disclosed. But Buckwalter found that Horvath’s suit was fatally flawed because her complaints about Keystone’s non-disclosures fall “outside the scope of any fiduciary relationship that may have existed between Keystone and Ms. Horvath.” The law of the 3rd Circuit, Buckwalter said, “generally holds that one who may have attained a fiduciary status does not have an obligation to disclose all details of its personnel decisions that may somehow impact upon the course of dealings with a beneficiary/client.” Instead, Buckwalter said, the 3rd Circuit has held that “a fiduciary has a legal duty to disclose to the beneficiary only those material facts, known to the fiduciary but unknown to the beneficiary, which the beneficiary must know for its own protection.” Horvath argued that Keystone’s physician compensation scheme is such material information for which Keystone has an affirmative duty to fully disclose, and anything less than full disclosure is misleading to its subscribers. Buckwalter found that the 3rd Circuit has not yet addressed the question whether ERISA imposes a fiduciary duty to disclose financial incentives in health insurance plans when silence on the matter allegedly constitutes a misrepresentation. Nonetheless, Buckwalter found that the appellate court “has developed a body of law with respect to an ERISA fiduciary’s obligation of disclosure.” In a trio of cases handed down in the past decade, Buckwalter found that the 3rd Circuit has “streamlined” the test so that plaintiffs must now prove a breach of fiduciary duty has occurred by alleging that harm resulted from information not disclosed to the beneficiary that is “material.” Buckwalter found that Horvath failed to satisfy the 3rd Circuit’s holding in Bixler v. Central Pa. Teamsters Health & Welfare Fund because she “did not make any type of request or inquiry that would trigger Keystone’s obligation to disclose information with respect to physician incentives.” And while the 3rd Circuit made clear in Glaziers & Glassworkers Union Local No. 252 Annuity Fund v. Newbridge Securities that the plaintiff had no duty to make a request, Buckwalter found that Horvath also failed to meet the Glaziers requirement for proof that Keystone was on notice that she needed protection from making a harmful decision with respect to her health insurance plan. “It appears that Ms. Horvath’s theory is that she would not have paid the rate that Keystone charged for its health insurance had she known of Keystone’s physician compensation scheme and her misinformed decision to do so was the result of Keystone’s misrepresentations in the form of omissions regarding physician incentives,” Buckwalter wrote. “Even if this was a cognizable harm deserving of protection through disclosure under ERISA, there is no factual support for the proposition that Keystone was on notice that its physician incentive scheme exposed Ms. Horvath to making a decision to pay higher rates for health insurance coverage.” Buckwalter noted that Horvath herself did not pay Keystone for health insurance, but instead that it was provided to her for free by the law firm. “Not only must the court infer that Ms. Horvath’s employer could negotiate a better rate for the group insurance it purchased through Keystone, but that had Ms. Horvath’s employer done so, it would have then passed along the savings to its employees,” Buckwalter wrote. Buckwalter also found that Horvath never claimed that Keystone’s omissions had the potential to expose her to incompetent medical treatment that could have been prevented had she known about physician incentives. “Ms. Horvath admits that she did not experience any medical injury or deficient healthcare, she has never had any type of treatment that was not covered or made any claim to Keystone that has not been paid,” Buckwalter wrote. “There is no evidence before the court that physicians’ financial interests eclipse their professional obligation to provide competent care or causes physicians to abandon their independent medical judgment, forgo directing patients to specialists or fail to prescribe medical necessary treatments, tests or hospitalizations, for the purpose of receiving a larger bonus payment from their managed health care organization.” Finally, under the 3rd Circuit’s decision in Jordan v. Federal Express Corp., Buckwalter found that Horvath could not show that information about the physician incentives would be material to her. “Her employer does not make available any other health plan to its staff. Ms. Horvath does not suggest that she would have chosen to forego subscribing to Keystone’s health plan, or chosen to subscribe to another plan at her own expense, had she known that Keystone offered various incentives to its physicians,” Buckwalter wrote.

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