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An HMO that promotes rationing of health care by providing “financial incentives” to doctors who limit their referrals to specialists has no duty under ERISA to disclose that fact to plan members, the 3rd U.S. Circuit Court of Appeals has ruled. In Horvath v. Keystone Health Plan East, the court upheld the dismissal of a proposed class-action suit that accused Keystone of breaching its fiduciary duty to ERISA plan members. The ruling is a victory for attorneys Edward F. Mannino, David L. Comerford and James Lewis Griffith of Akin Gump Strauss Hauer & Feld. In the suit, plaintiffs’ attorneys H. Laddie Montague, David Langer, Jonathan Auerbach and Jerome M. Marcus of Berger & Montague argued that Keystone’s financial 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, the suit alleged, the incentives compromise the independent medical judgment of primary-care physicians. Under ERISA, the plaintiffs’ team argued, such incentives must be disclosed because they have a direct effect on the scope of the insurance coverage actually provided. But in March 2002, U.S. District Judge Ronald L. Buckwalter found that a breach of fiduciary duty occurs under ERISA only “when harm results from information not disclosed to the beneficiary that is material.” Buckwalter found that plaintiff Donna Horvath’s suit was fatally flawed 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, the information about physician incentives could not be considered legally material to her decision. Now a unanimous three-judge panel of the 3rd Circuit has endorsed Buckwalter’s logic in its entirety. “We hold that ERISA imposes no duty on Keystone to disclose information regarding its physician incentives absent a request for such information by Horvath, absent circumstances which put Keystone on notice that Horvath needed such information to prevent her from making a harmful decision with respect to her healthcare coverage, and absent any evidence that Horvath was harmed as a result of not having such information disclosed to her,” U.S. Circuit Judge Jane R. Roth wrote. But Roth also emphasized that the court’s ruling would not prevent a lawsuit by a plaintiff who can show that the financial incentives caused a doctor to provide inadequate care that resulted in harm. “Our ruling in no way leaves plan members, who have suffered harm, without a remedy,” Roth wrote in an opinion joined by Senior U.S. Circuit Judge Morton I. Greenberg and visiting Judge Robert J. Ward of the Southern District of New York. “The Supreme Court’s decision in Pegram [v. Herdrich] would in no way preclude a claim by an HMO patient that the existence of financial incentives caused inadequate medical care to be provided, resulting in injury to the patient,” Roth wrote. Under Pegram, Roth noted, “treatment” or “quality of care” decisions are not pre-empted by ERISA and therefore may be brought as a state court medical malpractice action. On appeal, the plaintiffs’ team urged the 3rd Circuit to find that Buckwalter erred in granting summary judgment to Keystone because the breach of fiduciary duty claim was based on allegations of “affirmative misrepresentation” rather than on a failure to disclose material facts. Roth found that the plaintiffs had “struggled mightily” to persuade the court to adopt that view, but found that their argument “fails at the most basic level because it finds no support in the plain language of Horvath’s complaint.” Instead, Roth found, “an analysis of the text of the complaint reveals that the ERISA fiduciary duty claim, which is the only count asserted therein, is clearly premised on Keystone’s alleged failure to disclose material information.” Roth also found that a “misrepresentation-based breach of fiduciary duty claim cannot … be implied from a fair reading of her complaint.” To state a claim for misrepresentation, Roth said, the plaintiff “must allege (1) that Keystone was acting as a fiduciary, (2) that Keystone made a misrepresentation, (3) that the misrepresentation was material, and (4) that Horvath relied on the misrepresentation to her detriment.” Horvath’s suit failed that test, Roth found, because it never used the term “misrepresent.” Plaintiffs’ lawyers argued that Keystone’s plan documents “uniformly represent or imply that the primary care physician’s gatekeeper function will be exercised by each primary care physician on the basis of that physician’s independent medical judgment, and that the medical care recommended or prescribed for each member by that member’s primary care physician will be consistent with his or her physician’s independent medical judgment.” Since the existence of such financial incentives may potentially cause physicians to prescribe less care than called for by their independent professional judgment, they argued, the representation described in the plan must be false. Roth disagreed, saying, “The mere existence of financial incentives does not, ipso facto, render false Keystone’s representation that its physicians will recommend treatment that is consistent with their independent medical judgment.” In Pegram, Roth noted, the Supreme Court recognized that a physician’s “professional obligation to provide covered services with a reasonable degree of skill and judgment in the patient’s interest” serves as a check on the influence of financial incentives. As a result, Roth concluded, “the incompatibility between the existence of financial incentives and the rendering of competent medical care, suggested by Horvath, has not been demonstrated.”

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