Supreme Court Dispatches

Taking It to the Limit 

It’s good to know exactly what you’re asking for when you argue a case in front of the U.S. Supreme Court. It’s even better, however, to be quite certain of why you are asking for it and whether or not you’re even entitled to be asking in the first place.

What I am mostly asking for, from the U.S. Supreme Court, is a seat that’s not behind a pillar. And a margarita maybe.

But today, in Pegram vs. Herdrich, I find myself wanting limiting principles. Limiting principles are the invisible lines courts draw almost contemporaneously with their holding in a case. Almost as important as the new rule they announce is a limit on the reach of that rule. Limiting principles tether new legal doctrine to existing doctrine and keep us off the infamous “slippery slope” that necessitates reversing a dozen other cases to create new law.

Sometimes lawyers get too ambitious about the scope of the case they seek to try. Sometimes they don’t get ambitious enough. Pegram was called one of the seminal cases of the year because its “reach” could be vast. This case is about whether HMO patients have federal recourse when their health plans provide financial incentives for their doctors to withhold medical care. As such, the case could transform the entire managed-care system, either by bankrupting HMOs with a tsunami of class-action claims or screwing patients by further immunizing HMOs from oversight.

Everyone knows an HMO horror story: a plan that withheld tests/drugs/treatment at the caprice of a tightwad “gatekeeper” with her eye on the bottom line. It’s entirely rational to be skeptical about any health-care scheme in which the presumption is for withholding—as opposed to providing—care. And a scheme wherein the doctors themselves get to pocket the savings is not only suspicious but downright creepy. So when Cynthia Herdrich’s doctor made her wait over a week for an ultrasound, it’s fairly evident what Dr. Pegram was thinking: “Ultrasound for Cindy? New carpets for me? Ultrasound for Cindy? End tables for me?” Unfortunately for everyone, Herdrich’s appendix ruptured, requiring hospitalization and emergency surgery.

Now, this is how narrow the case might have been: Herdrich could have sued her doctor for malpractice under existing state med-mal law. She did so and recovered $35,000.

But Herdrich wanted to win the battle and the war. She felt that the problem lay with the incentive system created by her HMO, which gives physicians—who also own the practice, by the way—year-end bonuses for denying patients diagnostic tests, referrals, and other services. So Herdrich and her counsel decided to stick it to the big bad HMOs.

Until recently, the Employee Retirement Income Security Act shielded HMOs from liability. But ERISA also imposes fiduciary duties on those with “discretionary authority” over the administration of private health plans. (Fiduciary duties mean that the interests of the plan are subordinated to the interests of the patient.) Herdrich’s claim was that under ERISA the HMO violated its fiduciary duty to her as a patient by setting up a conflict of interest over whether doctors should provide care or pocket the green.

Dig the irony: The very statute that has been used to shield HMOs from liability is suddenly being wielded as the sword that threatens to eviscerate all managed care.

But Herdrich and her lawyer forgot about a limiting principle to keep the court from gutting every single managed-care program (including Medicare and Medicaid programs) that does precisely what managed care unabashedly promises to do: decrease health-care costs by limiting care. So people crowding the court today to witness the death of all HMOs are in for a surprise.

The first thing Carter Phillips, representing the HMO, says is that Herdrich’s case puts all managed care on the line. When Justice O’Connor asks him why the case can’t be limited to direct physician bonuses used by Herdrich’s plan (note: limiting principle), Phillips replies that any cost-cutting incentive by any HMO would be equally subject to criticism under the fiduciary theory. Phillips’ own incentive—for which he will doubtless get all sorts of bonuses—is to characterize this case as an endless slippery slope for which there is no limiting principle. Watch him work:

O’Connor asks if there is any situation under which fiduciary duties might be owed by an HMO. Phillips responds that it’s possible under the narrowest theory of the case (limiting principle), but that Herdrich’s focus in her pleadings is on any “undisclosed physician incentive to withhold treatment.” He doesn’t want the case to stray from her apparently limitless claim.

Justice Breyer jumps in to ask how it’s possible that doctors making calls about treatments are not administering plans under ERISA. But Phillips is sticking to his story: This case needs to be limited to what Herdrich pleaded in her brief: financial incentives to deprive patients of treatment. He’s not going to answer for the whole structure of managed care.

When James Feldman, from the solicitor general’s office, rises to defend HMOs (because the government’s all about patients’ rights) Justice Scalia cuts to the heart of it: Why are you calling these health-care decisions “discretionary” if the treatment is either authorized or not authorized by the plan? Where exactly is all this discretion? Feldman replies that the discretion belongs to the plan administrator not the doctors. But then, asks Stevens, if fiduciary duty militates in favor of patients, doesn’t the administrator always have to decide for the patient? Feldman’s answer (to this and the next six questions) is that fiduciary duty is only owed with respect to the terms of the plan not the patient.

Justice Souter says, if the plan gives incentives to doctors to deny care, how can a fiduciary duty run to the plan? He is so cute when he’s puzzled. Feldman concedes that at the stage where claims are processed, fiduciary duty may arise. Souter asks for a limiting principle. But Feldman’s time is up.

And up gets James P. Ginzkey, for Herdrich, who immediately insists he’s not attacking all HMOs, or even most HMOs, but only those HMOs that are owned and administered by the doctors who are also treating patients. Oh. So this case isn’t about the bizarre incentives in managed care anymore. Breyer tries to get him back on track by suggesting that even if a third party were withholding care, there would always be a built-in conflict between entities that both provide and ration health care.

This goes on until Justice Ginsburg, willing to stick for a moment to Ginzkey’s limiting principle, asks how many HMOs are physician-owned. He’s not sure. Scalia urges him to answer Breyer’s question about what difference it makes who’s denying the care, doctor or plan administrator. They are begging him to broaden his claim. But Ginzkey doesn’t want to argue that case. This continues until Souter, frustrated, asks if Ginzkey just wants the court to hold that HMOs only breach a fiduciary duty when doctors get year-end bonuses? Is that your limiting principle?

Ginzkey won’t even take that, it seems. “I’m not asking the court to outlaw physician incentives,” he says. Only incentives that reach the level of “undue influence.” Like, say, the cases where a doctor gets a billion dollars if he denies a CAT scan? That would be bad?

Rehnquist says, “Undue influence is extremely vague.”

O’Connor finally chokes out the words “slippery slope” with nine minutes left in the second half. She says Congress has built a scheme that’s served by doctors who have ethical obligations to “curb unfortunate financial incentives to cut costs.” Great, so the only thing standing between Dr. Pegram and her end tables is the Hippocratic oath.

And then the shoe drops—the limiting principle becomes the issue:

“What’s really at stake for your client?” asks Stevens.

“The doctor’s bonuses.”

“Who gets the money?” asks Stevens.

“The risk pools.”

“Wait. There was no denial of coverage for your client, right?” Scalia asks.

“Right. This is not a denial-of-coverage case.”

“And she wasn’t denied some expensive treatment, right?” Scalia goes on.

“Right. This is not a medical malpractice case.”

“Forgive my stupidity,” Stevens interjects, “but who owns the risk pool?”

“The plan.”

We are fighting to take money away from a plan, to give it to a plan?

Justice Souter asks Ginzkey to please answer Justice Scalia’s question, about what this case is about exactly.

“It’s a breach of fiduciary duty case.”

“This is a financial management of funds case?”


“And it’s just a coincidence that you’re bringing the financial-mismanagement case together with this malpractice case?”


And so we have gone, in an hour, from a case attacking the fundamental incentive problem in the managed-care system, to a case about some doctors who get some bonuses, so that their bonuses could go back to a plan.

Anyone out there want to try the real HMO case? Because I think the justices still want to hear it.

Finally, in other news, I’d be remiss if I didn’t flag two decisions that came down today that warrant a little strict scrutiny on your part: Both are Ninth Circuit cases, so it doesn’t even bear mention that both were reversals. In one, Rice vs. Cayetano, the court invalidated a Hawaiian voting scheme with the very principled determination that native Hawaiians—unlike Native Americans—don’t deserve special protection. Don’t miss the heartbreaking last paragraph: “When the culture and way of life of a people are all but engulfed by a history beyond their control, their sense of loss may extend down through generations.” (And here I paraphrase:) “Oh well. It sucks to be them.”

The other case, Roe vs. Flores-Ortega, is a screamer. Your attorney can forget to file an appeal or to even discuss your right to an appeal, but can still be deemed “effective” counsel. I think I’ll have that margarita now …