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Much Ado About Pegram v. Herdrich

On June 12, 2000, the U.S. Supreme Court issued a unanimous ruling in Pegram v. Herdrich. The case involved an attack on HMOs paying bonuses to doctors to direct patients to particular facilities. Although the case has attracted much attention, over time it will likely become more significant for bucking a trend, than for making new law.

A. The Facts Mr. Herdrich's Illinois employer offered HMO coverage to its employees and their families. Subsequently, Mr. Herdrich's wife sought care from a physician who was employed by the HMO. The physician, Dr. Pegram, examined Mrs. Herdrich, and discovered an inflamed abdominal mass.

Although a local non-participating facility could likely have performed an ultrasound diagnostic test sooner, Dr. Pegram referred Mrs. Herdrich to a participating diagnostic facility over fifty miles away, and the test was not scheduled to be performed until eight days later. During that eight-day waiting period, Mrs. Herdrich's appendix ruptured, and shortly thereafter, she contracted peritonitis.

B. The Legal Strategy

Mrs. Herdrich not only sued Dr. Pegram, and the HMO that employed Dr. Pegram, for medical malpractice, but Mrs. Herdrich also added a novel claim to her suit. She charged that offering doctors bonuses to use participating facilities is a violation of ERISA, the federal statute that governs employee benefits.

More specifically, ERISA requires managers of employee benefit plans to exercise fiduciary care, that is, to act solely in the interest of beneficiaries. Here, Herdrich argued that the HMO and Dr. Pegram, were wearing too many hats, because they were also trying to save money for the HMO, and trying to qualify Dr. Pegram for a potential bonus for using the designated facility.

C. The Decision

The United States Supreme Court, however, reversed a decision in favor of Mrs. Herdrich rendered by the Seventh Circuit, the federal appellate court with jurisdiction for Wisconsin, Illinois and Indiana. The Supreme Court concluded that neither Dr. Pegram nor the HMO was acting as a manager of the employee benefit plan in this context, and, therefore, owed no fiduciary duty under ERISA to Mrs. Herdrich. The Supreme Court determined that this part of ERISA was reserved for other situations, such as pension trustees diverting funds for their own use, but not for doctors making decisions that involve treatment.

D. The Implications

As a legal precedent, the Supreme Court's decision is not that surprising. As a milestone, however, the case may be more significant, because it reversed the lower appellate court's opposite conclusion. The Seventh Circuit, riding a crest of national anti-HMO sentiment, had condemned HMOs for incenticizing doctors to use particular facilities.

In fact, by reversing the lower court's ruling, the lasting legal impact of Pegram v. Herdrich may be the Court's explicit acknowledgement that insurance companies and HMOs are businesses, and, like other businesses, they will always have competing internal interests, and it is not illegal for them to have these competing interests.


December 21, 2000




Rosen, Barry F.


Health Care