Health maintenance organizations enter into contracts with subscribers and other contracts with physicians who provide health care services to subscribers. Recent legal developments suggest that HMOs may be obligated to disclose to their subscribers the financial incentives they may offer to providers.
Consider a decision by the U.S. Court of Appeals for the Eighth Circuit. The case involved Seagate Technologies, Inc., which provided health care benefits to its employees by contracting with a health maintenance organization known as Medica. As part of its managed care product, Medica required Seagate's employees to select one of Medica's authorized primary care doctors.
One Seagate employee, Patrick Shea, chose his family doctor, who was on Medica's list of preferred doctors. Under the terms of Medica's policy, Shea was insured for all of his medically necessary care, including cardiac care. Before Shea could see a specialist, however, Medica required that he get a written referral from his primary care doctor. Unknown to Shea, Medica's contracts with its preferred doctors created financial incentives that were designed to minimize referrals. Specifically, the primary care doctors were rewarded for not making covered referrals to specialists and were docked a portion of their fees if they made too many.
After being hospitalized for severe chest pains during an overseas business trip, Shea made several visits to his doctor. During these visits, Shea discussed his extensive family history of heart disease and indicated that he was suffering from chest pains, shortness of breath, muscle tingling, and dizziness.
Shea's doctor said a referral to a cardiologist was unnecessary. When Shea's symptoms did not improve, Shea offered to pay for the cardiologist himself. At that point, Shea's doctor persuaded Shea, who was then 40 years old, that he was too young and did not have enough symptoms to justify a visit to a cardiologist. A few months later, Shea died of heart failure.
Shea's widow brought suit against Medica. She alleged that if her husband had known his doctor could earn a bonus by providing less treatment, he would have disregarded his doctor's advice and sought a cardiologist's opinion at his own expense, and he would still be alive. She alleged that Medica's "behind-the-scenes" efforts to reduce covered referrals violated Medica's fiduciary duties under the federal law known as ERISA, which governs employee benefit plans, including health care benefit programs. Believing that ERISA did not require an HMO to disclose its doctor compensation arrangements because they were not "material facts affecting a beneficiary's interest," the district court dismissed the complaint for failing to state a claim. Mrs. Shea appealed to the Eighth Circuit.
The appellate court noted that ERISA fiduciaries, such as HMOs, have a duty of loyalty that requires that they deal fairly and honestly with all plan members. In the court's view, this duty requires that ERISA fiduciaries communicate any material facts that could adversely affect a plan member's interests. In fact, the court emphasized, "[t]he duty to disclose material information is the core of a fiduciary's responsibility."
Disagreeing with the district court, the Eighth Circuit determined that the compensation arrangements between Medica and its doctors were material facts requiring disclosure. From a patient's point of view, it stated, "a financial incentive scheme put in place to influence a treating doctor's referral practices when the patient needs specialized care is certainly a material piece of information." Such a patient necessarily relies on the doctor's advice about treatment options, and, according to the Eighth Circuit, the patient must know whether the advice is influenced "by self-serving financial considerations" created by the health insurance provider. In the appellate court's view, if Mr. Shea had been aware of his doctor's financial stakes, he could have made a fully informed decision about whether to trust his doctor's recommendation that a cardiologist's examination was unnecessary.
Moreover, the appellate court stated, even if Seagate's employees already had realized that their doctors' pocketbooks would be adversely affected by making referrals to outside specialists, they "would not have known their doctors were penalized for making too many referrals and could earn a bonus by skimping on specialized care." Accordingly, the court concluded, there should be a trial of Mrs. Shea's claim that Medica had breached its fiduciary obligation to disclose all the material facts affecting her husband's health care interests.
The Eighth Circuit's decision is not the only such recent legal development on this issue.
Earlier this year, Texas Attorney General Dan Morales reached a settlement with that state's largest HMO, the Fort Worth-based Harris Methodist Health Plan, that requires that the HMO disclose to its 300,000 policyholders if their physicians' compensation may be reduced if they make too many referrals to specialists, authorize too many treatments, or write too many prescriptions for non-generic pharmaceutical products. The settlement requires that the HMO's provider directories contain the following warning about physicians' compensation: "Your primary care physician's compensation may be increased or reduced by the cost and utilization of health care services for his or her patients."
This disclosure requirement could have a broader reach if more states adopt such a rule. Indeed, the American Association of Health Plans last year urged its members to adopt a policy disclosing how physicians are paid.
It is important to note, though, that a disclosure requirement assumes that the activity being disclosed, namely payment of financial incentives to physicians, is permitted. HMOs also should keep watch for legislative developments that may serve to restrict that contractual right.