Healthsource, Inc., either directly or through its wholly-owned subsidiaries, provides health benefits to over 3 million participants and beneficiaries of employee welfare benefit plans regulated pursuant to the Employee Retirement Income Security Act of 1974 ("ERISA" or the "Act"),29 U.S.C. 1001, et seq. (the "Class"). In enacting ERISA, Congress required that providers of health care benefits, such as defendants here, assume the obligations of fiduciaries, i.e., "the highest [obligations] known to the law," Donovan v. Bierwirth, 680 F.2d 263, 272 n.8 (2d Cir.), cert. denied, 459 U.S. 1069 (1982), including the duty of loyalty, due care, candor and full and fair disclosure. More specifically, Congress required that plan beneficiaries be furnished with a "summary plan description" of their benefits, which "shall be sufficiently accurate and comprehensive to reasonably apprise such participants and beneficiaries of their rights under the plan," 29 U.S.C. 1022, and "must not have the effect [of] misleading, misinforming or failing to inform participants and beneficiaries." 29 C.F.R. 2520-102-2(b). Moreover, the duties of fiduciaries under ERISA extend beyond the specific statutory requirements, and thereby include the obligation not to mislead or deceive Plan beneficiaries and to disclose material information the beneficiaries need to protect their interests.
The gravamen of this action is that defendants have utterly disregarded the fiduciary obligations ERISA imposes upon them by furnishing plaintiff and other plan beneficiaries with a totally false and misleading account of their entitlements. In promoting itself as an alternative to other health care providers, Healthsource stresses the fact that the all important doctor/patient relationship that its subscribers previously enjoyed would not be interfered with by membership with Healthsource and its subsidiaries. As the contract between Healthsource and its subscribers declares, "[t]he relationship between [Healthsource and its doctors] is a contractual relationship between independent contractors," that "does not interfere with the exercise of the physicians independent medical judgment." Complaint ("Cpt.") 30-31. Thus, Plan beneficiaries are led to believe that they can rely on their doctors to make medical judgments based solely on their patients needs. In fact, however, Healthsource seeks to influence the medical judgment of the doctors with whom it contracts so as to reduce medical costs to the Company and thereby enhance its profitability.
Healthsource, Inc., operating through various subsidiaries, is a publicly owned company providing a broad range of managed health care products and services across the nation. Its shares are traded on the New York Stock Exchange and the Company has achieved outstanding financial success over the last several years to the acclaim of its thousands of shareholders. The key to its profitability lies in its success in slashing the cost of the managed care provided through its HMO subsidiaries, with Healthsource, Inc. publicly acknowledging that its "profitability depends in large part on predicting and maintaining effective control of the healthcare costs of its HMOs." Affidavit of Shaheen Rushd ("Rushd Aff."), 7. Indeed, Healthsource, Inc. is so concerned with controlling the cost of providing managed health care that its President and Chief Executive office, Norman C. Payson, has stated that "we're obsessed about the cost containment. I live and die it and have been brought up in it, and the whole company does." Rushd Aff. 8.
In its "obsession" to cut medical costs, and thereby maximize profits for its shareholders, Healthsource's contracts with its doctors are structured to reduce medical services previously enjoyed by patients. Thus, Healthsource pays its doctors in two ways: first, by providing a flat rate for each patient, known as "capitation," with a portion of that fee withheld pending a review of the amount of treatment the doctor authorizes for his patients, and second, by providing an additional flat rate for each patient, known as the "Referral Fund," which is decreased each time Healthsource incurs medical expenses on behalf of a patient. As a result, "whenever a Healthsource doctor authorizes particular treatment for a patient, he is taking money directly out of his own pocket." Id. 38. Through these financial penalties and bonuses, the Healthsource doctors have been placed in an inherently conflicted position whereby they must balance their own financial considerations against the medical needs of their patients -- a fact which Healthsource hides from its subscribers.
If a physician elects not to refer his patient to a specialist, or otherwise provide additional medical care, the patient might very well accept the decision without further question in light of the trust he places in his doctor. If, however, the patient were aware of the conflict in which the doctor was placed by the direct financial incentive paid by Healthsource to not make the referral, he could be guided accordingly. More intelligent questions could be asked of the doctor, second opinions could be sought and other inquiry could be made to satisfy the question of whether the advice of doctor to provide the service rather than to make a referral was influenced by anything other than medical considerations. In short, the patients needs to know the doctor's compensation arrangement if he is to make a truly informed decision concerning his medical care. As the California Supreme Court noted in Moore v. The Regents of the University of California, 51 Cal.3d 120, 129, 793 P.2d 479 (1990), cert. denied, 499 U.S. 936 (1991), "the law already recognizes that a reasonable patient would want to know whether a physician has an economic interest that might affect the physician's professional judgment."
The issue is not theoretical -- but a real one. As discussed more fully below (pages 7-8), doctors across the country have been critical of the conflicts in which they have been placed as a result of the structure of the financial arrangements which they have with Healthsource and other HMOs. While some doctors have refused to join HMOs, and others have terminated their relationships because of the fee structures, many doctors are unable to combat the HMO influence, due to financial necessity. While the debate concerning the ethical propriety of these financial arrangements must await another day, there is no doubt that the materiality of this information to plan participants which affects their everyday medical decisions must be disclosed -- and fully disclosed -- now. Without such information participants are unable to make some of the most important decisions concerning the welfare of themselves and their families. Moreover, with increasing competition for subscribers by other health care providers the full level of services must be disclosed so that potential subscribers could make an intelligently informed decision as to where their dollars are best spent.
While reduction of unnecessary medical costs is certainly desirous, the fee agreement which Healthsource has with its doctors is structured in a way that provides direct financial incentives to the doctors to deter furnishing medical services which they otherwise might provide. While the entire concept of these bonus payments has come under great attack in Washington, and legislative bodies around the country, this litigation merely seeks the right of disclosure of these fee arrangements which Congress has already mandated under ERISA.
Plaintiff alleges that Healthsource has failed to disclose material information concerning the financial incentives which it pays its doctors to reduce medical care, thereby deceiving her and the members of the Class in violation of its fiduciary obligations under ERISA. At a minimum, plaintiff's allegations concerning whether Healthsource has deceived the Plan participants is a question of fact entitling her to pursue the litigation, making dismissal on the pleadings inappropriate. See, e.g., Mullins v. Pfizer, Inc., 23 F.3d 663, 669 (2d Cir. 1994)("the content of the alleged statements attributable to [defendant], as well as whether they constituted affirmative misrepresentations, are questions for the trier of fact"); In re UNISYS Savings Plan Litigation, 74 F.3d 420, 443 (3d Cir. 1996) ("Whether the communications [by the ERISA fiduciary to plan participants] constituted misrepresentations and whether they were material . . . are questions of fact that are properly left for trial.").
Healthsource's managed care structure revolves around the concept of a "primary care physician" or "PCP," a doctor who contracts with Healthsource to provide medical care to Healthsource subscribers. Under this plan, each subscriber must choose one physician from a Healthsource list who shall serve as the subscriber's primary doctor. This doctor will provide the basic medical care for the member, while coordinating any additional medical care that might be needed. Cpt. 28. The PCP is paid a small monthly stipend for each Healthsource patient he serves, and bears the cost of most routine care that he provides. Id. 35. In the event the patient obtains any medical services other than those directly provided by the PCP, however, such as diagnostic tests, examinations by specialists, emergency treatment or hospitalization, Healthsource itself will incur the additional expenses.
In an effort to keep down its costs and accordingly enhance its earnings, Healthsource seeks to avoid to the greatest extent possible the additional expenses incurred by such medical care. In furtherance of this end, Healthsource has structured its financial arrangements with its PCPs to impose strong incentives on its PCPs to avoid such expenses. Thus, Healthsource offers each PCP an additional 33% per patient in compensation on top of the capitated payments, through a "Referral Fund" which sets aside a certain amount for each patient. This Fund is provided to the PCP only if he keeps the medical costs incurred for his patients to a minimum. Accordingly, a portion of the costs of specialty physician services, laboratory and diagnostic tests, emergency care and hospitalization for the doctor's patients are deducted from the Fund, with only the remainder given to the doctor. Cpt. 39-40. Through the Referral Fund, each Healthsource doctor is literally penalized financially for each and every referral, test or hospitalization which the doctor authorizes for his patients. Id. 38. In addition to the Referral Fund, Healthsource also withholds a portion of the capitation payments otherwise due to the doctor, to be returned only if the doctor's use of medical services is less than that of other doctors in the "risk group" to which the doctor is assigned by Healthsource. Id. 37. The amount that is withheld is subject to Healthsource's discretion and may be increased if, in the Company's view, "total health care costs are excessive." Id.
Healthsource's compensation scheme is clearly designed for only one purpose -- to influence its PCPs to reduce the level of treatment they provide to their patients in order to save Healthsource money by reducing medical costs. The fact that the amount to be withheld can be increased if Healthsource deems medical costs to be "excessive" in itself demonstrates that the purpose of the financial arrangement is to deter medical expenses. This is further demonstrated in a June 5, 1989 memorandum from Healthsource to its physicians, in which it announced certain "major enhancements" in its 1989 contracts, including a "22% increase in Referral Funds," which offered the "[p]otential to increase total physician compensation through cost containment efforts." Id. 42. In short, Healthsource was informing its doctors that, if they were able to reduce costs through fewer tests and referrals for their patients, they would receive greater compensation.
The type of financial arrangements utilized by Healthsource has the effect of deterring PCPs from referring patients to specialists, in that they will be penalized as a result. Instead, the PCP may attempt to treat the illness himself, even though he may not be qualified or experienced enough to do so. As the American Medical Association's Council on Ethical and Judicial Affairs stated:
[T]he pressures of cost containment may encourage some physicians to try to manage cases longer than they should. Physicians may feel compelled to stretch their competence to keep patients at the primary care level and conserve resources. Inappropriate treatment and improper or missed diagnoses are potential outcomes of such decisions to delay or deny referral. Ethical Issues in Managed Care, 273 JAMA 330, 332 (Jan. 25, 1996) (the "AMA Council") (Hufford Aff., Exh. L).
The influence on doctors is particularly acute with respect to penalty mechanisms pursuant to which a portion of the doctor's compensation is withheld pending a review of his medical costs or financial bonuses tied to utilization rates, which go beyond mere capitation. Drs. Stephanie Woolhandler and David Himmelstein explained the difference in the New England Journal of Medicine where they pointed out that "risk-sharing arrangements," whereby doctors share in the risk of increased medical costs through the use of withholds and financial bonuses, "are not simply the inverse of fee for service," but of "fee splitting," in which doctors receive kickbacks for referring patients to pharmacies or other doctors -- practices which are often banned. 333 New Eng. J. Med. 1706 (Dec. 21, 1995) (Hufford Aff., Exh. O). As the doctors stated, the "[r]isk sharing - - what might be called fee-for-nonreferral care -- is the mirror image and ethical equivalent of these banned practices." Id.
Despite paying PCPs to reduce care to their patients, Healthsource materially misrepresents or omits material facts concerning these financial incentives to its Plan participants. Instead, Healthsource repeatedly assures its participants that their PCPs are "independent" physicians who serve the patient, not Healthsource, and are "responsible for determining treatment appropriate to the Member's care." Cpt. 30; Group Subscriber Agreement ("GSA") at 8, 28 (Hufford Aff., Exh. A). Moreover, in its Membership Guide, Healthsource stresses that "[r]outine medical care must be provided by your Primary Care Physician," adding that "[s]pecialty care will be coordinated through your Primary Care Physician based on medical necessity," and that "[y]our Primary Care Physician determines medical necessity for specialty care," Cpt. 30; Defendants' Memorandum of Points and Authorities ("Def. Mem."), Exh. 6 at 6-7. Additionally, the HMO Provider Directory, which lists the available Healthsource PCPs, emphasizes that "[a]ll medical care must be provided or arranged by your [PCP]," adding that "[y]our Primary Care Physician (PCP) will determine when specialty care is medically necessary and will help to arrange for a referral to one of the many Healthsource Specialists listed in this directory." Cpt. 30. These representations are clearly designed to make the patient believe that the doctor will serve as his or her representative, making medical decision and recommendations based solely on the patient's needs -- not influenced by financial considerations.
The implication drawn from these materials is underscored in the GSA, which specifically defines the PCP as a doctor who provides independent medical judgments on behalf of the patient:
Primary Care Physician (PCP). A Physician who is under contract with the Plan whom the Member has designated as the Member's primary care physician and who is normally engaged in one of the following categories of practice: Family Practice, Internal Medicine, Pediatrics or General Practice. The physician has a contractual relationship with HEALTHSOURCE which does not interfere with the exercise of the physician's independent medical judgment. . . . Cpt. 31 (emphasis added.); GSA at 30.
It is clearly misleading to state that the contract between Healthsource and the doctor does not "interfere with the exercise of the physician's independent medical judgment" when, in fact, Healthsource, directly seeks to influence the doctor's medical judgment by compensating him for reducing the level of medical care he provides to his patients.
The GSA is also directly misleading with respect to its compensation policies, stating:
Financial Arrangements with Participating Providers. HEALTHSOURCE contracts with Participating Providers under many different financial arrangements, which include, but are not limited to fee-for- service payments, fixed monthly payments for each Member, and fixed fees for each Referral or case. Participating Providers may also be entitled to additional payments for effectively managing care and/or Member satisfaction. Cpt. 32; GSA at 30.
It is outrageous for defendants to suggest, as they do, that this statement "clearly discloses" its physician incentives, Def. Mem. at 6. Subscribers reading the statement that doctors receive payments for "effectively managing care" may interpret it to mean that the care was "effective" in treating patients, but they certainly would not read it to mean that the doctors were offered direct financial incentives not to send patients to specialists or to be provided with other types of medical care. The referral to "fixed monthly payments," i.e., capitation, is also misleading without the further disclosure that a percentage of those payments are withheld pending a review by Healthsource of the doctor's utilization patterns and that Healthsource will only return these withheld payments if the doctor has kept the medical treatment he provides to his patients to a minimum. It is this conflict of interest of which the Plan participants have a right to know.
Plan participants who do not know about the financial penalties and bonuses paid by Healthsource will continue to rely on their doctors to protect their interests when, in fact, the patient himself must now assume more of the responsibility, by asking the right questions and understanding the potential limits on their doctor's recommendations. As noted by the AMA Council, for example, when a physician recommends a course of treatment under fee-for-service, the patient can seek a second opinion prior to agreeing to the treatment, whereas, in contrast, when a physician does not recommend treatment under managed care, "the patient may have no idea that a treatment option was withheld and therefore not recognize the need for a second opinion." Hufford Aff., Exh. L, at 333. In other words, if a doctor withholds treatment due to the financial disincentives provided by Healthsource, a patient may never know it and, thus, cannot protect himself from the possible adverse consequences, including by, if necessary, going outside the plan to obtain treatment from another doctor, even if it is at his own expense. It is therefore critical that the Plan participants understand the fundamental changes that have occurred in their doctor-patient relationship as a result of the financial incentives physicians are paid:
While no one can see into a doctor's heart, new physician- payment arrangements with managed-care organizations flip the old doctor- patient pact on its head by creating incentives to deny, rather than provide, care. Formerly, when doctors provided care, they made money. Now, when managed-care doctors order a hospital stay, a referral to a specialist or expensive, high-tech procedures, they stand to lose money. Confusing as the new payment systems are, consumers must begin to understand them by asking their doctors tough -- maybe even embarrassing -- economic questions, because how a plan's doctors are paid could compromise care when it is needed the most. S. Brink, How Your HMO Could Harm You, U.S. News & World Report, at 62 (Jan. 15, 1996) (Hufford Aff., Exh. P).
The problem, of course, is that because of the misrepresentations and omissions by Healthsource, its Plan participants are not even aware of the financial incentives that should prompt these "tough questions." And without asking those questions, the patient cannot truly make informed judgments concerning his medical care. It is for this precise reason that the AMA Council has concluded that "[a]ny incentives to limit care must be disclosed fully to patients by plan administrators on enrollment and at least annually thereafter." Cpt. 52.
Disclosure of the financial incentives is also important in order to facilitate the Plan participants' ability to choose which health plans to select. Because not all managed care companies use financial penalties and bonuses to encourage doctors to reduce care, disclosure of such incentives can be an important means to evaluate the alternatives. Certain managed care companies offer different incentive packages that could be consider material to a plan participant's decision whether to accept one HMO over another. Recently, for example, Physicians Health Service ("PHS"), a managed care company in the New York area, announced its decision to eliminate capitation payments and to return to fee for service, stating that "[c]apitation has caused nationwide concern about the quality of care patients are receiving," and "we want our patients to know that their health care will not be compromised due to financial pressure on physicians." Hufford Aff., Exh. R.
If the Healthsource Plan participants have a choice between plans, they can take into account the financial incentives that might deter treatment by physicians, and compare them to other options, such as those offered by PHS -- but only if they know about them. Moreover, if the employer selects the plan, the employee can use the information in an effort to persuade her employer to look for other options which could offer similar benefits but without the disincentives to care offered by Healthsource.
As explained below, both Healthsource-NH and Healthsource, Inc. are fiduciaries under ERISA and, as such, must comply with the Act's disclosure requirements. In particular, ERISA requires that all Plan participants receive "a summary plan description" which "shall be written in a manner calculated to be understood by the average plan participant, and shall be sufficiently accurate and comprehensive to reasonably apprise such participants and beneficiaries of their rights and obligations under the plan, and . . . [any] circumstances which may result in disqualification, ineligibility, or denial or loss of benefits . . ." 29 U.S.C. 1022. Pursuant to this requirement, the summary plan description "must not have the effect [of] misleading, misinforming or failing to inform participants and beneficiaries." 29 C.F.R. 2520-102-2(b). A failure to comply with this provision constitutes a breach of fiduciary duty. Although the specific disclosure requirements set forth in 29 U.S.C. 1022 is directed to the "Plan Administrator," Def. Mem. at 12-14, Healthsource is nevertheless liable for the failure to provide an adequate summary plan under section 405(a)(2) of ERISA, 29 U.S.C. 1105(a), which provides that "[c]o-fiduciaries who have knowledge of, knowingly participate in, or enable the commitment of a breach of duty by another fiduciary are jointly and severally liable with the breaching fiduciary." Martin v. Harline, 1992 U.S. Dist. LEXIS 8778, at *42 (D. Utah March 30, 1992). Here, Healthsource has contractually "assume[d] responsibility" for the content of "all literature and material furnished to employees," Group Contract, Def. Mem., Exh. 2 at 8, and, hence, is responsible for the information distributed by employers to their employees with respect to the Healthsource plans. It therefore cannot avoid liability for its own representations.
The summary plan descriptions at issue in this case consist of the brochures disseminated by Healthsource to the Plan participants which purport to describe the material terms and conditions of the Plan. Healthsource has breached its fiduciary obligations by disseminating summary plan descriptions which "mislead," "misinform," or "fail to inform" Plan participants with respect to their benefits, and possible means by which these benefits can be lost -- particularly as a result of incentives paid to doctors to reduce medical treatment that might otherwise be available under the Plan.
Not only does ERISA place affirmative obligations on Plan fiduciaries to disclose material conditions of the Plan, but a fiduciary's duties under ERISA go beyond the specific statutory requirements, prohibiting representations that mislead or deceive Plan participants. As the Supreme Court recently held in Varity Corp. v. Howe, 134 L.Ed.2d 130, 144 (1996), a fiduciary's obligations is more than "simply complying with the specific duties imposed by" the Act, given that "the primary function of the fiduciary duty is to constrain the exercise of discretionary powers which are controlled by no other specific duty imposed by the trust instrument or the legal regime."
Thus, it is a breach of fiduciary duty under ERISA "[t]o participate knowingly and significantly in deceiving a plan's beneficiaries in order to save the employer money at the beneficiaries' expense." Id. at 145.
The obligation not to deceive plan participants includes the obligation not to withhold material information which they need to protect their interests. In Eddy v. Colonial Life Insurance Co., 919 F.2d 747, 750-51 (D.C. Cir. 1990), the D.C. Circuit adopted the holding in Restatement (Second) of Trusts that the trustee "is under a duty to communicate to the beneficiary material facts affecting the interest of the beneficiary which he knows the beneficiary does not know and which the beneficiary needs to know for his protection in dealing with a third person," finding that an ERISA fiduciary "has a duty not only to inform a beneficiary of new and relevant information as it arises, but also to advise him of circumstances that threaten interests relevant to the relationship." Id. at 750 (emphasis added). A similar conclusion was reached by the Third Circuit in Bixler v. Central Pa. Teamsters Health and Welfare Fund, 12 F.3d 1292, 1300 (3d Cir. 1993), which cited Eddy in holding that "[t]his duty to inform is a constant thread in the relationship between beneficiary and trustee; it entails not only a negative duty not to misinform, but also an affirmative duty to inform when the trustee knows that silence might be harmful." In both Bixler and Eddy, the court recognized that, if a fiduciary has information concerning benefits and it has reason to know that its participants and beneficiaries could be harmed by their lack of knowledge, it has a clear duty to inform them. Based on this analysis, it is clear that Healthsource has misled its subscribers by failing to disclose its financial arrangements with its PCPs, information which the subscribers need to know to protect their interests.
Courts have long recognized that patients have a right to know what financial incentives may influence a doctor's medical decisions. In Moore v. The Regents of the University of California, 51 Cal.3d at 129, the California Supreme Court found that a doctor breached his fiduciary duty by failing to disclose the conflict of interest that arose as a result of his interest in performing medical research on the patient's unique blood. Relying on the "well-established principles" that patients have a right to "informed consent," and that "a physician has a fiduciary duty to disclose all information material to the patient's decision," the court held that a "physician must disclose personal interests unrelated to the patient's health, whether research or economic, that may affect the physician's professional judgment," and the failure to do so "may give rise to a cause of action for performing medical procedures without informed consent or breach of fiduciary duty." Id. (emphasis added).
In recognizing a patient's right to be informed of his doctor's financial incentives, the court in Moore also drew an analogy to California regulations which, out of "[t]he desire to protect patients from possible conflicts of interest," require that physicians disclose to the patient in writing if they refer to organizations where the physician has a significant beneficial interest. 51 Cal.3d at 129 (citing Cal. Bus. & Prof. Code 654.2(a)). A similar federal statute was considered by the court in United States v. Neufeld, 908 F.Supp. 491 (S.D. Ohio 1995). In upholding an indictment against a doctor for receiving kickbacks for referring medicare patients, the court found that the doctor's receipt of such kickbacks was a breach of his fiduciary duty to his patients, because they "deserved medical opinions and referrals unsullied by mixed motives." Id. at 500 (citing Current Opinions on Ethical and Medical Affairs of the American Medical Association 31-33 (1985)).
By being subjected to medical treatment without knowledge of the financial incentives that may influence their doctors' judgment, the participants have been denied their right to informed consent. In particular, they have been denied information they "need for their protection in dealing with a third person," namely their doctor. See Eddy, 919 F.2d at 750. As such, Healthsource has a fiduciary duty to provide such information and its failure to do so is a breach of its obligations under ERISA.
Congress, in its wisdom, unambiguously declared that beneficiaries in ERISA plans are entitled to full and fair disclosure of all material terms and conditions of their benefit plans. As plaintiff has alleged, Healthsource has violated these ERISA requirements by not merely omitting the requiredinformation, but by affirmatively misleading Plan beneficiaries concerning the conflicts of interest in which Healthsource places its PCPs. The plaintiff and other members of the Class have therefore been injured by the breach of duty owed to them by Healthsource in that they have been -- and will continue to be - - forced to make critical decisions concerning their health care needs without complete and accurate information concerning the financial conflicts that could influence the decisions of their doctors.
Despite defendants' assertion that plaintiff does not have standing to pursue this case -- failing to cite even one ERISA case in support of its argument -- plaintiff has clear standing to bring this action for the breach of fiduciary duty owed to her by Healthsource. In particular, ERISA authorizes beneficiaries, such as plaintiff, to bring a civil action "to enjoin any act or practice which violates" ERISA or "to obtain other appropriate equitable relief . . . to redress such violations. 29 U.S.C. 1132(a). This provision "essentially empowers beneficiaries to bring a civil action to redress any violation of the statute's fiduciary requirements," 964 F.2d at 148, which is exactly what plaintiff has done here. Cpt. 79.
Under ERISA, the law is clear that a breach of fiduciary duty is sufficient injury to sustain a cause of action, without the plaintiff being required to wait until that breach causes some type of physical or financial injury at some point in the future. As held in Larson v. Northrop Corporation, 21 F.3d 1164, 1169, 1171 (D.C.Cir. 1994), "[t]he ERISA statute of limitations . . . begins to run when actions constituting the breach take place and not when actual harm is suffered by the plaintiffs," and, as such, "a plaintiff need not suffer harm (i.e., be denied pension benefits) before he becomes entitled to bring an action under 29 U.S.C. 1104(a)." In essence, the plaintiff's cause of action accrues when the defendant breaches his fiduciary duties even though the plaintiff has yet to be injured as a result of the breach. See also Ziegler v. Connecticut General Life Insurance Co., 916 F.2d 548, 551 (9th Cir. 1990) ("Congress intended to make fiduciaries culpable for certain ERISA violations even in the absence of actual injury to a plan or participant. Indeed, plaintiffs need not prove any injury in order to prosecute violations of [fiduciary duty under ERISA]. . . . [Thus,] an ERISA plaintiff may prosecute a plan fiduciary who fails to perform for the exclusive benefit of participants and their beneficiaries regardless of cost or loss to the participants and their beneficiaries."); International Union of Electronic, Electric, Salaried, Machine & Furniture Workers v. Murata Erie North America, Inc., 980 F.2d 889, 899 (3d Cir. 1992) (cited in Larson as holding that, "under a breach of fiduciary duty claim brought pursuant to ERISA, 404, 29 U.S.C. 1104, the participants do not have to be denied benefits before they can bring suit," 21 F.3d at 1171); Gluck v. Unisys Corp., 960 F.2d 1168, 1178 (3d Cir. 1992) (the statute of limitations begins to run under ERISA upon "the date of the last action which formed a part of the breach" of fiduciary duty, without regard to when actual injury might occur as a result). Similarly, numerous courts have held that a plaintiff need not allege specific injuries to bring an action "to establish and clarify her rights to future benefits." Rice v. Rochester Laborers' Annuity Fund, 888 F. Supp. 494, 497 (W.D.N.Y. 1995). Thus, this case is ripe for review.
ERISA provides that any person is a fiduciary who exercises "discretionary authority . . . or control respecting management" of a benefit plan. 29 U.S.C. 1002(21)(A). The term "control" under this paragraph has been interpreted to mean "the power to exercise a controlling influence over the management or policies of a person other than an individual." 29 C.F.R. 2510.3-21(e)(2). Both Healthsource-NH and Healthsource, Inc. clearly meet this criteria.
Defendants apparently recognize that Healthsource-NH is an ERISA fiduciary, for while they claim that Healthsource-NH is merely "a vendor" to plaintiff's benefit plan, and "is not the Plan Administrator," Affidavit of Lisa Swenson at 4, they do not deny that Healthsource-NH has assumed fiduciary status due to its substantial discretion over the administration of its plans, including the power to grant or deny benefits to Class members. Cpt. 16. Defendants do, however, contend that Healthsource, Inc. is not a fiduciary, claiming that is has no "discretionary involvement" in the plaintiff's benefit plan. Def. Mem. at 18. The public record belies this claim, however, demonstrating that Healthsource, Inc. is an ERISA fiduciary due to the "controlling influence" it exercises over its HMO subsidiaries and the management of their benefit plans. Cpt. 16.
Both in its motion papers and at the June 3, 1996 pre-trial conference before the Court, Healthsource painted an extremely misleading picture of Healthsource, Inc. as merely a holding company, unconnected with the management, administration or policies of its wholly owned HMO subsidiaries. Def. Mem. at 18. The publicly available information flatly contradicts these assertions, revealing that Healthsource-Inc., which is incorporated and headquartered in New Hampshire, exercises substantial influence and control over the administration and management of the health care services that is provided through its wholly owned HMO subsidiaries, including Healthsource-NH. Healthsource, Inc. describes itself in its 1995 SEC Form 10-K as "a geographically diversified provider of a broad range of managed healthcare services," and "a leading managed care provider," Rushd Aff., 4, touting its business strategy to "enhance" its leadership position by, among other things, controlling the costs of health care "through global capitation arrangements or other suitable arrangements with healthcare providers" and "continuing to develop and offer new [health] products for different segments of the population such as Medicare." Id. Most significantly, Healthsource, Inc. acknowledges in its public filings that it provides "assistance, leadership and oversight," to its wholly owned HMOs, such as Healthsource-NH, in the provision of managed care, specifying that "[a]ssistance and leadership is often provided regarding negotiating major provider contracts, important marketing assignments, product innovation, expansion and other strategic initiatives." Id. 5. In other words, Healthsource, Inc. participates directly in the key matters affecting the administration of the benefit plans.
To satisfy its obsession with cutting costs, Rushd Aff., 8, Healthsource, Inc. has also become integrally involved in the administration, management, and policies of its HMO subsidiaries, reviewing and modifying the health benefits provided through its HMOs "so as to discourage inappropriate levels of consumer-driven utilization." Id. 10-11. To facilitate cost control and determinations of medical necessity in the administration of benefit plans, Healthsource, Inc. even maintains on a centralized basis the claims history of each managed care member, and in addition "maintains two major MIS [management information systems] centers . . . to service its HMOs." Id. 12. This centralized data system not only permits the medical directors for Healthsource, Inc.'s HMOs to "get the very intense statistical kinds of analysis they needed," but it also permits the Company itself to compare and evaluate medical utilization data from different HMOs in order to make corporate decisions concerning cost cutting efforts. Id. 12 n.4.
Similarly, Healthsource, Inc. keeps a tight reign over the PCPs who contract with its HMO subsidiaries, including Healthsource-NH, as it continually communicates with them "about the impact of clinically inappropriate utilization of healthcare resources." Id. 13. As Dr. Payson has conceded: "[T]he critical cost containment is written around the primary care doc. That's the whole game. That is a whole business, is working around the primary care doctor." Id. 13 n.5. Through its aggressive oversight of its HMOs, Healthsource, Inc. has succeeded in controlling costs through controlling the PCPs, with Dr. Payson proudly explaining: "We educated them [the PCPs], and it's an ongoing process. We've got physician costs under control." Id. 14.
Additional control by Healthsource, Inc. over its HMO subsidiaries is revealed in the marketing area, with the Company "rel[ying] upon an internal sales force to pursue local markets" and "developing a coordinated approach to regional accounts in New England and the Southeast across plan lines to improve effectiveness." Rushd Aff., 19-20. Moreover, Healthsource, Inc. communicates with employers with the "biggest account[s]," including such employers in New Hampshire, over pricing and other issues, and renders assistance in the obtaining of licenses and accreditation for its HMO subsidiaries, including Healthsource-NH. Id. 21-22.
Finally, Healthsource, Inc.'s influence over its subsidiaries is demonstrated by the substantial overlap among the directors and officers of Healthsource, Inc. and its HMO subsidiaries. Not only is every single director of Healthsource, Inc. also a director and/or officer of one or more of its wholly owned subsidiaries, Rushd Aff., 23, but the Chief Financial Officer of Healthsource, Inc., Thomas M. Congoran, also holds the same position in many of the HMO subsidiaries, including Healthsource-NH, while Healthsource, Inc. has a Corporate Medical Director who "is responsible for medical management policy issues on a company-wide basis." Id. 24.
These facts, and the supporting documentation attached to the Hufford Affidavit, demonstrate conclusively the substantial involvement of Healthsource, Inc. in the operations of its HMO subsidiaries and in the administration of their benefit plans. Where, as here, a parent corporation exercises a "controlling influence" over the management of its subsidiaries, it is an ERISA fiduciary with respect to benefit plans for which the subsidiaries are fiduciaries. At a minimum, the question of whether Healthsource, Inc. is a fiduciary due to the level of influence it exercises over its subsidiaries is a questions of fact to be determined at trial, not on summary adjudication.
The public documents demonstrate that Healthsource, Inc. exercises a controlling interest over its subsidiaries. To the extent this is insufficient to overcome defendants' motion for summary judgment, the plaintiff is therefore entitled, at a minimum, to discovery in order to determine the extent to which Healthsource, Inc. exercises this control, as suggested by its own public statements. Where a plaintiff "has not had the opportunity to discover information that is essential to his opposition," summary judgment is inappropriate. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 n.5 (1986). Thus, under Fed. R. Civ. P. 56(f), the nonmoving party may move for a continuance for discovery to be completed, which it has done here through the accompanying Rushd Affidavit.
Plaintiff clearly satisfies the requirements under Rule 56(f), with her attorney having submitted a timely affidavit which specifies good cause for plaintiff's need for further discovery and demonstrates that there is a "plausible basis for the belief" that the relevant information that is sought would raise a genuine issue of material fact with respect to the issues raised by defendants. Price v. General Motors Corp., 931 F.2d 162, 164 (1st Cir. 1991). The information needed to confirm the inferences which can be drawn from the public record are in the hands of Healthsource, and plaintiff has a right to discover such evidence in order to prove her case. As held by the First Circuit in Hebert v. Wicklund, 744 F.2d 218, 222 n.4 (1st Cir. 1984), "continuances should be routinely granted under Rule 56(f) where the moving party has sole possession of the relevant facts that the non-moving party needs to oppose the summary judgment motion."
For the foregoing reasons, plaintiff respectfully requests that this Court deny defendants' motion to dismiss the Complaint and/or its motion for summary judgment.
Dated: July 9, 1996
Respectfully submitted,
POMERANTZ HAUDEK BLOCK & GROSSMAN
By:
___________________________
D. Brian Hufford, Esq.
(admitted pro hac vice)
Pomerantz Haudek Block & Grossman
100 Park Avenue
New York, New York 10017
Telephone: (212) 661-1100
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