From Boston Bar Association Health Law Section

Post-Pegram Postmortem: Who's Ahead?
By S. Stephen Rosenfeld
Rosenfeld and Associates

On June 12, 2000, the United States Supreme Court issued one of its most important decisions on the meaning of the Employee Retirement Income Security Act of 1974 (ERISA), Pegram v. Herdrich, 530 U.S. 211, 120 S. Ct. 2143. It is the latest in a long line of more than a dozen cases that have dominated the world of workplace benefits in the past twenty-five years. Six months after Pegram, health care lawyers and their clients, while clear on its essential holding, are scratching their heads about its long-term implications. Is Pegram good news for HMO's because it limits worker/members' ability to sue for relief under ERISA? Or is Pegram bad news for HMO's because it opens the door far wider than before to state court relief against HMO's? This, readers, is the imbroglio that keeps us at the edge of our seats. Read on, please.

A Brief Introduction

When Congress enacted ERISA, its primary goal was to stamp out outrageous employer manipulation of worker pensions, which had become a front-page scandal in the early 1970's. There is no doubt that Congress succeeded admirably in this regard. However, the reach of ERISA's language extended well beyond pensions to encompass all employee benefits, including what were in 1974 the relatively uncontroversial areas of health benefits, short and long-term disability benefits, and other benefits pertaining to the health and well-being of the employees during their years on the job - contemporaneous benefits - rather than their well-being after retirement. Congress ordained that there should be a set of safeguards to ensure fair treatment in the delivery of these contemporaneous benefits, and that a system of internal appeals and subsequent judicial relief should be available to enforce these safeguards. Then, in a sweeping declaration, Congress determined that this federal protection system should be the exclusive remedy for improper administration of such benefits. In so doing, Congress -- at least insofar as its handiwork has been interpreted and applied by the Supreme Court -- swept aside all state remedies that might have been available to protect employees, with no regard to whether those state remedies might have proved more effective than ERISA, or at least have complemented the remedies available under ERISA.

It is no exaggeration to say that the lion's share of controversy about employee benefits since the enactment of ERISA has centered on the attempt by workers to extend the system of remedies available to them in challenging benefit denials and the use by employers and their benefits administrators of ERISA to resist those extensions. Employees have pursued essentially two lines of attack. One has been to try to make the relief under ERISA for benefit denials as far-reaching as possible, to include not only restoration of benefits, which is essentially equitable in nature, but remedies at law as well, e.g., tort damages and punitive damages. The other tack has been to seek relief under more sweeping state remedies to the degree that they were not available under ERISA, e.g., by bringing state tort actions against HMO's for injuries caused by benefit denials, or by bringing chapter 93A consumer protection actions against benefit plans for deceptive practices in plan administration. Almost invariably, the courts have thwarted workers' efforts in both arenas, a doctrinal double whammy. On the ERISA remedies front, the relief available under ERISA has been interpreted very narrowly, to include nothing more than the restoration of benefits denied, no matter how egregious the conduct of the plan fiduciary. On the state remedies front, the courts have interpreted the preemption language in ERISA very broadly, to preclude virtually every attempt to subject a plan fiduciary to liability under state law. In Pegram v. Herdrich, these two separate lines of attack converged in a dramatic way, and the nuances of meaning in Justice Souter's resolution of Pegram have left room for argument about the future fate of litigation against HMOs.


In Pegram, Mrs. Herdrich claimed that the decision to delay her medical treatment, which had resulted in a burst appendix, was driven by the self-interest of Dr. Pegram -- one of the physician owners of the HMO covering Mrs. Herdrich under her employer's health plan -- in increasing her incentive bonuses in violation of her fiduciary duty under ERISA, 29 U.S.C. 1001 et seq. The question before the Court was whether treatment decisions made by an HMO acting through its physicians, like Dr. Pegram, were fiduciary acts within the meaning of ERISA, and therefore cognizable in an ERISA action in federal court. The Court held that such treatment decisions were not fiduciary acts, and that therefore no relief was available under ERISA for treatment decisions, whether or not they were the product of financial self-interest.

So far so unremarkable. What is wholly new is the approach Justice Souter adopted. In structuring the discussion about what decisions of an HMO could be considered fiduciary and which not, Justice Souter made the following analysis:

It will help to keep two sorts of arguably administrative acts in mind. . . . What we will call pure "eligibility decisions" turn on the plan's coverage of a particular condition or medical procedure for its treatment. "Treatment decisions," by contrast, are choices about how to go about diagnosing and treating a patient's condition: given a patient's constellation of symptoms, what is the appropriate medical response? 120 S. Ct. at 2153-2154.

Let's pause right here. Until Pegram, "eligibility" decisions and "treatment" decisions defined the universe insofar as judicial analysis was concerned. To summarize and perhaps oversimplify, "eligibility" decisions have been considered the administrative acts of a fiduciary, wholly governed by ERISA and completely immune from state remedies. By contrast, "treatment" decisions over a bumpy, non-linear period, have come to be seen as sufficiently bound up with the practice of medicine to fall outside the ambit of ERISA and into the realm of medical practice, subject to state law remedies, primarily grounded in medical malpractice. In the past several years, the courts have struggled valiantly but not always consistently to determine whether a particular denial was an "eligibility" decision governed exclusively by ERISA, or a "treatment" decision, governed by state law. What Justice Souter did in Pegram is transform the dividing line between these two categories into a middle category, all its own.

Let us press the pause button again and resume his analysis:

These decisions are often practically inextricable from one another, . . . This is so not merely because, under a scheme like Carle's [Mrs. Herdrich's HMO], treatment and eligibility decisions are made by the same person, the treating physician. It is so because a great many and possibly most coverage questions are not simple yes-or-no questions, like whether appendicitis is a covered condition (when there is no dispute that a patient has appendicitis), or whether acupuncture is a covered procedure for pain relief (when the claim of pain is unchallenged). The more common coverage question is a when-and-how question. Although coverage for many conditions will be clear and various treatment options will be indisputably compensable, physicians still must decide what to do in particular cases. The issue may be, say, whether one treatment option is so superior to another under the circumstances, and needed so promptly, that a decision to proceed with it would meet the medical necessity requirement that conditions the HMO's obligation to provide or pay for that particular procedure at that time in that case. The Government in its brief alludes to a similar example when it discusses an HMO's refusal to pay for emergency care on the ground that the situation giving rise to the need for care was not an emergency . . . In practical terms, these eligibility decisions cannot be untangled from physicians' judgments about reasonable medical treatment, . . . [I]n the case before us, Dr. Pegram's decision was one of that sort. She decided (wrongly, as it turned out) that Herdrich's condition did not warrant immediate action; the consequence of that medical determination was that [the HMO] would not cover immediate care, whereas it would have done so if Dr. Pegram had made the proper diagnosis and judgment to treat. The eligibility decision and the treatment decision were inextricably mixed, as they are in countless medical administrative decisions every day. . . . Based on our understanding of the matters just discussed, we think Congress did not intend . . . any . . . HMO to be treated as a fiduciary to the extent that it makes mixed eligibility decisions acting through its physicians. (Emphasis added) 120 S. Ct. at 2154-2155.

So here is a whole new avenue of analysis open to ERISA-mavens, a type of eligibility decision that is arguably outside of ERISA, and therefore subject to state law remedies. There is at least a strong likelihood that, if these "mixed eligibility decisions" identified by Justice Souter as in a class by themselves had been part of ERISA doctrine in the past, several controversial and lamentable decisions would have gone the other way. To cite just one infamous example from Massachusetts, Andrews-Clarke v. Travelers, 984 F. Supp. 49 (D. Mass. 1997) Judge William Young decried having to dismiss as preempted by ERISA a state malpractice and chapter 93A claim against Travelers Insurance Company for a decision denying inpatient care to a mentally ill member who, when prescribed less intensive treatment, proceeded to commit suicide. Travelers had determined that the inpatient care advocated by the insured's doctors was not medically necessary. Judge Young was obviously repulsed by his judicial obligation, and would have remanded the case for trial under state law if there had been any available rationale for doing so. But at the time there was not.

Is the way now clear for a state remedy in cases like Andrews-Clarke? If so, then the victory of the HMO in Pegram is a Pyrrhic one, indeed. One need only review the procedural history of Pegram itself to see how unwilling the HMO was to have the issues in Pegram heard in state court. Originally, Mrs. Herdrich's lawyer had brought her complaint against the HMO in state court, claiming that it was responsible under state law for Mrs. Herdrich's burst appendix, and should be subject to the full array of remedies, including compensatory and punitive damages, available in state court but not under ERISA. The HMO immediately removed the case, as defendants in these kinds of actions reflexively do, seeking the protection of ERISA against this potentially ominous outcome. If the impact of Pegram is to cut off the removal option in the future, the long-term winner in Pegram may not be Mrs. Herdrich herself, now years later without any remedy against the HMO, but it may not be the HMO industry either, insofar as future Mrs. Herdrichs, and future Mrs. Andrews-Clarkes, may finally achieve the remedy they originally sought.


There are two major caveats, however, to the conclusion that Pegram is a victory for future plaintiffs. Before canvassing how Pegram has been used in the months subsequent to its announcement, one must appreciate what those caveats are.

First, as closer parsing of Justice Souter's now-famous quotation, supra, about "mixed eligibility decisions" will show, he was not unequivocally clear about the reach of his analysis. Initially, he focuses on the nature of the mixed eligibility-treatment decision, not the status of the person making it, as follows:

It will help to keep two sorts of arguably administrative acts in mind. . . . These decisions are often practically inextricable from one another, . . . because a great many and possibly most coverage questions are not simple yes-or-no questions, like whether appendicitis is a covered condition (when there is no dispute that a patient has appendicitis), . . . The more common coverage question is a when-and-how question. . . . The issue may be, say, whether one treatment option is so superior to another under the circumstances, and needed so promptly, that a decision to proceed with it would meet the medical necessity requirement that conditions the HMO's obligation to provide or pay for that particular procedure at that time in that case. (Emphasis added) 120 S. Ct. at 2153-2154.

This language suggests that every mixed eligibility decision, whether made by a treating physician or by an HMO administrator reviewing a treating physician's recommendation would fall outside the ERISA definition of a fiduciary, and thereby be subject to state law remedies, a momentous suggestion.

However, Justice Souter potentially narrows that broad proposition when, in announcing the precise holding of Pegram, he states as follows:

Based on our understanding of the matters just discussed, we think Congress did not intend . . . any . . . HMO to be treated as a fiduciary to the extent that it makes mixed eligibility decisions acting through its physicians. 120 S. Ct. at 2155.

The "acting through its physicians" language, read most narrowly suggests that only when an HMO treating physician determines that care is not medically necessary does the decision fall into the domain of an interrelated decision encompassing both eligibility and treatment. However, plaintiffs' counsel will argue that the same intermixing of eligibility and treatment occurs when a utilization reviewer employed by the HMO reviews a treating physician's recommendation and determines that the recommended treatment is not medically necessary, as was the case in Andrews-Clarke. In both cases, a medical decision is being made that implicates coverage, and by Justice Souter's reasoning, that decision should be seen as falling outside the kind of pure eligibility determination that Congress intended ERISA to address. Post-Pegram cases will doubtless seek to resolve the question.

The second caveat relates to the serious blow that Pegram dealt to the several ERISA class actions pending across the country, claiming fiduciary violations on behalf of nationally-defined classes of HMO members on account of widespread HMO practices, usually involving capitation or other financial incentives for withholding expensive treatments. On this front, the outcome is unequivocally a win for HMO's. Here is what Justice Souter had to say on the subject:

The fact is that for over 27 years the Congress of the United States has promoted the formation of HMO practices. The Health Maintenance Organization Act of 1973 . . . allowed the formation of HMOs that assume financial risks for the provision of health care services, and Congress has amended the Act several times, . . . If Congress wishes to restrict its approval of HMO practice to certain preferred forms, it may choose to do so. But the Federal Judiciary would be acting contrary to the congressional policy of allowing HMO organizations if it were to entertain an ERISA fiduciary claim portending wholesale attacks on existing HMOs solely because of their structure, untethered to claims of concrete harm. (Emphasis added) 120 S. Ct. at 2157.

With this statement, the Court can only be viewed as speaking directly to lower courts where the HMO class actions are pending. After all Pegram itself was not a class action, and although it was attacking a particular financial incentive under which Dr. Pegram was functioning, it is a stretch to characterize the case itself as a "wholesale attack on existing HMOs."

What the Post-Pegram Courts Have Said So Far

It is far too soon to pronounce clear trends in the lower courts' treatment of Pegram. Nonetheless, in a number of areas, there are initial indications that deserve mention.

A. The Supreme Court Declines an Opportunity to Expand Pegram

On the opening day of its 2001 term, the Supreme Court denied review of a ruling by the 8th Circuit Court of Appeals that a widow may sue physicians under state law for failure to disclose financial incentives that allegedly influenced her late husband's decision not to seek out a cardiac specialist before he died of a heart attack. Esensten v. Shea, U.S., No. 00-12, cert. denied 10/2/00. The Eighth Circuit had held earlier in 2000 that Dianne Shea's state law negligent misrepresentation claim against physician Sidney Esensten and others was not preempted by the Employee Retirement Income Security Act, Shea v. Esensten, 208 F. 3d 712 (8th Cir. 2000). 1 In his petition for certiorari, Dr. Esensten argued that if the Eighth Circuit ruling were permitted to stand, doctors potentially would be left open to unlimited liability for failing to disclose to patients the intricate details of HMO contracts, while the managed care organizations that draft those contracts would be exposed to far less liability.

Mrs. Shea alleged that her husband died of a heart attack at age 40 after being assured by physicians that a referral to a cardiologist was unnecessary. She claimed that financial incentives contained in a health maintenance organization contract were designed to minimize referrals to specialists, and if her husband had known of the incentives, he would have sought the opinion of a heart specialist at his own expense.

Dr. Esensten argued that the Eighth Circuit ruling "directly conflicts" with Pegram, and urged the court to hear the Shea case in order to "extend its Pegram analysis to the logical and just conclusion that doctors, like HMOs, cannot be held liable for participating in managed-care contracts, or for failing to disclose the details of those managed-care contracts."

In 1997, the Eighth Circuit ruled in Shea I that an HMO had a fiduciary duty under ERISA to disclose financial incentives that might have an impact on a treating physician's referrals to specialists. 107 F. 3d 625 (8th Cir. 1997).

B. Pegram's Impact on Removal Analysis

In Lehmann v. Brown, 230 F.3d 916 (7th Cir. 2000), decided on October 16, 2000, the same Seventh Circuit judge who wrote the stinging dissent that propelled the Supreme Court to its Pegram decision put a fine point on the Court's holding in Pegram by highlighting its impact on removal analysis. Lehmann itself, as Judge Easterbrook pointed out, presented a very weak state law claim. The ultimate outcome of the case was certain dismissal on the merits. Nonetheless, it served as a vehicle for teaching lower courts that removal attempts by defendants using ERISA are to be scrutinized far more closely than in the past.

Plaintiffs, decedent's ex-spouse and her children, filed suit against the trustee and deceased's retirement plan. They asserted that the trustee violated his fiduciary duties, and that decedent's retirement plan violated its duties under state law by distributing any benefits before defendant "qualified" as a trustee. Instead of asking the state court to dismiss the claim as frivolous, the retirement fund removed the proceedings to federal court, contending that plaintiffs' claim "arose under" ERISA and, therefore, could be removed under the doctrine known as "complete preemption." The district court then dismissed the suit, ruling that plaintiffs lacked "standing" because none was a beneficiary of decedent's retirement benefits contracts, and none had any possible claim under ERISA. Plaintiffs appealed. On appeal, the court held that while preemption might provide a defense, the claim asserted sounded in state tort law, and did not arise under ERISA; the case was remanded to state court.

Judge Easterbrook wrote as follows:

When the complaint alleges that a welfare-benefit plan has committed a tort--for example, when a physician employed by a HMO that has been offered as a benefit to employees commits medical malpractice--the claim must arise under state law, because ERISA does not attempt to specify standards of medical care. See Pegram v. Herdrich . . . Claims outside the scope of ERISA arise independently of federal law, and the possibility that 514(a) preempts one or another state-law theory is just a federal defense. 230 F. 3d at 920

On September 5, 2000, a district court judge in Illinois, a Seventh Circuit state, made clear that removal is far from obsolete. In Schusteric v. United HealthCare Ins. Co. of Illinois, 2000 U.S. Dist. LEXIS 13021, the plaintiff hoped that labeling her case as a negligence action would suffice to overcome removal under ERISA. Ms. Schusteric claimed that she continued to suffer pain due to defendant health insurer's delayed decision to pay for physical therapy. She alleged that defendant negligently practiced medicine in determining that therapy was not medically necessary. Defendant argued that despite its captioning as a negligence claim, plaintiff's case was really a claim for recovery of benefits due under her health care plan, and that it therefore arose under the ERISA and was preempted pursuant to 502(a) of ERISA, 29 U.S.C. 1132(a)(1)(B). The plaintiff's motion to remand was denied.

The court addressed the relevance of Pegram as follows:

Schusteric . . . argues this case must be remanded in light of the Supreme Court's decision in Pegram v. Herdrich . . . However, Pegram addressed a different question: whether an HMO should be treated as a fiduciary under ERISA 1109 when it makes mixed eligibility decisions -- decisions in which determination of whether a benefit plan covers a particular condition or procedure is "inextricably mixed" with determination of the appropriate treatment. The plaintiff in Pegram argued her HMO had an incentive to make mixed eligibility decisions in the physicians' self interest rather than the exclusive interests of plan participants because it rewarded its physician owners for limiting treatment by paying them a year-end bonus from the profits realized from limiting medical care. The court held that mixed eligibility decisions made by an HMO acting through its physicians were not fiduciary decisions under ERISA.The facts of Pegram are similar to those here in that both involved allegedly erroneous determinations by a health insurer that treatment was not medically necessary. However, . . . Pegram's discussion of whether the plaintiff could state a claim for breach of fiduciary duty under ERISA 1109 says nothing about whether a negligence claim of the type alleged in this case is completely preempted by 502(a). Pp. 5-6.

The result is unsurprising, as was Ms. Schusteric's attempt to see just how protection from preemption could be extracted from Pegram.

C. Impact on Class Actions

Although Maio v. Aetna, Inc., 221 F.3d 472 (3rd Cir. 2000), decided on August 11, 2000, is a Racketeer Influenced and Corrupt Organizations Act (RICO) case, 18 U.S.C. 1961, the Third Circuit's lengthy references to Pegram clearly suggest that class actions under both RICO and ERISA are in deep trouble. In Maio, the appellants filed a class-action complaint alleging that appellees violated RICO and state law by providing an inferior plan compared to what Aetna had marketed. The district court granted Aetna's motions to dismiss on the ground that appellants lacked standing to challenge the alleged activities. On appeal, the court affirmed the judgment. "Appellants could not establish that they suffered a cognizable injury to business or property flowing from appellees' conduct, an essential element of a civil action under RICO. Appellants failed to allege the facts necessary to support their assertion that they paid too much for the health insurance they received from Aetna. Specifically, appellants failed to allege that they suffered medical injuries, received inadequate or inferior care, or sought but were denied necessary care as a consequence of the structure of appellees' HMO plan, which included the systemic policies and practices challenged in the complaint." 221 F. 3d at 473.

The court's references to Pegram are the most extensive of any lower federal court to date and deserve close review. The key quotations are as follows:

Here . . . the property at issue is not real or personal property; rather, it is a contract for health insurance. Thus, the nature of appellants' property interests at stake is their contractual right to receive benefits in the form of covered medical services. See Pegram . . . ("The defining feature of an HMO is receipt of a fixed fee for each patient enrolled under the terms of a contract to provide specified health care if needed."); . . . Because appellants' property interests in their memberships in Aetna's HMO plan take the form of contractual rights to receive a certain level (quantity and quality) of benefits from Aetna through its participating providers, see Pegram, 120 S. Ct. at 2149, it inexorably follows that appellants cannot establish a RICO injury to those property rights (which in turn would cause financial loss in the form of overpayment for inferior health insurance) absent proof that Aetna failed to perform under the parties' contractual arrangement. . . .

If there were any doubt concerning the result we reach, which there is not, with respect to the message underlying appellants' damages theory, it surely would vanish when considered against the backdrop of the Supreme Court's recent decision in Pegram v. Herdrich . . . Given our analysis, it is evident that in the absence of allegations that the quantity or quality of benefits have been diminished, the only theoretical basis for appellants' claim that they received an "inferior health care product" is their subjective belief that Aetna's policies and practices are so unfavorable to enrollees that their very existence in Aetna's HMO scheme demonstrates that they overpaid for the coverage they received. Indeed, the concept underlying appellants' injury theory is unmistakable--the very structure of Aetna's HMO plan is poor in the sense that its policies and practices inevitably will result in physicians providing inadequate health care to Aetna's HMO enrollees, which in turn means that appellants are paying too much for inferior health care benefits.

Put differently, we believe that the not-so hidden message underlying appellants' RICO claims (and more specifically their injury theory) is as follows: while these policies might be good for Aetna's business (because that they promote increased profits and induce physicians to ration care), they certainly are not beneficial to Aetna's HMO members because they are medically unsound in that they restrict a physician's ability to make independent medical judgments and encourage physicians to withhold otherwise appropriate health care so as to increase Aetna's"bottom line" profits. See generally Pegram . . . (discussing financial structure of HMOs and the fact that profits are tied to physicians' rationing care) . . . Thus, we think it fair to characterize appellants' injury theory as bottomed on the notion that Aetna's policies challenged in the complaint render its HMO structure "bad" in comparison to the other types of health care insurance available in the marketplace. . . .

The force of this position, we believe, has been undermined significantly by the Supreme Court's recent decision in Pegram in which the Court rejected the plaintiff 's attempt to challenge the existing structure of an incentive scheme of one particular HMO under the rubric of a breach of fiduciary duty claim under ERISA. In Pegram . . . the Supreme Court recognized that federal courts are not in a position to judge the social value of one HMO structure over another, because "any legal principle purporting to draw a line between good and bad HMOs would embody, in effect, a judgment about socially acceptable medical risk." Id. at 2150. . . .

We read the Court's approach in Pegram as undermining the validity of appellants' RICO injury theory predicated on the notion that their health insurance was rendered "inferior" by Aetna's implementation of its managerial policies outlined in the complaint. . . . Accordingly, we find particularly compelling that aspect of Pegram which articulated clearly the myriad of practical problems which undoubtedly arise in a situation in which the federal courts are asked to determine the social utility of one particular HMO structure as compared to another. See id. at 2150. Indeed, we believe that the Court's observations in evaluating the validity of the plaintiff 's ERISA claim in that case apply with equal force where, as here, appellants' theory of economic injury is predicated on the notion that the structure of Aetna's HMO plan, with its "coercive and restrictive" internal policies and practices, renders the health insurance appellants actually received from Aetna less valuable than it otherwise would have been without those management decisions in place. 221 F. 3d at 490-499.

D. Impact on Preemption of Independent Review Panels

A recent decision of none other than the Seventh Circuit has created another opportunity for the Supreme Court to apply ERISA preemption. In Moran v. Rush Prudential HMO, Inc., 230 F.3d 959 (7th Cir. 2000), the majority decided that an independent review panel established by state law to review internal HMO decisions denying coverage was not preempted by ERISA, putting its views in direct conflict with a much-discussed Fifth Circuit decision, Corporate Health Insurance, Inc. v. Texas Department of Insurance, 215 F.3d 526 (5th Cir. 2000), which had earlier found a very similar Texas law preempted. Pegram played a role, albeit minor, in both decisions, which is worthy of note primarily because it tends to show the inevitability of a Pegram reference in this post-Pegram period.

In Moran, the plaintiff contended her attempt to invoke the independent review panel under state law was not preempted by ERISA. The district court followed the reasoning of the Fifth Circuit and found preemption. The court of appeals reversed. It held that the state law regulated insurance within the meaning of the ERISA savings clause and did not otherwise conflict with the substantive provisions of ERISA. The majority opinion made no mention of Pegram.

Judge Posner, a participant in the Seventh Circuit Pegram dissent that was ultimately vindicated by the Supreme Court's decision, dissented in Moran, joined by Judge Easterbrook, the author of the Pegram dissent. Judge Posner characteristically minced no words and drew Pegram into the discussion peripherally as follows:

The panel's decision creates a square conflict with another circuit, is very probably unsound, and will affect an enormous number of cases. It is . . .in tension with Pegram v. Herdrich . . . which it does not cite. Although Pegram held that combined treatment-eligibility decisions by an HMO are not fiduciary decisions under ERISA, it did not doubt that ERISA applied to HMO-managed ERISA plans; the panel, by contrast, seems to think ERISA inapplicable to such plans. 230 F. 3d at 974.

Similarly, Pegram played a bit part in the Fifth Circuit's treatment of independent review panels, when the Texas Attorney General attempted to persuade the Circuit Court to reconsider its earlier preemption decision, citing Pegram in support of its motion. The Fifth Circuit was not impressed with the relevance of Pegram:

Texas contends that the panel factually misunderstood the IRO provisions and that the recent Supreme Court decision in Pegram v. Herdrich cast doubt on both the panel opinion in this case . . . In Pegram, the Court held that mixed eligibility and treatment decisions that were made by an HMO acting through its physicians were not fiduciary acts under ERISA, and therefore no federal claim under ERISA for breach of fiduciary duty based on such decisions was stated. Texas points to the Court's observation that such a claim would duplicate state malpractice liability. The Court's holding in Pegram comports with our holding that certain liability provisions were not preempted, specifically direct liability for physicians' malpractice when making "health care treatment decisions" and the ensuing vicarious liability for the HMOs. However, we do not read Pegram to entail that every conceivable state law claim survives preemption so long as it is based on a mixed question of eligibility and treatment . . . It may be that state causes of action persist only for actions based in some part on malpractice committed by treating physicians. If so, state causes of actions against HMOs for the decisions of their utilization review agents would still be preempted, as Corcoran held. Because Pegram did not exhaustively discuss the specific kinds of state causes of action that it implied were not preempted, we make no additional inferences. 220 F. 3d at

E. Disclosure Requirements

In a much-quoted footnote in Pegram, Justice Souter left open, but in a rather coy fashion, the question of whether the failure to disclose financial incentives is a fiduciary obligation under ERISA:

Although we are not presented with the issue here, it could be argued that [an HMO] is a fiduciary insofar as it has discretionary authority to administer the plan, and so it is obligated to disclose characteristics of the plan and of those who provide services to the plan, if that information affects beneficiaries' material interests. See, e.g., Glaziers and Glassworkers Union Local No. 252 Annuity Fund v. Newbridge Securities, Inc., 93 F.3d 1171, 1179-1181 (CA3 1996) (discussing the disclosure obligations of an ERISA fiduciary); cf. Varity Corp. v. Howe, 516 U.S. 489, 505, 134 L. Ed. 2d 130, 116 S. Ct. 1065 (1996) (holding that ERISA fiduciaries may have duties to disclose information about plan prospects that they have no duty, or even power, to change). Pegram,120 S. Ct. at 2157, n. 8.

In at least one district court decision, the court was not persuaded that Justice Souter's language left the door open to broad attacks on insurance companies and HMOs for non-disclosure of financial incentives. The case is Peterson v. Connecticut General Life Insurance Co., 2000 U.S. Dist. LEXIS 16522 (D. Pa. November 14, 2000).

This is how the court addressed the import of Pegram:

Ms. Peterson also relies heavily upon the United States Supreme Court's recent decision in Pegram v. Herdrich . . . [She] claims that the [above-quoted language regarding financial incentives] "makes it clear that plaintiff's Complaint states a claim and that CIGNA's motion to dismiss should be denied." . . . However, the Court explicitly stated that it had not been presented with the issue that Ms. Peterson claims it decided. Moreover, even if the above language provides that such a claim could be advanced under ERISA, it certainly does not define its parameters, i.e., whether a broad duty to disclose may be imposed or whether special circumstances must exist. Clearly, as Ms. Peterson admits, the Third Circuit has not yet specifically addressed the question of whether ERISA imposes a broad fiduciary duty to disclose financial incentives in health insurance plans. [T]hose Third Circuit cases which have addressed the fiduciary duty to disclose . . . have done so only where a plan participant makes a specific inquiry or where the fiduciary knew of the plaintiff's particular circumstances requiring disclosure and the non-disclosure resulted in a particular injury. Further, while the Third Circuit is arguably willing to expand the protections afforded by ERISA's disclosure provisions, its reluctance to overly burden plan administrators with broad disclosure duties . . . recommends against the imposition of the blanket duty Ms. Peterson seeks. Because the burden of the duty Ms. Peterson asks us to impose is staggering, without a clear endorsement from the Third Circuit, we are reluctant to permit this action to go forward and result in an effective amendment of ERISA to encompass such claims.

Time will tell if other judges provide plaintiffs with more leverage for non-disclosure claims. This initial reaction in Peterson is not promising.


In the early returns, one would have to conclude that the short-term gains for HMO defendants are substantial. Class-wide relief under ERISA after Pegram seems highly unlikely, although it will require court decisions in several pending class actions to be certain. The potentially offsetting gains for plaintiffs in the widening of available state law remedies have yet to establish themselves. Much in this realm remains to be argued by the parties and determined by the courts. As time goes by, we should expect Pegram to be the vehicle for an expanded state law role. There can be little doubt that the state role will continue to expand, as the Supreme Court recognizes that its antipathy for expanded use of ERISA requires a state court safety valve.


1 This account of the Supreme Court's action in Esensten is based largely on a report in the Bureau of National Affairs (BNA) Health Care Daily Report, October 3, 2000.