ERISA Fiduciaries Must Safeguard Beneficiaries’ Interests

Failure to provide appropriate medical care to lower costs and thereby increase a physician’s bonus supports a breach of fiduciary duty claim under the Employee Retirement Income Security Act (ERISA).

When Cynthia Herdrich’s physician delayed an ultrasound on an inflamed mass in her abdomen, her appendix ruptured causing peritonitis, a life-threatening illness. Herdrich sued the medical clinic, the medical insurance company, the physician and the HMO for negligence and breach of fiduciary duty under ERISA. Based on evidence that the delay had increased Herdrich’s physician’s year-end bonus, which was calculated, in part, on lowering costs expended for treatment, a jury awarded Herdrich compensatory damages of $35,000 on the negligence claim. However, the district court dismissed her ERISA claim.

In a case of first impression, the U.S. Court of Appeals for the Seventh Circuit reversed the dismissal of the ERISA claim. As fiduciaries, the HMO review board was required to act in the interest of the plan beneficiaries. The decision to delay needed care, if as alleged to save money and secure bonuses, may be a breach of their fiduciary duty. Herdrich v. Pegram, 7th Cir., No. 97-1070, 8/18/98.

Impact:
To avoid a breach of fiduciary duty under ERISA, those in control of HMO plan assets must act in the best interest of the plans’ beneficiaries.

Source: D. Diane Hatch, a San Francisco HR consultant, and James E. Hall, an attorney with Barlow, Kobata & Denis (based in Los Angeles and Chicago).