HMO May Be Sued For Failure To Disclose Financial Incentives


Minnesotan Patrick Shea was only forty years old when he began to have heart problems. After having been hospitalized while on an overseas business trip, he consulted the primary care physician assigned to him by his HMO.

Mr. Shea’s doctor listened to his description of symptoms (chest pains, shortness of breath, muscle tingling and dizziness) and his family history of heart disease, but decided Mr. Shea did not need to see a cardiologist. After several visits without any improvement, Mr. Shea even offered to pay for the cardiology consultation out of his own pocket. Mr. Shea’s primary care physician persuaded him that, at his age, he was too young and had too few symptoms to need cardiac care. A few months later, Mr. Shea died of heart failure.

Dianne Shea, Mr. Shea’s widow, brought a wrongful death action in Minnesota state courts. She sued Mr. Shea’s primary physician, the medical clinic where the physician was employed, and the HMO which contracted for Mr. Shea’s medical care.

In addition to allegations of medical malpractice, Mrs. Shea charged that the HMO’s policies for reimbursing physicians rewarded them for not making referrals to specialists. If Mr. Shea had known of that financial conflict of interest, she claimed, he would have sought out a cardiac specialist at his own expense, and might not have died.

Medica, the HMO to which Mr. Shea belonged, demanded that the case be transferred to Federal Court. Then Medica argued that state law governing malpractice and wrongful death actions could not be used to challenge its reimbursement policies or the failure to disclose those policies to participants, because employer-sponsored HMOs are governed by the federal ERISA law. Mrs. Shea, in turn, amended her complaint to allege that Medica had violated ERISA by failing to disclose the financial arrangements with Mr. Shea’s physicians.

The importance of Mrs. Shea’s original claim to other HMO participants is twofold. First, if such lawsuits can be brought in state courts applying state laws, it likely would prove easier to challenge administrative regulations and their effect on patient care in individual cases. Second, if her claim is permitted to proceed despite federal law, it serves as an invitation to state legislatures and administrative bodies to regulate the business practices of HMOs.

After consideration, the Federal Court of Appeals ruled that Mrs. Shea may not pursue her claim in state court. At the same time, the court does give Mrs. Shea some hope of recovery. First, the court dismissed Medica’s assertion that Mrs. Shea could not make a claim on behalf of her husband, since he had died. Then the judges dealt with the central question: whether Medica had a duty to disclose its financial arrangements with participating physicians.

Noting that the principles governing HMO plan administration are similar to the fiduciary duties imposed on trustees, the judges held that Mrs. Shea could pursue her claim. “When an HMO’s financial incentives discourage a treating doctor from providing essential health care referrals for conditions covered under the plan benefit structure, the incentives must be disclosed and the failure to do so is a breach of ERISA’s fiduciary duties.” Shea v. Esensten, 8th Circuit Court of Appeals, February 26, 1997.

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