## Facts

- Carle was a physician-owned health maintenance organization (HMO) providing prepaid medical services to employees covered through their employers’ contracts.
- Carle used cost-containment incentives, including distributing annual profits to physician-owners, which increased when utilization of services and referrals were reduced.
- Cynthia Herdrich, covered under Carle through her husband’s employer, sought treatment from Dr. Lori Pegram for abdominal pain and an inflamed abdomen.
- Dr. Pegram ordered an ultrasound but scheduled it for eight days later at a Carle-affiliated facility rather than sending Herdrich immediately to a non-Carle hospital.
- During the delay, Herdrich’s appendix ruptured, causing peritonitis.
- Herdrich alleged that Carle’s profit-sharing and incentive structure encouraged physician-owners to limit care and thus constituted an “inherent or anticipatory” breach of ERISA fiduciary duty.
- After removal to federal court, the district court dismissed the ERISA fiduciary-duty claim on the ground that Carle was not acting as an ERISA fiduciary; the Seventh Circuit reversed; the Supreme Court granted certiorari.

## Issues

1. Whether HMO physicians’ “mixed” decisions combining treatment judgment and benefit-eligibility (coverage) determinations are fiduciary acts under ERISA.
2. Whether an HMO’s physician-owner incentive and profit-sharing structure can be challenged under ERISA as a fiduciary breach based on its influence on such mixed decisions.

## Decision

- The Supreme Court unanimously reversed the Seventh Circuit.
- The Court held that mixed treatment-and-eligibility decisions made by HMO physicians are not fiduciary decisions under ERISA.
- Because the challenged conduct was not taken in a fiduciary capacity, Herdrich failed to state an ERISA fiduciary-duty claim, and dismissal was required.

## Legal Principles

- ERISA fiduciary status is functional and applies only “to the extent” a person exercises discretionary authority or control over plan management, plan administration, or plan assets.
- Plan design and cost-control arrangements are generally business decisions, not fiduciary acts, even when they influence medical decisionmaking within an HMO structure.
- Treatment decisions (medical judgments) are not ERISA fiduciary conduct; pure eligibility determinations may involve fiduciary functions in some settings, but physicians’ mixed treatment/coverage decisions in providing care do not.
- Characterizing ordinary HMO cost-containment incentives as per se ERISA fiduciary breaches would improperly convert quality-of-care and malpractice disputes into federal ERISA fiduciary litigation without clear statutory authorization.

## Conclusion

The Court held that ERISA does not treat HMO physicians as fiduciaries when they make mixed treatment and coverage decisions in the course of providing care, and an HMO’s cost-containment incentives tied to such decisions do not, without more, state a claim for breach of ERISA fiduciary duty.


Pegram v. Herdrich, 530 U.S. 211 (2000)