Health maintenance organizations (HMOs) are health care providers that have virtually replaced the traditional employer-based, “fee-for-service” health care insurance. In an attempt to keep health care costs (and premiums) down, HMOs tend to limit access to specialized medical services and the choice of providers its members have. By 1999, ninety-two percent (92%) of employer-sponsored health insurance were managed care plans. HMOs require patients to enroll as members. In order to control costs, the health care provider and the insurer have a contract with each other; the health care provider will agrees to provide services to the HMO members in exchange for a fixed fee. These providers may be directly employed by the HMO, independent contractors, or independent contractors employed by an independent practice association.

In all cases, the HMO uses a primary care physician to determine whether a patient needs specialized services. The physicians are often paid by “capitation,” that is, one fee for all services provided to a particular member. Thus, the physician has incentive to minimize costs. HMOs have been known to give bonuses to primary care physicians who manage to keep referrals down, and some review the decisions of the primary care physicians before approving treatment or referrals.

HMOs have become heartless, moneymaking institutions in the minds of the public. Many people have had run-ins with an HMO or know somebody who has. Lawsuits have been filed against HMOs for bad faith (denied coverage); misdiagnoses leading to death; and direct mistakes, such as amputating the wrong arm.


Congress passed the Employee Retirement Income Security Act (ERISA) in 1974 to make sure that “safeguards [are] provided with respect to the establishment, operation, and administration” of employee benefit plans. ERISA applies to “any employee benefit plan” provided by an employer or employee organization. Courts have applied ERISA to HMOs.

ERISA contains a broad provision stating that ERISA preempts any state law that relates to ERISA plans except those regulating banking, securities, or insurance. ERISA forbids states from deeming employee plans as insurers. In 2004, the U.S. Supreme Court issued its holding in Aetna Health Inc. v. Davila, ruling that ERISA preempts state law allowing for damages resulting from health plans’ coverage decisions. This decision effectively forces these claims into federal court, which imposes limitations on damages in favor of the HMO.


Several theories of liability have been used against HMOs. One is a theory of direct negligence. This can be proven when an HMO has breached the independent duty of care to its patients and the plaintiff was injured due to that breach. For example, the HMO has a duty to hire competent staff and to supervise its staff adequately. If the HMO hires an incompetent staff and their incompetence leads to an injury, the HMO may be liable. Another example would be if the HMO assigns a physician too many patients to give effective care. Some HMOs have been held liable when their utilization review denies coverage that leads to damages. In all these examples, the key elements are the HMO’s duty to the patient and the foreseeability of injury.

HMOs can also be found liable through any one of three theories of vicarious liability—respondeat superior, ostensible agency, and non-delegable duty.

Under respondeat superior, an employer is held responsible for the acts of its employees. Proving respondeat superior is fairly straightforward if the doctors are employed by the HMO or if the HMO exercises control over the staff. However, if the HMO has some other organizational structure and does not directly employ the physicians or control the staff, proving vicarious liability under respondeat superior becomes more difficult. The key is the amount of control that the HMO has over those who were negligent.

If the HMO employs the physicians as independent contractors, then respondeat superior will probably not apply. In such cases, an HMO can be held liable under a theory of ostensible agency (sometimes called apparent agency). The Restatement (2nd) of Torts defines ostensible agency as follows:

One who employs an independent contractor to perform services for another which are accepted in the reasonable belief that the services are being rendered by the employer or by his servants, is subject to liability for physical harm caused by the negligence of the contractor in rendering such services, to the same extent as though the employer were supplying them himself or by his servants.

Although many HMOs utilize a model where the physicians are independent contractors, the patients have no reason to suspect that their primary care physician or their specialist is not employed by the HMO.  In fact, to be held liable under this theory, the HMO must hold itself out as a health care provider in such manner that a patient would reasonably believe the physician was employed by the HMO. The patient must also have “justifiably relied” on the HMO for the health care, not the physician. For example, if a patient did not choose his primary care physician, but was assigned one by the HMO, then the patient justifiably relied on the HMO for his health care.

An HMO may possibly be held liable under the theory of non-delegable duty. The Restatement (2nd) of Torts defines a non-delegable duty as a duty that is imposed by statute. For example, hospitals cannot escape liability from negligent emergency care by using independent contractors in the emergency room.

Whether a court would find any of these arguments compelling would be based on the facts of the case. Consult an experienced HMO Malpractice attorney to see if you have a case.


Some have tried to sue HMOs under ERISA’s fiduciary requirement. ERISA is found in Title 29, Chapter 18 of the US Code. Section 1109(a) provides:

Any person who is a fiduciary with respect to a plan who breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries by this subchapter shall be personally liable to make good to such plan any losses to the plan resulting from each such breach[.]

Although in the 2000 case, Pegram v. Herdrich, the Supreme Court held that mixed eligibility and treatment decisions made by an HMO, acting through its physicians, were not fiduciary acts within meaning of ERISA, other courts have found HMOs liable under ERISA’s fiduciary requirements. The HMO was liable for breaching its fiduciary duty to its members/patients by failing to disclose that physicians had certain financial disincentives to order different treatments. The HMO had a duty to keep the patients fully informed.


California recognizes the tort of bad faith. Insurance companies are routinely sued under the tort of bad faith when they fail to handle claims reasonably and in good faith. Some courts have held that bad faith claims apply to HMOs since they act, in part, as insurers. In one case, the court held the HMO liable for bad faith because the HMO put too much emphasis on financial considerations in deciding to deny care.


Generally, damages in a state court action for negligence against an HMO would include:

  • actual expenses (out-of-pocket expenses),
  • future medical expenses,
  • mental anguish,
  • future wage loss,
  • loss of consortium,
  • loss of parental advice and guidance,
  • funeral and burial expenses,
  • other financial loss, and
  • sometimes–punitive damages (if there is malice or fraud involved).

In contrast, damages arising under an ERISA action are limited to the actual medical expenses that were denied or the expenses incurred due to the negligence. The U.S. Supreme Court has held that punitive damages, consequential damages (damages arising as a direct foreseeable result of the wrongdoing) and damages for emotional distress are not recoverable under ERISA.


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