Should an HMO pay a doctor a bonus for providing less medical care? That issue is at the core of a case recently decided by the Supreme Court. Dan Rather reports.

The court considered the case of Cindy Herdrich. She says cost cuts in her health care almost killed her.

Herdrich, who lives in Bloomington, Ill., woke up one day with a pain at the top of her leg. She visited a doctor, who told her she had a urinary tract infection and prescribed antibiotics.

The following Thursday, Herdrich had her annual physical exam. Her doctor told her she might have an ovarian cyst. She ordered an ultrasound test, not at St. Joseph's Hospital in Bloomington but at an HMO hospital in Urbana, 50 miles away.

Herdrich asked if the procedure could be done at St. Joseph's. The doctor said that she could only authorize payment there in an emergency. "She didn't feel this was an emergency," Herdrich remembers.

So Herdrich got the first available appointment at the Urbana hospital - eight days later. At that appointment, doctors told her both of the previous diagnoses were wrong. She had a burst appendix that created a massive, life-threatening infection because it hadn't been treated for two weeks.

"They told me that this was a textbook case of a burst appendix where an abscess has formed," remembers Herdrich, who says she was surprised by the diagnosis.

Herdrich was rushed into the operating room for immediate surgery. She had to stay in the hospital for more than a week. She says she feels lucky to be alive.

She hired an attorney, Jim Ginzkey, who sued the doctor for medical malpractice and won $35,000. Now he is suing the HMO and saying it should share responsibility for the doctor's mistakes.

Ginzkey argues that his client wasn't sent to the emergency room because that would have cost the HMO money. He claims that the ultrasound test was delayed for the same reason: to save money.

"I think that every decision that the HMO made in this case can be explained on the basis of their profit motive," he says.

According to Ginzkey, the doctors in Herdrich's HMO were paid a bonus to keep costs down.

The bonus could go as high as $10 million per year, which would be divided by the participating physicians. Each doctor in the HMO stood to gain as much as $50,000 apiece, Ginzkey says.

In Ginzkey's view the arrangement boiled down to this: The less care the HMO and the doctors give, the more money the HMO and the individual doctors made. He will argue this before the Supreme Court.

Herdrich's case wound up with the Supreme Court after a federal appeals court ruled in her favor. The ruling was a blow for the managed health care industry, which called it an all-out assault on HMOs. The appeals court said that doctors' bonuses create an incentive to cut costs and limit patient care. The court also said that these payments suggest "kickbacks" to doctors who cut care. Herdrich's HMO, Carle are, appealed the case to the Supreme Court.

Carle Care and Herdrich's doctor both refused to comment. But other industry lawyers defend Carle Care.

"Health care systems have a budget," says attorney Stephanie Kanwit, who represents many of the country's biggest HMOs and has written a brief for the Supreme Court explaining the HMOs' position in this case. "And doctors have to be participants in trying to hold down costs. Who better than to hold down costs than a doctor who's making judgments?"

For holding down those costs, doctors can make a lot of money. At one Humana HMO, the doctor's contract spells out very clearly that if a physician can reduce the cost of medical services such as lab tests and outpatient surgery, his or her bonus goes up dramatically.

For example: If those services cost an average of $36 per patient a month, the doctor's bonus is 25 cents per patient. If the cost of the services drops to $24 a month, the bonus jumps to $1.25 per patient. Under this system, a doctor with 1,500 patients, which is not unusual, could make an extra $18,000 a year. There are also other bonuses - for reducing drug use, hospital visits and surgery. The total bonuses can amount to tens of thousands of dollars a year.

Kanwitt says that this system is a good way to hold down costs. "We all have to work for money and think about cost," she says. "The small business, Ma and Pa grocery store owner, has to think about money. Why should physicians be exempt from those rules of the marketplace?"

"It's not a conflict of interest because theoretically what's best for their patient is also best for the bottom line in the sense that they're delivering quality, but also cost-effective, health care."

Other doctors disagree. "(It is) an absolute conflict of interest - absolute, if you're giving money to not treat your patient," says Dr. Harvey Wachsman, a neurosurgeon and lawyer. One of the most successful medical malpractice attorneys in the country, he has made a career out of fighting HMOs.

"These incentives destroy people," Wachsman says. "That's the point. I am all for America. I'm all for incentives. I'm all for people making money. God bless America. But I'm not for seeing to it that they destroy people, and that's the incentive, to see to it that a physician doesn't do what's right for the patient, doesn't treat the patient, but avoids those things which will help the patient, so that he makes a few paltry extra dollars for doing that."

The American Medical Association joined in the fight against Herdrich's lawsuit.

Kanwitt says that 60 percent of doctors who work under managed care plans get some kind of incentive, including bonuses.

Wachsman says the Herdrich case is important because until now it has been very difficult under federal law to sue HMOs. "How do you make (HMOs) accountable?" asks Wachsman. "The simplest way is when it hits them i the pocket."

Malpractice suits have made some lawyers, including Wachsman, rich. His critics say he's just trying to pick the deep pockets of the HMOs.

On June 12, the Supreme Court decided in favor of the HMO.

Writing for the unanimous court, Justice David Souter said that financial incentives are essential to the survival of HMOs. Changing that structure, he wrote, would effectively eliminate for-profit HMOs.

That case is only one of several fronts in the war over managed care. Other lawsuits against HMOs accuse them of violating a racketeering law by concealing doctors' financial incentives to hold down treatment costs.

A number of states have enacted their own laws barring managed-care plans from giving doctors bonuses for providing inadequate care. Congress also is considering patients' rights legislation that could set new standards for managed care and might broaden patients' right to sue their HMOs.