Horvath v. Keystone Health Plan East, Inc.

Opinions of the United

2003 Decisions States Court of Appeals

for the Third Circuit

6-23-2003

Horvath v. Keystone Health Plan

Precedential or Non-Precedential: Precedential

Docket No. 02-1731

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PRECEDENTIAL

Filed June 23, 2003

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No: 02-1731

DONNA HORVATH,

on behalf of herself and

all others similarly situated

v.

KEYSTONE HEALTH PLAN EAST, INC.

DONNA HORVATH, on behalf of herself

and the proposed class she seeks

to represent,

Appellant

Appeal from the United States District Court

for the Eastern District of Pennsylvania

(D.C. Civil Action No.00-cv-00416)

District Judge: Honorable Ronald L. Buckwalter

Argued on October 18, 2002

Before: ROTH, GREENBERG, Circuit Judges

and WARD,* District Judge

(Opinion filed: June 23, 2003)

* Honorable Robert J. Ward, District Court Judge for the Southern

District of New York, sitting by designation.

2

H. Laddie Montague, Jr., Esquire

Jerome M. Marcus, Esquire (Argued)

Jonathan Auerbach

Berger & Montague, P.C.

1622 Locust Street

Philadelphia, PA 19013

COUNSEL FOR APPELLANT

Edward F. Mannino, Esquire

(Argued)

David L. Comerford, Esquire

James L. Griffith, Esquire

Akin, Gump, Strauss, Hauer

& Feld, L.L.P

One Commerce Square

2005 Market Street, Suite 2200

Philadelphia, PA 19103

COUNSEL FOR APPELLEE

OPINION OF THE COURT

ROTH, Circuit Judge:

Health Maintenance Organizations (HMOs) routinely

utilize financial incentives to encourage physicians to ration

care in a cost-effective manner. This case presents the

question whether, when the existence of such a plan has

been disclosed, the Employee Retirement Income Security

Act (ERISA), 29 U.S.C. § 1001, et seq., requires HMOs

automatically to disclose further information on these

incentives to plan beneficiaries. Because we conclude that,

under the circumstances of this case, neither our own

precedents nor the canons of statutory construction

support the imposition of such a duty, we will affirm the

District Court’s grant of summary judgment to the

defendant HMO.

I. Facts

Plaintiff-appellant Donna Horvath is the benefits

administrator at a law firm and a member of the HMO of

3

defendant-appellee Keystone Health Plan East, Inc. The

Keystone HMO is the only healthcare plan offered to

employees of Horvath’s firm. The firm pays all premiums

directly to Keystone as an employee benefit and does not

make any specific healthcare deductions from employees’

paychecks.

Horvath, both as a member of the Keystone HMO and as

her firm’s benefits administrator, was provided with

information regarding the plan’s structure. Specifically, she

received a letter from Keystone disclosing its practice of

attempting to “[c]ontrol the increase of health care costs

through negotiated agreements with health care providers,

doctors, hospitals, pharmacy, and ancillary providers,” as

well as a Doctor and Hospital Directory that included a

description of the physician compensation plan.1 Horvath

also received literature, the Keystone Health Plan East

Member Handbook and the September 1999 Letter to

Benefits Administrator, which provided that she could

request additional information regarding physician

compensation. She concedes she never made any effort to

do so.

II. Procedural History

Horvath’s complaint was filed on January 21, 2000, as a

proposed class action. It alleges that Keystone is a

“fiduciary,” as that term is defined under ERISA,2 and that

1. Horvath admitted during her deposition that she never read the

information contained in the Doctor and Hospital Directory but stated

that, if she had read the information, she “might have questioned a

physician’s recommendation for a particular service or treatment.”

2. In their submissions below, the parties did not vigorously contest the

issue of whether Keystone qualifies as a “fiduciary” under ERISA. See

Horvath v. Keystone Health Plan East, Inc., No. CIV.A. 00-0416, 2002 WL

265023, at *2-*3 (E.D. Pa. Feb. 22, 2002). Accordingly, the District

Court, citing Pegram v. Herdrich, 530 U.S. 211, 228 n.8 (2000), assumed

arguendo that Keystone was a fiduciary but held that it need not

specifically reach the issue because of its conclusion that ERISA imposed

no duty to disclose information on physician incentives. Horvath, 2002

WL 265023, at *3. We agree with this approach and therefore take no

position with respect to whether Keystone is a fiduciary as defined by

ERISA.

4

it therefore has a duty to disclose to plan beneficiaries “all

material facts relating to the insurance benefits” it provides.

Horvath contends this duty was violated when Keystone

failed to disclose information on physician incentives that

she believes have the potential to impact healthcare

decisions made by its physicians and thus decrease the

overall level of care provided. However, Horvath does not

allege that she has been personally affected by the

existence of the incentives or that the care she received

from the Keystone HMO was defective or substandard in

any way. As a remedy for the alleged breach of fiduciary

duty, Horvath seeks, inter alia, (1) injunctive relief requiring

the disclosure of information regarding physician

incentives, and (2) restitution and/or disgorgement of the

amount she and other members of the putative class

allegedly overpaid as a result of Keystone’s failure to

disclose such information. She defines this amount as the

difference between the value of the plan as she perceived it

(i.e., without a physician incentive structure) and the value

of the plan as actually configured (i.e., with physician

incentives).

The District Court denied Keystone’s motion to dismiss.

The court subsequently denied Horvath’s motion for class

certification but granted her leave to renew the motion at

the close of the discovery period. During the course of

discovery, Keystone turned over numerous documents in

response to Horvath’s requests for production. However,

Keystone withheld many other documents, objecting to

requests as overly broad and not reasonably calculated to

lead to the production of admissible evidence.

Horvath filed a motion to compel the production of

additional documents, which on March 13, 2001, the

District Court denied without prejudice. In doing so, the

court noted its belief that the requests at issue were overly

broad and therefore instructed Horvath to “specify with

regard to each discovery request explicitly how it is relevant

to the need for disclosures and not merely how it adds to

[her] understanding of Keystone’s operational structure.”

On July 13, a second motion to compel was granted in part

and denied in part. Horvath then deposed two Keystone

employees but took no other steps to obtain additional

5

information prior to the close of the discovery period. She

does not appeal the District Court’s denials of her motions

to compel.

Keystone filed its motion for summary judgment on

September 21, 2001, arguing that Horvath lacked standing

to assert her ERISA claim and that no material facts were

in dispute. The District Court did not expressly rule on the

issue of standing but granted summary judgment to

Keystone, based primarily upon the court’s belief that our

prior decisions regarding fiduciary disclosure under ERISA

did not require Keystone to disclose information on its

physician incentive structure. This appeal followed.

III. Jurisdiction and Standards of Review

The District Court exercised subject matter jurisdiction

over this case pursuant to 28 U.S.C. § 1331. We have

jurisdiction to consider Horvath’s appeal of the District

Court’s final order pursuant to 28 U.S.C. § 1291.

Our review of Horvath’s standing to assert her claim is

plenary. General Instrument Corp. of Del. v. Nu-Tek Elec. &

Mfg., Inc., 197 F.3d 83, 86 (3d Cir. 1999). We review the

District Court’s refusal to delay its ruling on Keystone’s

summary judgment motion for abuse of discretion, but our

review of the order itself is plenary. St. Surin v. Virgin

Islands Daily News, Inc., 21 F.3d 1309, 1313 (3d Cir.

1994). “Summary judgment is appropriate ‘if the pleadings,

depositions, answers to interrogatories, and admissions on

file, together with the affidavits, if any, show that there is

no genuine issue as to any material fact and that the

moving party is entitled to judgment as a matter of law.’ ”

Chisolm v. McManimon, 275 F.3d 315, 321 (3d Cir. 2001)

(quoting Fed. R. Civ. P. 56(c)). Summary judgment is not

appropriate, however, “if a disputed fact exists which might

affect the outcome of the suit under the controlling

substantive law.” Josey v. John R. Hollingsworth Corp., 996

F.2d 632, 637 (3d Cir. 1993).

IV. Discussion

A. Background

HMOs provide a variety of specified health care services

to members for one fixed fee. Thus, like other insurers,

6

HMOs attempt to control costs by carefully scrutinizing the

requests for services. Pegram v. Herdrich, 530 U.S. 211,

219 (2000). As part of this effort, HMOs provide guidance to

their physicians regarding appropriate levels of health care.

Id. “These cost-controlling measures are commonly

complemented by specific financial incentives to physicians,

rewarding them for decreasing utilization of health-care

services, and penalizing them for what may be found to be

excessive treatment.” Id. Accordingly, “in an HMO system,

a physician’s financial interest lies in providing less care,

not more.” Id.

However, the existence of such interests in no way affects

the legitimacy of the HMO structure. As noted in Pegram,

“[t]he check on [physicians’ financial interests] . . . is the

professional obligation to provide covered services with a

reasonable degree of skill and judgment in the patient’s

interest.” Id. Such incentives, in a fixed fee system, are

necessary as “no HMO organization could survive without

some incentive connecting physician reward with treatment

rationing.” Id. at 220.

Nevertheless, the presence of rationing in the context of

medical care inevitably raises a host of policy questions,

many of which are beyond the scope of those typically or

easily resolved by federal courts. Indeed, “any legal

principle purporting to draw a line between good and bad

HMOs would embody, in effect, a judgment about socially

acceptable medical risk.” Id. at 221. Thus, questions

requiring the exercise of “complicated factfinding” or

“debatable social judgment are not wisely required of courts

unless for some reason resort cannot be had to the

legislative process, with its preferable forum for

comprehensive investigations and judgments of social

value, such as optimum treatment levels and health-care

expenditure.” Id; cf. Maio v. Aetna, Inc., 221 F.3d 472, 499

(3d Cir. 2000) (rejecting notion that “in the complex world

of rate structures a trier of fact, probably a jury” could

determine the value of an HMO health insurance product

which offers physicians incentives to withhold medical

services.)

It is against this backdrop that we consider the claim at

issue here.

7

B. Standing

As a preliminary matter, we must address the threshold

issue of standing. It is axiomatic that, in addition to those

requirements imposed by statute, plaintiffs must also

satisfy Article III of the Constitution, see Warth v. Seldin,

422 U.S. 490, 501, 95 S. Ct. 2197, 2206, 45 L. Ed.2d 343

(1975), which requires as follows:

First, the plaintiff must have suffered an injury in fact

— an invasion of a legally protected interest which is

(a) concrete and particularized; and (b) actual or

imminent, not conjectural or hypothetical. Second,

there must be a causal connection between the injury

and the conduct complained of — the injury has to be

fairly . . . trace[able] to the challenged action of the

defendant, and not . . . th[e] result [of] the independent

action of some third party not before the court. Third,

it must be likely, as opposed to merely speculative,

that the injury will be redressed by a favorable

decision.

AT&T Communications of N.J., Inc. v. Verizon N.J., Inc., 270

F.3d 162, 170 (3d Cir. 2001) (quoting Lujan v. Defenders of

Wildlife, 504 U.S. 555, 560-61, 112 S. Ct. 2130, 119 L.

Ed.2d 351 (1992)). Because there is no basis for a challenge

to Horvath’s status as an ERISA beneficiary, and thus no

claim that she lacks statutory standing, see § 502(a)(3)

(permitting requests for injunctions and other equitable

relief to be brought by participants, beneficiaries, and

fiduciaries), the primary inquiry here is whether Horvath

has pled “a violation of [her] ERISA-created rights sufficient

to satisfy Article III’s injury requirement.” Financial Inst.

Retirement Fund v. Office of Thrift Supervision, 964 F.2d

142, 147 (2d Cir. 1992).

In addressing this question, we note that Horvath’s suit

seeks to utilize the enforcement provisions contained in

§ 502(a)(3), 29 U.S.C. § 1132(a)(3), in order to remedy an

alleged violation of the fiduciary duties imposed by § 404,

29 U.S.C. § 1104. Pursuant to the terms of § 502(a)(3),

Horvath is entitled only to equitable relief, see Great-West

Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204, 209-10,

122 S. Ct. 708, 712, 151 L. Ed.2d 635 (2002), which she

8

seeks in the form of requests for restitution, disgorgement,

and an injunction barring Keystone from continuing to omit

information regarding physician incentives from its

disclosures to plan members. For the reasons stated below,

we conclude that Horvath has established a case or

controversy as to her request for injunctive relief but has

failed to do so with respect to her requests for restitution

and disgorgement.

First, with regard to injunctive relief, it is well-established

that “[t]he actual or threatened injury required by Art. III

may exist solely by virtue of statutes creating legal rights,

the invasion of which creates standing.” RJG Cab, Inc. v.

Hodel, 797 F.2d 111, 118 (3d Cir. 1986) (quoting Warth,

422 U.S. at 499-500, 95 S. Ct. at 2205-06) (internal

quotations omitted); see also Kirby v. Department of Hous.

& Urban Dev., 675 F.2d 60, 65 (3d Cir. 1982). Here, the

disclosure requirements and fiduciary duties contained in

ERISA create in Horvath certain rights, including the rights

to receive particular information and to have Keystone act

in a fiduciary capacity. Thus, Horvath need not

demonstrate actual harm in order to have standing to seek

injunctive relief requiring that Keystone satisfy its

statutorily-created disclosure or fiduciary responsibilities.

See Gillis v. Hoechst Celanese Corp., 4 F.3d 1137, 1148 (3d

Cir. 1993) (finding “ERISA does not require that harm be

shown before a plan participant is entitled to an injunction

ordering the plan administrator to comply with ERISA’s

reporting and disclosure requirements”); see also Larson v.

Northrop Corp., 21 F.3d 1164, 1171 (D.C. Cir. 1994)

(holding plaintiff need not demonstrate actual harm in

order to file suit for alleged breach of fiduciary duty under

ERISA § 404); Financial Inst. Retirement Fund, 964 F.2d at

149 (noting that “ERISA’s goal of deterring fiduciary

misdeeds” supports a “broad view of participant standing

under ERISA,” and holding that a violation of § 404 satisfies

the injury requirement of Article III). As noted in Gillis, this

conclusion is further supported “by the Supreme Court’s

statement that ‘Congress’ purpose in enacting the ERISA

disclosure provisions [was to] ensur[e] that the individual

participant knows exactly where he stands with respect to

the plan.’ ” 4 F.3d at 1148 (quoting Firestone Tire & Rubber

9

Co. v. Bruch, 489 U.S. 101, 118, 109 S. Ct. 948, 958, 103

L. Ed.2d 80 (1989)).

However, the same cannot be said regarding Horvath’s

requests for restitution and disgorgement, both of which

are individual in nature and therefore require her to

demonstrate individual loss. See In re Unisys Sav. Plan

Litig., 173 F.3d 145, 159 (3d Cir. 1999) (citing Varity Corp.

v. Howe, 516 U.S. 489, 507-15, 116 S. Ct. 1065, 134 L.

Ed.2d 130 (1996)). Because she concedes that the care and

coverage she received as a member of the Keystone HMO

was never affected by the existence of physician incentives,

Horvath’s claim for individual loss, to the extent she has

one at all, is premised on her argument that her firm

overpaid for the healthcare she received.

We recently rejected a nearly identical claim in Maio v.

Aetna, Inc., 221 F.3d 472 (3d Cir. 2000), albeit outside the

context of ERISA. As in this case, the defendant HMO in

Maio utilized a financial incentive structure designed to

encourage physicians to ration medical care in a cost-

effective manner. 221 F.3d at 475. The plaintiffs, a putative

class consisting of current and former members of the

HMO, filed suit alleging that they were induced to enroll in

the healthcare plan as a result of the HMO’s claims

regarding the quality of its medical care but that they did

not receive that level of care because undisclosed financial

incentives impacted medical determinations made by the

HMO’s physicians. Id. at 474-75.

Because plaintiffs sought relief pursuant to the Racketeer

Influenced and Corrupt Organizations Act (RICO), 18 U.S.C.

§ 1961, et seq., the sole issue before us in Maio was

whether plaintiffs had, by use of this “diminished value”

theory, “alleged a valid RICO injury to business or property

sufficient to afford them standing under RICO” to assert

their claim. 221 F.3d at 482. We concluded that their

allegations failed to satisfy the statutory injury

requirements of RICO and that they therefore lacked

standing to sue. Id. at 501. Specifically, we held that they

could not “establish that they suffered a tangible economic

harm compensable under RICO unless they allege that

health care they received under [insurer’s] plan actually

was compromised or diminished as a result of [insurer’s]

10

management decisions challenged in the complaint.” Id. at

488.

Although the narrow scope of the issue presented in Maio

distinguishes that case from the instant ERISA action, our

observations regarding the viability of the diminished value

theory are nevertheless instructive. See Doe v. Blue Cross

Blue Shield of Md., Inc., 173 F. Supp.2d 398, 403-05 (D.

Md. 2001) (utilizing Maio to analyze plaintiff ’s standing to

assert diminished value theory under ERISA).

Moreover, proving diminished value claims is

problematic, as doing so necessarily requires a

determination of the value of the insurance provided by the

HMO. 221 F.3d at 499. This value inquiry, in turn,

inappropriately transforms juries into quasi-regulatory

commissions by requiring them to decipher complex rate

structures in order to determine whether, and to what

extent, HMO plan members overpaid for the insurance they

received. Id. Further, Horvath’s claims for restitution and

disgorgement rest not only on the troublesome assumption

that a factfinder can accurately determine the amount her

firm allegedly overpaid Keystone, but also on the notion

that the firm would have passed these savings on to its

employees in the form of a higher salary or additional

benefits. We find this reasoning far too speculative to serve

as the basis for a claim of individual loss and thus

conclude that Horvath lacks standing to seek restitution or

disgorgement. See Doe, 173 F. Supp.2d at 404-05 (noting

that no court has yet found standing to assert diminished

value claims under ERISA, and that the reticulated nature

of ERISA discourages the creation of new causes of action).3

3. Although we need not decide the issue in light of our conclusion

regarding standing, we note that, even if she had standing to assert

them, Horvath’s claims for restitution and disgorgement are likely barred

by the Supreme Court’s recent decision in Great-West. As noted above,

ERISA § 502(a)(3) provides only for equitable relief. In Great-West, the

Court, noting that not all claims for restitution are equitable in nature,

held that not all such claims are cognizable under § 502(a)(3). See Great-

West, 534 U.S. at 215, 122 S. Ct. at 715 (holding that whether a claim

for restitution “is legal or equitable in a particular case (and hence

whether it is authorized by § 502(a)(3)) remains dependent on the nature

of the relief sought”).

11

C. Horvath’s Rule 56(f) Motion

We begin our analysis of Horvath’s remaining claim for

injunctive relief by examining her assertion that the District

Court abused its discretion by failing to address her Rule

56(f) motion prior to ruling on Keystone’s motion for

summary judgment.4 Specifically, she contends that the

affidavits submitted in connection with her motion

adequately described both the additional discovery sought

and the way in which it would assist her in establishing her

claim. She further argues that the requested information, if

obtained, would clarify the extent to which the incentive

program at issue limits the scope of coverage received by

members of the Keystone HMO.

Keystone responds that the District Court’s implicit

denial of Horvath’s Rule 56(f) motion was proper because

Historically, “[i]n cases in which the plaintiff could not assert title or

right to possession of particular property, but in which nevertheless he

might be able to show just grounds for recovering money to pay for some

benefit the defendant had received from him, the plaintiff had a right to

restitution at law through an action derived from the common law writ

of assumpsit.” Id. at 213, 122 S. Ct. at 714 (citation and internal

quotations omitted). “In contrast, a plaintiff could seek restitution in

equity, ordinarily in the form of a constructive trust or an equitable lien,

where money or property identified as belonging in good conscience to

the plaintiff could clearly be traced to particular funds or property in the

defendant’s possession.” Id. Thus, in order “for restitution to lie in

equity, the action generally must seek not to impose personal liability on

the defendant, but to restore to the plaintiff particular funds or property

in the defendant’s possession.” Id. at 214, 122 S. Ct. at 714-15.

Here, there are no funds readily traceable to Horvath over which a

constructive trust or other equitable remedy may be imposed. Indeed, as

described above, it is questionable whether it is even possible to identify

an exact amount, assuming Horvath could prove entitlement to any

amount at all. Accordingly, even if she had standing to assert them,

Horvath’s requests for restitution and disgorgement arguably constitute

legal remedies not recoverable under § 502(a)(3).

4. Horvath additionally claims that the District Court abused its

discretion by denying her request to allow her expert to review certain

confidential documents. Because this claim was not properly preserved

for appellate review, we do not address it here.

12

the motion simply repeated the discovery requests already

rejected by the court in its denials of her two prior motions

to compel, neither of which have been appealed by Horvath.

Keystone further contends that the affidavits submitted by

Horvath’s counsel and by Dr. Klionsky in support of the

Rule 56(f) motion failed to identify facts that would preclude

the entry of summary judgment, and that Dr. Klionsky’s

testimony is barred from proper consideration because

Horvath failed to make the required expert disclosures prior

to submitting his affidavit.

As noted above, we review the District Court’s

determination not to delay its summary judgment ruling for

abuse of discretion. St. Surin, 21 F.3d at 1313. A district

court’s decision to grant a Rule 56(f) motion “depends, in

part, on ‘what particular information is sought; how, if

uncovered, it would preclude summary judgment; and why

it has not previously been obtained.’ ” Contractors Ass’n of

Eastern Pa., Inc. v. City of Phila., 945 F.2d 1260, 1266 (3d

Cir. 1991) (quoting Lunderstadt v. Colafella, 885 F.2d 66,

71 (3d Cir. 1989)). However, because “[a] district court has

discretion in acting on Rule 56(f) motions,” this list of

factors is not exhaustive. Id. at 1267. Instead, it “simply

offer[s] a guide for the district court to follow in exercising

its discretion under Rule 56(f),” id., and therefore provides

the general framework for our inquiry as well.

In addressing the first factor — an analysis of the

information sought — we examine the substance of the

Rule 56(f) affidavit. Id. at 1266. Here, Horvath concedes

that all of the discovery described in Dr. Klionsky’s affidavit

had previously been sought in the two motions to compel

denied by the District Court. In this sense, the Rule 56(f)

motion sought no new discovery, and essentially amounted

to nothing more than a motion for reconsideration of the

District Court’s denial of the two prior motions to compel.

With respect to the second factor, we examine whether

the requested information would have altered the outcome

of the District Court’s summary judgment determination.

Contractors Ass’n of Eastern Pa., 945 F.2d at 1266. As

discussed in more detail below, neither applicable case law

nor the text of ERISA required disclosure of the scope of

Keystone’s physician incentive structure under the facts

13

presented in this case. Accordingly, none of the information

described in the affidavits would have precluded the

District Court’s entry of summary judgment in favor of

Keystone.

Finally, we assess “why the party seeking more time has

not previously obtained the information.” Id. at 1267. Here,

Horvath’s initial motion to compel was denied without

prejudice, and she was given the opportunity to submit

more narrowly tailored document requests. She failed to do

so. The District Court therefore acted properly in denying

her second motion to compel. For the above reasons, the

District Court did not abuse its discretion in electing not to

grant Horvath’s Rule 56(f) motion.5

D. The Nature of Horvath’s Claim

In asserting that the District Court erred in granting

summary judgment to Keystone, Horvath’s counsel

struggled mightily, both in their briefs and at oral

argument, to persuade us that her breach of fiduciary duty

claim is based on allegations of affirmative

misrepresentation rather than on a failure to disclose

material facts. In so doing, they harshly criticized the

District Court for failing to address the misrepresentation

issue and argued that it misconstrued the true essence of

her claim.

We reject this argument, which fails at the most basic

level because it finds no support in the plain language of

Horvath’s complaint. Rather, an analysis of the text of the

complaint reveals that the ERISA fiduciary duty claim,

which is the only count asserted therein, is clearly

premised on Keystone’s alleged failure to disclose material

information. See, e.g., Compl. at ¶ 36 (“Keystone breaches

its fiduciary duty to plaintiff and the class by failing to fully

and accurately disclose the material facts [regarding

5. Because the three factors outlined in Contractors Ass’n of Eastern Pa.

provide ample grounds for affirming the District Court’s decision not to

delay its summary judgment ruling, we need not consider additional

factors. Similarly, because we conclude that Horvath’s Rule 56(f) motion

fails even with the aid of Dr. Klionsky’s affidavit, we do not address

Keystone’s argument that Horvath failed to make the required expert

disclosures with respect thereto.

14

physician incentives]”); id. at ¶ 37 (“Keystone is liable to

make restitution to plaintiff and each other member of the

Class for an amount by which plaintiffs over paid [sic]

Keystone because of Keystone’s failure to disclose the

above-described material facts”); id. at ¶ 38 (“As a result of

defendant’s breaches of fiduciary duty, Keystone is also

liable to disgorge the amounts by which it was unjustly

enriched as a result of its failure to disclose the material

facts set forth above regarding the true nature of the health

insurance it sold to plaintiff and the members of the class”).

Moreover, a misrepresentation-based breach of fiduciary

duty claim cannot, as Horvath argues, be implied from a

fair reading of her complaint. In order to state a claim for

misrepresentation by an ERISA fiduciary, Horvath must

allege (1) that Keystone was acting as a fiduciary, (2) that

Keystone made a misrepresentation, (3) that the

misrepresentation was material, and (4) that Horvath relied

on the misrepresentation to her detriment. See Daniels v.

Thomas & Betts Corp., 263 F.3d 66, 73 (3d Cir. 2001).

Although Horvath satisfies the first element listed above,6

there is no reasonable reading of her complaint — even

under the liberal pleading requirements contained in Rule

8 of the Federal Rules of Civil Procedure — pursuant to

which Horvath can be said to have alleged a material

misrepresentation by Keystone upon which she relied to her

detriment.7

6. See footnote 2 supra.

7. Indeed, nowhere in the complaint does Horvath use the term

“misrepresent” or any variation thereof. Instead, the primary basis for

her assertion that her complaint may be read to state a

misrepresentation-based breach of fiduciary duty claim is her allegation

that the plan documents distributed by Keystone “uniformly represent or

imply that the primary care physician’s gatekeeper function will be

exercised by each primary care physician on the basis of that physician’s

independent medical judgment, and that the medical care recommended

or prescribed for each member by that member’s primary care physician

will be consistent with his or her physician’s independent medical

judgment.” Specifically, she argues that, in light of her accompanying

assertion that the existence of financial incentives may potentially cause

physicians to prescribe less care than called for by their independent

professional judgment, the representation described above must be false.

15

Accordingly, having carefully reviewed the complaint, we

conclude that the breach of fiduciary duty claim presented

to the District Court was premised on Keystone’s alleged

failure to disclose material information. If Horvath desired

to change her theory of the case subsequent to her initial

filing, she could have sought leave to amend her complaint,

which is liberally granted when appropriate. See In re Paoli

R.R. Yard PCB Litig., 916 F.2d 829, 863 (3d Cir. 1990)

(citing Fed. R. Civ. P. 15(a)). Having failed to do so, she will

not now be heard to argue that the District Court erred by

ruling on the only claim properly before it.8

We disagree. Contrary to Horvath’s assertion, the mere existence of

financial incentives does not, ipso facto, render false Keystone’s

representation that its physicians will recommend treatment that is

consistent with their independent medical judgment. Cf. Pegram, 530

U.S. at 219, 120 S. Ct. at 2149 (noting that a physician’s “professional

obligation to provide covered services with a reasonable degree of skill

and judgment in the patient’s interest” serves as a check on the

influence of financial incentives). Accordingly, the incompatibility

between the existence of financial incentives and the rendering of

competent medical care, suggested by Horvath, has not been

demonstrated.

Furthermore, because this case comes to us on her appeal of the

District Court’s grant of summary judgment to Keystone, Horvath must

prove not only that she has successfully stated a misrepresentation-

based claim for breach of fiduciary duty, but also that there is sufficient

evidence to create a triable issue as to this claim. She has clearly failed

to do so. See Horvath, 2002 WL 265023, at *6 (noting the lack of support

for Horvath’s assertions “that physician incentives cause doctors to

prescribe less care than is medically necessary,” or “that physicians’

financial interests eclipse their professional obligation to provide

competent care or causes physicians to abandon their independent

medical judgment, forego directing patients to specialists or fail to

prescribe medical[ly] necessary treatments, tests or hospitalizations, for

the purpose of receiving a larger bonus payment from their managed

health care organization”). We therefore reject Horvath’s argument that

the juxtaposition of independent medical judgment and financial

incentives, as stated in her complaint, provides sufficient support for a

claim that Keystone breached its fiduciary duty by making a material

misrepresentation.

8. In light of this conclusion, our analysis of Horvath’s claim is not, as

she contends, governed by Varity Corp. v. Howe, 516 U.S. 489, 116 S.

16

E. Duty of Disclosure Under ERISA

We turn now to the issue at the core of the District

Court’s summary judgment decision, the question whether

ERISA required Keystone to disclose the details of its

physician incentive structure under the facts of this case.

In concluding that no such duty exists, the District Court

relied primarily upon our decisions in Bixler v. Central Pa.

Teamsters Health & Welfare Fund, 12 F.3d 1292 (3d Cir.

1993), Glaziers & Glassworkers Union Local No. 252

Annuity Fund v. Newbridge Sec., Inc., 93 F.3d 1171 (3d Cir.

1996), and Jordan v. Federal Express Corp., 116 F.3d 1005

(3d Cir. 1997), all of which address the extent to which the

fiduciary duty requirements contained in ERISA § 404 may

affect an ERISA fiduciary’s disclosure responsibilities.

In Bixler, we recognized the existence of an individual

cause of action for breach of fiduciary duty under ERISA.

Lucinda Bixler, the widow of an ERISA plan beneficiary,

sought recovery of her late husband’s medical expenses and

death benefits. 12 F.3d at 1296. Specifically, she alleged

that both her husband’s employer and the fund

administering his plan made material misrepresentations

that led her to elect not to renew her family’s healthcare

coverage pursuant to the Consolidated Omnibus Budget

Reconciliation Act (COBRA), 29 U.S.C. §§ 1161-1168. Id.

The District Court granted summary judgment to both

defendants based on its belief that ERISA did not permit

individuals to assert claims for breach of fiduciary duty.

We reversed, holding that § 404(a), which details the

duties of fiduciaries, must be read in conjunction with

§ 502(a)(3), which “authorizes the award of ‘appropriate

equitable relief ’ directly to a participant or beneficiary to

redress any act or practice which violates the provisions of

ERISA.” 12 F.3d at 1299. We concluded that Lucinda

Bixler’s requests for information, coupled with the

fiduciary’s understanding of her status and situation,

Ct. 1065, 134 L. Ed.2d 130 (1996). The Supreme Court’s opinion in that

case dealt primarily with the issue of misrepresentation, and expressly

declined to address “the question whether ERISA fiduciaries have any

fiduciary duty to disclose truthful information on their own initiative, or

in response to employee inquiries.” Id. at 506, 116 S. Ct. at 1075.

17

imposed a duty to accurately convey all information

relevant to her circumstances. Id. at 1300 (citing Eddy v.

Colonial Life Ins. Co., 919 F.2d 747 (D.C. Cir. 1990)).

In Glaziers, we noted that a request for information by a

beneficiary, such as the one that occurred in Bixler, is not

a “condition precedent” to the imposition of a fiduciary duty

to disclose under ERISA. 93 F.3d at 1181. Rather, we

concluded that, in certain circumstances, the knowledge of

the fiduciary may give rise to such a duty even in the

absence of a specific request by the beneficiary because

“absent such information, the beneficiary may have no

reason to suspect that it should make inquiry into what

may appear to be a routine matter.” Id. The defendant in

Glaziers was a brokerage firm which failed to disclose to

plaintiffs that the broker managing their funds resigned

from the firm under questionable circumstances. Plaintiffs

subsequently transferred their accounts to a new firm

established by the departing broker, who later stole a

substantial amount of money from them. Plaintiffs then

sought recovery from the defendant brokerage firm on the

basis of its failure to disclose the circumstances

surrounding the broker’s departure.

We held that a fiduciary has a legal duty to disclose to

the beneficiary those material facts, known to the fiduciary

but unknown to the beneficiary, which the beneficiary must

know for its own protection. Id. at 1182.

Finally, in Jordan, we applied the definition of

materiality, utilized in our misrepresentation cases, to a

claim for failure to disclose under § 404. We concluded that

such a failure was material “if ‘there is a substantial

likelihood that it would mislead a reasonable employee in

making an adequately informed retirement decision.’ ”

Jordan, 116 F.3d at 1015-16 (quoting In re Unisys Corp.

Retiree Med. Benefit “ERISA” Litig., 57 F.3d 1255, 1264

n.18 (3d Cir. 1995)). In Jordan, the plaintiff claimed a

breach of fiduciary duty based on his employer’s failure to

disclose to plaintiff that his decision to designate his wife as

joint annuitant on his retirement plan would become

irrevocable once he retired. Although the plaintiff failed to

inquire as to this issue, we held this failure excusable in

light of the fact that plaintiff had previously been permitted

18

to change his retirement plan options freely and had

received a letter discussing his retirement options which

expressly stated that he would be permitted to revoke his

pension plan election following retirement but failed to

disclose his inability to similarly alter his annuity election.

Id. at 1017.

In applying these decisions to the case at bar, the District

Court concluded that Horvath failed to create any issues of

material fact with respect to her claim because (1) she

failed to request the information Keystone offered to make

available regarding its methods of physician compensation,

see Bixler; (2) there was no set of circumstances pursuant

to which Keystone should have known that such

information was necessary to prevent Horvath from making

a harmful decision regarding her healthcare coverage, see

Glaziers; and (3) she failed to explain how the information

at issue was material in light of the fact that her employer

offers no other options for healthcare coverage, see Jordan.

We agree with this analysis. Further, we note, as the

District Court did, that Horvath’s claim is indistinguishable

from the one rejected by the Fifth Circuit Court of Appeals

in Ehlmann v. Kaiser Found. Health Plan of Tex., 198 F.3d

552 (5th Cir.), cert. dismissed, 530 U.S. 1291 (2000), where

it declined to add physicians’ reimbursement plans to the

list of specific disclosure requirements already included in

ERISA by Congress.9 Moreover, to the extent that our

9. We note that several district courts have employed similar logic in

dispensing with the type of claim asserted here. See, e.g., In re Managed

Care Litig., 150 F. Supp.2d 1330, 1356 & n.22 (S.D. Fla. 2001) (finding

no duty to disclose financial incentives because applicable case law does

not require such disclosure “absent a request for information or special

circumstances”); Weiss v. Cigna Healthcare, Inc., 972 F. Supp. 748, 754

(S.D.N.Y. 1997) (“Had Congress seen fit to require the affirmative

disclosure of physician compensation arrangements, it could certainly

have done so in ERISA §§ 101-111. The general fiduciary obligations set

forth in ERISA § 404 do not refer to the disclosure of information to Plan

participants, and it would be inappropriate to infer an unlimited

disclosure obligation on the basis of general provisions that say nothing

about such duties.”) (internal citations and quotations omitted); see also

Peterson v. Connecticut Gen. Life Ins. Co., No. CIV. A. 00-CV-605, 2000

WL 1708787, at *7 & n.5 (E.D. Pa. Nov. 15, 2000) (discussing Shea and

Ehlmann, and refusing to impose a blanket duty to disclose physician

incentives in the absence of clear direction from this Court).

19

conclusion is inconsistent with the position taken by the

Eighth Circuit Court of Appeals in Shea v. Esensten, 107

F.3d 625 (8th Cir. 1997), we are not bound by Shea.10

In conclusion, therefore, we hold that ERISA imposes no

duty on Keystone to disclose information regarding its

physician incentives absent a request for such information

by Horvath, absent circumstances which put Keystone on

notice that Horvath needed such information to prevent her

from making a harmful decision with respect to her

healthcare coverage, and absent any evidence that Horvath

was harmed as a result of not having such information

disclosed to her.11 Horvath’s claim therefore fails as a

matter of law.

10. In Shea, the plaintiff was the widow of Patrick Shea, an ERISA plan

beneficiary who previously had been hospitalized with severe chest

pains. Id. at 626-27. He later visited his HMO physician after again

experiencing indications of heart trouble. Id. at 626. Even after Shea

disclosed his family’s history of heart disease and offered to personally

pay for a visit to a cardiologist, the HMO physician sent him home

without referring him to a specialist, and without disclosing the

existence of a physician incentive structure that discouraged such

referrals. Shea died shortly thereafter as a result of heart failure. Id.

Citing our requirement that a fiduciary must speak if it “knows that

silence might be harmful,” Bixler, 12 F.3d at 1300, the court held that

a duty to disclose the existence of the physician incentives was triggered

under the circumstances of that case. 107 F.3d at 629. But see footnote

11 infra.

11. Horvath’s primary concern — that the existence of financial

incentives might harm plan members by causing some physicians to

place their own self-interest above their professional obligation to provide

competent healthcare — does not mandate disclosure here. We note,

however, that our ruling in no way leaves plan members, who have

suffered harm, without a remedy. The Supreme Court’s decision in

Pegram would in no way preclude a claim by an HMO patient that the

existence of financial incentives caused inadequate medical care to be

provided, resulting in injury to the patient. “Treatment” or “quality of

care” decisions are not preempted by ERISA and therefore could be

brought as a state court medical malpractice action. See Pryzbowski v.

U.S. Healthcare, Inc., 245 F.3d 266, 273 (3d Cir. 2001); Lazorko v.

Pennsylvania Hosp., 237 F.3d 242, 249-51 (3d Cir. 2000), cert. denied,

533 U.S. 930, 121 S. Ct. 2552, 150 L. Ed.2d 719.

20

V. Conclusion

For the reasons stated above, we will affirm the final

judgment of the District Court.

A True Copy:

Teste:

Clerk of the United States Court of Appeals

for the Third Circuit