Managed Care Lawsuit Watch - April 2005

This summary of key lawsuits affecting managed care is provided by the Health Care Law Group of Crowell & Moring LLP. If you have questions or need assistance on managed care law matters, please contact any member of the health law group.

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Cases in this issue:

• Abraham v. Intermountain Health Care Inc.
• CareFirst of Maryland, Inc. v. First Care, P.C.
• Geddes v. United Staffing Alliance Employee Medical Plan
• Maine Coast Memorial Hospital v. Sargent
• In re Preferred Health Services, Inc.
• Tourdot v. Rockford Health Plans Inc.
• Trustees of the Southern Illinois Carpenters Welfare Fund v. RFMS Inc.
• U.S. ex rel. Jiminez v. Health Net, Inc.

Abraham v. Intermountain Health Care Inc. D. Utah, No. 2:01-CV-0919 (2/10/05)

A group of optometrists brought an action in the District Court of Utah against Intermountain Health Care ("IHC") alleging illegal tying arrangements, an illegal group boycott, and a conspiracy or attempt to monopolize the hospital and surgical facilities market. Plaintiffs alleged that the limitation of IHC panel providers to ophthalmologists with IHC hospital privileges, and the requirement that IHC ophthalmologists use IHC surgical facilities violated the Clayton and Sherman Acts.

Plaintiffs claimed that IHC conspired to exclude them from providing non-surgical eye care services to IHC enrollees and affiliated plans by refusing to include them on provider panels. The optometrists also claimed that their exclusion was meant to increase IHC's dominant market position, that the exclusion of optometrists from the plan was a "negative tie," and that requiring enrollees to purchase non-surgical eye care services from IHC's ophthalmologists was a "positive tie." Plaintiffs asked the district court to require IHC to include each plaintiff optometrist as an authorized provider for non-surgical eye care services under all IHC health care plans, and also sought damages for lost profits.

In dismissing Plaintiffs' claim that IHC violated the Clayton Act because of a conspiracy or attempt to monopolize hospital or surgical facilities, the district court noted that Plaintiffs' lacked standing to seek relief under either § 4 or § 6 of the Clayton Act. The court found that Plaintiffs' injuries were too remote in that Plaintiffs, as licensed optometrists, did not compete in either the hospital or surgical facilities markets.

The district court also dismissed Plaintiffs' tying claims, noting that a tying arrangement cannot exist unless there are two separate products. The court determined that IHC marketed a single product - access to health care. The court rejected Plaintiffs' argument that enrollee use of panel providers for all eye care services was conditioned upon IHC's administration of its payment obligation. The district court reasoned that a plan subscriber purchases health care access to a plan's services, not merely the plan's administration of payment for health care costs.

The district court also dismissed Plaintiffs' claims that IHC's conduct constituted an illegal group boycott. The court noted that an enrollee is not restricted from seeking eye care from an optometrist outside IHC's provider panel. It also found that there was no evidence that IHC exercised power to the detriment of competition in the limited health plan market. The court observed that limited health plans are a creature of statute, and that the Utah Legislature, by restricting the ability of limited health plans to reimburse enrollees for services obtained outside of an enrollee's plan, intended that consumers would obtain health care services from a group of providers that is smaller than the entire provider market.

CareFirst of Maryland, Inc. v. First Care, P.C. Virginia District Court (E.D.), No. 2:04CV191 (Decided 11/2/04; published 3/15/05)

The District Court for the Eastern District of Virginia granted summary judgment for First Care, P.C., a physician group, which was the Defendant in a trademark infringement action brought by CareFirst of Maryland.

Plaintiff CareFirst of Maryland ("CareFirst") sued First Care, a group of eleven physicians in Portsmouth and Chesapeake, Virginia, alleging trademark infringement and trademark dilution. In order to prevail on a claim for trademark infringement, a Plaintiff must show first that it has a valid and protectable mark. If the mark is protectable, it must then show that Defendant's use of a similar mark is likely to cause substantial confusion among consumers.

The district court found that while CareFirst's mark satisfied the first prong, CareFirst failed to prove that First Care's mark was likely to cause substantial confusion among consumers. The district court noted that many third parties used either CareFirst or First Care names, indicating the weakness of the CareFirst mark. The court also determined that there was no evidence that the public confused the two marks, as the marks have different appearances, and there is no similarity with respect to the services, goods and facilities of CareFirst and First Care. Moreover, there is no evidence that First Care adopted its name with the intent to trade on CareFirst's goodwill, the court said. Therefore, the district court concluded there was no likelihood of consumer confusion and granted First Care's motion for summary judgment on the trademark infringement claim.

In order to make a claim for trademark dilution, a Plaintiff must show that Defendant's use of a similar mark began after Plaintiff's mark had become famous and that Defendant's use causes dilution of the distinctive quality of Plaintiff's mark. The district court granted First Care's motion for summary judgment on the dilution claim, finding that CareFirst failed to show that its mark was famous when Defendant began using the name First Care. The court noted that the CareFirst name was not well known in the Chesapeake and Portsmouth areas where First Care practiced, even several years after defendant began using the First Care name.

Geddes v. United Staffing Alliance Employee Medical Plan D. Utah Case No. 2:03-CV-00440 PGC (3/23/05) - at p. 178

The United States District Court for the District of Utah held that an ERISA plan fiduciary unreasonably interpreted the plan's provision to pay the "usual and customary amount" for services from out-of-network providers to mean that the plan would only pay an out-of-network provider the same discounted amount it had contractually arranged to pay in-network providers. The court reasoned that interpreting "usual and customary" as in-network would in effect turn a discounted fee negotiated between a specific provider and a specific plan into the usual and customary fee for the entire medical industry.

The case involved an injured boy, Andrew Geddes, who received extensive treatment at two hospitals. Geddes was enrolled in an employee welfare benefit plan that contracted for discounted prices with in-network providers and also offered coverage for out-of-network services. The plan specified that it would pay the "usual and customary amount as determined by the plan" for services provided by an out-of network provider, such as the first hospital that treated Geddes. However, Geddes's plan paid for less than half the costs charged by Geddes's first non-network hospital, claiming that this was the "usual and customary amount." The plan also denied payment for most of the costs of the second hospital's treatment, arguing that Geddes had exceeded his coverage limit for rehabilitative care.

The Geddes family brought numerous causes of action against the plan, the plan fiduciary and the plan's third party administrator. The parties filed cross motions for summary judgment, and the court ruled in favor of the Geddes' on two principal allegations: (1) that it was unreasonable for the plan fiduciary to claim that the "usual and customary" amount payable to out-of-network providers should be set at the rates paid to in-network providers; and (2) that the plan fiduciary wrongfully denied benefits on the grounds that Geddes's treatment was primarily rehabilitative.

The court first established that it would review the claims against the plan fiduciary de novo instead of with deferential review. The court noted that the final determinations regarding the Geddes's benefits were reviewed by the TPA, and never by the plan fiduciary. Thus, the court held that the plan fiduciary waived its right to deferential review on the claims by failing to exercise its discretion under the plan's terms to make final decisions about plan benefits.

The court then held that the plan fiduciary acted unreasonably in interpreting "usual and customary" payments to an out-of-network provider to mean payments at discounted in-network rates. The court noted that a prudent person would not define "usual and customary" to mean in-network, and that most insurance companies would interpret "usual and customary" to mean amounts determined by comparing similar services in an applicable geographic area. Citing medical evidence, the court further disagreed with the plan fiduciary's argument that Geddes's expenses were primarily rehabilitative, and ordered the plan fiduciary to pay for most of Geddes's hospital costs.

Maine Coast Memorial Hospital v. Sargent D. Maine, No. 05-13-P-C (3/10/05)

The U.S. District Court for the District of Maine held that ERISA preempted state law claims brought by a health plan participant against her employer, Wal-Mart Stores Inc., for allegedly unpaid medical bills. The court also ruled that the employer was not a proper defendant in the health plan participant's cause of action seeking payment of plan benefits allegedly due.

Maine Coast Memorial Hospital had sued Norma Sargent in state court to recover for unpaid hospital bills. Sargent filed a third-party complaint against her employer, Wal-Mart, as well as against Harvard Pilgrim Health Care. Wal-Mart removed to federal court, and moved to dismiss Sargent's claims against Wal-Mart. The district court agreed with Wal-Mart that ERISA preempted Sargent's state law claims since Sargent participated in an ERISA plan and her claim for allegedly unpaid health costs clearly "related to" the plan.

The court also held that Wal-Mart, as Sargent's employer, was not a proper defendant in her suit seeking payment of plan benefits allegedly due. The court noted ERISA § 1132(d)(2)'s requirement that monetary judgments in civil suits for recovery of benefits due under a plan can only be enforceable against the plan. The court also rejected Sargent's argument that Wal-Mart was a plan fiduciary, since Wal-Mart was not named as a fiduciary under the plan's terms and since Sargent did not allege that Wal-Mart exercised de facto control over the plan administrator.

In re Preferred Health Services, Inc. Federal Trade Commission File No. 041-0099(3/2/2005)

The FTC announced a proposed consent order with Preferred Health Services, Inc., an organization consisting of over 100 physicians and a hospital in the Seneca, South Carolina area, to settle charges that Preferred Health had orchestrated agreements among its member physicians to fix the prices charged to health plans and other payors.

Preferred Health's physician members accounted for approximately 70% of the physicians independently practicing in the Seneca area. Preferred Health claimed that it followed a "messenger model" and did not facilitate horizontal agreements on price. However, the FTC's complaint alleged that Preferred Health violated § 5 of the FTC Act by orchestrating price agreements whereby Preferred Health used a physician fee schedule in contract negotiations with payors, and automatically bound its member physicians to contracts that employed the fee schedule. The FTC alleged that Preferred Health's practices forced health plans to raise their payments to Preferred Health's physician members, thereby increasing the cost of health care in the Seneca are.

The proposed consent order imposes numerous restrictions upon Preferred Health, including prohibiting the organization from entering into or facilitating any agreement between or among any physicians: (1) to negotiate with payors on any physician's behalf; (2) to deal, or not to deal, or threaten not to deal with payors; (3) to designate the terms on which to deal with any payor; or (4) to refuse to deal individual with any payor, or to deal with any payor only through an arrangement involving Preferred Health.

The order also bans Preferred Health for three years from helping physicians exchange information regarding whether, or on which terms, to deal with payors. The order further bars Preferred Health from acting as an agent for physicians in connection with contracting. The order does not prevent Preferred Health from engaging in conduct reasonably necessary to form or participate in legitimate joint contracting arrangements among physicians in qualified risk-sharing or clinically integrated joint arrangements; however, Preferred Health must notify the FTC of its intent prior to entering into such an arrangement. The terms of the FTC's consent order are largely similar to other recent consent orders that the agency has issued to settle charges that physician groups engaged in unlawful agreements to raise fees they receive from health plans.

Tourdot v. Rockford Health Plans Inc. W.D. Wis., No. 04-C-0404 (2/15/05)

The U.S. District Court for the Western District of Wisconsin granted summary judgment for Defendant Rockford Health Plans, Inc., in a suit for benefits brought under ERISA. Plaintiff Tourdot brought suit after the plan denied him coverage for medical costs incurred following an accident between Tourdot's motorcycle and an automobile. Tourdot, who was allegedly driving while intoxicated, was distracted and crashed into an automobile. He was given a breathalyzer test, which showed a blood alcohol level of .10gm/dL, which is above the legal limit in Wisconsin.

Plaintiff was issued a citation for inattentive driving and pleaded no contest. Shortly thereafter, Defendant notified Tourdot that it was denying coverage for the costs of the injuries sustained in the accident, based upon an exclusion in Plaintiff's policy applicable to "services which result from...the commission of an assault, felony, terrorist action, or any illegal act."

Tourdot argued that the term "illegal act" was being applied too generally, as he was neither prosecuted nor did he face a criminal penalty. In addition, Tourdot contended that Defendant's use of the exclusion in this case would lead to coverage denials for minor infractions, such as speeding. The court rejected Tourdot's argument that the phrase "illegal act" was ambiguous and generally applied, emphasizing that an illegal act does not require a conviction or a criminal penalty.

The court emphasized that driving with a blood alcohol above a specific level had been declared illegal by Wisconsin's legislature, and therefore "[f]or purposes of deciding plaintiff's claim for benefits and determining whether the services provided to him were excluded from coverage under the plan, defendant needed to know only that driving with a prohibited blood alcohol level is a criminal act in Wisconsin." The court also found that application of the exclusion in this case would not allow insurers to deny coverage for minor infractions resulting in civil forfeitures, as "civil forfeitures are not crimes under Wisconsin law."

Trustees of the Southern Illinois Carpenters Welfare Fund v. RFMS Inc. 7th Cir., No. 03-2876 (3/24/05)

The Seventh Circuit affirmed the district court's ruling that a beneficiary's ERISA-governed employer-sponsored health plan ("RFMS' health plan") explicitly limited payments to $1,000 and is not liable for the participant's $160,000 medical expenses.

Though RFMS' plan was the beneficiary's primary plan, she also participated in the Southern Illinois Carpenters Welfare Fund, which was administered through her husband's employer. One clause in the RFMS contract stipulated that if the beneficiary is covered by another employer-sponsored plan, he or she will be covered by the RFMS "wrap-around plan" which limits the beneficiary's entitlement to $1,000.

The court found that the union's "no loss provision" did not contain language to support the proposition that it was a separate plan subject to another plan's coordination-of-benefits analysis. Instead, the provisions of both plans were compatible, and the "no loss provision" is specifically incorporated into the "wrap-around plan."

U.S. ex rel. Jiminez v. Health Net, Inc. 10th Cir., 2005 WL 568037 (3/11/05)

The Tenth Circuit dismissed Plaintiff's appeal of its qui tam action for lack of prosecution sua sponte. According to the order, Appellants "consistently ignored procedural rules and orders, failed at every step to follow even the most basic requirements of filing an appeal with this court, disappeared to the point that their counsel was forced to notify the court that he believed he had been abandoned by his clients, and most recently, failed to meet th[e] court's specific deadline for resurfacing." The court chronicled the party's failures: they did not file their opening brief on cross-appeal or seek an extension, they filed motions after extensions passed, and motions did not conform to local formatting rules.

The court put Appellants on notice that it was contemplating imposing $1,000 fines against each of them, but not their counsel, and would give them three weeks to respond.

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