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Managed Care Lawsuit Watch - April 2006


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

Please click to view the full Crowell & Moring Managed Care Lawsuit Watch archive.

Cases in this issue:

Mississippi Power Co. Medical Benefits Plan v. Welch
S.D. Miss. No. 1:03-cv-00224-JMR-JMR March 3, 2006

The U.S. District Court for the Southern District of Mississippi rejected a beneficiary's argument that his self-funded health plan waived its subrogation claim to the proceeds of the beneficiary's malpractice settlement.

Defendant Otis Welch underwent lung surgery in 1997, suffered complications, extended hospitalization and treatment and, in 1999, filed a malpractice suit against his surgeon.

In 2000, Welch contacted the subrogation unit of his insurer, the Mississippi Power Company Medical Benefits Plan (the “Plan”), to determine whether the Plan planned to assert any subrogation claims. In response, Welch received one itemization of claims for $6,533.40. In February 2002, Welch's attorney contacted the Plan to request itemizations of any other claims for which the Plan believed it had a right of subrogation, and the Plan's response did not include any further itemizations.

Welch's attorney sent a second letter to the Plan, stating that if the Plan did not produce an itemization of its subrogation claims by March 1st, he would treat the $6,533.40 claim as the sole amount the company was claiming. Welch then settled his malpractice suit and sent the Plan a check for $6,533.40. The Plan thereafter produced an itemization for $98,000. Welch refused to pay.

The Plan filed suit against Welch to recover the amount claimed. In response, Welch argued that the Plan had waived its right to subrogation by failing to act in a timely manner. The parties each moved for summary judgment.

The district court granted summary judgment for the Plan, denying Welch's claim that the Plan had waived its right to subrogation. It stated that nothing in the Plan's communications with Welch or his attorney demonstrated the Plan's intent to permanently waive its subrogation rights. The mere fact that the Plan knew Welch had demanded to resolve the subrogation issue was not evidence of a waiver.

Genord v. Blue Cross & Blue Shield of Michigan
6th Circuit No. 04-2486 March 14, 2006

The Sixth Circuit Court of Appeals rejected Blue Cross and Blue Shield of Michigan's argument that Michigan's Nonprofit Health Care Corporation Act, via the McCarran-Ferguson Act, preempts a civil RICO suit filed by physicians.

The suit, filed by a group of gynecologists, alleges that Blue Cross and Blue Shield of Michigan (“BCBS-MI”) systematically and fraudulently denied their claims in violation of the Racketeer Influenced and Corrupt Organizations Act (“RICO”) and Michigan 's Nonprofit Health Care Corporation Reform Act (“Health Care Act”). BCBS-MI moved to dismiss the suit, claiming that the district court lacked subject matter jurisdiction because the McCarran-Ferguson Act (“MFA”) prevents a private right of action under RICO. The district court denied BCBS-MI's motion, but certified the issue for interlocutory appeal to the Sixth Circuit.

The MFA provides that any federal law that invalidates, impairs, or supersedes a state law that regulates the “business of insurance” shall be preempted by state law. In order to determine whether the MFA preempted the physician's RICO claim, the Sixth Circuit determined whether the Health Care Act was enacted for the purpose of regulating the business of insurance.

The Sixth Circuit applied the Supreme Court's holding in United Labor Life Insurance Co. v. Pireno, evaluating: 1) whether the Health Care Act regulates a practice that has the effect of transferring or spreading a policyholder's risk; 2) whether the Health Care Act aims to regulate a practice that is an integral part of the relationship between the insurer and insured; and 3) whether the Health Care Act aims to regulate a practice that is limited to entities within the insurance industry.

The court found that the Health Care Act was not enacted for the purpose of regulating the business of insurance, as: 1) the Health Care Act, by allowing BCBS-MI to make gynecological services available to its subscribers through reimbursement agreements, does not regulate the transfer or spread of policyholder risk; 2) physician billing arrangements are not integral to the insurer-insured relationship just because they may result in lower health care costs; and 3) physicians are not “entities within the insurance industry.”

The court, finding it unnecessary to proceed to determine whether the RICO statute would invalidate, impair, or supersede the Health Care Act, affirmed the judgment of the district court, thus allowing the physicians' RICO claim to proceed.

Fitts v. Unum Life Ins. Co. of America
U.S.D.C., District of Columbia, No. Civ.A.98-00617(HHK) Feb. 23, 2006

The District Court for the District of Columbia granted a disability insurance beneficiary's motion for summary judgment that her bipolar disorder may not be classified as a “mental illness,” but ordered an evidentiary hearing to determine whether she truly suffers from bipolar disorder.

Fitts was diagnosed with bipolar disorder and could no longer work. Fitts' disability insurance policy, which generally provides disability benefits until age 65, excepts disabilities “due to a mental illness,” for which benefits are provided for 24 months.

Unum classified Fitts' bipolar disorder as a mental illness, and provided 24 months of benefits. Fitts filed suit, claimed that the classification violated ERISA, and moved for summary judgment that the exception was inapplicable. The district court granted Unum's cross-motion for summary judgment, but the D.C. Circuit Court of Appeals reversed, remanded and instructed the district court to review Unum's classification de novo.

On remand, the district court first found that Unum's definition of “mental illness” was ambiguous and “must therefore be construed strictly against Unum and in a manner that is reasonable and most favorable to Fitts.” The district court then adopted the most favorable definition of “mental illness” that it could find, from both the Ninth and Seventh Circuits: “a behavioral disturbance with no demonstrable organic or physical basis….”

The court determined that Fitts' bipolar disorder was not a “mental illness” under this definition. However, Unum presented evidence that Fitts actually suffers from a less severe disorder, and the court ordered an evidentiary hearing to determine the form of Fitts' disorder.

Academy of Medicine of Cincinnati v. Aetna Health, Inc., et al.
Supreme Court of Ohio, No. 2004-01, March 1, 2006

A group of physicians claimed that Aetna and United Healthcare of Ohio had violated Ohio's antitrust laws by maintaining artificially low reimbursement rates in four southwest Ohio counties. Aetna and United moved to stay the proceedings and compel arbitration. The trial court denied their motions, an appellate court affirmed and the Supreme Court of Ohio affirmed again.

In determining that the physicians' state antitrust claims were outside the scope of the parties' agreements' arbitration provisions, the lower court and appellate court both relied on a Sixth Circuit Court of Appeals decision that instructs a court, in analyzing the arbitrability of an issue, to “ask if an action could be maintained without reference to the contract or relationship at issue. If it could, it is likely outside the scope of the arbitration agreement.” Aetna and United appealed, arguing that the appeals court improperly relied on a federal standard.

The Ohio Supreme Court held that a lower state court may rely on federal precedent to the extent that it is consistent with Ohio law and not contrary to federal law. Reviewing Ohio and federal law on the issue of arbitrability, the Ohio Supreme Court stated that the Sixth Circuit's instruction “prevents the absurdity of an arbitration clause barring a party to the agreement from litigating any matter against the other party, regardless of how unrelated to the subject of the agreement. It allows courts to make determinations of arbitrability based upon the factual allegations in the complaint instead of on the legal theories presented.”

Medical Society of New Jersey v. Bakke
Superior Court of New Jersey, Appellate Division No. A-0439-04T2 March 6, 2006

In April, 2004, United Healthcare announced its acquisition of Oxford Health Plans, Inc. The Antitrust Division of the U.S. Department of Justice, determining that the combined companies would have a maximum market share of 30% and only limited negotiating leverage with health care providers, permitted the acquisition to proceed in July, 2004. Subsequently, insurance regulators of four States, including the New Jersey Department of Banking and Insurance (“NJDBI”), approved the acquisition.

The Medical Society of New Jersey (“Society”) appealed the NJDBI's decision. The court first determined that the Society had standing to appeal the determination – not because it was a “person aggrieved” under the state insurance code (which tracks almost verbatim the NAIC's Model Insurance Holding Company System Regulatory Act), but rather as a matter of New Jersey Constitutional law.

However, the court then determined that the insurance code requiring a “trial de novo ” does not apply to appellants with constitutional, as opposed to statutory, standing. Only “persons aggrieved,” i.e., persons who can successfully allege direct financial or other injury as a result of an acquisition, are entitled to the statutory, de novo review. As the Society could only allege “speculative” injury, i.e., that the combined company would negotiate for lower physician reimbursement rates, its appeal was subject to “firmly established principles of administrative law,” i.e., that the “[NJDBI's decision is entitled to a presumption of correctness… [and] may be overcome only by a showing that the [NJDBI's] factual findings are not supported by substantial credible evidence.”

The court then granted due deference to the NJDBI, found that substantial evidence supported its findings, noted the ease of market entry, and affirmed the NJDBI's approval of the acquisition.

University Hospitals of Cleveland v. South Lorain Merchants Assn. Health & Welfare Benefit Plan and Trust
Sixth Circuit Court of Appeals, No. 04-4067, March 21, 2006

The Sixth Circuit Court of Appeals reversed a district court's order that a health benefit plan must pay a hospital the full amount billed for services rendered to a plan beneficiary, and remanded for further proceedings.

A beneficiary of South Lorain Merchants Assn. Health & Welfare Benefit Plan and Trust (the “Plan”) was admitted to University Hospital of Cleveland (“UHC”) in 2000. For services rendered, UHC sent a bill in the amount of $195,000 to the Plan. Without notifying UHC, the Plan audited the bill and provided payment in the amount of $107,000, a reflection of both a $49,000 preferred provider network discount (“Discount”) and the audit's finding that the charges exceeded the usual, customary and reasonable (“UCR”) amount for such services by $39,000.

UHC filed suit in the U.S. District Court for the Northern District of Ohio, seeking full payment. The district court, reviewing the Plan's determination de novo, ordered the Plan to fully reimburse UHC, concluding that 1) the Plan was not entitled to the $49,000 Discount because the Plan failed to pay UHC's claim within 60 days, as required by agreement; and 2) the Plan's UCR audit was improper without at least 10 days' notice to UHC.

On appeal, the Sixth Circuit determined that the district court should have reviewed the Plan's determination for an abuse of discretion, rather than de novo. The court further held that, consistent with industry standard, if a claim is audited, the 60-day Discount rule does not begin to run until the audit is concluded. Thus, the Plan's payment was timely, the $49,000 Discount was warranted, and the district court's decision on this account was reversed.

The Sixth Circuit also held that the district court misconstrued the 10-day notice provision: it did not apply to notice of an audit, but rather to notice of a request for hospital records, if required for an audit. As the Plan's audit of UHC's bill did not require hospital records, the 10-day notice provision did not apply. Nonetheless, the Sixth Circuit could not verify the results of the Plan's audit, i.e., that UHC's bill was in excess of UCR by $39,000. Therefore, it remanded the case to the district court, instructing it to review the Plan's audit for an abuse of discretion.

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This material was prepared by Crowell & Moring attorneys. It is made available on the Crowell & Moring website for information purposes only, and should not be relied upon to resolve specific legal questions.

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Arthur N. Lerner
Partner – Washington, D.C.
Phone: +1 202.624.2820