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Managed Care Lawsuit Watch - April 2007


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:

Wachtel v. Health Net, Inc.
3rd Circuit Court of Appeals No. 06-3031/3032 Apr. 2, 2007

Zev and Linda Wachtel were participants in a plan insured by Health Net of New Jersey, Inc., a subsidiary of Health Net of the Northeast, Inc. On their own behalf and on behalf of those similarly situated, the Wachtels sued those entities, as well as their corporate parent, Health Net, Inc. (collectively, “Health Net”), alleging that Health Net breached its ERISA fiduciary duties by using outdated “usual, customary and reasonable” data to determine participants’ co-payments for out of-network services. During discovery, Health Net claimed that its attorney-client privilege protected from disclosure certain documents requested by the Wachtels.

A Special Master concluded that the “fiduciary exception” to the privilege applied, and that Health Net was required to disclose the documents. (The “fiduciary exception” traditionally holds that, when an attorney advises a client acting in a fiduciary capacity, the attorney-client privilege cannot shield documents and communications from disclosure to the beneficiary of that fiduciary relationship. The district court agreed with the Special Master, and Health Net appealed.

The Third Circuit Court of Appeals declined to adopt or reject the “fiduciary exception,” generally, but found that it was not applicable to Health Net, as an ERISA fiduciary, in this case. The court found that the Wachtels were not “the ‘real’ clients obtaining legal representation,” pointing to four significant differences between insurance company fiduciaries (such as Health Net) and ERISA fiduciaries to whom the exception had previously been applied.

Specifically, the court found that (1) insurance companies are not required to hold assets in trust; (2) unlike employer-maintained benefit and pension plans, Health Net had a conflict of interest with respect to its own profits; (3) similarly, Health Net had a conflict of interest resulting from simultaneously handling multiple plans; and (4) Health Net paid for legal advice out of its own funds, not with beneficiaries’ assets. For these reasons, the court found that “an insurer which sells insurance contracts to ERISA-regulated benefit plans is itself the sole and direct client of counsel retained by the insurer, not the mere representative of client-beneficiaries.”

The court also found that disclosure obligations under ERISA are “not coextensive” with common law fiduciary duties to disclose, and further noted its reticence to derogate a privilege that, if absent, would endanger fiduciaries’ ability to obtain confidential legal advice.

The court vacated the district court’s order and remanded the case for further proceedings.

U.S. ex rel. Tyson v. Amerigroup Illinois, Inc., et al.
N.D. Illinois No. 02 C 6074 March 13, 2007

After a jury found Amerigroup Illinois, Inc. and its parent Amerigroup Corp. (together “Amerigroup”) liable for knowingly submitting or causing to submit false claims to state and Federal governments for payment, U.S. District Court Judge Harry D. Leinenweber trebled the jury award and imposed a penalty for 18,130 false claims.

The court stated that “the compensatory award was not ‘monstrously excessive’ … [but] rationally related to the evidence…. Defendants pilfered money from Medicaid coffers to pad its own pockets… deprived discriminated-against women and ‘unhealthies’ access to a particular HMO network…. [Its] conduct was egregious and calculated.” The court, however, also stated that it must “impose a penalty at the minimum of the statutory range…[because] it will adequately serve the Plaintiffs’ interest in deterrence without being unfair to the Defendants.”

The judgment ended four years of litigation at the trial court level instituted by Cleveland Tyson, a former Amerigroup executive in charge of government relations, alleging False Claims Act violations, violations of the Illinois Whistleblower Reward and Protection Act, and several common law claims. After the three-week trial in October 2006, the jury held that Amerigroup illegally discriminated against Medicaid-eligible beneficiaries, including pregnant women and people with expensive medical conditions, used financial incentives (and disincentives) to limit unfairly enrollees’ access to care, and fraudulently induced the government to enter contracts with it.

Amerigroup stated it intends to appeal “aggressively” what it sees as evidentiary, liability, and damages errors.

Trustees of the University of Pennsylvania Health System d/b/a University of Pennsylvania Health System, et al., v. Americhoice of Pennsylvania
Phila. Ct. Com. Pl. No. 4392 Jan. 23, 2007

Pennsylvania’s Quality Healthcare Accountability and Protection Act (“Act 68”) requires managed care organizations (“MCOs”) providing coverage to medical assistance participants to pay out-of-network providers all “reasonable and necessary costs” for emergency stabilization treatment provided to participants. Act 68 does not, however, provide guidance on how such costs are to be calculated.

Following the expiration of a provider contact between University of Pennsylvania Health System (“UPHS”) and Americhoice, a Pennsylvania Medicaid managed care contractor, UPHS began billing Americhoice its full published rates for emergency medical services provided to medical assistance participants. Americhoice, however, reimbursed UPHS at its lower Medicaid rate for the services. As a result, UPHS brought a lawsuit for unjust enrichment under Act 68 to receive the difference between its full rate and the rate paid by Americhoice.

The court rejected the notion that the appropriate rate was set as a matter of law. Had the legislature intended to set a default rate, the court reasoned, it would not have included “reasonably necessary costs” as the standard for reimbursement. Thus, the court ruled that the case should proceed to trial and be conducted based on proof of reasonably necessary costs by procedure code. The court also ruled that UPHS has the burden of showing that its actual costs incurred were in excess of what Americhoice had already paid on the claims.

Congress has now addressed this type of situation legislatively. Effective January 1, 2007, any provider of emergency services that does not have in effect a contract with a Medicaid managed care entity that establishes payment amounts for services furnished to a Medicaid beneficiary enrolled in the plan, must accept as payment in full no more than the amounts (less any payments for indirect costs of medical education and direct costs of graduate medical education) that it could collect if the beneficiary were a Medicaid beneficiary not enrolled with a managed care plan.

Sutter v. Oxford Health Plans LLC
3rd Circuit Court of Appeals No. 05-5223 Feb. 28, 2007

Dr. John Sutter, M.D., filed a class action complaint against Oxford Health Plans LLC (“ Oxford”) in 2002, alleging that Oxford failed to promptly and timely pay and improperly bundled and downcoded medical claims. Oxford successfully moved to compel arbitration, while Sutter’s claims against three other defendants were removed to federal district court, specifically the U.S. District Court for the Southern District of Florida, as “Provider Track Tag-Along” actions.

In March, 2005, the arbitrator in the Sutter-Oxford dispute granted partial class certification to Sutter, on behalf of all similarly situated providers who filed claims with Oxford. Oxford requested that the U.S. District Court for the District of New Jersey vacate the arbitrator’s decision, but the court denied the request. Oxford appealed.

The Third Circuit Court of Appeals affirmed, finding that the district court properly (1) applied an “extremely deferential” standard of judicial review of arbitrator decisions, and (2) determined that the arbitrator did not exceed his authority or manifest a disregard for the law. The appellate court noted the arbitrator’s review of each requirement for a class action ser forth in the American Arbitration Association’s rules, as well as whether collateral estoppel would apply with respect to recent decisions regarding the Provider Track Tag-Along suits.

Ogle v. PacifiCare Life and Health Ins. Co.
Cal. App. 4th Dist. No. G037319 March 1, 2007

The California Appeals Court for the Fourth District refused to enforce an arbitration provision in a PacifiCare Life and Health Insurance Co. (“PacifiCare”) subscriber contract, finding that the contract failed to comply with the requirements of the Knox-Keene Act. The underlying lawsuit was brought by two subscribers who alleged breach of contract and bad faith insurance practices.

PacifiCare argued that two documents, the subscribers’ application and a subscriber booklet sent to Plaintiffs, compelled Plaintiffs to arbitrate their disputes. The application form contained an arbitration provision printed in capital letters, but the arbitration provision in the subscriber booklet was not set off and appeared in the “General Provisions” section. The application form also specifically disclaimed that the form was a contract.

The court held that the arbitration language in the application form constituted no part of the agreement between the parties, due to the disclaimer, and thus could not be relied upon to compel arbitration. The court also found that the arbitration language in the subscriber booklet did not satisfy any of the arbitration requirements of the Knox-Keene Act and was unenforceable, as it did not clearly state that subscribers waived their right to a jury trial, was not expressed in substantially the same language as the statute requires, did not appear in a separate article, and did not set forth the arbitration processes used by PacifiCare, including how arbitration was to be initiated.

Pharmaceutical Care Mgmt. Assoc. v. District of Columbia
D. District of Columbia No. 04-1082 March 6, 2007

In 2004, the District of Columbia Council unanimously passed the AccessRx Act of 2004, which requires that PBMs disclose to customers information regarding the quantity and cost of drugs provided to covered entities, as well as information regarding financial arrangements between PBMs and drug manufacturers. The Act was similar, but not identical, to an act adopted in Maine in 2003.

Pharmaceutical Care Management Association (“PCMA”), a trade association representing various PBMs, challenged both acts. PCMA contended that the statutes were unlawful because they were preempted by Federal laws, constituted regulatory takings of industry trade secrets and revenues, violated 42 U.S.C. §1983, and violated other constitutional provisions, including the Due Process Clause, the Contracts Clause, and the First Amendment.

PCMA lost its challenge to the Maine statute in the First Circuit Court of appeals. After that decision, D.C. amended the Act to “conform the District’s law to the Maine law to withstand constitutional and other legal challenges.” D.C. then filed a motion for summary judgment based on collateral estoppel, asserting that PCMA’s claims in the D.C. action were actually and necessarily determined by the First Circuit decision.

The district court agreed. It noted that “[a]s a result of the amendment, the Maine statute and the D.C. statute are now substantially similar, and in many instances, identical.” The court found that all of the elements of collateral estoppel were satisfied: (1) the same issues were raised and contested by the parties in the First Circuit case; (2) all of the issues were actually and necessarily determined by a court of competent jurisdiction in that case; and (3) preclusion would not be unfair to PCMA in this case.

Because PCMA was collaterally estopped from litigating the validity of the AccessRx Act, the district court entered summary judgment in favor of the D.C. Government.

Kurtek v. Capital Blue Cross
3rd Circuit Court of Appeals No. 05-4325 March 1, 2007, unpublished

Plaintiff, a health plan beneficiary, sued defendants Capital Blue Cross and Capital Advantage (collectively, “Capital”) for injuries resulting from Capital’s alleged failure to approve a medical treatment in a timely fashion. Plaintiff sought preauthorization for a recommended Lupus treatment, but Capital informed her that the procedure appeared experimental and that it would contact her when a decision regarding the preauthorization had been made. Plaintiff subsequently developed a condition which resulted in multi-organ system failure. She alleged that she would not have suffered her injuries, or at least her injuries would have been dramatically diminished, had Capital granted authorization in a timely fashion.

Arguing that ERISA preempted the Plaintiff’s state law claim, Capital removed the case to federal court. The District Court agreed with Capital and held in its favor. The Circuit Court of Appeals affirmed, stating that claims challenging the quantum of benefits due under an ERISA-regulated plan are completely preempted. The court rejected Plaintiff’s argument that Capital made a medical decision affecting the quality – not the quantity – of care by considering whether a procedure is “experimental.” The court noted that Plaintiff could have challenged Capital’s decision under ERISA §502(a)(1)(B) to recover benefits owed to her under the terms of the plan. The court also rejected Plaintiff’s argument that she could not have brought such a claim because she was challenging the delayed approval, and not a denial of benefits. The Court, however, stated that Plaintiff could have sought an injunction under §502(a) to accelerate the approval of the procedure, or could have paid for the procedure and then sought reimbursement.

Non-Routine Medical Survey of Blue Cross of California, a Full Service Health Plan
California Dept. of Managed Health Care Mar. 23, 2007

Blue Cross of California (“BCC”) was fined $1 million by the Department of Managed Health Care (“DMHC”) for routinely rescinding health insurance policies in violation of the Knox-Keene Health Care Service Plan Act, which prohibits the practice of post-claims underwriting. In 2006, DMHC began investigating BCC after complaints from members that their policies were rescinded after they had submitted a health insurance claim form or after they received medical treatment. DMHC based its fine on a non-routine survey, which included a review of BCC’s pre-enrollment underwriting and post-enrollment practices. The survey reviewed a random sample of individual health insurance policy rescissions from January 1, 2004 to January 1, 2006.

According to DMHC, BCC violated state law by failing to conduct a thorough and complete pre-enrollment investigation of the applicant’s medical history or to conform to its own underwriting policies before issuing health coverage. Additionally, DMHC found that a second deficiency resulted from BCC’s failure to prove that an applicant willfully misrepresented his or her medical history before coverage was rescinded.

In September, 2006, DMHC had already fined BCC $200,000 for rescinding coverage of one of its members. In addition to these fines, BCC is facing a class action lawsuit on the same issue and has settled over seventy (70) individual policy rescission lawsuits. BCC has agreed to implement changes to improve its processes, but is challenging the penalty.

Heartland Surgical Specialty Hosp. v. Midwest Div. Inc.
D. Kansas No. 05-cv-2164-MLB-DWB March 16, 2007

The U.S. District Court for the District of Kansas held that the Kansas Hospital Association (“KHA”) is not required to produce documents related to its strategy of advocating for bills in the Kansas State legislature, and that the terms of a joint protective order do not permit Plaintiff Heartland Surgical Specialty Hospital (“Heartland”) to refuse to respond to interrogatories submitted by Defendants Midwest Division, Inc. (d/b/a HCA Midwest Division) (“Midwest”) and CIGNA.

Heartland alleged that Midwest and CIGNA conspired to prevent managed care companies from contracting with specialty hospitals such as Heartland. In an earlier discovery order and opinion, the court ruled that CIGNA had waived its attorney-client privilege with respect to advice it had received from antitrust counsel related to its exclusivity arrangement with Midwest.

Heartland also subpoenaed KHA, which is not a party to the litigation, requesting that KHA produce twelve categories of documents, including evaluations of legislation, strategy documents, and other materials related to KHA’s lobbying efforts in the Kansas State legislature. KHA objected to the subpoena, arguing that the First Amendment protects associations’ efforts to influence government to enact laws. The court agreed, finding that KHA’s lobbying documents are precisely the type of activity protected by the First Amendment, and that Heartland failed to show the information sought was highly relevant to its case, necessary to prove its claims, and unavailable from other sources.

Separately, Heartland refused to answer interrogatories submitted by Defendants, arguing that the terms of a joint protective prevented Heartland from answering any discovery requests relating to documents produced by Defendants. The protective order permitted the producing party to designate documents as “Attorneys Eyes Only,” and Heartland contended that only its litigation counsel was authorized to view Defendants’ designated documents. Heartland also stated that its litigation counsel was unwilling to answer discovery on Heartland’s behalf because of fears that Defendants would claim waiver of the attorney-client privilege, seek to depose its counsel as fact witnesses, and/or move to disqualify them.

The court disagreed and held that Heartland is charged with the knowledge of its attorneys, that attorneys can sign discovery requests, and that Heartland may not simply avoid responding to discovery requests on the basis of the protective order.

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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