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Managed Care Lawsuit Watch - August 2009


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:


Phelan v. Wyoming Associated Builders
No. 08-8055 (10th Cir. July 31, 2009)

The United States Court of Appeals for the Tenth Circuit has concluded that the retroactive reinstatement of health insurance benefits is an equitable remedy available to beneficiaries under the Employee Retirement Income Security Act ("ERISA"). The Court found that the reinstated benefits did not specifically relate to the plaintiff, Phelan, but that retroactive coverage would be available to all employees. Furthermore, the Court concluded that the termination of coverage was in fact a pretext for it to avoid paying Phelan's extensive medical bills.

Scott Phelan, who was diagnosed with bone cancer at age 26, had health insurance through his employer, which in turn was a member of Wyoming Associated Builders ("WAB"), a trade association that held a trust to provide health benefits for its members' employees. Just as Phelan was about to submit a large claim for payment through his employer's insurance, WAB terminated his employer's membership in the insurance trust, purportedly because that employer had submitted a payment that was both late and in the wrong form.

The plaintiff sued under ERISA in order to have his health benefits retroactively reinstated. WAB argued that such a remedy would be tantamount to a legal, as opposed to equitable, remedy, which the particular ERISA provision the plaintiff sued under would prohibit. The Court agreed with the WAB that remedies, "despite their seemingly equitable form, are generally regarded as legal if they have a retrospective focus." Yet, in this case, the "remedy imposed by the district court . . . does not track the plaintiff's specific injuries, but is instead both broader and narrower. It reinstates coverage for all Lock Shop employees, not just Mr. Phelan." Furthermore, the Court pointed out that reinstatement of coverage does not even guarantee that Phelan's claims will be paid, since such payment "depends on a number of contingencies, including his own timely submission of the claims."

The Tenth Circuit also accepted the district court's finding that "the actual motivation for the Lock Shop's termination was avoidance of Mr. Phelan's claim." The Court focused in on the plan's language, which WAB had relied upon to terminate coverage: "Interpreting the word 'received' to mean 'posted' [as WAB did] might be objectively reasonable, but choosing this interpretation over equally reasonable alternatives solely in order to cut loose an expensive claim does not satisfy the obligations of good faith that plan administrators owe their fiduciaries." As a result, the Court affirmed the district court's order of the retroactive reinstatement of Phelan's employer's coverage.

AlohaCare v. State of Hawaii, Department of Human Services, et al.
No. 08-16589 (9th Cir. Jul, 16, 2009)

The United States Court of Appeals for the Ninth Circuit affirmed the district court's dismissal of AlohaCare's breach of contract suit.

AlohaCare, a non-profit organization providing health care services to the Medicaid population, was formed by a group of federally qualified health care centers (FQHCs) in Hawaii. AlohaCare submitted a proposal to provide managed care to the Medicaid population through Hawaii's Department of Human Services' (DHS) QUEST Expanded Access (QEXA) program. DHS had obtained a waiver from CMS to operate QEXA as an experimental demonstration project. After reviewing AlohaCare's proposal, DHS concluded that it was not a viable candidate for QEXA because AlohaCare did not meet the requisite technical requirements.

AlohaCare filed a protest, arguing that DHA had not properly evaluated its proposal. AlohaCare filed a request with the State Procurement office for reconsideration and also filed a suit against DHS alleging that DHS had violated various sections of the Medicaid Act. DHS moved to dismiss for failure to state a claim. The district court agreed, concluding that AlohaCare could not bring claims for Medicaid Act violations under § 1983 and that AlohaCare did not have standing to bring claims on behalf of the aged, disabled and blind population in Hawaii or AlohaCare member's FQHCs.

On appeal, the United States Court of Appeals for the Ninth Circuit affirmed the district court. Specifically, the Court rejected AlohaCare's argument that provisions of the Medicaid Act "conferred an unambiguous federal right to contract eligibility on FQHCs and FQHC entities." The Court noted that the Medicaid Act lacked any "rights-creating" language supporting a congressional intent to create such a federal right. The Court also rejected AlohaCare's argument that the Medicaid Act's enforcing regulations demonstrated the congressional intent to confer such a right because "plaintiffs suing under § 1983 must demonstrate that a statute - not a regulation - confers an individual right."

The Court also rejected AlohaCare's argument that it had associational standing to assert rights of its FWHC members. The Court reasoned that the FQHC members were not entitled to sue in their own right because the Mediciad Act does not provide FQHCs with an unambiguous federal right to contract eligibility and thus AlohaCare could not bring claims on their behalf.

The Court chose not to address AlohaCare's arguments based on the supremacy clause because they had not been raised at the district court level.

Office of Inspector General Advisory Opinion 09-10
OIG Advisory Opinion 09-10

The Department of Health and Human Services Office of Inspector General ("OIG") issued Advisory Opinion 09-10 in which it favorably addressed the use of "Preferred Hospital" networks by Medicare Supplemental Health Insurance ("Medigap") plans for the purpose of obtaining discounts on Medicare services for policyholders. The OIG concluded that this proposed arrangement did not pose a significant risk of fraud or abuse, and furthermore that it could have the potential to lower Medigap costs for the policyholders.

The requesters of the Advisory Opinion were licensed Medigap insurers who proposed entering into an arrangement with certain preferred provider organizations with contractual networks of hospitals throughout the country. The purpose of the arrangement would be to provide up to 100% discounts to the requestors' Medigap policyholders on their Medicare inpatient deductibles. These discounts would apply only to the Medicare Part A services at contracted hospitals, and if the policyholders sought treatment at non-contracted hospitals, the requestors would pay the full deductible on behalf of the policyholder. As part of this proposed program, the requestors would pass along savings directly to the policyholders in the form of $100 credits against their next renewal premiums.

The OIG first concluded that certain Anti-Kickback Statute safe harbors would not apply, including the safe harbor for waivers of inpatient deductibles, which specifically excludes waivers that are part of an agreement with an insurer. Nevertheless, OIG concluded that the proposed arrangement does not pose a significant risk of fraud or abuse since: (1) the waivers will not increase or affect per service Medicare payments; (2) the discounts should not increase utilization; (3) competition among hospitals should not be unfairly affected; and (4) professional medical judgment is unlikely to be affected.

OIG also concluded that the premium credits presented a low risk of fraud or abuse, however it noted that prohibition on inducements to beneficiaries would be implicated. Still, OIG found that the statutory exception for differentials in co-insurance and deductible amounts as part of a benefit plan design would likely apply. Even though it is not technically a differential, OIG found that the premium credit would have the same effect.

Finally, OIG concluded the proposed arrangement would have the potential to lower Medigap costs for the requesters' policyholders. Therefore, OIG found that the proposed arrangement would not constitute grounds for the imposition of civil monetary penalties under 42 U.S.C. 1320a-7a, and, while it could implicate the Anti-Kickback Statute, the arrangement would not result in civil monetary penalties or administrative sanctions under 42 U.S.C. 1320a-7b.

Crosby v. BlueCross/Blue Shield of Louisiana
No. 08-693 (E.D. La. July 2, 2009)

The District Court for the Eastern District of Louisiana dismissed all counts against Blue Cross/Blue Shield ("Blue Cross"), alleging arbitrary and capricious denial of claims for various dental procedures under plaintiff's ERISA group policy.

Plaintiff alleged that Blue Cross improperly denied multiple services related to her "idiopathic cervical root resorption" condition, arguing that such dental services were medically necessary to prevent damage to skeletal structures in her head and body. Blue Cross argued that the plan documents clearly excluded coverage for dental care and treatment, unless the surgery was related to an accident. Blue Cross further argued that the cause of plaintiff's condition and whether plaintiff's treatment was medically necessary were not determinative of coverage.

Applying an abuse of discretion review, the district court agreed with Blue Cross, finding that Blue Cross correctly excluded claims for dental care and treatment where the denied claims were for procedures performed by dentists or by members of the dental profession. The court further noted that the fact that plaintiff's condition may be part of a larger disease process and that the treatment may be medically necessary did not change the provisions of the plan excluding dental care and treatment. The court also found that plaintiff's dental procedures did not trigger the limited oral benefits available under the plan. Accordingly, the court dismissed plaintiff's claims for failure to state a claim upon which relief could be granted.

Barnes v. Humana, Inc. et al.
No. 8:09-CV-524-T-30MAP (D. Fla. Jun. 23, 2009)

Plaintiff, a paraplegic and Humana plan member, sued Humana for intentional infliction of emotional distress, breach of contract, breach of implied covenant of good faith and breach of fiduciary based on Humana's denial of home health care services. Humana removed the suit to federal court and subsequently moved to dismisson the ground that the Federal Employee Health Benefit Act (FEHBA) governed and preempted Plaintiff's state law claims.

Plaintiff opposed Humana's motion to dismiss arguing that the claim for intentional infliction of emotional distress is not preempted by FEHBA because it does not relate to the terms of Plaintiff's FEHBA plan. Plaintiff conceded that FEHBA preempted her other state law claims. The Court rejected Plaintiff's argument that Humana's intentional inference with her ability to receive medical services through intimidation of her provider and lies regarding Plaintiff's entitlement under the policy were independent of the terms of the FEHBA plan. The Court concluded that Plaintiff's allegations supporting the intentional infliction of emotional distress were "inextricably connected" to Humana's wrongful denial of Plaintiff's benefits and thus related to the terms of the FEHBA plan.

The court also rejected the plaintiff's attempt to remand the case back to state court.

Yeager v. Blue Cross of California
2009 Cal. App. LEXIS 1148 (Cal. Ct. App. Jul. 15, 2009)

The Court of Appeal of Californiaaffirmed that Blue Cross of California ("Blue Cross") did not violate California Health & Safety Code § 1374.55 by offering partial infertility coverage because it was not required to offer full coverage. The amount and cost of coverage were determined by negotiation between insurer and employer.

The appellant alleged that Blue Cross violated its statutory duty under California Health & Safety Code § 1374.55 by failing to offer coverage for treatment of infertility in her employer's group health plan. The appellant purported to bring a class action against Blue Cross, alleging causes of action for unfair competition and false advertising.

The appellate court dismissed the appellant's claims on summary judgment. First, Section 1374.55 obligated Blue Cross to offer coverage for infertility treatment, and left to Blue Cross and employer's mutual agreement the amount and cost of that coverage. The court found these while the $2,000 annual limit offered by Blue Cross did not provide full coverage for infertility treatment, the statute's language provided that an insurer need only offer coverage. No ambiguity existed in the statute, which left the terms and conditions of coverage to the parties' mutual agreement.

Second, the legislative history of section 1374.55 confirmed that the legislature did not intend to require a particular amount of coverage at any particular price. The legislature was concerned that infertility coverage was perceived as difficult to find and appellant offered no evidence that insurers today refuse to offer infertility treatment coverage. If the legislature was displeased about the statute's outcome, it had the power to change the statutory language.

Finally, the court found that the appellant had not established that a $2,000 annual limit for infertility treatment was too trifling to be a good faith offer of coverage. Therefore, the court dismissed the appellant's claims against Blue Cross.


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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