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Managed Care Lawsuit Watch - December 2010


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:


Commonwealth of Virginia v. Sebelius
Civil Action No. 3:10CV188-HEH (E.D. Va. Dec. 13, 2010)

The Attorney General of Virginia brought suit on behalf of the Commonwealth of Virginia challenging the constitutionality of Section 1501 of PPACA, commonly known as the Minimum Essential Coverage Provision or the Individual Mandate. This provision requires that every United States citizen, unless specifically excepted, maintain a minimum level of health insurance coverage for each month beginning in 2014, or the individual will have to pay a penalty.

The Court found that the penalty operated, in fact, as a penalty rather than a tax necessitating that Congress's authority to enact the penalty would have to be tied to a valid exercise of the Commerce Clause and the associated Necessary and Proper Clause, rather than the General Welfare Clause. However, the Court found that Congress had lacked the power under the Commerce Clause "to compel an individual to involuntarily engage in a private commercial transaction, as contemplated by the Minimum Essential Coverage Provision." The Court went on to state that this dispute "is not simply about regulating the business of insurance—or crafting a scheme of universal health insurance coverage—it's about an individual's right to choose to participate."
The Court ordered that Section 1501 be severed from the remainder of PPACA, but declined to issue an injunction. The ruling does not address any of the remaining PPACA provisions. The issue will now go up on appeal.

State of Florida v. United States Department of Health & Human Services
Case No.: 3:10-cv-91-RV/EMT (N.D. Fla. Oct. 14, 2010)

The United States District Court for the Northern District of Florida denied the Department of Health & Human Services ("HHS") motion to dismiss this action against the PPACA with respect to the individual mandate and the state coercion count. In this case, the plaintiffs contended that the PPACA violates the Constitution in the following ways: (1) the individual mandate and concomitant penalty exceed Congress's authority under the Commerce Clause and violate the Ninth and Tenth Amendments; (2) the individual mandate and penalty violate substantive due process under the Fifth Amendment; (3) "alternatively," if the penalty imposed for failing to comply with the individual mandate is a tax, it is an unconstitutional capitation or direct tax; (4) the PPACA coerces and commandeers the states with respect to Medicaid by altering and expanding the program in violation of Article I and the Ninth and Tenth Amendments; (5) it coerces and commandeers with respect to the health benefit exchanges in violation of Article I and the Ninth and Tenth Amendments; and (6) the employer mandate interferes with the states' sovereignty in violation of Article I and the Ninth and Tenth Amendments.

First, the court determined that the individual mandate penalty was not a "tax" and, thus, HHS could not rely on Congress's taxing authority under the General Welfare Clause to justify the penalty. Second, the court held that HHS's jurisdictional challenges fail.

The court then turned to the plaintiff's arguments for failure to state a claim upon which relief could be granted under Federal Rule of Civil Procedure 12(b)(6). In Count VI, the plaintiffs objected to the PPACA's employer mandate which requires the states, as large employers, to offer and automatically enroll state employers in federally-approved insurance plans or face substantial penalties. The court found that because the employer mandate regulates the states as participants in the national labor market the same way as it does private employers, and because the Supreme Court has held that adversely affecting the state fisc does not interfere with state sovereignty, the employer mandate does not violate the Constitution as a matter of law. In Count V, the plaintiffs claimed that the creation of health benefit exchanges which states may create and operate is really not a choice because the PPACA forces them to operate the exchanges under threat, in violation of the Ninth and Tenth Amendments. The court held that because the health benefit exchanges are voluntary and do not compel states to regulate the private conduct of their citizens, the PPACA gives the states a choice and is a type of "cooperative federalism." In Count III, the plaintiffs objected to the individual mandate penalty as an unconstitutional capitation or direct tax. The court found that Congress did not intend the individual mandate penalty to be a tax so it dismissed this count as moot. In Count II, the plaintiffs alleged that the individual mandate violates their rights to substantive due process under the Fifth Amendment. The court also dismissed this count because there was a "rational basis" for justifying the individual mandate.

In Count IV, the state plaintiffs object to the fundamental changes in the nature and scope of the Medicaid program. Specifically, the state plaintiffs claimed that the drastic expansion will force them to "run [their] budgets off a cliff." In light of the current state of the law, the judge found that there was little support for the plaintiffs' coercion theory, but the law did not preclude this argument. The court acknowledged that the plaintiffs are placed in an extremely difficult situation of either accepting sweeping changes to Medicaid or being withdrawn from the system entirely. Finally, in Count I, the plaintiffs challenged the individual mandate as exceeding Congress's power under the Commerce Clause. The court held that the plaintiffs had stated a plausible cause of action, as the government "has never required people to buy any good or service as a condition of lawful residence in the United States."

Thomas More Law Center v. Obama
Case No. 10-CV-11156 (E.D. Mich. Oct. 7, 2010)

The plaintiffs were a "public interest" law firm acting on behalf of its members and four individuals who asserted they do not have private health insurance and object to "being compelled to purchase heatlh care coverage". They claimed that they were being forced by the Individual Mandate to direct into saving for health insurance to be purchased in 2014 monies they would now be spendig in other preferred ways, even though the mandate and its penalties only become effective in 2014 and that Congress lacked the power to regulate "inactivity" – i.e., not buying health insurance. The court ruled that the plaintiffs did have standing and that the case was sufficiently "ripe" for resolution. On the merits, though, the court upheld Congress's power under the Constitution's interstate commerce clause to impose the penalty under PPACA for violation of the Individual Mandate to have health insurance. The court observed that the plaintiffs' "inaction" as regards purchase of health insurance effectively meant that they would purchase health care services in some other way, since they would no doubt be at some point participants in the health care services market. The federal government could regulate that choice, the court said, given the impact those choices can have on the operation of the health care marketplace. Because it upheld the law on interstate commerce clause grounds, it did not reach the separate argument by the government that the mandate penalty was enforceable under the federal government's separate taxing authority.

Oldenkamp v. United American Ins. Co.
No. 4:07-CV-00601-TCK-PJC (10th Cir. Sept. 28, 2010)

The parents of an infant son sued their insurer, United American Insurance Company, for denying their claim for coverage of removing a congenital cyst from their son's eyelid. The cyst was first noted in a routine well-baby visit in April 2006 while coverage under their Untied "Limited Benefit Hospital and Surgical Expense Policy" was not effective until August 1, 2006. The infant had surgery on the cyst in September 2006, and United subsequently denied the claim for coverage on the basis that the cyst was a pre-existing condition that was excluded under the policy.

The parents brought suit against United alleging that the policy's pre-existing exclusion provision was contrary to Oklahoma state law. Specifically, an Oklahoma insurance regulation prohibits the exclusion of pre-existing conditions if they are congenital anomalies of a covered dependent child. United argued that the insurance regulation only applies to health insurance policies and that the policy at issue is a "limited benefit policy" rather than a health insurance policy under Oklahoma law. The parents argued that the limited benefit policies are a category within accident and health insurance, and are not separate and distinct.

The Court of Appeals, reversing the District Court's decision, found that the insurance provision in question does not apply to limited benefit policies. Therefore, the Court found that the pre-existing condition exclusion in the parents' United policy was not in violation of Oklahoma state law so long as it is a limited benefits policy, an issue that will be decided on remand to the District Court of Oklahoma.

The American Medical Association v. United Healthcare Corporation
No. 1:00-cv-02800 (S.D.N.Y. Sept. 20, 2010)

On September 20, 2010, the federal district court for the Southern District of New York entered a final order approving a motion of class counsel for attorneys' fees of $87.5 million, or 25% of the $350 million of the Cash Settlement Fund.

The lawsuit, filed on March 15, 2000 by a class of providers and beneficiaries, alleged that Ingenix Corp. - a UnitedHealth Group subsidiary - had developed a database that had been used to improperly calculate the "Usual Customary and Reasonable" reimbursement to out-of-network providers

The order unconditionally approved the settlement and payment of attorneys' fees of $87.5 million, the full amount requested.

Lewis v. Aetna Ins. Agency Inc.
No. 09-cv-641 (S.D. Ill. Oct. 28, 2010)

In considering claims brought by a husband and wife ("Plaintiffs") against their employer-sponsored health plan and the plan fiduciary, a federal judge in Illinois dismissed all of the Plaintiffs' claims as duplicative and moot, among other reasons.

Plaintiffs Annie and Herbert Lewis were insured through a plan offered by Herbert's employer, Sherwin-Williams Co. Aetna Insurance Agency, Inc. ("Aetna") served as the plan fiduciary and was responsible for reviewing claims.

Following a horse-riding accident, Annie Lewis amassed medical bills totaling $38,165.92 for which she sought benefits under Plaintiffs' health plan. Aetna denied benefits, citing in part a pre-existing condition, and thereafter Annie's medical providers won judgments against her. The Plaintiffs subsequently brought claims against Aetna in state court, and the matter was removed to federal court on Aetna's motion based on ERISA preemption. The Plaintiffs later added Sherwin-Williams Co. as a co-defendant.

A federal judge in the U.S. District Court for the Southern District of Illinois concluded that two of the Plaintiffs' claims -- for arbitrary and capricious actions by Aetna and violation of ERISA Section 502(a)(1)(B) by the plan -- were duplicative since both alleged essentially the same thing. The court found that the only difference between these two claims was that one was against Aetna and the other was against the Plaintiffs' health plan. The complaint made clear that both counts were civil actions for violations of ERISA Section 502(a)(1)(B). As a result, the court dismissed the Plaintiffs' claim against Aetna for arbitrary and capricious conduct as duplicative.

Turning to the Section 502(a)(1)(B) claim against the health plan, the court found that, while there was evidence that Aetna did not process the claims in a timely fashion, such untimeliness did not impute additional liability to the plan in an action for benefits. The court pointed out that ERISA Section 502(a)(1)(B) "does not provide for compensatory damages, money damages, or extracontractual relief." Therefore, the court found that no genuine issue of material fact existed with respect to the civil judgments against the Plaintiffs. Furthermore, because the plan had already provided the relief allowable to the Plaintiffs, their ERISA Section 502(a)(1)(B) claim was moot.

The court dismissed the remaining counts asserted by the Plaintiffs for various reasons, including that Herbert Lewis did not have standing to bring suit under ERISA. As a result of its findings, the court almost entirely granted the defendants' motion for summary judgment, and dismissed the remaining count as moot.

Office of Federal Contract Compliance Programs, United States Department of Labor v. Florida Hospital of Orlando
No. 2009-OFC-00002 (Oct. 18, 2010)

TRICARE is the Department of Defense's worldwide health care program for active duty and retired military as well as their families. TRICARE contracted with Humana Military Healthcare Services (HMHS) to assist with administering the TRICARE program and to establish provider networks for TRICAREW beneficiaries. In 2005, Florida Hospital of Orlando (FHO) entered into a "Hospital Agreement" with HMHS regarding ide health care services to TRICARE members, in which it agreed to be bound by TRICARE rules and regulations.

The ALJ concluded that FHO had entered into a "subcontract" when it agreed with the TRICARE contractor to be a participating provider as regards provision of medical services to TRICARE beneficiaries. The ruling is now under review by the OFCCP Administrative Review Board.

Cumberland Heights Foundation, Inc. v. Magellan Behavioral Health, Inc.
No. 3:10-cv-00712, 2010 WL 3522414 (M.D. Tenn. Sept. 7, 2010)

In Cumberland Heights, the plaintiff, a non-profit alcohol and drug addiction treatment center, contracted with Magellan to provide treatment and addiction services. The contract permitted Magellan to terminate the agreement immediately upon the occurrence of several events, including engaging in misconduct which indicated Cumberland was delivering clinically inappropriate care. In late 2009, Magellan initiated an eight-month inquiry and review process of Cumberland's performance, which resulted in a letter outlining corrective measures for Cumberland to enact. Several months later, Magellan informed Cumberland that it was immediately terminating the Agreement, citing Cumberland's inability to provide services to members that met Magellan's medical necessity criteria and providing substandard care. Although the termination deprived Cumberland of "in-network" status, Cumberland remained free to admit and treat Magellan members on an "out-of-network" basis.

Cumberland filed a complaint alleging wrongful termination and seeking a preliminary injunction against termination. Cumberland argued that Magellan lacked a legitimate reason for terminating the agreement and Magellan's stated reason for termination was merely a pretext to terminate based on Cumberland's previous successes appealing adverse medical necessity decisions.

The court determined that Cumberland was unlikely to succeed on the merits of its claim, and concluded that the balance of other relevant factors weighed against issuing an injunction. First, the court held that Magellan had offered facially sufficient reasons for terminating the contract such as inadequate or inaccurate recordkeeping and clinical observations as well as other instances of substandard care. Second, the court determined that Cumberland failed to show why Magellan would have used the cited reasons as a pretext to retaliate.

During the appeals, Magellan doctors had reversed their own decisions once new information came to light. Further, Cumberland failed to explain why Magellan would have undertaken an extensive eight-month review process rather than simply utilizing the contract provision that authorized termination without cause upon 90-days notice.

The court also addressed other factors bearing on whether a preliminary injunction should issue. First, the court considered whether any irreparable harm would result absent an injunction. The court rejected Cumberland's argument that patients would be harmed because, even after Cumberland lost "in-network" status, existing patients continued their treatment and Cumberland admitted over 40 new Magellan patients. The court agreed, however, that Cumberland could be irreparably harmed because Magellan patients comprised 45% of Cumberland's revenues and a substantial number of patients would use other facilities if Cumberland lost in-network status. Thus, the court concluded that the "irreparable harm" factor weighed in favor of Cumberland because termination could potentially cause Cumberland to go out of business. Second, the court determined that forcing Magellan to contract with Cumberland against its will would cause Magellan "substantial harm," thereby weighing against an injunction. Finally, the court concluded that the "public interest" factor weighed against issuing an injunction. Patients could still utilize Cumberland's services even if Cumberland was out-of-network. Further, the court agreed that the interest of patients) would be better served if Magellan were permitted to contract with facilities that met its safety requirements.

Thus, although Cumberland might suffer irreparable injury, the balance of the factors for issuing a preliminary injunction weighed against enjoining termination of the agreement.

Fossen v. Blue Cross Blue Shielf of Montana, Inc.
No.CV 09-61-H-CCL D. Mont. October 6, 2010

Plaintiffs, various individuals as well as Fossen Brothers Farms ("FBF"), a partnership, obtained group health insurance through an association of unrelated groups of employers purchasing group health insurance together from Blue Cross Blue Shield of Montana, Inc. (the "Association"). Plaintiffs sued BCBSM after receiving notification that BCBSM would be increasing Plaintiffs' premiums, partly due to the health status of one of the FBF employees or its dependents. Plaintiffs alleged that BCBSM violated a Montana statute which prohibits it from charging an individual a higher premium for group health insurance based on the health status of an individual.

The Court first noted that Plaintiffs' state law claim falls within the scope of ERISA preemption because ERISA contains a provision identical to the state law relied upon The Court then rejected Plaintiffs' argument that the Association was a "group" and that FBF was an "individual" being charged a higher premium. According to the Court, the Association was a purchasing consortium with the actual group health insurance plans existing at the participating employer level. The Court ruled that ERISA permits an employer group health plan to be charged a higher premium due to health factors of its employees as long as the increased premiums apply equally to all the employees in the employer's group health plan. Because FBF was an employer group, the Court held that BCBSM did not violate ERISA by increasing Plaintiffs' premiums.





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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
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