Managed Care Lawsuit Watch - February 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:

• Empire Healthchoice Assurance Inc. v. McVeigh
• In re Evanston Northwestern Healthcare Corporation and ENH Medical Group, Inc.
• RenCare, Ltd. V. Humana Health Plan of Texas, Inc.
• Rome Ambulatory Surgical Center, LLC v. Rome Memorial Hospital, Inc.
• UnitedHealth Group Inc. v. Klay

Empire Healthchoice Assurance Inc. v. McVeigh 2nd Cir., No. 03-9098 (1/14/2005)

The Second Circuit Court of Appeals, in a 2-1 decision, ruled that a Federal Employees Health Benefit Act ("FEHBA") -governed health plan administrator cannot sue a beneficiary's estate in federal court under a subrogation provision. The Court affirmed a lower court dismissal for lack of subject matter jurisdiction.

A federal employee, Joseph McVeigh, participated in a FEHBA plan administered by Empire Healthchoice Assurance Inc., doing business as Empire Blue Cross and Blue Shield. In 1997, Mr. McVeigh was injured in an accident, and over the next four years Empire paid more than $157,309 for Mr. McVeigh's accident-related medical expenses. After his death in 2001, Mr. McVeigh's estate settled a personal injury lawsuit for $3,175,000. Empire filed an action in federal district court to recover $157,309, citing the subrogation and right-of-recovery provisions in its plan documents.

The district court held that although the plan is governed by the FEHBA, this did not require the case to be heard in federal court. The district court found that FEHBA preempts state law only when state law is inconsistent with the contractual provisions in a FEHBA plan, and in this case, Empire's actions did not arise under FEHBA because its claim alleged no such inconsistency.

The Second Circuit affirmed the district court, and held that there was no subject matter jurisdiction for Empire's claims. The Court found that FEHBA does not contain a cause of action, and does not specifically authorize the creation of federal common law in this case because there is no demonstrated conflict with state law that would require federal common law rulemaking. The Court ruled that Empire had failed to demonstrate that that New York state law conflicts with the unique federal interest at stake.

Further, the Court found that FEHBA's preemption provision, 5 U.S.C. § 8902(m)(1) does not confer federal jurisdiction. The Court noted that preemption only occurs when FEHBA contract terms relate to coverage or benefits, and "relate[s] to health insurance or plans." This second requirement was lacking in Empire's complaint, as Empire failed to show that the dispute implicated a specific state law or state common-law principle "relating to health insurance."

In re Evanston Northwestern Healthcare Corporation and ENH Medical Group, Inc. FTC, No. 9315 (1/18/2005)

The Federal Trade Commission ("FTC" or "Commission") withdrew Count III of its complaint filed against Evanston Northwestern Healthcare Corporation ("ENH"), which alleged price-fixing of physicians services in managed care contracts.

In its February 2004 complaint, the Commission alleged a violation of Section 5 of the FTC Act. Specifically, the Commission contended that hospital and physician services were negotiated as a package, with prices having been negotiated by ENH Medical Group for both salaried and non-salaried or independent physicians. The FTC complaint stated that these negotiations constituted price-fixing, as the salaried and independent physicians had not achieved financial integration or "meaningful efficiency-enhancing integration." The order withdrawing the count states that the parties had negotiated a consent agreement which was being submitted to the Commission for review. The proposed Consent Agreement is being withheld from the public until it receives preliminary approval from the FTC.

The order withdrawing Count III does not affect the remaining counts, which focus on the merger between ENH's two hospitals and Highland Park Hospital, in addition to the combination of ENH Medical Group and Highland Park Independent Physician Association.

RenCare, Ltd. V. Humana Health Plan of Texas, Inc. 5th Cir., No. 04-50087 (12/30/2004)

The Fifth Circuit found that because RenCare's claims against Humana were not inextricably intertwined with a claim for Medicare benefits and because there were no administrative appeals for RenCare to pursue, the district court erred in its partial denial of RenCare's motion to remand its claims to state court and its dismissal of RenCare's claims.

Humana, an HMO that contracts with the Centers for Medicare and Medicaid Services ("CMS") to provide medical services to Medicare+Choice ("M+C") enrollees, contracted with RenCare to provide kidney dialysis services to Humana's commercial and M+C enrollees. RenCare and Humana later disagreed about reimbursement in connection with RenCare's services. As a result, RenCare brought an action in Texas state court alleging breach of contract, detrimental reliance, fraud, and other violations of state law by Humana. The action was removed to federal district court, and RenCare moved to have the case remanded to state court.

The district court granted RenCare's motion on claims related to Humana's commercial enrollees, but retained jurisdiction over the claims related to the M+C enrollees. The district court then dismissed the claims related to the M+C enrollees on the ground that RenCare had failed to exhaust its administrative remedies under the Medicare Act. RenCare appealed.

On appeal, the Fifth Circuit reversed the district court's dismissal of RenCare's claims. The court noted that RenCare's claims did not arise under the Medicare Act because the standing and substantive bases for the claims were rooted in state law, not the Medicare Act. The court also found that RenCare's claims were not "inextricably intertwined" with a claim for Medicare benefits because (1) the government had no financial interest in the outcome of the case because it pays Humana a flat rate for providing medical care to M+C enrollees, and (2) M+C enrollees had no financial interest in the dispute because in its contract with Humana, RenCare waived its right to payment from Humana's enrollees.

The court noted that under Medicare Part C, the government passes the risk of providing services to M+C enrollees to a M+C organization. Finally, the appellate court determined that the administrative review process did not apply to claims under Medicare Part C where no enrollee had any interest in the claims.

Rome Ambulatory Surgical Center, LLC v. Rome Memorial Hospital, Inc. N.D.N.Y., No. 5:01-CV-23 (12/23/2004)

The case arose when Rome Ambulatory Surgical Center ("RASC") brought an action against Rome Memorial Hospital ("Hospital") and its corporate parent, Greater Affiliates, Inc., alleging violations of Sections 1 and 2 of the Sherman Act and state law claims, including tortious interference with business relations and intentional interference with contractual relations.

RASC, a freestanding ambulatory surgical facility, contended that Hospital engaged in various acts to limit the number of patient referrals to RASC, including conspiring with area physicians so that the physicians would not make referrals to RASC, and intimidating physicians who did refer patients to RASC. In addition, RASC alleged that Hospital entered into illegal exclusive contracts with commercial third party payors that essentially removed patients covered by those payors from the market in which RASC competed.

Defendants sought summary judgment on the issue of standing and on the merits, and RASC sought summary judgment as to some of its claims.

The District Court for the Northern District of New York determined that RASC met the Clayton Act Section 4 standing requirements of causation and an antitrust injury. It noted that RASC satisfied the causation requirement because RASC set forth facts sufficient for a factfinder to infer that Hospital was a substantial factor in causing RASC's injury. The court determined that RASC's allegations that the Hospital acted to limit the number of patient referrals to RASC satisfied the antitrust injury requirement, in that the Hospital's conduct was designed to prevent RASC from competing with the Hospital.

Of the twelve claims brought by RASC, the District Court determined that there were triable issues of fact with respect to three of RASC's claims under the Sherman Act. It granted Hospitals motion for summary judgment with respect to the other nine claims, including the two state law claims.

The court found that there was a triable issue of fact with respect to RASC's Sherman Act Section 1 claim that Hospital engaged in illegal exclusive contracts with third party payors. The court found evidence of anticompetitive effects in that during RASC's operation, commercial payors paid lower rates and patient's had greater choice with respect to ambulatory surgical services then after RASC's closure. RASC also alleged that Hospital foreclosed 65% of the relevant market, which, if true, would constitute an unreasonable restraint of trade. The court rejected Hospital's pro-competitive justification arguments for its conduct.

The District Court dismissed Hospital's motion for summary judgment on RASC's claim for attempted monopolization of the outpatient surgery market. It found that RASC presented evidence sufficient to defeat summary judgment that Hospital engaged in anticompetitive conduct with a specific intent to monopolize and that there was a significant likelihood of achieving monopoly power. The court observed that evidence to support allegations of conspiracy and physician intimidation to limit referrals to RASC and the exclusive contracts with commercial payors satisfied the anticompetitive conduct prong, and also could permit an inference of intent to monopolize. It then noted that RASC's allegation that Hospital had a 70% share of the outpatient surgery market before RASC opened, if true, would support a finding of monopoly power.

The District Court dismissed both parties' motions for summary judgment on RASC's claim that Hospital engaged in a conspiracy to monopolize the outpatient surgery market. While the court found that RASC sufficiently alleged the elements of conspiracy to monopolize: concerted action, over acts in furtherance of conspiracy and specific intent to monopolize, it determined that neither party conclusively proved their version of facts and that thus a triable issue of fact existed.

UnitedHealth Group Inc. v. Klay U.S., No. 04-522 Review Denied (1/10/2005)

In the latest chapter of the ongoing managed care litigation involving federal and state law claims brought by a class of thousands of doctors against major health maintenance organizations, the United States Supreme Court declined to review the September 1, 2004 decision by the 11th Circuit Court of Appeals to allow the physicians to pursue their federal RICO claims as a class.

The underlying litigation brought by the doctors alleged, in part, that the HMOs had conspired to systematically underpay the doctors for their services in violation of RICO. The District Court for the Southern District of Florida had granted class certification for the plaintiffs' federal RICO claims. The 11th Circuit affirmed. Applying Federal Rule of Civil Procedure 23, the 11th Circuit agreed with the district court that common questions of fact and law predominated for the plaintiffs' RICO claims, since the case involved allegations of a nationwide conspiracy to systematically underpay the plaintiffs. The HMOs filed a petition for certiorari, claiming that the Supreme Court should review the 11th Circuit's decision because the 11th Circuit presumed that the facts underlying the physicians' conspiracy claims were true, instead of carefully reviewing the record to evaluate whether Federal Rule of Civil Procedure 23 had been satisfied.

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