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Managed Care Lawsuit Watch - February 2008


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.

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Cases in this issue:

Hohn v. Surgeon
Eighth Circuit Ct. of Appeals No. 07-1087 Jan. 23, 2008

The U.S. Court of Appeals for the Eighth Circuit has reinstated claims brought by a network provider against an employee of Wellmark, Inc., holding that the employee may potentially be liable in his individual capacity for the provider’s claim of tortious interference. Wellmark terminated the provider, a physical therapy clinic, after a series of unsuccessful efforts by the provider to obtain reimbursement for vertebral axial decompression (“VAX-D”) procedures. The defendant employee (the “Defendant”), a Wellmark Vice President and Medical Director, allegedly unilaterally directed that the provider’s VAX-D claims be denied “up front” for lack of documentation, resulting in over $360,000 in unpaid claims.

The trial court granted the Defendant’s motion for summary judgment, noting that a claim of tortious interference under South Dakota law required the provider to demonstrate “a ‘triangle’ – a plaintiff, an identifiable third party who wished to deal with the plaintiff and the defendant who interfered with the plaintiff and the third party”. The trial court found Defendant had acted within the scope of his employment and was therefore considered to be the same as Wellmark, i.e., because a corporation cannot interfere with its own business relationships, the trial court held, the provider could not as a matter of law meet its burden of proving a triangular relationship.

The Eighth Circuit reversed, holding that while a corporate officer is immune from tortious interference claims involving actions of his or her own company even when acting in bad faith, South Dakota law does not exempt employees who are not officers from liability when the employee acts in bad faith or outside the scope of employment. The court then found that material issues of fact remained open as to whether the Defendant acted within the scope of his employment and whether he was a corporate officer.

Accordingly, the appellate court reversed the trial court’s opinion and remanded the case for resolution of the material issues of fact.

In re Lorazepam & Clorazepate Antitrust Litigation
D. District of Columbia D.D.C., MDL No. 1290, Misc. No. 99-MC-0276 Jan. 24, 2008

On January 24, 2008, the U.S. District Court of the District of Columbia granted HCSC's motion to treble the damages awarded by a jury to HCSC.

Initially, HCSC had been included within a class of indirect purchasers/third-party payors in underlying class action suits against Mylan Laboratories, Inc. Although the class litigation was settled, HCSC and three other third-party payors (Blue Cross Blue Shield of Massachusetts, Blue Cross Blue Shield of Minnesota and Federated Mutual Insurance Co.) elected to opt-out of the class settlement and litigate their antitrust claims. The decision to opt-out was based on concern that the class settlement provided the nationwide third-party payor class members only approximately $35 million, viewed as insufficient by the companies who opted out, as remedy for actual damages suffered due to defendants' anticompetitive conduct in the markets for two highly utilized anti-anxiety drugs -- lorazepam and clorazepate.

Following years of litigation and a month-long trial, the jury found in favor of HCSC and the other opt-out plaintiffs as to all claims and as to all damages alleged. The Court denied various post-verdict motions filed by Defendants and granted Plaintiffs' motions for trebling and other enhancements to the damages. The Court's damages award to the opt-out Plaintiffs, including HCSC, as trebled and enhanced, now totals over $69 million and constitutes roughly 200% of the settlement obtained for the entire nationwide class of third-party payors. This award does not yet include additional amounts for attorneys' fees and costs and/or interest that are the subjects of pending supplemental motions.

Medical Mutual of Ohio v. Schlotterer
Court of Appeals of Ohio CV-589806 Jan. 10, 2008

Medical Mutual of Ohio (“Medical Mutual”), an insurer, claimed that a physician committed fraud and breached his contract with Medical Mutual by engaging in “up-coding.” Medical Mutual filed a motion for a protective order and for an order directing the physician to respond to discovery in order to assist it in the production of non-party patient records, while still protecting the patients’ confidential information. The physician refused to execute the protective order and to produce the patients’ medical records, arguing that the order would require him to waive physician-patient privilege. An Ohio State lower court ordered the physician to disclose the physician-patient privileged information in response to a discovery request. The physician appealed.

In overturning the lower court’s decision, the Court of Appeals of Ohio rejected Medical Mutual’s argument that the case presented a recognized exception to the statutory physician/patient privilege – i.e., that the interests of the public outweighed the non-parties’ interests in confidentiality. Referring to the Supreme Court’s recent admonition “that judicially created exceptions to statutory privileges are disfavored,” the court noted that courts had permitted limited disclosure of privileged matters in cases involving revocation of a physician’s license or criminal charges. With respect to these cases, the court stated that “the ‘countervailing interest’ that permitted disclosure concerned the welfare of the patients themselves,” but that the case before it did not present such a situation.

The Court also noted that although Medical Mutual claimed the physician committed fraud, it had not complied with its statutory duty to report that belief to the State Board of Insurance, and that Medical Mutual possessed a statutory remedy of restitution.

In the Matter of Humana Insurance Company
Illinois Ins. Div., Dept. of Fin. & Prof. Regulation Jan. 2, 2008

On January 2, 2008, Humana Insurance Company (“Humana”) signed a Stipulation and Consent Order requiring the company to pay a $500,000 fine to the Illinois Insurance Division (the “Division”) for using unlicensed agents to sell its Medicare Advantage (“MA”) health plans. After receiving complaints about enrollment in Humana’s Medicare Part D and MA plans, the Division commenced an investigation. These complaints included allegations that Humana was “over-marketing” its MA plans to the elderly and disabled, and that the MA plans were expensive. The Division’s investigation revealed that Humana accepted applications from unlicensed producers and did not report that two producers had been fired for cause.

The Stipulation and Consent Order requires Humana to refrain from paying commissions to unlicensed producers and from allowing unlicensed agents/entities to “sell, solicit or negotiate” for any of its insurance products. Humana must also notify the Illinois Director of Insurance if it terminates any producers/agents for cause. Finally, Humana must provide proof of compliance with these measures and a civil forfeiture in the amount of $500,000.

Williams v. Viva Health Inc.
M.D. Alabama No. 2:07-cv-00321-WKW-TFM Jan. 25, 2008

The U.S. District Court for the Middle District of Alabama remanded to state court a prescription drug plan enrollee’s state law claims against Viva Health Inc. (“Viva”).

Susie Williams, whose prescription costs exceed $8,000 per year, enrolled in Viva to supplement her current prescription drug coverage. After enrolling, Williams learned that, by enrolling in Viva, her total prescription drug coverage had been reduced to $3,000 per year. Williams completed a disenrollment form and sent it to Viva. Viva did not disenroll her. Williams sued Viva in Alabama State court, alleging a state law tort and breach of contract.

Viva removed the case to federal court, claiming that provisions of the Medicare Act, including the Medicare Advantage preemption provision (the “MA Provision), created federal question jurisdiction by completely preempting Williams’ claims.

The court determined that the MA Provision does not carry complete preemptive force. The court specifically noted that such force is rare, that Viva had not shown that Congress intended the MA Provision to be a complete preemption statute, and that (unlike other statutory frameworks with complete preemption provisions), no federal cause of action to resolve disputes accompanied the MA Provision.

The court also determined that 42 U.S.C. §405(h) did not preempt Williams claims because Williams’ claims were not “inextricably intertwined” with a denial of benefits. The court found that neither Viva’s failure to disenroll Williams nor Williams’ challenge to the “quality” of Viva’s insurance coverage constituted a claim for benefits.

Accordingly, the district court found that Williams’ claims were not subject to removal and remanded them to state court.

Clay v. Permanente
N.D. California No. 06-7926 SC Dec. 14, 2007

The U.S. District Court for the Northern District of California held that the Medicare Advantage preemption provision (the “MA Provision”) preempts a California law regarding the enforceability of arbitration agreements, thus enforcing an arbitration provision contained in a member evidence of coverage (“EOC”) that allegedly failed to comply with California law. The underlying lawsuit was filed by the surviving family members of a Kaiser Medicare Advantage (“MA”) health plan member, who declined Kaiser’s request to submit their claims relating to the death of the member to binding arbitration, as required by the arbitration provision in the member’s EOC.

Plaintiffs argued the arbitration provision was unenforceable because it did not comply with the notice and disclosure requirements contained in California Health & Safety Code §1361 (“§1361”). Plaintiffs argued compliance with §1361 is mandatory, and violation of the statute renders the arbitration provision unenforceable. While the member enrolled in Kaiser’s MA plan in 2000, Defendants argued that later amendments to the Medicare Act preempted all state regulation of MA plans not relating to licensing or plan solvency, and particularly preempted state regulation of marketing materials such as EOCs. On the basis of the later amendments to the Medicare Act, Defendants argued §1361 was invalid as applied to the member’s EOC.

The court, citing to McCall v. Pacificare of Cal., 21 P.3d 1189 (2001), noted that it “examines the Medicare Act ‘as it read at the time relevant to the case’”, agreed with Defendants, and said “[b]ecause the events giving rise to this suit took place in 2004, and the arbitration provision governing the suit was executed in that year (by CMS approved amendment to the prior EOC), the Court concludes that the applicable version of the Medicare Act is that which was in effect in June of 2004, and which remains in effect today.”

Accordingly, the court held that the MA Provision preempted §1361 with regard to MA plans and that the arbitration provision could be enforced against Plaintiffs. The court ordered the Plaintiffs to submit their claims to binding arbitration.

Drissi, et al. v. Kaiser Foundation Hospitals, Inc., et al.
N.D. California No. 07-1980 SC Jan. 3, 2008

In 2003, when Colleen Drissi enrolled in Kaiser Foundation Health Plan, Inc.’s (the “Plan’s”) Health Plan Senior Advantage program, a Medicare Advantage plan, she signed an evidence of coverage (“EOC”) provision requiring her and her heirs to arbitrate nearly all disputes. In 2005, Drissi died from complications arising from kidney problems, and her heirs (the “Plaintiffs”) sued the Plan and other defendants for wrongful death, concealment, and conspiracy. The Plaintiffs refused to arbitrate the suit, and the defendants moved to compel arbitration.

Similar to the plaintiffs in Clay (above), the Plaintiffs argued that the arbitration provision signed by Drissi violated California law governing the adequacy of disclosures within arbitration agreements (the “Disclosure Law”). The Plan argued that the Medicare Advantage preemption provision (the “MA Provision”) preempted the Disclosure Law.

Expressly adopting the holding in Clay, the U.S. District Court for the Northern District of California found that, because Medicare Advantage regulations govern the approval and distribution of marketing materials (including the EOC), the MA Provision preempted state laws purporting to regulate MA plan marketing materials, such as the Disclosure Law.

In a second holding not addressed in Clay, the district court found that the arbitration provision was properly binding not only on Drissi, but also on Drissi’s heirs.

Admin. Comm. for the Wal-Mart Stores, Inc. Assocs.’ Health and Welfare Plan v. Horton, et al.
11th Circuit Ct. of Appeals Case. No. 07-10012 Jan. 15, 2008

At the age of 14, Joshua Horton was hit by an automobile and injured. He received medical benefits from the Wal-Mart Stores, Inc. Associates’ Health and Welfare Plan (“the Plan”) through his mother, who was then an employee of Wal-Mart. Under the Plan’s terms, in the event of a personal injury settlement, the beneficiary is required to reimburse the Plan for the medical benefits the Plan provided. Horton and his mother received $99,000 from a settlement in a personal injury lawsuit against the automobile’s driver. The settlement funds were deposited into a probate court account, and the probate court appointed Horton’s mother as his conservator. Horton’s mother then deposited the funds into a special needs trust and did not reimburse the Plan.

The Plan sued Horton, his mother as conservator, and the trust bank to recover the $51,446 the Plan had paid in medical benefits to Horton. A federal district court ruled that the Plan’s requested reimbursement did not qualify as “appropriate equitable relief” under ERISA Section 502(a)(3), and granted summary judgment in favor of Horton.

The Eleventh Circuit reversed. Based on the Supreme Court’s decision in Sereboff v. Mid Atlantic Medical Services, Inc., __ U.S. __, 126 S. Ct. 1869 (2006), the 11 th Circuit held that, because the Plan was seeking recovery from a specifically identified fund and not from the defendant’s assets generally, the lawsuit was equitable in nature and thus appropriate under Section 502(a)(3).

Moreover, addressing an issue not raised in Sereboff, the 11th Circuit held that the Plan could recover the funds from a third party, Horton’s mother, as conservator of the special needs trust. According to the court, the key consideration under Sereboff is not the identity of the defendant, but whether the settlement proceeds are identifiable and intact such that they can be restored to the rightful recipient. Thus, the appellate court reversed the district court’s ruling and allowed the Plan’s lawsuit to proceed under Section 503(a)(3).

Cossey v. Associates’ Health and Welfare Plan
E.D. Arkansas No. 4:02CV661 WKU Jan. 30, 2008

Cossey was injured in a car accident and covered by her husband’s employer’s health benefit plan, Associates’ Health and Welfare Plan (the “Plan”). Prior to providing coverage, the Plan requested that Cossey sign a subrogation agreement. Cossey refused, the Plan refused to pay her medical bills, and Cossey sued the Plan, alleging that it acted arbitrarily and capriciously.

In 2005, the court granted summary judgment to Cossey and determined the Plan acted improperly by relying on language in an informal plan document (an SPD) to condition coverage of Cossey’s injuries. However, the court stayed further proceedings after becoming aware that the Eighth Circuit Court of Appeals intended to resolve whether the SPD was part of the Plan’s formal documentation, albeit in a separate case.

In 2007, the Eighth Circuit Court of Appeals found that the Plan’s SPD constituted a part of the Plan’s formal documentation, and that the Plan could reasonably rely on the SPD to require participants to reimburse the Plan. Administrative Committee of the Wal-Mart Stores Inc. v. Gamboa, 479 F.3d 538 (8 th Cir. 2007).

After Gamboa, the district court asked Coffey and the Plan to resubmit briefs. Upon review, the court determined that since the SPD constituted a part of the Plan’s formal documentation (as determined by Gamboa), the Plan acted reasonably by refusing to provide benefits without Cossey’s signature on the subrogation agreement. Accordingly, the court granted summary judgment for the Plan.

Hailey v. California Physicians’ Service d/b/a/ Blue Shield of California
Cal. Ct. App. No. G035579 Jan. 22, 2008

On January 22, 2008, the California Court of Appeal, Fourth District denied Blue Shield of California's (“Blue Shield’s”) petition for rehearing of its December 24, 2007 decision against Blue Shield, which held that Blue Shield could not rescind health coverage to Hailey – an enrollee – without demonstrating that Hailey made a misrepresentation or a willful omission on her application.

The original complaint filed by Hailey alleged that Blue Shield violated California Health and Safety Code § 1389.3 prohibiting post-claims underwriting, when Blue Shield revoked Hailey's coverage because of misrepresentations on her application.  A trial court granted Blue Shield's motion for summary judgment, and ordered Hailey to pay Blue Shield $104,194, the amount incurred for medical expenses.  On appeal, the California Court of Appeal reversed the trial court judgment, holding that Blue Shield failed to make "reasonable efforts" to ensure Hailey's application was accurate and complete to assess the risk before issuing the health services agreement.

Blue Shield petitioned for rehearing, arguing that the Court of Appeal incorrectly interpreted § 1389.3.  In a January 22, 2008 order, the court denied Blue Shield's petition for rehearing but modified its December 24, 2007 opinion.  The modifications included revising facts, replacing references of "provider" to "insurer" and inserting a footnote clarifying that the court made certain illustrations to offer context to § 1389, not to change the law of rescission.

In conclusion, the court noted that the modifications did not change the judgment and denied Blue Shield’s petition for rehearing.

Golden State Restaurant Association v. San Francisco
9th Circuit Ct. of Appeals No. 07-17370 Jan. 9, 2008

The Golden Gate Restaurant Association (“GGRA”) filed suit against the City and County of San Francisco alleging that a local Ordinance violated ERISA by imposing conditions on the provision of employee welfare plans. Specifically, the Ordinance mandates that employers falling under its purview make “required health care expenditures to or on behalf of” certain employees each quarter. Covered employers are “businesses” with 20 or more employees and non-profit corporations with at least 50 employees. Employers that do not make the required health care expenditures must make payments directly to the city.

The District Court previously held that the Ordinance was “related to” an ERISA plan and thus preempted, and granted summary judgment in favor of GGRA. The City appealed this decision to the Ninth Circuit, filing a motion to stay. The Ninth Circuit held that the City had shown a “strong likelihood of success on the merits,” based on its conclusion that the Ordinance’s requirement that covered employers make a certain level of “health care expenditures” for their covered employees is preempted by Section 514(a) of ERISA.

The Ninth Circuit examined several ERISA cases to discern whether the Ordinance had a “forbidden connection” with ERISA plans. Distinguishing cases where federal courts have struck down such laws, the court noted that the Ordinance “does not require any employer to adopt an ERISA plan,” nor does it “require any employer to provide specific benefits through an existing ERISA” plan. The Court further held that the Ordinance did not have a forbidden “reference to” ERISA plans. Finally, the court examined the relative hardships involved on each side and the impact that a stay would have on the public interest. The Court found that these criteria “tipped sharply” in favor of the City because the Ordinance would likely increase the use of more cost-effective preventive care. Accordingly, the appellate court stayed the district court’s order.

On January 21, 2008, GGRA announced that it would not petition the Ninth Circuit for en banc review, as there was only a “minimal opportunity for success.”

Ramirez v. Health Net of the Northeast, Inc.
Connecticut Supreme Ct. No. SC 17933 Jan. 8, 2008

The Connecticut Supreme Court upheld a trial court’s decision granting Health Net of the Northeast’s (“Health Net’s”) motion for summary judgment. The dispute stemmed from a physician’s allegation that Health Net’s termination of his network participation agreement constituted a breach of contract and a violation of the Connecticut Unfair Trade Practices Act (the “CUTPA”).

After learning that the Connecticut State Department of Public Health had placed the physician’s license on probationary status, Health Net terminated the agreement without cause via letter to the physician, effective 90 days from receipt of the letter. The letter also informed the physician that while he no longer met the credentials necessary for network participation, he could appeal the termination.

The physician argued that the availability of the appeals process indicated that his termination had to have occurred under the “for cause” termination provision, rather than the “without cause” termination provision. The court disagreed and held that Health Net had properly terminated the agreement pursuant to the “without cause” provision, noting that the provision was plain, unambiguous and permitted Health Net to terminate the agreement for any reason. The Court also held that the termination was not transformed into a “for cause” termination merely because Health Net had a reason to terminate the physician.

Finally, the Court held that Health Net had not violated CUPTA because (1) Health Net had substantially complied with the termination procedures under the agreement, (2) the physician’s termination was distinguished from that of other physicians who also had licenses placed on probation, and (3) the physician presented no evidence showing that his termination caused substantial injury to consumers.

In re Insurance Brokerage Antitrust Litigation
D. New Jersey MDL No. 1663 Jan. 14, 2008

The U.S. District Court for the District of New Jersey granted summary judgment in favor of health insurers AIG, CIGNA, The Hartford, Metropolitan Life, Prudential and the Unum Group ("Defendants"), finding that Defendants did not violate ERISA because they were not ERISA fiduciaries when they administered plaintiffs' employee benefit plans.

The consolidated class action lawsuit, brought on behalf of commercial insurance policyholders and employee benefit plan sponsors (“Plaintiffs”), alleged that the Defendants breached ERISA fiduciary duties owed to the Plaintiffs when they conspired with brokers to allocate and protect their employee benefit plans' insurance business in exchange for commissions and fees.

The District Court first determined that under ERISA, the Defendants would be fiduciaries only to the extent that they exercised actual decision-making power for the management or administration of the plans.  Furthermore, the Defendants must have been acting as a fiduciary when the they allegedly conspired with brokers in exchange for commissions and fees.  The court acknowledged that the Defendants acted as claims administrators and possessed discretion in the administration of claims.  However, the court held that the Defendants were not ERISA fiduciaries because the Defendants’ limited role as claims administrators did not extend to the allegation that Defendants were ERISA fiduciaries with regard to administering plaintiffs' employee benefit plan as a whole. 

The court also rejected plaintiffs’ arguments that Defendants breached its fiduciary duty under ERISA for failing to disclose commissions, for exercising authority and control over the disposition of plan assets, and for accepting insurance premium payments made through payroll deductions.   In each case, the court found that no fiduciary duty arose with regard to the alleged conduct.  Accordingly, the court granted the Defendant's motion for summary judgment.

Wedekind, et al., v. United Behavioral Health and United Healthcare Insurance Co.
D. Utah No. 1:07 –CV-26 TS Jan. 23, 2008

Plaintiffs Donald and Jane Wedekind and their daughter filed suit against Defendants United Behavioral Health and United Healthcare Insurance Co. (collectively, “United”) for payment under a group health insurance policy and Nebraska state law for their daughter’s treatment at a residential facility. The daughter was hospitalized for complications due to an eating disorder and subsequently diagnosed with depression. After doctors concluded that residential treatment was medically necessary and constituted the “appropriate level of care” for her mental illness, the daughter was placed in a residential treatment facility for eight months. Although the daughter was a beneficiary under Donald Wedekind’s insurance, his employer, United, denied coverage, alleging that residential treatment services are specifically excluded from the Wedekinds’ policy.

The Wedekinds sued United in the U.S. District Court for the District of Utah, arguing that the policy’s exclusion of residential treatment services violated a Nebraska state law that prohibits insurers providing mental health coverage from placing greater financial burdens on treatment for mental illness than physical illness. United filed a motion to dismiss the complaint, primarily contending that ERISA preempted the Wedekinds’ state law claims.

The District Court held that ERISA did not preempt the Wedekinds’ state law claim. The District Court noted that, as in MetLife Ins. Co. v. Mass., 471 U.S. 724, 742 n.18 (1985), “the Nebraska statute at issue in this case requires health insurance plans to include certain provisions concerning the treatment of mental health conditions.” Although ERISA provisions normally preempt state laws relating to employee benefits, because the Nebraska statute was a “mandated-benefits statute,” it was saved from preemption.

While the District Court concluded that Jane Wedekind did not have standing to bring a claim, it rejected Defendants’ other challenges, holding that Nebraska law required coverage for the daughter’s treatment at the residential facility, and further that the insurance policy allowed for such coverage.

Vision Service Plan, Inc. v. U.S.
9th Circuit Ct. of Appeals No. 06-15269 Jan. 30, 2008

In a brief, unpublished opinion, the Ninth Circuit Court of Appeals affirmed a ruling that Vision Service Plan, Inc. (“VSP”) does not qualify as a social welfare tax exempt organization pursuant to 26 U.S.C. §501(c)(4).

Citing tax regulations and other federal appellate courts’ case law, the Ninth Circuit determined that VSP is not “primarily” engaged in promoting the common good and general welfare of the community. The appellate court made special note of VSP’s own articles of incorporation, which state that VSP’s primary purpose is to use a pool of subscriber payments in order to defray the cost of the subscribers’ vision care. The court found this purpose as one that “benefits VSP’s subscribers rather than the general welfare of the community.”

Report of the Market Conduct Examination of the Claims Practices of the PacifiCare Life & Health Insurance Co.
State of California Dept. of Insurance Market Conduct Div. Field Claims Bureau - Released Jan. 29, 2008

The California Department of Insurance (“CDI”) and the Department of Managed Health Care (“DMHC”) commenced a joint investigation of PacifiCare’s files after receiving “hundreds of consumer and provider complaints about claims payment problems by PacifiCare.”

After reviewing 1,125,707 paid claims, the CDI and DMHC examiners found 128,849 alleged violations of the California Insurance Code. The alleged violations pertained to failures to timely pay claims, pay interest on uncontested claims, and timely acknowledge receipt of claims. The examiners did note the insurance company’s assertion that a provider network transition (resulting from the merger of United HealthGroup and PacifiCare) led to many processing errors.

Because statutory penalties are $5,000 per non-willful violation and $10,000 per willful violation, potential penalties could reach $1.3 billion, according to the state. On January 29, 2008, the State of California filed a civil action against United HealthGroup for fines and penalties.


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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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