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Managed Care Lawsuit Watch - February 2013


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:


FTC v. Phoebe Putney Health System, Inc.
No. 11-1160, 568 U.S. __ (2013)

The Hospital Authority of Albany-Dougherty County (the "Authority") – owner of the Phoebe Putney Health System, Inc. ("PPHS") – is a creature of Georgia law,  which has permitted Georgia's political subdivisions to establish and delegate operational authority to hospital authorities since 1941. The transaction at issue in this case was first contemplated in 2010, when PPHS entered into discussions with HCA, Inc. ("HCA") about acquiring Palmyra Medical Center ("PMC"). PPHS already owned Phoebe Putney Memorial Hospital, and the acquisition of PMC would raise PPHS's share of the region's market for hospital services from 75 percent to 86 percent.

The FTC challenged the acquisition under § 5 of the FTC Act and § 7 of the Clayton Act and the State of Georgia joined the FTC's suit to enjoin PPHS's action. The trial court denied the FTC's and Georgia's request for a preliminary injunction and granted the defendants' motion to dismiss after finding that the state action doctrine makes PPHS immune from federal antitrust law. The Eleventh Circuit affirmed that decision, explaining PPHS's anticompetitive conduct was immune because it was a "foreseeable result" of the organic legislation.

The Court granted certiorari on two questions, but only reached the first, which was whether the Georgia legislature had "clearly articulated and affirmatively expressed a state policy to displace competition in the market for hospital services." The Court answered no to this question because it read the underlying legislation as granting general authority to PPHS, but in a way that was at most neutral toward – i.e., was not affirmative of – the prospect of anticompetitive conduct by PPHS. With this conclusion, the Court rejected what it called a loose reading of the clear articulation test on the part of the Eleventh Circuit.

In addition to explaining the legal framework and applicable test that informed its ruling, the Court also explained its rejection of various arguments adopted by the Eleventh Circuit. For instance, it acknowledged that legislatures cannot be expected to catalogue all anticipated effects of legislation, but highlighted contrasting examples of legislation that impliedly articulated authority to act anticompetitively because anticompetitive results followed logically from the conduct they expressly authorized. It also rejected the suggestion that Georgia supplied the implication of state action immunity by restricting market entry through issuance of Certificates of Need.

MHA, LLC v. Aetna Health, Inc. et al.
No. 12-02984 (SRC) (D.N.J. Feb. 7, 2013)

MHA, LLC ("MHA") brought claims under ERISA and state law to recover $39 million from Aetna Health, Inc. ("Aetna") for alleged underpayments for services Aetna beneficiaries had received at MHA facilities since December 2010.

MHA acquired Meadowlands Hospital Medical Center and Rehabilitation Center (collectively, "Meadowlands") in 2010 from its previous owner, Liberty Healthcare System, Inc. ("Liberty"). Aetna and Liberty had signed a managed care agreement in 1996, pursuant to which Aetna was entitled to reimburse Liberty at a steep discount off billed charges for in-network benefits received by Aetna members. The dispute arose after Aetna continued paying MHA the rates it had previously paid Liberty, despite MHA's insistence that Aetna's agreement with Liberty did not govern Aetna's relationship with MHA.

MHA argued that several features of Aetna's agreement with Liberty undermined Aetna's position, but the court did not reach those arguments and instead started and ended its decision with a determination that MHA did not have standing to sue under ERISA. MHA claimed to have standing because Aetna members had assigned their right to benefits to MHA, and therebypermitted MHA to "stand in their shoes" when seeking benefits from Aetna. Aetna challenged this characterization and argued that those members had not assigned their whole interest in their benefits to MHA but only the right to receive payments directly from Aetna.

The key legal questions for  the court were therefore whether Aetna members had assigned their whole interest in their benefits to MHA, and, if not, whether MHA could nonetheless claim to stand in their shoes in order to recover benefits from Aetna. Based on its examination of the documents by which Aetna members assigned rights to MHA, the court decided the answer to both questions was no. The Court granted Aetna's motion to dismiss the federal claim for lack of standing and dismissed the state law claims for lack of jurisdiction.

Jacks v. Meridian Resource Co., LLC & Blue Cross Blue Shield of Kansas City
No. 11-3037 (8th Cir. Dec. 17, 2012)

Appellant Blue Cross Blue Shield of Kansas City ("BCBS-KC") is a Federal Employee Health Benefit ("FEHB") plan or "carrier," which contracted with appellant Meridian Resource Company, LLC ("Meridian"), a Wisconsin vendor, for subrogation and reimbursement services. The appellee, Shannon Jacks, was in a car accident in 2007, received benefits from BCBS-KC for treatment of her injuries, then recovered funds for her injuries through a settlement with the third-party tortfeasor responsible for the accident. BCBS-KC asserted a lien on a portion of that settlement award equal to what it had paid for Jacks' benefits and Jacks sued – on her own behalf and on behalf of others similarly situated – on the grounds that Missouri state law prohibits such subrogation.

BCBS-KC removed Jacks' suit to federal court, citing three separate grounds for doing so: (1) the Class Action Fairness Act ("CAFA") permits such removal; (2) federal question jurisdiction obtains because Jacks' claims turn on a question of federal common law; and/or (3) the case is appropriate for federal officer removal (summarized below) – the federal officer in this case being the Director of the Office of Personnel Management, which is responsible for implementing the FEHB Act. The federal district court granted Jacks' motion to remand the case to Missouri state court. BCBS-KC appealed that decision to the Eighth Circuit, which found that it had jurisdiction to review the appeal, except as it related to federal common law.

The Eighth Circuit panel's review of the merits did not reach the question of removal under CAFA and only addressed federal officer removal under 28 U.S.C. § 1442(a). Federal officer removal is available to a defendant who can make a showing of each of four elements: (1) the defendant acted under the direction of a federal officer; (2) a causal connection relates the defendant's action to the officer's authority; (3) the defendant has a colorable federal defense to the claim at issue; and (4) the defendant is a "person" as the statute defines the term. Regarding elements (2) and (4), the panel made perfunctory observations that BCBS-KC met the "person" requirement and had pursued subrogation "because of" the health benefits plan it had contracted with OPM to perform. The panel also noted – without addressing its ultimate merits– BCBS-KC's "colorable federal defense" of preemption.

The panel addressed the first element at greater length after noting that at least one district court in the Eighth Circuit had found that a FEHBA carrier does not act under the direction of OPM when pursuing subrogation rights because the terms of the FEHBA Plan that guide a carrier's conduct makes subrogation discretionary. The panel grounded its analysis of that element in the leading Supreme Court case on point, Watson v. Philip Morris Cos., Inc., 551 U.S. 142 (2007), which distinguished a private contractor's "simple compliance with the law" from its "direction" by a federal officer. Under Watson, the latter arises where there is "detailed regulation, monitoring, or supervision," and where the contractor "is helping the Government to produce an item that it needs." The panel found that BCBS-KC performance of its contract with OPM fit those criteria and also rejected Jacks' suggestion that such a conclusion would expand the scope of federal officer removal beyond what Watson prescribes.

Mondry v. American Family Mutual Insurance Company
No. 06-cv-00320-bbc (7th Cir. Nov. 28, 2012)

The Seventh Circuit affirmed an insured's statutory penalty award under ERISA due to her self-funded group health plan's (the Plan) failure to timely produce plan documents.  CIGNA, the Plan's third party claims administrator, denied the insured's claim for reimbursement for her son's speech therapy on the grounds that it was not a medically necessary service covered by the terms of the plan. CIGNA relied on the following two documents as authoritative: CIGNA's Benefit Interpretation Resource Tool for Speech Therapy (BIRT), and CIGNA's Clinical Resource Tool for Speech Therapy (CRT). While both documents were merely interpretive guides as opposed to documents setting forth the terms of the plan, the Seventh Circuit affirmed that CIGNA's express reliance on these documents in its communications with the insured rendered them Plan documents subject to timely production under section 1024(b)(4) of ERISA. As a result, the Court affirmed the District Court's statutory damages award of $9,270 for the Plan's 309 day delay in producing the BIRT and the CRT.         

In calculating the number of days that daily penalties should apply, the Court affirmed that such penalties could not begin to accumulate until thirty days after the insured placed the Plan – not CIGNA – on notice that she was specifically seeking the BIRT or the CRT. Furthermore, the Court affirmed that even though the insured sought the $110 per day maximum statutory penalty, $30 per day was a fair and reasonable penalty given the facts of the case and the unsettled state of the law at the time of the insured's requests for the documents. The Court also declined the insured's request to stack the daily penalties, i.e., deeming each successive request for the same document sufficient to trigger a separate penalty, but the Court commented that stacking penalties might be appropriate in some cases.

United States v. Sharma
No. 11-20102 (5th Cir. Dec. 20, 2012)

The Fifth Circuit Court of Appeals vacated a district court's order that two physicians pay $43 million in restitution to Medicare, Medicaid, and thirty private insurers for fraudulently billing for injections they never administered to patients. 

Dr. Arun Sharma and Dr. Kiran Sharma, married to one another, pled guilty to one count of conspiracy and one count of health care fraud. Before sentencing, the United States Probation Office prepared Presentence Investigation Reports ("PSRs") for both defendants recommending that the court order the Sharmas to pay $43 million in restitution, the same amount submitted by the insurance companies. The Sharmas proposed an alternative figure, arguing that they were entitled to credit for medical services actually provided. The district court ultimately adopted the PSR recommendation and ordered that the defendants pay $43 million pursuant to the Mandatory Victim Restitution Act ("MVRA"). 

The Fifth Circuit vacated the district court's sentence on the grounds that the restitution award exceeded the insurers' actual losses by millions of dollars and was not supported by evidence in the record. The appellate panel ruled that the district court had abused its discretion as a matter of law in awarding the entire amount recommended by the PSRs and remanded the case for recalculation. The Fifth Circuit also ruled, however, that the district court did not abuse its discretion in disallowing the Sharmas credit for injections that were not demonstrated to be medically necessary or reimbursable.

Saint Alphonsus Medical Center – Nampa, Inc., et al. v. St. Luke's Health System, Ltd.
No. 1:12-CV-560-BLW (D. Idaho Dec. 20, 2012)

The United States District Court for the District of Idaho denied a motion for preliminary injunction filed by St. Alphonsus Medical Center ("St. Alphonsus") to enjoin St. Luke's Health System ("St. Luke's") from acquiring Saltzer Medical Group. St. Alphonsus based its request on Section 7 of the Clayton Act and Section 1 of the Sherman Act.

Under the proposed agreement, St. Luke's would acquire the Saltzer Medical Group -- resulting in St. Luke's employment of 67% of the adult primary care physicians in Nampa, Idaho. In addition, the acquisition would allegedly give St. Luke's control of referrals that accounted for 43% of the total adult primary care admissions and 100% of the pediatric admissions at St. Alphonsus's Nampa hospital.

St. Alphonsus argued that the acquisition would give St. Luke's such a dominant market share in Nampa that St. Luke's could raise prices on medical imaging procedures and block referrals to St. Alphonsus's hospital. According to St. Alphonsus, the loss of referrals would force the medical center to lay off 150 employees.

The district court denied the motion, stating St. Alphonsus did not show that irreparable harm would occur before trial, which was set for seven months from the date of the court's decision. The court based its decision on four main factors.

First, the combined entity would not be able to exercise any increased leverage, if any existed, until well after the trial. St. Luke's entered into a Memorandum of Understanding with the largest Idaho insurer, Blue Cross of Idaho, for a two-year term. St. Luke's would thus be unable to exercise its hypothetical increased leverage until at least 2015. In addition, St. Luke's acquisition agreement contemplated a gradual integration of Saltzer that would not close any of Saltzer's clinics or facilities, or change its organizational structure, for at least a year.

Second, the purchase agreement between St. Luke's and Saltzer contains a built-in unwinding process to disentangle the two groups if necessary. The district court would thus have no issues in ordering an immediate and complete divestiture if the trial compelled that result.

Third, St. Alphonsus provides a full range of medical imaging procedures. If St. Luke's raised its prices on those procedures, the district court theorized that patients would turn to St. Alphonsus as the low-cost provider in the city. St. Alphonsus would therefore gain patients as a result.

Finally, the court noted that St. Luke's agreed to allow Saltzer's physicians to retain the right to make referral decisions based on the best interests of the patient. The physicians could make referrals to St. Luke's or St. Alphonsus. If that proved not to be true, St. Alphonsus could bring that fact to the court's attention at trial.

The district court hedged its decision by enunciating the four critical assumptions upon which that decision was based: (1) this case is on a fast track to trial; (2) prior to trial, there will be no measurable reduction in referrals from Saltzer to St. Alphonsus; (3) the integration of St. Luke's and Saltzer will proceed gradually; and (4) the acquisition can be unwound if St. Alphonsus prevails at trial. The district court stated that St. Alphonsus could seek a preliminary injunction before trial if any of those assumptions proved unfounded.


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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