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Managed Care Lawsuit Watch - January 2006


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:

Capital Blue Cross v. Commissioner
Third Cir. No. 04-2645 (12/5/05)

The United States Court of Appeals for the Third Circuit found that the U.S. Tax Court erred in determining that a Blue Cross Blue Shield organization had a zero basis in cancelled subscriber contracts and thus could not claim the cancelled contracts as a loss on its tax return.

The case arose when Capital Blue Cross (“Capital”) claimed a loss deduction for terminated subscriber .contracts on its tax return. The Commissioner of Internal Revenue disallowed the deductions and the matter came before the U.S. Tax Court, which determined that Capital had not established any loss because it had a zero basis in its insurance contracts. On appeal, the Third Circuit found that Capital had established a basis in the cancelled subscriber contracts, noting that Capital’s contracts were not part of a single indivisible asset and could be individually valued.

While the court acknowledged that there were some flaws in Capital’s valuation of the contracts, it said that the flaws did not merit a finding that Capital had a zero basis. The Court observed that overall, Capital’s valuation was professional and well done. The Court of Appeals reversed and remanded to the Tax Court to determine a reasonable valuation for the contracts.

Central States Southeast and Southwest Areas Health and Welfare Fund v. Merck-Medco Managed Care, L.L.C.
Second Cir. No. 04-3300-cv(L) (12/8/05)

The Second Circuit Court of Appeals recently remanded a case to the U.S. District Court for the Southern District of New York in order for it to determine whether health plan beneficiaries can demonstrate sufficient injury-in-fact resultant from alleged activities of a pharmacy benefit manufacturer. If the beneficiaries fail to do so, they will fail to achieve constitutional standing to represent prescription drug plans in a class action suit against the pharmacy benefit manufacturer.

In 1997, certain prescription drug plans (“Plans”) filed a complaint against Merck-Medco Managed Care, L.L.C., Merck & Co., Inc., and Medco Health Solutions (collectively, “Medco”), alleging that Medco violated fiduciary duties that it allegedly owed to the plans. Several similar class actions suits were filed not only by other Plans, but also by Plan beneficiaries (“Individual Plaintiffs”) on behalf of their Plans against Merck & Co., Inc. and were consolidated with the first case in the District Court.

The Plans and Individual Plaintiffs alleged that Medco had managed formularies and drug-switching programs with the purpose of increasing the market share of specific drugs of Medco’s parent company, Merck; diverted rebates from drug manufacturers that should have been passed through to Plans; and engaged in transaction prohibited by ERISA – all of which allegedly raised Plans’ total costs and damaged the Plans.

By 2001, the parties had negotiated a settlement agreement (the “Agreement”), in which Medco agreed to pay 42.5 million into a fund for the settling Plans. Three self-funded Plans (the “Three Plans”) objected to the Agreement, asserting, inter alia, that the Individual Plaintiffs could not demonstrate injury-in-fact from Medco’s alleged conduct. The District Court dismissed the Three Plans’ assertions and, on May 25, 2004, preliminarily approved class certification (including the Individual Plaintiff as class representatives) and approved the Agreement.

On appeal, the Second Circuit determined that, despite the numerous instances in which issues of standing were raised before the District Court, the District Court had “repeatedly failed to rule on whether any of the Individual Plaintiffs had Article II standing to bring the class action and to enter into the Settlement Agreement.” Therefore, on December 8, 2005, the Second Circuit remanded the case to the District Court for determination on whether the Individual Plaintiffs had sufficiently demonstrated injury-in-fact from Medco’s alleged conduct, and deferred any other decision until that issue is resolved.

In re Hartwig v. Commissioner, Connecticut Department of Social Services
Connecticut Freedom of Information Commission, FIC 2005-025 Final decision announced 12/14/05

The Connecticut Freedom of Information Commission (the “Commission”) ruled that Anthem Blue Cross and Blue Shield of Connecticut, Community Health Network of Connecticut, Health Net of Connecticut and WellCare of Connecticut, each of which run Medicaid health maintenance organization (“HMOs”), are subject to the state’s Freedom of Information Act (“CN-FOIA”). According to the ruling, each of the private HMOs performs a “governmental function” and is therefore obligated to provide the public with access to certain internal documents.

The ruling followed a CN-FOIA request seeking information from the HMOs regarding reimbursement rates by in-state health insurance providers in connection with Connecticut’s Medicaid and State-Administered General Assistance programs. The Connecticut Department of Social Services (“DSS”) initially denied the request, taking the position that the HMOs were not performing a government function and were therefore not subject to CN-FOIA. The DSS decision was appealed, and the Commission concluded that “decisions made and policies implemented by MCOs are so similar to those made and implemented by DSS that the MCOs’ policies and decisions must necessarily be concluded to be governmental policies and decisions.”

Hagan v. Vision Service Plan
E.D. Mich. No. 05-72517 (12/15/05)

The U.S. District Court for the Eastern District of Michigan granted preliminary injunctive relief to three doctors (“Plaintiffs”) whom Vision Service Plan (“VSP”) terminated for failing to comply with VSP’s franchise affiliation requirements. After being terminated, Plaintiffs filed suit alleging breach of contract, breach of good faith and fair dealing, and tortious interference with business relations.

The physicians were panel members of VSP who had operated franchises of D.O.C. Optics Corporation (“DOC”) for the entire period of their relationship with VSP. VSP required its member physicians to have majority ownership and complete control of their practices. However, VSP had extended “grandfather agreements” to Plaintiffs and other member physicians who were affiliated with franchises. The grandfather agreements permitted franchise-affiliated doctors to retain their membership on VSP’s panel so long as they maintained their present employment, continued to practice at their present location, and met all other VSP rules and requirements.

According to the court, VSP knew of Plaintiffs’ franchise affiliations, and reviewed and approved Plaintiffs’ franchise agreements. In 2004, however, VSP summarily issued notices of termination to Plaintiffs. The sole basis for the terminations was that Plaintiffs did not have complete control over their practices and dispensaries, due to their franchise affiliations with DOC. VSP did not disclose this reason to the doctors in the initial termination letters or during later termination proceedings. VSP did not explain why it was treating Plaintiffs differently than 32 other VSP member doctors who were also affiliated with DOC, but who were not terminated. VSP also did not explain why it was treating Plaintiffs differently than other “grandfathered” doctors who were affiliated with franchises, but who were not terminated.

The court found that all prerequisites for preliminary injunctive relief were present in this case: (1) Plaintiffs had a strong likelihood of prevailing on the merits, given that VSP had clearly violated the grandfather agreements; (2) Plaintiffs would suffer substantial and irreparable harm to patient goodwill and their professional reputations; and (3) the balance of harms overwhelmingly favored an injunction.

United States v. UnitedHealth Group, Inc. and PacifiCare Health Systems, Inc.
D. D.C. Case No. 1:05cv02436 (12/20/05)
Proposed Consent Decree

One day after California’s Department of Managed Health Care (“DMHC”) and Department of Insurance (“DOI”) approved the proposed merger between UnitedHealth Group, Inc. (“United”) and PacifiCare Health System, Inc. (“PacifiCare”),the U.S. Department of Justice (“DOJ”) entered into a consent agreement to resolve antitrust allegations relating to the proposed acquisition. The DOJ complaint, filed in the United States District Court for the District of Columbia in connection with the settlement, alleged that the proposed acquisition would violate Section 7 of the Clayton Act.

DOJ alleged that the acquisition would (1) eliminate direct competition between United and PacifiCare in the sale of commercial health insurance to small group employers in Tucson, Arizona; and (2) eliminate direct competition between United and PacifiCare in the purchase of physician services in Tucson and in Boulder, Colorado. The complaint also stated that the proposed continuation of a network access agreement between United and Blue Shield of California would “substantially reduce competition in the markets for the purchase of health care provider services and for the sale of commercial health insurance” in California.

With its complaint, DOJ filed a proposed consent decree that would require the divestiture of certain PacifiCare commercial health insurance customer contracts in Tucson and Boulder. If the court approves the consent decree, United will also be required to terminate the network access agreement with Blue Shield of California.

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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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For more information, please contact the professional(s) listed below, or your regular Crowell & Moring contact.

Arthur N. Lerner
Partner – Washington, D.C.
Phone: +1 202.624.2820