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Managed Care Lawsuit Watch - January 2007


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 any member of the health law group.

Please click to view the full Crowell & Moring Managed Care Lawsuit Watch archive.

Cases in this issue:

Retail Industry Leaders Association v. Fielder

4th Circuit Court of Appeals No. 06-1840 Jan. 17, 2007

On January 17, 2007, in a 2-1 decision, the Fourth Circuit Court of Appeals concluded that the penalties imposed under Maryland’s “Fair Share Health Care Fund Act” (the “Act”) would essentially force employers to provide health benefits at specified levels, and because such benefits would in most cases be provided through ERISA-covered plans, such state regulation would run afoul of ERISA’s preemption provisions.

Passed by the Maryland legislature in January 2006, the Act was designed to assist Maryland in financing its increasing Medicaid funding burden by imposing a penalty on large employers that failed to devote a specified percentage of their total payroll to providing health insurance to their employees. Adding to the Act’s controversial nature was the fact that, in operation, it would affect only one employer in the state – Wal-Mart. Maryland argued that, because the Act did not mandate the creation of ERISA-covered plans, but instead provided employers with alternatives for meeting the health insurance funding requirement (for example, through paying the state penalty, or by providing benefits through non-ERISA programs), the Act should not be preempted by ERISA.

The court’s majority, however, disagreed and determined that employers affected by the Act would, as a practical matter, have “no reasonable choice” but to establish an ERISA-covered plan or to modify the terms of an existing ERISA-covered plan. As a result, the majority stated that the Act “directly regulates employers’ provisions of healthcare benefits, ... has a ‘connection with’ covered employers’ ERISA plans and accordingly is preempted by ERISA.”

The majority noted that other states and localities had adopted or were considering health care statutes that included employer coverage mandates, including some directed specifically at Wal-Mart. The majority concluded that allowing the Act and these other statutes to take effect would subject multi-state employers to conflicting regulation, thereby negating “ERISA’s purpose of authorizing Wal-Mart and others like it to provide uniform health benefits to its employees on a nationwide basis.”

A vigorous dissent noted that the Act did not regulate employee benefit plans, but rather employer spending, a matter traditionally reserved to the states and saved from ERISA preemption. That an employer may decide to satisfy the law through an ERISA-covered plan does not mean that the Act must be preempted, and the availability of non-ERISA alternatives is sufficient to save the Act from preemption. The dissent also argued that the Act was a legitimate response to the directives from Congress that states seek reimbursement from third parties for Medicaid costs.

Health Net of Connecticut v. Freedom of Information Commission, et al.

Connecticut Superior Ct. No. CV 06 4010428 S Nov. 29, 2006

Health Net of Connecticut, Community Health Network and Anthem Health Plans (collectively, the “Insurers”) challenged two consolidated decisions of the Connecticut Freedom of Information Commission (the “Commission”) granting public access to the Insurers’ documents and information related to their participation in the Connecticut Medicaid managed care program. Specifically, the Commission had ordered the disclosure of documents and information related to the rates paid by the Insurers to network cardiologists and gastroenterologists, to statistics regarding the selection of drugs for preferred status on formularies, and to statistics regarding the number of Medicaid beneficiaries who had been refused drug coverage for lack of prior approval.

Before the Commission, the Insurers had argued that requestors should not be entitled to such documents and information under the Connecticut Freedom of Information Act (the “Act”) because (1) the Insurers do not perform a “governmental function” and (2) the contracts between the Insurers and the state Medicaid agency do not contain provisions required by the Act and that trigger FOIA accessibility. The Commission rejected these arguments, determined that the Insurers perform a governmental function in administering the Medicaid benefit, and further ordered the state Medicaid agency to amend its contracts with the Insurers to contain terms required by the Act.

The court affirmed the commission’s reasoning in determining that the Insurers perform a governmental function. Specifically, the court cited to the Insurers’ determination of provider reimbursement rates and formulary details, such as which drugs will achieve preferred status and which will require prior approval, and further noted the state’s lack of veto authority on such determinations. Such activities were found to constitute “high-level decision-making,” and thus the performance of a function that the state Medicaid agency would otherwise perform.

The Insurers also argued that the second part of the commission’s order, i.e., that the State amend its pre-existing contracts with the Insurers to contain terms required by the Act, violated the Contracts Clause of the Constitution. However, the court rejected this argument as the contracts, despite pre-dating the Act, already required the Insurers to comply with all applicable “state statutes… and all amendments thereto,” in this instance, the Act.

Prior to the ruling, the Commission and the Insurers agreed to suspend resolution of whether the documents and information requested are the Insurers’ “trade secrets,” and it is likely that the Commission (and perhaps another state court) will be required to resolve that issue before the documents and information at issue are made public.

Rosenberg v. Blue Cross Blue Shield of Tenn.

Tenn. Ct. App. No. M2005-01070-COA-R9-CV Nov. 29, 2006

Drs. Zachary Rosenberg and Dewayne Darby brought suit against Blue Cross Blue Shield of Tennessee (“BCBST”) alleging, among other claims, breach of contract and unfair or deceptive business practices. They sought not only damages for claims denied, but punitive damages on behalf of a class of all BCBST participating providers.

The doctors had entered into participating provider agreements that required submission of unresolved claims to binding arbitration. After the suit was filed, BCBST moved to compel arbitration in accordance with the participating provider agreements. In response, the doctors argued that the arbitration provision was unenforceable because (1) it was part of a contract of adhesion and (2) arbitrating small claims was cost prohibitive. The trial court rejected both arguments and, on interlocutory appeal, the Court of Appeals of Tennessee agreed.

The appellate court noted that “[a] party challenging the arbitration provisions of a contract, particularly when those provisions are clear and unambiguous, faces a figurative tsunami of case law, both federal and state, ever strengthening and reinforcing the favored status of arbitration.” As to the argument that the contract was a contract of adhesion, the court ruled that the contract had to be shown to be “beyond the reasonable expectations of an ordinary person, or oppressive or unconscionable.” The court held that the contracts at issue did not meet that standard.

As to the doctors’ argument that arbitration was cost prohibitive, the court noted that while arbitration of individual claims might be cost prohibitive, the doctors in this case were asserting more than individual claims. The complaint alleged a pattern of deceptive conduct and practices that deprived a class of doctors of “millions of dollars” in reimbursements. The doctors also sought punitive damages. The court noted that “[w]hat might be cost prohibitive when a [small] claim is in issue would certainly not be prohibitive when millions of dollars and vast injunctive relief are actually in issue,” and thus the doctors failed to meet their burden of proving that arbitration was cost prohibitive.

Zembsch v. The Superior Court of Alameda County

Cal. Ct. App. A114157 Dec. 27, 2006

Mark Zembsch’s son suffered from dwarfism and, given the rarity of the condition, few physicians have substantial experience treating it. Zembsch sought a referral from his primary care physician’s medical group to an experienced specialist in Delaware. The group denied the request on the basis that the Delaware specialist was out-of-network and that the group could provide the requested services. Health Net of California, Inc. (“Health Net”) denied Zembsch’s subsequent appeals of the denial.

Zembsch sued the medical group and Health Net, alleging breach of contract and other causes of action. Health Net and the medical group moved to compel arbitration and, in response, Zembsch argued that Health Net’s enrollment form, by failing to prominently display the arbitration requirement, did not comply with California Health and Safety Code §1363.1. The trial court found that the enrollment form’s disclosure of the arbitration provision met the statutory requirements, and compelled arbitration.

The appellate court reversed, finding the disclosure to be inadequate because it was printed in the same “virtually indistinguishable” font as most of the form, because the heading was in faint boldface type, and because the paragraph was not indented or otherwise separated from the rest of the text. The court then found that a violation of §1363.1 renders an arbitration agreement unenforceable, and accordingly ordered the trial court to deny the motions to compel arbitration.

James v. State of South Carolina Employee Insurance Program

South Carolina Ct. App. No. 4182 Nov. 27, 2006

The South Carolina Court of Appeals recently upheld a circuit’s decision that a device designed to treat an infant’s misshaped skull that resulted from plagiocephaly and torticollis is within the scope of a state health insurance plan’s coverage. The Court ruled that the treatment was not for cosmetic purposes, agreeing with the lower court that reasonable minds would conclude that the treatment in this case is not primarily cosmetic, but rather, affects the functioning of the patient and is medically necessary.

In order to treat two conditions that caused their daughter to have a misshaped skull and neck, the James’ sought pre-authorization for a Dynamic Orthotic Carnioplasty Band, or DOC Band, which is used to correct the shape of an infant’s head. Their health plan denied coverage on the basis that the treatment was purely for cosmetic purposes and was not medically necessary.

In upholding the circuit court’s decision, the Court referred to the lower court’s acknowledgement that the infant’s treating neurosurgeon stated unequivocally that the DOC Band was medically necessary to correct her plagiocephaly. Moreover, the treating physician had taken the position that the treatment would prevent the development of severe mandible or other problems and obviate the need for surgery. As a result, the Court found unpersuasive the plan’s assertion that coverage should be denied because the infant did not currently have severe mandible and other problems. The Court stated that it would not be reasonable to deny coverage and require a patient to delay medically-recognized, viable treatments until a problem becomes more severe.

In the Matter of United Healthcare Insurance Company of New York

Atty. Gen of New York Dec. 19, 2006

United Healthcare Insurance Co. of New York (“United”) recently entered into an Assurance of Discontinuance with the Attorney General of the State of New York, agreeing to amend its printed provider directory, reprocess previously adjudicated claims, and pay fines and penalties. The Attorney General’s investigation was initiated after a consumer alleged that United had processed her claim for physician services as out-of-network, when United’s provider directory had listed that physician as a participant in United’s Empire Plan network. As a result, the consumer was allegedly required to pay the difference between the amount United paid and the physician’s bill, in addition to her co-pay.

The Attorney General’s investigation alleged that United encountered difficulty identifying physicians who practiced at multiple locations and participated in some, but not all, of United’s area networks. While United’s claims processing system correctly distinguished between the in-network and the out-of-network locations, a computer program allegedly caused errors in the company’s provider directory.

In resolving the investigation, United did not admit to any of the Attorney General’s allegations, but agreed to reprocess certain adjudicated claims and to reimburse members affected by the alleged directory errors. United also agreed to amend the provider directories and to pay $20,000 in penalties and $25,000 in costs

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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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