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Managed Care Lawsuit Watch - January 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.

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

Cases in this issue:

U.S. Equal Employment Opportunity Commission; Age Discrimination in Employment Act; Retiree Health Benefits: Final Rule
72 Fed. Reg. 72938 Dec. 26, 2007

The Equal Employment Opportunity Commission (the “EEOC”) issued a new regulation on December 26, 2007, allowing employers to coordinate the health benefits offered to their retirees with Medicare (or comparable state health benefits), without running afoul of the Age Discrimination in Employment Act (the “ADEA”). The rule allows employers who provide retiree health benefits to continue the practice of coordinating those benefits with Medicare, without ensuring that Medicare eligible retirees are receiving the same benefits as other retirees ineligible for Medicare. The rule does not affect the benefits that employers provide to their current employees.

For many years, it has been common practice for employers to coordinate the health care benefits they pay retired employees with the Medicare benefits retirees start collecting at age 65. Under these coordinated health care plans for retirees, employers only paid for health care costs not covered by Medicare or a similar state-sponsored plan.

As a result, the cost of providing health benefits to early retirees under 65—the minimum age for Medicare eligibility—is much higher than the cost of supplemental coverage for those who qualify for Medicare. By coordinating health coverage for retirees with Medicare, employers save money and are able to offer coverage to more retirees. Under this final rule, employers could also reduce or eliminate benefits for Medicare-eligible retirees.

The EEOC promulgated the rule as a result of a Third Circuit Court of Appeals opinion, Erie County Retirees Association v. County of Erie, 220 F.3d 193, in which the court ruled that an employer choosing to provide retiree health benefits must offer equal benefits to all retirees, regardless of Medicare eligibility .

After the County of Erie decision, many labor organizations and employers called on the EEOC to propose an exemption from the ADEA for such coordination with Medicare, stating that they would be forced to terminate retiree health coverage altogether under the court’s ruling. When the EEOC announced its intention in 2005 to finalize this exemption after a long rulemaking proceeding, the AARP sought an injunction to prevent the issuance of the final rule. In June 2007, the Third Circuit upheld the EEOC’s rule. See AARP v. EEOC (No. 05-4594, June 4, 2007). In that case, the court concluded that the ADEA “clearly and unambiguously grants to the EEOC the authority to provide, at least, narrow exemptions from the prohibitions of the ADEA.”

Moecke v. Caremark, Inc.
M.D Tennessee No. 3:04-0633 Nov. 13, 2007

John Morrell & Co. (“JM”) contracted with Caremark, Inc. from 1997 to 2006, for the provision of pharmacy benefit management (“PBM”) services to JM’s employee benefits plan (the “Plan”).

Moeckel, a JM employee and a Plan participant, brought a putative class action lawsuit against Caremark, alleging breach of ERISA fiduciary duties. Specifically, Moeckel alleged that Caremark breached its fiduciary duties by generating significant revenue from “pricing spreads” yet failing to pass that revenue on to the Plan. The parties moved for summary judgment as to whether Caremark was an ERISA fiduciary.

Moeckel argued that Caremark acted as an ERISA fiduciary by setting the price the Plan paid for generic drugs, selecting the AWP reporting source used to set the price the Plan paid for brand-names, determining whether to adjudicate prescriptions as generic or brand-name, deciding when to mail-order brand-names as generics, and managing the Plan’s formulary.

The court found that these activities related to the administration of Caremark’s own business and/or were industry standards, that these activities were distinct from Caremark’s contracts with plans and outside the scope of the ERISA regulatory framework, and that, ultimately and most importantly, JM at all times retained exclusive control over the management and administration of the Plan.

Accordingly, the court found that Caremark was not an ERISA fiduciary.

Hailey v. California Physicians’ Service, d/b/a Blue Shield of California
Cal Ct. App. No. G035579 Dec. 24, 2007

In the first appellate opinion to discuss the scope of a 1993 California law prohibiting the practice of “post-claims underwriting,” the California Court of Appeals, Fourth District, held on December 24 th that a health plan must first demonstrate that an enrollee made a misrepresentation or a willful omission on his or her application before seeking to rescind the enrollee’s coverage.

In 2000, Blue Shield of California issued a policy to Cindy Hailey and her family. During the application process, Cindy Hailey did not include health information pertaining to her husband, Steve, or her son. Blue Shield’s underwriter did not inquire as to her husband or son, and Blue Shield did not utilize the Haileys’ authorization to gather information from health care providers.

In February 2001, Steve Hailey submitted a claim for health services, and Blue Shield initiated an investigation into his health history. In March 2001, Steve Hailey nearly died in an auto accident, suffering significant injuries. In June 2001, Blue Shield rescinded the family’s coverage, citing misrepresentations on the application. The Haileys sued for reinstatement. A trial court granted Blue Shield’s motion for summary judgment and ordered the Haileys to pay Blue Shield $104,194 (the amount incurred by Blue Shield for Steve Hailey’s medical expenses).

California law prohibits the rescission of a policy because of the plan’s failure to complete medical underwriting and resolve all questions prior to issuing a policy, unless there is a showing of willful misrepresentation.

The appellate court interpreted ‘medical underwriting’ to require a plan to make reasonable efforts to ensure a potential subscriber’s application in accurate and complete.” The court further held that plans have a duty to ensure they have “all necessary information to accurately assess the risk before issuing the contract.”

The court held that Blue Shield may not have made reasonable efforts or fulfilled its duty. Specifically, the court noted that Blue Shield’s underwriter was not sufficiently thorough, and that Blue Shield did not inquire of the Haileys’ health care providers. Accordingly, the appellate court reversed the trial court’s summary judgment for Blue Shield.

The court also held that the Haileys had introduced evidence that Blue Shield had delayed its rescission decision until after the submission of claims, thus presenting triable issues of fact as to whether Blue Shield acted in bad faith and intentionally inflicted emotional distress.

Allstate Insurance Co. v. Thorpe
Nev. Supreme Ct. No. 44467 Nov. 21, 2007

Dr. Ted Thorpe and other providers sued various casualty insurers under the Nevada prompt payment statute, Nev. Rev. Stat. §690B.012, seeking declaratory, injunctive and monetary relief from the insurers’ alleged failure to pay their claims in a timely fashion. The insurers argued that the providers did not have a private right of action under the statute, but rather had to pursue administrative remedies, and further argued that the providers lacked standing without demonstrating that they had valid assignments from beneficiaries.

The trial court held that it had jurisdiction over the claims, but dismissed the complaint without prejudice, so that the providers could re-file after exhausting their administrative remedies through the Department of Insurance (“DOI”), which had “primary jurisdiction.” The insurers appealed.

The Nevada Supreme Court held that the providers lack a private right of action under the state statute and are required to first seek redress from the DOI. Although providers may subsequently seek judicial review of a DOI determination, the DOI has “exclusive original jurisdiction” over such disputes.

However, the Court also held that providers could proceed before the DOI under the prompt pay statute, regardless of whether they have valid assignments, because providers are persons with a “direct and immediate pecuniary interest in prompt payments,” state law has granted them “a right to apply to [the DOI] for redress and, then, if aggrieved, petition for judicial review,” and “[t]his right is independent of the rights of the patient and, thus, no formal assignment of rights is required.”

Golden Gate Restaurant Association v. City and County of San Francisco
N. D. California No. C 06-06997 JSW Dec. 26, 2007

The City of San Francisco passed an ordinance that, effective January 1, 2008, would have required medium and large businesses to make health care expenditures on behalf of covered employees, either through contributions to health savings accounts, direct reimbursement to employees, payments to third parties, or payments to the city. The Golden Gate Restaurant Association (“GGRA”) sued the city, claiming that ERISA preempted the ordinance.

The U.S. District Court for the Northern District of California agreed, finding that the ordinance “requires the modification of the core relationship between the private employers and their intended health care beneficiaries,” including ERISA plans and beneficiaries, and that “Congress has evinced its intent to preclude state or local governments from passing any legislation that relates to ERISA plans….”

Accordingly, the court granted GGRA’s motion for summary judgment, stating that “[a]ny state law that mandates employee benefit structures or their administration is preempted by ERISA.”

Halbach. v. Great-West Life & Annuity Ins. Co.
E.D. Missouri 4:05CV02399 ERW Nov. 19, 2007

Halbach, an employee of Great-West Life & Annuity Insurance Company (“Great-West”) had received disability benefits under the Great-West Life & Annuity Company Employee Health & Welfare Plan (the “Plan”). In November, 2004, Great-West sent all Plan participants a notice that, effective December 31, 2004, medical benefits would not be provided for current and future disability claimants.

Halbach sued Great-West, alleging that it amended the Plan in violation of ERISA and the Plan’s own terms. Great-West argued that the amendment was proper.

The District Court first determined that Great-West had not followed the Plan’s own amendment procedures, because it did not enumerate the benefits being eliminated and did not notify participants of the specific changes to the Plan documents. Great-West’s inclusion of a Summary Plan Description with the notice was insufficient.

In addition, the court noted that, by its own terms, the Plan could not be amended to divest a participant of vested benefits. Relying on evidence that Great-West had consistently interpreted the Plan to provide benefits for the duration of disability or until age 65 or death, the court determined that Plan benefits became vested upon determination of disability. Accordingly, the court ordered reinstatement of Halbach’s benefits.

Report of the Market Conduct Examination of the Claims Practices of Blue Shield of California Life & Health Insurance Company
CA Dept. of Insurance Dec. 13, 2007

The California Department of Insurance (“DOI”) conducted two market examinations of Blue Shield of California: one routine examination pertaining to 286 claims filed between June 1, 2004 and May 31, 2005, and one targeted examination pertaining to 30 rescinded and 4 cancelled policies during the same period.

In addition to improper rescissions, the DOI found the following “serious issues”: failure to pay claims on a timely basis; failure to provide required information when denying a claim; failure to complete medical underwriting upon receipt of the application; failure to attach the application to the contract; failure to pay interest on a claims where required; mishandling of member appeals; inaccurate or incomplete Explanations of Benefits provided to claimants; r equests for information not necessary to handle the claim; requests for information already in the company's possession; lack of documentation in the claims files regarding the investigation; and reference to ERISA standards when not applicable.

As a result, Blue Shield of California refunded $1 million in claims, agreed to improve its claims-processing services, and agreed to enhance the training of its representatives. Nonetheless, the DOI will seek an additional $12.6 million in fines.

Dillon v. Anthem Health Plans of Virginia, Inc.
W.D. Virginia No. 7:07CV00069-00 Nov. 29, 2007

Dillon suffered from a blood coagulation disorder, but chose to undergo an abdominoplasty, a cosmetic surgery that was neither covered by her health plan nor anticipated to be covered by Dillon. After the surgery, Dillon suffered from and was treated for deep vein thrombosis (“DVT”) and a pulmonary embolus. At the time of the post-operation hospitalization, Dillon’s surgeon indicated that the DVT and the pulmonary embolus were “unfortunate” complications of the abdominoplasty.

The plan denied coverage of the costs of treatment of the DVT and the pulmonary embolus, on the basis that they were excluded as “related to cosmetic surgery or procedures, including complications that result.” Dillon argued that the complications resulted from her coagulation disorder, and submitted a statement from her surgeon that the disorder could have led to the complications.

The court determined that Dillon’s surgeon’s differing statements were not self-contradictory, but could have led to a reasonable determination that the complications were a result of the surgery, not the disorder. Accordingly, the court determined that the plan’s “decision to deny coverage was the result of a deliberate, principled reasoning process and it is supported by substantial evidence.”


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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