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Managed Care Lawsuit Watch - July 2005


This summary of key lawsuits affecting managed care is provided by the Health Care Law 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:

Christianson v. Poly-America Inc. Medical Benefit Plan
8th Circuit, No. 04-1051 (6/20/05)

The Eighth Circuit affirmed a district court decision granting summary judgment to Plaintiff on the ground that Defendant had abused its discretion in denying a claim for benefits under an employer-sponsored plan. Plaintiff had filed an action under the Employee Retirement Income Security Act ("ERISA") after his claim for benefits was denied because the plan restricted coverage for tobacco-related conditions.

The Eighth Circuit noted that Plaintiff's doctors had not concluded that his condition was tobacco-related. The court also observed that under the plan, there would have to be a direct causal link between a beneficiary's condition and tobacco use in order to deny coverage for a tobacco-related condition. The Eighth Circuit determined that there was no evidence of such a direct link in this case.

Cleghorn v. Blue Shield of California
9th Cir., No. CV-02-00852-DOC (5/23/05)

The Ninth Circuit affirmed a district court's dismissal of Plaintiff's complaint in a suit involving state-law claims for an alleged violation of an emergency services provision of the California Health and Safety Code. The court determined that the factual basis of Plaintiff's claims arose from Blue Shield's denial of benefits under an ERISA plan. The court held that "Congress's exclusive and comprehensive civil enforcement scheme of [ERISA] section 502" preempts state-law causes of action.

The action was brought in state court by a participant of an employer-sponsored health plan who was denied coverage for an emergency department visit that was not pre-approved. Plaintiff contended that section 1371.4(c) of the California Health and Safety Code required the plan to cover emergency services so long as the insured "reasonably believed" that an emergency existed.

Blue Shield removed the case to federal court, and the district court determined that Plaintiff's claims were ERISA-preempted. The district court gave Plaintiff the opportunity to amend his complaint to include an ERISA claim, but Plaintiff refused and the complaint was dismissed.

Without addressing the proper interpretation of the language of the California statute, the appellate court determined that Blue Shield's only obligation to reimburse Plaintiff would arise under ERISA.

Consumers Union v. New York
NY Ct. of App., No. 83 (6/20/05)

The New York Court of Appeals held that Plaintiffs failed to state a viable cause of action when they challenged legislation that permitted the conversion of Empire Blue Cross and Blue Shield ("Empire"), the state insurer of last resort, from a non-profit to a for-profit corporation.

After the New York legislature passed a bill in 2002 that allowed for Empire's conversion and enabled Empire's assets to be used to fund non-charitable public purposes, the Consumers Union and several Empire subscribers, who claimed that their premiums and benefits would be adversely affected by the conversion, sued the State and Empire. The plaintiffs sued on numerous theories, centering around the argument that the assets from the restructuring would not be used to further Empire's historic charitable purposes. Plaintiffs sought to ensure that the assets from the conversion would be placed in a charitable trust.

The Court of Appeals found that Plaintiffs did have standing to challenge the conversion, in light of the fact that the legislation disempowered the Attorney General and Empire's Board from opposing the conversion. However, the Court of Appeals rejected Plaintiffs' takings, due process, contract clause, and fiduciary duty claims, as well as their claim that the legislation had violated the New York Constitution's prohibition of bills granting a corporation an exclusive privilege. On the last claim, the court reasoned that the bill merely granted Empire the right to operate as a for-profit insurer, a right that many other insurers enjoyed. The Court's ruling removed the last legal barrier to Empire's conversion and the use of the conversion proceeds.

Friedman Professional Management Co. v. Blue Shield of California
Cal. Ct. App., No. G033258 Unpublished opinion (5/26/05)

In an unpublished opinion, the California Court of Appeals ruled that a health insurer's request for declaratory relief for money held in a patient's trust account was in fact a claim for money damages for health benefits already conferred, and was thus not actionable under ERISA.

An injured patient had filed a malpractice suit in state court against her surgeon and the surgery center owner. The jury awarded the patient her costs, including past medical expenses, even though the patient's insurer had already paid those expenses. The insurer asserted a lien on the funds and filed an appeal seeking declaratory relief, arguing that ERISA entitled it to reimbursement for the amount that it had paid for the patient's expenses.

The Court of Appeals found that a California law that would have precluded the insurer from seeking reimbursement was preempted by ERISA. However, the court held that only equitable remedies are available under ERISA, and therefore the insurer did not have a right to money damages. Blue Shield argued that its claim was equitable because it sought declaratory relief regarding specifically identifiable money being held by the court in trust, rather than in the possession of any party. The court rejected that argument, and reasoned that Blue Shield was seeking the imposition of personal liability for the benefits that it conferred upon the patient, which was a legal remedy. The court emphasized that the existence of an escrow account cannot convert a legal claim to one in equity.

In Re Lorazepam & Clorazepate Antitrust Litigation
D.D.C., No. 99mc0276 (6/1/05)

On June 1, 2005, a federal jury found that generic drug manufacturer Mylan Laboratories Inc. had violated state antitrust laws, and awarded approximately $12 million in damages to four health insurers. The insurers had sued Mylan and several pharmaceutical ingredient companies under restraint of trade, conspiracy, monopolization and attempted monopolization theories, seeking to recover amounts the insurers had paid for two of Mylan's generic anti-anxiety drugs. The plaintiffs alleged that Mylan signed exclusive ingredient supply agreements that prevented generic competitors from gaining access to the ingredients for the two drugs, and then artificially inflated the prices for the drugs by over 2,000 percent. The jury found that Mylan and its co-defendants acted willfully, opening the door for treble antitrust damages.

Torres v. Dean Health Plan, Inc.
Wis. Ct. of App., No. 2003AP3274 (4/21/05)

The Wisconsin Court of Appeals affirmed a decision by the lower court dismissing an action Plaintiff brought against her HMO for exercising subrogation rights under Wisconsin statutory law.

Plaintiff's HMO asserted a subrogation interest in Plaintiff's recovery from a third-party tortfeasor for injuries sustained by Plaintiff. Plaintiff paid her HMO and then brought an action against the HMO asserting that the HMO was not permitted to seek subrogation under the Wisconsin HMO statute. Plaintiff argued that under the statute, HMOs may only receive funds from enrollee copayments, deductibles, and premiums. The trial court found that the HMO statute allowed HMOs to receive funds from enrollees only from one of these three sources, but that it did not prohibit HMOs from asserting a subrogation interest. The court dismissed Plaintiff's action.

The Court of Appeals agreed with the lower court that there was nothing in the statute that limited an HMO's ability to assert a subrogation interest. The court rejected Plaintiff's argument that by permitting an HMO to assert a subrogation interest, the HMO was essentially permitted to collect funds from enrollees other than the in form of copayments, deductibles and premiums. The court observed that the purpose of subrogation is to place the loss on the wrongdoer and also to prevent the insured from receiving a double recovery.

United States v. Capital Group Health Services of Florida, Inc.
N.D. Fla., No. 4:02-cv-00389-RH/WCS (6/7/05)

In a qui tam action that alleged a scheme between a hospital, an HMO and a psychiatrist for submission of false claims under the Medicare and Medicaid programs, a federal district court dismissed the action as against the hospital and the HMO, but denied a motion to dismiss the action as against the psychiatrist. The court determined that the complaint failed to allege the fraud against the hospital and the HMO with adequate specificity. The complaint also did not allege a basis for the relator's asserted knowledge regarding claims for services provided by hospital-employed physicians.

The court found that the complaint as against the psychiatrist, which alleged that the psychiatrist used "phantom" and "upcoded" claims, met the Rule 9(b) pleading standards because it alleged Medicare fraud for specific amounts on specific dates, and for specific procedures. In addition, the relator, a mental health counselor, had personal knowledge of the length of the psychiatrist's workday. The action as against the psychiatrist was therefore permitted to continue.

Zoblotsky v. Tenet Choices, Inc.
E.D. La., Civ No. 03-2957 (4/26/05)

A federal district court refused to dismiss a state-law negligence claim alleging that a health insurer's decision to only provide coverage for a generic form of a drug required an enrollee to change medications and suffer "significant clinical problems" and physical debilitation. The court did, however, dismiss a claim alleging violation of Louisiana Revised Statute 22:2001, finding that there is no right of private action to enforce the Louisiana Health Maintenance Organization Act, which requires HMOs to create a procedure to allow beneficiaries to submit grievances. The court determined that enforcement of the Act is the responsibility of the Louisiana Commissioner of Insurance. Therefore, even if Zoblotsky was denied necessary and appropriate drug therapy, she as a plan enrollee may not privately sue for damages under the Act.

The case involved a question of material fact as to whether an insurance company "forced" a member to switch drugs when it changed its reimbursement policies. Zoblotsky, a liver transplant patient, switched to a generic drug to regulate her liver when Tenet Choices, a supplemental Medicare drug coverage plan in which she was enrolled, allegedly refused to pay the full amount of her original prescription. Within three weeks of switching medications, she suffered liver rejection.

The court found that the only reason Zoblotsky's doctor changed her prescription to the generic was because the pharmacy informed him that Tenet Choices would no longer cover the drug she previously used. As such, the court stated that questions remained as to whether Tenet Choices was the proximate cause of Zoblotsky's alleged harm.

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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