Managed Care Lawsuit Watch - July 2012
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 Chris Flynn, Peter Roan, or any member of the health law group.
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Cases in this issue:
Chief Justice John Roberts split the difference between the two wings of the Supreme Court in his controlling opinion. That opinion upheld the individual mandate as constitutional under Congress's power to tax and spend, but also (in dicta) determined the Commerce Clause to be an insufficient constitutional basis for regulating "inactivity" – such as a decision not to purchase health coverage. The Chief Justice also charted a middle path for the Affordable Care Act's Medicaid provisions, upholding the law's conditioning of new Medicaid funding on states expanding Medicaid coverage, but rejecting provisions that would have permitted the federal government to withhold all Medicaid dollars from states that reject such expansion.
GlaxoSmithKline, LLC ("Glaxo") has entered into a number of settlement agreements in order to compensate various parties for the costs of treating injuries arising from use of Avandia, a drug Glaxo manufactured to treat Type II diabetes, and which was eventually found to increase the risk of heart disease. The Medicare Trust Fund is one such counterparty to a settlement with Glaxo, because under the Medicare Secondary Payer Act ("MSP Act") Glaxo qualifies as a "primary payer" of the costs of Medicare beneficiaries' medical care for Avandia-related injuries, and so is required to compensate Medicare for the cost of care it reimbursed even though it was a "secondary payer." However, Glaxo did not – in advance of Humana's suit – compensate any Medicare Advantage Organization ("MAO") for the costs of treating enrollees who required medical care as a result of taking Avandia.
Humana Medical Plan, Inc. ("Humana"), an MAO with approximately one million enrollees, sought similar compensation through a class action suit against Glaxo, which Humana filed its own behalf and on behalf of other similarly situated MAOs. In addition to seeking double damages under the MSP Act, Humana sought an order compelling Glaxo to identify MAO beneficiaries with which it had already settled Avandia claims. The trial court granted Glaxo's motion to dismiss the class action after concluding that the language of the Medicare Act, which differs from that of the Medicare Secondary Payer Act in its discussion of when a party may file a private cause of action, did not authorize Humana to bring such a claim for relief. According to the trial court, the MSP Act merely permitted Humana to create rights of reimbursement or subrogation in a contract with a party like Glaxo.
Humana appealed that decision to the Third Circuit, which rejected the trial court's narrow interpretation of the MSP Act and ruled for Humana. By way of background, the Third Circuit panel observed that while the MSP Act was enacted in 1980, before Medicare Part C's enactment in 1997, private Medicare risk plans had been authorized in 1972. Consequently, Congress was aware when it enacted the MSP Act that private Medicare issuers existed. The panel identified three points that, set against this background, won the day for Humana. First, nothing in the MSP Act's text or legislative history suggests that Congress meant to withhold a private cause of action from MAOs – yet Congress knew that private Medicare issuers existed and so might seek recovery from primary payers. Second, Humana's interpretation of the MSP Act as granting a private cause of action to MAO secondary payers would be consistent with the MSP Act's stated policy goals. Having determined that the meaning of the MSP Act is clear with respect to the controverted question, the panel – noting that the Medicare Act is notoriously dense and turgid – also conducted a Chevron analysis of the Medicare Act's relevant implementing regulations, promulgated by the Centers for Medicare and Medicaid Services ("CMS"). Those regulations state directly and unequivocally that the Medicare Act treats MAOs the same as the Medicare Trust Fund for the purpose of recovering from a primary payer.
Aetna, Inc. ("Aetna" or "Plaintiff") alleged that in 2008 Blue Cross Blue Shield of Michigan ("BCBSM" or "Defendant") began implementing a scheme to exclude competitors, which Aetna characterized as an Unlawful Agreement under the Sherman Act and as a violation of the Michigan Antitrust Reform Act. That scheme built on contracts with at least 70 of Michigan's 131 acute care hospitals, under which BCBSM had agreed to increase reimbursement rates on the condition that the hospitals agreed to charge BCBSM competitors (in some cases) still higher rates or (in other cases) rates at least as high as those charged to BCBSM. Allegedly, if hospitals did not agree to that condition, BCBSM would only agree to a lower set of rates. According to Aetna's complaint, BCBSM's enforcement of those conditional contract provisions starting in 2008 resulted in the substantial exclusion of BCBSM competitors, such as Aetna, from the Michigan markets for administrative services for self-insured health plans, insurance and health plan administration for employer groups and for individuals, all with the result of higher costs to consumers in those markets.
BCBSM moved to deny Aetna's complaint on three grounds: that Aetna (which sued only on its own behalf rather than as one of several BCBSM competitors) did not have antitrust standing; that Aetna failed to plead antitrust injury, and that Aetna failed to plead a proper geographic market. The court, quoting Twombly/Iqbal standard requiring that a pleading must be "plausible on its face," rejected each of BCBSM's arguments in turn.
The court first rejected BCBSM's suggestion that Aetna lacked antitrust standing so long as it sued only on its own behalf. It then rejected BCBSM's argument that Aetna had failed to draw a causal linkage between the contractual provisions it highlighted in its complaint and any adverse impact on competition. Specifically, it disagreed with BCBSM's point that a nominal increase in rates, such as Aetna identified as evidence of injury, was somehow insufficient to show such injury, and observed that those increases were plausibly both the means and injurious result of operating the scheme alleged by Aetna. Finally, the court rejected BCBSM's suggestion that the State of Michigan was an implausibly large market that could not provide the unit of analysis in an antitrust suit and was inconsistent with the county-level markets preferred by federal antitrust enforcement agencies.
In response to Jeanne Harlick's ("Plaintiff-Appellant" or "Harlick") query about coverage for the residential treatment prescribed by her doctors, Blue Shield of California ("BSC" or "Defendant") indicated that Harlick's plan did not provide coverage for residential treatment, even though her doctor had determined that treatment to be medically necessary. On that basis, BSC refused to cover her 8-month treatment at Castlewood, a facility in Missouri staffed by psychologists and others but not by licensed medical personnel.
Harlick challenged that refusal in federal district court as contrary to the terms of her ERISA plan and to California's Mental Health Parity Act ("the Act"). The trial court agreed with BSC that Harlick's plan clearly excluded the treatment she sought at Castlewood; the court did not reach the question of whether California's Mental Health Parity Act ("the Act") required such coverage.
The Ninth Circuit first issued an opinion reversing the trial court's decision in May of 2011. But the panel withdrew and revised that opinion, replacing it in June of 2012 with a revised opinion and a partial dissent. The more recent opinion did not change the panel's original determination that, while the terms of Harlick's plan excluded residential treatment from coverage, the Act compels coverage of any "medically necessary treatment" provided for "severe mental illness" if the plan at issue comes within the ambit of the Act.
The crux of the panel's opinion was its conclusion that the list of treatments required if medically necessary under the Act was not exhaustive. The panel reached this conclusion based in large part on the interpretation of an Act made by the California Department of Managed Care ("DMC") in a 2003 regulation. However, whereas the initial opinion understood that the DMC regulation referred to the Mental Health Parity Act, the revised opinion understood that it in fact referred to a different law altogether. Although the majority of the panel concluded that this difference should not overcome its "common sense" interpretation of the Act, the Dissent to the revised opinion disagreed and argued that the revelation should lead to a decision based solely on the text of the statute, which in turn would exclude residential treatment from coverage required under the Act and so would reverse the panel's original determination.
The Texas Department of Insurance ("Department") found that when American National Insurance Company ("American") had sold stop-loss insurance to self-insuring employee benefit plans, it was thereby selling insurance rather than reinsurance. Texas's Insurance Code exempts reinsurers, who sell insurance policies to other commercial entities seeking to hedge against catastrophic risk, from paying the taxes and complying with the regulatory requirements imposed on direct insurers, who sell insurance coverage to consumers.
American brought an administrative challenge to the Department's finding that American belonged in the "insurer" category when it sold stop-loss policies to self-insured benefit plans. That challenge failed. American then sued the Department, which prevailed again at trial. American appealed from the trial court's decision, which the court of appeals overturned after concluding that the Department's interpretation of American's stop-loss coverage was plainly at odds with Texas's Insurance Code.
The Texas Supreme Court noted that the Texas legislature had included broad definitions of "insurer" in the state's Insurance Code in order to prevent entities from acting as insurers in Texas but avoiding regulation. This policy logic, according to the Court, made the decision of the appeals court ironic, because finding that the broad definition encompassed self-insured employer plans led the appeals court to exclude entities like American from the regulatory regime drafted to prevent such exclusion. Guided by this statutory purpose, and by the fact that "the Insurance Code . . . is not a formal, unified Code containing uniform definitions," the Court determined that the Insurance Code is ambiguous in its classification of self-funded plans. Having concluded that the Insurance Code provided no dispositive guidance as to which entity – the self-funded plan or American – was a direct insurer, the Court looked to the Department's regulations and deferred to the definition they contain. Thus, even though, "[w]ithout question, self-funded employee health-benefit plans operate much like insurers," the Court deferred to the Department, which defines "reinsurance" as always involving two insurers, and therefore classifies American's stop-loss policies as direct insurance sold by an insurer to a non-insurer. The Court's ruling has potentially significant collateral impact in that it suggests that such stop-loss coverage may be subject to state mandatory benefit and other regulatory provisions directed at health insurers.
Citing the Third Circuit's application of the motion to dismiss standard first put forth in Ashcroft v. Iqbal, the United States District Court for the Middle District of Pennsylvania dismissed a pro se complaint brought against the United States Office of Personnel Management ("OPM") for lack of supporting evidence. The court also determined that the Federal Employees Health Benefits Act ("FEHBA") preempted the causes of action for which the plaintiff sought relief, which included breach of fiduciary duty, bad faith, fraud, and negligence.
The pro se plaintiff, a retired federal employee disabled by a spinal injury, filed a complaint against Blue Cross Blue Shield Association, CareFirst Blue Cross Blue Shield Maryland, PA Blue Cross Blue Shield, and OPM after the defendants provided only partial reimbursement for his durable medical equipment claims. After the Blue Cross defendants were dismissed from the case, OPM filed a motion to dismiss.
The court concluded that either of two independent lines of reasoning would support OPM's motion to dismiss. First, the plaintiff's allegations that OPM breached its fiduciary duty, etc. relied on "mere conclusory statements" rather than evidence. Second, the court determined that FEHBA preempted plaintiff's claims for monetary damages. On this point, the court explained that FEHBA authorizes judicial review of OPM decisions only for the purpose of awarding benefits wrongfully withheld from an enrollee. In a footnote, the court further noted that the plaintiff had attempted a well-worn gambit to circumvent FEHBA preemption by framing his claim as the result of improper processing rather than an adverse coverage decision. The court rejected the alleged distinction as immaterial in relation to preemption.
Blue Cross of Northeastern Pennsylvania / Highmark Blue Shield ("Blue Cross" or "Defendants") and New Life Homecare's ("New Life" or "Plaintiffs") agreement for group insurance coverage included underwriting requirements that limited how many New Life employees could reside outside Defendants' licensed service area. New Life exceeded that limitation with the enrollment of a new employee in September of 2006, which led to a dispute that the parties temporarily and partially resolved through a stop-gap settlement agreement. That settlement provided in relevant part that Blue Cross would provide New Life employees with group coverage through March 2007, but would then transition those employees to individual coverage starting in April of 2007.
The Federal District Court for the Middle District of Pennsylvania disposed of the case based on its substantial – but not complete – agreement with arguments presented by Defendants. To begin, the court rejected Defendants' contention that the terms of the partial settlement agreement eliminated Plaintiffs' standing to bring ERISA claims by effectively terminating the group coverage policy at issue. The court explained that, because the settlement did not provide for the release or dismissal of Plaintiffs' claims, it did not preclude Plaintiffs from seeking relief for Defendants' alleged breach of contract.
However, the court agreed with Defendants about all the claims at issue in their motion for summary judgment. First, looking to Pennsylvania contract law, the court determined that Defendants had not breached, but had rightfully terminated the agreement after Plaintiffs violated its underwriting requirements. The court was not persuaded by Plaintiffs' contention that Defendants should have given Plaintiffs a chance to cure that violation before terminating.
As to Plaintiffs' point that Defendants had breached a fiduciary duty by failing to offer a waiver of the plan's underwriting requirements, the court again agreed with Defendants that the plan's coverage policy documents imposed no such requirement, and that Defendants' decision to terminate was consistent with what those policy documents required. The court noted that Plaintiffs had supplied no evidence either that this fact could be disputed or that Defendants' decision was motivated by something other than a desire to comply with the policies stipulated by the parties.
Similarly, the court rejected for lack of evidence Plaintiffs' contention that Defendants' termination and refusal to waive underwriting requirements constituted impermissible retaliation. Plaintiffs argued that Defendants had treated Plaintiffs differently than other parties in similar circumstances, but, the court explained, Plaintiffs offered no evidence – either direct or circumstantial – showing that Defendants had "placed substantial negative reliance on an illegitimate criterion in reaching their decision." Because Defendants presented a valid basis for terminating the policy, which Plaintiffs could not impugn, the court agreed that the retaliation claim should also be dismissed.
Fox Insurance Company ("Fox") contracted with the Center for Medicare and Medicaid Services ("CMS") to provide Medicare enrollees prescription drug coverage under Medicare Part D from 2006 until March 9, of 2010. In January 2010, CMS awarded contracts to Humana to administer the Limited Income Newly Eligible Transition Program ("LI-NET"), and, as of March 10, 2010, transferred enrollees from Fox to LI-NET. That is, CMS instructed pharmacies to process Part D claims through LI-NET instead of billing Fox. The dispute between Fox and Humana arose after Humana and Fox both allegedly sought reimbursement for over $2 million in Part D claims, paid from March 1-9, 2010. According to the opinion, Humana was the first to seek reimbursement from CMS, and CMS rejected Fox's subsequent request for reimbursement for the same claims. Fox filed suit alleging that Humana had wrongfully accepted, processed, paid, and sought reimbursement for the March 1-9 claims.
The Federal District Court for the District of Arizona granted in part and denied in part Humana's motion to dismiss Fox's first amended complaint, whose claims included declaratory relief, conversion, intentional interference with contractual relations, and unjust enrichment. Humana moved to dismiss on the grounds that Fox had failed to state any claim for which relief could be granted. Humana's motion also argued in the alternative that the complaint had failed to join indispensable parties – namely, CMS and the pharmacies that had received Medicare Part D payments. The court agreed with Humana as to the claim for conversion, but otherwise found that Fox had properly asserted its claims for declaratory relief, intentional interference with contractual relations, and unjust enrichment. The court also rejected Humana's suggestion that CMS or the reimbursed pharmacies were necessary parties to the suit, and, accordingly, let all claims but the conversion claim stand.
Mid-Town Surgical Center, LLP ("Mid-Town") brought suit to recover roughly $12 million in alleged underpayments and delayed payments from Blue Cross Blue Shield of Texas ("BCBST") for medical services provided to members of plans that BCBST administered and in some cases insured directly. Mid-Town's amended complaint also alleged that, prior to providing the services at issue, Mid-Town had verified coverage for those services.
The April 11, 2012 order – Among Mid-Town's claims for relief from these injuries were negligent misrepresentation, promissory estoppel, quantum meruit, breach of fiduciary duty, and entitlement to recovery under FEHBA owing to the assignment of benefits. BCBST moved the District Court for the Southern District of Texas to dismiss those five claims; the court granted dismissal of two of those five claims – quantum meruit and breach of fiduciary duty. The court denied BCBST's motion to dismiss with respect to the others. The court responded to BCBST's arguments in relation to each of those five claims as follows:
- Negligent misrepresentation: BCBST argued that, when it indicated to Mid-Town that particular members were covered with respect to particular procedures, it was making representations about those members' future status rather than about an existing fact. The court rejected this argument, finding that a given member's coverage status was very much an existing fact at the time of BCBST's representation. The court also rejected BCBST's suggestion that Mid-Town had failed to provide sufficiently specific evidence about the "false information" allegedly supplied by BCBST.
- Promissory estoppel: Citing Twombly and stating that it found Mid-Town's claims to be "plausible," the court rejected BCBST's argument that Mid-Town had pled insufficient facts to support its promissory estoppel claim.
- Entitlement to recovery under FEHBA: BCBST argued that this claim should be dismissed because Mid-Town had failed to make OPM a party to the suit, and because OPM was a necessary party. The court corrected BCBST's interpretation of Rule 19, which requires dismissal if a necessary party cannot be joined (not merely when a necessary party has not yet been joined) before finding that OPM was not a necessary party to the suit.
- Quantum meruit: On this claim, the court agreed with BCBST that a plaintiff could recover in quantum meruit only if the plaintiff's efforts had been undertaken for the benefit of the defendant – and that Mid-Town had only ever acted to benefit BCBST's members, and not BCBST itself.
- Breach of fiduciary duty: Here again, the court agreed with BCBST that a plaintiff seeking recovery under ERISA could not maintain claims for both monetary and equitable relief, and must choose one or the other. Breach of fiduciary duty by a party responsible for coverage decisions of an ERISA plan can only be cured through equitable relief. Finding that Mid-Town had properly sought monetary relief, the court granted the motion to dismiss Mid-Town's claim for breach of fiduciary duty.
The April 12, 2012 order – The District Court's later order acknowledged that the Fifth Circuit has not yet addressed whether an entity that has control over benefit decisions of a health plan it does not sponsor can qualify as a proper defendant in a suit for recovery under ERISA. The court stated it was persuaded by the reasoning in a 2011 Eastern District of Texas decision, which found that control over decisions qualified an entity as a proper ERISA defendant. The court therefore held BCBST was the proper defendant and thus liable under ERISA.
The Third Circuit held that ERISA § 502(a)(3)'s provision permitting plans to seek "appropriate equitable relief" from beneficiaries also permits beneficiaries to assert equitable defenses and limitations, such as unjust enrichment, to reduce the amount of equitable relief awarded to a plan.
The beneficiary, James McCutchen, became totally disabled following a serious automobile accident. US Airways, the ERISA plan administrator, paid $66,866 for his medical expenses. The beneficiary settled a lawsuit involving the automobile accident for $110,000. His net recovery after attorney's fees and costs was less than $66,000. US Airways filed suit for "appropriate equitable relief" pursuant to ERISA § 502(a)(3). The District Court granted US Airways's motion for summary judgment and awarded it the full $66,866 reimbursement.
The Third Circuit reversed the District Court. It reasoned that the inclusion of "appropriate" in ERISA's "equitable relief" provision meant something "less than all equitable relief." By permitting relief based on traditional equitable categories, Congress also intended such relief to be limited by the equitable doctrines and defenses that were traditionally applicable to those categories. In other words, Congress intended for § 502(a)(3) to function as a two-way street: plans could seek equitable relief but such relief would naturally be subject to the defenses and limitations corresponding to those categories. The court remanded the case to the District Court, instructing it to consider, if necessary, factors such as (1) the distribution of third-party recovery between the beneficiary and his attorneys, (2) the nature of the attorney-client agreement, (3) the work performed by the attorneys, and (4) the allocation of costs and risks between US Airways and the beneficiary and his attorneys.
US Airways filed a petition for a writ of certiorari in the U.S. Supreme Court. It contends that Congress empowered plans to seek equitable relief to enforce the written terms of the plans, not the equitable terms chosen "at random by a judge." Thus, the Third Circuit’s decision, according to US Airways, contradicts ERISA's stated purpose of protecting contractually defined benefits. US Airways also argues that if plans are unable collect full reimbursement under § 502(a)(3), they will not be able to control their liabilities or costs, thus threatening ERISA plans' viability.
Two qui tam relators – a pharmacy technician formerly employed at Walgreens, and an independent pharmacist – brought to the Justice Department’s attention claims that Walgreens allegedly offered gift cards and similar promotions to beneficiaries of Medicare, Medicaid, Tricare, and the Federal Employee Health Benefits Program, thereby violating marketing provisions of federal and state forms of the False Claims Act. The Justice Department took up and pursued these claims as part of its Health Care Fraud Prevention and Enforcement Action Team initiative. Walgreens settled, paying $9.2 million in total, of which approximately $7.3 million will go to the U.S. Treasury. The Department voluntarily dismissed its allegations and Walgreens admitted no wrongdoing.
Settlement Agreement Between WellCare Health Plans, Inc. et al. and State of Connecticut and others Relating to Medicaid False Claims Allegations
In a series of qui tam actions filed between 2006 and 2009, the States of Connecticut, Florida, Illinois, and New York, and the U.S. Attorney for Florida's Middle District, alleged that between January 2002 and June 24, 2010, WellCare submitted false claims to Medicaid programs in those states and failed to repay the monies it received thereby. The conduct alleged in those law suits led to several agreements between WellCare and some or all of the parties, including a Deferred Prosecution Agreement and a Corporate Integrity Agreement with the HHS OIG.
The allegations against WellCare include the fraudulent inflation of expenses charged to Florida's Agency for Health Care Administration; manipulation of the MLR reported to various states; falsifying the encounter data submitted with Medicaid claims; rewarding physicians for upcoding and permitting contracted independent physician associations to collect premium payments for deceased former beneficiaries; manipulating CMS's Risk Adjusted Payment System in order to upcode claims; and operating a sham Special Investigations Unit that failed to provide adequate oversight and that filed false and misleading fraud prevention plans with CMS.
The Settlement Agreement specifies an amount that is comprised of a "fixed" component and a "contingent" component. The fixed component requires WellCare to pay $137.5 million to the United States and the states that execute separate settlements with WellCare. Of that, $53.5 million shall be allocated to the several states; Connecticut will receive $3.2 million. Interest on these amounts shall accrue at an annual rate of 3.125 percent. The contingent component anticipates a possible change in control of WellCare through transfer of a majority of its shares of stock and makes such a change in control the trigger for payment of an additional $35 million to the states settling with WellCare.
Under the terms of the Settlement Agreement, WellCare expressly warrants that it is solvent, and stipulates that several aspects of a normal bankruptcy proceeding would not apply should WellCare seek judicial relief for bankruptcy, insolvency, or attempt any sort of reorganization.
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