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Managed Care Lawsuit Watch - June 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:

Health Options Inc. v. Palmetto Pathology Services, PA
No. 3D07-1453 Fla. Dist. Ct. App. 4/16/08

The Florida Third District Court of Appeals affirmed the lower court's holding that pathology providers were entitled to $1.5 million in payments withheld by an HMO. Palmetto Pathology Services, P.A. ("PPS") sued Health Options, Inc. ("HOI"), Blue Cross Blue Shield of Florida's HMO, after HOI refused to pay for the "professional component of clinical pathology" or "non-patient specific services."

HOI claimed that the services rendered by PPS did not constitute "approved physician care" covered under the members' contracts. The court rejected this argument, finding that (1) the services fell within the definition of "physician care" which includes care "…supervised by physicians…" and (2) that "PPS's medically necessary clinical pathology services "rendered to" (not "rendered directly to") a member are compensable whether or not a pathologist and patient meet directly." Despite the court's rejection of HOI's arguments, PPS could only prevail if it was a third-party beneficiary of the contracts between HOI and its members. The court held that HOI was an intended third-party beneficiary. The court also affirmed the lower court's holding that PPS's claims were not preempted by ERISA.

East Portland Imaging Center, PC v. Providence Health System-Oregon, et. al.
9th Cir., No. 06-35394 Unpublished 5/20/08

The Ninth Circuit, in an unpublished opinion, has held that several diagnostic imaging centers failed to show that competitor Providence Health System-Oregon and related entities violated the Sherman Act by terminating its contracts with the plaintiff imaging centers in favor of contracting with its own affiliates.

The Court stated that in order to demonstrate a violation of §2 of the Sherman Act, the imaging centers had to prove: (1) Providence engaged in predatory or anti-competitive conduct; (2) Providence had a specific intent to monopolize; (3) there was a dangerous probability Providence would achieve monopoly power in the relevant market; and (4) the imaging centers suffered an antitrust injury as a result. To demonstrate a dangerous probability that Providence would achieve monopoly power, the imaging centers had to (1) define the relevant market; (2) show Providence owned a dominant share in the market; and (3) show significant barriers to entry and that existing competitors lacked the capacity to increase production in the short run.

The Ninth Circuit stated that plaintiffs failed to show that Providence, by contracting with its own affiliates instead of plaintiffs, was likely to achieve monopoly power because they had not demonstrated barriers to entry and expansion in the diagnostic imaging market. Nor had the imaging centers presented evidence regarding Providence's ability to control patients and physician referrals through its health plan, which would discourage new entrants. The Court also noted that plaintiffs admitted to excess capacity in the market and the lack of evidence regarding an (i) increase in the price of diagnostic imaging services, (ii) a decrease in the number of providers, or (iii) Providence's ability to control prices.

Midwest Emergency Associates-Elgin Ltd., v. Harmony Health Plan Of Illinois, Inc.
No. 1-07-0039, (Ill. App. Ct. May. 15, 2008)

The Appellate Court of Illinois held that Harmony Heath Plan of Illinois and Amerigroup Illinois, Medicaid managed care organizations (the "MCOs"), could pay an emergency care provider Medicaid fee-for-service program rates rather than the provider's billed charges.

The MCOs paid Midwest Emergency Associates-Elgin Ltd., a non-contracted provider at the rates set by the Illinois Department ofHealthcare and Family Services ("HFS") for theMedicaid fee-for-service program. Midwest sued the defendants, "seeking to recover the difference between its billed charges and the reimbursement amounts actually paid by Harmony Health over the five-year period preceding the lawsuit."

Midwest claimed that it was entitled to relief because Harmony unilaterally set its payment rates. The Court rejected Midwest's claim and relied in part on the MCOs' contract with HFS which required the MCO to "pay for all Emergency Services rendered by a non-Affiliated Provider at the same rate [HFS] would pay for such services, unless a different rate was agreed upon." The Court held that this language required the MCOs to reimburse Midwest at the HFS fee-for-service rate. The Court also stated that Midwest's complaint was inconsistent with the purpose of the Medicaid program to establish to provide furnish health care to the indigent; "if Midwest prevailed, providers would have little to no incentive to privately negotiate reimbursement rates with such managed care organizations."

California Department of Managed Health Care Settlements
May 2008 - Health Net Settlement Agreement - Kaiser Settlement Agreement

In mid-May, California's Department of Managed Health Care ("DMHC") entered into separate settlement agreements with Kaiser Foundation Health Plan and Health Net of California, respectively, requiring each plan to reinstate healthcare coverage to individuals whose coverage had been previously rescinded.

According to the state's allegations, Kaiser and Health Net enrolled and then rescinded membership agreements in violation of Section 1389.3 of the California Health and Safety Code, which prohibited post claims underwriting, defined in the code as "rescinding, canceling, or limiting of a plan contract due to the plan's failure to complete medical underwriting and resolve all reasonable questions arising from written information submitted on or with an application before issuing the plan contract." It does not include willful misrepresentation. Such membership revocations were said to generally occur after enrollees file large claims and have been under investigation.

Under the Agreement, Kaiser and Health Net will voluntarily offer the former enrollees the option to purchase healthcare coverage without medical underwriting. Furthermore, former enrollees will have the option to resolve any claims payment issues that arose during the period of non-coverage through an arbitration proceeding. The Kaiser Settlement Agreement covers approximately 1,092 former enrollees, while the Health Net Settlement Agreement covers approximately 85 former enrollees. The DHMC is also in settlement discussions with three other health plans under investigation for similar membership recision procedures.


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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