All Alerts & Newsletters

Managed Care Lawsuit Watch - March 2006


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:

Mathis v. Mahle Inc.
Sixth Circuit No. 04-6145 (unpublished) (2/6/06)

The Sixth Circuit reversed a district court’s summary judgment decision for plaintiff on an ERISA claim, finding adequate support for claim denial based on an exclusion for self-inflicted injuries.

Plaintiff Stacy Mathis participated in Mahle, Inc.’s self-funded health and dental insurance plan, governed by ERISA. Mathis brought an action before the District Court for the Eastern District of Tennessee after Mahle’s third-party administrator denied payment of his claims on the grounds that the gunshot wound to Mathis’ face was “self-inflicted.”

The district court first found that Mahle’s third party administrator, Acordia, was not the proper party to the lawsuit, because under the Plan, Mahle itself is the Plan Administrator. After further proceedings, the district court granted Mathis summary judgment, following de novo review.

Where an ERISA plan confers discretion on an administrator to decide all claims disputes, a court’s standard of review should be “arbitrary and capricious,” rather than “de novo.” Because Mahle had “absolute discretion... to decide[e] all disputes of eligibility,” the appellate court found that the district court should have reviewed Mahle’s decision only to determine whether it was arbitrary or capricious.

The appellate court noted that Mahle possessed a conflict of interest, but that the conflict did not change its review standard. The appellate court then reviewed Mahle’s denial of benefits to Mathis under the arbitrary and capricious standard. Mahle’s reason for denying Mathis’ claim was based on statements made by Mathis’ family, hospital records and the location of the wound. After reviewing the evidence, the appellate court determined that “the evidence in the record provides a reasoned explanation for Mahle’s conclusion that Mathis’s injuries were self-inflicted… and… therefore, cannot be arbitrary and capricious.”

Baptist Physician Hospital Organization, Inc. v. Humana Military Healthcare Services, Inc.
Court for the Eastern District of Tennessee No. 3:01-cv-588 (2/13/06)

Baptist PHO and Baptist Hospital (collectively, “Baptist”) had previously sued Humana for breach of contract, claiming that Humana owed Baptist the difference between the discounted charges for certain high-dollar services rendered to CHAMPUS beneficiaries and the amounts actually paid. Humana counterclaimed, alleging that it overpaid Baptist.

Humana argued that federal regulations, incorporated by reference into its agreement with Baptist, only required it to pay what CHAMPUS was required to pay for the services at issue. The Sixth Circuit did not agree.

On remand, Humana claimed that Baptist’s actions operated as a constructive acceptance of CHAMPUS levels of payment. After examining communications relayed during and after the parties’ execution of the agreement at issue, as well as oral testimony from both parties, the district court determined that Baptist did not expressly or impliedly accept CHAMPUS rates of payment for high-dollar services.

With respect to the high-dollar services, the court determined that Humana underpaid Baptist by $1,277,872.89. While the court indicated that Humana had overpaid Baptist for certain other services, it indicated that a portion of the total overpayment was owed to patients because of various patient cost shares and co-insurance issues. As Humana did not submit evidence on these patient cost shares, the court declined to find any award for Humana.

The court ordered Humana to pay to Baptist $1,277,872.89, plus prejudgment interest of 10% per annum, i.e., a total of $2,009,361.40.

Barnett v. Ameren Corp.
Seventh Circuit No. 05-1496 2/8/06

The Seventh Circuit Court of Appeals affirmed the opinion of the U.S. District Court for the Southern District of Illinois, determining that no latent or patent ambiguity in a bargaining agreement existed so that the Ameren retirees would be entitled to free lifetime health benefits.

In 2003, Ameren, the resultant company of a 1997 merger of two other companies, refused to provide lifetime health benefits to certain retirees on the basis that the obligation to provide such benefits only existed as long as the relevant bargaining agreement existed. Specifically, Ameren declared that, over time, retirees would have to pay up to 25% of their premiums and up to 50% of their dependents’ premiums.

In support of their claim that a patent or latent ambiguity existed, the retirees primarily relied upon the usage of the term “vested service” in a stipulation agreement between the parties. However, the Seventh Circuit found that the term could not be interpreted to mean “lifetime benefits” because the same agreement conferred upon Ameren’s predecessor the right to modify retiree benefits “for the life of the labor agreement.”

As a result, summary judgment for Ameren was affirmed. The Seventh Circuit specifically stated “as harsh as it may sound, in the absence of a contractual obligation, employers are generally free for any reason at any time, to adopt, modify or terminate welfare plans.”

Aetna Health v. Kirshner
U.S. District Court for the District of Connecticut Civil No. 3:05cv864 (JBA) 2/16/06

The United States District Court for the District Court of Connecticut remanded a case to a Connecticut state court, finding that a chiropractor’s counterclaim that Aetna had failed to process his claims in a timely manner was insufficient to implicate ERISA and federal jurisdiction.

Aetna had sued Kirshner for breach of contract, fraud, unjust enrichment and civil theft, alleging that he misrepresented his services and procedures in order to obtain reimbursement and waived or reduced member copayments in order to inflate billings. Kirshner counter-claimed, claiming, inter alia, breach of contract and tortious interference with business relationships and business expectancy by failing to process his claims properly and in a timely manner.

Aetna removed the case to federal court, alleging that Kirshner’s claims based on claims processing were preempted by ERISA.

The district court noted that counterclaims cannot give rise to federal “arising under” jurisdiction per 28 U.S.C. §1331, as plaintiffs should have the right to choose their forum. Moreover, the court stated that allowing counterclaims to determine forum would undermine the respect for the independence of state courts.

For these reasons, the district court remanded the case to the state court, which may be required to interpret the terms of an ERISA plan document.

Prospect Medical Group Inc. v. Northridge Emergency Medical Group
Court of Appeal of the State of California, 2nd Appellate District B172817 (2/17/06)

A California appellate court held that out-of-network emergency physicians may bill commercially insured patients for the balance of their fee not paid by the patient’s health plan, and are not required to accept the Medicare rate as payment in full for their services. However, the health plan (and its delegate) do have standing to litigate the reasonableness of the amount billed by the emergency physicians.

Prospect Medical Group, Inc., an IPA and a “delegate” to health plans (“Prospect”) sued two emergency physician medical groups (collectively, the “Physicians”), seeking declaratory relief that the Physicians 1) were only entitled to “reasonable” compensation for the medical services that they rendered; and 2) could not balance-bill their subscribers under the provisions of the Knox-Keene Act. Prospect specifically argued that because the Physicians have a statutory duty to treat all patients without regard to insurance or ability to pay, and because Prospect has a statutory duty to reimburse the Physicians for emergency care provided, the parties had an implied contractual relationship. The trial court sustained the Physicians’ demurrers, and Prospect appealed.

The appellate court first determined that the statutory framework of the Knox-Keene Act, which prohibits balance-billing in certain circumstances, neither implied a contract between Prospect and the Physicians nor applies to parties that lack a voluntarily negotiated agreement (such as Prospect and the Physicians). The court also noted that the California Department of Managed Health Care (DHMC) had promulgated regulations recognizing the practice of balance-billing in certain circumstances, and had recently withdrawn a proposed regulation that would have prohibited balanced-billing by non-contracted providers.

With respect to whether the Physicians were required to accept Medicare rates, the court noted that no authority – statutory, regulatory or otherwise – existed for such a proposition. In fact, the court noted the DHMC’s previous statement that the Medicare and Medicaid programs “are not designed to reimburse the provider for the fair and reasonable value of the services rendered….” Relying on case law, the appellate court held that health plans and their delegates are only statutorily required to reimburse providers at a rate that is “reasonable” for their services.

Finally, though, the appellate court recognized that if health plans and their delegates (such as Prospect) are required to pay a “reasonable” fee to provider, they must have the right to contest whether any fee charged by a provider is in fact “reasonable.” For this reason, the appellate court remanded the case to the lower court in order to allow Prospect to litigate whether the Physicians’ fees were reasonable.

Borden v. Blue Cross and Blue Shield of Western New York
U.S. District Court for the Western District of New York No. 05-CV-251S 2/21/06

The U.S. District Court for the Western District of New York ruled that a health insurer did not breach its contractual and fiduciary duties when it refused to waive its right of subrogation.

Borden was injured in a motorcycle accident involving persons insured by State Farm Automobile Insurance Company. HealthNow paid over $55,000 for medical expenses that Borden incurred due to the accident. In February 2005, HealthNow informed Borden that it planned to pursue its own recovery from all responsible persons and did not intend to waive its right of subrogation.

Later that month, State Farm offered to settle Borden’s claims for $100,000 – the entire policy limit – if Borden could provide documentation of lien satisfaction. Borden contacted HealthNow to request that HealthNow either consent to the settlement and waive its subrogation rights, or pay the amount of the proposed settlement directly to Borden. HealthNow refused, and provided Borden with a copy of the complaint it had filed against State Farm’s insureds.

Borden filed suit against HealthNow in New York state court, alleging violation of contractual and fiduciary duties. HealthNow promptly removed the case to federal court, arguing that Borden’s claims were completely preempted by ERISA. It then filed a motion to dismiss, stating that Borden had failed to state a claim under ERISA.

The district court agreed with HealthNow, and found that 1) Borden sought a remedy that falls within the scope of ERISA’s civil enforcement provision; 2) the policy unambiguously gave HealthNow an unqualified right of subrogation; and 3) refusing to waive this right was not a breach of any of the plan’s duties.

Accordingly, the court granted HealthNow’s motion to dismiss.

United States v. Topel
No. 1:05-cr-00388-WSD-JMF, 2/17/06

The U.S. Attorney for the Northern District of Georgia announced that two back pain clinic owners pled guilty to a health care fraud scheme that cost Blue Cross and Blue Shield of Georgia over $1 million.

Eric and Christopher Topel owned two back pain clinics in Albany and Columbus, Georgia. The clinics specialized in Vertebral Axial Decompression (“VAX-D”), which is a non-surgical procedure for the treatment of lower back pain. Blue Cross and Blue Shield of Georgia (“BCBS-GA”) deemed VAX-D to be “investigational/not medically necessary,” and did not reimburse physicians for the procedure.

According to the indictment issued against them, the Topels engaged in a systematic scheme to disguise the VAX-D procedures performed at their clinics in order to obtain reimbursement from BCBS. The Topels allegedly directed their employees to use a CPT code for surgical nerve decompression that BCBS would reimburse; instructed employees not to mention VAX-D when communicating with BCBS representatives; and instructed employees not to include any reference to VAX-D in patient files. Under this scheme, the Albany clinic collected over $600,000 in reimbursements from BCBS for VAX-D procedures and the Columbus clinic collected over $400,000, according to the charges.

Christopher Topel pled guilty to one count of health care fraud. His sentencing is scheduled for April 6th, where he could receive up to 10 years in prison and a $250,000 fine. Eric Topel pled guilty to two counts of health care fraud, and is scheduled for sentencing on April 20th. He faces up to 20 years in prison and a $500,000 fine.

Crowell & Moring LLP - All Rights Reserved
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.

Email Twitter LinkedIn Facebook Google+

For more information, please contact the professional(s) listed below, or your regular Crowell & Moring contact.

Arthur N. Lerner
Partner – Washington, D.C.
Phone: +1 202.624.2820