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Managed Care Lawsuit Watch - March 2007


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:

Heartland Surgical Specialty Hosp. v. Midwest Div. Inc.
D. Kansas No. 05-cv-2164-MLB-DWB Feb. 6, 2007

The U.S. District for the District of Kansas recently held that CIGNA waived the attorney-client privilege with regard to advice given by its attorney on the antitrust implications of an exclusivity arrangement in its contract with Midwest Division, Inc., d/b/a HCA Midwest Division (“HCA”). CIGNA referenced its attorney’s advice in a Contract Memorandum to HCA while the parties were in contract negotiations. Heartland Surgical Specialty Hospital, LLC (“Heartland”) later sued CIGNA and HCA, alleging that they engaged in a conspiracy to prevent managed care companies from contracting with specialty hospitals like Heartland.

During discovery, HCA produced the Contract Memorandum to Heartland. Regarding the exclusivity provision, the Memorandum stated: “Our anti-trust attorney has reviewed the current and proposed language and has found that CIGNA is at risk and should not proceed. This finding is based, in part, on a review of the case facts from a recent case in Oregon. We strongly believe that it is in HCA’s and CIGNA’s best interests to avoid the increased possibility of a similar situation ever happening here.” Based on these three sentences, Heartland argued that CIGNA had waived the attorney-client privilege with respect to the Contract Memorandum and to the Memorandum’s subject matter. CIGNA argued that waiver of the privilege did not apply to legal conclusions given during the course of contract negotiations.

The Court disagreed with CIGNA, finding that it had done much more than take a generic position on a legal issue. According to the Court, CIGNA revealed “the precise advice” of its attorney, and had thus waived the privilege with regard to the contractual exclusivity language at issue. The Court also did not agree with CIGNA’s argument that the disclosures sought by Heartland would “cripple business negotiations,” noting that contracting parties are free to use their legal concerns as a “backdrop” to negotiations as long as the “precise nature” of the advice is not revealed. Because the Court found that CIGNA waived the privilege as to the entire issue, CIGNA was also required to produce other documents, including an internal memorandum, an internal e-mail chain discussing relevant case law, and the attorney’s notes, in addition to the Contract Memorandum.

U.S. ex rel. Esktrand v. WellPoint Health Networks, Inc.
E.D. Missouri 4:04-cv-00825-RWS Jan. 29, 2007

In a suit filed by a relator under a qui tam action, the plaintiff claimed that RightCHOICE Managed Care, Inc. d/b/a Blue Cross Blue Shield of Missouri (“RightCHOICE”) improperly paid higher fees to a preferred provider network of physicians to render services to patients insured through its Federal Employee Health Benefits Program plan, as compared to the fees paid to the same physicians for services rendered to patients insured through its other health plans. RightCHOICE then allegedly passed on these higher rates to OPM as purported “reasonable” costs, in violation of the False Claims Act.

RightCHOICE expressly denied any liability but said it reached a settlement in order to avoid the delay, uncertainty, inconvenience, and expenses of protracted litigation.

Under the terms of the settlement agreement, RightCHOICE agreed to pay $975,000 to the government. The relator is to receive seventeen percent of that amount ($165,750) in addition to $50,000 for expenses and attorney’s fees.

Rittenhouse v. UnitedHealth Group Long Term Disability Ins. Plan
8th Circuit Ct. of Appeals No. 06-1905 Feb. 21, 2007

The plaintiff, Gary Rittenhouse, filed a claim for long-term disability benefits with UnitedHealth Group Long Term Disability Insurance Plan (the “Plan”), which is insured by AIG Life Insurance Company, based on a physician’s conclusion that he was totally disabled due to severe hearing loss. After AIG’s medical consultant reviewed the claim, AIG denied it, concluding that Rittenhouse was not disabled under the policy. AIG subsequently denied his appeal and Rittenhouse brought a civil suit under ERISA. Applying the de novo standard of review, the district court ruled in favor of Rittenhouse.

The appellate court, relying on AIG’s adjudication of the claim and the various correspondence that Rittenhouse had with AIG (and not the Plan), concluded that AIG was actually the plan administrator, despite the Plan being named as the administrator. The court then held that the district court should have engaged in an abuse-of-discretion standard of review, rather than a de novo standard of review. Although the Summary Plan Description (“SPD”) did not contain a reference to the administrator’s discretion, the court ruled that the policy and the SPD jointly constitute the “plan documents” and because the policy clearly conferred upon AIG “full discretion and authority,” the abuse-of-discretion was the proper standard for reviewing AIG’s decision.

With regard to AIG’s claim that the district court erred by considering documents submitted by Rittenhouse after the denial of his appeal, the appellate court held that the district court should not have considered evidence not in the administrative record unless Rittenhouse had showed good cause for its previous omission. Because Rittenhouse failed to do so, and further because AIG had provided Rittenhouse with a full and fair review in accordance with ERISA requirements, the district court abused its discretion by considering such documents.

Finally, the appellate court held that, even in the light most favorable to Rittenhouse, the evidence did not demonstrate that AIG abused its discretion in denying Rittenhouse’s claim for long term disability benefits.

Electrostim Medical Services Inc. v. Aetna Life Insurance Co.
M.D. Florida No. 8:06-cv-14-T-24TBM Feb. 13, 2007

Electrostim Medical Services, Inc. (“EMS”), a pain management medical device supplier, provides its devices directly to patients and, upon delivery, submits claims for reimbursement directly to insurers, including Aetna Life Insurance Co. (“ Aetna”).

EMS alleged that Aetna failed to process in excess of $1,000,000.00 of its claims as required by the patients’ health plans, ERISA, and Florida law. EMS also alleged that Aetna’s conduct constituted unfair or deceptive trade practices in violation of Florida’s HMO Act (the “Act”).

Aetna moved to dismiss the latter claim, arguing that the Act does not provide a private cause of action, but rather only permits the Florida Department of Insurance to enforce the Act. The U.S. District Court for the Middle District of Florida agreed and dismissed EMS’ unfair and deceptive trade practices claims. However, the court noted that the Act’s statutory provisions can be incorporated and converted into contractual obligations, and thus a failure to adhere to the Act’s provisions may be the subject of a common law breach of contract claim, including a third-party beneficiary breach of contract claim.

Gov’t Employees Hosp. Assn., et al., v. Serono Int’l., S.A., et al.
D. Massachusetts C.A. No. 05-11935 Feb. 14, 2007
Francis v. Serono Lab., et al.
D. Massachusetts C.A. No. 06-10613 Feb. 14, 2007

On February 14, 2007, the United States District Court for the District of Massachusetts granted a joint motion approving the settlement agreement between the class action plaintiffs and Serono International, S.A., and its affiliates. The court also approved certification of the class for the purpose of settlement.

The suit alleges that Serono promoted the use of an unapproved medical device that improperly diagnosed AIDS wasting, marketed the drug Serostim for uses not approved by the FDA, and wrongfully encouraged doctors to prescribe the drug through the use of travel stipends. Under the terms of the agreement, the Serostim Purchaser Class, which by definition includes individual consumers and third-party payors (primarily health insurance plans, union benefits funds, and self-insured employers) that paid for all or part of the cost of Serostim prescribed, would receive $13.2 million. Of that amount, $2.4 million would go to the individual consumers and $10.8 million to the third-party payors. In coordination with the class action settlement, a number of health plans executed a separate settlement agreement with Serono.

In October 2005, Serono entered into a settlement agreement with the Government following an investigation into the company’s marketing practices. The settlement with the government, however, only covered reimbursements under government plans.

A fairness hearing on the class action settlement is scheduled for June 19, 2007, after which the court will decide whether to grant final approval.

Deluca v. Blue Cross Blue Shield of Michigan
E.D. Michigan No. 06-12552 Jan. 25, 2007

A beneficiary of a self-funded ERISA plan brought a putative class action against Blue Cross Blue Shield of Michigan (“BCBSMI”), alleging that the company breached its fiduciary duties to the plan by negotiating more favorable rates on behalf of the insured participants and beneficiaries of its managed care subsidiary. The beneficiary claimed that hospitals across the state allegedly accepted lower payments from the managed care subsidiary in exchange for BCBSMI’s promise to pay offsetting additional amounts from the self-funded ERISA plans administered by the company.

BCBSMI moved for dismissal, arguing that the beneficiary lacked standing under Article III of the Constitution because he had not alleged an injury-in-fact resulting from the alleged fiduciary violations. The beneficiary had enrolled in the employer-sponsored plan a week before filing suit. Moreover, he was not seeking reimbursement for the alleged “excessive” co-payments and deductibles that resulted from the alleged breach. Instead, he was seeking a constructive trust to restore the excessive reimbursements to the plan.

The court ruled that the beneficiary had standing because Section 502(a) of ERISA specifically authorizes a beneficiary to bring an action against an ERISA-fiduciary on behalf of the plan. The beneficiary did not have to allege or demonstrate an injury-in-fact because he was not seeking relief that would benefit him individually. The motion to dismiss was therefore denied.

Ambulatory Infusion Therapy Specialists, Inc., v. Aetna Life Ins. Co.
S.D. Texas No. 05-4389 Jan. 30, 2007

Ambulatory Infusion Therapy Specialists, Inc. (“AITS”) sued Aetna Life Insurance Co. (“Aetna”) alleging breach of contract, negligent misrepresentation, and promissory estoppel for nearly $14,000 in medical services that AITS provided to a plan participant. In August, 2006, the district court determined that ERISA preempted the breach of contract claim, and dismissed it.

Following dismissal of that claim, the court ordered discovery on the remaining issues. Discovery revealed that AITS’ argument against Aetna was not that it misrepresented that the participant was insured at all, but rather, that Aetna improperly denied claims. Specifically, AITS’s Vice-President agreed in her deposition that AITS’s contention was rooted in the fact that Aetna “improperly denied covered charges.”

The district court agreed with Aetna that AITS’s claims were both barred by the statutes of limitations and preempted by ERISA. As to ERISA preemption, the court noted that “AITS cannot point to any representations about [the participant’s] coverage or benefits, made before it treated [the participant], that was contradicted by or different from the defendant’s later coverage and benefit decisions. [The participant] was covered under the Plan, as represented.”

AITS presented no evidence of misrepresentation and instead simply challenged a decision that certain amounts billed were not covered by the plan terms. As that claim is derivative of the participant’s rights under the plan and would require an inquiry into the plan’s terms and plan administration, such a claim is, as a matter of law, subject to ERISA conflict preemption. The court dismissed all claims asserted against Aetna.

CorVel Corp. v. Southwest La. Hosp. Assoc. d/b/a Lake Charles Memorial Hosp.
W.D. Louisiana No. 05-1330 Feb. 21, 2007

In 2005, Southwest Louisiana Hospital Association d/b/a/ Lake Charles Memorial Hospital (“LCMH”) instituted claims for reimbursement against CorVel Corporation (“CorVel”) in the Louisiana Office of Workers’ Compensation. LCMH alleged underpayment of certain medical services. CorVel sought declaratory relief, in part, to compel arbitration of the claims under the arbitration clause of the preferred provider organization contract entered into by the parties.

The district court granted the motion to compel arbitration on November 6, 2006, ordering the parties to arbitrate “any applicable disputes now existing between them.” Shortly thereafter, CorVel filed a motion to clarify the arbitration order, arguing that the state law statutory claims asserted by LCMH fall outside the scope of the arbitration clause.

Applying Louisiana Contract law, the court noted that the arbitration provision expressly applied to “any disputes or problems that may arise under this Agreement.” The court found that the dispute at hand was whether the claims for compensation under the Any Willing Provider law “arise under” the agreement between CorVel and LCMH. The statute provides for recovery of damages from a group purchaser, like CorVel, who engages in prohibited practices under the statute. The court explained, “[t]he agreement necessarily concerns LCMH’s business relationship with a preferred provider organization (‘PPO’) and the statute at hand plainly applies to PPOs.” Accordingly, the agreement created the relationship between the parties, without which, no statutory claims would exist.

The court held that the state statutory claims were subject to the arbitration provision and denied CorVel’s motion.

Catholic Healthcare West-Bay Area v. Seafarers Health and Benefits Plan
N.D. California No. 3:06-cv-1741 Jan. 18, 2007

Catholic Healthcare West-Bay Area d/b/a St. Mary's Medical Center (the “Hospital”) treated a patient for four months and requested approximately $1,350,000 from Seafarers Health & Benefits Plan (the “Plan”) for services rendered to the patient. When the Plan reduced the bill and paid only $530,000, the Hospital sued the Plan for the full amount, alleging breach of implied contract, negligent misrepresentation, promissory estoppel, quantum meruit and “indebitatus assumpsis.”

In granting summary judgment to the Plan, the court held that the methodology the Plan used to determine the “reasonable and customary” rate for reimbursement was both reasonable and within the Plan’s discretion. Although the Hospital verified the patient’s coverage and received pre-certification for treatment, the court rejected the Hospital’s argument that pre-certification bound the Plan to pay all charges submitted because a disclaimer on the eligibility certificate specifically stated that eligibility verification was subject to additional information and not a guarantee of payment.

The court also held that the Plan’s decision was subject to the ERISA abuse of discretion standard, because the Plan’s administrator had “exclusive, and absolute authority and sole discretion to adopt, implement and interpret the plan.” Under this standard, the court held that the Plan’s review of the charges, including 1) a professional’s review of the charges and his recommendation of a “reasonable and customary” charge based on industry research and a regional comparison of the services’ value; and 2) a physician’s review of the medical records, course of treatment and his explanation why some services were not medically necessary, was not arbitrary or capricious. The court held that “the question is not ‘whose interpretation of the plan documents is most persuasive,’ but whether the … interpretation is unreasonable;” and that the Hospital failed to show that the Plan acted unreasonably or in bad faith.

Eavenson v. Selective Insurance Co. of America
S. D. Illinois No. 06-731 Feb. 12, 2007

In October, 2004, Eavenson, a chiropractor, filed a nationwide class action complaint against Selective Insurance Company (“Selective”) in Illinois State court, alleging that Selective improperly paid out-of-network providers (such as Eavenson) at in-network, i.e., discount rates, in violation of Illinois statutory and common law.

In August, 2006, Eavenson amended his complaint to further allege that Selective improperly paid discounted rates to such “preferred” providers without steering patients to the providers.

After Eavenson amended his complaint, Selective attempted to remove the case to federal court, claiming that since Eavenson’s amended complaint was filed after the effective date of the Class Action Fairness Act (“CAFA”), the CAFA provision granting class action jurisdiction to federal courts applied.

The United States District Court for the Southern District of Illinois denied Selective’s motion and remanded the case back to state court. Specifically, the court determined that Eavenson’s further allegations were not “sufficiently distinct” from the original allegations so as to be treated as a new piece of litigation, or so as to prevent Selective from mounting an appropriate defense. Accordingly, the court found that Eavenson’s amendments “related back” to the original complaint, and that CAFA did not apply.

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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