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Managed Care Lawsuit Watch - March 2010


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.

Please click to view the full Crowell & Moring Managed Care Lawsuit Watch archive.

Cases in this issue:


In Re Higgins
No. 051-0252, Feb. 5, 2010 (F.T.C. consent decree)

The Federal Trade Commission settled charges that Catherine Higgins, executive director of a Colorado physicians' association, circumvented a previous FTC order by negotiating on behalf of the group in her individual capacity rather than as a director.

In 2008, the Boulder Valley Individual Practice Association (BVIPA), a group of about 365 competing physicians, entered a consent decree prohibiting it from engaging in collective fee negotiations with insurers. Physicians joining BVIPA had been required to sign agreements authorizing it to contract on their behalf with payers. Although Higgins had told insurers that she would pass on their offers, she did not transmit offers she thought were insufficient. Higgins also allegedly threatened to terminate contracts with payers who refused to negotiate with her and told physicians not to negotiate directly with payers.

Although the 2008 complaint prohibited collective negotiations by BVIPA or its employees, the complaint alleges that Higgins improperly told insurers she was permitted to continue negotiating on behalf of the group in her personal capacity because she was not individually named in the previous consent order. The consent order now names Higgins individually which, according to the FTC, is necessary to "prevent her from orchestrating or implementing price-fixing agreements among the group's competing physicians."

Sierra Military Health Services, LLC
January 25, 2010

Sierra Military Health Services, LLC ("Sierra") recently agreed to pay $2.2 million to settle false claims allegations. Sierra contracted with TRICARE Management Activity ("TMA") to provide various administrative and claims services for TRICARE beneficiaries. Sierra then subcontracted with Post Acute Care LLC ("PAC") to supply some of the services.

Under Sierra's contract with TMA, Sierra received an administrative fee for certain costs it incurred, including payments to subcontractors. However, the government alleges, instead of paying PAC from this administrative fee, Sierra entered into an agreement with PAC under which PAC added its fees to claims it submitted to TMA. According to the U.S. Attorney, "the alleged scheme resulted in double payment by TRICARE…TRICARE paid for administrative costs under the contract, and then paid again when the costs were disguised as claims."

Nieto v. Blue Shield of California Life & Health Ins. Co.
No. B214669 (Cal. Ct. App. Jan. 19, 2010)

A California appeals court affirmed a lower court and held that Blue Shield of California Life & Health Insurance Co. was entitled to rescission as a matter of law.

The appellant-policyholder in this case failed to disclose information about her medical condition and treatment on a health insurance application she submitted to Blue Shield. After Blue Shield discovered the omission, it rescinded her insurance policy. The appellant then filed an action against Blue Shield, alleging common law and statutory claims.

The court of appeals first held that the undisputed evidence established that Blue Shield was entitled to rescind the policy due to appellant's material misrepresentations and omissions. Governing law permits an insurer to rescind a policy when the insured misrepresented or concealed material information in connection with obtaining insurance. The court noted that Insurance Code sections 331 and 359 permit rescission of an insurance policy based on an insured's negligent or inadvertent failure to disclose a material fact in the application for insurance.

Second, the court held that Insurance Code Sections 10113 and 10381.5 did not bar rescission. Specifically, whether Blue Shield in fact attached or endorsed the application did not impact its ability to rescind where the only reasonable inference was that appellant's misrepresentations were the result of both fraud and deceit on her part. The court refused to adopt the blanket conclusion that material misrepresentations and omissions in an application which is not physically attached to a policy may not be relied upon by the insurer to rescind the policy.

Third, the court held that Insurance Code Section 10384 did not bar rescission. In this instance, Blue Shield made specific inquiries about previous medical history to confirm appellant disclosed all pertinent information. Thus, there was no triable issue of fact as to whether Blue Shield engaged in post-claims underwriting in violation of section 10384, because appellant offered no evidence that Blue Shield's rescission was "due to" its failure to complete the medical underwriting process and resolve all reasonable questions arising from written information submitted.

Finally, the court held that appellant did not raise a triable issue of fact concerning bad faith or punitive damages.

Nationwide Children's Hospital, Inc. v. D.W. Dickey & Son, Inc. Employee Health and Welfare Plan
No. 2:08-cv-1140 (S.D. Ohio Jan. 15, 2010)

The United States District Court for the Southern District of Ohio allowed a counterclaim for denial of benefits to proceed and dismissed remaining counterclaims against a health plan and plan administrator, alleging various violations under ERISA.

The beneficiary (Doe) filed various counterclaims against the health plan and plan administrator asserting claims under ERISA, including wrongful denial of benefits, breach of fiduciary duty, and failure to provide requested information relating to the treatment of Doe's bone cancer. Doe argued that the treatment - standard chemotherapy plus two additional drugs - was covered under the policy. The health plan and plan administrator argued that the treatment was experimental or investigational and therefore was excluded under the policy. The court allowed the claim to proceed, ruling that the question was one of fact that could only be determined by reviewing the 5,670 page administrative record.

The court dismissed the claims for breach of fiduciary duty pursuant to section 1132(a)(3), noting that remedies against a fiduciary were barred where Doe already had an adequate remedy under the plan. The court further dismissed the remaining claims for failure to provide information, finding that Doe did not make his request for information to the plan administrator, as required under ERISA.

McHenry v. PacificSource Health Plans, et al.
No. CV-08-562 D.Ore. January 5, 2010

A federal judge granted summary judgment to PacificSource Health Plans ("PacificSource"), ruling that PacificSource properly denied coverage for Applied Behavioral Analysis ("ABA") therapy because the provider of the treatment was not an eligible provider.

Plaintiff, the mother of a child with autism and a member of a health plan insured by PacificSource, sued PacificSource after PacificSource denied payment for her son's ABA therapy. The ABA therapy was provided by a board certified behavior analyst ("BCBA").

To be covered under Plaintiff's health plan, Plaintiff and PacificSource agreed that the ABA therapy must meet three criteria: (1) medically necessary, (2) covered benefit and (3) provided by an eligible provider. Both parties agreed that the ABA therapy was medically necessary. However, PacificSource argued that ABA therapy was not a covered benefit and that it had not been provided by an eligible provider. According to PacificSource, ABA therapy is excluded from coverage because it is either an experimental or investigational procedure, educational service or academic and social skills training. The Court disagreed with PacificSource concluding that (1) the evidence demonstrated that ABA therapy is supported by decades of research and application, is well-established as a treatment of autism, and is therefore not experimental or investigational, (2) based on the language of the educational service exclusion, this exclusion applied only if the ABA therapy was provided in a school or halfway house and because Plaintiff's son did not receive the therapy in such an institution the exclusion was inapplicable and (3) the evidence demonstrated that ABA therapy is not primarily academic or social skills training but is instead behavioral training.

Although the Court rejected all PacificSource's arguments that the ABA therapy was not a covered benefit, the Court nevertheless ruled in PacificSource's favor because it concluded that the ABA therapy had not been provided by an eligible provider. Based on the plan documents, the Court concluded that a provider is an "eligible provider" if either (1) the provider meets PacificSource's credentialing requirement or PacificSource does not require the provider to be credentialed and (2) the provider is authorized to be reimbursed under Oregon law. Upon analyzing the language in the plan documents, the provider manual and the credentialing manual, the Court ruled that the ABA therapy provider was not required to be credentialed by PacificSource. However, the Court held that the ABA therapy provider was not authorized to be reimbursed under Oregon law because she did not meet any of Oregon law's standards for reimbursement. As a result, the Court denied Plaintiff's motion to dismiss and granted PacificSource's cross motion.

Speegle v. Harris Methodist Health System & Harris Methodist Fort Worth
No. 2-08-228-CV (Tex. App. Dec. 17, 2009)

In 2001, Appellant Larry Speegle sustained injuries from an automobile accident with another vehicle and subsequently received treatment at Harris Methodist Hospital. The cost of Speegle's treatment at Harris Methodist totaled $142, 915.01. On June 29, 2001, Harris Methodist filed a notice of hospital lien for the entire cost of its services. Though Speegle was a Medicare beneficiary, Harris Methodist did not bill or receive payment from Medicare for his treatment. Several years later, Appellant entered into a Compromise Settlement Agreement and Release with the other party involved in the accident. The Agreement provided for the payment of Harris Methodist's lien in full. However, Speegle did not pay the Hospital the amount of the lien and instead sought a declaration that Harris Methodist's lien was invalid under Texas law because Harris Methodist did not bill Medicare for Speegle's treatment.

The Court found that Medicare's secondary payer provisions "expressly prohibit" Medicare from paying a claim "if a liability carrier has already paid or is reasonably expected to pay promptly." The associated regulations define "promptly" as within 120 days. Additionally, the Court found that "after the 120-day 'promptly' period ends, whenever services provided to a Medicare beneficiary are also covered by a liability insurance policy, providers can choose either to bill Medicare or to maintain a lien. Therefore, the Court held that Harris Methodist's lien was valid and it could thus recover the lien amount from Speegle.

The applicable Texas Statute, contrary to Federal law, does require medical care providers to bill Medicare for services received by Medicare eligible patients when providers are permitted. But the Court ruled that the Texas Statute was preempted by the Medicare secondary payer provisions.

Nationwide Children's Hospital Inc. v. D.W. Dickey & Son, Inc. Employee Health and Welfare Plan
No. 2:08-cv-1140 (S.D. Ohio Jan. 27, 2010)

A self-insured health plan participant's minor son, who was a beneficiary under the plan, underwent treatment for an aggressive form of bone cancer known as Ewing's Sarcoma. As part of the treatment, he was enrolled in a Children's Oncology Group (COG) study that treated him with chemotherapy and the drugs vinblastine and celecoxib. Most of the claims submitted for the son's treatment were approved until the plan, the third party administrator (TPA) of the plan, and United Re AG, the reinsurer of the plan, "became aware" that the son was enrolled in a COG study.

After learning of the son's participation in the COG study, United denied payment for the son's previous and future claims. The TPA informed the participant that the plan would not release any more funds for the son's treatment, and the TPA sought reimbursement from the providers. Several administrative appeals were requested in response to the denial of benefits, and the matter was referred to several third party reviewers. These outside reviews found that, at the very least, the study's treatment plan of chemotherapy was consistent with the prevailing standard of care and was not "experimental or investigational."

In response to the denial of benefits, the participant and the health care providers, as assignees of the participant's rights under the plan, sued the plan, the TPA, and United, seeking benefits under ERISA Section 502(a)(1)(B). The participant also filed a claim alleging that the plan, through the TPA, wrongly denied over $684,623 in valid medical claims.

Despite the TPA's assertion that only the ERISA plan itself could be the proper party defendant in a wrongful denial of benefits claim, the Court found that in the Sixth Circuit, the proper party defendant in such an action is the party that is "shown to control administration of the plan."

Smith v. Florida Healthy Kids Corp.
No. 4D08-2490 (Fla. Dist. Ct. App. Jan. 13, 2010)

The plaintiff sued Clarendon National Insurance Company for failing to pay benefits under a policy issued pursuant to the Florida Healthy Kids Corporation Act. Smith had been shot by a local police officer and incurred medical expenses. Clarendon denied payment on the basis of a policy clause excluding coverage for injuries sustained during the commission of felonies. Clarendon additionally disputed the amounts claimed by Smith because Smith had already collected money from the police department to cover his outstanding medical bills. The jury concluded that Clarendon breached the contract, but refused to award Smith any damages. Smith appealed, claiming this result was a "compromise verdict" in which the jury agreed to a middle ground rather than coming to a unanimous decision, thus requiring a new trial.

The court rejected Smith's appeal, explaining that there was no evidence the jury surrendered "conscientiously held opposing convictions" to reach a verdict not approved by the entire panel. Further, a key characteristic of a compromise verdict is a "clearly inadequate" damages award, something not present in this case. The court explained that a reasonable jury could have determined that Smith suffered "zero damages" even though Clarendon breached the contract because Smith did not pay any medical bills. Because the jury did not find two facts mutually exclusive of each other, the verdict was not inconsistent or the product of an improper "compromise."


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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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