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Managed Care Lawsuit Watch - May 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:

Angel v. Boeing Co. Retiree Health and Welfare Benefit Plan
N.D. Texas No. 3:04-CV-1498-D April 11, 2006

Angel, a beneficiary of the Boeing Co. Retiree Health and Welfare Benefit Plan (the “Plan”), claimed that the Plan and its administrator violated ERISA by improperly denying benefits – specifically by refusing to fully cover certain follow-up surgery services performed as a result of a first surgery’s inability to completely address Angel’s TMJ pain. The Plan first asserted that a lifetime benefit of $3,500 applied, but through the internal appeals process resolved to pay $18,000 of the $45,000 total charges.

The court determined that the Plan appropriately interpreted the plan language as capping lifetime benefits for TMJ pain at $3,500 – not only for TMJ syndrome, but also for all medical issues related to TMJ.

Further, after reviewing the administrative record of Angel’s three intra-Plan appeals, the court determined that the Plan and its administrator did not abuse their discretion in denying such benefits, and granted summary judgment for the Plan. The court specifically found that (1) historically, uniform construction had been given to relevant plan language; (2) the interpretation was fair and consistent with the plan language; and (3) the Plan would face unanticipated costs in the future if a varying interpretation were upheld in this instance.

The district court also refused to allow Angel to submit a physician’s testimony to the court, determining that under Fifth Circuit precedent it was bound to the administrative record before it.

HealthNow New York Inc. v. APS Healthcare Bethesda, Inc.
N.D. N.Y. No. 1:05-CV-612 March 10, 2006

In May, 2002, HealthNow New York contracted with APS Healthcare Bethesda, Inc. to provide mental health and chemical dependency services to HealthNow members. Shortly thereafter, APS alleged that the data supplied by HealthNow (including the standard nature of provider fee schedules and how a finite number of commercial members would be transferred to APS) were inaccurate, and further that HealthNow misrepresented the status of this data to APS during contract negotiations. After attempts to renegotiate price terms failed, APS notified HealthNow of its intent to terminate the agreement. HealthNow sued for breach of contract, APS made counterclaims of negligent misrepresentation and fraud, and HealthNow moved to dismiss the counterclaims.

The district court determined that both of APS’ counterclaims complied with state law pleading standards, accepting as true for purposes of the motion certain evidence that, during negotiations, HealthNow could have intended to deceive APS in order to quickly find a replacement provider for mental health and chemical dependency services. Moreover, the court also noted that HealthNow had a “special relationship” with APS vis-à-vis their contract negotiations, as HealthNow had “unique expertise and [a] proprietary grip on information that it provided to APS.” Thus, APS’ counterclaims survived HealthNow’s motion to dismiss.

Arkansas Blue Cross and Blue Shield v. St. Vincent Infirmary Medical Center
E.D. Ark. No. 4:03CV00662 JLH March 27, 2006

The U.S. District Court for the Eastern District of Arkansas refused to resolve Arkansas providers’ allegations that two Arkansas commercial insurers are liable for compensatory damages for refusing to adhere to Arkansas’ “any-willing-provider” law during a period when federal courts had enjoined the law’s application.

Arkansas passed an “any-willing-provider” law in 1995, but the district court, upon motion of several insurers, previously determined it to be preempted by ERISA. Although the 8 th Circuit Court of Appeals affirmed, the Supreme Court determined that ERISA did not preempt a similar Kentucky law.

After the Supreme Court’s decision, Arkansas Blue Cross and USAble Corp. – two Arkansas insurers – filed a lawsuit against St. Vincent Infirmary Medical Center and other medical providers, seeking declaratory judgment that the 8 th Circuit’s opinion was still valid with respect to Arkansas’ law. The providers counterclaimed, including a count for compensatory damages for the period of time that the insurers had not complied with the state law, despite the federal district and appellate courts’ holdings.

The insurers argued that equity should bar a claim for damages against them for not adhering to a law that had been enjoined. However, the district court refused to decide the issue, noting that it had dismissed all claims on which it had original federal jurisdiction and would not exercise supplemental jurisdiction on a “claim for monetary damages under Arkansas law brought by Arkansans against Arkansans.” Therefore, the providers’ claims for monetary damages were dismissed without prejudice.

Notably, in 2005, the Arkansas General Assembly amended the “any-willing-provider” law so that providers could no longer seek compensatory damages for insurers’ failure to adhere to it.

Government Employees Medical Plan v. Regence Blue Shield of Idaho, Inc.
D. Idaho No. CV-04-284-E-BLW March 31, 2006

The U.S. District Court for the District of Idaho dismissed the antitrust claims of the Government Employees Medical Plan (“GemPlan”) and Mutual Insurance Associates (“MIA”) against Regence Blue Shield of Idaho (“BS”) and Blue Cross of Idaho (“BC”).

After double-digit health insurance premium increases in the first half of the 1990’s, and at the request of the Idaho Association of Counties, GemPlan was established as a cooperative, self-funded health plan in 1996. MIA served as GemPlan’s general manager and also the independent agent of both BC and BS.

By 2001, GemPlan did business with each Idaho county government. However, in early 2004, BC allegedly informed MIA that BC would terminate BC’s contract with MIA as long as MIA worked for GemPlan. Two days later, BS also terminated its contract with MIA. Shortly thereafter, GemPlan and MIA filed suit, claiming that BC and BS conspired to drive GemPlan from the market in violation of the Sherman Act.

The district court first dismissed GemPlan’s price-fixing claims, stating that BC and BS actions’ vis-à-vis its competitor were exempt from federal antitrust liability under the McCarran Ferguson Act.

The court then dismissed MIA’s antitrust claims, noting that BC and BS acted within their self-interest by terminating their contracts with MIA, as MIA had previously disparaged BC and BS in order to steer business to GemPlan. The court also said that no evidence of collusion existed, and that collusion could not be inferred merely from BC and BS’ contemporaneous terminations of their agreements with MIA.

Tisl v. Slick
N.D. Iowa No. C 04-174-EJM March 30, 2006

Tisl was involved in an accidental shooting, and his health plan, the Wal-Mart Stores Inc. Associates Health and Welfare Plan (the “Plan”), reimbursed $410,000 of medical services rendered. Tisl then sought damages in state court from the alleged tortfeasor, Slick. In settlement of these claims, Slick’s insurance company, Grinnell Mutual, agreed to pay to Tisl the policy limit of $300,000 for injuries sustained. The state court noticed a hearing to apportion the settlement funds and to determine the Plan’s subrogation rights.

The Plan removed the case to federal court, seeking recovery from Tisl, Slick and Grinnell on the basis of constructive trust and from Tisl, separately, on the basis of breach of fiduciary duty.

The district court refused to recognize Tisl – a plan beneficiary – as a fiduciary under ERISA and further refused to recognize the settlement funds as Plan assets. Therefore, the Plan’s claim for breach of fiduciary duty was dismissed. However, the district court determined that Tisl would be unjustly enriched should he keep the $300,000 from Grinnell, therefore imposed a constructive trust for the Plan’s benefit, and ordered Grinnell to pay the $300,000 settlement to the Plan.

Premera v. Kreidler
Wash Ct. App. No. 32377-0-II April 4, 2006

Affording a high level of deference to the Washington State Insurance Commissioner, a Washington State appellate court upheld the Commissioner’s determination that a proposed reorganization and conversion of Premera Blue Cross to a for-profit company would be, as a whole, unfair and unreasonable to subscribers, against the public interest and likely to be hazardous or prejudicial to the insurance-buying public.

In so doing, the court also determined that the Commissioner properly interpreted the Health Carrier Holding Company Act, properly applied the Insurer Holding Company Act, properly applied a fair market value test to the proposed conversion, and sufficiently considered Premera’s claims that its proposed access to equity capital would help consumers.

Alaska’s Insurance Commissioner had also previously rejected Premera’s proposed conversion.

Heffner v. Blue Cross and Blue Shield of Alabama, Inc.
11th Circuit Court of Appeals No. 04-15477 March 29, 2006

In 2000, Heffner – a health plan participant – filed a class action suit against Blue Cross and Blue Shield of Alabama, Inc. (“BCBS-AL”), alleging that BCBS-AL violated ERISA by imposing calendar year deductibles on certain health plan participants’ prescription drug purchases when the applicable summary plan descriptions (“SPDs”) of BCBS-AL’s plans indicated that no such deductibles would apply.

In 2004, the U.S. District Court for the Middle District of Alabama determined that BCBS-AL had uniformly applied calendar year deductibles to PPO plans, despite SPD language stating that no such deductibles would apply, and certified the class action lawsuit.

The 11 th Circuit Court of Appeals reversed, indicating that for the ERISA claim to stand, the court would need to inquire into whether each of the 240,000 class participants had relied upon the SPD language. Because “a beneficiary must prove reliance on the [SPD],” class certification was improper.

The appellate court also noted BCBS-AL’s evidence that the erroneous SPD language was inadvertently included in approximately 1,400 plans, that SPDs are “not the sum total of an ERISA plan,” and that the SPDs instructed health plan participants to refer to the plan itself (which did not include the erroneous language) for complete information.

The appellate court therefore vacated the lower court’s certification order and remanded the case for further proceedings.

Moffat v. UniCare Midwest Plan Group 31451
N.D. Ill. No. 04 C 5685 April 5, 2006

Moffat, who had sued her employer-sponsored health plan, UniCare Midwest Plan Group 31451, and other UniCare entities for allegedly denying coverage of infusion therapy in violation of ERISA, unsuccessfully moved for class certification on behalf of participants in 248 UniCare plans.

The U.S. District Court for the Northern District of Illinois determined that class certification was inappropriate because UniCare plans treated infusion therapy benefits differently, i.e., whether the treatment was delivered on an outpatient or inpatient basis, the date of service, and/or the plan at issue. Moreover, while Moffat had described how her plan had allegedly breached the terms of her plan’s provisions, she failed to allege how other UniCare plans similarly breached the terms of their provisions.

The district court also refused to grant Moffat’s request for class certification of participants in non-ERISA plans, indicating that Moffat’s ERISA claims were not similar to the state law claims contemplated by non-ERISA plan participants.

Moffat is entitled to proceed against her plan as an individual.

Zavala v. Trans-System, Inc.
D. Ore. No. 05-6308-AA April 4, 2006

In 2001, Murrison was diagnosed with non-Hodgkin’s lymphoma and, in 2003, filed a claim with his employer, Trans-System, Inc. (“TSI”), for payment under TSI’s self-funded health plan for a stem cell transplant. The plan’s administrator initially denied coverage for the transplant, relying on a provision requiring a second opinion, but subsequently authorized coverage upon receipt of the second opinion. However, the administrator once again denied coverage when the plan’s reinsurer requested an investigation into Murrison’s need for the transplant.

Having not received the transplant, Murrison died. His estate sued TSI for violation of ERISA and various state law claims, and also sued the plan administrator for various state law claims. The District Court for the District of Oregon determined that ERISA preempted all the state law claims, as each arose directly from the denial of Murrison’s request for benefits.

The estate argued that ERISA should not apply to its claims against the plan administrator as, inter alia, the administrator could not be an ERISA fiduciary as its duties were merely ministerial. However, the court stated that, regardless of the nature of the administrator’s duties, the state law claims were preempted as they were each “premised on the existence of the Plan.”

The district court also dismissed the estate’s ERISA claim, relying on Supreme Court precedent in determining that the form of relief requested (monetary compensation in lieu of benefits denied) is unavailable to ERISA plaintiffs.

Mulder v. PCS Health Systems Inc.
D.N.J. No. 98-1003 (WGB) (unpublished) April 18, 2006

The U.S. District Court for the District of New Jersey held that PCS Health Systems, Inc., the pharmacy benefit manager for Oxford Health Plans, Inc., did not breach any fiduciary duties under ERISA by negotiating rebates and discounts with drug manufacturers yet failing to pass them on to plan participants.

Mulder brought a class action lawsuit against PCS when PCS allegedly switched Mulder’s cholesterol-reducing prescription drug to a more expensive drug. Mulder alleged that PCS was an ERISA plan fiduciary because it 1) influenced drug selection for the formulary; 2) developed software to adjudicate claims; 3) negotiated rebates and refunds with drug manufacturers; 4) created pharmacy networks; and 5) monitored providers’ prescription practices. Mulder alleged that PCS violated its fiduciary duties by 1) influencing the formularies so that they would contain drugs most profitable for PCS; 2) persuading pharmacists and physicians to prescribe drugs most profitable for PCS; and 3) not passing back the discounts and rebates it negotiated with drug manufacturers.

The district court, however, applied Supreme Court precedent to determine that PCS was not an ERISA fiduciary in the first instance, as it did not have sufficient decision-making authority in any of the activities it engaged in. The court specifically stated that Mulder failed “to show how PCS had actual control or authority over the Oxford plan or plan assets.”

Wallis v. Leavitt
D. Ariz. CV 02-448 TUC DCB March 21, 2006

In January, 2004, the U.S. District Court for the District of Arizona determined that Wallis’ Medicare + Choice plan (now a Medicare Advantage plan) had improperly refused to retroactively apply coverage criteria for angina treatment. DHHS filed a motion for clarification, which was ruled upon in favor of Wallis. DHHS appealed to the Ninth Circuit Court of Appeals, but subsequently and voluntarily dismissed the appeal. DHHS then sent the judgment to a private contractor for implementation, which delayed in sending payment. Ultimately, nearly two years after the initial judgment, Wallis had still not been reimbursed for the angina treatment, and thus filed a Motion to Enforce the Judgment. The private contractor immediately reimbursed Wallis for the treatment, but Wallis maintained his suit against DHHS for attorneys’ fees and interest.

DHHS argued that it should not be liable for attorneys’ fees and interest related to an obligation that its private contractor had been responsible for and had indeed already paid. However, the court granted attorneys’ fees to Wallis, stating that DHHS’ “failure to route [Wallis’] claim through its bureaucratic maze resulted in his incurring further expenses to file the enforcement motion to secure the reimbursement of the $7,500 he expended in 1997 and 1998, which he was entitled to as of July 20, 2005.” The court did not grant interest.

Brighton Optical, Inc. v. Vision Service Plan
E.D. Mich. No. 03-74974 March 16, 2006

The U.S. District Court for the Eastern District of Michigan granted part of Vision Service Plan’s (“VSP’s”) motion for summary judgment, dismissing several ophthalmologists’ federal and state antitrust claims.

Certain Michigan, Massachusetts and Florida ophthalmologists affiliated with the Pearle Vision, Inc. and D.O.C. Optics franchises had participated – as franchisors – in VSP’s provider network for over ten years. However, in 2005, VSP notified the ophthalmologists of its intent to terminate their participation agreements, on the basis that the franchise affiliations meant that the providers did not retain complete control over their practices and dispensaries.

In addition to state law claims against VSP, the ophthalmologists alleged that such conduct was tantamount to monopolization and attempted monopolization in violation of the Sherman Act and the three states’ companion antitrust acts. The district court, however, dismissed all antitrust claims because 1) the ophthalmologists failed to present any evidence of antitrust injury, i.e., harm to competition; and 2) the ophthalmologists failed to demonstrate a relevant service market. The ophthalmologists had asserted that VSP’s provider network constituted the relevant service market. However, the court stated that a “single healthcare plan, like a single manufacturer, cannot be deemed to have monopolized its own services.”

The ophthalmologists’ state law claims survived VPS’ motion for summary judgment.

Aurora Health Care, Inc. v. Wisconsin Physicians Insurance Service Corp.
Milwaukee Cty. Circuit Court, Branch 2 No. 05-CV-11279
Summons and Complaint
WPS - Answer, Affirmative Defenses & Counterclaims

In December, 2005, Aurora Healthcare, Inc., a large Milwaukee-based PHO, filed suit against Wisconsin Physicians Insurance Service Insurance, Inc. (“WPS”), a Milwaukee-based health insurer. Pursuant to a 2001 agreement, WPS had agreed to include Aurora in “all WPS plans.” According to Aurora, WPS breached the agreement by offering insurance products in the Milwaukee area without including Aurora as a preferred provider.

In response, WPS claimed that the agreement applies only to PPO products and not to HMO products, and further that WPS is not obligated to include Aurora as a preferred provider in plans utilizing rental or leased networks, i.e., networks that WPS does not control.

WPS also counterclaimed that Aurora violated Wisconsin’s antitrust laws by requiring WPS and other insurers to include Aurora as a preferred provider in products marketed in markets where Aurora has no market power, lest Aurora refuse to participate in products marketed in markets where Aurora does have market power, thus making insurance products untenable in such markets. WPS alleged that such “growth has been part of a longstanding, deliberate and intentional plan to dominate the provision of health care in Eastern Wisconsin so that it can control price and exclude rivals,” and further that “Aurora consistently exercises its leverage to extract high prices from health insurance companies….”

More specifically, WPS alleged that such conduct is both an unreasonable restraint of trade and an attempted monopolization of the Eastern Wisconsin market for health care services rendered to insurers serving small employer and group health plans. WPS also alleged that such conduct is tantamount to an illegal tying arrangement, in that Aurora leverages its alleged market power in the Eastern Wisconsin market to gain market power in other, smaller markets, such as Appleton and Green Bay, Wisconsin.

Notably, WPS cited a 2004 GAO report indicating that Milwaukee-area residents pay 56% more than the national adjusted average for hospital inpatient services and 22% more for physician services.

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.

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