Managed Care Lawsuit Watch - May 2011

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:

• Lieberman v. United Healthcare Insurance Co.
• Kitterman. v. Coventry Health Care of Iowa, Inc.
• Wrenn v. Principal Life Insurance Co.
• Florida v. United States Dep't of Health & Human Servs., et al.
• Coventry Health Care, Inc. v. Caremark, Inc.
• United States v. United Regional Health Care System
• Settlement Agreement between BlueCross and BlueShield of Illinois, Health Care Service Corporation, the United States, and State of Illinois
• Hornady Transportation, et al. v. McLeod Health Services Inc., et al.
• Sportscare of America, P.C. v. Multiplan, Inc.
• Daniel F. v. Blue Shield of California
• North Cypress Medical Center Operating Co. v. CIGNA Healthcare
• Kenseth v. Dean Health Plan, Inc.
• MCG Health, Inc. v. Owners Insurance

Lieberman v. United Healthcare Insurance Co. No. 9:09-cv-81050-KAM (11th Cir. Feb. 4, 2011)

Plaintiff, an individual receiving health insurance from United Healthcare Insurance Company through her employer's group health insurance plan, brought a claim challenging the method United used to calculate a non-network benefit. Specifically, Plaintiff's daughter received treatment billed at $10,000 from a non-participating physician, and United reimbursed Plaintiff for $236.84 of the cost of the procedure.

While Plaintiff's plan covers services provided by an out-of-network provider, the Certificate of Coverage provides that United has the discretion to choose from among four specified reimbursement calculation methodologies. Plaintiff contended that United had "improperly and arbitrarily" chosen the methodology that minimized United's financial responsibility.

Ultimately, the Appeals Court dismissed Plaintiff's complaint with prejudice finding that "United had no obligation to select an alternative reimbursement methodology that would have yielded a higher reimbursement to [Plaintiff]."

Kitterman. v. Coventry Health Care of Iowa, Inc. No. 10-1781 (8th Cir. Feb. 16, 2011)

Diane Kitterman, insured by Coventry, contacted a customer-service representative at Coventry to discuss her plan's coverage for treatment of her ovarian cancer at the Mayo Clinic. The representative informed Kitterman that because Mayo Clinic was a non-participating provider, coverage would be limited to out-of-network benefits, as set forth in the plan's schedule of benefits. The chart on the schedule indicated that the annual "out-of-pocket maximum" for an individual was $8,000 for a non-participating provider.

Kitterman only read the first two of the three-page schedule of benefits and determined that she would only owe $8,000 for the treatment at the Mayo Clinic. However, the third page specified that "[c]opayments and Charges that exceed our Out-of-Network Rate for Non-Participating Providers do not apply to your Out-of-Pocket Maximum." The definition of "Out-of-Network Rate" included the statement that the individual would be responsible for charges that exceed Coventry's out-of-network rate for non-participating providers and that it could result in the individual having to pay a significant portion of the provider's charge. As a result, Kitterman had to pay significantly more than $8,000 and she sued Coventry.

The District Court ruled in Kitterman's favor, concluding that a reasonable plan participant would give the term "out-of-pocket maximum" a "common and ordinary meaning" and therefore not expect to pay more than the maximum. The District Court also held that the plan language intending to exclude the out-of-network charges above the out-of-network rate from the out-of-pocket maximum was ambiguous and as a result a reasonable plan participant would not have known that he/she would have to pay an amount above the out-of-pocket maximum.

The 8th Circuit vacated the District Court's decision, concluding that the plan documents make it clear that charges exceeding the out-of-pocket network rate for non-participating providers do not apply to the out-of-pocket maximum. The court noted that "when interpreting the terms of the plan, we cannot ignore the provisions or rewrite the plan documents to conform with what Kitterman actually read." Consequently, the Court concluded that a reasonable plan participant would give term "out-of-pocket maximum" the meaning attributed to it by Coventry.

Wrenn v. Principal Life Insurance Co. No. 09-3658 (8th Cir. Mar. 2, 2011)

A 15-year-old girl ("S.W.") covered under her father's ERISA plan was admitted to the emergency room of Children's Hospital in Omaha for severe malnutrition and stayed there for 40 days stretching from 2006-2007. The plan contained a coverage limitation of 10 days for mental health treatment and a provision stating that in the event a member was treated for more than one condition, benefits would be paid based on the "primary focus" of the treatment.

Although S.W. admittedly suffered from an eating disorder and attended an outpatient treatment program for that issue after being discharged, the hospital records indicated that improving S.W.'s physical condition was the major focus of her hospital stay. Principal – which acted as both the plan insurer and the administrator – concluded that the "primary focus" of S.W.'s hospitalization was for mental health treatment. Accordingly, Principal only paid benefits for 10 days of S.W.'s hospitalization in 2006 and 10 days in 2007, and denied the rest of the claim.

After Principal denied the plaintiff's internal appeals, the plaintiff brought suit in the Northern District of Iowa. Principal then performed a supplemental review and, although the reviewing psychiatrist concluded that S.W.'s hospitalization was medically necessary for the first 21 days, Principal again denied the plaintiff's claim. The District Court reviewed Principal's decision for abuse of discretion and, despite taking into consideration Principal's conflict of interest as both insurer and plan administrator, nevertheless granted summary judgment in favor of Principal.

On appeal, the Eight Circuit reversed, holding that Principal's denial was unreasonable even under the more deferential abuse-of-discretion standard. The court acknowledged that there was "certainly evidence that mental health treatment was one focus of S.W.'s hospitalization," but concluded that there was "insufficient evidence to support the determination that S.W.'s mental health was the primary focus of the hospitalization." To the contrary, the court determined that the record indicated that S.W.'s malnutrition was the reason for her admission to the hospital, that her treating physician's subjective focus was on S.W.'s physical health, and that the criteria for discharging S.W. were tied to her physical health.

Although S.W. did receive some mental health treatment while admitted to the hospital, the court explained that the record lacked any evidence that hospitalization was necessary to the mental health treatment and lacked evidence indicating S.W.'s discharge from the hospital was connected to, or dependent upon, progress made in the treatment of her mental health. Accordingly, the court held that Principal had abused its discretion in asserting that the "primary focus" of S.W.'s hospitalization was mental health treatment and remanded with instructions to enter judgment in favor of the plaintiff.

Florida v. United States Dep't of Health & Human Servs., et al. Case No.: 3:10-cv-91-RV/EMT (N.D. Fla. March 3, 2011)

On March 3, 2011, Federal District Judge Vinson issued an order that will stay his prior ruling that the individual coverage mandate of PPACA is unconstitutional and that the entire law is therefore invalid, in response to a motion for clarification by the federal government. The judge conditioned the stay upon the government filing an appeal of his declaratory judgment ruling within seven days of his March 3 order and seeking an expedited appellate review, either in the Court of Appeals or in the Supreme Court.

Coventry Health Care, Inc. v. Caremark, Inc. No. 3:09-cv-1009 (M.D. Tenn. Mar. 7, 2011)

Coventry Health Care Inc. entered into an agreement in which Caremark Inc. provided claims processing services for Coventry's prescription drug plans. The agreement required Caremark to administer prescription claims of Coventry members submitted by Department of Defense (DoD) pharmacies. Coventry contended that Caremark had been wrongfully paying claims submitted for prescriptions filled by out-of-network pharmacies, seeking reimbursement for up to $1 million in uncovered claims. Coventry sued for breach of contract and sought a declaratory judgment that Caremark improperly paid out-of-network DoD claims. Caremark removed the case to federal court in Tennessee, countersued, and moved for summary judgment.

In the court's March 7, 2011 decision, Caremark was granted summary judgment as to the declaratory judgment as Coventry conceded that the claim was mooted after the parties' terminated their contractual relationship.

However, judgment was denied as to the remaining breach of contract and waiver claims because a question of fact remained as to which party under the agreement was responsible for identifying and applying a limited regulatory exception that permits denial of out-of-network DoD pharmacy claims submitted for participants covered by an HMO health plan. It was also unclear which party was responsible for submitting paperwork to authorize the application of the exception to the DoD claims.

United States v. United Regional Health Care System Civ. No. 7:11-cv-00030 (N.D. Tex. Feb. 25, 2011)

On February 25, 2011, United Regional Health Care System of Wichita Falls, Texas ("United Regional") stipulated to a consent decree proposed to the U.S. District Court for the Northern District by the U.S. Department of Justice and the Texas Attorney General ("plaintiffs"). The consent decree's terms include proscriptions, permissions, and requirements, all designed to purge anticompetitive aspects from United Regional's past and future contracts with commercial health care payer organizations in the Wichita Falls market for inpatient hospital services and outpatient surgical services. The legal basis for the plaintiffs' complaint is § 2 of the Sherman Antitrust Act, which prohibits the maintenance of monopolistic market power to anticompetitive effect.

To support their § 2 claim, plaintiffs had to show that United Regional's role and behavior in the relevant product markets satisfied several elements: 1) the defendant must have monopoly power in a given product market, 2) it must willfully maintain and exploit that monopoly power, 3) thereby creating anticompetitive effects, and it must do so in a way that cannot reasonably be characterized as procompetitive. The plaintiffs' complaint focuses on United Regional's role in two product markets, general acute-care inpatient hospital services and outpatient surgical services sold to commercial health insurers, within a geographic scope "no larger than the Wichita Falls Metropolitan Statistical Area (MSA)," which is comprised of Archer, Clay and Wichita counties. The complaint explains that the services offered in these product markets have no substitutes from other product markets, and that competition from providers outside the Wichita Falls MSA could not prevent providers of inpatient hospital services or outpatient surgical services in the MSA from charging supracompetitive prices.

United Regional denied any wrongdoing alleged by the complaint described above, but also agreed to marked revisions in its contracts with commercial health care payers when it stipulated the terms of a consent decree proposed to the U.S. District Court for the Northern District of Texas. The decree prohibits United Regional from entering into, adopting, maintaining, or enforcing any contractual term that conditions price discounts on exclusive dealing. It permits United Regional to offer discounts to payers only to the extent that those discounts reflect efficiencies in United Regional's cost structure. It requires United Regional to extend the full discount on billed charges to all commercial payers in the region, regardless of whether they contract with United Regional exclusively. Finally, it also requires United Regional to appoint an Antitrust Compliance Officer, to make that Officer responsible for implementing compliance with the decree's terms, and to report periodically to the Department of Justice and the State of Texas on the status of its contractual relationships with commercial payers.

Settlement Agreement between BlueCross and BlueShield of Illinois, Health Care Service Corporation, the United States, and State of Illinois (N.D. Ill. Feb. 24, 2011)

BlueCross and BlueShield of Illinois, and its parent company Health Care Service Corporation (collectively, "BCBS"), have agreed to pay $25 million to federal and Illinois state authorities to settle civil claims that they denied private skilled nursing benefits owed to beneficiaries under plan language, fraudulently shifting the costs of care to the Medicaid Home and Community Based Services ("HCBS") waiver program, and to individual beneficiaries.

The settlement agreement, governed under federal law in the Northern District of Illinois, resolves both federal and state allegations involving BCBS denials of private skilled duty nursing coverage for "medically fragile, technology dependent" children ultimately referred to the Medicaid HCBS program. According to the allegations, BCBS had engaged in a practice of fraudulently deeming coverage claims as "custodial, maintenance, and/or respite care" so as to shift the cost burden to HCBS. The State of Illinois specifically claimed that from January 1, 2000 through March 16, 2010 BCBS denied coverage on the basis of internal home healthcare guidelines "more restrictive than the benefit plan language provided to beneficiaries," improperly influenced the appeals and external review processes, knowingly referred beneficiaries to Medicaid, caused the state to present fraudulent claims for federal Medicaid matching funds, and insisted on the unavailability of private duty skilled nursing benefits to beneficiaries already referred to Medicaid.

Under the agreement, BCBS will pay a sum totaling approximately $25 million to state and federal authorities. It will pay $9.5 million to the federal government and $15.5 million to the State of Illinois ($14.25 million to the Illinois Attorney General, and another $1.25 million allocation for "Illinois consumers").

The terms of settlement release BCBS from (1) related federal claims under the False Claims Act, Civil Monetary Penalties Law, Program Fraud Civil Remedies Act, or certain common law theories and (2) related state claims under the Illinois False Claims Act, the Illinois Consumer Fraud and Deceptive Business Practices Act, or certain common law theories.

The settlement agreement, governed by the Northern District of Illinois, contains no admission of wrongdoing or liability. Though BCBS is released from civil and administrative monetary claims relating to the accusations covered under the settlement agreement, the United States and the State of Illinois reserve the right to institute other proceedings, including exclusion from federal health care programs, actions for individual liability, and actions for criminal liability.

Hornady Transportation, et al. v. McLeod Health Services Inc., et al. No. 3:10-cv-02461 (D.S.C. Feb. 24, 2011)

McLeod Health Services Inc. provided medical benefits to a participant under Hornady Transportation's self-funded health benefits plan, for which Hornady has entered into an administrative services agreement with Blue Cross and Blue Shield of Alabama ("BCBS"). Hornady contends that the claims were paid to McLeod at a higher rate than allowed under the preferred provider agreement between McLeod and BCBS. Hornady also contends that McLeod charged for services that were not provided and that Blue Cross Blue Shield should have monitored the payments to ensure they were in conformance with the administrative services agreement. Hornady sued in federal court, seeking reimbursement of the alleged overpayments to McLeod, and filing claims for breach of fiduciary duty under ERISA and breach of contract under state law.

In refusing to grant defendants' motion to dismiss, the court noted that fiduciary obligations under ERISA is still a developing area of law, and there was enough evidence that BCBS exercised some discretionary authority to support an inference that it acted as a fiduciary to the plan in at least some respects.

The plaintiffs' claim for equitable relief under ERISA to recover any overpayments was not dismissed because the program specifications could not be determined from the complaint and resolution of the issue required factual and legal development. The claim against McLeod may depend on whether the plan included provisions for reimbursement of overpayments to a provider. However, the court stated that the claim was not likely to succeed against BCBS because it did not retain any of the alleged overpayments.

The court was "inclined to agree" that all state law claims should be dismissed because they are preempted by ERISA, but concluded that the matter was not "entirely free from doubt." The fact that there is no available remedy under ERISA is significant, but does not necessarily preclude a finding of preemption. Because there is no clear precedent addressing these circumstances, the court held that a final determination of preemption under ERISA should be reserved until discovery is complete.

Sportscare of America, P.C. v. Multiplan, Inc. No. 2:10-4414 (D.N.J. Feb. 10, 2011)

Sportscare of America, P.C. is a physical therapy facility which sued twenty-one insurance companies and a medical claim processing company, alleging a variety of liability theories under state law. The Defendant insurance companies removed the lawsuit to the U.S. District Court in New Jersey on the theory that all state law claims involved are entirely preempted under the Employee Retirement Income Security Act of 1974.

The federal court fully adopted the report of the Magistrate Judge and denied Sportscare's motion to remand. Specifically, ERISA preempts state law claims if: (1) the plaintiff could have brought the claim under ERISA § 502; and (2) if no other independent legal duty arising under state law supports plaintiff's claim. Here, although the first prong was met by the plan beneficiaries' assignment of claims, Sportscare failed to clearly allege the basis of any independent legal duty unconnected to ERISA.

Daniel F. v. Blue Shield of California No. C 09-2037 PJH (N.D. Cal. March 3, 2011)

The district court for Northern District of California ruled that an employee benefits plan is not required to provide insurance coverage for residential treatment of mental health conditions under ERISA or under California law, so long as the plan policy does not cover residential treatment services generally.

The California Physicians' Service d/b/a/ Blue Shield of California ("Blue Shield") and the Ogdemli/Feldman Design Group Benefits Plan, an ERISA plan funded under contract with Blue Shield, as defendants, filed a motion for summary judgment on the claims of a plan member and his parents ("Plaintiffs"). Plaintiffs asserted purported class action allegations challenging denial of coverage for residential treatment services for mental health conditions, claiming violations of Blue Shield policies, the California Parity Act, and California Insurance Code. Plaintiffs sought both money damages as well as declaratory relief.

In deciding to grant the motion for summary judgment, the court first held that Blue Shield's interpretation of its own policy language was "reasonable and in good faith." The residential treatment services for which coverage was sought did not fall specifically within the categories of care listed in the policy language. The policy language further contained an express exclusion of coverage for residential care. In light of these facts, and evidence that Plaintiffs were repeatedly informed that residential treatment would not be covered, the court found Blue Shield's interpretation of the policy to be reasonable.

The court next held that Blue Shield's interpretation of the policy did not violate the California Parity Act. Because the Parity Act only requires that mental health services be provided "on par" with services for other conditions, an exclusion of coverage for residential treatment generally is consistent with the Act's provisions. The court did not read the Parity Act to require coverage of residential treatment specifically or to require coverage for all "medically necessary" treatment.

Finally, the court rejected Plaintiffs' arguments that Blue Shield's inconsistent processing of claims for residential treatment submitted by its various plan enrollees was an "arbitrary and capricious" practice in violation of ERISA. In making this argument, Plaintiffs relied on data from a Blue Shield survey of 10 residential treatment facilities, conducted in the course of discovery disputes, assessing the extent of prior payment for residential treatment services under Blue Shield-funded ERISA plans. The survey results indicated that 19 of 31 other claims for residential treatment services were paid by Blue Shield, at least in part. Despite the survey results, the court swiftly rejected Plaintiffs' argument, holding that the processing of claims other than those of the Plaintiff-enrollee is irrelevant to Plaintiffs' claims. The court decided that "[a]t most, the [ERISA regulations] require 'reasonable' processes, not perfection" in terms of consistent claims processing.

In addition to granting Defendants' motion for summary judgment, the court also denied Plaintiffs' motion to amend the complaint so as to allege improper claims processing practices, construed by the court as additional proposed ERISA claims. The court concluded that such amendment would be futile, as Plaintiffs could not demonstrate any viable claim under the ERISA plan, the Parity Act, or ERISA on the basis of improper processing of claims.

North Cypress Medical Center Operating Co. v. CIGNA Healthcare Civil Action No. 4:09-cv-2556 (S.D. Tex. Mar. 2, 2011)

North Cypress, a general acute care hospital that does not contract with any HMO but provides "out-of-network" and emergency care, alleged that CIGNA violated ERISA and state law when it miscalculated and underpaid the benefits it owed to North Cypress. CIGNA moved to dismiss these claims on the grounds that North Cypress lacked standing, pled its complaint without sufficiently specific facts, failed to state an ERISA claim, and was preempted from seeking relief under Texas law.

Standing: The court rejected CIGNA's argument that North Cypress's pleadings had to show – rather than merely stating – that CIGNA beneficiaries had assigned their benefits to North Cypress. It also rejected CIGNA's suggestion that CIGNA beneficiaries had not been injured because they had not yet been required to pay out-of-pocket for North Cypress's services. Finally, the court also determined that CIGNA – which had rebuffed North Cypress's requests for information and claims review – was wrong to suggest that North Cypress had failed to exhaust administrative remedies.

North Cypress's ERISA claims: The court determined that, even though CIGNA was not formally the administrator of the benefits plan at issue, CIGNA's effective control over benefits decisions made it the proper defendant for North Cypress's ERISA claims. The court agreed with CIGNA that North Cypress had not pled facts supporting a claim that CIGNA engaged in transactions prohibited under ERISA § 406, but it rejected CIGNA's arguments for dismissing claims that CIGNA had violated §§ 404 and 503 by refusing to disclose its method for calculating benefits, and failing to provide reasonable access to relevant records upon North Cypress's request.

State law claims: CIGNA argued and the court agreed that ERISA preempted the claim brought by North Cypress under the Texas Insurance Code, because evaluating that claim required interpreting the ERISA plan at issue. However, the court determined that North Cypress's claim for breach of its "Discount Agreements" with CIGNA was not preempted, because that claim related to an issue independent of an ERISA's plan's administration.

Kenseth v. Dean Health Plan, Inc. No. 3:08-cv-1-bbc (W.D. Wis. Feb. 14, 2011)

The district court for the Western District of Wisconsin ruled that ERISA claims brought by a plan beneficiary seeking "appropriate equitable relief" under 29 U.S.C. § 1132(a)(3) are not justiciable where the relief being sought is plan payment of medical expenses.

The plaintiff in Kenseth had a weight loss procedure in 1987 during which physicians applied gastric bands, but in 2005 she required surgery to remove the bands. Despite being mistakenly told by her ERISA plan's customer service office that the surgery could be covered, the defendant, Dean Health Plan, Inc., denied coverage after the fact under policy terms precluding coverage for obesity-related procedures.

The Western District of Wisconsin acquired the case on remand from the Seventh Circuit, which had denied summary judgment to the defendant after finding a viable claim for breach of fiduciary duty under ERISA. On remand, the district court, among other things, was left to determine whether the plaintiff's claims alleged any form of equitable relief authorized under § 1132(a)(3). Specifically, the plaintiff requested that she be held harmless for at least some extent of the medical expenses incurred as a result of the procedure, that the plan amend its policies and procedures to prevent similar mistakes, and that she be entitled to attorneys fees under 29 U.S.C. § 1132(g)(1). The Secretary of the Department of Labor ("Secretary") filed an amicus brief in the case in support of the plaintiff, arguing that the "appropriate equitable relief" provision should permit "make-whole monetary recoveries and disgorgement of ill-gotten gains."

First, the district court rejected the Secretary's argument that compensatory money damages could constitute "appropriate equitable relief." The Secretary had analogized the relief sought by the plaintiff to historical equitable grants of make-whole monetary relief to beneficiaries in actions for breach of trust, arguing that such monetary relief is likewise warranted particularly in cases where the plaintiff is a fiduciary. Rejecting this argument, the district court held that the holding in Mertens v. Hewitt Associates, 508 U.S. 248 (1993), viewing monetary damages as classic legal relief, made no distinction between fiduciaries and other plaintiffs.

The district court further held that even if the damages sought qualified as equitable relief, they were not "appropriate" where the same relief sought was available under a different ERISA provision (for denial of benefit claims) or where there was an insufficient connection between the relief sought and the defendant's violation of law. In this case, the plaintiff failed to show that the breach of fiduciary duty resulted in any increased expenses, since there was no evidence that the plaintiff had the option of foregoing the surgery or obtaining it by less expensive means.

Second, the district court denied the plaintiff's alternative characterization of her monetary claim as one for equitable restitution. The Seventh Circuit had expressed skepticism about the plaintiff's claim for restitution, commenting that "there is no evidence in the record suggesting [that the defendant] is holding money or property that rightfully belongs to her," as is the case under traditional restitution principles. The district court further recognized that even if the facts supported a claim for restitution, such relief is not "appropriate" for the same reasons that compensatory money damages were found not appropriate.

The district court also rejected plaintiff's claims for traditional injunctive relief and for attorneys' fees. Regarding plaintiff's claim for policy and procedural amendments to the plan, the court found standing to be lacking. Specifically, because plaintiff was no longer a plan member, she did not stand to benefit from any changes to the plan. Regarding plaintiff's claim to attorneys fees under § 1132(g)(1), the court found that neither the Seventh Circuit's remand nor the policy changes undertaken by the defendant qualified as "some degree of success on the merits," the standard for recovery of attorneys fees under the statute.

MCG Health, Inc. v. Owners Insurance No. S10G1142, 2011 Ga. LEXIS 24 (Jan. 24, 2011)

The Supreme Court of Georgia affirmed the dismissal of a hospital's complaint on preemption grounds, finding that the statutory and regulatory scheme underlying the federal TRICARE program, which insures active-duty service members, precludes enforcement of a state statutory hospital lien against the insurer of a third-party tortfeasor for recovery of the costs of beneficiary healthcare.

MCG Health, Inc. ("MCG"), a civilian provider of healthcare, filed a complaint against Owners Insurance Company ("Owners") in order to execute a hospital lien in the amount of $18,259.61 for healthcare services provided to Braxton Morgan, who was treated for injuries incurred in a car accident caused by a third party tortfeasor. Prior to the litigation, Morgan separately settled with Owners, the third-party tortfeasor's insurer, on the basis of the accident. Morgan, an active-duty Army member, received healthcare coverage under the United States Department of Defense TRICARE health insurance program ("TRICARE