Background - News & Events (Landing) 2016
All Alerts & Newsletters

Managed Care Lawsuit Watch - May 2013


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:


United States v. Blue Cross Blue Shield of Michigan
No. 2:10-cv-14155-DPH-MKM (E.D. Mich. Mar. 25, 2013)

New Michigan laws rendered unnecessary the injunctive relief sought by the United States Department of Justice and the State of Michigan against Blue Cross Blue Shield of Michigan (BCBSM). The federal and state governments had sought to enjoin BCBSM's use of most-favored-nation (MFN) clauses in provider contracts, but the new Michigan laws ban such clauses in all health insurer contracts. As a result, the parties jointly requested the United States District Court for the Eastern District of Michigan to dismiss the government plaintiffs' claim without prejudice.

On March 18, 2013, Michigan passed two laws (2013 P.A. 5 and 2013 P.A. 6) banning the use of MFN clauses by insurers, health maintenance organizations, and non-profit health care corporations in their contracts with providers. MFN provisions in health insurer/provider contracts generally refer to clauses guaranteeing that no other health plan can obtain a better rate from the provider than the plan requiring use of the MFN clause. The laws take effect on January 1, 2014, and they will prevent BCBSM and Blue Care Network, its subsidiary health maintenance organization, from using the MFN clauses that were the basis of this action.  BCBSM and Blue Care Network also cannot use other MFN clauses with Michigan hospitals. 

Until these laws take effect, the Commissioner of the Michigan Office of Financial and Insurance Regulation prohibited insurers from using MFNs without Commissioner approval through a bulletin issued February 8, 2013. That bulletin declared all MFNs currently in use by insurers to be void and unenforceable as of February 1, 2013 and required submission and Commissioner approval of any MFN before that MFN can be enforced. 

BCBSM acknowledged that the Commissioner order rendered its MFN clauses in provider contracts void and ineffective. The parties agreed that the injunctive relief sought by the plaintiffs was no longer necessary because of Michigan's new laws and the Commissioner's order banning MFN clauses, and they jointly asked the court to dismiss the case without prejudice or costs to any party.

U.S. Airways, Inc. v. McCutchen
569 U.S. __ (Apr. 16, 2013)

On April 16, 2013, the Supreme Court resolved a Circuit split stemming from a previous ruling involving ERISA § 502(a)(3)'s equitable enforcement provision. See Sereboff v. Mid Atlantic Med. Services, Inc., 547 U.S. 356 (2006). In Sereboff, the Court held that a plan administrator's suit under ERISA § 502(a)(3) for equitable enforcement of a reimbursement provision constituted an action to enforce an equitable lien by agreement. This type of action fit within the categories of equitable relief available under ERISA § 502(a)(3); therefore, the plan administrator properly sought equitable relief under that provision. The Court did not address whether beneficiaries could assert equitable defenses in these types of actions. A Circuit split on this issue ensued.

The majority of Circuits held that equitable defenses were unavailable in ERISA § 502(a)(3) actions where those defenses would conflict with the written terms of the plan. See, e.g., Zurich Am. Ins. Co. v. O'Hara, 604 F.3d 1232 (11th Cir. 2010) ("Because ERISA's primary purpose is to ensure the integrity of written, bargained-for benefit plans, the Plan must be enforced as written unless the Plan conflicts with the policies underlying ERISA or application of the common law is necessary to effectuate the purposes of ERISA.") (internal quotations and citations omitted). A minority of Circuits, including the Third Circuit (which decided the U.S. Airways case), held that by authorizing "appropriate equitable relief" under ERISA § 502, Congress intended such relief to be limited by the equitable doctrines and defenses ordinarily applicable in those types of actions. See, e.g., CGI Technologies & Solutions, Inc. v. Rose, 683 F.3d 1113 (9th Cir. 2012) ("Absent an express indication that either Congress or the Supreme Court has limited a district court's powers to fashion 'appropriate equitable relief,' as contended by CGI, we decline to read such a contractual limitation into a statutory term."). Against this backdrop, the Supreme Court considered U.S. Airways v. McCutchen.

In this case, the beneficiary, James McCutchen, became totally disabled following a serious automobile accident. U.S. Airways, the ERISA plan administrator, paid $66,866 for his medical expenses. The beneficiary settled a lawsuit involving the automobile accident for $110,000. His net recovery after attorney's fees and costs was less than $66,000. U.S. Airways filed suit for "appropriate equitable relief" pursuant to ERISA § 502(a)(3). The District Court granted U.S. Airways' Motion for Summary Judgment and awarded it the full $66,866 reimbursement. The Third Circuit overturned the District Court and remanded the case for further consideration, ordering the lower court to consider the beneficiary's equitable defenses.  U.S. Airways appealed the Third Circuit decision to the Supreme Court.

The beneficiary argued that when a plan brings an equitable action under ERISA § 502(a)(3), certain equitable principles such as "double recovery" (permitting an insurer to recover only the share of the amount the insured received to compensate him or her for the same loss the insurer suffered) and the "common-fund doctrine" (a litigant or lawyer who recovers a common fund for the benefit of other persons is entitled to reasonable attorney's fees from the fund as a whole) trump plan terms and prevent unjust enrichment. In contrast, the plan argued that equitable principles or defenses could not be employed to defeat the terms of the plan. The federal government, which filed an amicus brief in this case, argued that although the plan, not equitable principles, provides the measure of relief due, courts have inherent authority to apportion litigation costs in accordance with equitable principles, even if this conflicts with the plan's terms.

Relying heavily on Sereboff, the Court held that the plan's suit really sought to enforce an equitable lien by agreement. Such an equitable action "arises from and serves to carry out a contract's provisions." Consequently, enforcing an equitable lien by agreement means holding the parties to their mutual promises. Here, that means applying the terms of the plan, and rejecting rules—such as "double recovery" or the "common-fund doctrine"—that are at odds with the parties' agreement. After all, ERISA § 502(a)(3) does not authorize equitable actions at large, but rather only equitable actions to enforce the terms of the plan. In short, equitable defenses are not available in ERISA § 502(a)(3) actions based on equitable liens by agreement to the extent those defenses conflict with the terms of the plan.

The Court then held, however, that where plan terms are silent on a particular issue, courts must look at the background of "common-sense understandings and legal principles that the parties may not have bothered to incorporate expressly but that operate as default rules to govern in the absence of a clear expression of the parties' contrary intent." Here, the plan was silent on how to allocate attorney's fees. As a result, "the common fund doctrine provides the appropriate default."

U.S., ex rel. Upton v. Family Health Network, Inc.
No. 09 C 6022 (N.D. Ill. Mar. 4, 2013)

The United States District Court for the Northern District of Illinois denied defendant Family Health Network, Inc.'s (FHN) motion to dismiss federal and Illinois-state False Claims Act causes of action within plaintiff-Relator's Third Amended Complaint. The court held that the Relator's Third Amended Complaint sufficiently pled specific facts in its False Claims Act allegations.

FHN is a managed care organization that contracts with Healthcare and Family Services (HFS), an Illinois state agency, to provide healthcare to Medicaid recipients. FHN's contracts with HFS specify that FHN will not discriminate on health status. Relators alleged that, in breach of these contracts, FHN refused to enroll Illinois recipients who appeared to have high-cost medical needs, and instead only enrolled individuals who were unlikely to ever need FHN's services.

The court previously dismissed the Relators' Second Amended Complaint, finding that in pleading a False Claims Act violation, plaintiffs must allege specific wrongdoing, and the court held that the Second Amended Complaint did not plead any of its allegations with sufficient specificity. However, the court held that the Relators made sufficient changes in the Third Amended Complaint to withstand the motion to dismiss.

For example, the Third Amended Complaint contained more specific fraudulent inducement allegations. Specifically, Relator's alleged that in order to continue to receive funding from the government, FHN promised to not discriminate but never intended to fulfill that promise. Additionally, FHN allegedly submitted quarterly certifications and contracts that were false, thus inducing the government to continue to pay FHN and renew its contracts. The alleged false promises were thus essential to a causal chain leading to payment.

Because the Third Amended Complaint provided specific facts in its allegations, the Court found that it sufficiently pled False Claims Act violations against FHN.

Garcia v. Pacificare of California, Inc.
SACV 12-02022 JVS (RNBx) (C.D. Cal. Mar. 6, 2013)

The United States District Court for the Central District of California denied Plaintiff's motion for summary judgment and granted summary judgment in favor of PacifiCare, on an ERISA claim for benefits for myoelectric prosthetic devices.

Plaintiff sought coverage for replacement of myoelectric prosthetic devices, which PacifiCare denied based on a specific exclusion in the plan for myoelectric devices. Plaintiff argued that California Health & Safety Code § 1367.18 requires health plans to cover all medically necessary original and replacement devices as prescribed by a qualified medical professional. Plaintiff argued that PacifiCare's categorical exclusion for myoelectric devices violates the statute because it excludes coverage for a medically necessary replacement device prescribed by Plaintiff's physician.

PacifiCare argued that it is permitted to exclude specific types of prosthetics devices or services under the plain language of the statute. The statute authorizes the plan and subscriber, here Plaintiff's employer, to negotiate the "terms and conditions" of its offer of coverage.

The Court agreed with PacifiCare's interpretation of Section 1367.18 based on the statute's plain language, the legislative history, and case law interpreting similar California mandate statutes. The Court held that the statute's plain language does not address the type or quality of the covered prosthetic devices or establish that the physician's prescription supersedes the agreement between a plan and the employer. The Court also found that the legislative history confirms that the statute only dictates particular "terms and conditions"—the amount of coverage and costs—but leaves the scope of coverage to the mutual agreement of the parties. The Court therefore held that PacifiCare's exclusion for myoelectric prosthetic devices was lawful.

Crowell & Moring represents PacifiCare in this action. The case is now on appeal before the Ninth Circuit.

Morris v. Humana Health Plan, Inc.
No. 1116-CV08945 (Mo. Cir. Ct. Mar. 13, 2013)

The Circuit Court of Jackson County, Missouri granted a motion for summary judgment in favor of Humana after finding Missouri subrogation law was preempted by the Federal Employees Health Benefits Act (FEHBA).

The plaintiff received Federal Employees Health Benefits coverage from Humana. She was injured in an auto accident, received medical services that Humana reimbursed, and settled with the other driver's auto insurance carrier for her injuries. Humana placed a lien on plaintiff's settlement for the amount of the medical services it reimbursed and collected from the driver's auto insurance carrier. Plaintiff then sued Humana on the theory that Missouri law prohibits subrogation.

The court ruled that FEHBA preempts Missouri's law against subrogation, however, and granted summary judgment for Humana. For support, the court cited a Missouri appellate case from December 2012, reaching a similar conclusion. Nevils v. Group Health Plan, No. ED98538 (Mo. Ct. App. Dec. 26, 2012). The Court found that plaintiff's Humana plan expressly requires Morris to reimburse Humana if she receives injury-related compensation from a third party and allows Humana to seek subrogation directly from that third party. The court also found that Humana's contract with the United States Office of Personnel Management to administer FEHB coverage also expressly required Humana to subrogate any FEHBA claims. Crowell & Moring served as co-counsel for Humana.

In re Neurontin Marketing and Sales Practices Litigation
Nos. 11-1904, 11-2096 (1st Cir. Apr. 3, 2013); No. 11-1806 (1st Cir. Apr. 3, 2013); No. 11-1595 (1st Cir. Apr. 3, 2013)

The First Circuit ruled in three separate cases, including upholding a $142 million jury verdict, involving claims that Pfizer fraudulently marketed of its epilepsy drug, Neurontin, causing third-party payors financial harm.

The plaintiffs, Kaiser Foundation Health Plan, Inc., Aetna, Inc., and Harden Manufacturing Corp., alleged that Pfizer violated the Racketeer Influenced and Corrupt Organizations Act (RICO) and state law by fraudulently marketing Neurontin for off-label uses such as treatment of bipolar disorder, migraine and headache pain, and neuropathic pain.

Pfizer defended against the cases by arguing that prescribing physicians used their own judgment in prescribing Neurontin and therefore broke the chain of causation between Pfizer's marketing campaign and the harm caused when health care providers had to pay for prescriptions that were not effective at treating the conditions at issue.

In the Kaiser decision, the First Circuit ruled that Pfizer's marketing programs directly influenced physicians to prescribe Neurontin for off-label uses. The court found that Pfizer had hired doctors to write medical articles with misleading information about Neurontin's off-label benefits, despite a lack of scientific evidence to support its marketing claims.

In the Aetna and Harden cases, the First Circuit reversed grants of summary judgment, ruling that the plaintiffs had provided sufficient evidence of direct causation between Pfizer's fraudulent marketing of Neurontin and the financial injury caused when third-party payors had to pay for the ineffective prescriptions.

The Aetna and Harden cases have both been remanded for further proceedings, leaving Pfizer to face two more trials on the issue of fraudulent marketing of Neurontin.

Yox v. Providence Health Plan
No. 3:12-cv-0138-HZ (D. Or. Mar. 8, 2013)

The United States District Court for the District of Oregon denied a motion for summary judgment, reasoning that review of a health claim denial by an Independent Review Organization (IRO) was not an arbitration and thus was not exempt from judicial review. 

The plaintiff was a participant in the defendant ERISA-governed health plan and received dental treatment after she suffered a fall caused by a seizure and suffered facial trauma, including a fractured jaw. The relevant plan terms provided that dental services resulting from a trauma caused by an accident were covered. Relying on plan terms, the defendant health plan denied a claim for coverage by the plaintiff's dental service provider for teeth extraction, bone grafts, fixed partial dentures and certain other services. On the plaintiff's appeal to the plan, the defendant upheld its previous denial. The plaintiff sought external review by an IRO, but the IRO reviewer's findings and conclusion supported the defendant's denial of coverage. The plaintiff then brought an action to recover the unpaid health benefits plus attorney fees and costs in the district court. 

On a motion for summary judgment, the defendant argued that, because the IRO was an arbitration, judicial review was precluded. The court denied this motion, relying on the U.S. Supreme Court's holding in Rush Prudential HMO, Inc. v. Moran. The district court distinguished the IRO review from an arbitration because the IRO lacked the ability to hold hearings, conduct cross-examinations, subpoena witnesses, and consider legal claims. The district court also relied on the fact that the IRO reviewer's ability to override plan terms was limited in denying the motion for summary judgment.

Brigolin v. Blue Cross Blue Shield of Michigan
No. 1116-CV08945 (Mo. Cir. Ct. Mar. 13, 2013)

The United States Court of Appeals for the Sixth Circuit upheld a grant of summary judgment denying coverage to a putative class of women with recognized eating-disorder diseases who are members or beneficiaries of health insurance plans that Blue Cross Blue Shield of Michigan (BCBSM) administers or underwrites.

The plaintiffs claimed that BCBSM refused to pay for eating-disorder treatments they received at out-of-state residential facilities, even after a medical doctor determined that such treatment was necessary. BCBSM did not dispute the seriousness of eating disorders or that they are medically recognized diseases.

The plaintiffs asserted a breach-of-contract claim, but they did not cite any contractual provision that BCBSM had allegedly breached. Instead, the plaintiffs argued that because they neither saw nor signed a BCBSM contract, their coverage terms were established by BCBSM's written advertisements and communications. According to the plaintiffs, the BCBSM advertisements purported to cover "any and all" medically required treatments from any provider contracted with any Blue Cross Blue Shield entity.

For a group of women receiving coverage under BCBSM plans subject to the Employee Retirement Income Security Act of 1974 (ERISA), the court upheld the grant of summary judgment for three subgroups of plaintiffs. First, for the plaintiff who exhausted her administrative appeals, the court found no reason to overturn the plan's decision. Because the plan gives discretion to BCBSM as the claims administrator to construe the terms of her agreement and benefit eligibility, the court reviewed BCBSM's denial under an arbitrary and capricious standard. BCBSM denied coverage because the plan excludes coverage for services at nonparticipating facilities, and the plaintiff could give no reason for coverage in this case or why a denial was arbitrary and capricious.

Second, for plaintiffs who did not exhaust their administrative appeals, the court denied all claims without prejudice because the plaintiffs could give no reason why the internal appeals process would be futile. The plaintiffs in this group did not dispute that they had failed to exhaust their administrative remedies; rather, they argued that BCBSM's process was a "sham" that always resulted in denials. But the court found no evidence to support the plaintiffs' claims. In fact, the court cited numerous examples of the administrative appeals process working for claimants. Finally, for plaintiffs with no record of disputed payments, the court upheld the grant of summary judgment with little explanation.

For a group of women receiving coverage under plans not subject to ERISA, the court determined that a grant of summary judgment was proper based on Michigan contract law for a few reasons. First, the plaintiffs inappropriately introduced extrinsic evidence to help construe disputed terms. The court found that the contract was not ambiguous, so there was no reason to consider whether BCBSM's advertisements altered the definition of "participating provider." Second, the plaintiff's construction of the contract would negate other provisions of the agreement with BCBSM and would violate Michigan law. Finally, the court held that ignorance of the terms of a contract, absent fraud, does not change the validity of the contract.

Puerto Rico College of Dental Surgeons v. Triple S Management
No. 09-1209 (JAF) (D.P.R. March 13, 2013)

The United States District Court for the District of Puerto Rico declined to grant class certification in a class action lawsuit filed by the College of Dental Surgeons of Puerto Rico and nine of its dentists against twenty-four insurance companies because the plaintiffs failed to meet the commonality and typicality requirements. In an amended complaint, the plaintiffs asserted that the insurance companies violated the Act Against Organized Crime and Money Laundering (OCML), various provisions of Puerto Rico's Insurance Code, the law creating the Health Insurance Administration, contract and tort provisions of Puerto Rico's Civil Code, the Antitrust Act, and the General Corporations Act.

Under the Federal Rules of Civil Procedure, class certification is appropriate only if, in part: (1) the class is so large that joinder of all members of the class is impracticable; (2) questions of law or fact are common to the class; and (3) the claims or defenses of representative parties are typical for the class.  These three requirements can be referred to as (1) numerosity, (2) commonality, and (3) typicality.

The court held that the large number of claims alleged by the plaintiffs was sufficient to satisfy the numerosity requirement but ultimately denied class certification on the basis that the plaintiffs failed the commonality and typicality criteria. In reference to the commonality requirement, the court stated that it was "perplexed" that the plaintiffs did not provide any factual detail about the alleged harm done to the plaintiff dentist class. For example, the plaintiffs did not state how many members of the purported class were represented in their summary for the court. The plaintiffs also did not name any individual class member, provide any information on whether claims overlapped, or state what type of conduct underlies each claim. The plaintiffs could not cite a single case in which similar allegations satisfied the commonality prong.

In addition, the court explained that the plaintiffs failed to meet the typicality requirement because individual issues of fact dominate over common ones. According to the court, factual evidence submitted by the defendants "demonstrates the myriad factual distinctions that will frustrate any effort to try this case as a class action." 

Lastly, the court noted that the question of whether federal jurisdiction under the Class Action Fairness Act (CAFA) still exists following decertification is an open question within the First Circuit U.S. Court of Appeals and requested that the parties brief the issue.

S.M. v. Oxford Health Plans (NY), Inc.
No. 12-CV-4679 (PGG) (S.D.N.Y. Mar. 22, 2013)

S.M., who had been diagnosed with non-Hodgkin's lymphoma, sought coverage for the drug Gamunex, prescribed by her treating physician to fight pneumonia. Oxford denied coverage for the drug, finding that it was not medically necessary. S.M. sued Oxford in New York state court, asserting state law claims for fraud, unjust enrichment, and deceptive trade practices under New York General Business Law Section 349. Oxford removed the case based on ERISA preemption, and S.M. moved to remand.

Under to the Supreme Court's holding in Davila, ERISA completely preempts a state law claim if (1) the plaintiff could have, at some point in time, brought his or her claim under ERISA and (2) the defendant's actions do not implicate any other independent legal duty. Under the first prong of Davila, the Court found that S.M.'s claims were classic "right to payment" claims, which involve "challenges to benefit determinations, depend on the interpretation of the plan language, and often become an issue when benefits have been denied." Her claims were not, according to the Court, "amount of payment" claims, which involve "the computation of contract payments or the correct execution of such payments." As such, her state law causes of action constituted a claim to recover benefits due under ERISA, thus satisfying the first prong of Davila.

Under the second prong of Davila, Oxford's liability for its denial of coverage for Gamunex stemmed solely from its administration of an ERISA-regulated plan. Therefore, its actions implicated no other independent legal duty. Because S.M.'s claims satisfied both prongs of Davila, the Court held that they were completely preempted by ERISA.

WOS v. E.M.A.
No. 12-98, slip op. (U.S. Mar. 20, 2013)

A North Carolina statute requires that up to one-third of any damages recovered by a beneficiary for a tortious injury be paid to the State to reimburse it for payments the state made for medical treatment on account of the injury.

E.M.A. was born with birth injuries that require extensive daily nursing care and will prevent her from being able to work or live independently. North Carolina's Medicaid program pays part of the cost of her ongoing medical care. E.M.A. filed a medical malpractice suit against the physician who delivered her, and eventually settled for $2.8 million. The settlement did not allocate money between the medical and nonmedical claims. The state court allotted one-third of the recovery for the state.

E.M.A. sought declaratory and injunctive relief in federal district court, arguing that the State's reimbursement plan violated the Medicaid anti-lien provision. The District Court held that the one-third presumption was reasonable. The Fourth Circuit vacated and remanded, and the United States Supreme Court held that North Carolina's law is preempted.

In Arkansas Department of Health and Human Services v. Ahlborn, the Supreme Court held that Medicaid sets parameters for a State's potential share of a beneficiary's tort recovery. Under Ahlborn, a State has the right to recover the portion of a settlement representing payment for medical care but cannot recover the remainder of the settlement. Ahlborn did not, however, resolve how to determine what portion of a settlement is payment for medical care.

Because North-Carolina's statutory one-third presumption could result in a state recouping an amount from a tort recovery in excess of what was paid in medical expenses, it violates Ahlborn. North Carolina's law is thus preempted by the federal anti-lien provision insofar as it permits the State to take a portion of a Medicaid beneficiary's tort judgment not attributable to medical care.


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.

Please contact for more information.