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Managed Care Lawsuit Watch - November 2003


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:

Academy of Medicine v. Aetna
Ohio Ct. Common Pleas. No. A0204947 (10/23/2003)

Humana Inc. has announced that its subsidiaries, Health Plan of Ohio and Humana Insurance Co., have agreed to settle a suit which alleged that the companies conspired to reduce reimbursement rates to health care providers. The lawsuit, filed by Cincinnati-area doctors in state court against several health plans, alleged that the plans conspired to hold down reimbursement rates. In the settlement agreement, which is subject to court approval, Humana denied wrongdoing but agreed to increase payments to physicians in Cincinnati and Northern Kentucky over the course of the next three years. The settlement would end Humana's involvement in class action litigation brought by independent physicians, the Academy of Medicine of Cincinnati, the Butler County Medical Society, and the Northern Kentucky Medical Association.

Aetna Health, Inc. v. Davila; CIGNA HealthCare of Texas, Inc. v. Calad
U.S. Supreme Court No. 02-1845 No. 03-83 (11/03/2003)

The Supreme Court granted certiorari to two lawsuits that raise new questions about ERISA preemption of state lawsuits against HMOs for negligence.

Juan Davila was insured through Aetna. His physician prescribed the drug Vioxx® for Davila's arthritis pain. Pursuant to Davila's insurance plan, Aetna required that Davila enter its "step program," where Aetna would first pay for less expensive equivalent drugs to see if they worked before paying for Vioxx®. Three weeks after Davila started taking the less expensive drug on Aetna's formulary, he was rushed to the emergency room with a bleeding ulcer.

Ruby Calad was insured through CIGNA. After undergoing a hysterectomy, Calad's surgeon recommended that she remain in the hospital longer than the one-day hospital stay authorized under her CIGNA plan. Calad was discharged after one-day, and had to return to the hospital a few days later due to complications from her surgery.

Davila and Calad sued their HMOs under a Texas law that gives patients a right to seek damages for insurance decisions that "affect the quality of the diagnosis, care or treatment provided to the plan's insureds or enrollees." The Fifth Circuit Court of Appeals ruled in 2002 that such lawsuits were not preempted by ERISA.

The Court will hear arguments in the cases as a consolidated case in early 2004, and a decision is expected by June.

Difelice v. Aetna U.S. Healthcare
Third Cir. Ct. of Appeals No. 02-3381 (10/15/2003)

The Third Circuit affirmed in part and reversed in part a District Court ruling regarding ERISA preemption.

Joseph Difelice was insured in an employee welfare benefit plan administered by Aetna U.S. Healthcare which covered benefits only if they were "medically necessary." In March 2001, Defelice's physician inserted a tracheotomy tube for sleep apnea/upper airway obstruction. When the tube kept coming out, the physician ordered a specially designed tube. Aetna informed the physician that the specially designed tube was "medically unnecessary," and the physician inserted a different tube. Defelice experienced severe pain and developed an infection because of this tube and was hospitalized. Defelice alleged that Aetna insisted that he be released from the hospital before his physician intended to release him.

Defelice filed his claim that Aetna had interfered in his medical care in Pennsylvania state court, and Aetna removed it to federal court. The District Court for the Eastern District of Pennsylvania found that Defelice's claim was preempted by ERISA because he was challenging a matter of administration – whether the special tube was medically necessary – rather than the provision of medical benefits. Relying on the Third Circuit's decision in Pryzbowski v. U.S. Healthcare, Inc., the District Court found that Defelice's claim that Aetna interfered with his medical treatment was preempted because it could have been brought under Section 502(a) of ERISA to recover benefits under the plan.

The Third Circuit upheld the District Court's ruling regarding the specially designed tube, but reversed on Defelice's allegation that Aetna had forced the hospital to discharge him. Such a claim would be a negligence claim, and would not be preempted by ERISA.

In a concurring opinion, Judge Becker wrote that he wanted "to add [his] voice to the rising judicial chorus urging that Congress and the Supreme Court revisit what is an unjust and increasingly tangled ERISA regime." Becker argued that although ERISA is designed to protect plan participants, under current ERISA case law, "lower courts are routinely forced to dismiss entirely justified complaints by plan participants who have been grievously injured by HMOs and plan sponsors, all because of ERISA." Becker noted that ERISA was passed before the advent of HMOs, which deny coverage for services before the service is provided.

Duchesne-Baker v. Extendicare Health Servs. Inc.
E.D. Louisiana No. 02-0590 (10/09/03)

The U.S. District Court for the Eastern District of Louisiana held that ERISA does not preempt state tort claims regarding negligent operation of an insurance business. Duchesne-Baker, a health plan enrollee, claimed that an insurer's negligent denial of coverage resulted in additional medical expenses. Aetna, the plan administrator, attempted to characterize the suit as an improper processing claim, but the court rejected that argument. Instead, the court determined that the claim did not relate to the administration or interpretation of an ERISA plan. The tort claim was based, according to the court, on Aetna's alleged negligence in the ordinary operations of its insurance business, including hiring and training of employees.

Horizon Healthcare of New Jersey, Inc.

The New Jersey Department of Banking and Insurance announced it had reached an agreement with Horizon Healthcare of New Jersey, Inc. for the resolution of claims handling violations cited by the Department in a market conduct examination. The Department cited Horizon for allegedly failing to pay clean claims and to properly deny claims within the statutory time frames. Horizon was also cited for allegedly improper general business practice for failing to pay the interest on late payments within the required time frame. In addition to paying a $200,000 fine, Horizon has taken corrective actions, including retraining personnel regarding payment requirements and time frames. Horizon has also agreed to sponsor a child immunization program in Newark. The Department, in its statement, recognized that Horizon demonstrated its cooperation with the investigation and took corrective steps.

In re Managed Care Litigation
S.D. Fla. MDL No. 1334 (10/24/2003)

In the ongoing Multi-District Litigation against various insurers, the District Court has granted final approval to a $470 million settlement between Aetna, Inc. and 700,000 physicians that will end a class action lawsuit against Aetna. The lawsuit alleged that Aetna have violated federal RICO laws and state prompt-pay laws in processing the claims of the physicians. The judge had granted preliminary approval of this settlement in May 2003.

The court also granted preliminary approval to a similar but separate $550 million settlement between CIGNA HealthCare and the plaintiff physicians.

Still pending in the case are lawsuits against the remaining defendants, including Humana, Inc., Prudential Ins. Co. of America, Anthem, Inc., PacifiCare Health Systems, Inc., UnitedHealth Group, and WellPoint Health Networks, Inc.

Kaiser Permanente Colorado Region v. Colorado Department of Health Care Policy and Financing
Colo. Dist. Ct.

The Colorado Department of Health Care Policy and Financing has agreed to pay Kaiser Permanent Colorado Region $10 million, plus interest, to settle claims regarding underpayment for care to Medicaid managed care enrollees. The settlement agreement followed court awards to two other health plans for underpayment. On August 8, 2003, the state was ordered to reimburse Community Health Plan of the Rockies $9.8 million plus interest for underpayment between 1997 and 2001. Community Health Plan of the Rockies v. Colorado Department of Health Care Policy and Financing, Colo. Dist. Ct., No. 02-CV-0150. On August 26, 2002, Rocky Mountain HMO was awarded $15 million plus interest. Colorado Department of Health Care Policy and Financing v. Rocky Mountain Health Maintenance Organization Inc., Colo. Sup. Ct. No. 02SC5.

Palmer v. St. Joseph Healthcare P.S.O., Inc.
New Mexico Court of Appeals No. 2003-NMCA-118 (09/30/03)

The New Mexico Court of Appeals held that federal law did not preempt a class action claiming misrepresentation by a Medicare+Choice ("M+C") plan. In July 2000, St. Joseph Healthcare P.S.O. ("St. Joseph) informed its insureds that it would withdraw from the M+C market effective 12/31/2000, and then rescinded its withdrawal following Congress' passage of the Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of 2000 ("BIPA"). BIPA increased M+C reimbursements to providers and allowed insurers that had not renewed their contracts with CMS (then HCFA), such as St. Joseph, to continue their participation in the program. St. Joseph was concerned about its ability to offer coverage to its insureds in January and February 2001 while it prepared and submitted its rates and benefits for CMS approval, and sought CMS guidance on how to proceed.

CMS provided St. Joseph with a letter for it to send to its members along with an abbreviated member enrollment form, also prepared by CMS. St. Joseph was concerned that the letter, drafted by CMS, would create confusion among recipients, including the possibility that it could be read as representing that current (2000 through February 2001) plan rates or benefits would remain the same throughout 2001. St. Joseph planned to substantially change the benefit plans offered to members beginning March 2001. CMS did not allow St. Joseph to change the letter. Four days after the letter was sent out to members, a group of members instituted this class action alleging that St. Joseph violated New Mexico's Unfair Practices Act by making knowingly false and misleading representations to thousands of beneficiaries regarding 2001 rates and benefits in order to induce them to enroll.

The court narrowly construed BIPA's requirement that federal law preempt state requirements relating to marketing materials, and found that the New Mexico laws at issue were not positive law prohibitions relating specifically to the manner in which M+C marketing materials are to be presented to members. The court further noted that (1) if Congress had intended to preempt state general deceptive trade practices and breach of contract claims and remedies, it would have done so explicitly; (2) the state standards at issue do not directly diminish HCFA's duties under federal law; and (3) the plaintiffs would not have a remedy if their claims were dismissed. The court held that St. Joseph's state law claims were not preempted and rejected its argument that the entire process of sending the marketing materials was controlled by CMS.

People ex rel. Allstate Insurance Company v. Muhyeldin
California Court of Appeal, Second Appellate District No. B150524 (9/18/03)

The California Court of Appeal, Second Appellate District, rejected an appeal on standing and upheld a jury's award of $8 million to Allstate Insurance Company ("Allstate") after finding that three physicians had fraudulently submitted bills to the insurer. The Court held that Allstate had standing to sue three physicians and various health clinics owned by the physicians for fraudulent claims in violation of the California Penal Code.

Allstate claimed that the defendants presented false claims by knowingly using improper billing codes to inflate their bills and billing for services that were never performed. The defendants argued that Allstate would only have standing to file a civil qui tam suit if it could prove that the defendants employed cappers to procure clients. Defendants further argued that only the government can prosecute under the relevant provision of the Penal Code. The court rejected these contentions, noting that the defendants overlooked California law specifically allowing a qui tam suit under the criminal law at issue. The court further found that the district court properly instructed the jury on the standard of proof. Accordingly, the court affirmed the district court's judgment and instructed the district court to award Allstate its reasonable costs and attorney fees on appeal.

Seaway Food Town, Inc. v. Medical Mutual of Ohio
6th Cir. Ct. of Appeals No. 01-4285 (10/23/2003)

The Sixth Circuit upheld a district court's grant of summary judgment in favor of Medical Mutual of Ohio ("MMO") in a lawsuit that alleged MMO had breached its ERISA fiduciary duties. The Sixth Circuit upheld the district court's ruling that MMO did not act as a ERISA fiduciary when it was negotiating contract terms with the plaintiff, Seaway Food Town, Inc.

From 1991 to 1998, Seaway entered into a series of contracts with MMO (then operating as Blue Cross & Blue Shield Mutual of Ohio) to administer Seaway's employee health benefit plan. Seaway alleged that in contract negotiations, MMO told Seaway it would pass along provider discounts to Seaway through lower administrative fees and stop-loss premiums. The language of the contract, however, stated that discounts with providers were "for the sole benefit of the Plan, and the Plan will retain payments resulting therefrom." Seaway alleged that it was owed more than $700,000 plus interest in provider discounts for 1991 to 1994.

The 6th Circuit, like the District Court, held that MMO was not acting as an ERISA fiduciary when it negotiated the contracts. The contract language was unambiguous that any money resulting from provider discounts were retained by MMO.


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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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For more information, please contact the professional(s) listed below, or your regular Crowell & Moring contact.

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