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Managed Care Lawsuit Watch - November 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.

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Cases in this issue:

Foundation Health v. Westside EKG Associates
Florida Sup. Ct. No. SC05-870 Oct. 19, 2006

The Florida Supreme Court, affirming the decision of a state appellate court, determined that Florida prompt payment statutes are an integral part of the contract between an HMO and a subscriber, and thus a health care provider may sue an HMO for prompt payment as a third party beneficiary of that contract.

The Court determined that the prompt pay provision, part of the Florida HMO Act codified at Florida Statutes Section 641.3155, “serves an integral role in providing substance or structure to the rights of subscribers and the responsibilities of HMOs.” Moreover, the Court determined that, under Florida law, health care providers – whether in-network or out-of-network – are able to prove that they are intended to be third-party beneficiaries of an HMO-subscriber insurance contract, although the court explained that proving such status may be difficult. If such status can be proven, providers not timely paid could avail themselves of breach of contract actions against Florida HMOs.

The Court thus remanded the case for the lower court to determine if a subscriber contract existed, if the claims at issue were not paid promptly, i.e., within 35 days, if Plaintiff Westside EKG Associates (Westside), a physician group practice was damaged, and if Westside was, indeed, an intended third-party beneficiary of the prompt pay obligation.

Hawaii Medical Ass’n v. Hawaii Medical Service Ass’n Inc.
Hawaii Sup. Ct. No. 25923 Sep. 8, 2006

The Hawaii Supreme Court has reinstated two lawsuits against Hawaii Medical Service Association (HMSA), brought by two physician groups that alleged HMSA engaged in deceptive schemes to avoid paying claims and interfered with the physicians’ economic relationship with their patients.

The lower court dismissed the suits, finding that plaintiff Hawaii Medical Association (HMA) lacked standing to bring its suit on behalf of its members, and that both lawsuits failed to state a claim. The Hawaii Supreme Court reversed most of the lower court’s findings.

The Hawaii Supreme Court first held that HMA had sufficient organizational standing to bring its suit. Next the court held that an amendment to Hawaii’s unfair trade practices act permitted private enforcement suits, so the plaintiffs were entitled to proceed on their deceptive practices claims for any allegedly wrongful activity that occurred after the amendment was enacted. The court then turned to the applicability of an arbitration clause in HMSA’s provider contracts, and determined that the arbitration clause did not prevent collective actions brought against systemic practices. Finally, the court held that plaintiffs had sufficiently pled a claim for tortious interference and unfair competition.

Abraham v. Intermountain Health Care Inc.
10th Circuit Court of Appeals No. 05-4043 Sep. 6, 2006

The Tenth Circuit has held that Intermountain Health Care (IHC), Utah’s largest managed health care company, did not violate the federal antitrust laws by using only panel ophthalmologists for the provision of eye care services to its members . The suit was filed by non-panel optometrists, who alleged that IHC and its ophthalmologists conspired to exclude optometrists from IHC’s provider panels, and unlawfully tied the sale of its managed care plans to the provision of surgical and non-surgical eye care.

With one exception, all of IHC’s eye care providers are ophthalmologists. The optometrists had tried for more than a decade to be listed on IHC’s provider panels, but were unsuccessful. Plaintiffs eventually filed suit, alleging that IHC and its panel ophthalmologists agreed to keep optometrists off IHC’s panels, in exchange for the ophthalmologists referring their patients to IHC hospitals and surgical facilities (instead of IHC competitors). According to Plaintiffs, this conduct increased IHC’s dominance in the market for hospital and surgical facilities. The district court granted summary judgment in favor of all defendants.

The Tenth Circuit affirmed, stating that evidence that the opthalmologists lobbied IHC not to panel optometrists did not establish that IHC and its opthalmologists acted in concert. Instead, the court held that Plaintiffs failed to present sufficient evidence that tended to exclude the possibility that IHC acted independently. The court also noted that there were several reasonable economic and pro-competitive benefits to IHC’s decision not to empanel optometrists. With regards to Plaintiffs’ tying argument, the court held that IHC does not “sell” eye care services, and the provision of its plans cannot be tied to a product it does not sell.

Wirth v. Aetna U.S. Healthcare
Pennsylvania Supreme Court No. 28 EAP 2005 Aug. 22, 2006

The Pennsylvania Supreme Court held that the state’s Motor Vehicle Financial Responsibility Law (MVFL), which prohibits insurer subrogation or reimbursement actions in tort cases, does not apply to health maintenance organizations. The court was asked to resolve a perceived conflict between the MVFL and the state’s HMO statute, which states that insurance regulations do not apply to HMOs unless the regulation specifically and explicitly states otherwise.

Plaintiff Wirth filed a proposed class action in an attempt to avoid a lien by Aetna against a third-party judgment he had obtained in a personal injury lawsuit following a motor vehicle accident. Plaintiff settled with Aetna to release the lien, then filed a lawsuit alleging unjust enrichment and violation of the MVFRL. Aetna moved to dismiss the complaint on the basis that the HMO Act exempts HMOs from complying with the MVFL. The trial court granted the motion, and the Pennsylvania appellate court asked the Pennsylvania Supreme Court to resolve the apparent conflict between the two statutes.

The Pennsylvania Supreme Court agreed with Aetna, and held that the MVFL and HMO statute are not in irreconcilable conflict with each other. The court held that even though the MVFL was passed after the HMO Act, the HMO Act specifically applies to subsequently passed insurance laws. The court also noted that the Pennsylvania General Assembly did not “specifically and in exact terms” apply the MVFL to HMOs, as required by the HMO Act in order to make it applicable to HMOs. Thus, HMOs are exempt from complying with the MVFL.

Merkle v. Health Options
Florida. Dist. Ct. App. No. 4D05-4552 Oct. 18, 2006

Peter Merkle, a physician providing emergency hospital services, filed four class action complaints against several HMOs alleging, among other things, violations of §641.513(5). All the defendant HMOs filed motions to dismiss, arguing that the section does not authorize a private cause of action. The trial court consolidated the cases, granted the motions to dismiss with prejudice, and entered final judgment in favor of the HMOs.

On appeal, the Fourth District Court of Appeals reversed, relying heavily on the recent Fifth District decision in Adventist Health System/Sunbelt, Inc. v. Blue Cross & Blue Shield, 934 So. 2d 602 ( Fla. Dist. Ct. App. 2006) and distinguishing prior precedent to arrive at the conclusion that §641.513(5) does allow for a private right of action. The court agreed with the Adventist reasoning that when a dispute centers on how liability should be imposed, and not whether liability should be imposed, a private right of action may be implied.

In coming to this conclusion, the court was also persuaded by the amici curiae briefs and the legislative history of the statute: “In enacting 641.513(5), the legislature intended to protect not only subscribers, but also non-participating providers. As the amici curiae supporting Merkle’s position point out, the terms of section 641.513(5) are obligatory (“shall”). Further, legislative history confirms that the legislature intended non-participating providers to be reimbursed in accordance with the statute.”

U.S. ex rel. Cleveland Tyson v. Amerigroup Illinois, Inc.
N.D. Ill. No. 92C6074 Oct. 30, 2006 (no written opinion available)

A federal jury determined that Amerigroup, and Illinois Medicaid HMO, violated both the federal False Claims Act and the Illinois Whistleblower Reward and Protection Act. After a former Amerigroup lobbyist provided internal memos and e-mails to federal prosecutors, the jury found that (1) the HMO actively discriminated against and sought to prevent the enrollment of pregnant women and sick individuals; and (2) the HMO had falsified its certification that it complied with anti-discrimination statutes and policies. This certification was made in each enrollment form submitted to the government, and thus each falsely-certified enrollment form constituted a “false claim.”

The jury fined Amerigroup $48 million, which could be tripled to $144 million. Amerigroup has indicated its intention to appeal the ruling to the Seventh Circuit Court of Appeals, and to specifically appeal the ruling that an enrollment form may constitute a false claim.

Newark Beth Israel v. Northern New Jersey Teamsters Benefit Plan
D. New Jersey No. 03-2922 Sep. 29, 2006

Newark Beth Israel (Hospital) filed state law breach of contract claims against the Northern New Jersey Teamster’s Benefit Plan (Plan), alleging that the Plan breached its agreement with the hospital by failing to timely remit payments for three plan participants.

The Plan removed the case to federal district court and the Hospital moved to remand the case back to state court, arguing that the district court lacked subject matter jurisdiction over the state law breach of contract claims. The district court agreed, rejecting the Plan’s contention that ERISA completely preempts the asserted state law breach of contract claims. The court held that “while ERISA may, or may not, provide a Defendant a preemption defense, it does not completely preempt state law, and therefore does not create federal question jurisdiction over this case.” The court found that the hospital’s claims were predicated on a separate legal duty independent of ERISA. As a result, the court remanded the case because it lacked subject matter jurisdiction.

Total Benefits Planning Agency Inc., et al., v. Anthem Blue Cross and Blue Shield, et al.
S.D. Ohio No. 1:05cv519 Sep. 8, 2006

Total Benefits Planning Agency Inc. (“TBPA”), a former appointee to sell the life and health insurance products of two companies, sued the insurance companies for conducting an illegal boycott in violation of Section 1 of the Sherman Act, as well as for various state law claims.

TBPA specifically alleged that the insurance companies instructed TBPA to not employ its “Total Benefits Strategy” in selling the products and that, when TBPA refused, the companies defamed them, libeled them, proclaimed that TBPA sold products through a strategy known to be unethical and illegal, and blacklisted TBPA and agents that did business with TBPA – all restraining free and open competition to the damage of both competition and TBPA.

The defendant insurance companies moved to dismiss for failure to state a claim, and further for exemption under the McCarran-Ferguson Act. However, the court determined that TBPA had sufficiently pled each element of each claim. Moreover, the court found that the McCarran-Ferguson Act’s antitrust exemption for insurance companies does not apply to allegations of refusals to deal and illegal group boycotts. Therefore, the court refused to dismiss TBPA’s Sherman Act claim, and maintained supplemental jurisdiction over the state law claims.

Halliburton Co. Benefits Comm. v. Graves
5th Circuit Court of Appeals No. 06-20632 Aug. 30, 2006

Halliburton entered into a merger agreement with Dresser that contained a provision stating that retirement plans would be maintained “except to the extent than any modifications thereto are consistent with changes in the medical plans provided . . . for similarly situated active employees.” Contemporaneous documentation showed that the purpose of the provision was to ensure that changes could be made to retirement benefits but only to the extent that similar changes were made to the benefits of active employees. Halliburton attempted to amend the retirees’ health care plans in a manner inconsistent with that understanding.

After several complaints from the retirees, Halliburton filed a declaratory judgment action in federal district court in the Southern District of Texas seeking permission to institute the amendments. Despite Halliburton’s contentions to the contrary, the Fifth Circuit ruled that the merger agreement constituted a plan amendment, and the amendment required that the retirees’ benefits could be modified only to the extent consistent with modifications to the active employees’ plans.

The merger agreement contained a clause prohibiting third parties from enforcing the provisions in the agreement, which Halliburton contended precluded the retirees from enforcing their ERISA rights, specifically their rights to enforce their plan’s provisions. The Fifth Circuit rejected that contention, explaining: “To adopt Halliburton’s argument that a provision in a contract, or more specifically, a no-third-party beneficiary clause, can trump rights prescribed by ERISA would fly in the face of the exclusive remedial scheme prescribed by Congress for plan participants and beneficiaries to enforce rights under employee benefit plans.”

Quality Infusion Care Inc. v. Unicare Health Plans of Texas, Inc.
S.D. Texas No. H-06-01557 July 27, 2006

The U.S. District Court for the Southern District of Texas, Houston Division, determined that an out-of-network pharmacy’s claim for payment is “an insurance regulation issue, not a coverage issue.”

Quality Infusion Care, Inc. (“QIC”), a licensed pharmacy specializing in providing home infusion therapy services, sued Unicare Health Plans of Texas in state court for improper denial of payment. QIC was an out-of-network provider.

Unicare Health Plans of Texas removed the case to federal court, but the court remanded the case to state court, finding that “the dispute between these parties is one that is covered by the Texas Any Willing Provider statute,” and further that “the failure to process and pay benefits for non-participant providers does not give rise to an ERISA cause of action because the remedy sought goes beyond ERISA-regulated benefits.”

Quality Infusion Care Inc. v. Health Care Service Corp. d/b/a Blue Cross and Blue Shield of Texas
Texas Court of Appeals No. 01-05-00753 Oct. 19, 2006

Quality Infusion Care Inc. (“QIC”) provided infusion therapy services to subscribers of two Blue Cross and Blue Shield health plans (the “Plans”), despite the fact that (1) QIC’s contract with the Plans did not designate QIC as a “network” provider; and (2) the Plans repeatedly informed QIC that it would not be compensated for such services without prior certification. When the Plans refused to pay QIC for such services, QIC sued in Texas State court, alleging a series of Texas State common law tort and breach of contract claims. The Plans counter-claimed for overpayments mistakenly made to QIC.

Upholding the trial court’s decision, the appellate court determined that (1) QIC’s contract with the Plans did not make it a “network provider” capable of expecting payment for services rendered without prior certification; (2) QIC’s 1999 decision to reject a “network provider” agreement furthered the Plans’ argument that QIC was aware it was not a “network provider”; (3) the Plans’ occasional granting of permission to certain subscribers to use QIC’s services did not operate as blanket permission that all subscribers could use QIC’s services; and (4) the Plans’ occasional payment of QIC’s invoices as an out-of-network provider did not outweigh the numerous times that the Plans rejected QIC’s invoices.

After dismissing QIC’s tort and contract claims for the above reasons, the appellate court found in favor of the Plans on their counter-claims for refund of overpayments. Accordingly, the court granted collective judgment in the amount of $23,203, as well as reasonable attorneys’ fees, to the Plans.

Vine Street Clinic v. HealthLink Inc.
Illinois Supreme Court No. 99790 Sep. 21, 2006

The Illinois Supreme Court held that a provider network may not provide administrative services to a physician group practice in return for a percentage of revenue without violating the Illinois Medical Practice Act’s prohibition on fee-splitting, but refused to order a refund of any fees paid on such a basis.

HealthLink, Inc. entered into network participation arrangements with physicians, and then marketed its networks to health insurers and other third-party payors. HealthLink also entered into claims processing agreements with certain network physicians, including Vine Street Clinic. Some of these latter agreements required the physicians to compensate HealthLink on a percentage-of-revenue basis; others required a flat fee. At the time of the opinion, HealthLink was no longer party to any arrangement that called for percentage-based payments.

Vine Street Clinic, purporting to represent a class of similarly-situated providers, sued HealthLink, claiming that HealthLink’s historical percentage-based compensation arrangement and current flat-fee arrangement both violated Illinois’ fee-splitting prohibition. Vine Street Clinic demanded a refund of all such fees paid.

The Illinois Supreme Court clarified that the fee-splitting provision prohibits percentage-based arrangements, which could lead to overutilization and improper patient referral practices, but permits flat-fee arrangements, which could not. Therefore, HealthLink’s historical, percentage-based arrangement was declared void.

However, the Illinois Supreme Court refused to order the requested refund, finding that the statute prohibits physicians – and not networks such as HealthLink – from splitting professional fees. The Court also refused to allow the physicians to avoid the results of an illegal contract in which they had willingly and knowingly participated, distinguishing the situation from one of fraud, misrepresentation or mistake of fact.

Hunter v. Regence Blue Shield
Washington Ct. of Appeals No. 56638-5-I Aug. 21, 2006

David Hunter, a Seattle, Washington resident, was diagnosed with prostate cancer and, believing he could received better treatment at Johns Hopkins University Medical Institute, requested preauthorization from Regence Blue Shield (“Regence”) to pay for a radical procedure at that facility. Relying on contract language, Regence denied coverage and asserted that out-of-state care was covered only if it is medically necessary and unavailable in Washington.

Regence contacted both Johns Hopkins and Hunter’s Washington physician, who claimed that the radical procedure was available in Seattle with “similar results” and, on that basis, refused to refer Hunter to Johns Hopkins. Regence did not identify for Hunter any Washington specialists that could perform the procedure.

Hunter sued Regence, alleging a series of state law tort and breach of contract claims, but the trial court dismissed them. Upon appeal and in an unpublished opinion, the court determined that Regence had no duty to provide coverage for the “best care in the country,” and further had no duty to provide Hunter with the names of network specialists who could perform the procedure. For these reasons, the court dismissed Hunter’s tort claims. The breach of contract claim was dismissed as untimely filed.

Carolina Care Plan Inc. v. McKenzie
4th Circuit Court of Appeals No. 05-2060 Oct. 23, 2006

The Fourth Circuit Court of Appeals determined that a plan administrator abused its discretion in denying coverage for a cochlear implant, citing the ambiguity of the exclusion language, the inconsistency of the determination and other plan language, and the failure to construe the ambiguity in favor of the beneficiary.

Carolina Care Plan Inc. (“CCP”) denied McKenzie’s claim for payment of a cochlear implant, on the basis of plan language excluding coverage for devices that helped “both communication and speech.” McKenzie successfully argued that (1) the language was ambiguous, because while the implant aided her communication, it did not help both her communication and speech; (2) a cochlear implant is not an item of “comfort and convenience,” under which title the exclusionary language was listed; and (3) the plan’s explicit exclusion of hearing aids implied coverage of cochlear implants.

The Fourth Circuit Court of Appeals applied a “modified” abuse of discretion standard of review because CCP was both the administrator and the insurer, an inherent conflict of interest. Affording less deference to the administrator’s decision, the court determined it was unreasonable and thus ordered coverage of the device.

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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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Arthur N. Lerner
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