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Managed Care Lawsuit Watch - October 2009


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:


Marin General Hospital v. Modesto & Empire Traction Co.
No. 07-16518 (9th Cir. 2009)

The Ninth Circuit Court of Appeals reversed a lower court and remanded the case to state court. The court held that because the state-law actions for breach of contract, negligent misrepresentation, quantum meruit, and estoppel rely on legal duties that are independent from duties under any benefit plan established under ERISA, they are not completely preempted. Thus, there was no federal question subject matter jurisdiction in federal court so removal from state court was improper.

Marin General Hospital (“Marin”) contended that is representative spoke to a representative of Medical Benefits Administrators of M.D. Inc. (“Medical Benefits”) on April 8, 2004 to confirm that a prospective patient had health insurance through a plan provided by his employer, Modesto & Empire Traction Co., and administered by Medical Benefits. Marin contended that the Medical Benefits representative verbally verified the patient’s coverage, authorized treatment, and agreed to cover ninety-percent of the patient’s medical expenses. Marin sued Medical Benefits and Modesto & Empire in state court and the defendants successfully removed the case to the U.S. District Court for the Northern District of California, claiming that ERISA completely preempted the claims. The district court subsequently dismissed Marin’s complaint, concluding that the only remedy available was under ERISA § 502(a)(1)(B).

The court first found the parties “have not clearly understood the difference between complete preemption under ERISA § 502(a), 29 U.S.C. § 1132(a), and conflict preemption under ERISA § 514(a), 29 U.S.C. § 1144(a).” Complete preemption under § 502(a) is a jurisdictional doctrine. A party seeking removal based on federal question jurisdiction must show either that the state-law causes of action are completely preempted by § 502(a) of ERISA, or that some other basis exists.

In Aetna Health Inc. v. Davila (542 U.S. 200 (2004)), the Supreme Court set forth a two-prong test under § 502(a)(1)(B). First, whether the plaintiff seeking to assert a state-law claim could have brought the claim under ERISA. Here, Marin could not have brought its state law claims under Section 502(a)(1)(B) because the hospital was seeking money owed to it based upon the alleged oral contract between it and Medical Benefits and, thus, was not suing as an assignee of an ERISA plan participant or beneficiary under § 502(a)(1)(B). The term “relates to” is not the test for complete preemption, but rather the test for conflict preemption.

Second, whether there is no other independent legal duty that is implicated by a defendant’s actions. Here, Marin asserts claims that do not rely on and are independent of any duty under ERISA because they are based on the alleged oral contract between the parties. The question under this second prong is only whether there is no other legal duty that is implicated.

Therefore, Marin’s state law claims were not completely preempted by § 502(a)(1)(B). They could not be brought under § 502(a)(1)(B), and they relied on independent legal obligations.

Pipefitters Local 636 Insurance Fund v. Blue Cross Blue Shield of Michigan
No. 04-73400 (E.D. Mich. Sept 3, 2009)

In 2006, plaintiffs filed a class action lawsuit under ERISA, on behalf of hundreds of self-insured customers and its trustees against Blue Cross, alleging that Blue Cross breached its fiduciary duty when it charged fees that allegedly should not have applied to their funds under federal benefits law.

On September 3, 2009, the district court for the Eastern District of Michigan certified a class of plaintiffs against Blue Cross consisting of “all entities which had or have administrative-services contracts with Blue Cross [and] which were or are assessed [an] other-than-group fee.” Administrative-services contracts allow self-insured employers, retirement funds and other entities to utilize the Blue Cross network and administrative services to process insurance claims. According to the complaint, the other-than-group fee is allegedly a two to three percent fee that Blue Cross charged to its insurance, but not administrative service customers.
The court ordered Blue Cross to disclose all self-insured employers, retirement funds and other entities that used its administrative services and paid the carrier a contested fee. The certified issues were whether Blue Cross was a fiduciary under ERISA and whether Blue Cross breached a fiduciary duty owed to the class.

On Sept 18, 2009, Blue Cross filed its Motion for Reconsideration. In its motion, Blue Cross argued that a necessary pre-requisite to certifying a class and asserting a claim under ERISA should be a court determination that Blue Cross acted as a fiduciary. Blue Cross claimed that it did not have a fiduciary relationship with the class members. Blue Cross further argued that the court would have to undertake complex individualized inquires to determine both liability and damages, therefore making class treatment unmanageable.

The court has not yet ruled on Blue Cross’ motion for reconsideration.

Blue Cross Blue Shield of Montana, Inc. v. Montana State Auditor
No. DA 09-60 (Mont., Sept. 24, 2009)

In late 2006 Blue Cross Blue Shield of Montana (“BCBS”) submitted a form for approval by the Commissioner of Insurance (“Commissioner”), as required by Montana law. The form included language excluding payment of benefits to the insured if the insured received or is entitled to receive benefits from an automobile or premises liability insurance. The Commissioner rejected the form because it violated state law and deceptively affected the risk purported to be assumed in the insurance contract. However, forms with this exclusion had been submitted by BCBS and allowed by the Commissioner since 2002. After losing a contested case hearing on the issue and a subsequent judicial review in the Montana First Judicial District Court, BCBS appealed the District Court’s order upholding the Commissions disapproval of BCBS’ form.

The Court first reviewed whether the District Court had correctly concluded that the Commissioner was authorized to withdraw its prior approval. The Court rejected BCBS’ argument that the Commissioner’s prior approval of the BCBS form with the exclusionary language precluded it from now disapproving the BCBS form. Quoting the relevant Montana statute providing that the Commissioner “may at any time, after notice and for cause shown, withdraw any approval,” the Court concluded that the Commissioner clearly possessed the power and duty to withdraw its previous approval of BCBS’ forms, even if one of the approvals arose during a contested case proceeding. The Court also rejected BCBS’ argument that the Commissioner was barred by res judicata based on the previous administrative proceeding from withdrawing its previous approval because that proceeding had not produced a decision, decree or order.

The Court then examined whether the Commission properly rejected the BCBS form. Under Montana law, a health service corporation's right to subrogation may not be exercised until the insured has been fully compensated for his or her losses. The Court noted that the exclusions in the BCBS form permitted BCBS to avoid paying benefits to an insured if the insured was merely entitled to receive benefits from an auto or premises liability insurance, regardless of whether the insured actually received any benefits from such policy. As a result, the Court concluded that the exclusions violated Montana law and therefore the Commission properly rejected the BCBS form.

Glen Ridge SurgiCenter, LLC v. Horizon Blue Cross Blue Shield of New Jersey, Inc.
No. 08-6160 (D.N.J. Sept. 30, 2009)

A District Court in New Jersey ruled that a course of dealing between a health benefits plan and a non-participating provider may be sufficient to establish a waiver of an anti-assignment provision in an ERISA health care plan. Glen Ridge SurgiCenter (“GRS”) sued Horizon Blue Cross Blue Shield of New Jersey, Inc. (“Horizon”), a provider of ERISA employer-sponsored benefits plans, seeking to recover increased reimbursements for services provided to beneficiaries. Although GRS is not a participating provider under Horizon’s benefits plan, GRS has long provided services to Horizon patients in exchange for an assignment of benefits, rendering GRS a “beneficiary” entitled to enforce the terms of the benefits plan under § 502(a) of ERISA. The relationship between GRS and Horizon, GRS claims, has always involved discussing patient coverage under health care policies, direct submission of claim forms, and direct reimbursement of medical costs. For example, GRS alleges in the Complaint that “topics GRS discusses with Horizon include: the existence, nature, and extent of the patient’s out-of-network coverage; whether specific procedures are covered under the applicable insurance policy; the amounts of applicable co-payments and deductibles; pre-existing conditions; whether the patient has satisfied applicable requirements for authorizations or referrals, such as authorizations from Horizon or referrals from a primary care physician, without which (when required) GRS will not go forward with a procedure; and other issues concerning the patient’s insurance coverage.”

In its motion to dismiss, Horizon argued that GRS lacked standing to sue under ERISA because anti-assignment provisions in Horizon’s plans rendered any assignments obtained by GRS invalid. Noting that the Third Circuit has not yet ruled on the enforceability of anti-assignment clauses, the Court recognized that many other Circuits had accepted the enforceability of such clauses, and thus they are potentially valid.

Although the court agreed with Horizon that it would be possible to avoid waiving an anti-assignment provision by authorizing certain forms of conduct in a benefits plan or, as here, if a state law required direct reimbursements to be made to a non-participating provider, the Court held that in this case, “the Complaint alleges a course of conduct beyond direct reimbursement for medical services.” Specifically, “[t]he Complaint described regular interaction between Horizon and GRS prior to and after claim forms are submitted, without mention of Horizon’s invocation of the anti-assignment clause.” Thus, the Court denied Horizon’s motion to dismiss this count of the Complaint.

Glaus v. Kaiser Foundation Health Plan
No. C-09-2232 MMC (N.D. Cal. 2009)

The Northern District of California granted defendant Kaiser Foundation Health Plan’s (“Kaiser”) motion to dismiss against Nicole Glaus (“Glaus”). Glaus alleged that she recovered a settlement of $4,250 from the individual responsible for her auto accident, and that Kaiser did not credit her with the “cost-sharing payments she had made out-of-pocket.”

Glaus alleged in federal district court that, under ERISA, she was entitled to a declaration that Kaiser’s failure to credit the cost-sharing payments constituted a violation of the Stead Plan and a breach of Kaiser’s fiduciary duty to her, as well as an order requiring Kaiser to reimburse her for the cost-sharing payments, which were $20.

The court first found that where both parties have offered evidence outside of the pleadings, the court may determine whether such evidence demonstrates a failure to exhaust administrative remedies. Here, Glaus conceded that she did not submit a grievance in the manner set forth in the Evidence of Coverage (“EOC”) provision. Because the EOC provision affording participants the ability to submit a grievance was an administrative remedy available to Glaus, she was required to exhaust that remedy before filing suit.

Glaus also contended that she should be excused from having to exhaust her administrative remedies because the pamphlet did not advise her of those administrative remedies. However, the court found that Glaus failed to show how a procedural violation constituted a cognizable excuse for her failure to exhaust. Furthermore, exhaustion was not excused because Glaus failed to show any statement by her former employer that was in fact misleading. Therefore, the court held that Glaus failed to show that she was excused from having to exhaust her administrative remedies.

Choice Healthcare Inc., et al. v. Kaiser Foundation Health Plan of Colorado, et al.
No. 09-12 (E.D. La. Sept. 30, 2009)

Various Kaiser Foundation Health Plans in several states (collectively “the Defendants”) had each individually contracted with Meritplan, a New York based preferred provider organization that negotiated reduced rates with participating health services providers. Choice Healthcare, Inc. and Touro Infirmary (“the Hospital”) was one of the preferred providers that Meritplan had contractually negotiated a reduced pricing arrangement for services rendered to the insureds of the Defendants. The Hospital and the Defendants did not directly contract with each other.

When the Hospital sued the Defendants for insufficient payment, the Defendants argued that the Court lacked personal jurisdiction to hear the lawsuit because of the Defendants’ lack of contacts with the state of Louisiana. The Defendants only provide services to individuals who work or reside within the Defendants’ service areas and Louisiana is not within any of the service areas. The Defendants do not maintain offices within the state, do not have any agents who reside or are employed within the state, do not have any mailing addresses or telephone listings within the state, do not have any property interests within the state, nor maintain any financial accounts within the state. In sum, the Defendants are not authorized to and do not conduct business in Louisiana, and the Defendants do not solicit business from or purposely direct any marketing activities toward residents or employees within the state.

The Hospital argued in opposition that because the Defendants had tendered payment for fifty-three patient accounts with the Hospital during a prior three year period, the defendants had sufficient minimum contacts with Louisiana to establish personal jurisdiction.

The Court, however, held in favor of the Defendants stating that the fifty-three patient accounts were an insufficient amount of contacts with Louisiana regardless of the fact that it was foreseeable that the Defendants’ insureds may need services while traveling to Louisiana or may relocate to Louisiana, and despite the fact that the Defendants had contracted with Meritplan who had contracted with the Hospital, a Louisiana entity.


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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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