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Managed Care Lawsuit Watch - October 2014


This summary of key lawsuits affecting managed care is provided by the Health Care Group of Crowell & Moring. If you have questions or need assistance on managed care law matters, please contact Art Lerner or any member of the health law group.

Cases in this issue:


Michigan Spine and Brain Surgeons, PLLC v. State Farm Mutual Automobile Insurance Co.
No. 13-2430 (6th Cir. July 16, 2014)

The United States Court of Appeals for the Sixth Circuit held that a health care provider can bring an action under the Medicare Secondary Payer (MSP) Act's private cause of action against a non-group health plan (NGHP) without first demonstrating that the NGHP denied coverage based on the patient's Medicare eligibility. In doing so, the Court declines to read the MSP statute narrowly, finding that the intent of the statute was to allow providers to recover from liability insurance carriers that make primary payment on behalf of a Medicare beneficiary despite arguments that the insurance companies should not be considered group health plans, subject to the provider's private cause of action.

The Sixth Circuit's opinion focuses on the meaning of the conjunctive "and" as used in 42 U.S.C. § 1395y(b)(3)(A), which establishes a private cause of action when a primary plan fails to pay "in accordance with paragraphs (1) and (2)(A)." Paragraph (1) applies only to group health plans and prohibits the plan from taking into account an individual's Medicare eligibility when determining benefits. In its prior decision in Bio-Medical Applications of Tennessee, Inc. v. Central States Southeast & Southwest Areas Health & Welfare Fund, 656 F.3d 277 (6th Cir. 2011), the Sixth Circuit held that the primary plan must meet the requirements of both paragraph (1) and (2)(A) before the private cause of action was triggered. The district court and State Farm relied on Bio-Medical to conclude that there is no private cause of action against a NGHP unless a plaintiff establishes that the NGHP denied coverage based on Medicare eligibility. The district court dismissed the provider's MSP claim because State Farm allegedly denied coverage on the basis that the injury was caused by a preexisting condition, not because the individual was eligible for Medicare.

In Michigan Spine, the Sixth Circuit backs away from its broad language in Bio-Medical andconcludes that its holding is dicta to the extent it can be read to address application of the private cause of action to NGHPs. Specifically, the Sixth Circuit states: "While it is true that Bio-medical stated that primary plans rather than group health plans must meet the requirements of paragraphs (1) and (2)(A), this does not provide a basis to conclude that Bio-Medical was addressing the non-group health plan issue faced here. As a result we find Bio-Medical distinguishable." Opinion at 7 (emphasis in original).

Having found that Bio-Medical is not controlling, the court next turns to the statutory language, which it finds inconsistent and unclear. Noting that "[w]hen statutory text is unclear, courts afford deference to and seek guidance from agency regulations," the Court examines CMS regulations and legislative history. The court finds most instructive the CMS regulations on what constitutes "taking into account" Medicare eligibility, noting that every example provided in the regulation involves a group health plan, supporting the court's the conclusion that paragraph (1)'s "taking Medicare into account" requirement applies only to group health plans. The court also finds that the congressional intent behind the MSP – to curb health costs and protect the fiscal integrity of the Medicare system – further bolsters this conclusion, since "State Farm's interpretation… would eviscerate the private cause of action as it relates to non-group health plans."  Id. at 8. It also cites to other appellate decisions that have allowed claims against NGHPs to proceed without evidence that Medicaid eligibility was involved in the benefit decision.

The court therefore concludes that the "takes Medicare into account" requirement in paragraph (1) applies only to group health plans and that a provider may pursue a private claim under the MSP against a NGHP that denies coverage on a basis other than Medicare eligibility. 

Crowell & Moring LLP submitted an amicus brief on behalf of Humana, Inc. in support of appellant Michigan Spine and Brain Surgeons, PLLC.


Self-Insurance Institute of America, Inc. v. Snyder
No. 12-2264 (6th Cir. August 4, 2014)

The United States Court of Appeals for the Sixth Circuit upheld dismissal of a lawsuit seeking to invalidate the Michigan Health Insurance Claims Assessment Act (HICA) on ERISA preemption grounds. 

Michigan passed HICA in 2011 to generate revenue for the state Medicaid program. HICA imposes a one percent tax on all paid claims by carriers or third party administrators (TPA) to providers for services given in Michigan for Michigan residents. Additionally, every carrier and TPA subject to the tax must submit quarterly returns to the Michigan Department of the Treasury and keep accurate records and documents as required by the department.

Self-Insurance Institute of America, Inc. (SIIA) sought a declaratory judgment that ERISA preempted HICA, as well as an injunction preventing HICA's enforcement. SIIA argued that HICA interfered with ERISA plan administration, imposed administrative burdens on top of those added by ERISA, and obstructed the relationship between ERISA-covered entities.

The court held that the HICA does not have an impermissible connection with ERISA plans or present an impermissible burden on them. First, it explained that state taxes are traditional areas of state sovereignty. This gave additional force to the presumption that Congress did not intend federal laws, including ERISA, to preempt state laws of particular state concern. The court found that HICA does not interfere with ERISA plan administration because its only potential plan effects are cuts to plan profits. Furthermore, HICA's recordkeeping requirements did not constitute inappropriate administrative burdens on ERISA plan; ERISA precedent considers inappropriate administrative burdens to be those related to plan financial stability. The court also rejected SIIA's argument that the HICA tax's limit to Michigan residents altered the relationship between plan administrators and beneficiaries by requiring administrators to collect additional information from beneficiaries. Instead, the court explained, administrators rely on existing business records to determine beneficiary residency for HICA purposes.


DB Healthcare, LLC v. Blue Cross Blue Shield of Arizona
No. 2:13-cv-01558 (D. Ariz. Jul. 9, 2014)

The United States District Court for the District of Arizona dismissed a lawsuit initiated by health care providers against Blue Cross Blue Shield of Arizona (BCBS) which claimed that the health insurance company illegally recouped  reimbursements paid to the providers. The health care providers, including ten nurse practitioners employed by DB Healthcare, had been reimbursed for conducting allergy tests and providing attendant care since May 2011. Thereafter, BCBS reversed its policy of covering these tests on the basis that they were henceforth considered "investigational."

In April of 2012, BCBS sent letters to the health care providers demanding that they return $237,000 in erroneous payments. The providers refused to refund the payments and sued, alleging the demand letter violated ERISA and health care reform claim rules requiring adequate notice in writing within 30 days and the opportunity for full and fair review. In reply, BCBS argued that the providers had breached their contract with the health insurance company in spite of the providers' claims that ERISA preempted the contracts. BCBS moved  to dismiss the complaint on the ground the providers lacked standing to bring the ERISA claims. The providers countered that they had standing under ERISA because they collected payments directly from BCBS. The court rejected the providers' argument that a direct payment for services is an ERISA benefit that granted them the right to sue under ERISA.

The court held that that such a right comes only from an assignment of benefits from a plan participant and explained that characterizing beneficiaries as more than just a covered spouse or dependent would undermine ERISA. The court also found that some, if not all of the plans, had valid non-assignment clauses, which eliminated all bases for providers to expect ERISA claims rules to be applicable.


Epstein v. Burwell
No. 13-8728 (C.D. Cal. August 5, 2014)

The United States District Court for the Central District of California dismissed plaintiff Stanley Epstein's claim for lack of subject matter jurisdiction, holding that the Secretary of Health and Human Services (the Secretary) could apply the "Copay-First Approach" to administer Medicare Part D claims that straddle the gap between the Initial Coverage Stage and the Catastrophic Coverage Stage. This Coverage Gap Stage, commonly referred to as the Part D "donut hole," exists when an enrollee's total prescription drug costs for the year have exceeded his or her "initial coverage limit," but where those costs have not yet reached the "annual out-of-pocket" threshold that marks the beginning of the Catastrophic Coverage Stage. The Copay-First Approach allows health plans to resolve "straddle claims" by counting an enrollee's copay toward the initial coverage limit before determining its share of the prescription drug cost.

Epstein properly exhausted his administrative remedies challenging Humana's denial of his Part D insurance claim; however, the Medicare Appeals Council (MAC) ultimately found that application of the Copay-First Approach was the correct method to resolve Epstein's claim.  Epstein then filed a class action complaint in the district court, challenging the Secretary's use of the Copay-First Approach to resolve "straddle claims."

Although the court found that Epstein had standing to pursue declaratory and injunctive relief against the Secretary, the court nevertheless held that Epstein did not satisfy the $1,400 amount-in-controversy requirement, either individually or when aggregating his claim with those of putative class members. Specifically, the court found that the Medicare statutory and regulatory schemes required Epstein to expressly request aggregation before the Administrative Law Judge—a request that Epstein did not make. Moreover, Epstein's attempts to use the projected value of his own future "straddle claims" to satisfy the amount in controversy failed: because the Part D "donut hole" would cease to exist in 2019, Epstein's straddle claims during the remaining six year period would only amount to $696, well below the $1,400 requirement.

Finally, the court held that there was no basis to invoke mandamus jurisdiction because Epstein failed to establish that the Secretary owed him a plainly-prescribed, nondiscretionary duty. The Secretary properly applied the congressionally-mandated initial coverage limit required by the plain language of the statute, and the Secretary was under no duty to go through notice-and-comment rulemaking prior to applying the Copay-First Approach.


Sidibe et al v. Sutter Health
No. 12-04854 (N.D. Cal. June 20, 2014)

Djeneba Sidibe and other insured individuals (Plaintiffs) sued Sutter Health, a hospital system in northern California, for allegedly violating state and federal antitrust laws. The District Court for the Northern District of California granted Sutter's motion to dismiss for failure to state a claim.

Plaintiffs alleged that two clauses in Sutter's contracts with health plans violated antitrust laws: the "all-or-nothing" clause and the "anti-steering" clause. The all-or-nothing clause required health plans to either include all of the Sutter hospitals in their provider networks or none of the Sutter hospitals. The anti-steering clause required health plans to provide financial incentives that encouraged consumers to use Sutter services.

The plaintiffs claimed that the all-or-nothing clause constituted an illegal 'tying arrangement' because it required health plans to include Sutter's Inpatient Hospital Services in five competitive markets (San Francisco, Oakland, Sacramento, Modesto, and Santa Rosa) in order to access Sutter's "must have" Inpatient Hospital Services in nine non-competitive markets (Antioch, Berkeley, Burlingame, Castro Valley, Davis, Roseville, San Leandro, Tracy, and Vallejo).  Sutter controlled 70 - 100 percent of the inpatient hospital services in these nine non-competitive markets, which prevented health plans from competing in these markets unless they had Sutter's hospitals in their networks. As a result, the all-or-nothing clause allowed Sutter to avoid competing with other hospitals in the five competitive markets.

Similarly, the plaintiffs claimed that the anti-steering clause raised their insurance costs. This clause expressly required health plans to encouraging consumers to visit Sutter hospitals, preventing health plans from steering consumers to lower-cost hospitals. Plaintiffs concluded that the anti-steering clause allowed Sutter to use its market power to overcharge for its services.

The court noted that the Federal Trade Commission and the Department Of Justice had recently issued a policy statement condemning anti-steering and all-or-nothing clauses.

However, before addressing whether Sutter's conduct was anticompetitive, the court addressed the threshold issue of whether the plaintiffs properly defined the relevant market. A valid geographic market must identify the entire area where health plans and consumers can purchase inpatient hospital services. If every supplier within an alleged geographic market increases the price, and consumers respond by turning to external providers, then the proposed market must be expanded to include that area. The purpose of this test is to determine the limits of Sutter's power to control prices.

The plaintiffs relied on Dartmouth Atlas of Health Care to define the geographic markets where health plans purchase Inpatient Hospital Services. Dartmouth Atlas defines a market as "a collection of ZIP codes whose residents receive most of their hospitalizations from hospitals in that area."

Sutter argued that plaintiffs failed to state a claim under state and federal antitrust statutes by failing to identify a "relevant geographic market" that included all areas where health plans or their members could seek similar services. The plaintiffs argued that competition forced health plans to provide access to the hospitals that their members currently visit, rather than those the members could visit.

The court agreed with Sutter, observing that the Ninth Circuit requires district courts to analyze geographic markets by examining the availability of substitute products. The court thus found that Plaintiff's relevant market definition failed by only considering the zip codes where a health plan or its members received most Inpatient Hospital Services. The court reasoned that a plausible geographic market must define a boundary, beyond which consumers refuse to travel to seek a substitute for Sutter's services. Absent a viable geographic market, the plaintiffs could not demonstrate that Sutter had the market power necessary to engage in anticompetitive conduct.

University of Chicago Medical Center v. Sebelius
2014 BL 199605, No. 1:13-cv-04742 (N.D. Ill. July 18, 2014)

An Illinois federal district court reversed the Department of Health and Human Services' (HHS) decision to dismiss a Medicare reimbursement claim brought by the University of Chicago Hospital (Hospital).

There was a long series of disputes regarding Medicare reimbursement to Hospital from FY 1996 through FY 2007. One of the disputes, regarding FY 1996, was eventually resolved by the Seventh Circuit, and many of the disputes regarding other fiscal years had been put on hold while the Seventh Circuit case was resolved.  Once the FY 1996 dispute was resolved, the HHS Board scheduled position paper deadlines and hearings for the remaining disputes. 

The revised filing schedule repealed a preliminary position paper filing deadline but did not explicitly change the position paper filing deadline for the FY 2005 dispute. Hospital missed the purported filing deadline for the FY 2005 claim, and the HHS Board dismissed Hospital's FY 2005 appeal for failure to timely submit a position paper. The Board refused Hospital's petition to reinstate the FY 2005 appeal, CMS denied additional review, and Hospital brought the instant action.

The court reversed HHS's decision. The filing deadlines were unclear, evidenced in part by the fact that a sophisticated Hospital with the aid of counsel did not understand HHS' deadlines. For HHS to then strictly apply those deadlines and refuse any requests for appeals or reinstitution of appeals was arbitrary and capricious. The court chastised HHS for enforcing deadlines that made no sense and said that the case "did nothing to improve Medicare's reputation" as "an unfeeling bureaucracy stuffed with arcane rules." The court reversed HHS' dismissal and granted summary judgment to Hospital.

U.S. ex rel. Kester v. Novartis Pharmaceuticals Corp.
No. 11 Civ. 8196(CM) (S.D.N.Y. Aug. 7, 2014)

The United States District Court for the Southern District of New York held that the Affordable Care Act (ACA) does not limit the existing false certification analysis in Anti-Kickback-Statute (AKS) false claims cases. The Government brought a False Claims Act (FCA) suit against Novartis for kickbacks paid to several pharmacies for promoting two drugs, Myfortic and Exjade. Novartis purportedly paid kickbacks in the form of cash rebates and patient referrals.  The Government alleged that Novartis violated the FCA because the AKS violations rendered "false" the claims regarding those drugs that the kickback-receiving pharmacies submitted to the Government through Medicare and Medicaid.

At issue was whether the definition of "legally false" as stated  in Mikes v. Strauss, 246 F.3d 687 (2d Cir. 2001) (Mikes) still applied. The Government alleged that the claims were "legally false" because they were "tainted" by a violation of the AKS committed in connection with the claims, thus applying the standard of "falsity" outlined in Mikes. Novartisargued that the 2010 amendment to the AKS under the ACA had undone the application of legal falsity as outlined in Mikes. As Novartis argued, "it is not enough that a pharmacy received kickbacks for promoting a particular drug (Myfortic or Exjade) and then submitted claims for reimbursement for that drug after falsely certifying that it was in compliance with the AKS-even though this is sufficient to render a claim ‘false' under Mikes."

The district court rejected Novartis' argument. The court held that the 2010 amendment to the AKS under the ACA confirmed that compliance with the AKS is a precondition to payment of Medicare and Medicaid claims. That a certification is made by an innocent party submitting a claim without knowledge of an AKS violation does not remove the taint of falsity from the certifications. Mikes' framework applied to the Government's claims, and the Government sufficiently pled false Medicare claims under Mikes.

However, the court did issue a divided ruling on the Government's Medicaid false claims allegations. Only the Government's allegations regarding New York Medicaid false claims were adequate. Moreover, only the state Medicaid allegations submitted to the state Medicaid programs beginning on March 23, 2010 (when the 2010 amendment took effect) were adequate under an "implied false certification theory."

Tim Keffeler v. Partnership HealthPlan of California
224 Cal. App. 4th. 322 (February 8, 2014)

Medicaid is a cooperative federal-state program that provides funds to cover medical expenses incurred by needy persons. The funds are disbursed either by the state itself or by private entities, like Partnership's managed care program. These private entities are bound by the terms of their contract, and thus many have freedom to negotiate rates. Rates are governed by a vast regulatory framework, including federal statutes such as § 30(A). This section requires states to “assure that payments are consistent with efficiency, economy, and quality of care.”

Tim Keffeler owns pharmacies in northern California that dispense prescription drugs to Medi-Cal (Medicaid) beneficiaries. In October 2010, California required Medi-Cal eligible seniors and persons with disabilities to enroll in Medi-Cal managed care plans rather than traditional fee-for-service Medi-Cal, and thousands of people enrolled in Partnership HealthPlan. Keffeler's pharmacies became part of the network.

Keffeler alleged that Partnership set pharmaceutical reimbursement rates so low that they violated the 'quality of care' and 'equality of access' requirements of 42 U.S.C. § 1396a(A)(30)(A) (§ 30(A)). He argued that Partnership should have used cost studies so that the rates correlated with provider costs.

Partnership argued that the requirements of § 30(A) do not apply to managed care programs, but only to Medicaid fee-for-service programs. The trial court agreed with Partnership. The Court of Appeal affirmed on other grounds, but explicitly refused to determine whether § 30(A) applied to Medicaid managed care plans.

The California Court of Appeal relied on a 2013 decision by the United States Court of Appeal in Managed Pharmacy Care v. Sebelius, 716 F.3d 1235 (9th Cir. 2013), which held that even if § 30(A) applies to Managed Care plans, it does not require states to consider provider costs.  The California Court of Appeal observed that the Ninth Circuit noted that the language of § 30(A) is intentionally broad and amorphous and that Congress could have required specific methodologies, but chose not to. And that the Ninth Circuit decision did not require Medicaid managed care plans (such as Partnership) to consider provider costs or require any specific rate methodology. Rather, the Ninth Circuit held that § 30(A) gives states discretion in determining precisely how they comply with § 30(A)'s mandated substantive outcomes, specifically: (1) efficiency, (2) economy, (3) quality care, and (4) access to providers. In agreement with the Ninth Circuit, the California Court of Appeal concluded that showing rates are below provider costs does not establish a claim under § 30(A), unless a provider can show that these low rates negatively impacted one the four substantive mandates. 

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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

William A. Helvestine
Senior Counsel – San Francisco
Phone: +1 415.365.7260

Harsh P. Parikh
Associate – Los Angeles
Phone: +1 213.443.5528