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Managed Care Lawsuit Watch - September 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:


Kopstein v. Independence Blue Cross
2009 U.S. App. LEXIS 16890 (3d Cir. July 29, 2009)

The Third Circuit Court of Appeals affirmed summary judgment in favor of Independence Blue Cross after plaintiffs alleged a violation of Medicare Part D.

Specifically, the plaintiffs alleged that Blue Cross intentionally provided misleading information concerning their prescription drug benefits, in violation of the Medicare Act and their health benefits contract. The claims related to Medicare Part D's "donut hole" coverage gap.

The district court held that this was a federal question case and then dismissed the plaintiffs' amended complaint for failure to state a claim. The plaintiffs appealed to the Third Circuit.

The Third Circuit concluded that it only had subject matter jurisdiction for claims arising under the Medicare Act (42 U.S.C. § 405(g)), which states that a plaintiff may bring an action in federal district court only after obtaining a final decision from the Secretary of Health and Human Services.

Thus, the plaintiffs were first required to exhaust the administrative review channels that the Medicare Act mandates before seeking judicial review.

Northern Michigan Hospitals, Inc., et al. v. Health Net Federal Services LLC
Nos. 08-2860; 08-2981 (3rd Cir. September 28, 2009)

The United States Court of Appeals for the Third Circuit affirmed the district court's dismissal of a $100 million putative class-action complaint brought by several non-network hospitals against TRICARE managed care support contractors Health Net Federal Services LLC ("Health Net") and TriWest Healthcare Alliance Corporation ("TriWest") for failure to exhaust administrative remedies available under the TRICARE program.

In their complaint filed in the U.S. District Court for the District of Delaware, non-network hospitals asserted claims against Health Net and TriWest for breach of contract implied in fact and unjust enrichment. The complaint was filed on behalf of a putative class of non-network participating provider hospitals who had submitted claims to Health Net and TriWest on behalf of TRICARE beneficiaries. The complaint alleged damages in excess of $100 million based on underpayment of claims. The hospitals alleged that Health Net and TriWest refused to pay "facility charges" for certain outpatient services rendered to TRICARE beneficiaries in accordance with regulatory requirements. The defendants moved to dismiss the complaint on various grounds, including failure to exhaust TRICARE's administrative remedies. The district court dismissed the complaint, without prejudice, because the hospitals failed to exhaust their available administrative remedies prior to seeking redress in the District Court under the doctrine of prudential exhaustion. The hospitals then appealed the dismissal to the Third Circuit.

On appeal, the United States Court of Appeals for the Third Circuit affirmed the district court's dismissal. The Court first rejected the hospitals' argument that their complaints did not raise appealable issues under the TRICARE administrative regulations. Framing the dispute as one over "whether certain charges that the Hospitals submitted qualify for reimbursement as facility charges," the Court held that necessary factual determinations, including "whether expenses that qualify as facility charges were incurred, whether such charges were properly billed, and how much is owed if they were incurred and properly billed" could be determined by the TRICARE Management Activity through the administrative process. Because the hospitals' claims are "best understood as a challenge to the denial of payment", the Court found them to raise "an appropriate issue for administrative appeal."

The Third Circuit further held that the District Court did not abuse its discretion in ordering exhaustion, as it found that exhausting administrative remedies would be neither futile nor overly burdensome. The Court granted that the defendants "persuasively argue[d] that the Hospitals' real complaint is that they may not ultimately prevail at the agency level and that exhaustion will be time consuming. But these reasons are not enough to excuse exhaustion and do not establish that exhausting administrative remedies would be futile." The Court also rejected the hospitals argument that because their complaint is a putative class action, exhaustion is overly burdensome. The Court noted that the same claims will be presented in the administrative process as are presented to the Court, and regardless, only the claims of the four named plaintiffs are before the court and subject to exhaustion at this time.

Health Net Federal Services is represented in this matter by Crowell & Moring attorneys Chris Flynn, Tracy Roman, Art Lerner, Barbara Ryland and April Ross.

National Ass’n of Chain Drug Stores v. New England Carpenters Health Benefits Fund
No. 09-1577 (1st Cir. Sep. 3, 2009)

The First Circuit upheld a district court's approval of two settlements involving class action suits brought by purchasers of prescription drugs against First DataBank and Medi-Span ("Defendants"). In the first suit, the class alleged that First DataBank violated RICO by inflating AWP whereas in the second suit, the class alleged negligence for similar conduct. The Class and the Parties agreed to proposed settlements. The primary provision of the proposed settlements required the Defendants to "rollback" their published AWP figures for all drug products with a mark-up higher than 1.2 down to a 1.2 mark-up. The district court preliminarily approved the proposed settlements. As a result of objections to the proposed hearings, primarily from pharmacy interests worried that the rollback would reduce payments they receive from third party payers and PBMs, the settlements were amended. However, the rollback provision remained the same.

The district court issued a final order and judgment certifying the class and approving the settlements. Parties representing the pharmacy interests and PBMs filed appeals. The issues under appeal included (1) which parties could appeal the judgment, (2) whether the judgment operates against pharmacies that were not parties to the case and therefore violates their rights to due process and offends Federal Rule of Civil Procedure 19 and (3) whether the district court correctly concluded that the settlements were "fair, reasonable, and adequate."

With regard to the parties entitled to appeal the judgment, the Court ruled that (1) the National Association of Chain Drug Stores, the Food Marketing Institute, and DeVille Pharmacies were entities within the class definition, did not opt out of the class and were therefore entitled to appeal, (2) the Long-Term Care Pharmacy Alliance and the American Society of Consultant Pharmacists, non-class members who moved to intervene in the district court but were denied, are permitted to intervene on appeal and (3) Eaton Apothecary, Louis and Clark Drug, Thrifty White Drug, the National Community Pharmacists Association, and the Pharmaceutical Care Management Association, non-class members who had not attempted to intervene in the district court, are not entitled to now intervene.

Although the Court acknowledged that the pharmacy interests would likely lose money for some period of time as a result of the rollback provision of the settlement and that their interests were not formally parties to the case, the Court concluded that the judgment does not violate their due process rights nor had Rule 19 been offended. The Court noted that their interests "had been vigorously address by arguments and evidence from pharmacy interests who were present and were considered by the district court in the passing on the settlements," and that the pharmacy interests had not suggested that Rule 19 had been offended during the district court case.

On the merits of the case, the Court affirmed the district court's approval of the settlement. The Court stated that the rollback is sensible because it would recover some of the profits gained and provide some compensation for past overcharges.

Lone Star OB/GYN Associates v. Aetna Health Inc.
No. 08-50646 (5th Cir. Aug. 18, 2009)

The Fifth Circuit ruled that a claim involving the rate of payment as set forth in a provider agreement is not preempted by ERISA. Lone Star OB/GYN Associates ("Lone Star") sued Aetna under Texas' prompt pay statutes for Aetna's failure to pay the contracted amounts provided in the provider agreement as well as for Aetna's failure to make its payment within the time period required under the prompt pay statutes. Aetna removed the case to federal court on ERISA preemption grounds. Upon a motion made by Lone Star, the district Court permitted Lone Star to amend its complaint, redacting claims which were denied by Aetna because coverage was denied. The only claims that would remain were those that were partially paid by Aetna. The case was remanded back to state court and Aetna appealed.

Referring to similar holdings made by the Third and Ninth Circuits, the Court concluded that "a claim that implicates the rate of payment as set out in the Provider Agreement, rather than the right to payment under the terms of the benefit plan, does not run afoul of Davila and is not preempted by ERISA." The Court noted that Lone Star's claims were completely separate from a coverage determination and arose out of a independent legal duty encompassed in the provider agreement and the prompt pay law. The Court further stated that "…where claims do not involve coverage determinations, but have already been deemed "payable," and the only remaining issue is whether they were paid at the proper contractual rate, ERISA preemption does not apply.

The Court then examined whether Lone Star's claims implicated issues involving the rate of payment or whether they instead involved benefit determinations. The Court noted that Lone Star had originally submitted a list that included partially paid claims as well as claims fully denied claims but that Lone Star had later redacted all the fully denied claims. Consequently, the Court concluded that claims for underpaid claims were not preempted by ERISA because they did not implicate coverage determinations. However, the Court also held that based on the facts, it could not determine whether Aetna partially paid the claims because Aetna decided that only part of the claim was covered under the plan or because Aetna misinterpreted the agreement or mistakenly referred to the wrong fee schedule.

Merling v. Horizon Blue Cross Blue Shield of New Jersey
No. 04-4026 (D.N.J. Jul, 31, 2009)(unpublished opinion)

The U.S. District Court for the District of New Jersey concluded that Horizon Blue Cross Blue Shield of New York, a health insurer, abused its discretion in terminating Plaintiffs' health plan coverage. Plaintiffs, health plan participants, sought and received reimbursement for psychiatric services provided by a provider by telephone. However, Plaintiffs' bills used a CPT code indicating that the consultations were face-to-face, not by telephone. These consultations by telephone were excluded under Plaintiffs' plan. Once Horizon became aware that Plaintiffs had improperly received these benefits, Horizon terminated Plaintiffs' coverage based on Plaintiffs' alleged intent to defraud Horizon.

Plaintiffs filed suit against Horizon claiming that Horizon violated ERISA and state laws. Horizon moved for summary judgment.

In determining whether Horizon violated ERISA by abusing its discretion in terminating Plaintiffs' coverage, the Court examined two issues. First, the Court looked at whether Horizon acted arbitrarily and capriciously in determining that the psychiatric treatments were not covered under the plan. The Court concluded that Horizon did not act unreasonably in determining that the telephonic consultations were not covered under the plan because they were specifically excluded under the terms of the plan.

The Court then examined whether Horizon's termination of Plaintiffs' coverage was arbitrary and capricious. According to the Court, Horizon had to show substantial evidence that Plaintiffs had knowledge of the fraud because the termination provision under the plan defined fraud as a knowing misrepresentation. The Court held that the record did not disclose evidence of knowing misrepresentation and therefore Horizon acted arbitrarily when it terminated Plaintiffs' coverage.

Horizon had filed state law counterclaims alleging fraud and misrepresentation. The Court ruled that ERISA preempted the state law claims noting that Horizon could have brought a claim against Plaintiffs under § 502(a) of ERISA and that "interpretation under the plan form an essential part of the counterclaims…"

Hulsman v. Behavioral Health Systems, Inc. and Blue Cross & Blue Shield of Alabama
No. 2008 – CA-00635-COA (Miss. Ct. App. July 21, 2009)

The Court of Appeals of Mississippi affirmed a lower court ruling that Plaintiffs' state law claims, alleging failure to arrange for medical treatment is preempted under ERISA.

Plaintiffs – husband and wife – alleged state law claims against Defendants for failing to provide Ms. Hulsman with an immediate referral for in-patient treatment. Plaintiffs were enrolled in Blue Cross & Blue Shield of Alabama ("Blue Cross"), an ERISA regulated plan, through Mr. Hulsman's employer. The plan included a mental health program managed by Behavioral Health Systems ("BHS").

The Complaint alleges that Mr. Hulsman had requested that BHS refer Ms. Hulsman to an in-patient treatment facility relating to Ms. Hulsman's fear that she would hurt herself or someone around her. In response, BHS told Mr. Hulsman that it would be difficult to admit Ms. Hulsman into an inpatient facility over the holiday weekend, but would be in touch the next week with a referral. Mr. Hulsman again contacted BHS after the weekend for an in-patient referral, but none was given. Three days later, Ms. Hulsman attempted suicide. Plaintiffs sued in state court, alleging various claims of negligence for failing to arrange for medical treatment. Defendants moved for dismissal on the grounds of federal preemption under ERISA. The circuit court granted Defendants' motion.

On appeal, the Court upheld federal preemption, finding that Plaintiffs claim that a medical provider failed to provide for or arrange for medical treatment is related to the administration of the medical benefit plan and therefore preempted by ERISA. The Court rejected Plaintiffs argument that federal preemption is inappropriate in cases where an insurer has failed to provide or arrange for medical treatment. Relying on the Supreme Court decision Aetna Health Inc. v. Davila, the court found preemption appropriate because plaintiffs' claims emanated from the administration of an ERISA regulated benefit plan. Accordingly, the court affirmed the lower court ruling that plaintiffs claims were preempted by ERISA.

Grider v. Keystone Health Plan Central, Inc.
No. 08-3074 (3rd Cir. Sept. 1, 2009)

In a September 2007 decision, U.S. District Judge James Knoll Gardner imposed sanctions on several lawyers and their clients for engaging in discovery tactics that the judge said were designed to delay proceedings and drive up the costs of litigation. The Third Circuit Court of Appeals, while upholding the findings of fact and the credibility determinations made by Judge Gardner, vacated the trial court's order of sanctions, since Judge Gardner did not consistently employ the "individualized analysis" that was required of him when considering motions for sanctions.

This case, which stems out of a 2001 case filed by plaintiffs as a putative class action, alleged that the defendants -- Pennsylvania insurers -- conspired to defraud, delay payment, and reduce payments on health insurance claims. After the defense attorneys removed the case to federal court, the parties engaged in protracted discovery aimed primarily at uncovering documents in the possession of the defendant-insurers, which the plaintiffs argued would be the key to the resolution of the case.

Trial Judge Gardner found that counsel for the parties had a great deal of animosity towards one another, and that all the defendants and their counsel had abused the discovery process by, for instance, denying "the existence of documents that Plaintiffs had sought throughout discovery" only later, after crucial junctures in the litigation, "announc[ing] that they had found many of those documents." Furthermore, no defendant, when producing documents, included a privilege log that would have detailed the documents that the defendants claimed were privileged. Ultimately, Judge Gardner found that the most important documents for the litigation were withheld by the defendants, and that the actions of the defendants, including producing thousands of documents on the last day of discovery, were unwarranted and an abuse of process.

Nevertheless, finding that Judge Gardner had not employed the "individualized analysis" necessary when imposing sanctions, the Third Circuit vacated the order for sanctions. The court found that Judge Gardner was justified in his frustration with the parties and that it was difficult for Judge Gardner to pinpoint exact points of sanctionable behavior. However, noting that where the livelihoods of attorneys are at stake, the law requires trial court judges to employ a more specific analysis for sanctions than was used in this case.


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.

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