Managed Care Lawsuit Watch - August 2004

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

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Cases in this issue:

• Carter v. Health Net of California Inc.
• Peninsula Regional Medical Center v. Mid Atlantic Medical Services LLC
• Johns Hopkins Hospital v. Carefirst of Maryland, Inc.

Carter v. Health Net of California Inc. 9th Cir., No. 03-15544 (7/6/04)

The U.S. Court of Appeals for the Ninth Circuit held that a district court did not have subject matter jurisdiction over a health plan enrollee’s petition to confirm an arbitrator’s award of plan benefits or the health plan administrator’s petition to challenge the award, as neither petition presented a federal question. The Ninth Circuit thus reversed the district court’s decision to vacate the award, and remanded the case to state court.

Carter enrolled in an employer-sponsored PPO underwritten by Health Net Life Insurance (“HNL”), and HNL issued Carter a certificate of insurance that contained an arbitration clause. HNL was a wholly-owned subsidiary of Health Net, and Health Net served as the administrator of the PPO plan. Carter requested a pre-determination of benefits for his daughter’s surgery, and Health Net determined that no benefits were available. The Carters initiated arbitration against Health Net to recover the surgery costs. The arbitrator found for the Carters, who filed a petition in state court pursuant to the California Arbitration Act to confirm the award and to recover attorneys’ fees pursuant to an ERISA fee-shifting provision. Health Net removed the case to federal court and petitioned under the California Arbitration Act to vacate the award. The district court vacated the award, and the Carters appealed.

The Ninth Circuit stated that a petitioner seeking to confirm or vacate an arbitration award in federal court must establish an independent basis for federal jurisdiction. The court rejected Health Net’s argument that the Carters’ request under ERISA for attorney’s fees created a federal question, noting that fee-shifting provisions cannot themselves confer subject matter jurisdiction that is otherwise absent. The court also rejected Health Net’s contention that the claims in the underlying dispute were of a uniquely federal character. The court stated that federal question jurisdiction depends on the grounds asserted for federal review in the parties’ petitions, and here both petitions relied on state law. The court noted that federal jurisdiction would have been proper had Health Net alleged that the arbitrator engaged in “manifest disregard of federal law,” but found that Health Net did not meet that standard by alleging that the arbitrator made errors of fact.

Peninsula Regional Medical Center v. Mid Atlantic Medical Services LLC D. Md. No. RDB-04-657 (7/22/04)

The U.S. District Court for the District of Maryland held that a hospital’s lawsuit, which alleged that health insurers had violated contractual agreements by failing to promptly pay for services rendered to the insurers’ subscribers, was not preempted by ERISA and was improperly removed by the insurers to federal court.

Plaintiff Peninsula Regional Medical Center (“Peninsula”) held contracts with numerous health insurers whereby Peninsula agreed to provide care to the insurers’ subscribers in return for prompt payment. Peninsula sued in state court, alleging that the insurers failed to timely pay Peninsula for “medically necessary” services rendered to subscribers. The insurers removed to federal court, arguing that Peninsula’s claims required an interpretation of “medically necessary” which would involve interpretation of ERISA plan terms. Peninsula moved to remand to state court for lack of subject matter jurisdiction.

The district court agreed with Peninsula and remanded. The court held that the case was not removable under “ordinary” § 514 ERISA preemption; the court noted that ordinary preemption, which occurs when state laws conflict with federal laws, does not give rise to federal removal jurisdiction but instead allows the defendant to assert the federal preemption defense in state court. The court also held that Peninsula’s claims were not properly removable to federal court pursuant to “complete” ERISA preemption, which occurs when federal law completely sweeps away state law in the area. The court noted that the U.S. Supreme Court’s recent Davila decision held that any state-law cause of action that “duplicates, supplements, or supplants the ERISA civil enforcement remedy… is..[completely] preempted.,” and stated that the threshold test of complete preemption is whether the plaintiff bringing the state law action has standing to sue under ERISA’s civil enforcement provision, § 502(a). The court held that since Peninsula was not a participant, beneficiary, fiduciary or assignee of an ERISA plan and since its claims were based entirely upon non-ERISA agreements between Peninsula and the insurers, Peninsula had no standing to sue under ERISA’s civil provisions and therefore its claims were not completely preempted by ERISA and were not removable to federal court.

Johns Hopkins Hospital v. Carefirst of Maryland, Inc. D. Md. No. RDB-03-3333 (7/22/04)

In a case that presented an identical question as Peninsula Regional Medical Center and that was decided on the same day, the U.S. District Court for the District of Maryland held that a contracting hospital’s state law contract claims against a health insurer were not removable to federal court. The court found that the hospital’s claims were not subject to complete preemption under ERISA because the hospital was not a participant, beneficiary, fiduciary or assignee of the ERISA plan and thus had no standing to sue under ERISA’s civil enforcement provisions. The district court remanded the case to state court.

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