Managed Care Lawsuit Watch - August 2005

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:

• AdvancePCS v. Bauer
• AmeriChoice of Pennsylvania, Inc.
• Bell v. Blue Cross of California
• Fine imposed by California Department of Managed Health Care on Blue Cross of California
• Lifecare Hospitals, Inc. v. Health Plus of Louisiana, Inc.
• In re: Managed Care Litigation
• Prudential Insurance Co. of America v. National Park Medical Center Inc. ("Prudential II")
• State v. Cohen and State v. Morreale
• In re Union Pac. R.R. Employment Practices Litig.
• Virginia Academy of Clinical Psychologists, et al. v. Group Hospitalization & Medical Services d/b/a Blue Cross/Blue Shield of the National Capital Area, et al.

AdvancePCS v. Bauer Ga. Ct. App. No. A05A0455 2005 Ga. App. LEXIS 769 (7/13/05)

The Georgia Court of Appeals ruled on July 13, 2005 that the Employee Retirement Income Security Act ("ERISA") did not preempt a class action brought by health plan participants alleging that two pharmacy benefit management companies ("PBMs") and two mail order pharmacies were unjustly enriched by the companies' wrongful classification of a generic drug as a brand name drug.

The plaintiffs were participants in ERISA plans which required higher copayments for brand name drugs than for generic drugs, and alleged that the defendants unjustly enriched themselves by universally misclassifying Tamoxifen as a brand name drug and reaping the higher copays. The defendants tried to remove the case to federal court under ERISA preemption, but the Georgia Court of Appeals held that the unjust enrichment claim did not relate to an ERISA plan such that express preemption would apply. The court reasoned that the claims were not disguised claims for drug benefits, did not involve interpretation of plan terms, and were not filed against a plan, employer or plan fiduciary.

AmeriChoice of Pennsylvania, Inc. E.D. Pa. (settlement announced 6/30/05)

AmeriChoice of Pennsylvania, Inc. has agreed to pay $1.6 million, to enter into a corporate integrity agreement, and to maintain a claims processing system that will allow providers to query the status of unsettled claims, to settle allegations by the U.S. Attorney for the Eastern District of Pennsylvania and the HHS OIG that the company violated the False Claims Act. The settlement requires AmeriChoice to pay 95% of clean claims within thirty days of receiving all necessary documentation to process the claim.

The government alleged that from September 1995 through June 1998, AmeriChoice did not pay providers' health claims in a timely fashion or did not pay them at all. The complaint also alleged that the company did not report claims processing data accurately to regulators. AmeriChoice, previously known as Healthcare Management Alternatives Inc., denies any wrongdoing but agreed to settle to avoid the costs associated with litigation.

Bell v. Blue Cross of California Cal. Ct. App., No. B174131 (7/21/05)

The Court of Appeals of California, Second Appellate District, held that Blue Cross of California must pay a "reasonable amount" to Dr. Mark R. Bell, an emergency room physician who provides services to the plan's enrollees but did not have a contract with the company.

The doctor had filed a class action for injunctive relief, disgorgement, and damages under the Unfair Competition Law (Bus. & Prof. Code, § 17200 et seq.) or reimbursement for the reasonable value of services rendered (quantum meruit). The court reversed the trial court, saying that these claims are not barred by the Knox-Keene Act (California's system of licensing and regulation under the jurisdiction of the Department of Managed Health Care). The court reasoned that (1) concern for higher health care services costs does not justify a rule that singles out emergency care physicians, (2) Blue Cross's duty to "reimburse" would be illusory if the reimbursement was not reasonable, and (3) the statute requiring reimbursement would be unconstitutional if it allowed reimbursement at a "confiscatory rate."

Fine imposed by California Department of Managed Health Care on Blue Cross of California Cal. Dep't of Managed Health Care (Fine imposed 7/5/05)

The California Department of Managed Health Care ("DMHC") fined Blue Cross of California $150,000 for allegedly overcharging nearly 45,000 debit and credit card customers a total of nearly $12 million in premiums. The overcharges were due to a faulty computer program, but the DMHC found that the company did not take proper precautions to prevent and detect overcharges and did not timely notify regulators. The DMHC stated that its fine was intended to send a message to health plans that they need to be on constant guard to protect consumers from computer-related mistakes.

Lifecare Hospitals, Inc. v. Health Plus of Louisiana, Inc. 5th Cir., No. 04-30422 (7/20/05)

The Fifth Circuit Court of Appeals held that a health plan participant may elect to receive Consolidated Omnibus Budget Reconciliation Act ("COBRA") continuation benefits after the 60 day minimum election period specified in COBRA if plan documents are silent with respect to the maximum length of the election period.

In this case, a critically ill employee was fired by his employer, and his insurance coverage was terminated by his employer's insurer. Four months after the firing the employee mailed a COBRA election form to the insurer, seeking to extend his coverage and to pay premiums for the previous four months of long-term hospital care. The insurer refused to reimburse the former employee's medical expenses, claiming that the employee failed to timely elect to extend his insurance coverage. The hospital sued the employer and insurer, seeking payment for the employee's long-term hospital care. The 5th Circuit held that the insurer must reimburse the hospital, reasoning that the employee could and did validly elect COBRA coverage at any time within the 18-month period allotted by the plan for continuation coverage, since the COBRA statute is silent on the maximum length of an election period and since the plan documents specified no maximum length on the COBRA election period. The court reasoned that this result comported with COBRA's goal of protecting employees from loss of insurance coverage.

In re: Managed Care Litigation S.D. Fla., MDL 1334 (Settlement granting preliminary approval, 7/13/2005)

On July 11, 2005, WellPoint Inc. announced that it will pay as much as $198 million to settle the national class action in which 700,000 physicians alleged that WellPoint and other major managed care companies conspired to systematically underpay the physicians. A federal district court judge granted preliminary approval to the settlement on July 13, and a fairness hearing has been set for December 2, 2005. If given final approval, WellPoint would become the fifth managed care company to settle in the case.

The physician plaintiffs in the long-running case, titled In re Managed Care Litigation, alleged that the managed care companies violated numerous federal and state laws, including the Racketeer Influenced and Corrupt Organizations ("RICO") Act and state prompt-pay laws, in their effort to hold down physician payments. Various lawsuits were consolidated before the District Court for the Southern District of Florida in 2000, and class certification was granted for the federal RICO claim. Under the terms of the settlement, WellPoint will pay $135 million to a physician compensation fund; adopt a standard definition of "medical necessity"; not "downcode" or automatically reassign or reduce the codes billed for covered services to a code with a lower-paying rate; give physicians at least 90 days written notice before making material adverse contract changes; and pay the doctors' legal fees.

Prudential Insurance Co. of America v. National Park Medical Center Inc. ("Prudential II") 8th Cir., No. 04-1465 (6/29/05)

The Eighth Circuit Court of Appeals found the Arkansas any-willing-provider ("AWP") law (Ark. Code Ann. § 23-99-204) preempted as it applies to self-funded ERISA plans. In an earlier decision (Prudential I, 154 F.3d 812 (8th Cir. 1998)), the Eighth Circuit held that the Arkansas AWP law was preempted by ERISA "'in its entirety,' not just as it relates to ERISA plans." In Prudential II, however, the Eighth Circuit stated that its earlier decision was overruled in part by the United States Supreme Court decision in Kentucky Association of Health Plans v. Miller, 538 U.S. 329 (2003). The Eighth Circuit found that Kentucky Association overruled its earlier decision with respect to self-funded ERISA plans, because ERISA's deemer clause requires that "statutes that indirectly regulate self-funded ERISA plans are not saved from preemption to the extent such statutes apply to self-funded plans."

The Eighth Circuit also reviewed the civil penalties provision of the Arkansas law, which allows suits against health insurers for injunctive relief, with the possibility to recover no less than $1,000, plus penalties and costs. It reviewed the Arkansas provision in light of Aetna Health Inc. v. Davila, 124 S. Ct. 2488 (2004), which provided that any state law cause of action that "duplicates, supplements, or supplants" ERISA § 502 "conflicts with the clear Congressional intent to make ERISA remedy exclusive." The Eighth Circuit held, therefore, that ERISA completely preempts the civil penalties provision of the Arkansas AWP law as applied to claims that could have been brought under ERISA's civil penalties provision.

State v. Cohen and State v. Morreale Cal. Super. Ct, San Bernardino County (Indictment, 6/22/05)

Two former executives of an insolvent HMO have been indicted for Medi-Cal fraud, grand theft, perjury, and filing false corporate financial reports. Robert Hugh Cohen, M.D., is the former president and CEO, and John Carlo Morreale the former CFO, of Tower Health, a HMO that provided Medi-Cal services to patients in San Bernardino and Riverside counties. The defendants were indicted by the San Bernardino County Grand Jury on June 22, 2005, but the charges were sealed until Cohen and Morreale were arraigned on July 20, 2005.

The indictments followed an investigation by the Bureau of Med-Cal Fraud and Elder Abuse of the California Attorney General's Office. Attorney General Lockyer's office stated in a press release that Cohen and Morreale "siphoned a total of more than $10 million from Tower Health and 'loaned' the money to other companies owned by Cohen and also to his family members...[t]he diverted $10 million included more than $2 million that was supposed to reimburse Inland Empire Medi-Cal service providers."

In re Union Pac. R.R. Employment Practices Litig. D. Neb., No. 8:03CV437 (7/22/05)

Union Pacific Railroad lost its motion for summary judgment in a class action lawsuit brought by its female employees for excluding prescription contraception coverage from its health plans. Judge Laurie Smith Camp of the U.S. District Court for the District of Nebraska ruled that the denial of coverage violated Title VII of the 1964 Civil Rights Act and the Pregnancy Discrimination Act.

The court held that since "only women have the ability to conceive ...[h]ealth plans that deny coverage for contraception, by definition, affect only the health of women" (emphasis in original). The court also preempted any arguments that the arrival of male contraception would change the court's ruling because any male contraception would not impact the health of the male. The exclusion of coverage of prescription contraceptives for all would still only affect the health of women, according to the court, because "only women can become pregnant." Also of note was the fact that Union Pacific's plan covered several prescriptions and medical services designed to eliminate and prevent diseases that are less threatening to health than pregnancy, including male-pattern baldness.

Virginia Academy of Clinical Psychologists, et al. v. Group Hospitalization & Medical Services d/b/a Blue Cross/Blue Shield of the National Capital Area, et al. D.C. Ct. App., No. 03-CV-392 (7/14/05)

The D.C. Court of Appeals affirmed a decision by the Superior Court granting Defendants' motion for summary judgment on a common law claim of fraudulent misrepresentation. Plaintiffs, a group of individual subscribers, clinical psychologists, and a professional association of clinical psychologists, sued Blue Cross/Blue Shield of the National Capital Region and other insurers in connection with the coverage of mental health benefits under a hybrid health plan that allowed a subscriber to choose between HMO and PPO coverage each time medical treatment was sought. Plaintiffs' claim was based upon allegations that (1) the informational materials for the plan said that the HMO would cover 52 medically necessary mental health sessions but one subscriber only received five HMO sessions before being induced to switch to PPO coverage; and (2) the size and stability of the panel of in-network providers was falsely represented because defendants had just made a rate cut without warning potential customers. One hundred providers left the panel following the rate cut.

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