Managed Care Lawsuit Watch - December 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:

• American Chiropractic Association, Inc. v. Trigon Healthcare, Inc.
• Blue Cross & Blue Shield v. Philip Morris USA Inc.
• Hawaii Mgmt. Alliance Ass’n v. Insurance Comm’r, Hawaii
• North Texas Specialty Physicians
• Pascack Valley Hospital Inc. v. Local 464A UFCW Welfare Reimbursement Plan
• Ortlieb v. United HealthCare Choice Plans
• UnitedHealth Group Inc. v. Klay
• Klay v. PacifiCare Health Systems, Inc.
• UnitedHealthcare of North Carolina, Inc. and United HealthCare Insurance Co.
• White Consolidated Industries Inc. v. Lin

American Chiropractic Association, Inc. v. Trigon Healthcare, Inc. U.S. Supreme Court No. 04-312 (11/08/2004) Underlying Fourth Circuit opinion

The U.S. Supreme Court denied certiorari on November 8, 2004, without comment. The Court’s denial of cert leaves in place a Fourth Circuit decision from May 2004 which rejected claims by an association of chiropractors that the physician members of a managed care advisory board had conspired with the insurer to limit the usage of chiropractors. The association argued that physician members of the advisory panel, in concert with the insurer, had established false referral guidelines, and that the effect was a severe limiting of insurance dollars flowing to chiropractors, and an increase in insurance dollars flowing to medical doctors.

The Fourth Circuit affirmed the ruling of the court in the Western District of Virginia, which denied the association’s Sherman Act Section1 and RICO claims. The Court found that Trigon had “no economic motive” to preclude referrals to chiropractors. The Court rejected the RICO claims, finding that the association failed to allege a claim for mail or wire fraud or any other RICO violation.

Blue Cross & Blue Shield v. Philip Morris USA Inc. 2d Circuit, NY Slip Opinion 07403 (10/19/2004)

The Second Circuit held that third party payers lack standing to bring an action under New York General Business Law § 349 because their claims are too remote. The case involved a suit brought by several Blue Cross plans against tobacco companies alleging that defendants misled the public as to the danger of cigarette smoking. Because it determined that plaintiffs had no standing to sue, the court did not reach the issue of whether a third party payer would have to provide individualized proof of harm to subscribers in order recover amounts paid to those subscribers for services required as a result of a violation of N.Y. Gen. Bus. Law § 349.

In finding that third party payers lack standing to sue under § 349, the Second Circuit noted that third party payers traditionally have not been permitted to recover derivatively for injuries suffered by their insured. Rather, a third party payor’s exclusive remedy is in equitable subrogation, whereby an insurer that has “paid for the losses its insured, is placed in the position of its insured so that is can recover from the third party legally responsible for the loss.” The Second Circuit determined that neither the text of N.Y. Gen. Bus. Law § 349 nor its legislative history suggested that the New York Legislature intended to permit a third party payor to bring a direct action to recover the losses of its insured. The court further found that precluding an insurer from bringing a suit to recover for derivative injury would not limit the scope of § 349 to consumers alone.

Hawaii Mgmt. Alliance Ass’n v. Insurance Comm’r, Hawaii No. 24801 (11/18/04)

The Hawaii Supreme Court ruled that Hawai`i Revised Statutes (HRS) § 432E-6, the state law that allows Hawaii’s insurance commissioner to review health plan coverage decisions, is preempted by the Employee Retirement Income Security Act (“ERISA”).

Though the law is not expressly preempted because the express regulation does not apply to laws that “regulate insurance” (29 U.S.C. § 1144 (2000)), it is impliedly preempted because it "so resemble[s] an adjudication as to fall within Pilot Life's categorical bar." Rush Prudential HMO, Inc. v. Moran, 536 U.S. 355 (2002) (citing Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 57 (1987)).

To come to this conclusion, the court reconciled two seemingly inconsistent recent U.S. Supreme Court decisions, Aetna Health Inc. v. Davila, 124 S. Ct. 2488, 2500 (2004) where a unanimous Court held that a Texas law granting a cause of action against HMOs for failure to exercise ordinary care was preempted by ERISA, and Rush Prudential, an Illinois review law similar to the one at issue, by explaining that the cases “preserve the states’ right to regulate insurance so long as those insurance regulations do not conflict with ERISA’s civil enforcement scheme.”

North Texas Specialty Physicians Federal Trade Commission, Office of Administrative Law Judges Docket No. 9312 (11/15/04)

In an initial decision issued on November 15, an Administrative Law Judge (“ALJ”) concluded that the FTC proved its allegations that a Texas independent practice association (“IPA”) engaged in illegal price fixing and anticompetitive conduct when negotiating contracts between health insurance payors and the IPA’s participating physicians.

The FTC had filed an administrative complaint in September 2003 alleging that the North Texas Specialty Physicians (“NTSP”), an IPA composed of approximately 500 Texas physicians in the Fort Worth area, engaged in unfair methods of competition in violation of Section 5 of the FTC Act. NTSP regularly received offers from health insurance payors who wanted to contract with NTSP’s physicians for health services. NTSP would evaluate the offers, negotiate with the payors over the offer terms, and then submit selected offers to NTSP’s participating physicians for their consideration and possible acceptance. The FTC complaint alleged that NTSP conducted polls whereby it asked its participating physicians what minimum fee they would accept for performing services.

FTC alleged that NTSP then communicated the minimum fee figures to payors during negotiations in order to coerce the payors to offer higher reimbursement rates and more favorable economic terms than the payors had initially offered. FTC claimed that NTSP also refused to submit to its participating physicians any payor proposals that fell below the fee minimums. The FTC complaint alleged that as a result of these NTSP practices, competition among the participating physicians was lessened, the price of physicians services increased, and consumers suffered.

In his initial decision, ALJ D. Michael Chappell concluded that NTSP had engaged in concerted action to restrain trade in violation of Section 1 of the Sherman Act, which constituted an unfair method of competition under Section 5 of the FTC Act. Though NTSP was the sole respondent in the FTC’s complaint, the ALJ held that NTSP engaged in concerted action through its relationship with its participating physicians. The ALJ reasoned that concerted action occurred when NTSP’s participating physicians conveyed their minimum fee requests to NTSP and allowed NTSP to bargain for higher fees on their behalf, and when NTSP accordingly negotiated and obtained favorable contracts for the physicians. The ALJ also determined that NTSP’s minimum fee calculations and negotiating tactics were unreasonable restraints of trade, and that NTSP demonstrated no valid procompetitive justification for its conduct. The opinion identified numerous respects in which the respondent did more than merely serve as a messenger between the physicians and the payors. Accordingly, the ALJ issued an order that required NTSP to cease and desist from price fixing in its negotiation of payor contracts, and that allowed for termination of any current contracts that had been negotiated between payors and NTSP.

The ALJ’s initial decision will become the Commission’s final decision 30 days after it is served upon NTSP, unless NTSP appeals the decision for review by the full Commission or the Commission takes the case on its own motion.

The opinion contains potentially controversial aspects. These include a finding that it was necessary for the government to establish a relevant geographic market, notwithstanding the government’s claim that that such a determination is not required in a case involving a restraint on price competition. Some observers may also fault the decision for seemingly failing to clarify, in its conclusions, how the conduct of the respondent differed from those of legitimate “messenger model” IPAs that survey members on their individual contract acceptance terms. The respondent’s activities, as described, may have exceeded antitrust boundaries, but the particular attributes of its conduct that exceeded antitrust limits may not, in the view of some observers, have been adequately explained in the opinion.

Pascack Valley Hospital Inc. v. Local 464A UFCW Welfare Reimbursement Plan 3d Cir., No. 03-4196 (11/1/2004)

The Third Circuit decided that a hospital’s state law breach of contract claims against a health plan are not preempted by the civil enforcement provision of the Employee Retirement Income Security Act (“ERISA”).

MagNet, Inc., a consultant that organized a hospital network which included Pascack Hospital, Inc., entered into a subscriber agreement with the United Food Commercial Workers International Union Local 464A, AFL-CIO Group Reimbursement Welfare Plan (“Plan”) in 1995. The hospital agreed to provide discounted rates to MagNet subscribers as long as the plan made all payments within thirty days after the hospital submitted each claim. In 1999, the plan allegedly made late payments for two subscribers.

Pascack Valley Hospital brought suit in New Jersey state court, and the Plan removed the case to federal court, arguing it was preempted by ERISA. The Third Circuit reversed the New Jersey District Court because (1) the hospital did not have standing since it was not a participant or a beneficiary and (2) the suit was not based on an ERISA claim because it turned on the interpretation of the subscriber agreement, not the Plan.

Ortlieb v. United HealthCare Choice Plans 8th Cir., No. 04-1383 (10/28/04)

United Healthcare’s decision to deny coverage for Total Parenteral Nutrition (“TPN”) was not an abuse of discretion, according to the Eighth Circuit.

Jo Ortlieb was diagnosed with toxic encephalopathy, malnutrition, malabsorption, irritable bowl syndrome, allergic food gastroenteritis, toxic effect petrochemicals and solvents, and fatigue and was prescribed TPN therapy, among other treatments.

United HealthCare (“Plan”) denied coverage for TPN, stating it fell within the Plan’s “experimental, investigational, or unproven service” exclusion. After administrative reconsideration and an appeal, the district court determined that the Plan reasonably relied on the assessments of multiple doctors that TPN’s value was unproven. The Eighth Circuit agreed that the Plan did not abuse its discretion because Ortlieb’s coverage request was reviewed at least four times by four physicians, two of whom were independent consultants.

The court rejected Ortlieb’s argument that her condition fell under the life threatening exception to the Plan’s “experimental, investigational, or unproven service” exclusion because her records did not establish her condition as life threatening and TPN was not “safe with promising efficacy.”

UnitedHealth Group Inc. v. Klay U.S. No. 04-522 Petition filed (10/19/04)

In the latest chapter of the ongoing managed care litigation involving federal and state law claims brought by thousands of doctors against major health insurers, defendants filed a petition for certiorari to the United States Supreme Court to review the September 1, 2004 decision by the 11th Circuit Court of Appeals to allow the physicians to pursue their federal RICO claims as a class.

The 11th Circuit had affirmed the District Court for the Southern District of Florida’s grant of class certification for the plaintiff’s federal RICO claims. Applying Federal Rule of Civil Procedure 23, the 11th Circuit agreed with the district court that common questions of fact and law predominated for the plaintiffs’ RICO claims, as the case involved allegations of a nationwide conspiracy to systematically underpay the plaintiffs. The petition for certiorari claimed that the Supreme Court should review the 11th Circuit’s decision because the 11th Circuit presumed that the facts underlying the physicians’ conspiracy claims were true, instead of carefully reviewing the record to evaluate whether Federal Rule of Civil Procedure 23 had been satisfied.

Klay v. PacifiCare Health Systems, Inc. 11th Circuit, No. 03-14828 (11/05/2004)

The Eleventh Circuit upheld a district court decision refusing to compel arbitration of various claims against HMOs. The case arose when a group of physicians brought an action in district court against several HMOs alleging that the HMOs failed to appropriately reimburse physicians for services rendered. Plaintiff physicians alleged breach of state prompt pay statutes, breach of contract, unjust enrichment and violations of the Racketeer Influenced and Corrupt Organizations Act (RICO), among other claims. The defendants responded by seeking to compel arbitration of the claims based on arbitration agreements that some of the physicians and some of the HMOs had signed. The district court ruled that an HMO cannot compel arbitration of an aiding-and-abetting charge regarding a physician’s rights against a different HMO from the one with which it has an arbitration agreement. The Eleventh Circuit affirmed this finding and affirmed the district court’s refusal to compel arbitration of indirect RICO claims.

Plaintiffs then amended their complaint to add new defendants and to clarify the allegations of conspiracy. Defendant HMOs again sought to compel arbitration. The district determined that indirect RICO claims are not arbitrable, certain nonparticipating provider claims are not arbitrable, certain medical association claims are not arbitrable, and that claims falling outside the effective dates of the arbitration contracts are not arbitrable. The HMOs challenged these findings on appeal to the Eleventh Circuit.

The Eleventh Circuit decided that the law of the case doctrine compelled it to find that the indirect RICO claims at issue in the appeal are not arbitrable, based upon its earlier decision affirming the district court’s refusal to compel arbitration of indirect RICO claims. The law of the case doctrine provides that when a court decides a rule of law, that rule should govern the same issues throughout the case. The Eleventh Circuit rejected the HMOs’ contention that one of exceptions to the law of the case doctrine applied, noting that the addition of new defendants did not materially alter the nature of the indirect RICO claims.

In finding that certain nonparticipating provider claims were not arbitrable, the court noted that an HMO could not use a broad arbitration clause found in one contract to compel arbitration where the dispute was based on services under another contract that did not contain an arbitration clause.

The Eleventh Circuit rejected the HMOs’ argument that the district court should have compelled arbitration of nonparticipating provider claims under quasi-contract and statutory causes of action, noting that these claims are independent of patient-subscriber contracts, so the arbitration agreements in such contracts cannot be used to compel arbitration.

The court also found that medical association arbitration claims could not be arbitrated if allowing arbitration would be inconsistent with the court’s determination of the scope of arbitration agreements regarding indirect RICO claims. Finally, the Eleventh Circuit determined that it could not compel arbitration of disputes that arose outside the time period for which the arbitration agreement was effective, unless the parties had agreed otherwise.

UnitedHealthcare of North Carolina, Inc. and United HealthCare Insurance Co. North Carolina Dept. of Insurance (11/04/2004)

The North Carolina Insurance Commissioner announced a voluntary settlement agreement between the North Carolina Department of Insurance and UnitedHealthcare of North Carolina, Inc. and United Healthcare Insurance Co. The Department had alleged that the companies violated state laws by failing to make prompt and effective corrections to the problems with their claims systems when they became aware of them. The Department also alleged that the companies failed to promptly investigate and resolve complaints about claims errors.

Each company will pay $1.1 million in civil penalties. Neither company admitted any wrongdoing. Both companies have already conducted an in-depth study of their operations and have prepared to address the concerns at the heart of the Department’s allegations.

White Consolidated Industries Inc. v. Lin N.J. App. Div., No. A-4255-02T5 (10/22/2004)

The New Jersey Superior Court Appellate Division affirmed a lower court’s decision that an employer’s self-funded medical benefits plan was a non-insured plan, and was protected by ERISA’s deemer clause from state insurance laws such as New Jersey’s collateral source rule.

White Consolidated Industries (White) had an ERISA benefits plan that included a point-of-service health benefits program for New Jersey employees. White paid medical benefits to an employee for the employee’s sinus ailments, and the employee later sued her physician, Dr. Lin, for alleged mistreatment of the ailments. The employee was awarded damages from Lin at trial, and White subsequently brought a lawsuit against Lin seeking subrogation for the benefits it had provided to the employee. The trial court held that White’s plan was a self-funded plan under ERISA, and accordingly that the plan was not subject to the state collateral source rule that would bar White from suing Lin. Lin appealed.

The appellate court affirmed the trial court’s finding. The court rejected Lin’s arguments that the plan was not self-funded because it contracted with an insurer to administer the plan and because it provided a portion of its benefits through the purchase of an insurance policy. Although the plan contracted with Prudential to administer the point-of-service plan, the court held that a plan remains self-funded if it contracts with an insurance company to only provide administrative services such as negotiating rates with a network of providers. The court also held that the plan did not lose its self-insured status because it purchased certain types of insurance for a limited class of non-New Jersey employees, reasoning that those other types of insured benefits were separate and distinct from the self-funded medical benefits provided under the plan by White to its employees.

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