Managed Care Lawsuit Watch - December 2008

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 any member of the health law group.

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Cases in this issue:

• Watanabe v. California Physicians’ Serv.
• Ramadoss v. Caremark, Inc.
• Callil v. California Physicians’ Service
• Medical Mutual of Ohio v. k. Amalia Enterprises Inc.
• Island View Residential Treatment Ctr. V. Blue Cross Blue Shield of Massachusetts
• Tenet Healthcare Ltd., d/b/a Park Plaza Hospital, v. Unicare Health Plans of Texas, Inc.
• Genord v. Blue Cross Blue Shield of Michigan
• New York City v. Group Health, Inc., et. al.

Watanabe v. California Physicians’ Serv. No. B195725 Court of Appeal of California

The plaintiff, Maria Watanabe, brought suit against Blue Shield of California ("Blue Shield") alleging breach of contract and breach of the duty of good faith and fair dealing. Watanabe claimed that Blue Shield was vicariously liable for the acts and omissions of the Good Samaritan Medical Practice Association ("GSMPA"), a Blue Shield contracted network provider. The lower court held that Blue Shield had not breached its duty of good faith and fair dealing.

On appeal, the plaintiff alleged three failures with regard to the jury instructions. First, Watanabe claimed that it was error to instruct the jury that Blue Shield and GSMPA were each liable for their own acts or omissions under the Knox-Keene Act. Second, the plaintiff argued that Blue Shield's delegation of utilization review decisions to the GSMPA was impermissible under California law. Finally, the plaintiff argued that Blue Shield's delegation of utilization review to GSMPA was inconsistent with the fact that Blue Shield is "ultimately responsible for GSMPA's utilization review decisions."

The Court rejected all of the plaintiff's claims. The Court concluded that the Knox-Keene Act clearly provides that "a plan and provider are each responsible for their own acts or omissions." Significantly, the Court also found that the plaintiff's contract included affirmation that the initial decision for services was to be made by the medical group or provider. Moreover, the Court held that the standards for utilization review state that Blue Shield's policy is to "abide by the provider's initial decisions but that the appeal process can overturn that decision." Therefore, "[c]onsidering that [the plaintiff] was well aware of the fact that she was not being treated by Blue Shield but her primary care physician and GSMPA," she could not have been misled by any general language in the contract that Blue Shield would remain liable for the acts or omissions of the Medical Group. As a result, the Court of Appeals affirmed the lower court's judgment that Blue Shield was not liable to the plaintiff.

Ramadoss v. Caremark, Inc. No. SA-99-CA-00914-WRF District Court for the Western District of Texas

The U.S. District Court for the Western District of Texas granted in part and denied in part Caremark's motion for partial summary judgment, holding that Caremark had not presented reverse false claims to the government.

Caremark's motion for summary judgment involved whether Caremark, a pharmacy benefit manager ("PBM"), could apply existing health plan "restrictions," also called "benefit plan limitations," to reject a reimbursement request from a state Medicaid agency under Medicaid "third party liability" rules, such as restrictions on the timing of a claim's submission, even if the restrictions might not be enforceable. The parties disputed whether the restrictions can be applied to state Medicaid requests for reimbursement after it paid claims it said were the responsibility of the program administered by Caremark. The Court explained that the False Claims Act was not an appropriate vehicle for "policing technical compliance with administrative regulations" or "differences in interpretation growing out of disputed legal question."

The Court concluded that, "[t]o the extent that the Government and the other plaintiffs in this case base their reverse false claims on Caremark applying a restriction in accordance with the client's plan -- that is, a restriction that accurately existed at the time the request for reimbursement was made -- Caremark has made a true statement and Plaintiffs have failed to establish falsity." Finding a "good faith legal dispute" on the issue, the Court concluded that Caremark's informing Medicaid of the restrictions did not constitute false claims. Specifically, the Court found that "the application of a restriction [to a request for reimbursement by Medicaid] contained in the corresponding plan was not a lie that triggered FCA liability." Therefore, the Court granted partial summary judgment in favor of Caremark, holding it had not submitted reverse false claims to the government.

Callil v. California Physicians’ Service No. B203085 Court of Appeal of California

California Physicians' Service, d/b/a Blue Shield of California ("Blue Shield"), issued a conditional preauthorization for a hysterectomy. Later Blue Shield of California rescinded the coverage after learning that the plaintiff, Callil, failed to disclose medical information in her application, including the fact that she had a history of fibroids and related surgery.

Callil sued Blue Shield claiming breach of contract and breach of the duty of good faith and fair dealing. Blue Shield moved for summary judgment on the basis that it was entitled to rescind the contract based on Callil's willful misrepresentations and also based on the fact that California Health and Safety Code Section 1389.3, which requires a health care service plan to complete medical underwriting before issuing a policy, did not apply because there were no "reasonable questions" raised by Callil's application.

The Court cited precedent from the Court of Appeal of California, and held, "section 1389.3 precludes a health care services plan from rescinding a health plan contract based upon an applicant's misrepresentation or omission unless it can demonstrate either that the misrepresentation or omission was willful or that it made reasonable efforts to ensure the accuracy and completeness of the application before issuing the contract."

The Court found that there were triable questions of fact regarding whether Callil willfully omitted the information dealing with her fibroids and also regarding whether the health plan took reasonable steps to ensure the accuracy and completeness of the application. Therefore, the Court reversed the lower court's grant of summary judgment for Blue Shield.

Medical Mutual of Ohio v. k. Amalia Enterprises Inc. No. 07-4422 (6th Cir. Dec. 2, 2008)

The United States Court of Appeals for the Sixth Circuit affirmed the dismissal of an insurer's complaint seeking partial rescission and alleging breach of contract, negligent representations and fraud under ERISA, holding the claim was time-barred by a contractual provision requiring all legal actions to be brought within two years"from the date the cause of action arises."

Medical Mutual of Ohio ("MMO") had filed a lawsuit against k. Amalia Enterprises and its employee ("Tran") in federal district court, alleging failure to disclose a preexisting condition of hemophilia in Tran's Health and Life Application. The district court dismissed the case, holding that the suit was time-barred by a provision in the contract.

On appeal, the appellants argued that its claim was timely because it discovered the fraudulent misrepresentation in an audit within the two year period. The Court of Appeals first upheld the district court's finding that the contract provision was reasonable and correctly applied to the case. The Court then rejected MMO's discovery argument, reasoning that in the exercise of due diligence, MMO should have discovered the fraudulent misrepresentation more than two years prior to the audit. Accordingly, the Court affirmed the dismissal of the remaining claims as time-barred under the contractual limitations period.

Island View Residential Treatment Ctr. V. Blue Cross Blue Shield of Massachusetts No. 08-1287 (1st Cir. Nov. 14, 2008)

The United States Court of Appeals for the First Circuit affirmed the dismissal of a complaint brought under ERISA for denial of benefits, finding the claim was time-barred by a contract provision that required lawsuits to be brought within two years of the denial of benefits.

Appellants, Island View Residential Treatment Center ("Island View"), had filed a lawsuit against Blue Cross Blue Shield of Massachusetts ("Blue Cross") in federal district court, alleging that Blue Cross wrongly denied reimbursement and seeking to recover costs for inpatient care provided to a beneficiary covered under an ERISA plan. The district court dismissed the case, holding that the suit was time-barred by a provision in the contract and finding that the denial of benefits was not arbitrary or capricious.

On appeal, Island View argued that the district court incorrectly applied the contract provision, rather than the longer time limitation provided under the state statute of limitations. The Court of Appeals rejected appellants' argument, finding that state law permitted the contractual time limitation. The Court then noted that although it had the ability to refuse to enforce the contract, it would not do so because the provision was neither unreasonable nor unconscionable. Accordingly, the Court of Appeals applied the shorter two year time limiting provision included in the insurance policy and affirmed the district court dismissal of appellants' claim.

Tenet Healthcare Ltd., d/b/a Park Plaza Hospital, v. Unicare Health Plans of Texas, Inc. Civil Action No. H-07-3534 (S.D. Tex. 11/26/08)

Tenet Healthcare ("Tenet") obtained prior authorization for services and after Unicare Health Plans of Texas ("HMO") paid the claims, the HMO subsequently demanded and received a refund from the hospital because the patient was no longer a member on the date of service. Tenet sued, claiming breach of contract and negligent misrepresentation.

The Court granted the HMO's motion for summary judgment on Tenet's claim that the HMO arbitrarily and capriciously denied full coverage. The individual was not a member because her benefits expired, and was not entitled to receive covered services.

The Court also granted the HMO's motion for summary judgment on Tenet's negligent misrepresentation claim. ERISA preemption did not apply because the claim was not related to the extent of the individual's rights under the plan, but rather what the HMO told Tenet about the status of those rights. However, the Court granted summary judgment on statute of limitations grounds.

Genord v. Blue Cross Blue Shield of Michigan No. 07-21688 S.D. Fla. November 24, 2008

The U.S. District Court for the Southern District of Florida dismissed a group of physicians' claims alleging that Blue Cross and Blue Shield of Michigan ("BCBSM") violated RICO, a Michigan statute requiring the payment of clean insurance claims, breached contracts, and were unjustly enriched by instructing the physicians to use new billing code procedures and then fraudulently rejecting those claims. These physicians had opted out of the Love class action settlement. BCBSM filed a motion for judgment on the pleadings, asserting that the physicians failed to sufficiently plead their RICO claims.

Under the Supreme Court's 2007 Twombly decision, which heightened the pleading standards for a § 1962(c) RICO claim, a plaintiff must "set forth a violation….that is plausible on its face because they do not raise a right to relief above a speculative level." Although the physicians presented examples of BCBSM communications regarding its new claims procedures coinciding with the rejection of allegedly proper claims, the Court noted that the physicians' amended complaint "did not connect the allegedly fraudulent communications to the specific rejection of any individual claims." (emphasis in original) As a result, the Court dismissed the physicians' § 1962(c) claim.

The Court also dismissed the physicians' § 1962 (a) claim, which required a violation of the § 1962(c) claim, as well as the RICO conspiracy claim because the Amended Complaint did not sufficiently allege that BCBSM conspired with other people or entities.

New York City v. Group Health, Inc., et. al. No. 1:06-cv-13122 SDNY, November 21, 2008

The U.S. District Court for the Southern District of New York recently granted the City of New York's (the "City's") renewed motion to compel the production of cost and experience documents from Health Plan of New York's ("HIP") accounts as part of its antitrust suit to prevent the merger of HIP with Group Health, Inc. ("GHI"). The Court had previously denied the motion.

In its renewed motion, the City asserted that it had established a plan to obtain information from third parties, had served subpoenas on several large employers and insurers, and had already obtained some of the information. The City submitted declarations of an expert who stated that the City would be able to perform the post-merger analysis with data available to the City and the data requested under the motion. HIP's own expert, however, asserted that the data available to the City is not sufficient to perform the necessary analysis using the proposed models the City planned to use.

The Court noted that both parties "relied heavily, if not exclusively, on the declarations of their experts to prove or dispute the relevancy and utility of the HIP data at issue." The Court stated, however, that for discovery purposes, the issue is whether the requested data appeared "reasonably calculated to lead to the discovery of admissible evidence." Under this standard, the Court ruled that the data would lead to information related to the antitrust litigation and therefore granted the City's motion to compel production of the requested documents.

The Court also balanced the interests for compelling the data requested under the renewed motion. The Court concluded that the balance favored production of the documents because the data was already compiled and therefore not too burdensome for HIP to produce the confidentiality order in place protected against any concerns regarding disclosure of any sensitive information as well as any concerns about the City becoming privy to any information that may have an adverse impact on retaining HIP as its insurer.

 

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