Managed Care Lawsuit Watch - May 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:

• Boales v. Blue Shield of California
• Chatham Surgicare Ltd. v. Health Care Service Corp.
• Illinois Health Maintenance Guaranty Association v. Shapo
• In the Matter of UAHC Health Plan of Tennessee, Inc.
• J.E. Pierce Apothecary Inc. v. Harvard Pilgrim Health Care Inc.
• Levine v. United Healthcare Corp.
• Parnell v. Adventist Health System/West
• State Farm Mutual Auto. Ins. Co. v. Mallela

Boales v. Blue Shield of California Cal. Ct. App. No. B175185(March 30, 2005)(Unpublished)

The Court of Appeals of the State of California, Second Appellate District, affirmed the lower court's decision dismissing a complaint brought by Michael Boales and Alice Marion La Rue-Boales against Blue Shield of California, Health Net of California, Inc., and Health Net, Inc. and several health care providers. The complaint had alleged various violations of Civil Code section 3428, which requires a health plan to exercise "ordinary care to arrange for the provision of [a] medically necessary health care service," a violation of the plan's requirement to provide continuity of care pursuant to Health and Safety Code section 1367, and professional negligence, among others.

A Medicare + Choice (now Medicare Advantage) enrollee must show he exhausted "the procedures provided by the applicable independent review system" before he can file a complaint in court against a health plan for not ordering a medical procedure. In an unpublished opinion, the court determined that Boales failed to exhaust the administrative remedies available to him to establish the medical necessity of an EMG (electromyogram) test. Boales could have gone to an administrative law judge for review, or pursued the case before the Appeals Board of the Department of Health and Human Services.

Next, the court held that a health care provider is not a "health care service plan." A provider cannot be liable as a plan under Health and Safety Code section 1367 requiring plans to provide "continuity of care" even if the provider acts as the plan's agent. Further, the "continuity of care" requirement does not include a duty to provide a patient's medical records to third parties without a request by the patient. The health plans were not required to send Boales' medical history from doctor to doctor.

The court also rejected Boales' claim that Blue Shield and Health Net breached their implied covenant of good faith and fair dealing. This claim is a "cause of action pursuant" to section 3428, and requires Boales to exhaust the same administrative remedies as required previously.

Finally, the court did not give Boales leave to amend his complaint to allege violations of three additional regulations. First, the requirement that a plan review the overall care delivered to enrollees "does not impose a duty on a health care service plan to ensure that each enrollee receive adequate health care" and is not the basis for a negligence claim. Second, the requirement that a plan have a mechanism to correct under-service does not require a plan to force enrollees to be seen by specialists without a referral. Third, the regulation requiring plans to take the responsibility to monitor the follow up of enrollees' health care documentation is not appropriate here because no physician had determined that follow up was necessary.

Chatham Surgicare Ltd. v. Health Care Service Corp. Ill. App. Ct. No. 1-04-1509 (March 24, 2005)

The Illinois Appeals Court held that the circuit court erred in dismissing a medical service corporation's promissory estoppel claim against Health Care Services Corporation, but affirmed the lower court's dismissal of a fraud claim.

Plaintiff Chatham Surgicare ("Chatham") filed a complaint in the Circuit Court of Cook County alleging deceptive trade practices, illegal restraint of trade, violation of public policy, disparagement of services, promissory estoppel and fraud. Chatham is a corporation that provides out-patient surgical facilities and supplies to patients needing podiatric services. Defendant Health Care Service Corp., a Blue Cross Blue Shield licensee ("Blue Cross"), sells health insurance and provides administrative services to self-funded insurance plans.

Chatham was an out-of-network provider - it did not have a contract with Blue Cross for a set reimbursement rate. For more than four years, Chatham provided services to patients who had Blue Cross coverage. Before providing podiatric services to these patients, Chatham called Blue Cross to determine whether the insureds were covered. Blue Cross allegedly represented that the insured's were covered for Chatham's services. Chatham then, it claims, properly filed and submitted claims for these services to Blue Cross, who refused to pay the claims.

At trial, Blue Cross moved to dismiss Chatham's claims, and the motion was granted by the circuit court. Chatham appealed only the dismissal of the estoppel and fraud claims.

On appeal, the court held that in viewing the facts presented in the light most favorable to Chatham, Chatham had sufficiently alleged grounds for a promissory estoppel claim. The court found that Blue Cross should have known that by representing to Chatham that certain patients were covered by Blue Cross, Chatham would be induced to provide services to those patients. The court said this was sufficient to satisfy the promise element of a promissory estoppel claim. However, the court upheld the circuit court's dismissal of the fraud claim, finding that Chatham had not pled with sufficient specificity fraud by misrepresentation or scheme, in that Chatham failed to plead what representations were made, who made them, and when they were made. The court noted that the allegations could not be inferred or implied because a fraud claim must be pleaded with specificity.

Illinois Health Maintenance Guaranty Association v. Shapo Ill. App. Ct., Sixth Div., No. 1-02-0264 (March 31, 2005)

The Illinois Appeals Court upheld the decisions of a trial court and the Director of the Illinois Department of Insurance (the "Department") awarding $22 million to health care providers for services rendered to participants of the now insolvent MedCare HMO. The judgment was based on the failure of the Illinois Health Maintenance Guaranty Corporation Association (the "Association") to exhaust administrative remedies by seeking review of Director Shapo's decision.

The Association was created by statute to "assure payment of the contractual obligations" of persons covered by insolvent health plans. When MedCare HMO was declared insolvent in 1993, 24 providers, primarily hospitals, sought payment from the Association for unpaid bills incurred when treating MedCare participants. When the Association denied the claims, the Department conducted hearings on the issue and awarded the providers more than $22 million.

Rather than requesting rehearing from the Department, the Association filed more than 20 separate complaints in trial court, where the complaints were consolidated and then dismissed for failure to exhaust administrative remedies. The appellate court affirmed, noting that the Association is not exempt from the exhaustion doctrine. The court emphasized that under the Illinois Administrative Review law, the Association was required to file a motion for rehearing before it could seek judicial review of the Director's decision.

In the Matter of UAHC Health Plan of Tennessee, Inc. Notice of Administrative Supervision, Tenn. Dept. of Commerce and Insurance (April 20, 2005)

The Commissioner for the Department of Commerce and Insurance has determined that there are sufficient grounds for imposing administrative supervision on UAHC Health Plan of Tennessee. The health plan ("Respondent") is a health maintenance organization that has a Contractor Risk Agreement with the State of Tennessee to provide health care services to enrollees in the TennCare program. Respondent is owned by United American Healthcare of Tennessee ("UATN"), which is a wholly-owned subsidiary of United American Healthcare Corporation ("UAHC"). Respondent contracts with UATN to provide management services and UATN in turn provides all employees and infrastructure of Respondent. Respondent was the sole source of income for UATN and UAHC since November 2002, and Respondent represents the majority of assets of UAHC.

In March 2005, the former Vice President and General Counsel for Respondent brought a lawsuit against Respondent, UATN, and UAHC for wrongful discharge, alleging that she was fired for refusing to remain silent about and participate in acts she believed to be illegal or in violation of public policy. In addition, she claimed that the President and CEO of Respondent provided false information to the Tennessee Department of Commerce and Insurance when he denied that Respondent had a business relationship with Managed Care Services Group, a company affiliated with State Senator John Ford. Media reports indicated that Senator Ford had been hired as a consultant to Respondent and was being paid $10,000 per month under that arrangement.

The Commissioner for the Department of Commerce and Insurance determined that there were sufficient grounds as set forth in Tenn. Code Ann. § 56-9-503(a)(1) for administrative supervision of Respondent. Some of the relevant factors include whether allowing the HMO to continue business as normal poses a risk to the public or its enrollees, whether the HMO has exceeded the powers granted it under its certificate of authority and the law, whether the HMO has violated the Tennessee HMO Act, whether the HMO's business is being fraudulently conducted, and whether the HMO consents to administrative supervision.

The Commissioner noted that the financial condition of Respondent and its affiliates are at risk because Respondent may have breached the TennCare Contractor Risk Agreement. The Commissioner also noted the apparent untrustworthiness of the Respondent's management as evidenced by the false statements made to the Department of Commerce and Insurance, as well as the TennCare Bureau.

J.E. Pierce Apothecary Inc. v. Harvard Pilgrim Health Care Inc. D. Mass. No. 98-12635 (March 31, 2005)

The U.S. District Court for the District of Massachusetts ruled that an HMO and a pharmacy operator violated the state's Any Willing Provider ("AWP") law and the state's unfair trade practices / consumer protection statute (MGL ch. 93A) by renegotiating an agreement that would keep the pharmacy operator's wholly-owned PBM as the HMO's dominant drug supplier. In holding that the AWP law may be enforced through ch. 93A, the court enabled injured pharmacy competitors to sue for AWP violations even though the AWP law did not create an independent right for injured parties to sue.

Massachusetts' AWP law sets out requirements a health plan must follow when creating a restricted pharmacy network, including (1) requirements that ensure fair competitive bidding processes among individual pharmacies; and (2) requirements that plans with restricted networks allow any willing pharmacy to provide plan insureds with prescriptions as long as the pharmacy agrees to the same terms as the network pharmacies.

Harvard Pilgrim Health Care, a Massachusetts HMO, formed an agreement with PharmaCare, a PBM subsidiary of pharmacy corporation CVS, for PharmaCare to administer Harvard Pilgrim's drug benefits. Several independent pharmacies brought AWP and ch. 93A claims against Harvard Pilgrim, CVS and PharmaCare, alleging that their agreement violated the AWP law's competitive bidding requirements and improperly favored PharmaCare and CVS.

The district court held that the agreement ran afoul of the AWP law, noting inter alia that the agreement gave PharmaCare the right to cancel if CVS's share of Harvard Pilgrim's prescriptions fell below 80%, a benefit not afforded to any other pharmacy. The court then held that ch. 93A was an appropriate avenue through which the independent pharmacies could seek redress for AWP law violations. The court noted that it would not get "overly enmeshed" in the relationship between AWP violations and ch. 93A, but stated that here the defendants' conduct in avoiding the AWP law fell to a "level of rascality" that constituted unfair trade practices prohibited by ch. 93A.

Levine v. United Healthcare Corp. 3rd Cir., No. 04-1224 (March 16, 2005)

The United States Court of Appeals for the Third Circuit held that ERISA § 502(a) preempts plan participants' claims that health plans violated New Jersey law by attempting to enforce subrogation and reimbursement liens.

Three plan participants were injured in separate occurrences, and their health plans covered part of their medical expenses. A New Jersey insurance regulation in effect at that time permitted the inclusion of reimbursement and subrogation clauses in health plan policies. Thus, when each plan participant sued and recovered from the responsible tortfeasors, their health plans (with policies containing reimbursement clauses) sought reimbursement. Each of the plan participants settled the reimbursement claims by providing the health plans with a portion of their tort settlements.

Shortly thereafter, the Department of Insurance regulation was determined to be invalid, as it conflicted with a New Jersey statute, NJSA § 2A:15-97, which was interpreted in Perreira v. Rediger 778 A.2d 429 (N.J. 2001) to prohibit subrogation with regard to fully insured plans. The plan participants then sued the health plans in state court for unjust enrichment, arguing that they should be able to recover the amounts paid to the health plans.

The health plans removed the cases to the U.S. District Court for the District of New Jersey. The district court ruled that New Jersey's anti-subrogation rule was "saved" as a state law that regulated insurance.

The principal issues considered by the appellate court were whether Perreira was saved from preemption, and whether the participants' claims fell within § 502(a) of ERISA, thus allowing removal of the claims to federal court.

With regard to removal, the Third Circuit determined that the health plans properly removed participants' claims to federal court because the claims were for benefits due under § 502(a) of ERISA. With respect to preemption, the lower court's decision regarding Perreriawas reversed, with the Third Circuit explaining that ERISA's savings clause requires that a law be "specifically directed" toward the insurance industry to be saved from preemption. The Court reasoned that the statute discussed in Perreria is a generally applicable law that is not specific to insurance.

Parnell v. Adventist Health System/West California Supreme Court No. S114888 (April 4, 2005)

The California Supreme Court held that a hospital seeking to assert a lien under the state's Hospital Lien Act ("HLA") can only do so if the patient owes an underlying debt to the hospital. The court's holding complicates the efforts of hospitals to engage in "balance billing", a practice by which hospitals seek to recover the difference between the actual treatment costs provided to injured patients and the negotiated discounted rates paid by the patients' health plans by asserting liens against judgments or settlements achieved by patients against injuring tortfeasors.

Under California's HLA, a hospital that treats a patient injured by a third party tortfeasor can assert a lien against any judgment or settlement recovered by that patient from the tortfeasor in the amount of the hospital's reasonable and necessary charges. Mr. Parnell was injured in a car accident and received treatment at a hospital owned by the defendant Adventist Health System/West (the "Hospital").

Parnell's health plan had contracted with a PPO, and the Hospital was in the PPO network. The Hospital had agreed to treat beneficiaries of contracts entered into by the PPO, and had agreed to accept as "payment in full" the amount set forth in the contracts the PPO formed with payors. Parnell's health plan paid the Hospital approximately ¼ of Parnell's treatment costs, pursuant to the plan's contractually negotiated discount.

However, when Parnell filed a tort claim against the injuring driver, the Hospital filed a notice of lien under the HLA to recover the difference between the cost of its services and the negotiated amount it received. Parnell sued under various unfair business practice theories, and the district court granted a motion for judgment on the pleadings to the Hospital. The Court of Appeal reversed, and the California Supreme Court granted review.

The Supreme Court agreed with Parnell that the HLA requires the patient to owe an underlying debt to the hospital before the hospital can assert a lien. Finding the HLA's statutory language to be unclear on this issue, the court based its ruling on the HLA's legislative history, on decisions by other state courts, and on the Supreme Court's previous ruling that a lien claim under Cal. Government Code § 23004.1 (a statute enabling a county to assert a lien for the cost of medical care it has provided to an injured patient against a judgment from the tortfeasor) arose out of the creditor-debtor relationship created between the county and the patient. In this case, since Parnell had provided "payment in full" to the Hospital, the Hospital could not assert its lien.

The court acknowledged that its decision would cause hardship to hospitals that have discounted rate agreements with payors, but noted that the hospitals could always contract to preserve their right to assert liens to recover the difference between negotiated rates and the actual cost of treatment.

State Farm Mutual Auto. Ins. Co. v. Mallela N. Y. Slip Op. No. 02416 (March 29, 2005)

The New York Court of Appeals held that under New York's no fault insurance laws, an insurance company may refuse to pay a fraudulently incorporated medical services corporation for a claim assigned to the corporation by an insured.

Plaintiff State Farm filed a complaint in U.S. District Court for the Eastern District of New York seeking a declaratory judgment that it need not pay defendants, fraudulently incorporated medical service corporations, for assigned claims submitted under New York's no-fault system. Under New York law, medical service corporations may only be owned by licensed physicians - non-physicians are prohibited from sharing ownership in such corporations. State Farm alleged that defendants had set up corporations where non-physicians paid licensed physicians to use the physicians' names on the incorporation papers of the medical services corporations, but the non-physicians actually operated the corporations.

State Farm's claim was based upon the fraudulent nature of the corporations - State Farm never claimed that the fraudulent corporations provided inappropriate care to patients.

The district court dismissed State Farm's complaint, finding that State Farm still had a duty to pay the assigned claims even though defendants' corporations did not comply with the licensing and incorporation statutes, as long as the medical providers acted within the scope of their licenses in providing services. The Second Circuit then certified to the New York Court of Appeals the issue of whether a fraudulently incorporated medical services corporation is entitled to be reimbursed by insurance companies for services rendered by licensed providers.

The New York Court of Appeals found that under New York's no-fault insurance laws, an insurer must reimburse a patient for "basic economic loss." The Court noted that pursuant the insurance regulations, payments made to unlicensed providers are excluded from the meaning of "basic economic loss." Thus, the court held that insurers may withhold reimbursement from fraudulently incorporated medical service corporations for assigned no-fault claims.

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