Managed Care Lawsuit Watch - October 2011

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 Chris Flynn, Peter Roan, or any member of the health law group.

Please click to view the full Crowell & Moring Managed Care Lawsuit Watch archive.

Cases in this issue:

• Calingo v. Meridian Res. Co.
• Phillips v. Kaiser Foundation Health Plan Inc., et al.
• State of Florida, et al. v. United States Department of Health and Human Services, et al.
• City of New York v. Group Health Incorporated, HIP Foundation, Inc., and Health Insurance Plan of Greater New York
• Weight Loss Healthcare Centers of America, Inc. v. Office of Personnel Management
• United States of America and State of Michigan v. Blue Cross Blue Shield of Michigan
• New Jersey Physicians, Inc. v. President of the United States
• In re WellPoint, Inc. Out-of-Network "UCR" Rates Litigation
• Commonwealth v. Geisinger Med. Ctr. & Shamokin Area Cmty. Hosp.
• Harlick v. Blue Shield of California
• Fisher v. Blue Cross Blue Shield of Texas
• Churchill v. CIGNA Corp.
• PacifiCare of Nevada, Inc. v. Rogers

 

Calingo v. Meridian Res. Co. No. 7:11-cv-628 (S.D.N.Y. Aug. 15, 2011)

Plaintiffs brought a class action alleging that the defendants, Empire HealthChoice Assurance and Meridian Resource Company, improperly sought reimbursement from plaintiffs' settlement proceeds for the cost of health care services they provided plaintiffs.  The action arose because of a change in New York law that may prohibit health insurers and other benefit providers from seeking reimbursement from the proceeds of any settlement of personal injury, medical malpractice, or wrongful death actions for the cost of medical services or benefits they provided to the claimant.  Plaintiffs challenged how this provision is affected by the FEHBA, which provides that the terms of any contract which relate to the nature, provision, or extent of coverage or benefits (including payments with respect to benefits) shall supersede and preempt any state or local law relating to health insurance or plans.

Defendants removed this action from the state court, and plaintiffs moved to remand.  The District Court denied plaintiffs' motion.

Plaintiffs argued that CAFA's local controversy exception divested the court of subject matter jurisdiction.  The success of plaintiffs' argument thus turned on whether CAFA's exceptions were jurisdictional, as plaintiffs' motion was filed more than 30 days after the notice of removal was filed.  If plaintiffs' remand were to be grounded in a challenge to the federal court's subject matter jurisdiction, it would be timely as this ground can be asserted at any time; but if filed for any other reason, the motion for remand would be untimely. 

The court held that the local controversy exception to CAFA does not deprive the district court of subject matter jurisdiction over the case for three reasons.  First, the Court found the text and structure of the statute suggest that Congress did not intend for the exception to negate subject matter jurisdiction under CAFA—the exceptions pertain to the exercise of subject matter jurisdiction, not to the existence of subject matter jurisdiction.  Second, no court addressing this issue has held the exceptions to be jurisdictional.  Third, the court observed that if the local controversy exception were jurisdictional, courts would be required to consider it no matter when asserted and would be required to address it sua sponte if appropriate.  Therefore, plaintiffs' failure to file their motion within 30 days of removal made that motion untimely, providing the court with grounds for denial in turn.

The court also denied defendants' motion to dismiss finding that (1) plaintiff's claims are not preempted under FEHBA's preemption provision, which it said only preempts issues relating to coverage and benefits under a policy, not issues of subrogation and reimbursement, (2) federal common law does not displace plaintiffs' reliance on state law because reimbursement varies from state to state, such that there is no "uniquely federal interest," and (3) the United States's sovereign immunity does not bar plaintiffs' claims because the federal government would not be liable for any damages pursuant to this action.

Phillips v. Kaiser Foundation Health Plan Inc., et al. No. C 11-02326 CRB (N.D. Cal. Jul. 25, 2011)

An enrollee in a Medicare Advantage plan insured by Kaiser was in a car accident and received medical services for her injuries.  Kaiser initially covered these medical services.  Subsequently, the enrollee received a $100,000 settlement from a liability insurer in connection with the car accident.  Following this settlement, Kaiser sought to recover $88,205 it had paid for her medical services, pursuant to its statutory rights as a Medicare secondary payer to a third party source of funds.  The fee for the medical services was calculated using California Civil Code section 3040 and was greater than the corresponding Medicare FFS rates.

The enrollee then filed suit against Kaiser alleging violations of state law because (1) Kaiser sought repayment in excess of Medicare FFS rates, and (2) Kaiser failed to inform potential enrollees that Kaiser would seek reimbursement in similar instances and at rates in excess of what would be sought from an individual who was enrolled in Original Medicare.  In response, Kaiser argued that enrollee's claims should be dismissed because they were preempted by the Medicare Act and because the enrollee had failed to exhaust administrative remedies prior to filing suit.

The District Court agreed with Kaiser and dismissed enrollee's claims.  Specifically, the Court determined that enrollee's state law claim alleging that Kaiser, as a secondary payer, was unlawfully seeking an amount in excess of Medicare FFS rates was actually a disguised claim for benefits arising under the Medicare Act.  With respect to the enrollee's other state law claim that Kaiser had failed to inform potential enrollees when marketing the plan, the court determined that although the claim did not arise under the Medicare Act, it was nonetheless preempted by the Medicare Act.  This latter determination rested on extensive CMS regulations governing Medicare Advantage marketing materials as well as a concern that application of California consumer protection laws could undermine these standards.

State of Florida, et al. v. United States Department of Health and Human Services, et al. No. 11-11021 and 11-11067 (11th Cir. Aug. 12, 2011)

The Eleventh Circuit reversed in part and affirmed in part the district court's ruling on the parties motions for summary judgment on the constitutionality of the Patient Protection and Accountable Care Act ("ACA"). 

The first issue before the Eleventh Circuit was the constitutionality of Congress' use of its powers under the Spending Clause of the Constitution to expand the Medicaid program to (i) increase eligibility under Medicaid and (ii) provide additional subsidies to those participating in the program.  The State of Florida, and other states that joined in the suit, argued instead that the Act was unduly coercive because it required the States to participate in a more expensive Medicaid program, or otherwise forgo their federal funds subsidizing their existing Medicaid program.  The Eleventh Circuit, in analyzing the coercion doctrine put forth by the States, held that the Act's expansion of Medicaid was not unduly coercive because (i) at the creation of the Medicaid program, Congress warned that it reserved the right to make changes to the program; (ii) the federal government will bear nearly all of the costs associated with the expansion and as such, the States' complaint of being required to participate in a more expensive program is more "rhetoric than fact;" (iii) the States have received plenty of notice about the potential expansion and therefore can budget appropriately as needed, and (iv) the Act gives the Department of Health and Human Services the discretion to withhold all or merely a portion of the funding for those States that choose not to participate in the new Medicaid program, therefore it is not a foregone conclusion that the States will lose all their funding.  In light of these factors, the court did not find sufficient grounds for the States' argument that the expansion of the Medicare program is coercive and consequently upheld the district court's ruling that the expansion was constitutional.

The second issue before the court was whether the individual mandate in the ACA was constitutional.  The "individual mandate" requires all individuals to obtain health insurance either through private insurance companies or government programs.  The court focused its analysis on whether (i) "the action itself" is constitutional, and (ii) ‘its implications for our constitutional structure."  The parties focused on the issue of whether the individual mandate was a regulation of "activity" or "inactivity," and thus whether the regulation of "inaction" could be within Congress' powers. In analyzing prior Supreme Court cases that invoked the Commerce Clause, the court emphasized that these prior cases involved "preexisting, freely chosen activities."  Here, however, the court found that the individual mandate in the ACA would force a person into an activity – the act of purchasing insurance.  The Eleventh Circuit, however, did not focus its decision on this basis.  Rather, it noted that the "formalistic dichotomy of activity and inactivity" does not provide "a workable or persuasive enough answer in this case."  The court reframed the question before it as "whether the federal government can issue a mandate that Americans purchase and maintain health insurance from a private company for the entirety of their lives."

Part of the court's constitutionality analysis focused on the "unprecedented nature of the individual mandate," noting that never before has Congress sought to require the purchase of a commodity because an individual was a resident of the United States.  The lack of precedent implied to the court that Congress does not have the power to enact such a statute.  Rather, Congress has traditionally incentivized activities it favored and discouraged activities it did not.  The court distinguished the ACA from prior cases that upheld the broad power of Congress to regulate interstate activity by noting that the prior statutes all permitted some element of choice for the individuals affected by Congress' actions.  However, the court noted that "individuals subjected to this economic mandate have not made a voluntary choice to enter the stream of commerce, but instead are having that choice imposed upon them by the federal government."  The court also found that the scope of the individual mandate was too broad and "woefully overinclusive" to survive scrutiny.  The individual mandate is not limited to only those who consume health care – it impacts even those individuals who do not enter into the health care market at all, such as those individuals who neither purchased health insurance nor obtained health care services. 

The court also rejected the government's contention that the individual mandate was permissible under the Taxing and Spending Clause.  Here, the court came to the same conclusion as numerous other courts that have considered the question of the individual mandate and found that it is a "regulatory penalty" and not a "tax."  Thus, for these reasons, the court upheld the ruling of the district court and found that the individual mandate of the ACA was unconstitutional.

Finally, the court concluded that the individual mandate was severable from the other health reforms contained in the ACA and that the district court erred in its decision to invalidate the entirety of the ACA.  The court noted that there is ample precedent in which the Supreme Court has severed a portion of a legislation that was deemed unconstitutional, even where there was no severability clause.  The court held that excising the individual mandate from the ACA "does not prevent the remaining provisions from being ‘fully operative as law.'" The court also considered whether removing the individual mandate from the ACA would adversely impact the two other health insurance reforms contained in the ACA – guaranteed issue and coverage for pre-existing conditions.  The court noted that these reform provisions do not contain any cross-references to the individual mandate, nor did Congress draft a severability clause dictating that these three provisions only work in tandem.  Thus, the court was not persuaded that it was "evident (as opposed to possible or reasonable) the Congress would not have enacted the two reforms in the absence of the individual mandate."

City of New York v. Group Health Incorporated, HIP Foundation, Inc., and Health Insurance Plan of Greater New York No. 10-2286-cv (2d Cir. Aug. 18, 2011)

The City of New York brought an action in 2006 against two of the health insurers who sell coverage to the City's Health Benefits Program for City employees and their dependents.  The City argued that, under state and federal antitrust laws, including Sections 1 and 2 of the Sherman Act, the health insurers' plan to merge would have impermissibly anticompetitive effects in the "low-cost municipal health benefits market." The trial court did not dismiss the action, but denied the City's motion for a temporary restraining order (TRO), noting that "there are substantial questions about the market definition analysis" put forward by the City.

The defendants, Group Health Incorporated and Health Insurance Plan of Greater New York, moved for summary judgment in December 2009 after undertaking several years of discovery.  The court agreed with both the arguments presented in that motion: first that the City's market definition did not accurately reflect the market of insurers that compete for the City's business, and second that the injury ascribed by the City to antitrust violations actually arose only from the defendants' planned conversion to for-profit status. 

Before the court granted the defendants' motion, it first denied the City's motion to amend its complaint – specifically, to revise its market definition and to present an alternative theory of antitrust injury that was not dependent upon a particular market definition. Pointing out that the denial of a TRO in 2006 had put the City on notice about the deficiency of its initial market definition, the court rejected the City's motion to amend its November 2006 complaint in January 2010. Such an amendment, according to the court, suffered from "undue delay" and was likely to prejudice the defendants, who had spent the intervening years conducting discovery in response to the initial market definition.

The Second Circuit panel upheld the trial court on all points after rejecting the City's latest market definition argument and also rejecting the City's argument that denying the motion to amend below amounted to an abuse of discretion.

Weight Loss Healthcare Centers of America, Inc. v. Office of Personnel Management No. 10-3247 (10th Cir. Aug. 23, 2011)

The Tenth Circuit heard an appeal relating to the reimbursement provided a federal employee who received outpatient laparoscopic gastric "lap band" surgery from Weight Loss Healthcare.  The employee was covered by a Standard Option health insurance plan through Blue Cross Blue Shield of Kansas City.  Weight Loss received the employee's permission to pursue his claim after Blue Cross informed the employee that it would reimburse only $1,610 of the $56,000 charged by Weight Loss for the procedure.

Upon the request of Weight Loss to reconsider the amount of its reimbursement, Blue Cross confirmed the amount as accurate.  Weight Loss appealed to OPM, which affirmed, and then brought suit in federal court, where OPM's decision was affirmed again.  Weight Loss challenged that affirmance, raising three issues: whether the trial court owed deference to OPM's interpretation of the plan, whether OPM's interpretation was correct, and whether OPM's decision was reasonable given that it had never seen the data or method that informed Blue Cross' calculation of benefits.

The question of deference to OPM was one of first impression for the Tenth Circuit, and the panel concluded that deference was owed, based upon the three-part test in Sternberg v. Sec'y, Dep't of Health & Human Servs., 299 F.3d 1201 (10th Cir. 2002) as well as similar conclusions drawn by the Eighth and Eleventh Circuits.  This establishes that OPM decisions will be reviewed in the Tenth Circuit under an arbitrary and capricious standard.

The panel's analysis of the disputed benefits contract provision found no ambiguity that could not be resolved by reading the provision in context and so rejected Weight Loss' argument to the contrary.  As the panel explained, the reasonable insured standard of interpretation "does not excuse the insured from reading the policy, the entire policy." However, the panel agreed with Weight Loss that because OPM "apparently just took Blue Cross at its word" rather than requesting the data underlying Blue Cross' benefit calculation, its decision to uphold Blue Cross' calculation was arbitrary and capricious.  For that reason, the court remanded the matter to OPM for further investigation and resolution.

United States of America and State of Michigan v. Blue Cross Blue Shield of Michigan No. 10-14155 (E.D. Mich. August 12, 2011)

The United States and the State of Michigan allege that Blue Cross Blue Shield of Michigan's ("Blue Cross") use of most favored nation clauses ("MFNs")  in its agreements with various hospitals violates Section 1 of the Sherman Act and Section 2 of the Michigan Antitrust Reform Act.  Specifically, Plaintiffs allege that the MFNs have deterred or prevented competitive entry and expansion in health insurance markets in Michigan by denying Blue Cross' competitors access to competitive hospital contracts.

Blue Cross is the largest provider of commercial health insurance in Michigan, and the largest non-governmental purchaser of health care services, including hospital services, in Michigan.  Blue Cross allegedly has agreements containing MFNs with at least 70 of Michigan's 131 acute care hospitals.  The MFNs fall into two categories.  The first type is known as "MFN-plus," which purportedly requires hospitals to charge some or all other commercial insurers as much as 40% more than the hospital charges Blue Cross.  Plaintiffs allege that MFN-plus clauses guarantee that Blue Cross' competitors cannot obtain hospital services at prices comparable to the prices Blue Cross pays, thereby limiting competition.

The second type of MFN is known as "Equal-to MFN," which requires hospitals to charges other commercial health insurers at least as much as they charge Blue Cross.  "Equal-to MFNs" are typically with smaller, community-based hospitals, and under these agreements Blue Cross allegedly agreed to pay approximately 16% more to a hospital in exchange for the Equal-to MFN. 

Ruling on Blue Cross' motion to dismiss the first cause of action – violation of the Sherman Act – the District Court found that the complaint sufficiently alleged the necessary elements to establish a violation of Section 1 of the Sherman Act.  The court also rejected Blue Cross' argument that the Complaint failed to plausibly allege relevant product markets, geographic markets, market power, anticompetitive effects and harm. 

Regarding the second cause of action – violation of the Michigan Antitrust Reform Act ("MARA") – Blue Cross argued that its conduct is exempt from the act.  The court noted that the cited exemption only applies to health insurers "when the transaction or conduct is to reduce the cost of health care and is permitted by the commissioner."  As alleged in the Complaint, Blue Cross' conduct was neither for the purpose of reducing cost nor permitted by the commissioner.  The court concluded that Blue Cross had not shown it was exempt at this stage of the proceedings.

Finally, the court also rejected Blue Cross' various defenses, including its argument for state action immunity based on Michigan's heavy regulation of the insurance industry.  The court narrowly construed the state action immunity doctrine, and found that Blue Cross failed to meet either prong of the two-part test.  First, the legislature did not clearly articulate nor affirmatively express the act sought to be restrained – using MFNs to deter competition with other insurers.  Second, Blue Cross could not point to any regulations or statutes showing that the state actively supervises use of MFNs. 

New Jersey Physicians, Inc. v. President of the United States No. 10-4600 (3rd Cir. Aug. 3, 2011)

The Third Circuit affirmed a dismissal by the District of New Jersey due to its finding that a doctor, his patient and a nonprofit corporation lacked standing to sue because they did not adequately plead an injury in fact.  The underlying plaintiffs' action was a challenge to the validity of the Patient Protection and Affordable Care Act ("ACA").  Plaintiffs objected primarily to the ACA's minimum essential coverage provision, more commonly referred to as the individual mandate, as well as generally asserting that the entire Act is unconstitutional because the individual mandate exceeds Congress' law-making authority.

The court declared that plaintiffs' complaint was "factually barren" and insufficient to indicate that plaintiffs are in any way impacted by the Act or the individual mandate.  Plaintiffs' only relevant allegations were (1) that the patient pays himself for his care, and (2) that the patient is a New Jersey citizen who chooses who and how to pay for the medical care he receives.  The Third Circuit stated that these allegations failed to establish standing: "The first apparently suggests that Roe pays for his own health care [and t]he second reveals only that, before Roe pays, he chooses his doctor and his method of payment."  The court emphasized that the patient failed to provide necessary specifics as to whom the patient chooses or how he pays for the care.  The court noted that this challenge was unlike others in which plaintiffs alleged some current financial harm or pressure arising out of the individual mandate's looming enforcement in 2014.

In re WellPoint, Inc. Out-of-Network "UCR" Rates Litigation MDL 09-2074 PSG (FFMx) (C.D. Calif. Aug. 11, 2011)

Defendants Wellpoint, Inc., United Health Group, Inc. and Ingenix, Inc. filed motions to dismiss all thirteen claims brought against them by subscribers, providers and various associations ("Plaintiffs") in a multidistrict litigation case. The court denied some of Defendants' motions to dismiss while granting others.

Plaintiffs alleged that Defendants violated the Sherman Antitrust Act, ERISA, RICO and various state laws by failing to properly reimburse them for out-of-network services.  According to Plaintiffs, subscribers were promised reimbursement for out-of-network services at a percentage of the lesser of either (1) the actual amount of the subscribers' medical bills or (2) the   "usual, customary and reasonable" ("UCR") rate of reimbursement charged by providers in the same or similar geographic area for substantially the same services. However, Plaintiffs claimed that when paid the UCR rate, they were underpaid due to flawed UCR data provided by Ingenix.  Ingenix had maintained a proprietary database which compiled out-of-network services reimbursement data provided by various health insurance companies and provided certain billing rate information back to insurance companies.  Plaintiffs alleged that the the data were manipulated in order to populate the database with deflated UCR figures.

The court granted Defendants' motions to dismiss (1) for Plaintiffs' lack of standing based on non-Ingenix out-of-network benefit reductions; (2) Plaintiffs' RICO claims; (3) Plaintiffs' ERISA § 1132(c) claim; (4) Plaintiffs' fraud-based California unfair competition and false advertising claims; (5) Plaintiffs' N.Y. Gen. Bus. Law § 349 claim (only with regard to United Health Group and not WellPoint) and (6) Plaintiffs' California Cartwright Act claim for ERISA Plaintiffs (only with regard to WellPoint and not United Health Group).

The court denied Defendants' motion to dismiss (1) for lack of standing for all other claims; (2) Plaintiffs' Sherman Act claims; (3) ERISA §§ 1132(a)(1)(B), 1132(a)(2) and 1132(a)(3) claims; (4) Plaintiffs' breach of contract claims; (5) Plaintiffs' implied covenant of good faith and fair dealing claims; (6) Plaintiffs' unfair and unlawful California unfair competition claims; (7) Plaintiffs' N.Y. Gen. Bus. Law § 349 claim (only with regard to WellPoint and not United Health Group) and (8) Plaintiffs' California Cartwright Act claim for non-ERISA Plaintiffs (only with regard to WellPoint and not United Health Group).

Commonwealth v. Geisinger Med. Ctr. & Shamokin Area Cmty. Hosp. Case No. 344 MD 2011 (Pa. Commw. Ct. July 26, 2011) - Order - Complaint

The court gave final approval for the merger of Shamokin Area Community Hospital  into Geisinger Medical Center on July 26, 2011 but imposed conditions based on antitrust concerns that the merger would substantially lessen or eliminate competition in the region.  Pennsylvania's Attorney General sought to block the merger on the grounds that it would hurt competition in the Northcumberland County markets for primary and non-tertiary specialty physician services and inpatient acute-care hospital services, especially for Medicare Advantage plans.  Geisinger Medical Center and Shamokin Area Community Hospital are the two largest providers of inpatient acute-care hospital services in the county and together control 60% of the hospital market in the region.

Medicare Advantage plans constitute a significant percentage of the hospitals' revenues from patient care.  However, Geisinger had limited its participation in Medicare Advantage plans it does not own.  The court therefore conditioned the merger's approval on Geisinger extending the term of Shamokin's Medicare Advantage plan contracts with health plans by three years.  The court additionally held that Geisinger cannot condition a contract for the services of Shamokin on the health plan's agreement not to contract with certain hospitals, nor could it require a health plan to have a contract with Shamokin as a condition of having a contract with Geisinger.  The court's order also prohibits agreements with most favored nation clauses or requirements that a provider refer patients to Geisinger.

Geisinger had also not granted independent physicians privileges at its facilities.  The court's order requires Geisinger to extend privileges to all independent physicians in Northumberland County who have privileges at Shamokin.  Moreover, the merger's approval is conditioned upon Geisinger permitting its medical staff to participate in other physician-hospital networks.

Harlick v. Blue Shield of California No. 10-15595 (9th Cir. Aug. 26, 2011)

The appellant received treatment for her anorexia nervosa at a residential treatment facility that employed licensed psychologists but no nurses; she weighed 65% of her optimal body weight when she was first admitted there, and her treatment included the use of a feeding tube. Blue Shield explained its denial of coverage for that care by referring to the express exclusion for "residential treatment" that appears three times in the plan's explanation of benefits.  That exclusion also appeared in several letters from Blue Shield to the appellant, though those letters were only some of the multiple communications between Blue Shield and the appellant, and the Ninth Circuit panel noted disapprovingly that the communications conveyed mixed and conflicting information to appellant about what her plan covered and why.  When appellant sought review of Blue Shield's refusal from the California Department of Managed Health Care (DMHC), Blue Shield justified its decision based the plan's exclusion of coverage for residential treatment and did not address to whether the treatment had been medically necessary.

The appellant then sued in federal district court, where she argued that (i) the term "residential treatment" was ambiguous as used in the plan's language; (ii) the treating facility was a Skilled Nursing Facility (SNF) for which her plan did provide coverage; and (iii) California's Mental Health Parity Act required Blue Shield to cover her treatment in any case, because her mental illness was among those "severe mental illnesses" enumerated by the Act, and her treatment was medically necessary.  The district court did not reach the third issue and rejected the appellant's arguments on the other two.

A Ninth Circuit panel agreed in part with the district court after a de novo review, upholding its conclusions that "residential treatment" was not ambiguous, and that the residential treatment facility (which had no nurses of any kind on staff) was not a SNF.  However, the panel also considered the Mental Health Parity Act ("Parity Act") where the district court had not.  The panel read the Parity Act's language as directing plans to cover treatments for enumerated "severe mental illnesses" (such as anorexia nervosa), so long as those treatments are "medically necessary."

The question of coverage for appella