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Managed Care Lawsuit Watch - July/Aug. 2006


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.

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

Cases in this issue:

Empire HealthChoice Assurance Inc. d/b/a Empire Blue Cross Blue Shield v. McVeigh
U.S. No. 05-200 June 15, 2006

The United States Supreme Court recently ruled that the Federal Employees Health Benefits Act (FEHBA) does not provide federal jurisdiction for a carrier’s reimbursement action against an insured.

McVeigh, an enrollee in Empire’s Federal Employees Program plan, filed a state tort action against parties who had caused his injuries. Though Empire was aware of the suit, it declined to participate. Once Empire learned of the lawsuit’s settlement, it filed suit in federal district court for reimbursement of the $157,309 it had paid for McVeigh’s medical care.

The Supreme Court held that the FEHBA provides for federal jurisdiction only in actions against the United States, and that nothing in the statute’s text gave carriers a federal forum for the carrier’s claims against either its insured or an alleged tortfeasor to share in the proceeds of a state-court tort action. Empire argued that the reimbursement claim was a federal cause of action, because Congress intended all rights and duties stemming from Empire’s contract with the Office of Personnel Management (the federal agency that administers FEHBA) to be federal in nature. The Court disagreed, holding that Empire had not demonstrated a significant conflict between an identifiable federal interest and the operation of contractual reimbursement provisions and state subrogation law. In the absence of such a conflict, the Court saw no reason to displace state law or to decide this type of case in federal court.

Cruz v. Blue Cross Blue Shield of Illinois
U.S., No. 04-1657 (judgment vacated) June 26, 2006

As a result of the McVeigh decision, the Court vacated the Seventh Circuit Court of Appeals’ decision in Cruz v. Blue Cross Blue Shield of Illinois and remanded the case for further proceedings consistent with McVeigh. The Seventh Circuit had found the FEHBA to preempt health plan administrators’ state law claims for reimbursement from enrollees, determining that Congress’ “clear intent” was to make FEHBA enrollees’ benefits uniform across the states. The appellate court thus (erroneously) opined that such reimbursement claims must be brought in federal court.

In re: Managed Care Litigation
U.S. D.C., S.D. Fla. MDL No. 1334 June 19, 2006

On June 19, 2006. Judge Moreno of the U.S. District Court for the Southern District of Florida dismissed all claims brought by 700,000 physicians in a class action suit against UnitedHealth Group Inc. and Coventry Health Care, Inc., including claims that the insurers violated federal racketeering and state prompt-pay laws.

In granting summary judgment to the two remaining defendants, the court stated that the physicians, despite “multiple opportunities to demonstrate triable issues of fact,” had simply not presented evidence that would allow a jury to reasonably find that the insurers had engaged in an underpayment conspiracy.

In February, 2006, the court dismissed PacifiCare Health Systems, Inc. as a defendant on similar grounds. The other seven originally-named defendants. Humana, Inc., Health Net Inc., Prudential Financial Inc., WellPoint Health Networks, Inc., Anthem, Inc., Aetna Inc. and CIGNA HealthCare Plan, had previously entered into settlement agreements or proposed settlement agreements with the physicians.

Sewell v. 1199 National Benefit Fund for Health and Human Services
2nd Circuit No. 05-6096-cv June 14, 2006

A health benefit plan did not act unlawfully by downcoding a provider’s claims to redress his identified patterns of overbilling, according to a ruling by the Court of Appeals for the Second Circuit.

As part of a standard review of over 800 providers participating in its health benefit plan, the 1199 National Benefit Fund for Health and Human Services (the “Fund”) noticed, further investigated and ultimately determined that Dr. Clinton Sewell and his medical practice had improperly upcoded claims for payment between 1999 and 2003, resulting in overpayments in the amount of approximately $200,000. After making this determination, the Fund downcoded Dr. Sewell’s claims for approximately 18 months, until the amounts were recovered.

Sewell sued, claiming the Fund’s actions violated ERISA. Both the trial and appellate courts found that the Fund “had both the [fiduciary] duty and authority” to not only investigate Dr. Sewell’s claims practices, but also to recoup money from Dr. Sewell. With respect to the Fund’s practice of routine downcoding in order to recoup funds, the Court of Appeals stated that “downcoding his incoming bills one level was a fair approximation of the correct value of his services and a reasonable response to the inherent difficulties posed by a more individualized inquiry.” The courts had previously determined that Sewell had waived any claims he might have had under the terms of his contract with the Fund.

Murch v. Prudential Welfare Benefits Plan
S.D. Wa. 2:05-cv-00992-MJP May 23, 2006

The U.S. District Court for the Western District of Washington denied defendant’s motion for summary judgment on a plan participant’s suit for coverage of home health benefits under Prudential Welfare Benefits Plan, an ERISA plan administered by Aetna Life Insurance Co. The court found that coverage provided for home health care in the main body of the benefit document should be given a broad construction, despite narrowing language with regard to custodial care contained in the plan glossary definition of “medically necessary” since the latter was not conspicuous enough, the court said, to draw a reasonable layperson’s attention.

Murch was covered by the Prudential Plan. Following a severe stroke in 2003, Murch’s physician ordered home health services – both medical care and assistance with daily activities. Murch submitted claims to Aetna for round-the-clock care provided in February and March, 2004, but an Aetna claims reviewer denied all but four hours per day for the submitted claims, finding the services provided during the other 20 hours were “primarily custodial.” The reviewer further recommended that Aetna similarly deny services provided through June, and deny all home health services claims after June as “primarily custodial”, even though Murch had not yet submitted such claims. After Aetna denied Murch’s appeal, he filed suit.

Applying a de novo review standard, the court found that Aetna unreasonably interpreted the terms of the plan to exclude custodial home health services. The court stated that a plain reading of the main body of the plan document appeared to cover custodial home health services, despite the glossary definitions of the terms “medically necessary” and “necessary” indicating that custodial home health services were not covered. The court found that such a “coordinate reading” of separate provisions of the document rendered the exclusion unenforceable, because it was not conspicuous enough to attract the attention of a reasonable layman.

The court also held that Murch sufficiently demonstrated that administrative exhaustion would have been futile, determining that Aetna’s claims-review procedure was substantively and procedurally unreasonable, as Aetna had continually failed to respond to Murch’s claims within its own time frames.

The court remanded the claims for reconsideration with instructions that the plan document should be read as covering home health care that includes custodial care.

Syndicated Office Systems, Inc. v. Guardian Life Ins. Co.
E.D. Mo. No. 4:05-cv-00640-ERW May 31, 2006

The U.S. District Court for the Eastern District of Missouri refused to dismiss a hospital’s suit against Guardian Life Insurance Co. (“Guardian”) for nonpayment of services, finding that ERISA did not preempt the hospital’s claims. However, the court granted summary judgment in favor of Guardian, finding that a statute of limitations barred the hospital’s claims.

Feverston was admitted to St. Louis University Hospital following an accident. The hospital contacted Guardian to obtain precertification for Feverston’s treatment. Based on Guardian’s provision of an initial treatment authorization and several continuing authorizations throughout Feverston’s admission, the hospital provided treatment and services valued at $580,052.76. Thereafter, Guardian determined that Feverston’s coverage had terminated prior to her admission to the hospital, and refused to pay for any of the hospital’s charges.

The hospital alleged detrimental reliance, promissory estoppel, and negligent misrepresentation against Guardian (as the third party administrator), and vicarious liability against KForce (as the plan). KForce moved to dismiss the complaint based on ERISA preemption and, in the alternative, asked the court to grant summary judgment based on the expiration of the statute of limitations.

Although the court granted summary judgment in favor of KForce, finding that the hospital filed suit one day after the expiration of the five-year statute of limitations, the court engaged in an extensive ERISA-preemption analysis, looking specifically to seven factors: whether 1) state law negates an ERISA plan provision; 2) state law affects relations between primary ERISA entities; 3) state law impacts the structure of ERISA plans; 4) state law impacts the administration of ERISA plans; 5) state law has an economic impact on ERISA plans; 6) preemption of state law is consistent with other provisions; and 7) state law is an exercise of traditional state power.

The court found that the hospital sued KForce for damages caused by the tortious actions of its agent; it did not seek to enforce or expand plan benefits, and did not argue that KForce breached a fiduciary duty or failed to properly administer the plan. The only factor that weighed in favor of preemption, according to the court, was whether state law had an economic impact on ERISA plans. The court found that it did, but that overall the balance of factors weighed against ERISA preemption. The court noted that if providers had no recourse under ERISA or state law, they may be “understandably reluctant to accept the risk of non-payment and may require up-front payment”, which the court found “directly defeats” Congress’ purpose in enacting ERISA.

Citizens Ins. Co. of America v. MidMichigan Health ConnectCare Network Plan
6th Circuit No. 05-1237 June 1, 2006

Bradshaw was injured in an automobile accident and incurred $135,565 in medical expenses. At the time, she had no-fault auto insurance through Citizens and participated in her employer’s health benefit plan, MidMichigan. Citizens paid for Bradshaw’s expenses and then sued MidMichigan, claiming that MidMichigan was primarily responsible for paying the expenses in light of a clause in the Citizens policy, which stated that Citizens would not be primarily responsible for expenses to the extent that “similar benefits are paid, payable, or required to be paid, under any individual, blanket or group accident or disability insurance, service, benefit, reimbursement, or salary continuation plan” (emphasis added).

The U.S. District Court for the Eastern District of Michigan found Citizens primarily responsible, finding the clause “accident or disability” to modify each of the following terms, including “benefit… plan.” A divided Sixth Circuit Court of Appeals reversed and held Citizens secondarily responsible. The court specifically found that “the intent of the [auto insurance plan] clause was to exclude payment of medical expenses for a variety of plans.”

Beeman et al. v. TDI Managed Care Services, Inc. d/b/a Eckerd Health Services
9th Circuit No. 04-56369 June 2, 2006

The California Civil Code requires pharmacy benefit managers (“PBMs”) to 1) perform a study, at least every two years, of the fees that pharmacies charge their customers; and 2) report the findings to third party payors. The law grants a private right of action to pharmacies to enforce the law. When passing this law, the California legislature stated that it hoped the findings would “at a time in the future… become the basis for reimbursement.”

In Beeman, several pharmacies sued several PBMs, claiming that the PBMs’ failure to perform the studies caused damage. The PBMs moved to dismiss, claiming that the pharmacies could not prove an “injury in fact” from the PBMs’ failure to perform the studies, and thus did not have standing. The U.S. District Court for the Central District of California agreed.

The Ninth Circuit Court of Appeals reversed, noting that the studies’ findings could be used “to evaluate what should be actual market prices, negotiate fairer reimbursement rates, lobby for legislative intervention… and ascertain payments made to PBMs against those amounts the PBMs pass on to pharmacies.” The court stated that if it found the pharmacies did not have proper standing to proceed, it would be tacitly finding the legislature to have “passed a bill with useless procedural provisions, [which] play some, if not a critical, part in future third-party payor decisions.”

Cook v. Medical Savings Insurance Co.
W.D. Okla. No. CIV-05-289-C June 12, 2006

Cook, a subscriber to a group policy offered by Medical Savings Insurance Co. (“MSIC”), claimed that MSIC’s handling of his insurance claims wrongfully caused hospitals and collection agencies to pursue payment directly from him, caused distress when he was diagnosed with prostate cancer, and constituted health care fraud and bad faith. A jury found for Cook, awarding $550,000 in damages. MSIC moved for a new trial or remittitur, but on June 12, 2006, the U.S. District Court for the Western District of Oklahoma denied MSIC’s motion.

The court determined that 1) the jury’s verdict was well-supported by the evidence; 2) there was “no inference or evidence that passion, prejudice, corruption or other improper cause led to the verdict”; and 3) the verdict did not shock judicial conscience. The court further dismissed MSIC’s claim that it was error to admit evidence of MSIC’s destruction of records related to its adjustment of Cook’s claims. MSIC has since appealed.

Ross v. Blue Care Network of Michigan
Michigan Court of Appeals No. 266240 June 13, 2006

Douglas Ross, a Michigan resident and beneficiary of Blue Care Network of Michigan (“BCN”), an HMO, sought and procured (before obtaining a referral) out-of-network specialty cancer care from an Arkansas facility. He received treatment there from July through November, 2002, and again from December, 2002 through March 3, 2003. BCN denied coverage and, after Ross died, his wife proceeded through BCN’s internal appeals process and the external review process required by the state’s Patient’s Right to Independent Review Act (“PRIRA”).

Physicians affiliated with the independent review organization (“IRO”) analyzed only the initial period of Ross’ care, and found that BNC was required to cover all of the care rendered within that period, as it constituted “emergency care.” The Commissioner of the Office of Financial and Insurance Services, authorized by PRIRA to make the ultimate independent review decision, determined that only some of that care was emergent in nature, and thus ordered BCN to cover only the care provided from July 8 through July 23, 2002.

The trial court reversed, finding that the Commissioner was statutorily authorized only to determine whether BCN’s contract required coverage; the Commissioner was not authorized to question the medical judgment of the IRO’s physicians. Affirming the judgment of the IRO physicians that the care was emergent in nature, the court ordered BCN to cover all of the Arkansas facility’s care, including the care rendered from December, 2002 to May, 2003.

The Michigan Court of Appeals affirmed the trial court’s reasoning, but reversed the determination that BNC must also pay for the second period of care, as neither the IRO physicians nor the Commissioner had analyzed that period of care for purposes of determining coverage.

California Consumer Health Care Council v. Kaiser Foundation Health Plan, Inc.
Cal. Ct. App. No. A108697 July 25, 2006

In an unpublished opinion, the California Court of Appeal upheld the dismissal of a lawsuit filed against Kaiser Foundation Health Plan (“KFHP”) for allegedly violating patient privacy rights by disclosing medical records without the patients’ consent.

The California Consumer Health Care Council (“CCHCC”) alleged that KFHP’s practice of sharing patient records with their attorneys, when the patient was making or contemplating making medical malpractice claims against KFHP, violated California’s Unfair Competition Law, California’s Confidentiality Act, and the physician-patient privilege.

The court held that the Confidentiality Act specifically authorized the disclosure of patient medical information to persons engaged in reviewing the competence of health care professionals, and that limiting the disclosure of such information would “raise an intolerable barrier” between health plans and their attorneys.

The court also held that the suit was barred by Proposition 64, a recent California initiative that prohibits private parties from initiating lawsuits under the Unfair Competition Law on behalf of the general public.

Temple Univ. Hosp., Inc. v. Group Health Plan, Inc.
E.D. Pa. No. 05-102 July 13, 2006

The United States District Court for the Eastern District of Pennsylvania recently dismissed breach of contract claims filed by Temple University against Group Health Plan, Inc. (“GHI”), Oxford Health Plans, Inc. (“Oxford”), and MultiPlan, Inc. (“MultiPlan”), . The court determined that ERISA preempted claims that the plaintiff should have been paid in accordance with the rates set in its contract with MultiPlan.

GHI and Oxford administer plans for the United Welfare Fund. Both plans also “rent” a provider network from MultiPlan. Temple University Hospital (“Temple”) is a participating provider in the MultiPlan network..

Both GHI and Oxford had opted not to use the MultiPlan network for their respective enrollees’ claims: GHI denied the claims outright because of member eligibility issues; Oxford opted to pay its enrollees’ claims under its usual and customary rate, which was substantially lower than the MultiPlan rate. Temple filed suit for breach of the discount and access agreements the parties had with MultiPlan.

The court found that the GHI and Oxford plan business in question is governed by ERISA, that Temple’s breach of contract claims were related to the plans, and thus that ERISA preempted the claims. The court then found that Temple lacked standing to sue under ERISA, because it had not properly been assigned the patients’ claims. Both GHI’s and Oxford’s plan documents contained non-assignment provisions that prohibited assignment without the consent of the plans, which Temple had not received.

Independent Living Center of Southern California v. Leavitt
E.D. Cal. No. 06-cv-0435-MCE-KJM June 29, 2006

The U.S. District Court for the Eastern District of California dismissed a lawsuit brought by eight dual eligible Medicare and Medicaid beneficiaries, as well as an independent living center, that sought to enjoin the implementation of the Medicare Prescription Drug, Modernization and Improvement Act of 2003 (“MMA”) on grounds that it is unconstitutional.

Prior to the MMA, Medi-Cal paid for the dual eligibles’ prescription drugs. After the MMA, Medicare Part D paid for their drugs. The dual eligibles asserted that they were harmed by Medicare Part D’s more narrower formularies, as well as Part D’s copayment requirements. The plaintiffs asked the court to require Medi-Cal to resume paying for their prescription drugs.

The court dismissed the complaint on jurisdictional grounds: first because the plaintiffs had not exhausted their administrative appeal rights; and second because it was barred by the Eleventh Amendment. The court reasoned that, despite the plaintiffs’ naming of state officials as defendants, the suit in essence sought damages from the State of California. Under the 11th Amendment, federal courts do not have jurisdiction over such suits against a state.

Wachtel v. Guardian Life Insurance Co. of America
3rd Circuit No. 04-4304 June 30, 2006

The Third Circuit Court of Appeals vacated a lower court’s certification of a class action suit filed by participants in a Health Net of New Jersey, Inc. health plan. The suit alleged that Health Net of New Jersey, Inc. and other defendants had breached a fiduciary duty by using outdated “usual, customary and reasonable” data to calculate participants’ copayment amounts, in violation of ERISA.

In December, 2003, the Federal Rules of Civil Procedure pertaining to class action suits were amended to require certification orders to “define the class, class claims, issues, or defenses.” Health Net of New Jersey, Inc., argued that the lower court’s order failed to adhere to FRCP 23(c)(1)(B), as amended in December, 2003.

The 3 rd Circuit, stating that it was the first court to address the issue, agreed. The court stated that most class certification orders only address issues of commonality, typicality or predominance, but “are most often devoid of any clear statement regarding the full scope and parameters of the claims, issues or defenses to be treated on a class basis.” As the court could not discern any clear statement from the lower court’s order or memorandum opinion (other than a definition of the members of the class), it vacated the order and remanded the case to the trial court. The trial court will now have an opportunity to define the claims, issues or defenses to be treated on a class basis.

Carter v. ENSCO, Inc.
W.D. La. No. 03-2236 July 13, 2006

Carter, a beneficiary of an employer-sponsored health benefit plan that excluded coverage for injury or sickness “caused by engaging in an illegal act,” was injured in an auto accident that he caused while driving under the influence of alcohol.

The health plan denied coverage under the “illegal acts” exclusion, even though Carter was not prosecuted for driving under the influence of alcohol. Carter filed suit, but the court found sufficient medical evidence in the administrative record that Carter had operated his auto with a blood-alcohol level in excess of .08 percent, an illegal act under Louisiana law.

Adventist Health System / Sunbelt, Inc., etc. v. Blue Cross and Blue Shield, etc., et al.
Fl. Ct. of Appeal No. 5D05-1735 July 21, 2006

A Florida state appellate court reversed a lower court’s order dismissing a complaint on the pleadings concerning rates of payment to out-of-network providers. A Florida hospital had sought declaratory relief under Florida Statute 641.513(5)(b), which requires Florida HMOs to pay out-of-network providers the lesser of 1) the provider’s charges; 2) the usual and customary provider charges for similar services in the community where the services were provided; or 3) an amount agreed to by the parties within 60 days of the claim being submitted.

Health Options, a Florida HMO, stipulated that the statute requires it to pay some amount for out-of-network services, but contends that, on the facts presented, the statute only requires it to pay 120% of what Medicare pays for emergency medical services. On the other hand, the Florida hospital contends that its full charges are the “usual and customary” charges in the community.

The lower court dismissed the complaint on the pleadings, finding that it sought an advisory opinion from the court. However, distinguishing prior precedent, the appellate court held that a private right of action may be implied when the dispute is not about whether a statute imposes liability, but rather about the methodology for establishing the amount of liability, and the applicable enforcement remedy. An “actual controversy” existed once both parties admitted that some statutory liability existed, but disputed how to calculate it.

In the Matter of Puerto Rico Assn. of Endodontists, Corp.
Federal Trade Commission Docket No. 0510170

On July 20, 2006, the Federal Trade Commission (“FTC”) announced a consent agreement settling its claims that the Puerto Rico Association of Endodontists, Corp. (“PRAE”) coordinated and carried out illegal price-fixing agreements and concerted refusals to deal with dental insurers.

According to the FTC’s complaint, the PRAE – whose membership consisted of 30 endodontists, nearly all the endodontists in Puerto Rico – allegedly organized a “pre-payment committee” that negotiated reimbursement rates directly with payors and, when challenged by a payor, asserted that such prior challenges had led to network disruption problems. The PRAE had also allegedly pressured dental insurers to waive their ban on balance billing.

The proposed consent order would 1) prohibit PRAE from negotiating or facilitating the negotiation of any reimbursement rate on behalf of any endodontist; 2) prohibit PRAE from transmitting price information among endodontists; and 3) require PRAE to distribute the FTC’s complaint and order to its members and all payors that it has had contact with in the last 5 years.

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