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Managed Care Lawsuit Watch - June 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:

Sereboff v. Mid Atlantic Medical Services, Inc.
U.S. Sup. Court No. 05-260 May 15, 2006

Injured in a car accident, the Sereboffs’ $75,000 of medical expenses were paid by an ERISA plan administered by Mid Atlantic Medical Services Inc. (“MAMSI”). The Sereboffs sued the party responsible for their injuries, settled for $750,000, and refused to reimburse MAMSI when MAMSI asserted a subrogation claim.

MAMSI sued the Sereboffs under ERISA, and the U.S. District Court for the District of Maryland allowed the claim to proceed, denying the Sereboffs’ argument that MAMSI’s claim was not equitable in nature, and thus not permitted under ERISA. The Fourth Circuit affirmed, holding that MAMSI’s claim was equitable because it sought specifically identifiable funds, belonged in good conscience to MAMSI, and was in the Sereboffs’ possession and control.

Resolving a circuit split on the issue of whether such subrogation claims are equitable in nature, and thus permissible under ERISA, the Supreme Court – in a unanimous opinion authored by Chief Justice Roberts – affirmed the Fourth Circuit’s opinion and reasoning. The Court specifically stated that a plaintiff seeking equitable relief is not required to prove that the disputed funds “trace” to the particular funds or assets sought.

McCoy, et al. v. Health Net, Inc., et al.
D.C. New Jersey Civ. Docket No. 03-1801 May 12, 2006

On May 12, 2006, a U.S. district court ordered Health Net, Inc., Health Net of the Northeast, Inc. and Health Net of New Jersey, Inc., each a health benefit plan administrator (collectively, "Health Net,”) to produce certain documents to the plaintiff-beneficiaries of one of Health Net's ERISA health benefit plans, holding that, as a result of the “fiduciary exception,” the attorney-client privilege does not apply to Health Net documents related to its fiduciary duties to beneficiaries. The decision, and the line of cases it follows, have potentially significant implications for the confidentiality of advice provided by attorneys to managed care companies that act as ERISA plan fiduciaries, or that are alleged to be fiduciaries.

Determining that Health Net acted as a fiduciary in performing medical reimbursement determinations, the court held that the “fiduciary exception” to the attorney-client privilege excluded from the privilege’s protection those communications between Health Net and its attorneys that related to fiduciary matters because, “as a representative for its beneficiaries, the fiduciary is not the real client in the sense that it is personally being served by its attorney. Under this reasoning, the fiduciary’s and beneficiaries’ interests are aligned with respect to certain communications, and the beneficiaries are thus entitled to review those communications.”

The court rejected the applicability of the “liability” exception to the fiduciary rule, holding that only documents prepared solely for the benefit of the fiduciary could remain privileged on that basis. The court ruled that the plaintiffs did not need to demonstrate “good cause” to gain access to the documents at issue. It also ruled that Health Net itself was a fiduciary on account of the responsibilities entrusted to it by its affiliates which were the direct contractors to ERISA plans.

The plaintiff beneficiaries claimed that Health Net violated state law by affirmatively selecting outdated data to determine health care providers’ Usual and Customary (“UCR”) charges, thus leaving the beneficiaries to absorb higher costs for treatment. The court held that selection of UCR data is a fiduciary function, and thus documents related to that function fall into the “fiduciary exception.” The court also determined that the following documents were related to Health Net’s fiduciary functions, exempt from the attorney-client privilege, and subject to production: documents regarding claims determinations, lobbying efforts, responses to compliance issues, and inquiries or investigations by governmental or regulatory agencies.

Florida v. Harden
Florida Sup. Court No. SC04-613 May 18, 2006

In an opinion that did not involve any managed care organization, but that has potential ramifications for managed care business arrangements, the Florida Supreme Court determined that the federal Medicaid anti-kickback statute preempts the Florida anti-kickback statute.

The Florida anti-kickback statute is more stringent than its federal counterpart, in that 1) the Florida law criminalized negligent behavior, whereas the federal law criminalizes acts performed “knowingly and willfully; and 2) the Florida law does not except any conduct, as the federal law does via 22 statutory and regulatory “safe harbors.”

Despite the federal law’s lack of preemptive language, the Florida Supreme Court found that the Florida law is preempted because it criminalizes conduct that the federal law (as supplemented by regulation and subregulatory guidance) specifically intends to be shielded from prosecution.

The opinion is important not only because it touches upon the preemptive effect of the federal anti-kickback law, but also because the analysis is not necessarily Florida-specific, i.e., the court’s analysis could be adopted by subsequent federal and state courts. The Florida Supreme Court stated that it was the first court to fully analyze and address the preemptive effect of the federal anti-kickback law.

Uhm et al. v. Humana, Inc. et al.
W.D. Washington No. C06-0185-RSM June 5, 2006

In perhaps the first written opinion to analyze Medicare Part D law and regulations, a federal district court determined that Medicare Part D preempted state law claims that Part D beneficiaries brought against their Part D plan for allegedly failing to provide them forms needed to obtain reimbursement for prescription drugs.

Uhm allegedly enrolled in a Medicare Part D prescription drug plan sponsored by Humana (the “Plan”), paid monthly premiums to Humana, repeatedly requested mail-order forms that the Plan required for Uhm to obtain prescription drugs, but never received the forms, requiring Uhm to pay for the drugs out-of-pocket at retail prices. Individually and on behalf of similarly situated enrollees, Uhm sued Humana, claiming breach of contract, violation of state consumer protection laws, unjust enrichment, fraud and fraud in the inducement.

The district court determined that Medicare Part D, specifically 42 U.S.C. §1395w-26(b)(3), preempts such state law claims, finding that “if Part D establishes standards that cover plaintiffs’ claims, then those standards supersede state law, and plaintiffs’ state law claims are preempted.”

The court then found that the Medicare Part D regulations set standards for marketing materials, coverage determination procedures and appeals processes, and grievance procedures. The combination of these standards operated to preempt Uhm’s state law claims.

Uhm argued that under the court’s analysis, nearly all state law causes of action against PDP sponsors would be preempted. In a response indicative of the breadth of the Medicare Part D preemption provision, the court stated that Medicare Part D, which “creates an exceedingly complex national program which requires administration by agencies with expertise in the area,” specifically provides that “state laws are presumed to be preempted unless they relate to licensure or solvency.”

Florence Urgent Care v. Healthspan Inc.
S.D. Ohio No. 1:04-CV-00177 May 3, 2006

Two Kentucky-based physicians and the urgent care clinic they own sued an Ohio-based provider network doing business in Kentucky, claiming that the network’s termination of the clinic’s participation agreement amounted to racial discrimination and violated Kentucky’s any willing provider (“AWP”) law.

The network purportedly terminated its contract with the clinic because it was concerned that the physicians were submitting improper claims. However, when the physicians sought re-entry to the network on an individual basis, the network refused admission and (in a claimed effort to demonstrate “conflict avoidance”) concededly lied to the physicians, informing them that there was no geographic need for their participation.

The district court granted the network’s motion for summary judgment on the physicians’ AWP claim, determining that 1) the Kentucky AWP law did not apply to the network, as it only applies to licensed insurers; and 2) Ohio law, not Kentucky law, expressly governed the original contract between the clinic and the network anyway. However, the physicians’ discrimination claims survived summary judgment, as the root cause of the network’s decision to terminate the clinic was not clear on the record.

St. Joseph’s Hospital of Marshfield, Inc. v. Carl Klemm Inc.
W.D. Wisconsin No. 05-C-0663-S May 3, 2006

The U.S. District Court for the Western District of Wisconsin determined that an ERISA health benefits plan’s administrative claims appeal procedures violated ERISA regulations, and thus operated to deny a full and fair review to a party appealing a claims denial.

St. Joseph’s Hospital rendered medical services to a beneficiary of a health plan sponsored by Carl Klemm Inc. (“CKI”) and administered by Benistar. St. Joseph’s submitted a claim based on an assignment of benefits from the plan beneficiary. Benistar denied St. Joseph’s claim for payment, notified it of its appeal rights and, upon appeal, once again denied the claim. St. Joseph’s sued CKI, which filed a third-party complaint against Benistar.

The district court acknowledged ERISA regulatory provisions stating that, in order for an appellant to be afforded a full and fair review, the entity making the initial claims determination must not also make the claims determination upon appeal. As Benistar made both such determinations, CKI’s appellate procedures violated ERISA regulations, the court stated. The court granted St. Joseph’s motion for summary judgment, although it did not order CKI to pay the claim. Rather, the court ordered CKI to utilize a party other than Benistar to review St. Joseph’s appeal in accordance with ERISA regulations.

Children’s Hospital of Philadelphia v. Tricorp Enterprises Ltd. Flexible Benefits Plan
E.D. Pennsylvania No. 06-65 May 10, 2006

The U.S. District Court for the Eastern District of Pennsylvania determined that it was the proper venue for an ERISA claim for benefits, even though both the plan and the beneficiary at issue were located in Missouri.

A minor child of a participant in Tricorp Enterprises Ltd. Flexible Benefits Plan (the “Plan”) was diagnosed with cancer, and traveled to and received treatment from Children’s Hospital of Philadelphia. When the Plan refused to cover the second half of the child’s treatment, the hospital accepted assignment of the participant’s benefits and sued the Plan in a Pennsylvania federal court.

Despite the fact that the Plan participant and his child both reside in Missouri, that the participant’s job is in Missouri, that the participant received the Plan’s summary plan description in Missouri, that the Plan was based in Missouri, that the Plan processed the claim and decided not to pay it in Missouri, and that benefits would have been paid in Missouri, the court determined that the Eastern District of Pennsylvania was a proper venue for the hospital’s claim because ERISA §1132(e)(2) states that claims may be brought “where the breach took place.”

The court then determined that if the Plan violated ERISA, it did so in Pennsylvania because that is where the services were rendered and where payment would have been made upon assignment.

In the Matter of CIGNA Government Services, LLC
GAO Opinion File B-297915.2 May 4, 2006

The GAO sustained CIGNA Government Services, LLC’s protest of the Center for Medicare and Medicaid Services (“CMS’”) award of a claims processing and payment services contract to Palmetto GBA. As a result of the Medicare Prescription Drug Improvement and Modernization Act of 2003, certain of such contracts are now subject to competitive procurement procedures and, specifically, the Federal Acquisition Regulation (“FAR”).

After both CIGNA and Palmetto had submitted their final proposals to administer Medicare claims for DME, prosthetics, orthotics and supplies in 15 states, Puerto Rico and the Virgin Islands – and after the due date of the final proposals had also passed – CMS representatives and Palmetto representatives discussed certain erroneous aspects of Palmetto’s bid. These discussions, which CMS did not entertain with either CIGNA or any other entity submitting a proposal, ultimately allowed Palmetto to correct its proposal.

The GAO determined that, under the express provisions of the FAR, these discussions were improper. Therefore, the GAO recommended that CMS reopen discussions with all original bidders, request and reevaluate all revised proposals, and engage in a new decision-making process to award the contract. The GAO also recommended that CMS reimburse CIGNA for its costs of filing and pursuing its protest, including reasonable attorneys’ fees.

Prime Care of Northeast Kansas, LLC et al. v. Humana Ins. Co., et al.
10th Circuit No. 05-CV-2227 KHV May 12, 2006

Prior to the February 18, 2005 effective date of the Class Action Fairness Act (“CAFA”), a class action lawsuit was filed against several health insurers in a Kansas State court. On April 22, 2005, the class action plaintiffs added defendants Humana, United Healthcare and Coventry Health & Life Insurance Company to the complaint. The new defendants removed the case to federal court, asserting the applicability of CAFA, which grants to federal courts jurisdiction over class actions involving at least 100 members and over $5 million in controversy when minimal diversity is met.

The U.S. District Court for the District of Kansas granted the plaintiffs’ motion for remand, finding CAFA inapplicable as the case had been filed before its effective date. However, the 10th Circuit Court of Appeals determined that a post-CAFA pleading amendment (including the addition of a new defendant) can trigger the CAFA jurisdictional provision if the amendment does not relate back to the claims made in the pre-CAFA complaint.

The 10th Circuit remanded the case for the district court to determine whether the class action plaintiffs’ addition of the new defendants related back to the original claims.

Chao v. Pharmaceutical Care Network
E.D. California No. 2:06-cv-01078-LKK-GGH May 23, 2006

On the heels of the DHHS Office of Inspector General’s (“OIG’s”) execution of a Corporate Integrity Agreement (“CIA”) with AdvancePCS, a pharmacy benefit manufacturer, for allegedly retaining drug rebates paid by drug manufacturers to ensure that drugs would be included on health plans’ formularies, the U.S. District Court for the Eastern District of California entered a consent order in resolution of the U.S. Department of Labor’s ERISA suit against Pharmaceutical Care Network (“PCN”), a pharmacy benefit manager, for allegedly similar conduct.

The DOL had alleged that PCN violated ERISA by inappropriately retaining 1) portions of the drug rebates that it negotiated with drug manufacturers; 2) the difference between the drug prices that it established with chain pharmacies and the higher prices that its health plans clients paid; and 3) undisclosed transaction fees on each pharmaceutical claim processed.

In return for a full waiver and discharge of the DOL’s claims, the consent order requires PCN to pay $721,323 to 24 of its health plan clients, as well as $72,132 in civil monetary penalties to the DOL. On a going-forward basis, PCN must also make a variety of disclosures reminiscent of the type of disclosures that AdvancePCS is required to make as a result of its CIA. For instance, PCN must disclose to its health plan clients the nature of all sources of compensation that it receives for its services, as well as any differential in drug prices that it is paid for and that it pays for, and must make its books and records available to health plan auditors.

Board of Trustees of Bay Medical Center et al. v. Humana Military Healthcare Services, Inc.
Fed. Circuit 05-1501 May 4, 2006

In 1996, Humana and the U.S. Department of Defense entered into a contract whereby Humana provided managed care support services to all CHAMPUS (now TRICARE) beneficiaries residing in parts of the southeast U.S. For three years, Humana paid hospitals at agreed-upon rates for outpatient non-surgical services, but in 1999 and as a result of the government’s adoption of a payment policy, Humana began capping payment for such services at the CHAMPUS Maximum Allowable Charge. In 2003, Bay Medical Center and another hospital sued the government for declaratory relief (that the policy was invalid), and sued Humana for breach of contract.

On grounds that the hospitals didn’t have standing to sue it for breach of contract, the government successfully moved to dismiss the claims against it. Humana, however, unsuccessfully moved to have the case transferred to the Court of Federal Claims on grounds that the government was the true party in interest. Humana appealed to the Federal Circuit Court of Appeals.

The Federal Circuit affirmed the lower court’s decision, finding that Humana is the proper defendant: the “network provider contracts are private agreements between the Hospitals and Humana. The government was not a party to those contracts, and the Hospitals have no direct relationship with the government.” The appellate court further stated that “the Hospitals are not in privity of contract with the government and have not sought monetary relief from the government.” The case was remanded to the U.S. District Court for the Northern District of Florida.

Janssen v. Minneapolis Auto Dealers Benefit Fund
8th Circuit No. 05-1396 May 19, 2006

The 8th Circuit affirmed a decision of the U.S. District Court for the District of Minnesota that trustees of a multiemployer health fund abused their discretion when they terminated the insurance coverage of a fund participant and his family.

Alex Janssen had a surgical procedure in 1995 that caused nerve damage to his face; his family sued the physician for medical malpractice in 2002. Janssen’s malpractice attorney immediately notified the fund of the action, as it had paid $28,000 for Janssen’s surgery. The fund initially asserted a subrogation claim; however, the fund’s attorney did not attend the trial, did not contest either the defendant physician’s motion to dismiss the subrogation claim or the district court’s subsequent determination that Janssen’s claims for medical expenses were time-barred, and did not assert any further interest in the case.

After the malpractice action settled for $225,000 of pain and suffering, the fund threatened to terminate Janssen’s coverage if he did not reimburse it for the $28,000 in medical expenses that it paid. The district court granted summary judgment to Janssen, finding that as no portion of the settlement accounted for medical expenses, the fund had no right to subrogation. The fund appealed, but the appellate court affirmed the decision and reasoning, and further found that the fund’s decision to revoke coverage was not in compliance with ERISA procedural requirements and, therefore, unreasonable.

Quality Infusion Care, Inc. v. Aetna Health, Inc.
S.D. Texas No. H-05-3308 Apr. 27, 2006

Quality Infusion Care, Inc. (“QIC”) performed infusion therapy on an Aetna HMO plan participant with breast cancer. Aetna allegedly refused to pay QIC once it determined that QIC was an out-of-network provider. QIC sued Aetna in state court, alleging that Aetna violated Texas’ any-willing-provider (“AWP”) law.

Aetna removed the case to the U.S. District Court for the Southern District of Texas, arguing that ERISA completely preempted QIC’s AWP claim. Relying on Fifth Circuit precedent, the district court held that complete preemption under ERISA §502 is sufficient for a court to retain removal jurisdiction, and that the presence of conflict preemption under ERISA §514 is not necessary. The court further held that ERISA created the sole remedial scheme for pursuit of claims for failure to provide benefits under a health plan governed by ERISA, irrespective of the plaintiff’s reliance on the AWP law.

The court denied QIC’s motion to remand the case back to state court.

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This material was prepared by Crowell & Moring attorneys. It is made available on the Crowell & Moring website for information purposes only, and should not be relied upon to resolve specific legal questions.

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