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Managed Care Lawsuit Watch - June 2007


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:

In re Guidant Corp. Implantable Defibrillators Products Liability Litigation
D. Minnesota No. 05-1708 Apr. 17, 2007

The United States District Court for the District of Minnesota dismissed claims brought by two third party employee welfare benefit funds (“EWBFs”), as well as a Medicare beneficiary under the Medicare Secondary Payer statute (“MSP Statute”), against Guidant in litigation involving the device-maker’s implantable cardioverter defibrillators (“ICDs”) and pacemakers.

Plaintiff Tamela Ivens argued that the MSP Statute, similar to the False Claims Act, partially assigns government claims to private plaintiffs, thus permitting private parties to bring suit on behalf of the government for economic wrongs done to the Medicare program. Guidant argued that Ivens lacked standing to bring suit on behalf of other Medicare beneficiaries, and pointed out that she did not allege her own ICD malfunctioned or that she had suffered any financial loss. The court held that, unlike the False Claims Act, the MSP Statute does not unambiguously indicate that Congress intended to assign to private individuals the right to bring actions, and that Congress could not manufacture Article III standing merely by providing a private right of action in a statute.

The court similarly dismissed claims brought by two EWBFs for damages, breach of several Minnesota consumer protection laws, subrogation, unjust enrichment, and breach of warranty. The court found that, unlike third party payers in other pharmaceutical lawsuits who forwent cheaper alternatives based upon representations made by pharmaceutical manufacturers, there was no direct relationship between the EWBFs and Guidant in this case. The EWBFs also failed to allege a causal connection between any injuries suffered by the EWBFs and Guidant’s alleged misconduct. On these bases, the court held the EWBFs lacked standing to assert their consumer protection claims. The court then held that the EWBFs subrogation and unjust enrichment claims must also be dismissed, because the EWBFs failed to identify any of their insureds who had alleged claims against Guidant, or received money from Guidant.

City of New York v. Group Health Inc.
S.D. New York No. 06-13122 Apr. 23, 2007

The United States District Court for the Southern District of New York denied without prejudice the City of New York’s (the “City’s”) motion to compel discovery against the Health Insurance Plan of New York, finding that the City failed to demonstrate the relevance of the requested cost and experience information.

The City filed its antitrust action against Group Health, Inc., HIP Foundation, and Health Insurance Plan of Greater New York (the latter two defendants, collectively, “HIP”), alleging that the proposed merger would create a monopoly in the City for the provision of insurance to city employees and retirees, employee unions, and other employers with connections to the City. In connection with its lawsuit, the City filed a motion to compel HIP to produce documents related to HIP’s costs, expenses, and profits attributable to individual employers within HIP’s community-rated HMO product. The City argued this information was necessary to analyze whether the merged entity could profitably raise premiums.

The court found that the City’s request was irrelevant, noting that in order for the information the City requested to have any predictive value, the City would also require comparative financial data from HIP’s clients, who may be unwilling to produce such competitively sensitive information. The court noted that the City could ask for reconsideration of its motion if it could demonstrate a “reasonable likelihood” of obtaining the comparative data, including identifying which employers’ data were necessary to conduct the City’s analysis and the availability of such data.

Martin et al v. Pacificare of California, et al.
Cal. Ct. App. 4th Dist. Case No. G036253 April 27, 2007 [unpublished]

In an unpublished opinion, a California appeals court held that a Medicare Advantage plan could not compel a deceased plan member’s heirs to arbitrate their bad faith and wrongful death case against the plan.

Elsie Martin enrolled in SecureHorizons, a PacifiCare of California Medicare managed care plan (“PacifiCare”), in 2001. The 2001 enrollment form contained a clause requiring Martin to arbitrate “any differences between myself and Secure Horizons, relating to the health plan or its performance....” The clause did not bind the member's heirs. In June, 2003, PacifiCare sent Martin the 2003 plan policy, effective January 1, 2003, purporting to amend the arbitration agreement to bind both the member and the member's heirs and assigns.

Martin died on January 16, 2004; her husband and her children filed suit against PacifiCare for insurance bad faith and wrongful death arising from the denial of timely care. Pacificare subsequently filed a motion to compel arbitration.

PacifiCare argued that Martin’s heirs were bound to arbitrate their claims per the 2003 plan policy document. The court disagreed, holding that the 2003 plan policy did not constitute proper notice of the change, as the 2001 plan policy provided that “Secure Horizons costs and benefits may change from year to year, and we would notify you before any changes were made” (emphasis added). The court, citing federal regulations, found that PacifiCare failed to send notice to Martin regarding the change to the arbitration clause before it purported to become effective. Moreover, the court held that the 2003 plan policy did not constitute proper notice because (1) it became effective on January 1, 2003, but was not sent out until June of that year, and (2) it did not state the arbitration clause represented a change from the prior arbitration clause.

Accordingly, the court denied Pacificare’s motion to compel arbitration.

White v. Humana Health Plan Inc.
N.D. Illinois Case No. 06-C-5546 May 2, 2007

Plaintiffs sued Defendants, Humana Health Plans Inc. (“Humana”) and its tort-claim recovery agent, ACS Recovery Services Inc. f/k/a Primax Recoveries Inc. (“Primax”), claiming that Humana had Primax illegally place a lien on the Plaintiffs’ children’s tort recovery, i.e., settlement funds. Under Humana’s benefit plan’s subrogation clause, Humana could recover the medical benefits it paid for the children under the plan. Plaintiffs argued that the plan’s subrogation clause was illegal under Illinois law, as applied to the children’s claims, because in Illinois a parent is liable for a child’s medical expenses, i.e., if Humana were to recover any funds, it would be required to proceed against the parents, not the children’s settlement fund.

Humana removed the case to Federal court, contending that ERISA preempted the Plaintiff’s claims. The Plaintiffs opposed removal, and requested class certification of the claims. Humana also moved to dismiss the action completely, arguing that it had mooted the Plaintiffs’ claim with a settlement offer it had made before the Plaintiffs moved for class certification.

Following Seventh Circuit precedent, Federal Judge Harry D. Leinenweber for the District Court of the Northern District of Illinois held that the Plaintiffs’ state law claims challenging the legality of the health plan's subrogation clause were essentially claims to enforce their rights under the terms of their employer-sponsored, ERISA-governed health benefit plan, and therefore were preempted by ERISA.

Judge Leinenweber further dismissed Plaintiffs’ claims because the Defendants’ settlement offer, submitted to the Plaintiffs before they moved for class certification, effectively mooted the claims. The settlement offer, which consisted of $5,000 and a future self-imposed subrogation restriction with regard to children’s benefits, satisfied all of the Plaintiffs’ claims before they actually moved for class certification. Judge Leinenweber, therefore, held that controlling precedent mooted the Plaintiffs’ claims.

Palmetto Pathology Servs. v. Health Options, Inc.
Florida Circuit Court No. 05-4137-CA-09, jury award April 20, 2007

Judge Thomas Wilson held that the Blue Cross Blue Shield of Florida (“BCBS-FL”) HMO, Health Options, must pay the reasonable value of the professional services provided by Palmetto Pathology Services (“Palmetto”).

Health Options made a decision in 1999 to stop paying hospital pathologists for the professional component of clinical pathology services, contending that hospitals were required to cover those charges. That decision saved Health Options nearly $4.1 million annually. Palmetto tried unsuccessfully to recover the fees, and ultimately filed a lawsuit in 2005 against Health Options for past amounts owed.

After the court ruled that Health Options was required to pay for professional services under the Florida HMO Act, the jury calculated damages against Health Options at $1.5 million.

Roofers Local No. 20 Health and Welfare Fund v. Memorial Hermann Hospital System, et al., v. FMH Benefit Services, Inc.
W.D. Missouri Case No. 05-1206-CV-W-FJG May 9, 2007

Roofers Local No 20 Health and Welfare Fund (the “Fund”) filed a declaratory judgment action against Memorial Hermann Hospital System and Memorial Hermann Continuing Care Hospital (collectively, the “Hospitals”), alleging that the Fund had properly denied benefits to Defendant Sullins, a member of the Fund’s self-funded employee benefits plan (the “Plan”). The Hospitals provided medical care to Sullins, but the Fund denied coverage to Sullins under the Plan’s exclusion for injuries incurred while committing or attempting to commit a felony.

The Hospitals filed a counter-claim against the Fund for negligence, negligent misrepresentation, and violations of the Texas Insurance Code, alleging that the Fund’s third-party administrator, FMH Benefits Services, Inc. (“FMH”), had verified and precertified coverage for Sullins. The Fund then filed a third-party complaint against FHM for indemnity. The Fund and FHM both filed motions for summary judgment.

Focusing on three Hospital employees involved in handling Sullins’ claim for benefits under the Plan, the court found undisputed facts that neither the Fund nor FHM had made any statements to the employees that Sullins’ medical services would be covered under the Plan. The Hospitals, therefore, did not rely on any such statements in providing medical services to Sullins. Moreover, the court found that it was undisputed that both the Hospitals’ insurance verifier and its utilization review specialists were aware that verifications with disclaimers and authorizations are not guarantees of payment. The court therefore granted the Fund’s summary judgment motion and dismissed the Hospitals’ claims. In addition, the court granted FHM’s motion for summary judgment and dismissed the Fund’s claim for indemnity.

Methodist Hospitals of Dallas v. Amerigroup Texas, Inc.
Texas Court of Appeals Case No. 05-05-01579-CV May 7, 2007

Methodist Hospitals of Dallas (“Methodist”) sued Amerigroup Texas, Inc. (“Amerigroup”) to recover $1.8 million in healthcare and hospitalization services it rendered to a Medicaid recipient between 2001 and 2004. Methodist contended that Amerigroup breached its provider contract with Methodist, as well as its payment contract with the Texas Health and Human Services Commission (“THHSC”), when it refused to pay for such expenses.

Under the Texas Medicaid program, Medicaid providers are reimbursed on one of two bases: 1) a traditional fee-for-service basis; or 2) a capitation rate, which reimburses at a higher rate than fee-for-service.

Amerigroup, a Medicaid HMO, contracted with Methodist to pay for services rendered to persons qualified under the Temporary Assistance for Needy Families (“TANF”) program, run by THHSC. The patient whom Methodist treated was a qualified TANF participant until December, 2001. Under TANF, Amerigroup was contractually obligated to reimburse Methodist at the higher, capitation rate. After December 2001, however, the patient no longer participated in the TANF program and thereafter was only qualified for Supplemental Security Income (“SSI”) benefits, a separate Medicaid program.

The Court ruled that when the patient’s participation status changed, Amerigroup’s contractual obligation to reimburse Methodist under the TANF program’s higher reimbursement rate ended. The court held that, in December 2001, when the Medicaid participant’s status changed, the State of Texas, not Amerigroup, became responsible for reimbursing Methodist. The state administrator had paid Methodist $436,000 under the SSI program, i.e., at the lower fee-for-service rate, and the court ruled that such reimbursement was all that Methodist was contractually entitled to.

Hansen v. Harper Excavating, Inc.
D. Utah No. 2:05CV490 DAK May 8, 2007

Plaintiff claimed Harper Excavating, Inc., (“Harper”), his former employer and his health insurance plan’s Plan Administrator, violated ERISA by breaching its fiduciary duty to him. When Plaintiff was hired, his Benefit Disclosure & Acknowledgement form stated that he would be eligible for benefits beginning the first day following 90 days of employment and that he would be entitled to initially enroll within 30 days of first becoming eligible. Once eligible, Plaintiff completed and submitted application forms to enroll in the benefit plans. However, an employee of Harper treated Plaintiff’s application as though he was subject only to a 60 day waiting period, which was actually the correct time period. As a result, Regence Blue Cross and Blue Shield, Harper’s health insurance provider, denied his application for medical insurance because his enrollment was untimely. Harper did not inform Plaintiff that his application had been denied until after he had terminated his employment, which was almost three months after the denial.

The court, granting Plaintiff’s motion for summary judgment, concluded that Harper had breached its fiduciary duty to Plaintiff by not only conveying materially inaccurate information regarding his eligibility and enrollment requirements, but also by leading him to believe he was insured, as it provided him with group insurance numbers, deducted premiums from his paycheck, and failed to inform him of the denial while he was employed at Harper.

Plaintiff also alleged that Harper violated COBRA by failing to inform Plaintiff of his rights under COBRA regarding his dental and vision insurance. The court found for Plaintiff on this count, as well, determining that the Employee Change Form sent by Harper did not comply with all of the COBRA requirements.

Kinnison v. Humana Health Plan of Texas, Inc., et al.
S.D. Texas Case. No. C-06-355 May 8, 2007

Plaintiff, a member of an employer-sponsored health benefits plan, sued Humana Health Plan of Texas, Inc. and Humana Insurance Company (collectively, “Humana”) after Humana denied a portion of the Plaintiff’s coverage claim for treatment at the Betty Ford Clinic (the “Clinic”).

Plaintiff received four days of inpatient detoxification services and nearly a month of inpatient rehabilitation services at the Clinic. Corphealth, Inc. conducted a utilization review for Humana, certifying the detoxification treatment but finding that the inpatient rehabilitation services did not meet continued stay criteria for a residential level of care. Plaintiff appealed this decision and Humana sent the claim to an independent review organization, Prest & Associates (“Prest”). Two board-certified physicians from Prest affirmed the denial of benefits, and Humana sent a notice to Plaintiff informing her that her appeal was denied. Plaintiff then sued Humana, alleging several state law claims including misrepresentation and violations of the Texas Code, but did not sue under ERISA §502(a).

Humana moved for summary judgment, arguing that ERISA preempted Plaintiff’s claims. The court agreed, ruling that conflict preemption applied under §514 because Plaintiff’s claims related directly to her membership in an ERISA plan, were directly tied to her claim for coverage, and directly affected the relationship among ERISA entities.

The court rejected Plaintiff’s argument that preemption did not apply because she was challenging a mixed treatment and coverage decision. Rather, the court found that even to the extent that Humana determined whether the inpatient rehabilitation services were medically necessary, this was a coverage decision made after the services were provided, and not a treatment decision. The court also rejected Plaintiff’s argument that Humana failed to complete a full investigation by failing to provide the reviewers with documentation regarding her earlier outpatient treatment for drug and alcohol dependence. The court found that this argument may have been relevant if Plaintiff had brought a claim under §502(a) for denial of benefits, but that it was irrelevant to whether ERISA preempted her state law claims.

For these reasons, the court ruled that ERISA preempted Plaintiff’s state law claims and dismissed the case.

Badal v. Hinsdale Memorial Hosp.
E.D. Illinois No. 06-C-7164 May 8, 2007

While playing basketball in 1999, Geno Baldo injured his ankle. At the emergency room, he requested that his doctor approve the medically necessary treatment. His doctor, Gerald Lofthouse, a plan physician, authorized x-rays and told Mr. Baldo that he was suffering from a sprained ankle. In fact, Mr. Baldo was suffering from a severed artery and an aneurysm in his ankle. The aneurysm became infected and caused permanent damage to Mr. Baldo’s ankle.

In 2002, Mr. Baldo sued Dr. Lofthouse and, vicariously, Aetna (among others) in state court alleging medical negligence. Four years later, Aetna removed the case to federal court after Mr. Baldo filed a supplemental expert report indicating that Dr. Lofthouse violated the accepted standard of care. Mr. Baldo filed a motion to remand and a motion for sanctions and fees alleging that the removal was frivolous.

The district court held that there was no basis to remove the case to federal court when Mr. Baldo originally filed the claim, and that ERISA did not preempt Baldo’s medical negligence claim because the three factors relevant to ERISA §502(a) preemption were not satisfied: (1) whether the plaintiff is eligible to bring a claim under that section; (2) whether the plaintiff’s cause of action falls within the scope of an ERISA provision that the plaintiff can enforce via § 502(a); and (3) whether the plaintiff’s state law claim cannot be resolved without an interpretation of the contract governed by federal law. The court noted: “[a]lthough it appears that Plaintiff might have been entitled to bring a claim under the Aetna plain, his claim of medical negligence is not a cause of action that falls within the scope of § 502(a) of ERISA, nor do his state law claims require resolution of an interpretation of the contract governed by federal law.”

Further, the supplemental expert report did nothing to change that fact because it did not “reveal anything that could not have been determined from the face of the operative Complaint.” Therefore, the court held that the report provided no basis for removal and, even if it did, the time for removal had long expired. The court found that it lacked subject matter jurisdiction and remanded the case to state court. However, the court declined to grant Mr. Baldo’s motion for fees and sanctions.

Center for Restorative Breast Surgery, LLC v. Blue Cross Blue Shield of Louisiana
E.D. Louisiana No.06-9985 May 10, 2007

Plaintiffs, the Center for Restorative Breast Surgery (the “Center”) and certain of its patients, brought 30 lawsuits against Blue Cross Blue Shield of Louisiana (“BCBS-LA”) and numerous other Blue Cross Blue Shield entities for allegedly failing to properly adjust insurance claims and pay for treatment rendered by the Center to patients, despite maintaining open accounts with the Center for its services to the patients. Defendants removed the lawsuits to federal court on the basis of federal question, diversity, and/or the federal officer removal statute. After removal, Plaintiffs withdrew their ERISA claims.

The court held that there was no basis for federal question jurisdiction based on ERISA preemption. Although the court noted that the patients had assigned their benefits to the Center, and the Center could have sued under ERISA §502 as the patients’ assignee, the state law claims were based on a prior approval and misrepresentation theory of recovery, and not on the right to payment under the benefit plans.

The court also concluded that diversity jurisdiction was lacking, rejecting the claim that BCBS-LA was improperly joined in the lawsuits and determining that BCBS-LA had not been fraudulently joined.

However, as to one claim related to a FEHBP patient, the Court held that such claims were removable as raising a federal question under FEHBA, as well as under the federal officer removal statute, because FEHBA completely preempts state law actions related to its civil enforcement provisions, including any action that touches directly upon a benefit determination.

Based upon considerations of judicial economy, fairness, convenience, and comity, the court declined to exercise supplemental jurisdiction over the remaining claims, noting that Plaintiffs had withdrawn their ERISA claims before trial.

Elmont Open MRI v. New York Central Mutual Fire Insurance Co.
N.Y. District Court No. 19187/06 March 30, 2007

A New York state court recently ruled on the issue of whether a radiological medical provider seeking to recover no-fault benefits provided to a patient based upon a referring physician’s prescription must produce for deposition an individual with personal knowledge of the medical necessity of the services performed. The court held that such a production was not necessary, and that the remedy was to depose the patient’s non-party referring, or treating, physician.

Plaintiff, an MRI provider, sued an insurer to recover no-fault insurance benefits after the insurer denied Plaintiff’s claim based on a peer review doctor’s determination that the MRI scans performed by Plaintiff were not medically necessary. During discovery, the insurer made a motion directing Plaintiff to produce a person for deposition who had firsthand knowledge of the justification for the services rendered. Plaintiff failed to comply with the motion, explaining that it did not have a physician with such firsthand knowledge, as it was not required to conduct an independent medical examination of the patient.

In denying the insurer’s motion, the court ruled that the insurer had failed to establish that any of Plaintiff’s physicians or employees possessed personal knowledge regarding the insurer’s defense that the MRI scans were not medically necessary. The court further stated that the insurer’s deposition request was too broad, because it directed Plaintiff to produce a person to contest the insurer’s defense, regardless of whether the person was independent of, and not an employee or agent of, the Plaintiff.

State of Nebraska v. United Healthcare Group, et al.
Nebraska Dept. of Insurance Cause No. C-1612 May 16, 2007 (consent order filed)

The Nebraska Department of Insurance (“DOI”) received numerous consumer complaints regarding United HealthCare Group’s and certain of its subsidiaries’ and affiliates’ (collectively, “United’s”) market practices. The DOI examined United’s market practices for the period of July 1, 2003 through June 30, 2004, and filed a petition alleging numerous violations of Nebraska State insurance laws, rules, and regulations, including the Insurers Examination Act, the Unfair Trade Practices Act, the Unfair Claims Settlement Practices Act, and the Health Carrier Grievance Procedure Act.

To settle the allegations, United agreed to pay an administrative fine of $650,000 to the DOI, to pay the DOI’s costs associated with the action, to bolster its complaint handling process, to meet quarterly with the DOI regarding consumer complaints, and to participate in the Process Improvement Plan, a proposed national consent order between certain United subsidiaries and various states via a workgroup of the National Association of Insurance Commissioners. United denied any liability in connection with the settlement, but acknowledged that errors were made in implementing technological efficiencies.

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