Background - News & Events (Landing) 2016
All Alerts & Newsletters

Managed Care Lawsuit Watch - June 2005


This summary of key lawsuits affecting managed care is provided by the Health Care Law Group of Crowell & Moring LLP. If you have questions or need assistance on managed care law matters, please contact any member of the health law group.

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

Cases in this issue:

Corporate Integrity Agreement between the Office of Inspector General of the Department of Health and Human Services and the Hawaii Region of Kaiser Foundation Health Plan, Inc., et al.
Corporate Integrity Agreement (4/21/05)

Kaiser Foundation Health Plan Inc. reached an agreement with the Office of Inspector General of the Department of Health and Human Services ("HHS") to pay $1 million to settle allegations that Kaiser submitted inaccurate claims to Medicare. Kaiser also reached an agreement to pay $900,000 to the state of Hawaii to settle claims of Medicaid fraud. Both agreements stemmed from a federal False Claims Act qui tam action brought by a former Kaiser employee, who alleged that Kaiser had submitted reimbursement claims for dermatology professional services when in fact the provider of the dermatology treatments was not licensed. As part of its settlement agreement with the federal government, Kaiser agreed to a five year corporate integrity agreement that mandates stricter controls, review and reporting procedures, and recordkeeping requirements.

Dolan v. Excellus, Inc.; Medical Society of the State of New York v. Excellus, Inc.
N.Y. Sup. Ct., No. 9768-01, (5/23/05); N.Y. Sup. Ct., No. 9769-01, (5/23/05)

Excellus Blue Cross Blue Shield, a Rochester New York health plan, agreed to settle lawsuits filed by the Medical Society of the State of New York and a class of physicians alleging breach of contract and denial, purposeful delay or reduction in payments to physicians.

The plan consented to an agreement valued at $50 million including:

  • $5 million for physicians currently treating Excellus members
  • $500,000 for retired or deceased physicians who treated Excellus members
  • $250,000 to the Medical Society for medical liability advocacy programs
  • $1.25 million for community health initiatives

The plan also agreed to pay electronically submitted claims within 15 days of being filed and to pay paper claims within 30 days of being filed. It will publish fee schedules and clinical editing rules for participating physicians as well as lists of procedures requiring authorization.

Heartland Surgical Specialty Hospital v. Midwest Division Inc.
D. Kan. No. 05-CV-2164-GTV/DJW Complaint filed 4/26/05

A Kansas City-area specialty surgical hospital filed an antitrust lawsuit in the U.S. District Court for the District of Kansas, alleging that traditional acute-care hospitals had colluded with managed care insurers to prevent the specialty surgical hospital from gaining access to managed care network contracts. According to the complaint of Heartland Surgical Specialty Company, the acute-care hospitals viewed specialty surgical hospitals as a major competitive threat and so they collectively and successfully pressured the insurers not to contract with Heartland. Heartland's lawsuit seeks treble antitrust damages from the Defendant hospitals and insurers for their alleged conspiracy in restraint of trade in the market for acute care hospital services and for their boycott against Heartland.

Hill v. Blue Cross and Blue Shield of Michigan
6th Cir., No. 03-2607 (5/13/05)

The Sixth Circuit reversed the dismissal of a complaint against Blue Cross and Blue Shield of Michigan ("BCBSM") for breach of fiduciary duties under the Employee Retirement Income Security Act ("ERISA"), finding that requiring Plaintiffs to exhaust administrative remedies would be futile.

Plaintiffs brought an action against BCBSM, the third-party administrator for their employer-sponsored health plan, for wrongful denial of medical emergency benefits and breach of BCBSM's fiduciary duties under ERISA. Plaintiffs alleged that BCBSM improperly utilized an automated claims-processing system that made claim determinations based on a physician's final diagnosis, rather than the claimant's signs and symptoms at the time of treatment. The District Court for the Eastern District of Michigan dismissed Plaintiffs' complaint on the ground that Plaintiffs failed to exhaust the administrative remedies available to them under their health plan.

On appeal, the Sixth Circuit reversed the district court's dismissal of Plaintiffs' claims for breach of fiduciary duties, finding that requiring Plaintiffs to exhaust administrative remedies would be futile in this case. Because the court found that exhaustion would be futile, it did not reach the issue of whether exhaustion of administrative remedies should be required for statutorily created rights.

With respect to Plaintiffs' individual benefits claims, the Sixth Circuit reversed the district court's dismissal of the claim of one of the Plaintiffs, finding that that plaintiff had exhausted all administrative remedies available to him, but it affirmed the district court's dismissal of the remaining plaintiffs' individual benefits claims. The court noted that because BCBSM had apparently decided not to implement its new claims-handling procedures with respect to certain employer-sponsored plans, including Plaintiffs' employer-sponsored plan, BCBSM had already reached a determination on the issue that Plaintiffs would have brought in an administrative review proceeding.

In the Matter of: Inquiry into the Charitable Obligations of GHMSI/CareFirst in the District of Columbia
Report of the District of Columbia Department of Insurance, Securities and Banking (5/15/05)

Commissioner Mirel of the District of Columbia Department of Insurance, Securities and Banking ("DISB") issued a report addressing the alleged charitable obligations of Group Hospitalization and Medical Services, Inc. ("GHMSI"), the Blue Cross Blue Shield plan for the Washington, D.C. area. The report followed a DISB hearing in March 2005 into whether, and to what extent, GHMSI was obligated by its federal charter to engage in charitable activities. The DISB inquiry was initiated after a community advocacy organization alleged that GHMSI had a legal obligation to fund community health projects and other charitable causes and to extend such benefits to the public beyond its policyholders.

DISB's report concluded that GHMSI's Congressional charter, issued in 1939, declared it a charitable organization with a primary legal obligation and mission of providing health insurance to its policyholders. DISB also found that GHMSI's charter provides it with the authority to engage in additional activities, beyond the provision of health insurance, to support the health of the communities in the greater Washington area. Commissioner Mirel found that GHMSI has a "social responsibility that goes beyond its legal obligations" and that the Company is in appropriate financial condition to take additional steps to support public health.

The Commissioner's report did not state how much charitable activity GHMSI should conduct. It did emphasize, however, that consistent with GHMSI's obligations to its policyholders, the Company must maintain a significant surplus. DISB declined to make a finding as to what should be the maximum level of surplus for GHMSI, noting that it is the responsibility of GHMSI's Board to determine the appropriate amount.

Insurance Federation of Pennsylvania Inc. v. Pennsylvania Insurance Dept.
Pa. Commw. Ct., No. 10 M.D. 2004, (4/25/05) (unreported)

The Commonwealth Court of Pennsylvania dismissed a lawsuit challenging a notice issued by the Pennsylvania Insurance Department (the "Department") directing plans to cover alcohol and substance abuse treatment upon referral. The court found that the issue was not ripe and the court therefore lacked jurisdiction. The suit was brought by the Insurance Federation of America, the Managed Care Association of Pennsylvania, Aetna Health Inc., HealthAssurance Pennsylvania, Inc., Independence Blue Cross, Magellan Behavioral Health, Inc., and ValueOptions, Inc. following the Department's issuance of a notice interpreting the Pennsylvania Insurance Company Law. That law, also known as Act 106, requires group health insurers to cover alcohol and substance abuse dependency treatments.

The challenge involved the interaction between Law 106 and Act 68, which permits managed care companies to conduct pre-certification utilization review. Plaintiffs argued that Act 106 does not limit the ability of managed care companies to determine the "medical necessity and appropriateness" of alcohol and substance abuse dependency treatment. They objected to the Department's interpretation of Law 106, which is that it "clearly mandates that all group health plans, including managed care plans, provide drug and alcohol treatment benefits" to patients receiving a referral for such treatment.

The court found that the effect of the notice on Plaintiffs was "not direct and immediate" and that Plaintiffs suffered no harm. The court also determined that the Department's notice was merely a policy statement that did not indicate future steps to be taken by the Department. The statement on policy, therefore, did not have the force of law.

Jones v. LMR International
M.D. Ala. No. 2:04cv538-AWO 2005 U.S. Dist. LEXIS 7722 (4/26/05)

ERISA preempts state law negligence, breach of contract, fraud, breach of fiduciary duty and bad faith failure to pay claims brought by beneficiaries of an ERISA plan, even where the plan at issue had lapsed at the time of the suit. The suit was brought by employees of LMR International, who had continued to pay premiums for their health plan because they were never told by the plan or by their employer that their plan had been terminated due to LMR's failure to pay its premiums.

The court emphasized that the plan was established as an ERISA plan, and is therefore governed by ERISA. Therefore, all of Plaintiffs claims were preempted, because they sought relief similar to that which is available under ERISA's civil enforcement provision.

Maine Coast Memorial Hospital v. Sargent
D. Me. Civil No. 05-13-P-C (5/10/05)

The United States District Court for the District of Maine dismissed a third-party complaint against Harvard Pilgrim Health Care ("Harvard Pilgrim"). Plaintiff Maine Coast Memorial Hospital brought an action against a patient for unpaid medical bills. The defendant-patient brought a third party complaint against her employer and Harvard Pilgrim, alleging that they were responsible for paying her medical bills. The employer's motion to dismiss was granted previously.

In dismissing the claim against Harvard Pilgrim, the court noted that the proper party defendant in an action concerning ERISA benefits is the party that controls the administration of the plan. The court found that defendant-patient's complaint failed to state a claim as to Harvard Pilgrim because Harvard Pilgrim was not the plan administrator and was not a fiduciary.

RenCare, Ltd. v. United Medical Resources, Inc.
Texas App. No. 04-03-00816-CV

A Texas appeals court held that the trial court had subject matter jurisdiction over the state law claims of a kidney dialysis provider because the claims did not "arise under" the Medicare Act.

RenCare, a kidney dialysis provider, brought an action against Southwest General Hospital, Southwest's parent, and the administrator of Southwest's self-funded group health care plan, alleging fraud, intentional misrepresentation and negligent misrepresentation. RenCare alleged that Southwest represented that one of the beneficiary's of Southwest's plan had full primary coverage for dialysis treatments, and that Southwest subsequently refused to pay for dialysis services that RenCare provided to that beneficiary. The trial court dismissed RenCare's claims on the ground that it had no jurisdiction because the claims arose under the Medicare Act, and also found that Medicare was the primary payer for the dialysis treatments under Southwest's plan.

The Texas appeals court reversed the trial court's dismissal for lack of subject matter jurisdiction. The appeals court found that RenCare's claims did not arise under the Medicare Act because the claims were based upon a claim for payment pursuant to a contract between private parties. The appeals court also determined that Medicare was the secondary payer under Southwest's plan. The court found that Southwest's plan confirmed that (1) federal law controls on this issue; and (2) Medicare is the secondary payer under federal law.

Sylvester v. Cigna Corp., et al.
D. Me. No. 03-CV-176-P-S (5/9/05)

The United States District Court for the District of Maine denied a motion seeking approval of a proposed class action settlement between insurers and plan participants over alleged collection of improper coinsurance payments. The court determined that the proposed distribution of settlement funds was not shown to be "fair, reasonable and adequate."

Plaintiffs alleged that the insurers required plan participants to make coinsurance payments based on the list prices of procedures, rather than on the actual, negotiated prices, resulting in overpayments that were improperly retained by the insurers. The parties drafted a proposed $3.4 million, "claims made" settlement, in which payments to each class member would be capped, and payments would only be made to class members properly returning claim forms. The settlement agreement also contained a "clear sailing provision", under which the Defendants would not object to Plaintiffs attorneys receiving 30% of the settlement in fees, and a "reverter clause" that would permit any unspent funds to be returned to the Defendants. The court preliminarily approved the settlement based on representations that despite the existence of these special clauses, "the payout to class members would be approximately $2 million ($40 per claim x 50,000 claimants)."

The court later determined, however, that the claims made settlement was based on a 100% response rate, when in actuality, the response rate was less than 20%. Thus, despite raising the payout cap to $51.97 per class member, less than $410,000 would be paid to members of the class. This fact, combined with the existence of the reverter clause and the clear sailing provision, combined to create a presumption of unfairness. This presumption shifted the burden to the proponents of the proposed settlement.

In determining whether the proposed settlement was fair, the court considered the following factors: "(1) a comparison of the proposed settlement with the likely result of litigation; (2) reaction of the class to the settlement; (3) stage of the litigation and the amount of discovery completed; (4) quality of counsel; (5) conduct of the negotiations; and (6) prospects of the case." The court found that the proponents of the settlement did not meet their burden, expressing concern about the low total payout to the class, when compared with the expected attorneys fees and the significant percentage of funds that would revert back to the Defendants. The court noted that the proposed terms of the settlement suggested "a lack of arm's-length negotiations."

Telecare Corp. v. Leavitt
Fed. Cir. No. 04-1389 (5/25/05)

The United States Court of Appeals for the Federal Circuit affirmed the decision of the United States District Court for the Northern District of California in a suit regarding the liability of an employer for Medicare payments made to the company's employees. The appellate court determined that where the Medicare program, acting under the Medicare Secondary Payer ("MSP") statute, makes a payment in error, it may seek repayment from an employer that sponsors or contributes to a group health plan.

Telecare contracted with and paid a premium to the Kaiser Foundation Health Plan in order to provide its employees with a prepaid health care plan. After the Medicare program made a payment for benefits on behalf of one of Telecare's employees, who was also covered by Kaiser's group health plan, the Medicare program sought reimbursement directly from Telecare. The Medicare program did not first demand payment from Kaiser, despite its statutory authority to do so.

Telecare repaid Medicare, and then filed suit seeking recovery under the Little Tucker Act and declaratory and injunctive relief against additional repayment demands under the Administrative Procedure Act ("APA"). The district court dismissed the suit for failure to state a claim, because the MSP statute, as amended by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 ("MMA") retroactively authorized the Medicare program to seek reimbursement from employers that sponsor or contribute to group health plans. The district court also held that it did not have jurisdiction over the APA claim "because there was no APA waiver of sovereign immunity where an adequate remedy existed under the...Little Tucker Act to recover amounts illegally extracted by the government."

The appellate court agreed with the district court, finding that the MSP statute's "plain language compels a finding that all employers who sponsor or contribute to a group health plan are liable." The court considered Telecare's arguments that imposing liability on employers in this manner would be contrary to public policy, because contractual provisions limit the amount of time that an employer may seek recourse from an insurer, forcing an employer "who is not otherwise liable for medical expenses" to reimburse Medicare. Nonetheless, the court determined that the language of the statute is clear, noting that "it is up to Congress, and not this court, to decide whether the statute is fair to employers..."

Westside EKG Assoc. v. Foundation Health
Fla. Dist. Ct. App. No. 4D03-3533 (5/4/05)

Service providers may bring a breach of contract action under the "prompt pay" provision of Florida's Health Maintenance Association Act (the "Act") against health maintenance organizations ("HMOs") who fail to pay for claims within the Act's mandated pay period.

Florida's Fourth District Court of Appeals found that Westside EKG Associates were third party beneficiaries of the HMO contracts. As such, they may bring suit "by virtue of the common law principle that contracts governed by regulatory statutes are deemed to incorporate relevant portions of such statutes in their terms." In doing so, the court decided that section 641.185(2) of the Act, which warns that it does not create a civil cause of action against HMOs, only applies to the rights detailed in the previous section and not to the rest of the Act, including the "prompt pay" provisions.

Crowell & Moring LLP - All Rights Reserved
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.

Please contact for more information.