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Managed Care Lawsuit Watch - July 2008


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:

Metropolitan Life Ins. Co. v. Glenn
No. 06-923, June 19, 2008

In Metropolitan Life Ins. Co. v. Glenn, the Supreme Court addressed a situation in which Metropolitan Life, acting as both plan administrator and insurer of a disability plan maintained by Sears, Roebuck & Company, processed a claim for disability benefits by a Sears employee with a heart condition. Metropolitan initially approved short term disability benefits for the employee on the basis of opinions from a number of doctors that the employee was incapable of performing any kind of work.

The disability plan provided for an offset of benefits if a participant also received Social Security disability payments, and Metropolitan specifically encouraged the employee to file an application under the Social Security disability insurance program. The Social Security Administration granted her application, finding her totally unable to work, and Metropolitan deducted the amount of her Social Security payments from the short term disability payments she received from the plan. At the end of the employee's short term disability coverage period, Metropolitan re-examined her status to determine her eligibility for long-term disability payments. Despite both the findings of a majority of physicians and the decision of the Social Security Administration, Metropolitan concluded that the employee was able to perform other jobs, and therefore was not entitled to long-term disability benefits. Evidence produced in the District Court indicated that, in denying this claim, Metropolitan ignored medical opinions contrary to its conclusion and failed to provide complete information of the employee's medical status to its internal medical experts.

Despite the shortcomings of Metropolitan's claims appeal process, the District Court upheld the claims denial. It relied on the Supreme Court's conclusion in the Firestone decision that courts must defer to claims decisions by fiduciaries possessing interpretive discretion over plan terms unless such decisions are found to be arbitrary and capricious. On appeal, the Sixth Circuit reversed, relying in part on another portion of the Firestone decision stating that the presence of a conflict of interest is a factor a court can consider in determining whether to defer to a fiduciary's claims decision. The Sixth Circuit found that Metropolitan, as both administrator and insurer, operated under such a conflict, that Metropolitan's decision was not as a result entitled to deference, and that in any event, Metropolitan had abused its discretion in denying the employee's claim.

Writing on behalf of himself and Justices Stevens, Souter, Ginsburg and Alito, Justice Breyer confirmed that under the Firestone decision, courts should continue to be guided by trust law in determining the appropriate standard of review for reviewing denials of benefits. Under the Restatement of Trusts, according to Justice Breyer, a benefit plan that is operated under a conflict of interest requires that "that conflict must be weighed as a factor in determining whether there is an abuse of discretion." Glenn at 5 (quoting Firestone, at 115). What Firestone left unclear, however, was when such a conflict arises and the manner in which courts must take such conflicts into account.

The decision in Glenn is very clear on the issue of when a conflict arises – it occurs whenever the claims decision maker has an interest at odds with the interest of plan participants and beneficiaries. All nine justices agreed that an insurance company that both administers and insures a plan operates under such a conflict. Seven of the justices concluded that an employer that both administers and self-funds a plan also operates under such a conflict (with Justices Scalia and Thomas stating that this issue did not need to be decided based on the facts of the case).

The court was less clear how courts should take the presence of a conflict into account. Essentially, the majority adopted a totality of the circumstances test to be used in reviewing denial of benefits. In giving weight to the conflict of interest factor, a reviewing court should take into account the circumstances particular to each case. Thus, courts should give more weight to the conflict of interest when the circumstances demonstrate that the conflict affected the decision to deny benefits, and give less weight to the conflict if "the administrator has taken active steps to reduce potential bias and to promote accuracy." Glenn at 11.

The majority noted, for example, that the effect of a conflict (although not the existence of the conflict itself) could be reduced if an insurance company could show that it has adopted structures or practices to wall off the claims processing function from those portions of its operations concerned with finances. In the majority's view, this case-by-case approach was completely consistent with trust law, and would not result in diminishing the deferential standard originally announced in the Firestone decision. Applying this new standard to the facts in Glenn, the Court found that that Sixth Circuit correctly took the conflict of interest into account, along with other factors, in determining that the insurance company abused its discretion in denying benefits to the employee.

Allison Engine Co. v. United States ex rel. Sanders
No. 07-214 (June 9, 2008)

The U.S. Supreme Court unanimously held that a claim under the False Claims Act (FCA) requires proof not only that a false statement was made to the government, but that the statement was made with the intent of "get[ting] a false or fraudulent claim paid or approved by the Government." The Court reversed a Sixth Circuit decision which was based on an interpretation of U.S.C. §3729(a)(2) that "impermissibly deviates" from the FCA's statutory language. The Supreme Court also held that §3729(a)(2) requires proof that a defendant intended a claim to be paid by the government.

This litigation arose out of a defense contract where a Navy contractor awarded subcontracts to Allison Engine Co. to build generator-sets for guided missile destroyers. The Navy's contract with the primary contractor indicated that every part of the destroyers be built in accordance with the Navy's standards. Allison Engine contracted with another company, GTC, to assemble the generator sets. Two former GTC employees filed suit in federal court as whistleblowers seeking to recover damages under §3729. The whistleblowers alleged that "Allison Engine, GTC, and SOFCO fraudulently sought payment for work that had not been done in accordance with contract specifications." At trial, however, they did not present the invoices submitted by the shipyards to the Navy, and the District Court held that, "absent proof that false claims were presented to the Government, respondents' evidence was legally insufficient under the FCA." The Sixth Circuit reversed, holding that "such claims do not require proof of an intent to cause a false claim to be paid by the Government."

The Supreme Court overturned the Sixth Circuit decision, noting that "[e]liminating this element of intent …would expand the FCA well beyond its intended role of combating 'fraud against the Government'," making the "reach of §3729(a)(2) boundless." The Court was also clear that its holding "does not mean … that §3729(a)(2) requires proof that a defendant's false record or statement was submitted to the Government."

Northern Michigan Hospitals, Inc. and Gifford Medical Center, Inc. v. Health Net Federal Services, LLC and Lakewood Health System and Northwest Medical Center v. Triwest Healthcare Alliance Corp.
Civil Action No. 07-039 GMS and Civil Action No. 07-069 GMS

The U.S. District Court for the District of Delaware has dismissed a class action against Health Net Federal Services and Triwest Healthcare Alliance brought by a putative class of hospitals that provide outpatient services to CHAMPUS/TRICARE (C/T) beneficiaries. The hospitals alleged that the defendants had violated an implied-in-fact contract by failing to reimburse them for facility overhead charges.

The underlying issue in the case was the amount of reimbursement non-contracted hospitals are due when providing certain services to C/T members. The court held that each hospital must individually exhaust its administrative remedies prior to seeking redress in the courts since the required exhaustion would aid judicial efficiency and would not be futile. Health Net was represented by Crowell & Moring.

Solomon v. Blue Cross and Blue Shield Association, et. al.
S.D. Fla., No. 03-22935 5/23/08

The U.S. District Court for the Southern District of Florida put five years of litigation to rest when it dismissed, with prejudice, a third amended class action complaint alleging RICO violations related to reduced, delayed and denied insurance claims payments.

Under the class action complaint, non-physician health care providers and practitioners claimed RICO violations. The court first announced that it would follow pleading standards set forth by the United States Supreme Court, requiring that fraud complaints must state with particularity, the who, what, when, where, and how of fraud. The court then dismissed the complaint, finding that the plaintiffs failed to adequately allege facts about the predicate fraud or conspiracy, including who made the agreement, when the agreement took place or how the defendants reached an agreement to violate RICO. The court further determined that the failure to adequately plead the requisite fraud claim in turn warranted a dismissal of all the plaintiffs RICO claims.

Eufaula Drugs Inc. v. TDI Managed Care Svcs. Inc.
No. 2:05-cv-293-MEF (M.D. Ala. June 17, 2008)

The United States District Court for the Middle District of Alabama certified a putative class of plaintiff drug stores against an insurer and a pharmacy benefits manager (PBM) despite a large disparity in the potential damages of the members. Plaintiffs claimed the pharmacy benefits manager, Eckerd Health Services (EHS), underpaid them for prescriptions by not using the most recent pricing methods. The Average Wholesale Price (AWP) for covered drugs is updated on a daily, weekly and monthly basis. The plaintiffs alleged that by using weekly instead of daily AWP updates, EHS breached their Agreement requiring reimbursement based on the "current average wholesale price of a Covered drug."

Plaintiffs sought class certification of all pharmacies and/or other similar entities that entered into a contract with defendants for reimbursement of prescriptions based on the AWP on or after February 14, 1999. EHS argued that plaintiffs' claims were not typical because some had adjudicated their claims through a third party, not directly through EHS. The Court held that the claims of plaintiffs reimbursed through third party contracts had the same "essential characteristics" of those plaintiffs with contracts directly with EHS. EHS reimbursed the parties according to "the same basic formula, [and] pursuant to contracts containing the same definition of AWP."

Although there was a disparity in the amount of potential damages between the named plaintiffs and larger class members like Walgreens, the parties had no conflict of interest. Including "low stake" members "is the principal justification for class actions-using a cost spreading mechanism to allow plaintiffs to bring suits that otherwise would not be profitable." An opt-out provision allows members seeking greater damages to pursue their own lawsuit.

The Court also held that the named plaintiffs were adequate representatives of the class. The named plaintiffs need not be a "'driving force' behind the litigation;" the Court was satisfied that they had a sufficient knowledge about the nature of the case and their claims against EHS. Common questions of law and fact predominated since there was no evidence presented that any of the pharmacies knew that EHS was using weekly instead or daily AWP updates and because each plaintiffs claim arose from the same form contract.

Situ v. Leavitt
Case C.06-02841-TEH (N.D. Cal.)

A putative class of dual eligible beneficiaries, those eligible for Medicare and Medicaid benefits, and the Secretary of Health and Human Services have sought approval of a settlement agreement in the United States District Court in San Francisco.

The case concerns implementation issues with the Part D Low Income Subsidy (LIS) program. The settlement agreement provides for CMS to make modifications to the system for auto-enrolling full benefit dual eligibles and deeming them eligible for the LIS. CMS will begin processing state eligibility files by the first business day after receipt, rather than waiting for the submission of all state files in a given month. CMS will then deliver enrollment and LIS eligibility information to plans in the next weekly report after the files have been processed.

In addition, CMS will conduct an outreach campaign to pharmacists and pharmacy organizations to explain modifications to the point-of-service contract to relieve pharmacists of liability for claims based on reasonable evidence of LIS status. In addition, CMS must issue clarification to the Best Available Evidence policy through an HPMS memorandum. The memo must include certain provisions, including mandatory obligations of Part D Plans to update subsidy status of full benefit dual eligibles when the beneficiary, pharmacist or representatives provide the plan with documentation of Medicaid enrollment. In addition, the memo will provide that plans must assist beneficiaries who claim to be subsidy eligible but cannot provide proper documentation.

It may take several months for the settlement agreement to be approved by the court.

DeVito v. Aetna, Inc.
No. 07-418 May 22, 2008 D. N.J

In a class action suit involving denial of payments for eating disorders, Aetna and the class representatives recently entered into a settlement agreement to be approved by the court.

Plaintiffs, a putative class of adolescent health plan members, filed an action against Aetna in the United States District Court for the District of New Jersey claiming that Aetna violated New Jersey's Parity Law by limiting both inpatient and outpatient benefits for the treatment of eating disorders. The named plaintiff, DeVito, and another plaintiff, Meiskin, have daughters with eating disorders.

Both DeVito and Meiskin requested that Aetna cover the treatment of their daughters' eating disorders. DeVito had never obtained coverage for treatment, and on at least one occasion was denied because it was not considered "medically necessary." Meiskin had actually sought and received benefits, but the coverage was terminated when it surpassed the limits for coverage of non-Biological Based Mental Illnesses ("BBMI"). The plaintiffs claimed that Aetna breached its contracts, violated its fiduciary duty and denied plaintiffs their entitled benefits by improperly classifying the eating disorders as non "BBMIs."

The settlement terms require Aetna to: (1) reprocess and pay denied claims within forty-five days of the final approval of the settlement by the Court; (2) provide class counsel with access to and explanation of all reprocessed claims; (3) agree not to apply limitations of coverage applicable to non-biologically based mental illness to the payment of benefits for eating disorders and to cover treatment of eating disorders in the same manner as biologically based mental illness for covered persons enrolled in insured Aetna plans as of the class notice; and (4) utilize existing appeals procedures for disputes relating to medically necessity determinations for treatments of eating disorders and also to permit beneficiaries to request binding review by an independent eating disorder specialist after the completion of current appeal procedures.

Doiron v. Conseco Health Insurance Co.
No. 07-30357 5th Cir.

The Fifth Circuit vacated a district court's grant of class action status in a case involving an alleged denial of benefits for cancer treatments. Doiron filed a suit against Conseco Health Insurance Company on behalf of a class of Conseco policyholders. Doiron alleged that Conseco breached its contractual obligations when it refused to pay for her husband's radiation and chemotherapy treatments. She sought class certification for similarly situated plaintiffs, alleging that "Conseco has a uniform corporate policy of denying claims for benefits for certain charges that she and other class members incurred as part of their radiation and chemotherapy treatments."

Although the district court accepted Doiron's two sub-classes, the first consisting of policy holders who incurred specific charges as part of their radiation treatment and whose claims Conseco denied and the second consisting of policy holders who incurred specific charges as part of their chemotherapy treatment and whose claims Conseco denied, the Fifth Circuit vacated the certification of these subclasses. The Court agreed with Conseco's argument that the subclasses may include policyholders who had claims denied for reasons other than because the claims were "not covered" under the radiation/chemotherapy provision of the policy. As a result, the Court would have to do a claim-by-claim analysis for each sub-class member to determine why the claim was denied.

Acknowledging that all other requirements for class certification were satisfied, the Court remanded the case, suggesting that the District Court "revisit the sub-class definitions to narrow the sub-classes such that they only included policyholders who had claims denied only because they were "not covered" under the Radiation/Chemotherapy Benefit provision."

With regard to Doiron's allegation that Conseco acted in bad faith by denying the cancer treatment payments, Conseco argued that Doiron's bad faith claims precluded class certification because they would require a fact-based analysis of each claim in order to determine whether Conseco's failure to pay the claim was arbitrary and capricious. The Court again agreed with Conseco but stated that the question of bad faith claims would not prevent class certification if the sub-classes were redefined as the Court suggested.

Cooper v. Premera Blue Cross, et. al.
No. C06-1466RSL (W.D. Wash. May 23, 2008)

The United States District Court for the Western District of Washington held that defendant health insurers did not contravene ERISA when they sought reimbursement from a plaintiff's medical providers after plaintiff failed to return their money despite receiving payment for medical services from another insurance company. Plaintiff filed suit alleging ERISA violations; the court granted summary judgment in favor of defendants.

After Plaintiff was injured in an ATV accident, Allied Insurance denied him coverage under his Personal Injury Protection (PIP) or Uninsured Motorist (UM) plans. Allied later reversed its denial providing the Plaintiff with $10,000 to pay his medical expenses. Plaintiff also received compensation in UM benefits and lost wages. Before Allied's reversal, Plaintiff's employer's insurance provider, Premera, fully reimbursed his medical providers. Premera's affiliate sought reimbursement of the $10,000 because PIP is "an exclusion" under the plan, or to demonstrate that the money went to pay his medical expenses. Plaintiff did not provide this information, and Premera obtained reimbursements from his medical providers.

The Plaintiff argued that he was not required to repay Premera for the PIP benefits despite explicit contract language that "Benefits aren't available under this plan when coverage is available through: … Personal injury protection (PIP)." Plaintiff did not argue that this language was ambiguous; he claimed that he was entitled to keep his PIP benefits because he did not receive full compensation for his damages. The Court held that "the Plan does not require that plaintiff be 'made whole.'" The Court also rejected Plaintiff's secondary argument that the subrogation provision required that a Plaintiff be "made whole" before Premera could pursue reimbursement from Plaintiff's providers.

Hill Dermaceuticals, Inc. v. RX Solutions, United Health Group, Inc. and United Healthcare of Florida, Inc.
Case No. 6:08-cv-330-Orl-31KRS

The plaintiff, Hill Dermaceuticals sued RX Solutions (a pharmacy benefit manager) and affiliates for injurious falsehood, defamation, misleading advertising and deceptive and unfair trade practice based on RX Solutions' communications to physicians and patients that Hill's product would be available if the patient was unable to use other products on the PBM's formulary. The court granted the motion to dismiss and directed the clerk to close the case since "Hill's true complaint is with RX Solutions' refusal to include Derma-Smoothe on its formulary, not anything that RX Solutions has said (or implied) about that medication." The court noted that such a complaint, while not alleged, does not appear to give rise to a cause of action.

Summers v. Touchpoint Health Plan, Inc.
No. 2005AP2643 Supreme Court of Wisconsin 5/28/08

A divided Wisconsin Supreme Court affirmed a lower court's decision, ordering Touchpoint Health Plan, Inc. ("Touchpoint") to retroactively reinstate cancer treatment benefits withheld by the health insurer. Summers sued Touchpoint on behalf of their son, after Touchpoint terminated his coverage for cancer treatment.

Summers claimed that the termination of benefits for cancer treatment was arbitrary and capricious because the termination letter failed to explain the reason for termination. Summers had submitted two requests for specialized chemotherapy treatment coverage. Touchpoint denied the first request for treatment in a clinical trial setting , citing an experimental and investigational exclusion in the enrollee's plan. Summers subsequently resubmitted a request for coverage of the same treatment in a non-clinical setting, which Touchpoint denied, again citing the experimental and investigational exclusion in the enrollee's plan.

The majority agreed with Summers, finding that the case involved an arbitrary and capricious termination of benefits action because Touchpoint's second denial letter failed to address the change in reasoning for coverage that no longer included a clinical trial. The court further ordered a remedy of retroactive reinstatement of benefits.


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