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Managed Care Lawsuit Watch - July 2009


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 Chris Flynn, Peter Roan, or 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 Alta Bates Medical Group, Inc.
FTC, No. 051 0260 Settlement announced 6/4/09

The Federal Trade Commission ("FTC") charged Alta Bates Medical Group, Inc., ("ABMG"), a multi-specialty independent practice association comprised of approximately 600 physician members, about 200 of whom are primary care physicians, with violating Section 5 of the Federal Trade Commission Act, by agreeing to fix the prices and terms of the contracts between its member physicians and payors.

FTC alleged that: (1) ABMG negotiated rates and terms of fee-for-service contracts with payors and suggested payors reconsider what ABMG considered to be inadequate terms without first obtaining the price and terms acceptable individually to its physicians; (2) ABMG failed to notify its individual physicians of a payor's proposal or counterproposal; (3) on an opt-out basis, ABMG only notified its physicians of proposals after ABMG had accepted the prices and terms; and (4) ABMG warned its physicians about negotiating with payors individually by suggesting that such individual contracts may not have beneficial terms.

ABMG claimed it used the lawful "messenger model" to facilitate the negotiations on behalf of its members. Under the messenger model, a third party coordinates contracting between various physicians and payors in a manner that does not constitute illegal price fixing because the third party does not negotiate prices or other significant terms, facilitate coordination among the physicians, nor does it dissuade physicians from individually contracting with a payor.

The FTC released a proposed consent order against ABMG. Among other things, the proposed order sets forth the following requirements:

  • Prohibits ABMG from "entering into or facilitating any agreement between or among any health care providers: (1) to negotiate on behalf of any physician with any payor; (2) to refuse to deal, or threaten to refuse to deal with any payor; (3) regarding any term, condition, or requirement upon which any physician deals, or is willing to deal, with any payor, including, but not limited to price terms; or (4) not to deal individually with any payor, or not to deal with any payor other than through ABMG." However, ABMG is permitted to participate in qualified risk-sharing and qualified clinically-integrated joint arrangements.
  • Requires ABMG to notify each of its physicians and each payor with which it has contracted of the complaint and settlement and to allow payors to terminate their existing contracts as well as notify, for the next three years, any future physicians and payors of the complaint and settlement.

G.R.J.H. Inc. v. Oxford Health Plans Inc.
07-cv-00068 N.D.N.Y May 14, 2009

The U.S. District Court for the Northern District of New York recently held that ERISA preempts employer G.R.J.H's state law breach of contract claims against Oxford Health Plans ("Oxford"). However, the Court denied Oxford's motion to dismiss G.R.J.H.'s claims and permitted G.R.J.H. to amend its complaint to plead an ERISA claim.

Under a group enrollment agreement between G.R.J.H. and Oxford, Oxford agreed to arrange or pay for G.R.J.H.'s employees' medical and hospital care in return for appropriate premium payments made by G.R.J.H. on the first day of the month. Oxford terminated the agreement, claiming G.R.J.H. failed to make timely premium payments. G.R.J.H. then sued Oxford in state court alleging, among other things, that Oxford's termination breached the agreement.

Oxford moved to dismiss G.R.J.H.'s complaint on the grounds that ERISA preempted the state law claim. G.R.J.H. argued that the Court should not dismiss the state law claim and should instead recharacterize it as a federal claim because the facts supporting the state law claim also supported an ERISA claim.

The Court noted that federal courts disagree on whether to accept the recharacterization argument or to instead dismiss the claim pursuant to the preemption doctrine. The Court then referred to a Southern District of New York case in which the court held that a breach of contract claim also including elements of an ERISA § 502 claim should be recharacterized as an ERISA claim.

The Court concluded that G.R.J.H.'s state law claims, as pleaded, did not sufficiently state an ERISA § 502 claim and therefore refused to deem the claim as arising out of ERISA. However, because the substance of the state law claim could raise an ERISA § 502 claim instead of dismissing the claim, the Court permitted G.R.J.H. to replead it as an ERISA claim. The Court therefore denied Oxford's motion to dismiss.

Oxford also argued that the complaint should be rejected because G.R.J.H. wrongly named Oxford as a defendant. Oxford argued that it should not have been named as a defendant because it was not a party to the agreement nor was it a plan administrator or trustee. The Court denied Oxford's summary judgment motion on the basis that Oxford had been involved with the agreement and with G.R.J.H. despite not being a signatory to the agreement.

Medical Mutual of Ohio v. Schlotterer
No. 2009-Ohio-2496 (Ohio 6/3/09)

On June 3, 2009, the Ohio Supreme Court ruled that where a patient gives explicit consent, the doctor-patient privilege does not prohibit the release of a patient's medical records to a health insurer. The plaintiff insurer, Medical Mutual sought patient medical records in discovery in order to support its claim of fraud and breach of contract against a physician. Medical Mutual alleged that the doctor improperly applied patient billing codes, resulting in the insurer overpaying the doctor by $269,576. The trial court granted Medical Mutual's motion ordering the doctor to respond to discovery requests calling for the medical records of ten families.

The court of appeals held that an order compelling discovery of the medical records would violate the physician-patient privilege. The Ohio Supreme Court sided with the trial court, holding that ordering discovery of medical records did not violate the privilege where the patients expressly waived it.

The Court held that "consent to the release of medical information is valid, and waives the physician-patient privilege, if it is voluntary, express, and reasonably specific in identifying to whom the information is to be delivered." Where a waiver form explicitly states a purpose for releasing medical records, the waiver does not apply for a disclosure inconsistent with said purpose. The relevant portion of the Medical Mutual form read "You consent to the release of medical information to Medical Mutual when you enroll and/or sign an Application."

The defendant doctor argued that the waiver in Medical Mutual's forms did not include investigation into fraud. The Court rejected this and other arguments raised by the defendant, noting that the Medical Mutual consent statement contained no express purpose and that the insurer's goal of investigating prior claims and reimbursement fell "within the category of claim review." The Court further held that the consent statement could not prohibit disclosure of the medical records to Medical Mutual's attorneys because to do so would require insurers like Medical Mutual to seek waiver of privilege on a pro se basis.

Chelsea Family Pharmacy, PLLC v. Medco Health Solutions, Inc.
No. 08-5103 (10th Cir. June 2, 2009)

The United States Court of Appeals for the Tenth Circuit, in a suit brought by a local pharmacy, on behalf of itself and all similarly situated pharmacies, against Medco Health Solutions, Inc. ("Medco"), ruled that claims related to Medco's reimbursement rates were subject to mandatory arbitration while separate claims related to anticompetitive conduct on Medco's part, were not subject to that provision. The plaintiff, Chelsea Family Pharmacy, PLLC ("Chelsea"), alleged violations of the Oklahoma Third Party Prescription Act, as well as claims for breach of contract and unfair business practices.

Chelsea, when joining Medco's pharmacy network, entered into an agreement that contained provisions permitting Medco's mail order service to offer more favorable dispensing rates than Chelsea was permitted to offer. Chelsea, in addition to its claims for inadequate reimbursement, claimed that these provisions gave Medco undue bargaining power, which Chelsea claimed "undermined [its] ability to compete for the business of its own local customers."

The Court considered Chelsea's claims for reimbursement and unfair business practices separately, determining in turn whether the claims were arbitrable under the terms of the parties' agreement. First, the Court found the parties' arbitration clause to govern any "controversy or claim arising out of or relating to payments to [Chelsea] by Medco," the Court found Chelsea's reimbursement claims clearly within the scope of the arbitration clause. The Court found the arbitration clause "broadly inclusive when it comes to payments." The Court refused to follow the lower court's logic that the arbitration clause governed only claims relating to specific payments.

However, the Court concluded that Chelsea's claims pertaining to unfair business practices were not within the scope of the arbitration provision. Although Medco argued that the claims were interrelated and therefore must be arbitrated together, the Court disagreed and found the two claims to be distinct. In so finding, the Court relied upon the factual allegations in the complaint rather than the labels attached to each of the causes of action within the complaint.

G., Parent and Next Friend of K., a Disabled Child, et al. v. State of Hawai’i Dept. of Human Serv., et al.;
G., Parent and Next Friend of K., a Disabled Child, et al. v. United States Dept. of Health and Human Serv., et al.

No. 08-00551 No. 0900044 (D.Haw. May 11, 2009) (Consolidated)

The United States District Court for the District of Hawaii allowed certain claims, which were brought on behalf of Hawaii's aged, blind, and disabled population, to proceed against the Centers for Medicare and Medicaid Services ("CMS"). The claims alleged a violation of the federal Medicaid Act rights of Hawaii beneficiaries by CMS's improper approval of contracts entered into between the Hawaii Department of Human Services and healthcare entities. Furthermore, the court permitted the plaintiffs to pursue a private right of action to sue under the Medicaid Act's freedom of choice provision.

The plaintiffs alleged that the entities that were granted Hawaii Medicaid managed care contracts were not appropriately licensed by the state and did not have, or were unable to establish, an appropriate geographic list of providers. Plaintiffs claimed that, despite correspondence to CMS indicating the deficiencies with the award recipients' contracts, CMS did not consider or investigate the alleged problems.

Under the Administrative Procedure Act, the Court held, "judicial review of agency action is available except in those rare instances where statutes are drawn in such broad terms that in a given case there is no law to apply and a court would have no meaningful standard against which to judge the agency's exercise of discretion." In this case, the defendants agreed that CMS's approval of state Medicaid contracts was subject to federal law requiring the Secretary's determination that the contractor met the definition of a managed care organization and that contract and contractor complied with the requirements of federal Medicaid law. As a result, the court found that it could review CMS's decision because the applicable statutes were not so broad that the Court could not apply a meaningful review.

The Court also permitted the plaintiffs' claims against Hawaii's Department of Human Services, which alleged violations of the Medicaid Act's freedom of choice provision. The Court concluded that the Medicaid freedom of choice provision was clearly intended to permit beneficiaries to receive care from the provider of their choice, not of the government's choice. Furthermore, the Court agreed with the plaintiffs that the freedom of choice provisions conferred a private right of action on Medicaid beneficiaries. Therefore, the Court permitted the plaintiffs to proceed with their allegations against CMS.

Thompson v. TransAm Trucking, Inc. et al.
No. 2:08-cv-927 (S.D. Oh. June 1, 2009)

The United States District Court for the Southern District of Ohio held that ERISA did not preempt a beneficiary's claim that an orthopedic center and one of its physicians negligently misrepresented that a knee procedure would be covered as an in-network expense by the terms of the beneficiary's health plan.

TransAm Trucking, Inc. ("TransAm") was the plan sponsor of plaintiff Cynthia Thompson's health plan, which was administered by defendant FMH Benefit Services, Inc. ("FMH"). When plaintiff sought treatment for a knee condition from defendant-Columbus Orthopaedic Group, Inc., ("Columbus Orthopaedic"), plaintiff alleged that the group and her physician's office "represented to [her] that her medical care would be covered as an ‘in-network' expense, or, alternatively, failed to inform her otherwise."

When her claim for benefits was submitted, FMH partially denied the claim, concluding that while the bills submitted by the physician were covered as an in-network expense, the plaintiff's hospital bills were an out-of-network expense. As a result, the plaintiff's hospital bills were paid at an out-of-network rate.

The plaintiff sued TransAm, the health plan, and FMH as administrator, to recover the benefits she was denied for her surgery. She also brought state law claims, including negligent misrepresentation and promissory estoppel, against the physician and Columbus Orthopaedic. The physician and Columbus Orthopaedic countered that the plaintiff's state law claims were preempted by ERISA.

The Court concluded that the plaintiff's claims did not relate to the health plan and therefore were not preempted under ERISA. The Court found that such claims did not "affect the structure, the administration, or the type of benefits" provided by the health plan. Furthermore, the court found that state laws like negligent misrepresentation and promissory estoppel are "laws of general application -- not specifically targeting ERISA plans -- that involve traditional areas of state regulation and do not affect relations among the principal ERISA entities." As a result, the court found that the plaintiff's state law claims against the physician and Columbus Orthopaedic were not preempted by ERISA.

John L. Hill, Francine Barnes, and Glory Celestine, v. Blue Cross and Blue Shield of Michigan
Case No. 03-cv-40025 (E.D. Mich. 3/31/09)

The United States District Court for the Eastern District of Michigan dismissed ERISA claims of participants and former participants of a General Motors' sponsored health plan. The plaintiffs sought equitable accounting, disgorgement, and restitution under ERISA for Blue Cross Blue Shield of Michigan's ("BCBSM's") alleged breach of fiduciary duty. The plaintiffs alleged that BCBSM's claim determinations were not based on the participants' symptoms at the time of treatment, but rather, were based on the doctor's final diagnosis, which was contrary to the plan's terms. The District Court dismissed these claims because plaintiffs could not show that there were "any losses to the Plan" or that the defendant secured any profits as a result of the alleged breach of fiduciary duty.

The Court held that plaintiffs Barnes and Celestine had Article III standing to seek the remedies of an accounting, restitution, and disgorgement in favor of their plan, because such remedies would redress the injuries they claimed to have incurred. Plaintiff Hill, however, did not have standing under Article III or ERISA because he was no longer a plan participant.

Despite having standing, Celestine and Barnes' claims were still dismissed as the remedies they sought were not on their own behalves, but on behalf of the plan. The Court could not find that the plan suffered any "cognizable losses." In fact, plaintiffs never affirmatively identified any losses suffered by their plan. The Court rejected plaintiffs' alternative argument that it was premature for it to determine that there were no losses. The Court declined to preemptively deny plaintiffs any further relief under ERISA, reserving the right to consider such claims if and when plaintiffs actually asserted them.

Pharm. Care Mgmt Ass’n v. D.C.
04-1082 D.D.C Mar. 19, 2009

In May 2004, the Access Rx Act (the "Act"), a District of Columbia law designed to lower the cost of prescription drugs, went into effect. Title II of the Act regulates the relationship between PBMs and "covered entities," including ERISA plans. Among other things, the Act dictates that PBMs owe a fiduciary duty to covered entities, and requires PBMs to disclose rebates, discounts and other payments to their customers and disclose financial terms and arrangements for remuneration between the PBM and prescription drug manufacturers.

The Pharmaceutical Care Management Association (PCMA) asked the Court to enjoin enforcement of the Act and the Court granted preliminary injunctive relief. The District of Columbia (D.C.) then appealed to the D.C. Circuit, which remanded the case to determine whether a recent First Circuit decision precluded PCMA from challenging the validity of the Act on the basis of collateral estoppel. The First Circuit decision, PCMA v. Rowe, involved a nearly identical statute in Maine. That court ruled that PBMs are not ERISA fiduciaries and that the Maine statute was not preempted. As a result of this decision, the Court concluded that the Rowe ruling precluded PCMA from challenging the validity of the Act.

However, the circuit court disagreed on appeal, noting policy reasons as well as practical considerations, the latter of which related to the Department of Labor's proposed rule which would require PBMs to disclose particular financial information. The circuit court remanded the case back to the Court for further consideration on the merits and both the PCMA and D.C. filed motions for summary judgment.

Reviewing the Act, the Court concluded that it "improperly injected state regulation into an area exclusively controlled by ERISA" by dictating requirements regarding the relationship between an ERISA plan and a PBM. The Court noted that ERISA allows plan fiduciaries to contract with PBMs as "parties-in-interest" to provide necessary operational services for reasonable compensation. As such, "PBMs provide ERISA plans with essential administrative services, which states may not regulate." The Court also stated that the DOL rule provided further support for its conclusion because the rule, if promulgated, would regulate PBM's contractual relationships with ERISA plans, and the Act, by also regulating that relationship, could create conflicting regulation of benefit plans, which is what ERISA preemption was designed to prevent.

Blue Springs Internal Medicine, P.C. v. Blue Cross and Blue Shield of Kansas City
No. 00-1334 United States District Court for the Southern District of Florida

The plaintiffs, medical service providers, brought suit against Blue Cross and Blue Shield of Kansas City and other insurers alleging various state law claims, including quantum meruit, breach of contract, unjust enrichment, violation of the Missouri prompt pay statutes, negligent misrepresentation, fraud, and civil conspiracy. The defendants brought a motion to dismiss for failure to state claims upon which relief could be granted. The defendants principally argued that ERISA preempted the plaintiffs' state law claims or that the plaintiffs had not sufficiently pled their claims. The plaintiffs responded that the heart of the dispute resided in the "appropriate and required amount of payment" due the providers, not whether a right to payment exists under any ERISA plan.

With regard to the plaintiffs' claims for unjust enrichment and quantum meruit, the Court found that the plaintiffs' claims were not brought independently of an ERISA plan. The Court found that the "gist" of the plaintiffs' claims is the defendants' "alleged underpayment for the services provided" to insureds. Furthermore, because the plaintiffs possessed beneficiary assignments under many ERISA plans, the plaintiffs have "no choice but to pursue their claims under ERISA." Therefore, the Court dismissed the unjust enrichment and quantum meruit claims without prejudice.

With respect to the claim for breach of contract, the Court found that ERISA may not preempt the plaintiffs' claim. ERISA does not preempt claims based on contracts entered into between parties directly, such as provider contracts. Therefore, state law claims of this variety against plan insurers may "too tenuously affect ERISA plans" for preemption to apply. Nevertheless, because the court could not find that the plaintiffs' breach of contract claim was based on an express contract between the plaintiffs and defendants, it dismissed the breach of contract claim without prejudice.

Next, with regard to the plaintiffs' state law claims under the Missouri prompt pay statutes, the court found that ERISA completely preempted the plaintiffs' claim. ERISA preempted this cause of action because, as the Eleventh Circuit has found, preemption occurs "whenever the alleged conduct at issue is intertwined with the refusal to pay benefits." Therefore, the court dismissed this cause of action with prejudice.

The Court also dismissed the plaintiffs' claims for negligent misrepresentation and fraud. The defendants' argued that the plaintiffs had not pled these causes of action with sufficient particularity, and the court agreed. Although the plaintiffs did plead their causes of action on the basis of "representations surrounding coding practices, reimbursement rates, and payment schedules," the court agreed with the defendants that these allegations were insufficient to state claims. The court held that the plaintiffs had not "precisely describe[d] what statements were made in what documents or oral representations." Therefore, the court dismissed the negligent misrepresentation and fraud claims without prejudice.

Likewise, the court found that the plaintiffs had not sufficiently pled a cause of action for civil conspiracy. The plaintiffs alleged that the defendants had conspired among themselves "to systematically deny, delay, and diminish payments to health care providers." Nevertheless, when looking at the complaint, the court found only conclusory allegations, which were not sufficient. Thus, the court also dismissed the civil conspiracy claim without prejudice.

Johns v. Blue Cross Blue Shield of Michigan
No. 2:08-cv-12272 United States District Court for the Eastern District of Michigan

The plaintiff, Chris Johns, sued Blue Cross Blue Shield of Michigan ("BCBSM") after it denied coverage for Applied Behavioral Analysis ("ABA") treatment for his son's autism. BCBSM denied coverage for ABA on the basis that it was "experimental" or "investigative." Johns sued and attempted to define a class as "all plan participants and beneficiaries insured under ERISA-governed employee benefit plans administered by Blue Cross and Blue Shield of Michigan who have been denied coverage for ABA treatment within the last six years."

The Court considered the following four factors to determine class status: (1) whether the class is so numerous that joinder of all members is impracticable; (2) whether there are common questions of law or fact; (3) whether the claims of the representative parties are typical of the claims of the class; and (4) whether the plaintiff will adequately represent the interests of the class.

Though the court concluded that the elements of numerosity and commonality were satisfied, it nevertheless held it would be premature to certify a class at this point, because "there is no evidence in the record that the terms of the experimental-treatment coverage exclusion in Johns's plan bear any similarity to the terms of the corresponding exclusions in the other proposed class members' plans." Therefore, the Court could not at this point conclude that the plaintiff's claims were typical of the claims of all putative class members. The Court did find, however, that class certification in this case would likely occur eventually.

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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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