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Litigation Trends Across the U.S. in Managed Care

The relationship among providers, payors and other managed care entities involves inevitable conflicts. Rising healthcare costs and an increasing pool of uninsured patients add pressure to already stressed relations between these entities, whether their interactions are defined by contract, statute or otherwise. Meanwhile, patients continue to demand access to their provider of choice, limiting the benefits of steerage. This paper provides an overview of the manifestation of these issues in litigation in recent months, and suggests some trends that those involved in healthcare, and managed care in particular, should consider.

This article addresses litigation trends related to provider / payor litigation and pharmacy benefit managers (“PBMs”). Moreover, this paper generally limits discussion to litigation filed, resolved, or resulting in a noteworthy development in approximately the last year and a half.


Unquestionably, most of the cases involving managed care litigation in recent months arose in claims brought by providers against payors. These claims generally concern either the timeliness or amount of reimbursement for medical services, or the means of resolving a dispute over reimbursement, i.e. challenging contractual arbitration clauses.

A.Timing and Manner of Payment

1.Timely Payment

More than thirty states have passed laws requiring managed care organizations (“MCOs”) to pay “clean claims” within a certain period of time or face possible penalties and fines. These laws generally require MCOs to pay clean claims within 15 to 60 days, and often require 9% to 18% annual interest rates to be applied to clean claims not promptly paid. Not surprisingly, prompt pay laws provide fertile ground for litigation between MCOs and providers. Some recent examples are discussed below.

Taheri v. California Physicians Service., No. BC353804 (Cal. Super. Ct., L.A. filed June 12, 2006) is a putative class action brought by two California physicians. The physicians claim Blue Shield of California unlawfully refuses to pay them for seeing patients by placing the physicians in a “special audit” program. The program requires patients to call the plan to respond to questions describing their visit and the procedures before authorizing payment. The physicians claim this practice violates California’s Knox-Keene Health Care Service Plan Act of 1975 requiring claim payment within 30 days, violates other state law, and amounts to a breach of contract.2 Plaintiffs assert two counts: breach of contract and “unlawful, unfair and fraudulent business acts and/or practices in violation of Calif.Business & Professions Code §§ 17200, et seq.” See also, Rosenberg v. BlueCross BlueShield of Tn., Inc., No. M2005- 01070-COA-R9CV, 2006 WL 3455209 (Tenn. Ct. App. Nov. 29, 2006), discussed below in the Arbitration section, for another case involving physicians’ allegations of “special audit” programs or physician “profiling” for “high utilizers.”

See also, Sutter v. Oxford Health Plans LLC, No. 05 5223, 2007 WL 625625 (3rd Cir. Feb. 28, 2007) (affirming district court’s denial of motion to vacate arbitrator’s award absent a manifest disregard of the law), discussed below in the Arbitration section, for another case involving a provider’s prompt pay claim.

2.Proper Payment

A lawsuit related to Sutter v. Oxford Health Plans by the same Plaintiff and attorney against Horizon Blue Cross Blue Shield of New Jersey settled on October 16, 2006. In that case, Sutter v. Horizon Blue Cross Blue Shield of New

2 The Knox-Keene Health Care Service Plan Act of 1975, as amended, sets forth the requirements that HMOs must follow. See Cal. Health & Safety Code § 1340.

Jersey, Inc., No. L-3685-02 N.J. Super. Ct., Essex County, Plaintiffs made similar allegations as they made against Oxford Health Plans, including improper bundling of claims, unilateral and retroactive reductions, and “downcoding.”

Key settlement terms by New Jersey Blue Cross include making fee schedules for common procedures available electronically to participating physicians, disclosing “significant automated edits” used to process physician claims, providing 90 days notice to participating physicians of material changes to its contracts, policies and procedures, and allowing participating primary care physicians to close their practices to new patients covered by Blue Cross of New Jersey. Additionally, Blue Cross agreed that most fees shall not be reduced for participating physicians more than once a year, if at all, and agreed not to recover for overpayments to physicians after more than 18 months of the original payment. See Settlement Agreement.

See also, Edward Collins, M.D., et al. v. Anthem Health Plans Inc., No. X06CV990156198S, Slip op. (Conn. Super. Ct., Waterbury Jud. Dist. Feb. 7, 2007) (dismissal of class claims filed by orthopedic surgeon group against insurer finding that individual physicians lacked standing since physician groups signed the participating provider agreements and harm to individual physicians was indirect).

In a case somewhat unique to New York’s healthcare regulatory scheme, the Second Circuit upheld a grant of summary judgment to Horizon Blue Cross and Blue Shield of New Jersey on claims by hospitals seeking increased reimbursement under New York’s three-tier provider reimbursement rate in effect from 1991 through 1996. The court upheld the one-year limitation for filing claims found in the contracting hospital agreements (CHAs) with Horizon. For the hospitals without CHAs, the appeals court ordered the district court to determine whether the claims, based on implied-in-fact contracts, were time barred or waived by the hospitals’ acceptance of the lower rates. See Beth Israel Med. Ctr. v. Horizon Blue Cross & Blue Shield of N.J., Inc., 448 F.3d 573 (2nd Cir. 2006).

3.MDL Class Action

In re: Managed Care Litigation, MDL No. 1334 (S.D. Fla.).3 Approximately 700,000 physicians and medical societies, certified as a class, brought this lawsuit against several managed care organizations. The court certified the class of providers but denied class certification of the MCO subscribers. The physician plaintiffs valued the lawsuit at over $1 billion.

The provider class claimed that the MCOs violated RICO and various state statutes by systematically reducing or denying payments in an alleged conspiracy with the provider of the claims processing software that many of the defendants used to verify claims. The court dismissed certain prompt pay claims under state statutes that do not provide for an express or implied private right of action, but found that the plaintiffs made sufficient allegations in their amended complaint to allege an association-in-fact enterprise for purposes of RICO liability. For a detailed description of the facts and procedural background of this litigation, see the Eleventh Circuit’s decision affirming in part the district court’s initial class certification order, Klay v. Humana, Inc., 382 F.3d 1241 (11th Cir. 2004).

Several defendants settled with the Plaintiffs prior to the Court’s June 2006 summary judgment order. For a summary of the final settlements, see (last visited April 18, 2007).

The court granted summary judgment to PacifiCare Health Systems, Inc., and most recently, on June 19, 2006, to the last remaining defendants, Coventry and United. See In re Managed Care Litig., 430 F. Supp. 2d 1336 (S.D. Fla. 2006). The court found that plaintiffs had not presented sufficient evidence by which a jury could find that United and Coventry had engaged in a conspiracy for the alleged underpayments. Responding to the plaintiffs’ reliance on the defendants’ alleged parallel conduct to show a conspiracy, the court observed that “[e]ach Defendant undoubtedly had an economic interest in decreasing physician costs. Consequently, the Defendants' allegedly parallel conduct is as easily explained by their theory of rational independent action as by the Plaintiffs' theory of concerted action.” 430 F. Supp. 2d at 1348.

Notably, at the outset of its order granting summary judgment, the court wrote: [T]he Court is not giving its imprimatur to the Defendants' actions or to the tremendous amounts of compensation received by their executives, described by some as exorbitant. But any reform related to executive compensation or individual practices by the health maintenance organizations is beyond the power of this Court. Those desiring changes in the way health care is provided in America must either look for remedies before Congress or allow the free market to dictate the results. 430 F. Supp. 2d at 1340 (emphasis added). The court’s opinion harkens to the opening line of Kolari v. New York-Presbyterian Hospital., 382 F. Supp. 2d 562 (S.D.N.Y. 2005), vacated in part, 455 F.3d 118 (2nd Cir. 2006) from the Not-for- Profit Hospital Litigation: “Plaintiffs here have lost their way; they need to consult a map or a compass or a Constitution because Plaintiffs have come to the judicial branch for relief that may only be granted by the legislative branch.” Both opinions reveal a hesitation of federal courts to employ civil litigation as a means of reforming the nation’s healthcare system.

B.Quality and Credentialing

In Washington State Medical Associates v. Regence Blue Shield, No. 06- 230665-1SEA (Wash. Super. Ct. filed Sept. 21, 2006), the medical association sued the insurer alleging unfair and deceptive business practices, defamation, libel, intentional interference with commerce, and breach of contract. The dispute arose following the insurer’s decision to exclude approximately 500 physicians from its “Select Network Program.” The association disputes the methodology the insurer used to select the physicians in its program. The association seeks an injunction against the insurer to prevent implementation of the program, and seeks monetary damages for alleged inaccurate statements to patients regarding certain physicians’ failure to meet the insurer’s quality and efficiency standards required by the program. In November 2006, a coalition of the American Medical Association and state medical associations, called the American Medical Association Litigation Center, joined the lawsuit as co-plaintiff.

C.Class Action Fairness Act of 2005

Congress passed the Class Action Fairness Act of 2005 (“CAFA”) to address perceived abuses in class action litigation. A general goal was to keep class actions of national importance in federal court and shield out-of-state defendants from a perceived bias in state courts.

In Eavenson v. Selective Insurance Co. of America, No. 06-731-MJR, 2007 WL 489206 (S.D. Ill. Feb. 12, 2007), No. 06-731, the plaintiff-physician brought a putative class action in Madison County, Illinois state court prior to CAFA’s February 2005 effective date. Generally, plaintiff alleged improper discounting of a class of healthcare providers’ bills for medical services for the defendant-insurer’s patients. In August 2006, after CAFA’s effective date, plaintiff amended his complaint to add new allegations, prompting the defendant- insurer to remove the case under CAFA in September 2006 to federal court. In February 2007, the court granted plaintiff’s motion for remand, finding that the new allegations “related back” to the filing of the original complaint prior to CAFA’s effective date. The court wrote that “[t]he criterion of [the] relation back [doctrine] is whether the original complaint gave the defendant enough notice of the nature and scope of the plaintiff’s claims that he shouldn’t have been surprised by the amplification of the allegations of the original complaint in the amended one.” Id. at *3.

D.California Provider/Plan Litigation

California has seen a host of suits by providers or provider associations against health plans in the last year. At least five suits were filed in recent months.

1.Rescission of Benefits a/k/a “Post-Claims Underwriting”

At least three suits are pending against WellPoint and Blue Cross of California for allegedly rescinding individual health benefits after medical services have been provided. The cases are Horton v. Wellpoint, Inc., No. BC341823 (Cal. Super. Ct. filed October 24, 2005) Coast Plaza Doctors Hospital v. Wellpoint Health Networks Inc., No. BC360235 (Los Angeles Super. Ct., Cent. Civ. W. (Complex Div.), Dept. 16 filed Dec. 15, 2006); and Memorial Health Services Inc. v. WellPoint Health Networks Inc., No. BC352012 (Cal. Super. Ct. filed May 8, 2006).

Plaintiff in the Coast Plaza case is a hospital challenging Blue Cross’ alleged rescission of members’ coverage. Plaintiffs in the Memorial Health case are several Los Angeles area hospitals including Long Beach Memorial Medical Center, Anaheim Memorial Medical Center, Miller Children’s Hospital, and Orange Coast Memorial Medical Center. Plaintiffs in the Horton suit are individuals, but the Coast Plaza plaintiff hospital and the California Medical Association (“CMA”) filed motions to intervene in December 2006. The CMA contends that “[t]he Patient Class seeks monies from Blue Cross that belong to the CMA Physicians . . . by virtue of their status as assignees.” In January 2006, the court concluded that Coast Plaza and Horton were related cases, and stayed the cases to allow settlement negotiations.

These class actions charge that Blue Cross of California improperly rescinded individual health policies after the individuals filed claims for extensive healthcare services, and failed to pay the healthcare providers for the treatment already provided to those individuals on grounds that the patients were not eligible for the service. According to the complaints, because most of the patients whose policies get rescinded lack the resources to pay the providers’ bills, the cost of the services allegedly authorized by Blue Cross falls on the providers.

The California Dept. of Managed Health Care is also looking into the issue of “post-claims underwriting,” which the Department contends is prohibited by Cal. Health & Safety Code §§ 1389.3 and 1371.8.

2.Incentivized Payment Policies

In California Hospital Assn. v. Blue Cross of California., No. BC353609 (Cal. Super. Ct., L.A. County filed June 8, 2006) the California Hospital Association (“CHA”), which represents approximately 400 hospitals in California, sought an injunction to block Blue Cross’ implementation of a new payment policy for endoscopic procedures. The policy rewards physicians for performing such procedures in ambulatory surgical centers (“ASCs”), and penalizes physicians who perform them in hospitals. The court found that CHA failed to prove that the policy would create countervailing financial considerations that would prevent physicians from exercising their professional judgment, which was CHA’s chief contention. The court determined in ruling on plaintiff’s motion for a preliminary injunction that it was “not satisfied that the payment policy at issue is any different than any other pay policy routinely adopted by health care service plans throughout California.” See Court’s Ruling and Order Re: Plaintiffs’ Motion for Preliminary Injunction, August 1, 2006, p. 10. Further, the court held that even if CHA had met its evidentiary burden, in light of California’s “statutory and regulatory scheme governing health care service plans,” the court would have adopted “the doctrines of primary jurisdiction and equitable abstention in this case.” Id. at 18. Thus, it is not just federal courts, see section I.A.4., supra., that have recently shown hesitancy in promoting healthcare reform through litigation.

In a related development, the Wall Street Journal reported on April 10, 2007 that UnitedHealth has implemented a new policy whereby it may fine physicians for referring patients to out-of-network laboratories for tests. According to the article, UnitedHealth’s network includes approximately 520,000 physicians. The new policy arises from a 10-year agreement under which Laboratory Corp. of America Holdings will serve as UnitedHealth’s national in- network laboratory. See Vanessa Fuhrmans, Doctors Assail UnitedHealth's Threat of Fines, WALL STREET JOURNAL, April 10, 2007, at B1.

3.Workers’ Compensation Reimbursement

In Henstorf, M.D. v. Wellpoint Health Networks Inc., No. BC367524 (Cal. Super. Ct., L.A. County filed March 8, 2007), a group of California physicians filed a putative class action against Wellpoint, Blue Cross of California, and the California State Compensation Insurance Fund, alleging a conspiracy to pay physicians who treat workers’ compensation patients at below market rates. The physicians’ claims rest on an alleged recognition by the state that workers’ compensation patients cost more to treat. According to the physician plaintiffs, the state addresses this by offering higher fees for these services in its Official Medical Fee Schedule (OMFS). Plaintiffs contend that Blue Cross has paid its member physicians less than the OMFS fees.

E.Litigation Over Plan’s Contract Negotiation Tactics

While payor / provider litigation usually erupts over payment issues, litigation recently erupted in Georgia regarding a plan’s conduct during contract negotiations. In June 2006, a major Atlanta healthcare system (the “hospital”) and one of Georgia’s largest plans found themselves in tense negotiations over the renewal of their managed care contracts. The contracts had expired June 1, 2006, putting the hospital out of the plan’s network.

During the negotiations, the plan ran full-page advertisements in the Atlanta-Journal Constitution (“AJC”) about the hospital’s network status and the ability of plan members to seek care from the hospital. Similar statements appeared in mass mailings to the hospital’s patients. The hospital filed suit against the plan in the Superior Court of Fulton County, seeking a temporary restraining order against continued ads and mailings. The hospital asserted claims for false advertising, unfair and deceptive trade practices, breach of contract, and tortious interference with business relations. The court granted the TRO. A subsequent proceeding ensued when the hospital charged the plan with failing to comply with the injunction. The Court ordered the plan to run advertisements in the AJC and send mailings to its members correcting the plan’s prior statements about the hospital. In August 2006, the parties settled the litigation in conjunction with an agreement on a contract renewal. See Piedmont Mountainside Hosp., Inc v. Blue Cross and Blue Shield of Georgia, Inc., Civil Action File No. 2006 CV 118077 (Super. Ct. of Fulton County, Ga.).

F.Out-Of-Network / Non-Participating Provider Lawsuits

Litigation by out-of-network, or non-participating, providers constitutes a significant share of litigation against payors. Recent cases have focused on whether a private right of action exists under state laws requiring providers to provide emergency care, the amount of reimbursement that payors must pay, and non-participating providers’ ability to sue as third-party beneficiaries of plan members’ policies.

1.Implied contracts between the plan and non- participating provider

In Prospect Medical Group, Inc. v. Northridge Emergency Medical Group, 39 Cal. Rptr. 3d 456 (Cal. Ct. App. 2006), superseded by 136 P.3d 167 (Cal. 2006) (on appeal to Calif. Supreme Court), Prospect, the delegate of a health plan, sought a declaratory judgment that 100% of the Medicare rate was a “reasonable” fee to pay non-contracting providers of emergency services. Prospect also sought a declaration that the non-contracting providers could not balance bill the plan members for amounts above the Medicare rate. Prospect alleged that § 1379 of California’s Knox-Keene Health Care Service Act of 1975 prevented the non-contracting provider from balance billing due to an implied contract with the plan. This case is a bit unusual in that the plan (through its delegate) alleged the existence of an implied contract with the provider, rather than the provider alleging an implied contract. See Baycare Health Sys., infra.

The California Court of Appeal affirmed the trial court’s dismissal of Prospect’s claim. First, the court held that the Knox-Keene balance billing prohibition only applied to “traditional contractual principles such as a meeting of the minds” with “physicians who have freely negotiated a contract” with a plan, and did not include implied contracts. Id. at 462. The court gave great deference to the California Department of Managed Health Care (DMHC), which had promulgated a regulation requiring plans to advise subscribers that “the member may be liable to the noncontracting provider for the cost of the services.” Id. at 464.

Second, the court rejected Prospect’s request for a declaration that the Medicare rate was per se “reasonable” for emergency room physicians. Instead, the court again looked to DMHC and adopted its regulatory six factor test to determine reasonableness. These factors consider: (1) the provider’s qualifications, (2) nature of services provided, (3) fees usually charged by the provider, (4) prevailing provider rates in the area, (5) “other aspects of the economics of the medical provider’s practice that are relevant”, and (6) “any unusual circumstances in the case.” Id. at 466, n. 10. Although finding against Prospect on its claims that the Medicare rate was per se “reasonable,” the court held that Prospect should have been allowed leave to amend its claims in order to litigate what amount was “reasonable,” and remanded the case for that purpose.

The California Supreme Court granted Prospect’s petition for review on May 24, 2006, which appeal is pending. See Prospect Med. Group v. Northridge Emergency Med. Group, 136 P.3d 167 (Cal. 2006).

2.Amount of Reimbursement to Non-Contracting Providers

Emergency Care.

Courts are increasingly being asked to determine the appropriateness of the amount payors have reimbursed a non-contracting provider for medical services. In doing so, courts have looked to federal and state statutes and regulations for guidance. Medicare regulations provide some criteria for determining what rate is reasonable and customary. See 42 CFR §§ 405.502. “The criteria for determining what charges are reasonable include:

  1. The customary charges for similar services generally made by the physician or other person furnishing such services.

  2. The prevailing charges in the locality for similar services.

  3. In the case of physicians' services, the prevailing charges adjusted to reflect economic changes as provided under Sec. 405.504 of this subpart.

  4. In the case of medical services, supplies, and equipment that are reimbursed on a reasonable charge basis (excluding physicians' services), the inflation-indexed charge as determined under Sec. 405.509.

  5. In the case of medical services, supplies, and equipment (including equipment servicing) that the Secretary judges do not generally vary significantly in quality from one supplier to another, the lowest charge levels at which such services, supplies, and equipment are widely and consistently available in a locality.

  6. Other factors that may be found necessary and appropriate with respect to a category of service to use in judging whether the charge is inherently reasonable. . . .

  7. In the case of laboratory services billed by a physician but performed by an outside laboratory, the payment levels established in accordance with the criteria stated in Sec. 405.515. . . . 42 CFR §§ 405.502 (2006).

As discussed above, the California Court of Appeals employs a six- factor test to determine what rates are reasonable and customary. See Prospect Med. Group, Inc., 39 Cal. Rptr. 3d at 466, n. 10. Maryland has a statute governing reimbursement to non-participating providers that treat HMO plan members for emergency and trauma services, requiring 125% of contract physician rates for similarly licensed providers in the same region. See Md. Code Ann., Health - General, § 19-710.1.

Florida also has a statute addressing non-participating provider reimbursement. Fla. Stat. § 641.513(5) provides:

Reimbursement for services pursuant to this section by a provider who does not have a contract with the health maintenance organization shall be the lesser of:

  1. The provider's charges;

  2. The usual and customary provider charges for similar services in the community where the services were provided; or

  3. The charge mutually agreed to by the health maintenance organization and the provider within 60 days of the submittal of the claim.

Such reimbursement shall be net of any applicable copayment authorized pursuant to subsection (4). Fla. Stat. § 641.513(5) (2006).

Several recent Florida cases have addressed this issue. Among them is Adventist Health System/Sunbelt, Inc. v. Blue Cross & Blue Shield, 934 So. 2d 602 (Fla. 5th DCA 2006). Here, a Florida hospital system sought a declaratory judgment against an HMO under Fla. Stat. § 641.513(5)(b) (quoted above), requesting the court to declare that the HMO must pay the hospital’s “full billed charges because they are the ‘usual and customary provider charges for similar services in the community.’” Id. at 603. The District Court of Appeal reversed the trial court’s grant of judgment on the pleadings, finding an implied private right of action in the statute, or, alternatively that “common law theories are available,” citing Westside EKG Assocs. V. Found.Health, 923 So. 2d 214 (Fla. 4th DCA 2005), discussed below.

Riding on the heels of Adventist, in Merkle v. Health Options, Inc., 940 So. 2d 1190 (Fla. 4th DCA 2006), a physician practice claimed several HMOs failed to adequately reimburse it for out-of-network emergency services where the HMOs paid a percentage of the Medicare rate. Citing Adventist, the appellate court reversed a dismissal of the physicians’ claims under § 641.513, discussed above. The court stated in adopting Adventist’s analysis:

. . . unlike [the emergency services statute], each of the statutory provisions at issue in [other cases the court distinguished where no private right of action was found] were aimed specifically at protecting the public as an entity; i.e.: preventing negligence, unfair and deceptive trade practices and bad faith. [The emergency services statute] is aimed at protecting non-participating providers who must provide emergency medical services to HMO subscribers, ensuring they are compensated fairly. Merkle, 940 So. 2d at 1196 (citations omitted). Based on this reasoning, the court found a private right of action under the statute, and also reversed the dismissal of claims for unjust enrichment and quantum meruit.

In Foundation Health v. Westside EKG Associates, 944 So. 2d 188 (Fla. 2006), the Florida Supreme Court held that a non-participating provider, of both emergency and non-emergency care, could maintain a claim as a third-party beneficiary for a plan’s alleged breach of its member contract. Here, a physician practice group providing imaging procedures claimed that the defendant-plan violated the “prompt pay provisions” of Florida’s HMO Act. Id. at 191. The Court was careful to hold that this allegation alone did not support a claim because “[t]he HMO Act does not expressly authorize a private cause of action to enforce its provisions.” Id. at 194. However, the court concluded that the basis of the claim at issue was that the violation of the statute constituted a breach of contract between the plan and its members, and that the physician providers were third- party beneficiaries of those contracts. Id. at 191. The court concluded that given the significant statutory regulation surrounding HMO contracts and the integral role that “prompt pay provisions” play in them, section 641.3155 may be incorporated into the HMO contract. Then, recognizing that medical service providers previously have been considered intended beneficiaries of insurance contracts under Florida law, we extend the same recognition to HMO contracts.

Id. at 194.

A different result was reached in Electrostim Medical Services, Inc. v. Aetna Life Insurance Co., No. 8:06-cv-14-T-24TBM, 2007 WL 470481 (M.D. Fla., Feb. 13, 2007). The court granted the defendant plan’s motion to dismiss a claim by a medical products provider alleging a private right of action under Florida’s HMO Act. In this case, the medical products provider sued the plan alleging that the plan failed to process claims as required by the Florida HMO Act. Plaintiff argued its right to sue flowed from its purported status as a third-party beneficiary of the contracts between the plan and its members, which contracts incorporate the Act’s prohibition against unfair or deceptive trade practices. Id. at *2. The court disagreed, and citing Foundation Health v. Westside EKG Associates, discussed above, held that while a common law right of action for breach of contract may exist, as Plaintiff alleged in a separate claim, the count at issue was a statutory cause of action for relief from violations of the Florida HMO Act, and no such private right of action existed. Electrostim Med. Servs., Inc., 2007 WL 470481, at *3.

b.Non-Emergency Care

Payors won a victory in a Texas dispute over “out-of-network” services. In Quality Infusion Care, Inc. v. Health Care Service Corp., No. 01-05-00753-CV, 2006 WL 2974351 (Tex. App. Oct. 19, 2006), a provider of infusion chemotherapy sued for non-payment of claims for which it failed to obtain pre- certification. The payor, a Blue Cross and Blue Shield of Texas affiliate, counterclaimed for claims it deemed mistaken payments for non-pre-certified services. Here, the provider had a contract with Blue Cross to provide services to certain members, but did not enter into Blue Cross’ in-network provider agreement, which required discounted rates, and consequently, according to Blue Cross, was not an “in-network provider.” The provider claimed its contract, which used the term “Provider,” made it an in-network provider.

The courts disagreed. Following a bench trial, the trial court found against the provider and awarded Blue Cross damages for its counterclaim, as well as attorney’s fees. The appellate court affirmed. Although the contract was ambiguous as to the meaning of “Provider,” Blue Cross sent the provider two letters, both prior to and after the effective date of the contract, expressly stating that the provider was not considered an “in-network” provider. Also significant to the court’s opinion, the provider had previously rejected Blue Cross’ offer to execute an in-network provider contract. See also S. Jersey Hosp., Inc. v. Correctional Med. Servs., No. CIV. 02-2619 (JBS), 2005 WL 1410860 (D.N.J. June 15, 2005) (in the absence of agreement on a price term, no implied contract existed between the parties as a matter of law and, at best, the hospital would be entitled to recover no more than the reasonable value of its services under a theory of unjust enrichment or quasi contract). See also, Foundation Health v. Westside EKG Assocs., 944 So. 2d 188 (Fla. 2006), discussed above, which concerns both emergency and non- emergency care.

G.Arbitration Clauses & Alternative Dispute Resolution

Alternative dispute resolution (ADR), including arbitration and mediation, plays a prominent role in managed care litigation. Payor contracts typically include arbitration clauses, and litigation often arises regarding their enforceability.

1.Decisions Enforcing Arbitration Clauses

Sutter v. Oxford Health Plans LLC, No. 05 5223, 2007 WL 625625 (3rd Cir., Feb. 28, 2007), is an offshoot of the MDL Managed Care Litigation. See § I.A.4. The case began in August 2002 when a New Jersey pediatrician filed a class action against Oxford and other health insurers in New Jersey Superior Court. Sutter complained of untimely payments in violation of New Jersey’s Prompt Payment Law, improper “bundling” and “downcoding” of procedures, and refusal to recognize code modifiers. Id. at *1. Oxford moved to compel arbitration. The case was severed as to each defendant. Three of the defendants, Cigna, United and HealthNet, removed their cases to federal court, and were transferred to the S.D. Fla. MDL. The arbitrator in Oxford’s case granted Sutter’s motion for class certification. Oxford filed a motion in district court to vacate, arguing in part that the parties’ contract, which adopted the AAA Rules, envisioned a de novo judicial review of the arbitrator’s award “at least as to whether proper legal standards have been applied and followed.” Id. at *2. The district court disagreed, and denied the motion to vacate based on an “extremely deferential” standard of review. The Third Circuit affirmed, holding that the arbitrator’s decision “may not be vacated simply because the arbitrator made an error of law, but only because the arbitrator’s decision evidences manifest disregard for the law.” Id. at *2 (internal citation omitted).

In Rosenberg v. BlueCross BlueShield of Tennessee, Inc., No. M2005- 01070-COA-R9CV, 2006 WL 3455209 (Tenn. Ct. App. Nov. 29, 2006), the court upheld the arbitration clause at issue based on the class-wide relief sought. Two Tennessee physicians brought a putative class action against the Tennessee Blue Cross plan complaining of “bundling,” “downcoding,” and failure to honor code modifiers. Both physicians had entered into the plan’s standard Participating Provider Agreement, which contained arbitration clauses for “ALL DISPUTES.” Id. at *20. The physicians sought to avoid the arbitration clauses on two grounds. First, they argued that the contracts were contracts of adhesion given Blue Cross’ 20-40% market share in Tennessee. Second, the physicians argued that the costs of Blue Cross’ arbitration procedure were so expensive as to make the right to arbitration illusory. The trial court rejected both arguments. On appeal, the Tennessee Court of Appeals focused on the second argument, but found it unconvincing in light of the expansive, class-wide relief, including injunctive relief, sought in the complaint. The court acknowledged that the requisite arbitration procedures might be cost prohibitive to redress small claims by the individual physicians, which aggregated only $4,000 spread over two years. The court noted that the complaint, however, alleged improper and deceptive conduct affecting a class of physicians and claimed millions of dollars of damages. The court wrote, “What might be prohibitive when a $4,000 claim is in issue would certainly not be prohibitive when millions of dollars and vast injunctive relief are actually in issue.” Id. at *20.

2.Decisions Not Enforcing Arbitration Clauses

Contrary to Rosenberg, which enforced class arbitration, in Hawaii Medical Ass’n v. Hawaii Medical Service Ass’n, 148 P.3d 1179 (Haw. 2006), reconsideration denied, 144 P.3d 560 (Haw. 2006) the Hawaii Supreme Court found that the arbitration clause was not enforceable in this case precisely because the relief sought was class-wide. The Hawaii Medical Association (“HMA”) and the putative class representative physician-plaintiffs (whose appeal was consolidated with HMA’s) asserted claims against the Hawaii Medical Service Association (“HMSA”) for violation of Hawaii’s tortious interference statute, alleging that HMSA engaged in unfair methods of competition and “delayed, impeded, denied or reduced reimbursement” owed to HMA's physician members. Id. at 1183. The high court reversed the lower court and held that the parties’ arbitration clause did not apply because it did not provide for class arbitration, and the plaintiffs were proceeding collectively. The court held that the dispute resolution clause only contemplated disputes between single physicians and the health plan over a dispute arising from a decision of the plan.

Similarly, Kansas City Urology Care, P.A. v. Blue Cross & Blue Shield of Kansas City, Inc., No. 0516-CV04212 (Cir. Ct. of Jackson County, Mo. filed Dec. 4, 2006), was brought by a group of physicians and physician organizations asserting a putative class action against health insurance providers alleging price fixing and conspiracy. The court denied the defendant-payors’ motions to compel arbitration based on clauses in the various provider agreements. Generally, the court found that the broadly-worded arbitration clauses either did not specifically address the allegations at issue, including conspiracy and antitrust allegations, or did not address the issue of joinder and class action. The court found some of the clauses unenforceable as against public policy due to their breadth. The court, however, granted defendants an interlocutory appeal, and indeed, on January 5, 2007, re-designated its order as a “judgment” to improve the chances of immediate appellate review.

A recent opinion from Washington’s Supreme Court held that two Washington statutes absolutely proscribed binding ADR in healthcare provider / payor contracts. See Kruger Clinic Orthopaedics, LLC v. Regence BlueShield, 138 P.3d 936 (Wash. 2006). Two groups of orthopaedic surgeons filed separate suits against two different payors. Each plaintiff had entered into a provider agreement with a mandatory arbitration clause.

Two Washington statutes, however, provided for health carriers to file with the insurance commissioner its procedures for adjudicating provider complaints, and required those procedures to be “a fair review” that “may be submitted to non-binding mediation.” Id. at 939. The court found that two Washington state statutes “prohibit health insurance carriers from requiring providers to engage in ‘alternative dispute resolution to the exclusion of judicial remedies.’” Id. at 937. (emphasis in original). The court further found that the Federal Arbitration Act did not preempt the state statutes because it found that § 2(b) of the federal McCarran-Ferguson Act “shielded from FAA preemption” any state statute passed “for the purpose of regulating the business of insurance.” Id. at 939 (quoting the McCarran-Ferguson Act).

3.Statutory Third-Party Claims Resolution

Although not involving arbitration, a recent Florida case is analogous to the arbitration process. The case held that a hospital system that elected to assert its claims through a statutory third-party claims resolution entity could not challenge a state agency’s administrative ruling enforcing the third-party claims resolution entity’s findings, which were adverse to the hospital. See Baycare Health Sys., Inc. v. Agency for Health Care Admin., 940 So. 2d 563 (Fla. 2nd DCA 2006). The hospital challenged the amount of an HMO’s reimbursement of out-network-services that the hospital had provided to the HMO’s members, mostly involving emergency services. Id. at 565. To resolve the dispute, rather than filing a lawsuit, the hospital filed claims with an independent, third-party claim-dispute-resolution organization with whom the Florida Agency for Health Care Administration (“AHCA”) had contracted pursuant to a state statute. The claims organization sided with the plan and awarded the hospital a percentage of the Medicare rate instead of the hospital’s billed charges, and AHCA issued orders enforcing this ruling.

The Florida Second District Court of Appeal ruled that the hospital could not challenge AHCA’s orders implementing the claims organization’s findings, and agreed with the lower court that the hospital did not suffer a due process violation. “Baycare can only blame itself for the inadequacies of the forum that it selected”. Id. at 569. The court ruled that since the hospital voluntarily availed itself of the process provided for under Fla. Stat. § 408.7057, no due process of law occurred. See also, Health Options, Inc. v. Agency For Health Care Admin., 889 So. 2d 849 (Fla. 1st DCA 2004) (related case); Jacksonville Emergency Consultants, P.A. v. Vista Health Plan, 941 So. 2d 1262 (Fla. 1st DCA 2006) (per curiam opinion citing Baycare Health Sys.).

H.ERISA Preemption in the context of provider / payor litigation

ERISA preemption in the context of provider / payor litigation often arises when a payor removes a case filed against it to federal court on the basis of preemption pursuant to the Employment Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. § 1001. ERISA can come into play to the extent the claims at issue involve healthcare services provided to enrollees of ERISA-qualified plans, typically self-insured plans offered by employers for the benefit of their employees.

1.Complete Preemption

The basis for removal to federal court under ERISA is referred to by the courts as “complete preemption,” (or sometimes as “super preemption”) and applies when the plaintiff is seeking relief that is available under 29 U.S.C. § 1132(a). See, e.g., Butero v. Royal Maccabees Life Ins. Co., 174 F.3d 1207, 1212 (11th Cir. 1999). The party seeking removal must demonstrate three elements: (i) there must be a relevant ERISA plan; (ii) plaintiff must have standing to sue under the plan (e.g. a participant); and (iii) the complaint must seek relief akin to that available under ERISA (see 29 U.S.C. § 1132(a)). Aetna Health Inc. v. Davila, 542 U.S. 200 (2004).

In most cases, a plan or insurer will prefer to have the claims considered as ERISA claims in federal court. For example, as a general rule, plan benefit determinations are reviewed under ERISA pursuant to an “arbitrary and capricious” standard, with a less deferential standard used where there is a conflict of interest involved (e.g., an administrator with a financial interest in the plan). See McGraw v. Prudential Ins. Co. of Am., 137 F. 3d 1253, 1258 (10th Cir. 1998). There is no right to a jury trial in ERISA cases. See, e.g., Broaddus v. Fla. Power Corp., 145 F.3d 1283, 1287 (11th Cir. 1998). In addition, the plaintiff is not entitled to extra-contractual damages. See Mertens v. Hewitt Assocs., 508 U.S. 248 (1993).

2.Conflict Preemption

A second type of preemption exists under ERISA referred to as conflict preemption, also sometimes referred to as “defensive” or “express” preemption.

The party seeking removal must demonstrate two elements: (i) there must be a relevant ERISA plan; and (ii) the complaint must raise claims that “relate to” the ERISA plan (see 29 U.S.C. § 1144(a)). In a recent conflict preemption case, the Fourth Circuit found that Maryland’s Fair Share Health Care Fund Act “relates to” ERISA plans and is, therefore, defensively preempted because it affects how the employers covered by the act structure their ERISA plans. The act required employers with 10,000 or more employees that spend less than 8% of total wages on health insurance to pay the difference to the State of Maryland. See Retail Indus. Leaders Ass’n v. Fielder, Nos. 06-1840, 06-1901, 2007 WL 102157 (4th Cir. Jan. 17, 2007).

Courts have found that independent state law claims of providers brought against third-party payors are not preempted by ERISA. See, e.g., In Home Health, Inc. v. Prudential Ins. Co. of Am., 101 F.3d 600, 606 (8th Cir. 1996); Lordmann Enters., Inc. v. Equicor, Inc., 32 F.3d 1529 (11th Cir. 1994). Preemption, however, may be available where the provider sues as an assignee of the plan beneficiary. See, e.g., Misic v. Bldg. Serv. Employees Health & Welfare Trust, 789 F.2d 1374, 1378 (9th Cir. 1986). The district court for the Southern District of Florida, in In re Managed Care Litigation, 135 F. Supp. 2d 1253 (S.D. Fla. 2001), summarized the rationale of those courts which have declined to extend the preemptive reach of ERISA to independent claims of providers.

Maryland announced on April 16, 2007 that it would not appeal the Fourth Circuit’s ruling. See Erin Marie Daly, Maryland Backs Down In “Wal-Mart Law” Fight, HEALTH LAW 360, April 18, 2007.

In Lordmann Enterprises, Inc. v. Equicor, Inc., 32 F.3d 1529 (11th Cir. 1994), the Eleventh Circuit agreed with the position of Memorial Hosp. Sys. v. Northbrook Life Ins. Co., 904 F.2d 236 (5th Cir. 1990), that ‘state law claims brought by health care providers against plan insurers too tenuously affect ERISA plans to be preempted by the act.’ Lordmann Enterprises, 32 F. 3d at 1533. In this case, the Provider Plaintiffs assert that they seek to enforce the terms and conditions of their own contracts with the Defendants, rather than assignments from ERISA beneficiaries. Amended Complaint, ¶ 297. See also, Variety Children’s Hospital, Inc. v. Blue Cross/Blue Shield, 942 F. Supp. 562, 568 (S.D. Fla. 1996) (claim not preempted where provider plaintiff brought suit in its independent status as a third-party rather than as an assignee of benefits). The Plaintiffs allege that the Defendants engaged in bundling and downcoding, actions which might sustain a breach of contract claim without a need for reference to the interpretation of ERISA plans. The Plaintiffs’ state law contract claims therefore do not ‘relate to’ the ERISA plans, and are not preempted by the Act.

The policy arguments set forth in Memorial Hospital and adopted by the Court in Lordmann Enterprises elucidate the wisdom of this result. First, preemption of provider contract claims would ‘defeat rather than promote’ ERISA’s goal to ‘protect the interests of employees and beneficiaries covered by benefit plans.’ Lordmann Enterprises, 32 F.3d at 1533. The Court theorized that as a result of preemption, health care providers could no longer rely as freely on the representations of insurers and would therefore act to protect themselves by denying care or raising fees. Id. Second, health care providers are not within the scope of ERISA. Id. Although employer and employees traded their right to bring a state cause of action in exchange for the benefits of ERISA, the statute does not provide a cause of action for health care providers who treat ERISA participants. In short, preemption of state law claims would leave health care providers with no viable civil remedy. Id. at 1533-34.” Id. at 1268.

Although beyond the scope of this paper, for a recent and more detailed discussion of ERISA preemption with respect to state legislation addressing Medicaid shortfalls and the uninsured, see the March 2007 Member Briefing for the HMO’s and Healthplan’s Practice Group of the American Health Lawyers Association, entitled State Legislative Approaches to Medicaid Shortfalls and the Growing Number of Uninsured and Underinsured: The Preemption of Maryland’s “Fair Share” Legislation Under ERISA, by K. Polvino, J. Burnett, and N. Antia.

3.ERISA’s Savings Clause

Some provider/payor disputes may involve provisions or issues that relate to the “regulation of insurance” and thereby fall into the ERISA “savings clause.” ERISA’s savings clause applies to state laws which “regulate insurance” and are thus saved from ERISA preemption. See 29 U.S.C. § 1144(b)(2)(A). The Supreme Court unanimously affirmed the Sixth Circuit’s opinion that ERISA’s savings clause saved from preemption Kentucky’s “any willing provider” laws relating to the rights of providers to participate on HMO provider panels. Kentucky Ass’n. of Health Plans, Inc. v. Miller, 538 U.S. 329 (2003).

4.Recent Cases finding no ERISA Preemption

In Riverside Medical Associates v. Humana, Inc., No. 06-61490-CIV- COHN, 2006 WL 3827541 (S.D. Fla., Dec. 28, 2006), the court held that ERISA did not preempt the provider plaintiff’s state claims because the plan failed to prove that the provider had standing to sue under the plan. The plan contended that the plaintiff had “derivative standing” to sue under ERISA by virtue of a written assignment of claims. Id. at *2. As the party seeking removal, however, the defendant plan had the burden of showing the plaintiff’s standing to sue under ERISA. The court interpreted the Eleventh Circuit’s opinion in Hobbs v. Blue Cross Blue Shield of Alabama, 276 F.3d 1236, 1241 (11th Cir. 2001), as “unequivocally requiring a written assignment of ERISA benefits” in order for a provider to have derivative standing under ERISA. Riverside, 2006 WL 3827541, at *2. Since the record did not contain the purported written assignment of claims, the court found that the plan did not meet its burden.

A federal district court in Texas held that ERISA does not preempt a hospital's claim that Arkansas Blue Cross Blue Shield, in failing to pay its subscriber's medical bills, violated a since-repealed Texas insurance law that required prompt payment for medical services. The court reasoned that the claim was properly governed by a state prompt payment law that regulated payment by insurers to health care providers, not to plan participants or beneficiaries. The court reasoned that in this particular instance, the hospital was suing to enforce its contract with Blue Cross, rather than suing on behalf of its patient, which suit would be preempted by ERISA. Baylor Univ. Med. Ctr. v. Ark. Blue Cross Blue Shield, 331 F. Supp. 2d 502 (N.D. Tex. 2004).

Louisiana Health Service & Indemnity Co. v. Rapides Healthcare System, 461 F.3d 529 (5th Cir. 2006), cert. denied, No. 06-839, 2007 WL 789099, at *1 (U.S. Mar. 19, 2007) involved a Louisiana assignment statute requiring insurers and employee benefit plans to honor patient benefit assignments to hospitals once put on notice of such assignment. Blue Cross of Louisiana’s member contracts provided that such benefits were not assignable to non-participating providers. When two hospitals complained to the Louisiana Department of Insurance that Blue Cross was not complying with the assignment statute, Blue Cross filed suit seeking a declaratory judgment that the assignment statute was preempted by ERISA. Id. at 531. On summary judgment, the court held that the statute was not preempted because, according to the court, it did not conflict with ERISA’s exclusive enforcement scheme or impermissibly relate to employee benefit plans. Further, the effect of the statute on ERISA’s national uniform plan administration was minimal.

5.Recent Cases finding ERISA Preemption

In Alabama Dental Ass’n v. Blue Cross & Blue Shield of Alabama, Inc., No. 205-CV-1230-MEF, 2007 WL 25488 (M.D. Ala. Jan. 3, 2007), the district court found that ERISA preempted these dentists’ state law claims that Blue Cross of Alabama allegedly engaged in improper billing procedures that violated contractual agreements that Blue Cross had made with either the dentists or their individual patients. The Alabama Dental Association along with two individual dentists, one “in-network” and one “out-of-network,” filed suit in an Alabama state court alleging that Blue Cross engaged in “down coding,” and “bundling” of submitted claims. The Alabama Blue Cross plan removed the case to federal court on the basis that the interpretation of the contracts at issue would implicate matters completely preempted by ERISA; the plaintiffs then filed a motion to remand the case to state court. The district court denied the plaintiffs’ motion to remand, finding that Alabama Blue Cross had provided undisputed evidence that most of the dentists’ Blue Cross patients received their dental benefits under ERISA plans. Thus, the court found that any analysis of Alabama’s Blue Cross’ actions concerning the dental services would necessarily involve these ERISA- covered plans. Moreover, the court found that ERISA preempted the dentists’ claims because their requested relief sought relief similar to that available under ERISA. The court also dismissed the Alabama Dental Association as a plaintiff, finding that the organization lacked standing as a plaintiff, and also granted Alabama Blue Cross’ motion to transfer the case to the Northern District of Alabama where its offices are located.

Advance PCS v. Bauer, 632 S.E.2d 95 (Ga. 2006), cert. denied, 127 S. Ct. 671 (2006), provides an example of a court finding both complete and conflict preemption. In this case, employee benefit plan participants filed a state law class action against prescription drug providers and pharmacy benefit management companies. The employees alleged they had to pay higher copayments because the defendants misclassified a generic drug as a brand name drug. The court held that the action was: (1) preempted under ERISA § 514(a), ERISA’s conflict preemption provision, because the resolution of the plaintiffs’ claims “[were] entirely dependent on the language and terms of the plaintiffs’ ERISA plans;” and (2) completely preempted because the plaintiffs could have brought an ERISA benefits action under ERISA § 502(a)(1)(B) seeking the difference between the generic co-payment and the brand name drug co-payment. The court further held that the plaintiffs could not avoid this result by suing the plan’s pharmacy benefits manager rather than the plan or the plan’s fiduciaries.


​While most managed care litigation between payors and providers arises when providers file suit against payors, a few examples exist of payors filing suit against providers.

In Allstate Insurance Co. v. Valley Physical Medicine & Rehabilitation, P.C., No. 05-5934 (DRH) (MLO), 2007 WL 570130 (E.D.N.Y. Feb. 21, 2007), the insurers claimed that several providers of medical services were fraudulently incorporated under a New York law that prohibited non-physician ownership of medical practices. As a result, the insurers sought to recover payments for medical services made to those providers under New York’s no-fault insurance program, alleging violations of RICO, fraud and other theories. The district court disallowed the insurers’ claims for payments prior to April 2002, when New York amended its insurance regulations to prohibit payments to fraudulently incorporated medical service providers. The court allowed Allstate to amend its complaint “[t]o the extent that Allstate can plead that it issued timely denials . . . or can plead other billing fraud claims not subject to preclusion.” Id. at *10.

See also, Prospect Med. Group, Inc. v. Northridge Emergency Med. Group, 39 Cal. Rptr. 3d 456 (Cal. Ct. App. 2006) (on appeal to Calif. Supreme Court), discussed in § I.F.1, infra. (finding against plan on its claims that the Medicare rate was per se “reasonable”).

See also, La. Health Serv. & Indem. Co., v. Rapides Healthcare Sys., 461 F.3d 529, (5th Cir. 2006), discussed in §, I.H.4, infra. (finding no ERISA preemption in connection with a Louisiana assignment statute requiring insurers and employee benefit plans to honor patient benefit assignments to hospitals).


A.Breach of Fiduciary Duty Under ERISA

Several cases have been brought against pharmacy benefit managers (“PBMs”) alleging that the PBMs are fiduciaries under ERISA and have breached their fiduciary duties. The allegations in most cases are that the PBMs are receiving discounts and rebates from drug manufacturers without disclosing or passing along those amounts. Results have generally been in favor of the PBMs.

In Chicago District Council of Carpenters Welfare Fund v. Caremark Inc., 474 F.3d 463 (7th Cir. 2007), a multi-employer health fund alleged that the PBM breached fiduciary duties by charging the fund higher drug prices than the PBM itself paid and by failing to pass on to the fund the full amount of rebates and discounts. The Seventh Circuit, however, found that the PBM was not an ERISA fiduciary and the multi-employer health fund’s claims were unsuccessful.

In Mulder v. PCS Health Systems, Inc., 432 F. Supp. 2d 450 (D.N.J. 2006), the court held that the PBM was not an ERISA fiduciary and thus did not breach its fiduciary duties under ERISA. The plaintiff, an individual who participated in an employer-sponsored plan administered by an HMO that contracted with the PBM, alleged that the PBM breached fiduciary duties by not passing on rebates and discounts to the plan participants that the PBM had negotiated with drug manufacturers. The court found that the PBM’s actions did not constitute fiduciary functions.

In Glanton ex rel. ALCOA Prescription Drug Plan v. AdvancePCS, Inc., 465 F.3d 1123 (9th Cir. 2006), two participants in employer-sponsored prescription drug plans sued the PBM for breaching its alleged ERISA fiduciary duties by retaining the difference between what the PBM was charging health plans and what it was paying suppliers. Although the Ninth Circuit found that the PBM did qualify as an ERISA fiduciary, the plaintiffs were nonetheless unsuccessful. The court held that the plaintiffs lacked standing to bring a lawsuit as representatives of their plans and that the plaintiffs failed to prove that a favorable outcome in the litigation would likely redress their alleged injuries of higher co-payments and contributions.

Individual plan beneficiaries and trustees brought class actions against PBM Merck-Medco Managed Care, L.L.C., Merck & Co., Inc. and Medco Health Solutions (“Medco”) for alleged breach of fiduciary duties to employee plans under ERISA, resulting in a $42.5 million settlement. The Southern District of New York approved the settlement. The Second Circuit in Central States Southeast & Southwest Areas Health & Welfare Fund v. Merck-Medco Managed Care, L.L.C., 433 F.3d 181 (2nd Cir. 2005), however, vacated the settlement approval, questioning whether the plaintiffs had suffered any injury sufficient for Constitutional standing and remanding the case to the district court for consideration of the plaintiffs’ standing.

In re Express Scripts, Inc. Pharmacy Benefits Management Litigation, No. MDL No. 1672, 2006 WL 2632328 (E.D. Mo. Sept. 13, 2006) involved a fund trustee filing a lawsuit against a PBM and its parent company alleging they secretly entered into deals with drug manufacturers to increase their profits and then failed to disclose that compensation. The court found that the parent entity could not be held liable for any allegedly fraudulent behavior of the PBM before it purchased the PBM; however, after its acquisition, the parent could be held liable under agency law for the actions of its subsidiary PBM.

In Bickley v. Caremark RX, Inc., 461 F.3d 1325 (11th Cir. 2006), a participant of an ERISA employee benefits plan filed a class action lawsuit against the plan’s PBM alleging breach of fiduciary duties. The plaintiff alleged that the PBM is a fiduciary of the plan because it manages the prescription drug benefits, and allegedly breached fiduciary duties by not disclosing additional rebates or other discounts that it was receiving from drug manufacturers. The Eleventh Circuit affirmed the dismissal of the lawsuit on the ground that the plaintiff had not exhausted its administrative remedies.

B.Disclosure Laws

There has been movement in certain jurisdictions to adopt disclosure laws that require PBMs to disclose certain price information to their client health plans. In response, the Pharmaceutical Care Management Association, a trade association representing PBMs, challenged two such laws, one in Maine and one in D.C. The Supreme Court declined to hear an appeal challenging the First Circuit’s decision in Pharmaceutical Care Management Ass’n v. Rowe, 429 F.3d 294 (1st Cir. 2005), cert. denied, 126 S. Ct. 2360 (2006), upholding a Maine law that requires PBMs to disclose to health plans certain information about drug pricing and conflicts of interest. The Pharmaceutical Care Management

Association challenged Maine’s law claiming that the law was expressly preempted by ERISA. The First Circuit found that PBMs are not ERISA fiduciaries and that the Maine statute did not have an impermissible “connection with” ERISA that would deem the law to be preempted.

The Pharmaceutical Care Management Association also challenged a similar D.C. law requiring PBMs to make certain disclosures to health plan providers. However, the challenge was unsuccessful as the District Court of D.C. followed the First Circuit’s decision in Pharmaceutical Care Management Assoc. v. Rowe. In Pharmaceutical Care Management Assoc. v. District of Columbia, No. CIV. A. 04 1082 RMU, 2007 WL 666319 (D.D.C. Mar. 6, 2007), the District Court for the District of Columbia lifted an injunction against the District of Columbia enabling the District to implement a law similar to Maine’s.

C.False Claims Act

There are few reported cases considering False Claims Act allegations against PBMs. The federal government intervened in two whistleblower qui tam actions that were filed against the PBM Medco Health Solutions, Inc., and were later consolidated into one case as United States ex rel. Hunt v. Merck-Medco Managed Care., 340 F. Supp. 2d 554 (E.D. Pa. 2004). Among other allegations, the Department of Justice claimed that Medco submitted false claims for mail- order prescription drug services and violated the anti-kickback statute by paying kickbacks to health plans in order to induce their business. It also alleged that Medco violated the anti-kickback statute by soliciting and accepting payments from pharmaceutical companies that induced Medco to favor those pharmaceutical companies’ drugs. The PBM agreed to pay $155 million in a settlement with government in October of 2006.

Four whistleblowers initially filed an amended complaint under the False Claims Act against the PBM, Caremark Inc., and its parent, Caremark Rx, Inc., that was dismissed for failure to plead fraud with particularity in United States ex. rel. Fowler v. Caremark RX, Inc., No. 03C8714, 2006 U.S. Dist. LEXIS 39424 (N.D. Ill. May 30, 2006) (Fowler I). The plaintiffs then filed a second amended complaint in 2006, which was also dismissed for failure to allege claims with sufficient particularity. United States ex. rel. Fowler v. Caremark RX, Inc., No. 03C 8714, 2006 U.S. Dist. LEXIS 58992 (N.D. Ill. Aug. 21, 2006) (Fowler II).

Plaintiffs then filed a motion for leave to amend the prior complaint, which the District Court for the Northern District of Illinois dismissed yet again for failure to plead a False Claims Act violation with sufficient particularity in United States ex. rel. Fowler v. Caremark RX, Inc., No. 03C 8714, 2006 U.S. Dist. LEXIS 86960 (N.D. Ill. Nov. 30, 2006).

D.Fee Studies

In Beeman v. TDI Managed Care Services, 449 F.3d 1035 (9th Cir. 2006), the Ninth Circuit held that a group of California pharmacies had standing to sue a group of PBMs in federal court to enforce a state statute. The California statute required PBMs to conduct sample surveys of retail drug pricing and then present the results to their customers, third-party payors. The PBMs argued that the plaintiffs did not have standing to enforce the legislation because they suffered no injury. The Ninth Circuit, however, found that the pharmacies had alleged a procedural injury that was capable of redress.

E.Unfair Trade Practices

A Pennsylvania appeals court in Commonwealth ex rel. Corbett v. Peoples Benefit Services, Inc., 895 A.2d 683 (Pa. Commw. Ct. 2006), held that a state’s complaint against a PBM could proceed. The state alleged that the PBM violated the Pennsylvania Unfair Trade Practices and Consumer Protection Law by allegedly marketing its discount prescription drug plan in ways that could mislead consumers into thinking that the PBM was government related. The court denied the defendant’s motion to dismiss that had asserted, inter alia, objections to subject matter jurisdiction and the sufficiency of the state’s pleadings.

F.Antitrust Litigation

In Drug Mart Pharmacy Corp. v. American Home Products Corp., 93-CV- 5148 (ILG), 2007 U.S. Dist. LEXIS 6971 (E.D.N.Y. Jan. 25, 2007), plaintiffs, independent retail pharmacies, brought suit against pharmaceutical manufacturers, PBMs, health maintenance organizations, managed care organizations, third-party payors and mail order pharmacies alleging violations of the Robinson-Patman Act, 15 U.S.C.S. § 13(a). The plaintiffs claimed that the defendants were giving discounts on brand name prescription drugs to favored purchasers in violation of the act under the indirect purchaser doctrine. With respect to the PBM defendants, the plaintiffs argued that the PBMs were purchasers within the act because under their agreements with manufacturers, the PBMs negotiated prices that they passed on to their customers and they exercised dominion and control over those negotiated prescription drugs. The court held that those PBMs that did not take title to, resell, or dispense the brand name prescription drugs were not “purchasers” within the meaning of 15 U.S.C.S. § 13(a), but those PBMs that did take title to the drugs and exercise dominion and control over them were purchasers within the act. Ultimately, the court granted the defendants’ summary judgment motion on the grounds that the plaintiffs are not entitled to damages.

Plaintiffs in several different district courts sued various PBMs alleging that the practices used by PBMs in negotiating drug prices for the sale of prescription drugs by retail pharmacies violated the federal antitrust laws. In In re Pharmacy Benefit Managers Antitrust Litigation, 452 F. Supp. 2d 1352 (J.P.M.L. 2006), a panel of judges ordered the various plaintiffs’ actions to be consolidated in the Eastern District of Pennsylvania.

UltiMed, a PBM, filed suit against another PBM, Becton, alleging two general antitrust theories: exclusive dealing and monopoly leveraging in UltiMed, Inc. v. Becton, Dickinson & Co., No. 06-2266 (DSD-JJG), 2006 U.S. Dist. LEXIS 95433 (D. Minn. Nov. 7, 2006). UltiMed essentially argued that Becton, which controls ninety percent of the PBM market for home use insulin syringes, was preventing UltiMed from competing in the market through various anticompetitive practices. Becton filed a motion for judgment on the pleadings for failure to state sufficient claims. The District Court for the District of Minnesota granted Becton’s motion for judgment on the pleadings. See also, Advance PCS v. Bauer, 632 S.E.2d 95 (Ga. 2006), cert. denied, 127 S. Ct. 671 (2006), discussed in the ERISA section at § I.H.5.

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