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The Litigation Wave In The Managed Care Industry: Has It Crested?

Winter 2004

The legal landscape surrounding health maintenance organizations (HMOs) and other managed care organizations (MCOs) continues to undergo dramatic change. HMOs are the target of public criticism, adverse legislation and costly litigation. The size of adverse judgments and settlements has increased dramatically, as recently illustrated by several HMOs’ nine-figure settlements in connection with the In Re Managed Care multidistrict litigation pending in Florida.

Perhaps the most significant development in managed care litigation has been the influx of class action lawsuits in recent years. These actions have been brought both by providers who contract with the MCOs, and by subscribers in the organizations’ health plans. Many such class actions have been consolidated into the In Re Managed Care litigation. However, we have continued to observe new class action suits being filed against MCOs, asserting a variety of liability theories. We discuss below the recent “waves” of litigation in the managed care industry.

I. Managed Care Litigation: A Historical Perspective

There has long been a significant level of litigation activity involving MCOs (undoubtedly due in part to a perception that MCOs represent “deep pockets” and, therefore, are a favorable target). However, as discussed below, historically most managed care litigation has involved “one-off” cases presenting widely varying degrees of exposure.

A. Subscriber Suits Against Managed Care Organizations

Traditionally, most high profile lawsuits against MCOs were brought by aggrieved policyholders. For example, there have been numerous suits alleging HMOs wrongfully denied care to members, some of which have resulted in significant punitive damages awards. There also has been a multitude of actions seeking to hold MCOs liable for the alleged malpractice of contracted physicians. Courts have recently expanded the circumstances in which MCOs may be liable for physician malpractice, while narrowing the defenses traditionally available to MCOs. Finally, subscribers have brought fraud and misrepresentation suits, alleging MCOs did not fully explain their business practices. Such lawsuits frequently involve multiplied damages under state consumer protection laws.

1. Denial of Benefits Claims

HMO members have consistently brought actions alleging they were wrongfully denied benefits that were covered by their health plans. These are fairly straightforward disputes that usually center on the interpretation of the plan documents at issue, and the decision-making process employed by the managed care organization. In a “pure” denial of benefits claim, the member seeks coverage for the medical care or treatment he or she received, and may assert claims for damages arising out of the denial of the requested service. The majority of benefit disputes do not involve significant dollar amounts. However, some cases in which the member was extremely ill and/or suffered a catastrophic outcome as a result of the MCO’s denial of benefits have presented significant exposure. Examples of such cases are listed below.

  • Perhaps one of the most widely publicized such cases arose out of Aetna’s denial of certain treatment for a patient with incurable stomach cancer. The patient’s widow later brought suit against Aetna in California, and recovered $120.5 million, which included $116 million in punitive damages. Goodrich v. Aetna, et al. The 1999 verdict was later reduced following appeal.

  • In a 1993 California case, a jury awarded $89.1 million to the family of a woman who died of breast cancer after Health Net refused to authorize a bone marrow transplant. Fox v. Health Net, Inc. The Fox verdict included $77 million in punitive damages.

  • A Florida jury awarded the family of a disabled child $79.5 million, following Humana’s decision to terminate the child’s eligibility for its medical case management program (which included speech, occupational and physical therapy benefits). Chipps v. Humana Health Ins. Co. of Florida. The decision was overturned on appeal, and the case later settled for $2 million.

  • In Georgia, a jury awarded $45 million in a suit alleging Kaiser wrongfully sent a 6 month-old boy to a hospital forty-two miles away, where Kaiser received a discount, rather than to closer hospitals where Kaiser did not receive such a discount. By the time the child arrived at the hospital, he had gone into cardiac arrest. The child was revived, but the blood flow to his extremities had stopped. Gangrene set in, and all four extremities were amputated. Adams v. Kaiser Foundation Health Plan. The case ultimately settled for less than half of the initial award.

MCOs have frequently been able to minimize their exposure in benefit claims by asserting ERISA preemption as a defense. ERISA is a federal statute that governs certain employer-sponsored health plans, and imposes various duties on the administrators of such plans. The remedies afforded an aggrieved person under ERISA are relatively modest (basically, recovery of the benefit amount at issue and perhaps attorney’s fees). ERISA contains a broad preemption provision, and for years MCOs asserted that ERISA preempted any state law cause of action arising out of the administration of benefits under an ERISA plan. The Supreme Court has seemingly recognized that ERISA will preempt any state law cause of action involving a “pure eligibility decision” which turns on the plan’s coverage of a particular condition or medical procedure for its treatment. Pegram v. Herdrich, 530 U.S. 211 (2000). Notably, the cases discussed above did not involve ERISA-governed health plans.

2. Medical Malpractice/Vicarious Medical Malpractice

Another common type of subscriber lawsuit seeks to hold the MCO liable for medical negligence. Such suits may be based on a theory of direct liability (in situations where the MCO directly employs the physicians, as is true for staff model HMOs, or the allegedly wrongful decision-making is made by the MCO’s utilization review staff or Medical Director), or vicarious liability (in situations where the allegedly negligent providers are not employed by the MCO but, rather, are independent contractors). The value of such cases varies widely, depending upon the nature of the injuries alleged and the venue.

MCOs historically relied on ERISA preemption as a defense to malpractice actions. Many courts have upheld ERISA preemption in the context of suits challenging MCOs’ medical decision-making. Danca v. Private Health Care Systems, 185 F.3d 1 (1st Cir. 1991); Marks v. Watters, 322 F.3d 316 (4th Cir. 2003); Corcoran v. United Healthcare, Inc., 965 F.2d 1321 (5th Cir. 1992); Haynes v. Prudential Health Care, 313 F.3d 330 5th Cir. 2002); Tolton v. American Biodyne, Inc., 48 F.3d 937 (6th Cir. 1995); Jass v. Prudential Health Care Plan, Inc., 88 F.3d 1482 (7th Cir. 1996); Thompson v. Gencare Health Systems, Inc., 202 F.3d 1072 (8th Cir. 2000); Spain v. Aetna Life Insurance Company, 11 F.3d 129 (9th Cir. 1993); Cannon v. Group Health Service of Oklahoma, Inc., 77 F.3d 1270 (10th Cir. 1996).

However, courts have recently issued decisions indicating ERISA preemption may not apply to direct or vicarious medical malpractice actions against MCOs. Cicio v. Does, 321 F.3d 83 (2nd Cir. 2003); Villazon v. Prudential Healthcare Plan, Inc., 843 So.2d 842 (Fla. 2003); Pappas v. Asbel, 768 A.2d 1089 (Pa. 2001). These decisions are troubling, and may be representative of a trend in managed care litigation. The Supreme Court may address this issue in the near future, as it has been asked to review Cicio.

3. Consumer Fraud Litigation

Subscriber claimants have asserted a variety of liability theories against MCOs with regard to their business practices in connection with marketing and enrollment, as well as their billing and payment practices.

Many subscribers have contended that intentional or negligent misrepresentations in the MCO’s brochures and other promotional materials induced them to enroll in a specific plan. Health plan subscribers also may contend the MCO’s conduct violates state deceptive trade practice or consumer fraud statutes, because such statutes commonly permit prevailing plaintiffs to recover multiplied damages and/or attorney’s fees.

Subscribers frequently allege that the MCO failed to disclose that it used capitation and other business incentives to encourage providers to limit or deny medical care. Courts have reached differing conclusions as to whether MCOs have a duty to disclose financial incentives that may affect physician referrals. (Compare, Shea v. Esensten, 107 F.3d 625 (8th Cir. 1997), cert. denied (1997), finding HMO had a duty under ERISA to disclose physician incentives that affected the quantity of referrals to specialists, and Ehlmann v. Kaiser Foundation Health Plan of Texas, 198 F.3d 552 (5th Cir. 2000), cert. denied (2000), finding HMOs do not have a general duty under ERISA to affirmatively disclose financial compensation arrangements.) However, juries may not view such financial arrangements favorably, and many major MCOs have moved away from including financial incentives in provider contracts.

Some subscribers have successfully challenged MCOs’ billing and payment practices. For example, many MCOs require subscribers to pay a percentage of costs for certain procedures, sometimes referred to as a co-payment. Some MCOs have been found liable for fraud because they negotiated discounted rates with providers, but calculated the subscriber’s co-payment based on the provider’s normal, undiscounted fee schedule. (For example, assume a surgeon’s normal fee schedule called for payment of $5,000 for a procedure, but the provider had agreed to charge members of an HMO plan only $2,500 for the procedure. The MCO calculated the member’s 10% co-payment based on the normal fee of $5,000, or $500. The members contended the co-payment should have been based on the discounted rate actually paid by the MCO, or $250.) Subscribers have filed suit, accusing the MCO of fraudulent business practices and seeking disgorgement of overpaid co-payments. These suits can present significant exposure. In 1995, Trigon Blue Cross/Blue Shield agreed to pay more than $18 million to settle a co-payment class action suit brought by consumers in Virginia.

B. Provider Suits Against Managed Care Organizations

There also has been a fair amount of litigation arising out of the relationship between MCOs and the medical providers with whom they contract. Many providers file suit against MCOs alleging breach of contractual payment obligations or violation of state prompt pay statutes. Providers have also challenged MCOs’ allegedly anticompetitive business practices under state and federal statutes, or common law theories such as fraud, unjust enrichment, unfair competition, or breach of the covenant of good faith and fair dealing.

1. Payment Practices Claims

Much of the litigation between MCOs and contracted providers concerns the basic issue of payment. Controversies have arisen where MCOs have delayed payment or, in an effort to control costs, have tried to limit the amounts paid by paying only for one service for a patient encounter in which the physician performed and billed for multiple procedures (so-called “bundling”) or paying for a less costly service than that billed by the physician (so-called “downcoding”). As discussed below, MCOs’ payment practices are at the heart of the national class action litigation currently pending in Florida.

Providers have initiated a variety of lawsuits in response to payment problems. The allegations in such suits include improper failure/refusal to pay submitted claims based on undisclosed criteria, failure to pay claims promptly, failure to pay claims as specified in the provider’s contract, or paying the provider a lesser amount due to downcoding or bundling charges. While individual provider payment claims typically do not present significant exposure, the MCOs’ reimbursement policies frequently are implemented at a national level. As such, physician payment disputes may give rise to litigation by medical groups, state medical associations or purported classes of providers. These types of actions potentially present far greater exposure.

The vast majority of states also have enacted prompt pay statutes that require MCOs to pay “clean” claims within a certain number of days after submission (may be as short as 15 business days, but usually 30-45 days depending on whether the claim is submitted electronically or in writing). These laws impose penalties in the form of interest (as high as 18% per annum) on the unpaid/untimely paid claims. Given the volume of claims submitted to large MCOs, exposure under the prompt pay laws can be significant. Earlier this year, PacifiCare agreed to pay several million dollars to resolve a suit brought by the Texas Attorney General, alleging violations of Texas’ prompt-pay statute. As described further below, state prompt pay statutes also are a central issue in the national provider class action litigation against MCOs.

2. Antitrust Suits by Providers

Because the largest MCOs arguably have a certain amount of market power, there have been numerous antitrust suits arising out of disputes between providers and MCOs. We discuss below two such types of disputes: those relating to the MCOs’ allegedly improper refusal to contract with certain providers; and those relating to the MCOs’ alleged manipulation of prices for the delivery of healthcare.

In the past, some MCOs made a business decision to exclude coverage for certain medical services (e.g., physical therapy, acupuncture, chiropractic care, mental health services) or to not offer services through certain classes of providers (e.g., chiropractors, psychologists, optometrists). Providers then filed suits seeking to compel entry into the network and/or recover damages they sustained as a result of wrongful exclusion. Providers alleged the exclusionary practices violated antitrust laws, and sought to recover statutory treble damages. Courts generally were reluctant to second-guess an MCO’s judgment concerning staffing, provided the MCO’s decisions were based on objective, medically sound criteria. However, in the 1980s, the American Chiropractic Association successfully pursued antitrust litigation against various medical organizations (including the American Medical Association, Joint Commission on Accreditation of Healthcare Organizations, American College of Physicians, American College of Surgeons, American College of Radiologists), alleging that the organizations had conspired in an effort to boycott chiropractors. Wilk v. American Medical Association, et al. The American Chiropractic Association remains litigious, and is currently embroiled in antitrust litigation with Trigon.

Managed care organizations also have historically faced suits challenging the MCOs’ influence over prices for the delivery of healthcare. Such actions typically are brought under the federal and state antitrust statutes, and a few of such actions have resulted in large settlements or awards. See, e.g., Blue Cross Blue Shield United of Wisconsin v. Marshfield Clinic and Security Health Plan of Wisconsin, which resulted in a $48 million award (judgment later reversed on appeal).

3. Unfair Business Practices

Providers have also sued MCOs under state law (such as California Business and Professions Code §17200) or common-law unfair competition theories. Such suits may arise out of an MCO’s decision to limit the number of physicians approved to treat subscribers (in states that do not have “any willing provider” laws, which require MCOs to accept any otherwise qualified providers into their networks). By limiting the number of physicians, MCOs are able to assure providers of a certain patient volume. MCOs then use the assurance of certain patient volume to negotiate lower fee schedules. In other cases, MCOs may try to persuade physicians to join a certain practice group. The MCOs’ business practices may ultimately impact patient volume, which in turn impacts provider revenues. Under these circumstances, providers have filed suit against the MCOs, alleging tortious interference with a business relationship or a business expectancy, and seeking to hold the MCO liable for the lost income. Some statutes, such as Cal. Bus. & Prof. Code §17200, only permit injunctive or equitable relief.

II. The First Wave Of Class Action Suits: In Re Managed Care

As many in the insurance industry may be aware, for the past few years many national HMOs have been embroiled in multidistrict litigation known as In Re Managed Care (MDL No. 1334), which is pending before Judge Federico Moreno in the United States District Court for the Southern District of Florida (Miami Division). In Re Managed Care can be traced back to the late 1990s, when American Medical News announced that “attorneys who won multi-billion dollar settlements suing the tobacco industry are aiming at HMOs’ cost-containment strategies. This could be the industry’s biggest threat yet.”

Former asbestos and tobacco lawyer Dickie Scruggs and associates first announced in 1999 that they intended to file suits “designed to address the core problems associated with HMO abuses: the interference with the delivery of medical services and, frankly, the shakedown of America’s doctors to cut medical services and place HMO profits over people.” The lawyers predicted “a rapid succession of national and statewide class actions [would be] filed across the country to stand up for the rights of patients and doctors.” Unfortunately, these predictions proved correct. In May 2000, well-known former tobacco attorney Archie Lamb filed a class action lawsuit against large national HMOs on behalf of the California Medical Association. State medical associations in Texas and Georgia later joined in the suit. Archie Lamb is now lead co-counsel for Plaintiffs in the consolidated In Re Managed Care multidistrict litigation. Lamb calls this “the biggest case of his career.”

A. Factual and Procedural History of In Re Managed Care

Basically, In Re Managed Care involves consolidated class action lawsuits brought against HMOs by providers and by members of the HMO plans. These class action suits have been divided into a provider track and a subscriber track. The provider track potentially presents far greater exposure to MCOs, as Judge Moreno refused to certify a class in the subscriber track. The following discussion will therefore focus on the provider track of In Re Managed Care.

The matter now known as In Re Managed Care arose out of a purported class action suit filed by an Alabama provider in January 2000, alleging violations of the Racketeer Influenced and Corrupt Organizations (RICO) Act. Numerous other provider class action suits were thereafter filed across the country. Simultaneously, subscribers began filing class action suits, alleging that MCOs violated RICO and various other statutes by not disclosing financial incentives and cost-cutting measures. The Judicial Panel on Multidistrict Litigation ordered the cases to be consolidated for pretrial purposes and transferred to Judge Moreno in the U.S. District Court for the Southern District of Florida. The lead case in the provider track of such litigation is Shane v. Humana, et al.

Shane is a nationwide class action lawsuit filed in the U.S. District Court for the Southern District of Florida by Charles Shane, M.D. and numerous other providers, both individually and on behalf of a class of similarly situated physicians who rendered services to certain health insurers. Shane was consolidated with numerous other class actions brought by groups of physicians who claim that payments owed to them by various health insurers have been wrongfully denied or delayed. The other provider class action suits transferred to Judge Moreno are now considered “tag-along” actions. The tag-along actions have been stayed temporarily, pending the disposition of certain motions filed in connection with the lead Shane case, as detailed below.

Judge Moreno ordered Plaintiffs to file a consolidated class action complaint in connection with the Shane case. The most recent such complaint (the Provider Plaintiffs’ Second Amended, Consolidated Complaint) generally alleges the insurer Defendants repeatedly withheld, denied or delayed compensation owed to Plaintiffs for medical services they provided to the Defendants’ plan members, through the use of practices such as bundling and downcoding. The Complaint asserts civil RICO violations (Counts I-III), declaratory and injunctive relief (Count IV), breach of contract (Count V), unjust enrichment (Count VI), violations of state prompt pay statutes (Count VII), violations of California Business and Professions Code § 17200 (Count VIII), violations of the Connecticut Unfair Trade Practices Act (Count IX), and violations of the New Jersey Consumer Fraud Act (Count X). Plaintiffs seek declaratory and injunctive relief, treble damages under RICO, disgorgement/restitution, interest on payments due, and attorney’s fees. The MCOs named as Defendants include: Aetna, Anthem, Cigna, Coventry, Health Net, Humana, PacifiCare, Prudential, United Healthcare and Wellpoint.

In September 2002, Judge Moreno conditionally certified a global class and two subclasses in the provider track. There are estimated to be at least 600,000 providers in the Global Class, which includes all doctors who provided medical services to a person insured by Defendants from 4 August 1990 to 20 September 2002. There are two subclasses as well: a National Subclass of doctors who provided medical services to any person insured by Defendants, and who are not bound to arbitrate their claims; and a California Subclass of medical doctors who provided medical services to any individual insured in California by any Defendant, and who are not bound to arbitrate their claims. The certification order did not apply to Defendants Anthem and Coventry. However, Plaintiffs have now filed a motion seeking class certification as to Anthem and Coventry.

B. Current Status of In Re Managed Care

The order conditionally certifying the provider class has been appealed to the U.S. Court of Appeals for the Eleventh Circuit. Defendants argued the conditions for class certification had not been met, particularly the requirement that issues common to the class predominate over individual providers’ issues. Defendants argued on appeal that the circumstances surrounding each provider’s payment are unique and, therefore, are not suitable for class adjudication. The appeal has been fully briefed, and oral argument was held on 11 September 2003. It is not known when the panel will issue its decision.

In the meantime, activity continues before Judge Moreno. Many Defendants filed motions to dismiss and/or compel arbitration in connection with the Shane case. Defendants argued the Provider Plaintiffs’ Second Amended, Consolidated Complaint should be dismissed because it adds claims on behalf of non-participating providers who did not have written contracts with the Defendants. Defendants asserted that any payment obligations with regard to non-participating providers arise under the terms of the health plans and, therefore, are preempted by ERISA. Judge Moreno heard oral argument on the motions to dismiss in August 2003.

Judge Moreno also heard oral argument on renewed motions to compel arbitration in connection with Shane. Many of the provider contracts at issue contain arbitration clauses, and the enforceability of those clauses has been the subject of appellate review. Plaintiffs initially argued that to the extent the arbitration agreements preclude recovery of punitive and/or extra-contractual damages, Plaintiffs’ ability to recover “meaningful” (meaning, treble) damages under RICO would be impaired. Judge Moreno agreed, and refused to compel arbitration of the RICO claims. This decision was appealed. The Eleventh Circuit affirmed, but the Supreme Court reversed in PacifiCare v. Book (2003). The Court determined that the issue of enforceability of the damages limitation clauses should be determined by the arbitrator, and remanded for further proceedings. The motions to compel arbitration were renewed following the remand, and have been fully briefed and argued. Motions to dismiss or to compel arbitration filed in connection with the tag-along cases have been stayed, pending Judge Moreno’s decision on the motions to dismiss and motions to compel arbitration in the lead Shane case.

In the meantime, the Shane parties have been participating in court-ordered mediation. Several sessions have been held thus far, and the next such meeting will take place in early October 2003. Discussions to date have reportedly focused on non-monetary relief (such as Defendants’ agreement to change certain business practices), and the Defendants have jointly participated in mediation.

C. Settlements in Connection withIn Re Managed Care

Most of the national MCOs named in In Re Managed Care have vowed to vigorously fight, despite monumental legal expenses. (Many such MCOs have reportedly already incurred tens of millions of dollars in legal expenses.) These Defendants are anxiously awaiting the Eleventh Circuit’s ruling on the appeal of Judge Moreno’s provider track class certification order, and believe the case will lose “most, if not all, of its significance” if the Eleventh Circuit overturns the class certification order.

However, not all Defendants share this view. Two national MCOs, Aetna and Cigna, have agreed to settle the In Re Managed Care litigation. In May 2003, Aetna reached a settlement valued at a total of $470 million, which is comprised of approximately $170 million in monetary payments (including up to $50 million in attorney’s fees) and $300 million in non-monetary relief (including commitments to change internal payment practices). Aetna’s settlement has been preliminarily approved by Judge Moreno. Aetna later separately agreed to settle a tag-along action brought by the American Dental Association for $5 million. The American Dental Association case concerned out-of-network payment practices, and did not allege RICO violations.

More recently, Cigna agreed to settle for more than $500 million. Cigna’s settlement reportedly includes $85 million in cash payments to the provider Plaintiffs, up to $55 million in attorney fees, and business improvements estimated to be worth $400 million. Judge Moreno preliminarily approved Cigna’s settlement on 4 September 2003.

These settlements may make it more difficult for the remaining Defendants to negotiate with Plaintiffs (assuming Defendants are so inclined). These settlements also suggest the In Re Managed Care litigation might potentially present significant exposure to the MCOs remaining in the suit.

III. Recent Class Action Activity: The Second Wave?

The wave of provider RICO class actions culminating in In Re Managed Care appears to be at or near its peak. Many have speculated that other MCOs will follow in Aetna and Cigna’s footsteps and negotiate settlements. On the other hand, if the Eleventh Circuit overturns the class certification order, the provider class action litigation may lose steam (as did the subscriber track litigation). However, the more intriguing question may be whether another wave of managed care litigation is beginning to swell. As discussed below, there are signs that another wave of class action litigation may be underway.

A. Continuing Class Action Suits Regarding Claims Processing and Payment Activities

1. Suits by other Providers

Importantly, the provider class certified in the In Re Managed Care case is limited temporally: the global class is defined as including all physicians who rendered services to Defendants’ members from August 1990 through September 2002. It is conceivable that physicians who rendered services after September 2002 may continue to assert class action suits against MCOs.

Further, there may be provider class actions that are litigated outside of the multidistrict litigation. The American Dental Association recently filed a class action suit against numerous MCOs, including Cigna, MetLife and Mutual of Omaha, in the U.S. District Court for the Southern District of Florida. The ADA suit alleges violations of RICO and state prompt pay statutes. The ADA is hoping to have the matter transferred to the In Re Managed Care litigation. However, Defendants have filed a motion to compel arbitration. In light of the Supreme Court’s opinion in PacifiCare v Book, there is a chance this matter may proceed independently of In Re Managed Care.

2. Suits Against Other MCOs

There still may be MCOs that have not been brought into the In Re Managed Care litigation, particularly smaller, regional MCOs. It likely is too late to do so now. Although national class action suits have garnered significant publicity of late, plaintiffs’ attorneys may begin targeting regional MCOs in class actions, particularly given the large settlements reached by Aetna and Cigna in the national provider class action litigation.

Further, plaintiffs may be starting to target other types of MCOs. For example, there have recently been a spate of class actions against prescription benefit managers (PBMs). Such suits have been filed by pharmacies and pharmacy associations (including the Pharmacy Freedom Fund and National Community Pharmacists Association) against Medco Health Solutions, a large national PBM affiliated with pharmaceutical giant Merck, and AdvancePCS, the largest PBM in the United States in terms of covered lives. Plaintiffs allege the PBMs have misused their market power and violated antitrust laws. These suits were filed in mid-August 2003 in the U.S. District Court for the Eastern District of Pennsylvania. Plaintiffs have recovered significant settlements in past class actions against PBMs. For example, Medco reportedly recently agreed to a $42.5 million settlement of a class action suit brought by various health plans that had contracted with Medco for the administration of prescription drug benefits.

3. Class Arbitration

There also is the possibility of class arbitrations against MCOs. Some MCOs have succeeded in having potential class action suits dismissed based on motions to compel arbitration. Providers have then filed purported class action arbitration complaints with the American Arbitration Association (AAA). The MCOs have challenged the providers’ right to maintain a class action before the AAA. Courts have historically been divided on the issue of whether class arbitration may be maintained if the contractual arbitration clause at issue does not specifically refer to class adjudication.

The South Carolina Supreme Court found that where a contractual arbitration clause was silent as to class adjudication, class arbitration would be permitted. Green Tree Financial Corp. v. Bazzle, 351 S.C. 244, 569 S.E.2d 349 (2002). However, in June 2003, the Supreme Court held that if a contract does not specifically state whether class action arbitration is permissible, the arbitrator must decide whether or not class action treatment is proper. As such, purported provider class action arbitration proceedings may now be initiated with the AAA. However, the arbitrators’ decision whether or not to allow a provider class arbitration to proceed may depend in part upon the Eleventh Circuit Court of Appeals’ ruling on the provider class certification order in the Shane case.

B. Other Areas of Potential Class Action Exposure

Payment practices have been the focus of recent class action activity. However, there may be class action litigation in the future arising out MCOs’ provider selection practices.

As discussed above, courts have historically demonstrated reluctance to interfere in the medical judgments and business judgments of MCOs concerning who can provide medical services to plan participants. In response, provider groups lobbied state legislatures for legislation allowing for greater access to MCOs. Many states have now enacted so-called “any willing provider” (AWP) laws. AWP laws generally require health insurers to enter into service contracts with all providers who are qualified under state law to practice within the general geographic area served by the insurance company, and who are willing to meet the terms and conditions set forth by the insurer. Many assumed AWP laws would have little meaningful effect because their enforcement would be largely preempted by ERISA. However, the Supreme Court recently decided in Kentucky Association of Health Plans v. Miller that ERISA did not preempt a state AWP statute. Consequently, MCOs may be forced to accept more providers in their networks. Those that decline to do so could face a wave of AWP lawsuits challenging decisions to exclude physicians from a network.

Further, MCOs may face antitrust class action litigation arising out of their negotiation of fee schedules with providers in a given geographic area. Large national MCOs (including Aetna, Anthem, Humana and United Healthcare) have recently been named in antitrust class action suits in Ohio and Kentucky, in which providers contend that the MCOs abused their market power by artificially lowering provider reimbursement rates in the Cincinnati metropolitan area. Academy of Medicine of Cincinnati, et al. v. Aetna, et al. Plaintiffs allege violations of state antitrust laws, and seek to recover more than $1 billion in damages. Defendants’ motion to compel arbitration was denied. These proceedings may be significant, given the national MCOs involved.

Conclusion

Future activity is difficult to predict. On the one hand, Aetna and Cigna’s settlements in In Re Managed Care could lead to a wave of large settlements and continuing litigation. However, on the other hand, the Supreme Court’s decisions in PacifiCare v. Book and Green Tree Financial Corp. v. Bazzle may result in more provider disputes being arbitrated, perhaps in class arbitrations. Additionally, many MCOs have undertaken proactive efforts to avert further litigation and improve their relationships with providers and subscribers. Such efforts may include “transparency initiatives” designed to shed more light on MCOs’ claim handling practices, such as web-based systems that allow providers to check on the status of submitted claims, and round-the-clock customer service access for subscribers. These actions ultimately may make MCOs less desirable as litigation targets. At the present time, however, we expect the waves of class action MCO litigation will continue, given the potentially lucrative payouts available to plaintiffs.

© 2003 Sedgwick, Detert, Moran & Arnold LLP. This communication is published as an information service for clients and friends of the firm, and is made available with the understanding that it does not constitute the rendering of legal advice or other professional service.

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