Managed Care Litigation Tutorial Brian R. Stimson, Esq., Alston & Bird LLP

1. Managed Care Litigation TutorialBrian R. Stimson, Esq., Alston & Bird LLP 1

2. Arbitration versus Litigation Pros and cons Enforcement of arbitration clauses Members’ Theories of Liability Denials of covered services Vicarious malpractice Post-claims rescission of coverage Medicaid Act and ADA Participating Provider Litigation Breach of contract Tort and statutory theories Non-Participating Provider Litigation Providers’ theories Payors’ theories Silent PPOs Governmental Immunity Managed Care Litigation 101 Overview 2

3. Arbitration versus Litigation • Arbitration may proceed under the Federal Arbitration Act (FAA) or state arbitration acts. • The FAA preempts state law when the contract evidences a transaction involving interstate commerce. See 9 U.S.C. § 2. • When the FAA applies, the parties may choose the procedures for the arbitration, including arbitrator selection. 9 U.S.C. § 5. • Judicial review is generally limited to egregious defects in the arbitration, e.g., fraud, corruption, misconduct. 9 U.S.C. § 10. • State arbitration acts often limit the availability of arbitration while also establishing the procedures for arbitration. • For example, Georgia does not authorize arbitration of insurance disputes, and only permits arbitration of medical malpractice disputes under specific procedures. O.C.G.A. §§ 9-9-2(c)(1)-(3), 9-9-61. Georgia also has its own rule for arbitrator selection. § 9-9-7. 3

4. Arbitration Pros Confidentiality Parties may agree to keep proceedings confidential Some (but not all) ADR rules require confidentiality Efficiency (theoretically) Relaxed procedures Relaxed evidentiary rules Panelists’ Expertise Arbitration Cons Additional Costs Filing and Panelists’ Fees Discovery May Be Limited ADR rules may only authorize informal exchange Panelists may limit nature and extent of discovery May alternatively be a “Pro” Limited Appellate Review May alternatively be a “Pro” Arbitration Pros and Cons 4

5. Enforcement of Arbitration Clauses • Unconscionability and other contract law defenses can be hard to prove. • Blue Cross Blue Shield of Ala. v. Rigas, 923 So.2d 1077, 1097 (Ala. 2005) (finding that arbitration clause in health plan was not unconscionable) • Lovey v. Regence BlueShield of Idaho, 72 P.3d 877, 885 (Idaho 2003) (finding that clause in individual health insurance contract was not unconscionable) • In re Managed Care Litig., No. 00-1334-MD, 2009 WL 855963, at *4-7 (S.D. Fla. Mar. 30, 2009) (finding that clauses in provider agreements were not unconscionable). • Nayal v. HIP Network Servs. IPA, Inc., 620 F.Supp.2d 566, 573 (S.D.N.Y. 2009) (finding that clause in provider agreement was not unconscionable). • Other state laws are often preempted because the contract evidences a transaction involving interstate commerce. See, e.g., Health Ins. Corp. of Ala. v. Smith, 869 So.2d 1100, 1108 (Ala. 2003) (concluding that FAA applied where insurer conducted claims processing across state lines). • Broad arbitration clauses may be construed to encompass more than just breach of contract disputes. Kan. City Urology, P.A. v. United Healthcare Servs., 261 S.W.3d 7, *14 (Mo. Ct. App. 2008) (holding that price fixing and monopolization claims were within scope of arbitration clause). 5

6. Members’ Theories of Liability • Members’ state law claims may be completely preempted by the Employee Retirement Income Security Act (ERISA) if the member receives benefits through an ERISA plan (i.e., an employee benefits plan). • Aetna Health Inc. v. DaVila, 542 U.S. 200, 211-14 (2004) (finding that claims for breaches of state statutory duty of ordinary care based on denials of benefits were preempted). • Lind v. Aetna Health, Inc., 466 F.3d 1195, 1199 (10th Cir. 2006) (holding that state claims for tortious interference based on denials of benefits were preempted). • DaVila Test: • The individual, at some point in time, could have brought claim under ERISA § 502(a)(1)(B) (“A civil action may be brought … by a participatn or beneficiary … to recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan”), and • No other independent legal duty (state or federal) is implicated by the defendant’s actions. 6

7. Members’ Theories of Liability • Compare ERISA Conflict Preemption: • A defense, not an independent basis for federal jurisdiction • Tripartite Test: (1) “relate to,” (2) the savings clause, and (3) the deemer clause: • (1) ERISA supersedes state laws that “relate to any employee benefit plan …,” 29 U.S.C. § 1144(a). • The state law claim must address an area of exclusive federal concern, and • The claim must directly affect the relationships among traditional ERISA entities – the employer, the plan and its fiduciaries, and the participants and beneficiaries. Mayeaux v. La. Health Serv. Indem. Co., 376 F.3d 420 (5th Cir. 2004) • (2) State laws which relate to employee benefit plans are saved by ERISA’s “savings clause,” 29 U.S.C. § 1144(b)(1)(B), so long as the law: • Is directed towards entities engaged in insurance; and • Substantially affect the risk pooling arrangement between the insurer and the insured. Ellis v. Liberty Life Assurance Co. of Boston, 394 F.3d 262, 276 (5th Cir. 2005) • (3) State laws which regulate self-funded benefit plans or their TPAs, however, are still preempted because they fall within the “deemer clause,” 29 U.S.C. § 1144(b)(2)(B). 7

8. Members’ Theories of Liability • If ERISA does not completely preempt the member’s claims, the member may pursue the claims in state court. • Romo v. Amedex Ins. Co., 930 So.2d 643, 648 (Fla. 3 Dist. Ct. App. 2006), reh’g denied (Jun. 27, 2006) (finding that estate of insured who died after denial of coverage stated claims for reformation, promissory estoppel, fraud, and negligent misrepresentation). • Hymel v. HMO of La., Inc., 951 So.2d 187, 208 (La. Ct. App. 2006), writ denied (Feb. 16, 2007) (affirming jury verdict for insured who sued for statutory violations, negligence and breach of contract based on denial of claim for MRI, which delayed cancer diagnosis). • Mintz v. Blue Cross of Cal., 92 Cal.Rptr.3d 422, 440 (Cal. Ct. App. 2009) (concluding that TPA for state employees’ health plan owed a duty of reasonable care to insured in making benefit determinations under plan, and could be liable for non-economic losses) 8

9. Members’ Theories of Liability • Denials for medical necessity may present questions of fact. Compare Wells v. Anthem Health Plans of Me., Inc., No. Civ. A. CV-04-574, 2006 WL 1670294, at *6, *8 (Me. Super. May 9, 2006) (affirming summary judgment on statutory and breach of contract claims) with Blue Cross and Blue Shield of Ky. v. Smither, 573 S.W.2d 363, 365 (Ky. Ct. App. 1978) (reversing summary judgment for insured). • Even when evidence of medical necessity is lacking, allegations of pretextual denials may be sufficient to evade summary judgment. Beye v. Horizon Blue Cross Blue Shield of N.J., 568 F.Supp.2d 556, 566 (D.N.J. 2008). • State law claims for medical necessity denials are inappropriate for class treatment because of the individualized issues involved. Eisen v. Independence Blue Cross, Nos. 2705 Aug. Term 2000, Control No. 080620, 2002 WL 1803721, at *10 (Pa.Com.Pl. Jul. 26, 2002) (denying class certification). • Denials based on the experimental or investigative nature of the treatment may likewise present questions of fact. Compare Emerson v. Medical Mut. of Ohio, No. C-030074, 2004 WL 1635604, at *7 (Ohio App. 1 Dist. Jul. 23, 2004) (affirming summary judgment on claims for breach of contract, bad faith, and emotional distress) with Health Options, Inc. v. Kabeller, 932 So.2d 416, 421-22 (Fla. 2 Dist. Ct. App. 2006) (reversing summary judgment for insured on claims to recover denied benefits). 9

10. Members’ Theories of Liability • HMOs may also be vicariously liable for the malpractice of independent-contractor providers. • Compare Pacificare of Okla. v. Burrage, 59 F.3d 151, 153 (10th Cir. 1995) (concluding that ERISA does not conflict-preempt claim for vicarious malpractice) with Jass v. Prudential Health Care Plan, Inc., 88 F.3d 1482, 1493-94 (7th Cir. 1996) (holding that ERISA conflict- preempted claim for vicarious malpractice that was intertwined with benefits denial). • Petrovich v. Share Health Plan of Ill., Inc., 719 N.E.2d 756, 766, 772 (Ill. 1999) (recognizing apparent and implied authority as theories of vicarious HMO liability). • Villazon v. Prudential Health Care Plan, Inc., 843 So.2d 842, 855-56 (Fla. 2003) (recognizing apparent and actual authority as theories of vicarious HMO liability). • Rodriguez v. Orange Coast Managed Care Servs., No. D038189, 2002 WL 31319700, at *5 (Cal. Ct. App. 2002) (finding that HMO was not vicariously liable for physician’s failure to diagnose cancer). 10

11. Members’ Theories of Liability – Rescission • Members filed the first civil actions alleging improper rescission against Anthem Blue Cross (ABC) and Blue Shield of California (BSC) in May 2006. • Next, a class of California hospitals filed suit. The hospitals and the California Medical Association moved to intervene in a patients’ class action in December 2006. • In 2006 and 2007, California’s Departments of Insurance (DOI) and Managed Health Care (DMHC) began investigating the rescission practices of ABC, BSC, HealthNet, Kaiser, and PacifiCare. • Each payor eventually settled the investigations by agreeing to offer future coverage without medical underwriting, reimburse for out-of-pocket expenses and, in some instances, pay a fine. 11

12. Members’ Theories of Liability – Rescission • Hailey v. Cal. Physicians’ Serv., 69 Cal.Rptr.3d 789 (Cal. Ct. App. 2007). • Plaintiff sued BSC, alleging that it improperly rescinded her family’s coverage after authorizing her husband’s hospitalization for GI issues, and authorizing additional care for her husband following a car crash. Plaintiff sued for breach of contract, bad faith, and emotional distress. • BSC obtained summary judgment on the grounds that it was entitled to rescind because Plaintiff’s application omitted material information concerning her husband’s history of GI problems. • The Court of Appeals reversed, finding that: • California’s managed care statutes require plans to make reasonable efforts to ensure that a potential subscriber’s application is accurate and complete before entering into a plan contract; 12

13. Members’ Theories of Liability – Rescission • A plan may only rescind for a material misrepresentation or omission if it can show that (1) the material misrepresentation or omission was willful, or (2) the plan used reasonable efforts to ensure that the application was accurate and complete; • Plaintiff raised a genuine issue of material fact on willfulness, and BSC failed to establish reasonable efforts as a matter of law; and • BSC’s delay in rescinding coverage until after Plaintiff’s husband’s car accident raised jury questions regarding bad faith and emotional distress. • Plaintiff eventually stipulated to a directed verdict, admitting that she willfully omitted her husband’s health information. While this ended the litigation, the Hailey decision remains. • Most civil actions by members and hospitals have settled. 13

14. Members’ Theories of Liability – Rescission • Within months of Hailey, the LA County Attorney sued ABC, BSC, and HealthNet for violating the state UCL. The complaint states that the defendants rescinded without using reasonable efforts to ensure accuracy, completeness. • ABC demurred, arguing that (1) DMHC had exclusive jurisdiction under the managed care statutes, (2) the trial court should abstain, or (3) the trial court should stay the case under the primary jurisdiction doctrine in order to allow DMHC and ABC to implement their settlement agreement. • The LA County Attorney and putative class counsel objected to DMHC and ABC’s settlement notices to members. The trial court ordered (1) ABC to inform members of the government and putative class actions, (2) ABC to present member notices regarding the DMHC settlement to the court and class counsel before dissemination, and (3) class counsel to inform the court and ABC before contacting any members. • The trial court rejected ABC’s arguments. The Court of Appeals affirmed in Blue Cross of Cal., Inc. v. Super. Ct.,102 Cal.Rptr.3d 615 (Cal.App. 2010), finding that DMHC does not have exclusive jurisdiction, and that the UCL is cumulative of administrative remedies. 14

15. Members’ Theories of Liability – Rescission • The Patient Protection and Affordable Care Act of 2010 (“PPACA”) limits rescissions for health plan years beginning on or after September 23, 2010. • Section 2712 of PPACA prohibits rescissions except when the insured performs an “act or practice constituting fraud or makes an intentional misrepresentation of material fact … .” • PPACA eliminates “reasonable efforts” as a safe harbor for rescissions for material misstatements and omissions. • Many large insurers have agreed to conform their rescission practices to Section 2712. • This begs the question of what specifically constitutes “fraud” or “an intentional misrepresentation of material fact.” • Section 2712 might tighten the intent requirement from “willfulness” to scienter. • Failure to implement Section 2712 may create civil exposure under the UCL. • Rescission issue illustrates why litigators should monitor the implementation of all PPACA market reforms. 15

16. Participating Provider Litigation • Numerous jurisdictions have held that ERISA does completely preempt a participating provider’s claim without an assignment by the member. See, e.g., Johns Hopkins v. CareFirst of Md., Inc., 327 F.Supp.2d 577, 581-82 (D. Md. 2004) (finding that claim for breach of network agreement was not completely preempted); Marin Gen. Hosp. v. Modesto Empire Traction Co., 581 F.3d 941, 947 (9th Cir. 2009) (holding that claims for implied contract, oral contract, negligent misrepresentation, quantum meruit, and estoppel were not completely preempted) • Participating provider litigation commonly involves contractual claims disputing the interpretation of rate provisions. See, e.g., Rush Presbyterian-St. Luke’s Med. Cntr. v. The Prudential Ins. Co., No. 02C0947, 2004 WL 723849, at *1 (N.D. Ill. Mar. 30, 2004). • The states have also authorized provider claims for tortiously interfering with patient and insurer relationships. Haw. Med. Ass’n v. Haw. Med. Serv. Ass’n, Inc., 148 P.3d 1179, 1219-20 (Haw. 2006) (claim against insurer for interfering with patient relationship); Doctors Med. Cntr. of Modesto v. Global Excel Mgmt., Inc., No. 1:08-cv-01231, 2009 WL 2500546, at *3-7 (E.D. Cal. Aug. 15, 2009) (claim against TPA for interfering with insurer relationship); cf. Shands Teaching Hosp. and Clinics, Inc., v. Beech Street Corp., 899 So.2d 1222, 1228-30 (Fla. 1 Dist. Ct. App. 2005) (claim against benefit plan’s TPA for interfering with contract with PPO network). • RICO claims have been dismissed for failure to sufficiently plead the underlying fraud. Brookdale Univ. Hosp. & Med. Cntr., Inc. v. Health Ins. Plan of Greater N.Y., No. 07-CV-1471, 2009 WL 928718, at *4-5 (E.D.N.Y. Mar. 31, 2009) (“Claims based on failure to perform under a contract … do not state a claim for fraud”); see also Am. Dental Ass’n v. Cigna Corp., 605 F.3d 1283, (11th Cir. 2010) (“Plaintiffs may have a difference of opinion from Defendants regarding the coding that was used in processing their claims, but we cannot infer a scheme-driven deception from a complaint that provides no details of fraud or conspiracy”). 16

17. Non-Participating Provider Litigation • “Courts have, with near unanimity, found that independent state law claims of third party providers are not preempted by ERISA.” Rocky Mountain Holdings, LLC, LC, C.J. v. Blue Cross and Blue Shield of Fla., Inc., No. 6:08-cv-686, 2008 WL 3833236, at *2 (M.D.Fla. Aug. 13, 2008). • Common provider theories of liability include: • Quantum meruit and unjust enrichment, Temple Univ. Hosp., Inc. v. Healthcare Mgmt. Alternatives, Inc., 832 A.2d 501, 507 (Pa.Super. 2002), cert. denied (Mar. 24, 2004) (affirming equitable award); Midwest Special Surgery, P.C. v. Anthem Ins. Cos., No. 4:09CV646, 2020 WL 716105, at *4-5 (E.D. Mo. Feb. 24, 2010) (declining to dismiss equitable claim); • Negligent misrepresentation and estoppel, Regents of the Univ. of Cal. v. Principal Fin. Grp., 412 F.Supp.2d 1037, 1045-46 (N.D. Cal. 2006) (allowing estoppel claim after dismissing negligent misrepresentation claim); • Third-party beneficiary breach of contract, Vencor Hosp v. Blue Cross Blue Shield of R.I., 169 F.3d 677, 680 (11th Cir. 1999); see alsoFound. Health v. Westside EKG Assocs., 944 So.2d 188, 196-97 (Fla. 2006) (holding that beneficiary’s contract with HMO incorporated Florida prompt pay law for purposes of provider’s third-party beneficiary claim). • Key issue is often the measure of restitution or damages. 17

18. Governmental Immunity Defenses • Kaiser v. Blue Cross of Cal., 347 F.3d 1107, 1117 (9th Cir. 2003) (concluding that Medicare fiscal intermediary possessed federal sovereign immunity); Nicole Med. Equip. & Supply, Inc. v. TriCenturion, Inc., No. 10-389, 2011 WL 1162052 (E.D.Pa. Mar. 28, 2011) (finding that Medicare Program Safeguard Contractor and Medicare “insurance carrier” possessed federal sovereign immunity against state law tort claims) • Compare Shands Teaching Hosp. and Clinics, Inc. v. Beech St. Corp., 208 F.3d 1308, 1312-13 (11th Cir. 2000) (finding that TPA of state employee health plan possessed 11th Amendment immunity) with United States ex rel. Barron v. Deloitte & Touche, L.L.P., 381 F.3d 438, 442 (5th Cir. 2004) (finding that state Medicaid TPA did not possess 11th Amendment immunity) and Snodgrass v. Doral Dental of Tenn., No. 3:08-0107, 2008 WL 2718911, at *5-7 (M.D. Tenn. Jul. 10, 2008) (same) • Sante Rehab., L.P. v. Nat’l Heritage Ins. Co., No. 03-03-00738-CV, 2004 WL 1792401, at *4 (Tex.App. Aug. 12, 2004, reh’g overruled) (affirming dismissal of claims against state Medicaid TPA based on sovereign immunity) 18

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