August 2000 Bulletin

Lawsuits attack HMO incentives

Plaintiffs allege health insurers defrauded members

By Carolyn Rogers

The ongoing flurry of lawsuits against some of the nation’s largest managed care organizations–more than 30 at last count–shows no signs of slowing down. In late June, another batch of suits against six managed care organizations were filed in a federal district court in Miami.

Like the first suit filed against Humana Inc. in October, the latest court actions accuse the insurers–Aetna, Cigna, Foundation Health Systems, Pacificare Health Systems, Prudential Health Care and United Healthcare–of failing to disclose to plan members that they offered rewards to doctors and other employees who denied payments for care and who limited hospital admissions. The suits also allege that the companies defrauded members in violation of the federal anti-racketeering law, which provides for treble damages.

The high-profile lawyers, many of whom were involved in huge settlements in earlier suits against tobacco companies, are now seeking to combine dozens of suits against Humana and the other major insurers into a single case.

"There was an agreement among many firms that we should all pull together in the subscribers’ interest," says Jerome Marcus, a partner with Berger and Montague in Philadelphia. "We filed complaints in Miami against all of the national companies. Whether they’ll ultimately wind up in the same court or different courts, we don’t know."

Eleven suits against Humana already have been consolidated at the company’s request. Brian Boyle, a lawyer for Humana, said the company did not want the consolidation of the latest suits to slow down a "fast track" schedule that the judge has set to consider a motion for dismissal.

Judge Frederico Moreno has scheduled a hearing on Humana’s dismissal motion for Aug. 17. If the judge lets the case proceed, the plaintiffs must file their arguments for seeking class-action status by Aug. 18 and Humana must respond by Sept. 14.

The original lawsuit against Humana, which insures 6 million Americans, claimed that the medical insurer misled patients about its methods for determining coverage in violation of the 1974 Employee Retirement and Income Security Act (ERISA). The suit alleges that Humana failed to disclose that its coverage and treatment decisions were determined in part on cost-based criteria and not medical necessity, as subscriber materials describe.

"HMOs utilize a variety of tools to induce health care providers and others to hold down the cost of care," Marcus says. "Our cases say these cost-suppression devices have not been disclosed and in some cases have been intentionally misrepresented. We’re saying they have a duty to disclose this information."

Under this theory, Marcus says, the market for health care services would have deemed HMOs with such arrangements to be less valuable if the information about their financial structure had been known, and the organizations could be found to have benefited from "unjust enrichment" by withholding the information.

Meanwhile, the managed care industry breathed a collective sigh of relief after the U.S. Supreme Court ruled on a closely-watched case, Herdrich v. Pegram, on June 12. In a 9-0 ruling, the Supreme Court said that the financial incentives that HMOs give doctors to hold down costs do not make the HMOs liable to suit in federal court for violating a duty to put their patients first.

Declaring the cost-containment mechanisms illegal "would be nothing less than elimination of the for-profit HMO," Justice David H. Souter wrote for the court. "No HMO organization could survive without some incentive connecting physician reward with treatment rationing.

"The fact is that for over 27 years the Congress of the United States has promoted the formation of HMO practices," Justice Souter continued. "The federal judiciary would be acting contrary to the congressional policy of allowing HMO organizations if it were to entertain (a claim) portending wholesale attacks on existing HMOs solely because of their structure."

The court dismissed a federal lawsuit by Cynthia Herdrich of Bloomington, Ill, whose appendix ruptured after her Urbana, Ill., HMO forced her to wait eight days for a test to diagnose her abdominal pain. After a near-brush with death, Herdrich sued the doctor and won a $35,000 malpractice verdict in state court. Upon learning that doctors at the HMO received annual bonuses for holding down costs–including for diagnostic tests–Herdrich believed she also had a remedy against the HMO under ERISA.

Although the court clearly said in its June ruling that such incentives are legal, many important questions that were not presented in this case remain unresolved. For example, the justices did not decide whether financial incentives ought to be disclosed, giving hope to trial lawyers who are pushing the class-action lawsuits. Much of their enthusiasm stems from a footnote in the Herdrich decision; the court notes that HMOs may breach their fiduciary duty to members by not disclosing financial arrangements that give health care providers and others an incentive to ration care.

"We were very happy with the Supreme Court ruling," Marcus says. "Our cases expressly say we are not challenging the practices that managed care companies choose to try to save money. We are challenging the failure to make truthful disclosures about those practices."

For the health care industry, though, the ruling was clearly a positive one.

Karen Ignagni, American Association of Health Plans president, characterized the ruling as a "resounding defeat for suit-happy trial lawyers and those who seek through class action suits to destroy the country’s private health care system. The Court’s decision today validates the principle that the legal system is not the place to make health care work."

Other ongoing suits include an action against Aetna U.S. Healthcare, filed in late May by a coalition of 24 New York-area hospitals. The suit charges Aetna with breach of contract, various violations of the New York Prompt Payment Law, the New York Managed Care Act, and violations of New York’s deceptive practices laws. The hospitals are seeking no less than $45 million in compensatory damages and $50 million in punitive damages.

Also in late May, the California Medical Association teamed up with a group of Alabama lawyers to bring suit against three of California’s largest health plans, charging them with extortion and racketeering. The federal suit, filed against Blue Cross of California, Foundation Health Systems and PacifiCare Health Systems Inc., accuses the plans of interfering with physicians’ ability to make independent medical decisions. It differs from the others by naming doctors–rather than patients–as plaintiffs. The essence of the lawsuit, according to a lawyer heading up the case, is that there is such a disparity between the information and ability to control one’s destiny between the physicians and the insurance companies that it essentially dooms the physician groups from the beginning.

Where all of these cases are headed remains to be seen; none of the cases has been certified as a class action to date.

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