Managed Care Challenged in Class Action Lawsuit

This week has seen a rush of publicity about legislation and litigation targeting managed care organizations. Perhaps most notably, on October 4, 1999, several of the nation's most prominent plaintiffs' attorneys filed a lengthy class action complaint against Humana. This lawsuit, although not unexpected, has sent tremors through the managed care industry. This Alert summarizes the allegations in – and offers some preliminary observations about – the Humana lawsuit.

Background Events

Congress appears headed toward the passage of some form of "patients rights" legislation that may increase the exposure of managed care organizations to lawsuits by health plan enrollees. A number of states already have passed such legislation and many more appear inclined to follow suit.

Adding to managed care's woes, the Health Care Financing Administration has increased the regulatory burden on the Medicare managed care industry, and the U.S. Departments of Justice and Health and Human Services have made the investigation and prosecution of alleged fraud, waste, and abuse by managed care organizations (and their downstream providers) a law enforcement priority.

Moreover, in a number of recent lawsuits against managed care organizations, courts have decided to treat decisions involving medical judgment as raising quality of care rather than denial of benefits issues, thereby permitting actions that might otherwise have been dismissed – due to the ERISA preemption of state malpractice and other laws – to survive.

Finally, recent reports have suggested that a number of large law firms – including a coalition of firms that spearheaded the tobacco industry litigation – have turned their sights (and sizeable war chests) on the managed care industry. These reports, as it turns out, were true. On Monday, a three-count, 71-page class action complaint was filed against Humana in the United States District Court for the Southern District of Florida (Miami Division).

The Humana Lawsuit

The Humana lawsuit is brought by five individuals on behalf of themselves and "a class consisting of all persons in the United States who are, or were, enrolled" in Humana's health maintenance organizations, preferred provider organizations, or point of service plans at any point during the past six years. In general, the lawsuit – which raises claims under both the federal Racketeer Influenced and Corrupt Organizations ("RICO") Act and ERISA – alleges that Humana "systematic[ally] and intentional[ly] conceal[ed] from members of its health plans . . . accurateinformation about when health care will be provided, when claims will be approved or disapproved, and what criteria and procedures are actually used to determine the extent and type of their coverage."

More specifically, the lawsuit contains a mix of allegations that go to the core of how managed care plans operate (e.g., through capitation payments to physicians) and that target Humana's particular methods of operation. The lawsuit's core allegation is that Humana falsely represented to its enrollees that all coverage and treatment decisions would be made on the basis of "medical necessity" when, in fact:

  • Humana bases its coverage and review decisions "on a variety of concealed cost-based criteria that were unconcerned with, and sometimes inimical to, the medical needs" of enrollees.

  • Humana "concealed" from enrollees "that it has established a set of financial incentives for claims reviewers – including direct cash bonus payments – designed to encourage denial of claims without regard to [the] medical needs" of enrollees.

  • Humana "concealed" from enrollees that it "subcontracts the claims review process - and with it, the authority to decide the scope of [enrollees'] medical coverage – to third parties" who (1) hired "persons without appropriate medical training and specialization to make claims review determinations" and (2) use "criteria different from and more restrictive than" Humana's medical necessity criteria.

  • Humana "concealed" from enrollees that Humana "provides direct financial incentives to treating physicians and other health care professionals to deny coverage" to enrollees, "even where the proposed treatment satisfies" Humana's "[m]edical [n]ecessity definition."

With respect to the issue of injury, the lawsuit asserts that "[b]y means of this wrongful conduct," Humana provided enrollees with "benefits of lesser value than the benefits" Humana represented enrollees would receive. As such, the suit alleges, enrollees suffered harm – and Humana was "unjustly enriched" – in an amount "equal to the difference in value between the coverage described in" the Humana health plans "and the coverage actually provided" to enrollees.

Implications and Ramifications

It is, of course, impossible to predict the outcome of the Humana lawsuit. There are a host of complicated (and untested) legal issues that will need to be resolved by the court and, assuming the case survives a motion to dismiss, a massive amount of pretrial discovery that will need to be completed, before the case will be ready for either trial or settlement. Among other things, whether the plaintiffs can distinguish their factual allegations and legal theories from those offered in the recent class action against Aetna – which raised similar, although not identical, issues and was dismissed by a federal district court judge in Pennsylvania on September 29, 1999 – remains to be seen. (Note: At the time this Alert went to print, it was reported that a second class action had been filed against Aetna on October 4, 1999. According to these reports, this second suit raises issues similar to those raised in the Humana lawsuit.)

Notwithstanding these uncertainties, however, a few preliminary conclusions can be drawn. First, the plaintiffs are represented by experienced, aggressive, and high profile legal counsel – most notably David Boies, who has led the Department of Justice's antitrust litigation against Microsoft, and Cohen, Milstein, Hausfeld & Toll, a wellknown Washington, DC plaintiffs' firm. As a result, it is unlikely that the lawsuit will be anything other than hard fought.

Second, both financially and from a public relations standpoint, the Humana lawsuit – as well as the numerous related actions that reportedly will be filed against other managed care organizations in the coming weeks – will be exceedingly costly to the managed care sector. This is true almost regardless of whether the suits actually have merit or ultimately proceed to trial. Indeed, the discovery process itself will not only be costly in terms of legal fees, it will almost inevitably open a "Pandora's Box" of operational issues and questions that go beyond the allegations in the Humana complaint.

Third, although the principal target of (and sole defendant in) the Humana lawsuit is Humana itself – and not the network of physicians, hospitals, and other providers that actually furnish medical services to Humana's enrollees – the lawsuit plainly implicates these providers in Humana's purported scheme to deny enrollees medically necessary care. Thus, even apart from the potential adverse financial impact that such providers will feel if these lawsuits are successful, these actions are likely to have a derivative public relations impact on these providers. It also is foreseeable that many of the allegations leveled against Humana and other managed care organizations also may be leveled against other organizations, such as indemnity insurers that have a role in making medical necessity determinations.

Please contact us if you would like to discuss these developments further.

Bruce Merlin Fried(Health Law Group Chairperson)
[email protected] - 202.663.8006

H. Guy Collier
[email protected] - 202.663.8138

Rebecca L. Jackson
[email protected] - 202.663.8916

David C. Main
[email protected] - 202.663.8443

Gadi Weinreich
[email protected] - 202.663.8236