American Bar Association National Institute on Health Care Fraud 2001
by Lesley Ann Skillen, Esq.
Back in 1998, James Sheehan, the noted Chief of the Civil Division in the U.S. Attorney’s Office in Philadelphia, forecast the future of enforcement in the era of managed care thus: “No longer will we be involved primarily with sophisticated frauds in a complex payment scheme (billing for services not rendered, upcoding of services, providing unnecessary services). Law enforcement’s role will become the policing of deliberate denial or limitation of necessary services, and the provision of poor quality services.”1
Including in “law enforcement” private enforcement efforts by citizens on their own behalf, much has happened in the managed care (“HMO”)2 setting since 1998, particularly in the past year. And yet it remains to be seen whether “denial or limitation of necessary services” or “the provision of poor quality services” are even amenable to “enforcement” in that setting, outside of individual cases. In January 2000 (for example) an outraged Florida jury awarded nearly $80 million in punitive damages to the family of Caitlyn Chipps, a 9-year-old girl who died of cerebral palsy after she was terminated from a special treatment program for catastrophically ill children by her cost-conscious HMO.3 But broader assaults on the HMO industry by patients seeking to enforce promises by HMOs to provide them with the health care services that they thought they had purchased, and by doctors and other providers to enforce promises by HMOs to pay them without delays, reviews, reductions and improper denials, are presently hanging in the balance. In a federal multidistrict litigation currently pending in Florida, the nation’s leading HMOs are engaged in a gladiatorial contest on two fronts — the subscriber or patient class action front, and the health care provider class action front, both alleging RICO4 and ERISA5 violations and seeking treble damages and corrective injunctive relief.
This article focuses on the subscriber or patient class actions brought on behalf of millions of HMO plan members. In the HMOs’ analysis, these class actions amount to no less than an attack on the legitimacy and wisdom of the HMO system of health care itself. The practices that the plaintiffs claim to be fraudulent, say the HMOs, are not only not fraudulent, they are the essence of the system, crafted and honed over decades and officially enshrined in myriad legislative and regulatory forms. In response, the plaintiff plan members deny that their lawsuits impugn the legitimacy of HMOs. They deny that the state and federal laws and regulations governing HMOs sanction the behavior of the HMOs, which they allege amount to a purposeful failure to disclose “cost-containment” measures designed to reduce health services irrespective of medical need.
This article explores the broader policy issues and arguments, and some of the RICO questions, behind these class action lawsuits. Included is a discussion of the Supreme Court’s recent unanimous decision in Pegram v. Herdrich, 530 U.S. 211 (2000), in which the Court referred to “treatment rationing” by physicians, and financial rewards to physicians for their efforts, as “the very point of any HMO scheme.”6 Readers should ask themselves this question: Is the primary commitment of HMOs to provide optimum health care to their members, or is it in fact to contain health care costs, and thus to promote their own profitability, inevitably at the expense of optimum care?
In the 1990s, the government and private insurers grappled with industry practices and frauds that exploited the traditional fee-for-service payment system.7 “Overutilization” of medical services — providing services in excess of those strictly medically necessary — was a preferred means by which health care providers maximized their reimbursement from Medicare and others. A good example is the conduct at the heart of the government’s “Operation Labscam,” in which the government criminally and/or civilly prosecuted the nation’s major clinical testing laboratories. The government alleged that the labs “unbundled” and billed packages of blood tests on a per-test basis and billed for millions of medically unnecessary tests. Ultimately, settlement monies from the labs totaled more than $1 billion.
As the ‘90s progressed, the HMO concept was increasingly hailed as the cure for this explosion of fraud and abuse in fee-for-service medicine.8 Pay providers for “packages” of patient care rather than for individual services, supporters of the HMO system urged, and you will have created a system with little if any opportunity or incentive for overutilization. So, if the labs had been paid a flat fee (for example) per patient, per year, regardless of the number of tests performed, there would have been no opportunity to bill per test, and certainly no incentive to perform more tests than were medically necessary.
The HMO revolution may have eliminated fee-for-service provider fraud (at least to the extent that it has eliminated fee-for-service, which remains a feature of most HMO plans, albeit greatly reduced), but has it created an evil of even greater proportions? The HMO system, unfortunately, not only financially disincentivizes providers to overtreat, but provides them with powerful incentives to undertreat. Even more disturbing, managed care systems, as the name implies, require management by non-clinicians, administrators who also have a compelling financial interest in undertreatment — or “resource management,” as they may prefer to describe it.
Has managed care grown into a money-making machine with a captive audience of millions, in which life-and-death decisions are driven as much (perhaps more) by the financial interests of the machine as the medical needs of the patient? This is the drama currently being played out in Florida.
In In re Managed Care Litigation before Judge Federico Moreno in the United States District Court for the Southern District of Florida, eight major insurers – including Humana, Aetna-U.S. Healthcare, CIGNA, Foundation Health Systems, UnitedHealthcare and Prudential — are defendants in class action lawsuits brought on behalf of millions of HMO subscribers and providers. Both the “subscriber track” and “provider track” actions seek (inter alia) treble damages under RICO and injunctive relief under ERISA for allegedly fraudulent practices that the defendants argue are no more than the normal practice of providing managed health care.
The Subscribers’ Case
The subscriber plaintiffs9 — described as all persons who participated in the defendants’ health plans from a date certain to the present — argue that the HMOs systematically and intentionally concealed from them accurate information about the criteria and procedures actually used in determining the nature and extent of their coverage. The plaintiffs allege that the HMOs made material misrepresentions and omissions in uniform disclosures sent to plan members setting forth the “medical necessity” criteria that purportedly govern treatment and coverage determinations. The plaintiffs allege that instead, such determinations were made on the basis of “Undisclosed Cost-Based Criteria” that are different from, and even inimical to, the medical needs of patients. These included external clinical appropriateness criteria and guidelines developed by actuarial and consulting firms, such as Milliman & Robertson, Value Health Sciences and McKesson (developers of the InterQual Criteria).10
The plaintiffs allege that health care claims reviewers — some of whom lacked appropriate (or any) medical training and/or were third parties subcontracted by the HMOs — were given financial incentives, including direct cash bonuses, to encourage denial of claims and limitation of hospital admissions and stays, whether or not the “medical necessity” criteria set forth in the uniform disclosures were met.
Furthermore, the plaintiffs allege, the HMOs concealed from plan members that physicians were given financial incentives to reduce the amount of care. Such incentives included capitated payment arrangements (e.g., flat fees per patient, per month, regardless of the amount of care provided), “profiling” practices that analyze the clinical practice patterns of physicians to identify cost-effective and cost-ineffective physicians (as a result of which those in the second category were threatened with exclusion from the network), and automatic “downcoding” of claims submitted by physicians, whereby the benefits code assigned to a rendered service is arbitrarily changed so as to reduce the payment to the physician (thus providing a disincentive to perform certain medical procedures for which the physician is unlikely to be paid).
As a result of these affirmative misrepresentations and omissions, plaintiffs allege that they received health insurance of a lesser value than the coverage promised, and that the HMOs unjustly enriched themselves by retaining the difference between what plan members paid for health coverage, and the value of what they received. This amount, according to the plaintiffs, constitutes the financial injury that is recoverable threefold under RICO, and the amount that should be disgorged by the HMOs under ERISA. Plaintiffs also seek additional equitable relief under ERISA in the form of corrective disclosure of the allegedly concealed treatment and coverage criteria. With respect to ERISA, the complaints allege that the HMOs failed to meet the statute’s mandatory disclosure requirements, that the HMOs’ pattern of concealment and misrepresentation constituted a breach of their fiduciary duty to employee health plan members and that the HMOs breached a further obligation to act in accordance with plan documents.
The plaintiffs’ RICO case alleges a violation of 18 U.S.C. § 1962(c), which makes it unlawful “for any person employed by or associated with an enterprise engaged in, or the affairs of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise’s affairs through a pattern of racketeering activity . . . .” Section 1962(c)’s principal elements — “(1)conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity”11 — are alleged by the plaintiffs to consist of the operation and management by the HMOs of a network of “association-in-fact”12 national and local enterprises dispensing health care services to the plaintiffs through a pattern of multiple ongoing acts of mail and wire fraud13, extortion14 and Travel Act violations.15 The mail and wire frauds alleged consist of the delivery to plan members via the U.S. mails and interstate wires of uniform health plan documents containing the above-described material misrepresentations and omissions about the nature and extent of their health care coverage. The extortions allegedly consist of various forms of financial pressure and incentives imposed on physicians that effectively punish them for providing medically necessary care.
Beneath RICO’s facially simple elements lie a profusion of technical pleading requirements. The “enterprise” element in § 1962(c), for example, requires that the RICO “person” (the defendant) and the “enterprise” be separate from each other; in other words, the RICO defendant cannot be the RICO enterprise that the defendant “conduct[ed] . . . through a pattern of racketeering activity.” The defendants have attacked the plaintiffs’ enterprise theory as a violation of this “enterprise/person” rule, charging that a RICO enterprise under § 1962(c) cannot consist of the HMO entity (for example, Humana), together with its employees, affiliates and contracted health care providers, where the defendant is also the HMO entity. Inability to find an acceptable framework for pleading the enterprise element has been the undoing of many RICO cases.
“Enterprise” theories aside, the HMOs’ conduct, if the plaintiffs are correct, represents just that type of organizational misbehavior that RICO was intended to proscribe. The institutionalized nature of the administrative and clinical networks through which the HMOs operated, the systematic and ongoing distribution of misleading coverage materials to unsuspecting victims, and a behind-the-scenes infrastructure catering to corporate greed at the victims’ expense, are all elements of a classic RICO suit. Those who find offensive the whole idea of characterizing seemingly upright corporate citizens like Humana, Aetna-U.S. Healthcare, and CIGNA et al., as “racketeers” should take note of the Supreme Court’s 1985 ruling on this subject: “Congress wanted to reach both ‘legitimate’ and ‘illegitimate’ enterprises . . . . The former enjoy neither an inherent incapacity for criminal activity nor immunity from its consequences.”16 This sentiment was echoed by the Court less than five years later: “[T]he legislative history shows that Congress knew what it was doing when it adopted commodious language capable of extending beyond organized crime . . . . We thus decline to accept the invitation to invent a rule that RICO’s pattern of racketeering concept requires an allegation and proof of an organized crime nexus.”17
The HMOs’ Response
Trumpeting the Supreme Court’s June 2000, decision in Pegram v. Herdrich, 530 U.S. 211 (2000), an ERISA case (discussed further below), the HMOs argue that the plaintiffs’ lawsuit is precisely what the Supreme Court in Pegram warned the judiciary not to entertain, viz.: “wholesale attacks on existing HMOs . . . untethered to claims of concrete harm.”18 The HMOs argue that the class action suits are, in fact, an attempt “to overturn our nation’s system of health care delivery,” an effort that is “plainly untenable in light of the Supreme Court’s recent holding that such policy judgements lie exclusively in the hands of the political branches of government.”19 The HMOs assert that under Pegram, the alleged fraudulent non-disclosures to class members are, in fact, an attempt to declare the use of cost-containment measures by HMOs illegal per se. Pegram, they point out, recognizes that all HMO systems involve financial incentives that are designed to bring down the cost of health care by reducing unnecessary services.
The HMOs thus complain that the plaintiffs have misconstrued as fraud their well-meaning efforts to provide optimum health care services to their members within affordable boundaries. They point out that federal and state laws not only authorize, but even promote, the practices that the plaintiffs say were concealed — such as physician financial incentive arrangements, utilization review and management, and the use of third party claims reviewers – and that such practices have been widely and publicly debated.
Furthermore, they argue, plaintiffs cannot show any injury under RICO or otherwise. Since plaintiffs do not allege that they have been denied coverage for specific medical procedures, their alleged injuries are purely hypothetical, and RICO does not permit recovery for intangible losses attributed to the risk of future harm. Plaintiffs’ claim that the value of their health care coverage was reduced as a result of the alleged fraud is no more than speculation. The defendants also assert that plaintiffs have failed to identify a RICO “enterprise” that is distinct from the defendant (see above) and that the required RICO elements of materiality, causation and reliance cannot be established because the plaintiffs’ employers, and not the plaintiffs themselves, made the initial selection of their health coverage. Therefore, the plaintiffs cannot show that they would or could have made different health coverage choices had they known of the allegedly concealed cost-containment practices.
Pegram and Maio
During the year 2000, two crucial judicial decisions set parameters for the class action suits currently pending in Florida. Neither case was great news for plan members, although the real impact on future litigation remains to be seen.
In Pegram (referred to above), the Supreme Court unanimously held that treatment decisions made by HMOs acting through physician employees are not fiduciary acts under ERISA. Cynthia Herdrich’s HMO doctor, Lori Pegram found an eight centimeter inflamed mass in Mrs. Herdrich’s abdomen after she complained of pain in the mid-section. Rather than immediately refer Mrs. Herdrich to a local hospital for an ultrasound, Dr. Pegram chose to wait eight days for an ultrasound to be performed at an HMO facility 50 miles away. Before that could occur, Mrs. Herdrich suffered a ruptured appendix. Mrs. Herdrich brought a successful malpractice claim (receiving $35,000 compensation for her injury) as well as an action under ERISA, alleging that the HMO’s practice of rewarding physicians for limiting medical care entailed a breach of an ERISA fiduciary duty to act solely in the interests of plan participants.
The Court declined to treat the physician incentive policies of Mrs. Herdrich’s HMO – under which physicians were directly paid the profits resulting from their own decisions limiting care – as distinct from those of other HMOs for ERISA fiduciary duty purposes. “[I]nducement to ration care goes to the very point of any HMO scheme,” said the Court, “[N]o HMO could survive without some incentive connecting physician reward with treatment rationing. The essence of an HMO is that salaries and profits are limited by the HMO’s fixed membership fees . . . . Whatever the HMO, there must be rationing and inducements to ration.”20 Therefore, all HMOs must be subject to the same fiduciary standards under ERISA.
To hold that a mixed eligibility/treatment decision was fiduciary in nature under ERISA, reasoned the Court, would mean that plan members could recover simply by showing that the profit incentive to ration care would affect those decisions in general, contrary to the fiduciary standard of acting solely in the interests of the patient. Since Mrs. Herdrich sought the return of profits from the HMO, the effect of such holding would be “nothing less than the elimination of the for-profit HMO … [T]he judiciary has no warrant to precipitate the upheaval that would follow a refusal to dismiss Herdrich’s ERISA claim. The fact is that for over 27 years the Congress of the United States has promoted the formation of HMO practices.”21
Naturally, these strongly-worded statements from the Supreme Court Justices were hailed by HMOs and their counsel as the death knell of the Florida class action suits. However, Pegram does necessarily mean that HMOs can never be sued for anything. For example, the Justices saw fit to exempt from their ruling an ERISA fiduciary duty that might arise from failure to disclose physician incentives to limit care. In footnote 8, the Court observed: “Although we are not presented with the issue here, it could be argued that Carle [the HMO] is a fiduciary insofar as it has discretionary authority to administer the plan, and so it is obligated to disclose characteristics of the plan and of those who provide services to the plan, if that information affects beneficiaries’ material interests.”22
Non-disclosure, of course, is the thrust of the plaintiffs’ argument in the Florida cases. The plaintiffs emphasize that their lawsuits do not challenge the legality of the cost-containment practices themselves but the failure to disclose them to plan members. Previous cases, Pegram included, challenged the use of certain practices — in Pegram, the use of financial incentives to physicians to limit care. The plaintiff plan members’ actions address the HMO’s failure to disclose the physician financial incentives to limit care, the “Undisclosed Cost-Based Criteria” and the other cost-containment measures detailed in their actions.
This concealment-focus is also the means by which the plaintiffs distinguish their cases from the Third Circuit Court of Appeals ruling in August 2000 in Maio v. Aetna, Inc., 221 F.3d 472 (3d Cir. 2000), a RICO class action. In that case, the plaintiff plan members alleged that Aetna fraudulently misrepresented through marketing, advertising, and membership materials that its primary commitment was to provide quality health care services to its HMO members. In fact, they alleged, Aetna’s internal policies, which included medical decision-making by non-clinicians and physician incentives to limit care, sought to contain health care costs and to improve Aetna’s own profitability at the expense of quality of care. As a result, plan members paid more for their policies than they were worth in fact, and hence suffered property damage to that extent.
The Third Circuit held that a cognizable injury to property under RICO’s § 1962(c) could not be established without proof that Aetna failed to perform under its contractual arrangements with plan members. The allegation that the “injury” consisted of a lower quality of care was too speculative, and specific losses on an individual basis would have to be proven to ground a RICO action. The value of the plaintiffs’ coverage “simply cannot be ‘worth less’ unless something plaintiffs were promised was denied them,” reasoned the court.23 The plaintiffs failed to identify specific medical care that was denied, inferior health care that was received, medical treatment that was delayed, or medical injuries that were caused by the alleged fraud. Therefore, plaintiffs could not establish sufficient injury to business or property under RICO.
The court also noted what it viewed as the profound impact of the Supreme Court’s decision in Pegram on its decision in this case: “We read the Court’s approach in Pegram as undermining the validity of appellants’ RICO injury theory predicated on the notion that their health insurance was rendered ‘inferior’ by Aetna’s implementation of its managerial policies outlined in the complaint. In particular, given that the very concept underlying appellants’ economic harm is the notion that the structure of Aetna’s HMO plan is faulty, we cannot ignore the circumstance that appellants’ injury theory in essence asks us to pass judgment on the legal validity of the policies and practices themselves.”24 The Third Circuit found “particularly compelling” Pegram’s articulation of the practical problems which arise when courts presume “to determine the social utility of one particular HMO structure as compared to another.”25
Thus the Florida plaintiffs repeatedly stress that their lawsuits do not challenge the wisdom or legality of the HMO system itself, nor do they allege that the HMOs provided a lower quality of care than that promised. The plaintiffs’ claim is that the HMOs knowingly and purposefully misrepresented that decisions regarding claims and benefits would be made on the basis of a definition of “medical necessity” that was plainly inconsistent with the practices the HMOs were in fact using to make such decisions. These misrepresentations directly injured plan members because they received lesser coverage than the HMOs represented they would provide. This coverage has economic value regardless of whether the participant was provided or denied care, because the value of insurance is measured by the amount of risk covered, not by the claims actually made: “If the safety net of insurance coverage that is sold to subscribers is materially smaller than it was represented to be, then the subscribers have been cheated, whether or not they actually fell through the net.”26
Plan members can take some comfort from Judge Moreno’s March 2, 2001, ruling on the HMOs’ motion to dismiss the provider track complaints. Judge Moreno declined to join the Pegram chorus, finding that “the Court in Pegram did not fashion an all-encompassing cloak of immunity for the health care industry . . . . The viability of HMO-type structures will not be imperiled if such entities are held accountable for concrete harm flowing from acts of fraud, extortion and breach of contract, as alleged by the Plaintiffs.” Pegram, Judge Moreno observed “is not a talisman before which all of Plaintiffs’ claims should fail,” as the defendants would have it.27
Further, Judge Moreno did not find Maio applicable to the facts of the provider complaints: “Even if this Court were to adopt the Third Circuit’s reasoning, the Defendants’ argument would fail as to these plaintiff providers (doctors).”28 The providers, Judge Moreno found, had alleged in detail the specific fraudulent claim denials and other fraudulent acts leading to their monetary losses, and thus had pled sufficient injury to business or property to confer standing under RICO.29
It seems that the courts may be reluctant either to wade into the uncertain seas of managed care fraud, and/or to take the risk of undermining the foundations of the managed care system, lest it collapse. The Supreme Court’s perhaps unfortunate choice of words in the Pegram case serve to highlight what may well be a bleak reality: “no HMO organization could survive without some incentive connecting physician reward with treatment rationing.”30 The Dickensian images brought to mind by the notion of “treatment rationing” hardly reflect the way in which most Americans would prefer to view their health care coverage. And the idea that physicians must be financially incentivized to police (and even to promote) this “rationing” is even less appealing.31
The outcome of the Florida lawsuits will no doubt help to define the parameters of the future of managed care. If the plaintiff plan members are right, then millions of American consumers have been systematically duped by their health insurers — those whom they trusted and paid handsomely to protect their lives and health. Hopefully, curtailment of the worst of these excesses and significant reforms to the operation and management of HMOs would follow.
If the defendant HMOs are right, then not only have consumers not been duped, but the practices plaintiffs allege to be fraudulent will be acknowledged as the normal business of the HMO industry. If defendants are right, then popular beliefs about HMOs – for example, that they provide cut-rate, often second-rate medicine, that clerks and actuaries rather than physicians are the ultimate arbiters of medical need, that patient plans of care are liable to be curtailed when funds run short, that HMOs don’t tell consumers (or providers) the whole truth about their health coverage decisions, that “HMO horror stories” abound — all of this will turn out not only not to be fraudulent, but it will turn out to be part and parcel of managed care as we know (or ought to know) it. In short, all of these widely held views about the nature and quality of HMO medicine may well prove to reflect precisely what those who designed it intended.