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Court decisions hold implications for managed care plans - part one.

Court Decisions Hold Implications for Managed Care Plans--Part One

The managed care industry--and HMOs in particular--is now facing the realities of a maturing business. Maturity has brought a competitive tension to the HMO/managed care field, one consequence of which is increased litigation, not only among HMOs but also between HMOs and their suppliers, customers, and indemnity insurers. Entanglement in the legal system is an outgrowth of efforts to gain or preserve a competitive edge, reduce costs, and attract customers. This article highlights selected legal developments from the past two years that reflect the causes and effects of this environment. Additional cases will be discussed in the March-April 1990 issue of the journal. "Health Law" is a regular feature of Physician Executive contributed by Epstein Becker & Green. Douglas Hastings, Esq., a partner in the law firm's Washington, D.C., offices, serves as column editor.

In this issue of Physician Executive, I will deal with two major medicolegal issues--antitrust and racketeering.


Ocean State Physicians Health Plan v. Blue Cross and Blue Shield of Rhode Island[1] The U.S. Court of Appeals for the First Circuit recently ruled that a Blue Cross monopoly, as a "buyer" of physician services, could enforce a coercive "most favored nation" clause against physicians, as long as the resulting prices were not "predatory." The case arose when a three-year-old HMO, Ocean State, charged the Blues with monopolization of the state insurance market through the use of a tripartite strategy that, Ocean State alleged, forced physicians to cancel their contracts with Ocean State and coerced employers to cease offering the Ocean State plan to their employees. Under that strategy, Blue Cross selectively marketed an HMO look-alike product called "HealthMate" and simultaneously imposed "adverse selection" price penalties on employers that offered the Ocean State Plan as an alternative to Blue Cross coverage. The HealthMate product was offered only as an option to traditional Blue Cross coverage for employers offering a competing HMO (i.e., Ocean State). Employers who offered HealthMate as an alternative to Ocean State received price considerations on their traditional Blue Cross coverage. Most significantly, Blue Cross imposed a "Prudent Buyer" policy on physicians participating in competing HMOs, which required them to give no competing health plan a more favorable price than they gave to Blue Cross. Physicians who could not establish compliance with the policy were subjected to an automatic 20 percent fee reduction by Blue Cross. In practice, this policy was applied only against physicians who contracted with Ocean State. Because Ocean State employed a 20 percent risk "withhold," Blue Cross demanded that those physicians either drop their Ocean State contracts or give Blue Cross a 20 percent discount. Following those actions by Blue Cross, Ocean State's roster of participating physicians shrank by one-third. Enrollment, which previously had shown steady growth, went flat and market share declined. The plan incurred increased expenses for marketing and to purchase specialty physician services to replace those previously provided by the defecting physicians. Significantly, Blue Cross imposed price increases after the Ocean State defections, turning a $14 million deficit in the first half of 1986 to a $10 million surplus in the second half. On the basis of those facts, a jury found that Blue Cross had violated Section 2 of the Sherman Act and had tortiously interfered with Ocean State's physician contracts. It awarded Ocean State and its physicians $3 million in damages. The verdict, however, was set aside by the trial court. The court ruled that Blue Cross' actions were not anticompetitive. The court was unpersuaded that consumers had been harmed by any exercise of market power, finding instead that Blue Cross sought only to obtain the best price for the services it purchased. In general, the court characterized Blue Cross' actions as legitimate responses to competitive conditions. The District Court's decision was affirmed by the appellate court. It held, first, that the Healthmate and adverse selection aspects of Blue Cross' strategy were exempt from antitrust scrutiny. The court was then persuaded that Blue Cross had adopted the "Prudent Buyer" strategy as a cost containment measure, to the ultimate benefit of consumers. Although the Court found that Blue Cross had monopoly power, it held that Prudent Buyer must be deemed a legitimate business practice as a matter of law unless the payments made to physicians were below the selling physicians' incremental costs. Ocean State will seek review of the decision in the U.S. Supreme Court.

Reazin v. Blue Cross and Blue Shield of Kansas[2]

This case arose when Blue Cross of Kansas terminated its contract with a hospital that was under common ownership with a competing HMO. A jury awarded the competing hospital and HMO $7.8 million under the Sherman Act, based in part on its finding that Blue Cross' actions were undertaken in concert with the terminated hospital's competitors. Evidence at trial showed that at least 27 meetings had taken place between Blue Cross and the competitor hospitals, mostly in the context of discussing the development of a new HMO/PPO with the hospitals, and that the termination of the plaintiff hospital had been discussed at some of those meetings. The evidence also suggested that the competitor hospitals agreed to give Blue Cross a better discount. The jury inferred a conspiracy to reduce competition from those facts. The decision is presently on appeal.

Hassan v. Independent Practice Associates, Inc.[3]

Two physicians terminated from participation in an HMO brought a Sherman Act suit against the plan's IPA, alleging price-fixing and group boycott. The plan paid the defendant IPA a capitation amount and retained 12 percent of the capitation as a risk "withhold." The withhold was to be paid to the IPA when sufficient surplus was available. The IPA paid its members on a fee-for-service basis according to a maximum fee schedule that it established. The plaintiffs charged that the fee schedule fixed prices at lower than competitive levels. Citing evidence that the IPA and the health plan had combined to both underwrite and provide services, that the IPA members shared in the plan's risk, and that the risks of loss were real (in the sense that some physicians lost their "withhold" amounts in some years), the court concluded that the physicians were engaged in a legitimate joint venture. As a consequence, their maximum fee schedules did not constitute per se illegal price-fixing. The court also found that, even if considered under a "rule of reason" analysis, the fee schedules were lawful because the rates paid to IPA members had no direct impact on consumers, and if those rates were too high, the physicians were at risk for the excess plan costs. The court also rejected the plaintiffs' group boycott claims, finding that the IPA's 20 percent market share did not give it sufficient market power to harm competition even if the IPA were engaged in a boycott. Moreover, the court found that the exclusion of the plaintiff physicians was for legitimate business reasons, having been in reaction to the plaintiff's objections to the IPA's cost-containment policies. Thus, the court concluded, the exclusion was justified as enhancing the efficiency of the plan.

Hahn v. Oregon Physicians' Service[4]

The Ninth Circuit Court of Appeals reversed a summary judgment in favor of a physician-controlled Blue Shield plan and against a group of podiatrists, who claimed that their categorical exclusion from Blue Shield participation constituted an unlawful boycott. The podiatrists also alleged that the plan had engaged in price-fixing, by virtue of the fact that the claims of participating physicians were paid at a higher rate than the claims of nonparticipating podiatrists. In the court's opinion, evidence that the physicians occupied a majority of the plan's board raised at least an inference that the plan was a conspiracy among the physicians and not an independent provider. The court concluded that the board members, even if not themselves competitors of the podiatrists, conceivably could have acted in the anticompetitive interests of those Blue Shield physicians who did compete with the podiatrists. In addition, the court noted an absence of evidence that the podiatrists' categorical exclusion was motivated by cost or other legitimate business considerations. Significantly, the court indicated in a footnote that control of a health plan by providers "may" be less probative of an unlawful conspiracy in the HMO context: "We recognize, however, that this rule, [i.e., that a plan may reimburse member and nonmember providers differently only if not controlled by providers] may not be applicable to some health plans, such as health maintenance organizations, in which `persons who would otherwise be competitors pool their capital and the risks of loss as well as the opportunities for profit....' In such an arrangement, involving a `functionally integrated group of doctors,' it is the doctors, rather than the patient or insurer, who bear the economic risk."

Thompson v. Midwest Foundation Independent Physician Association[5]

The much-publicized ChoiceCare case came to a conclusion through a settlement urged upon the parties by the Ohio Department of Insurance. In ChoiceCare, a group of physicians claimed that the plan, which was physician-controlled, had engaged in unlawful price-fixing through its maximum fee schedules. The allegations were complex, as the complaining physicians were class representatives of physicians who either contracted with the plan or had invested in the plan when it converted to for-profit status. The plaintiffs claimed that the physicians who controlled the plan had conspired with each other and with the officers of the plan to set physician payment rates at an artificially low level. That was done, the plaintiffs alleged, in order to improve the plan's financial status, thus benefiting the controlling physicians and officers, who were heavily invested in the new for-profit corporation that owned the plan. A federal jury awarded the plaintiffs $102 million in damages. While a motion for judgment notwithstanding the verdict was pending, the case was settled. The settlement was vigorously pursued by the state insurance commissioner, who sought to avert the bankruptcy of the largest HMO in the Cincinnati area. Under the settlement, the jury verdict was reduced to approximately one-third of its original level. ChoiceCare will remain a nonprofit health care plan and continue in operation. Participating providers will retain only minority representation on the plan's board, with other arrangements being made to give providers a voice in major corporate decisions. Most of the plan's officers and directors have been replaced. The disposition of the ChoiceCare suit eliminates any precedential legal value it may have had. This is important, as the trial court arguably misinterpreted a number of key antitrust principles governing provider-controlled HMOs.


Teti v. U.S. Healthcare[6]

In late 1988, a group of former enrollees of the U.S. Healthcare (USHC) plan in Philadelphia filed two class action cases against USHC and all of its constituent plans, alleging violations of the federal Racketeer Influenced and Corrupt Organizations (RICO) Act. The complaint alleged that USHC failed to inform its current and prospective enrollees about the existence and terms of its incentive payment arrangement for primary care physicians. The plaintiffs claimed that those arrangements create a disincentive for primary care physicians to make referrals for specialty care and to admit patients to hospitals. In the context of USHC's marketing representations (including advertising by radio, television, and the mail) that it provides "unlimited" access to necessary specialist and hospital care and that it is dedicated to provision of the "highest quality" care, USHC's failure to disclose the physician incentives was alleged to constitute federal mail and wire fraud. Those "fraudulent" acts, in turn, were alleged to be the predicate of a "racketeering" scheme in violation of RICO. In November 1989, the trial court dismissed the case, finding that allegations did not state a sufficient racketeering claim. Teti represented the first major RICO attack on HMO operations and one of the first RICO attacks against health care providers. The favorable disposition of the case is important for three reasons. First, litigation called into question the validity of physician fee withholds and other forms of physician incentives in the prepaid care setting. Second, the Teti case raised the question of whether HMOs bear an affirmative obligation to disclose their provider arrangements to enrollees. By implication, that question also reached the nature of permissible representations that HMOs and other providers may make to current and prospective enrollees about the quality and availability of services, particularly where access to services is controlled in any fashion, i.e., by prior authorization requirements, concurrent or retrospective utilization review, or provider practice monitoring and incentives. Finally, the case raised a number of significant legal issues of first impression concerning the relationship of RICO to state HMO regulatory schemes and to federal preemption doctrines.


[1].838 F.2d 1011 (1st Cir. Aug. 21, 1989), aff'g, 692 F. Supp. 52 (D.R.I. 1988). [2].635 F.Supp. 1287 (D. Kan. 1986) and 663 F. Supp. 1360 (D. Kan. 1987). [3].698 F. Supp. 679 (E.D. Mich. 1988). [4].868 F.2d 1022 (9th Cir. 1988). [5].Thompson v. Midwest Foundation Independent Physicians Ass'n d/b/a Choicecare, 124 F.R.D. 154 (S. D. 154 (S.D. Ohio 1988) (approving settlement). [6].No. 88-9808, along with Erlacher et al. v. U.S. Healthcare, Inc., et al.,No. 88-9822 (E.D. Pa.).

Robert W. McCann is a Partner, Epstein Becker & Green, Washington, D.C. Additional cases will be discussed in the March-April 1990 issue of Physician Executive.
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Author:McCann, Robert W.
Publication:Physician Executive
Date:Jan 1, 1990
Previous Article:Managing in a merger and acquisition era.
Next Article:Paradigms for success in purchasing health care.

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