11th Circuit Affirms Class Status of RICO, but Not Prompt-Pay, Lawsuit
Stacey A. Tovino
satovino@central.uh.edu
October 15, 2004
During the 78th (2003) Regular Session, the Texas Legislature passed Senate Bill
418, which is frequently referred to as the “Prompt Pay Legislation” (SB 418). SB 418
amended both the Texas HMO Act and the Texas Preferred Provider Benefit Plan Act to
require HMOs and PPOs to pay paper claims within forty-five days and electronic claims
within thirty days of the date of the filing of a clean claim.1 One question that has been
raised is whether HMOs or other managed care organizations that are alleged to routinely
violate SB 418, or other states’ prompt pay laws, can be sued by a group of late- or nonpaid physicians as part of a class action lawsuit.
On September 1, 2004, the United States Circuit Court of Appeals for the
Eleventh Circuit affirmed the class-action certification of a lawsuit brought on behalf of
more than 600,000 physicians contending that several of the nation’s largest health
insurers violated the federal Racketeer Influenced and Corrupt Organizations Act
(RICO).2 The Eleventh Circuit also concluded, however, that the lower court’s class
certification of a prompt-pay lawsuit was inappropriate because, among other reasons, the
various state laws on the subject vary significantly and of the need for individualized
findings of facts.
The plaintiffs in Klay v. Humana, Inc. are a putative class of physicians who
submitted at least one claim to one of the defendant HMOs (including Humana, Health
1
TEX. INS. CODE §§ 843.338 and 1301.103, available at http://www.capitol.state.tx.us/statutes/in.toc.htm.
Klay v. Humana, Inc., 2004 WL 1938845 (Sept. 1, 2004), available at
http://www.ca11.uscourts.gov/opinions/ops/200216333.pdf.
2
Net, PacifiCare, Prudential, United HealthCare, and Wellpoint) between 1990 and 2002.
In their Second Amended Complaint, the plaintiffs allege that the backbone of their
relationship with the defendant HMOs is that they “’will be paid, in a timely manner, for
the covered, medically necessary services they render.’”3 The plaintiffs also claim that
the defendants systematically “’deny, delay and diminish the payments due’” them, and
that the defendants’ reimbursement systems are based on:
. . . covertly denying payments to physicians based on financially
expedient cost and actuarial criteria rather than medical necessity,
processing physicians’ bills using automated programs which manipulate
standard coding practices to artificially reduce the amount they are paid,
and . . . systematically delaying payments to gain increased use of the
physicians’ funds.4
The plaintiffs specifically allege that they are being systematically underpaid under both
fee-for-service and capitation methods of reimbursement. Under a fee-for-service plan,
an HMO agrees to reimburse physicians for any medically necessary services they
provide to covered individuals, whether or not those physicians are under contract with
the HMO. In theory, fee-for-service plans offer incentives for physicians to perform as
many tests and procedures as they can convince the HMO are medically necessary and
create incentives for HMOs to approve as few procedures as possible. The plaintiffs
allege that computer systems are programmed to systematically underpay the plaintiffs
through a variety of methods.
Under a capitation agreement, each patient specifies a physician as his or her
primary care provider and the HMO is obligated to pay each physician a small monthly
fee, called a capitation payment, for each patient registered to the physician. The
physician, in turn, is obligated to provide whatever medical services each registered
3
4
Id. at *1.
Id.
patient requires. In theory, capitation offers incentives for physicians to provide as few
services as possible to each patient, whether or not medically necessary, because the
physician’s payments are not tied to the quality or extent of services provided, and for
HMOs to register as few patients as possible with each physician in order to reduce their
monthly per-patient outlays. The plaintiffs contend that the defendant HMOs underpaid
the plaintiffs by failing to pay capitation fees for those patients who registered with a
plaintiff physician but have yet to visit the physician. The plaintiffs further allege that the
HMOs are withholding too much from their capitation reimbursements for pharmacy risk
pools because the HMOs are basing such withholdings on the actual cost of the drugs the
patients are using without taking into account the substantial rebates, refunds, or
discounts granted by the drug manufacturers. In addition, the plaintiffs allege that the
HMOs are “adjusting” the year-end statements to avoid the provision of contractually
obligated bonuses, which are due if there is money left in the pharmaceutical risk fund at
the end of the year after all of the patients’ covered medications have been paid for.
Finally, the plaintiffs argue that when capitation-plan physicians submit CMS-1500
forms for non-covered services, the capitation-plan physicians are subject to the same
types of fraudulent behavior as the fee-for-service physicians.5
Klay v. Humana, Inc. originated when lawsuits were filed in four federal judicial
districts against Humana. The Judicial Panel on Multidistrict Litigation (Panel)
consolidated the suits against Humana and, later, decided to combine the suits against
Humana with other suits filed across the country against other large HMOs. The Panel
found that all of the suits involved common questions of fact. Once the cases were
consolidated, the plaintiffs filed an amended complaint against all of the defendants,
5
Id. at *3.
requesting the district court to certify three classes: (1) a Global Class, including all
physicians who provided services to a person insured by a defendant from August 14,
1990, and who are in pursuit of claims under RICO; (2) a National Subclass, including all
physicians who provided services to a person insured by a defendant and who are in
pursuit of various state-law claims (including breach of contract, unjust enrichment, and
prompt-pay violations) as well as certain “direct” RICO claims; and (3) a California
Subclass, including all physicians who provided services to any person insured in
California by any defendant and who are in pursuit of violations of the California
Business and Professions Code.6
The United States District Court for the Southern District of Florida certified the
three classes under Federal Rule of Civil Procedure 23(b)(3), which permits a class to be
certified if the court finds that the questions of law or fact common to the members of the
class predominate over any questions affecting individual members and that a class action
is superior to other available methods for the fair and efficient adjudication of the
controversy. The defendant HMOs appealed the district court’s certification, arguing that
the common questions of law and fact concerning the federal and state claims do not
predominate over individual issues specific to each plaintiff physician and that a class
action is inferior to other methods of adjudicating them.7
On appeal, the Eleventh Circuit concluded that common questions of law and fact
concerning the fraud-based RICO claims did predominate over individual issues specific
to each plaintiff and that a class action was superior to other available methods of
adjudicating these RICO claims. However, the Eleventh Circuit requested the district
6
7
Id. at *5.
Id.
court to consider whether the creation of two new subclasses (a fee-for-service subclass
and a capitation subclass) “might be a superior way of proceeding.” The Eleventh Circuit
also found that because individualized issues of law or fact predominated over common,
class-wide issues, the district court inappropriately certified the state breach of contract,
unjust enrichment, and prompt-pay claims. With respect to the prompt-pay claims, the
Eleventh Circuit specifically noted that in the absence of any allegations that the
defendant HMOs’ computer programs always delayed payments, the prompt-pay claims
could only be proved by evidence unique to each class member physician. The Eleventh
Circuit did not reach the district court’s certification of the California Subclass because
the defendant HMOs did not specifically challenge this certification on appeal.
Klay v. Humana, Inc. will make it more difficult for large groups of Texas
physicians injured by violations of SB 418 to bring a class action. The remedies set forth
in the Texas HMO Act and the Texas Preferred Provider Benefit Plan Act continue to be
available for individual physicians or modest-sized groups of similarly situated
physicians who join as plaintiffs. For example, if an HMO has not paid a physician’s
clean claim on or after the 46th day and before the 91st day after the HMO is required to
make a determination or adjudication of the claim, the HMO is required to pay a penalty
in the amount of the lesser of: (1) 100% of the difference between the billed charges, as
submitted on the claim, and the contracted rate; or (2) $200,000.8
8
TEX. INS. CODE § 843.342(b).