418, which is frequently referred to as the Prompt Pay Legislation (SB 418). SB 418

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Clarissa O’Brien’
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1 11 th Circuit Affirms Class Status of RICO, but Not Prompt-Pay, Lawsuit Stacey A. Tovino October 15, 2004 During the 78 th (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 and , available at 2 Klay v. Humana, Inc., 2004 WL (Sept. 1, 2004), available at

2 Net, PacifiCare, Prudential, United HealthCare, and Wellpoint) between 1990 and 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 Id. at *1. 4 Id.

3 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.

4 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 Id. at *5. 7 Id.

5 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 46 th day and before the 91 st 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, TEX. INS. CODE (b).

MATTHEW T. SCHELP. St. Louis, MO office:

MATTHEW T. SCHELP. St. Louis, MO office: MATTHEW T. SCHELP Partner St. Louis, MO office: 314.480.1772 email: matthew.schelp@ Overview A former federal prosecutor, Matt concentrates his practice in the areas of compliance, internal investigations,