The HMO lawsuit: Is the end in sight?

This class-action lawsuit could force insurers to stop shortchanging physicians.

By Robert Lowes
Senior Editor

One of the greatest paper chases ever—a mammoth class-action suit against 10 managed care companies in a federal district court in Miami—is headed into the home stretch, and doctors are starting to emerge as the big winners.

It's a two-headed suit, really. One part, filed by patients, asserts that insurers have denied 145 million Americans promised medical care. The other part, brought by individual physicians and state medical societies, accuses these same insurers of shortchanging some 700,000 doctors through abusive business practices, such as downcoding claims, using dubious medical-necessity guidelines, and delaying legitimate payments.

While the patients' case has stalled, the physicians have begun to wrest major settlements from individual insurers. Last month, Aetna announced that it would pay the doctors $100 million and, more importantly, reform how it conducts business with them. If other defendants follow Aetna's lead, the total payout could approach $1 billion, while fees for the plaintiffs' lawyers could run in the hundreds of millions.

It's a high-stakes contest that has bred tens of millions of pages of court documents, tied up a brigade of lawyers, and extended as high as the US Supreme Court.

Class-action certification strengthens the doctors' hand

The physicians' litigation began as separate suits in various state and federal courts. A panel of federal judges thought it best to combine the cases and assign them to US District Judge Federico Moreno in Miami. The defendants are Anthem, Cigna, Coventry Health Care, Health Net, Humana, Oxford Health Plans, PacifiCare Health Systems, WellPoint Health Networks, and UnitedHealth Group, which includes UnitedHealthcare, and Aetna.

In addition to 22 individual doctors, the plaintiffs include the medical societies of California, Florida, Georgia, Louisiana, and Texas, as well as the Denton County (Texas) Medical Society. Fourteen law firms plead their cause.

And that cause is a familiar one. The suit takes dead aim at what it calls fraudulent claims processing. It says insurers rely on software such as ClaimCheck (see "Software under a legal microscope") to systematically downcode, bundle, and deny legitimate claims, while concealing the software's coding logic from doctors. Likewise, insurers bounce claims using medical-necessity guidelines such as those published by Milliman USA—guidelines the plaintiffs brand as cost-based as opposed to scientific. And when a check is mailed, it's often months late, violating insurance contracts and state laws.

The suit also accuses insurers of failing to make monthly capitation payments for patients until they seek treatment from their assigned doctor. The payments should kick in as soon as patients are added to a doctor's panel, the suit states. Likewise, insurers are said to play games with pharmacy risk contracts, inflating drug costs to reduce capitation payments and cooking the books with year-end adjustments.

Physicians endure such mistreatment, the suit claims, because otherwise, they'd find themselves without patients. Insurers wield "overwhelming economic power and market dominance" to bully doctors into submission. Insurers work in cahoots with each other, too. As proof, the suit cites common software, common guidelines, trade associations, and joint ventures.

So far, the doctor's suit has been on a roll. Last fall, the federal court in Miami approved it for class-action status, which often gives plaintiffs an upper hand (the patients' version of the suit, in contrast, was denied similar status). A class-action suit packages a myriad of individual claims and presents them to a single jury. Rather than risk a colossal defeat on one roll of the dice, defendants often find it prudent to settle.

"The doctors are litigating from a position of strength," notes Sara Rosenbaum, a professor of health policy at The George Washington University. "So the urgency of a settlement becomes very high."

What makes the possibility of a jury trial especially scary is how the plaintiffs have fashioned their attack. They claim that the insurers collectively use fraud and extortion—think economic intimidation—to bilk doctors, thereby violating the federal Racketeer Influenced and Corrupt Organizations Act, or RICO. Lawsuits under this statute rival the Powerball lottery. Winners collect triple damages.

RICO was created to help prosecutors fight organized crime. Proponents of tort reform say the managed care lawsuit is one more example of plaintiffs' lawyers misusing RICO to raid the coffers of corporate America.

"The managed care industry needs fixing, but filing a RICO claim isn't the right way to do it," says New York attorney Philip Howard, author of The Collapse of the Common Good: How America's Lawsuit Culture Undermines Our Freedom (Ballantine Books, 2001). "We're not talking about a bunch of gangsters here."

Two insurers have already caved in

Judging by the actions of two defendants, the insurers are ready to surrender. Last November, Cigna reached a preliminary settlement in a separate but similar class-action suit filed by two physicians in a federal court in East St. Louis, IL. Cigna reasoned that the settlement, covering 600,000 physicians and other providers, would essentially remove it from the jumbo case in Miami.

Cigna agreed to compensate providers for wrongfully reduced or denied claims as well as late payments going back to Jan. 1, 1996. The outlay was estimated at $50 million to $200 million. Cigna also agreed to play fair with doctors. One major concession was eliminating "black-box" claims processing, where the rationale for approving, modifying, or rejecting claims is never revealed to doctors. The settlement called on Cigna to post its payment policies—including common bundling "edits" and medical necessity guidelines—on its Web site. Another concession was the promise to pay "clean" claims within 30 days or tack on interest.

The settlement, though, quickly became unsettled. The plaintiffs in the Miami case howled that Cigna's end-run around their litigation would undercut comprehensive, meaningful reform among all insurers. While the settlement forces Cigna to reveal its claims processing methodology, they say, it doesn't go far enough in actually eliminating improprieties such as the use of bogus medical-necessity guidelines. Furthermore, the Miami plaintiffs called the monetary damages too small.

A sympathetic Judge Moreno issued an injunction halting the settlement. "Cigna snookered both this Court and Judge Murphy in Illinois in an obvious attempt to avoid this Court's jurisdiction," Moreno wrote. A panel of federal judges later transferred the settlement to Moreno's court, where he will give it a final thumbs-up or thumbs-down.

The Aetna deal, in contrast, has the blessing of the Miami plaintiffs, who call it a model for any settlements with other defendants. Like Cigna, Aetna promises to make its claims processing transparent—you can look up everything on the Web—and cut checks faster. However, the Aetna settlement, which still needs Judge Moreno's approval, goes further to placate doctors. The insurer says it will work with doctors to develop claims-processing software that uses doctor-approved coding rules. And the agreement purports to have real teeth, calling for an independent appeals process for billing disputes, with recourse, if need be, to federal court.

Aetna and the Miami plaintiffs threw in some high-minded goals, too—the creation of a pharmacy discount card that doctors can give to patients as well as a foundation that will address issues like patient safety, childhood obesity, and the uninsured.

And, oh yes, the money. Aetna will be handing over up to $50 million to the plaintiffs' attorneys, $20 million to the new foundation, and $100 million to 700,000 active and retired physicians, or about $140 apiece. The 19 medical societies that endorsed the settlement are encouraging members to give their award to the foundation.

"What the doctors will receive is a pittance compared to what they might have gotten from a jury," says plaintiffs' attorney Archie Lamb of Birmingham, AL. "However, my clients were more interested in changing how Aetna dealt with them in the future than being compensated for past transgressions."

Closer to the end than the beginning

The Aetna settlement gives doctors something to crow about, but their HMO lawsuit hasn't been a complete cakewalk. Last April, the US Supreme Court sided with PacifiCare and UnitedHealth Group in its argument that complaints about unfair compensation shouldn't be resolved in court, but through arbitration, as their contracts with physicians stipulate. Archie Lamb calls the decision inconsequential. While breach-of-contract claims against PacifiCare and UnitedHealthcare will go to arbitration, says Lamb, the RICO claims against the two insurers alleging they're conspiratorial members of a managed care "racket" still remain in Moreno's court.

Meanwhile, all eyes are on the federal appeals court in Atlanta, where the insurers seek to overturn the class-action status given to the Miami litigation. They contend that a single jury shouldn't decide the fate of their industry. There's too much variation, they argue, in their claims processing systems, the state laws they operate under, their physician contracts—not to mention among physicians themselves—to justify rolling up individual grievances into one case. "The plaintiffs' position that all the insurers acted the same way over the last decade is almost laughable," says Los Angeles attorney Richard Doren, who represents the insurers.

If the insurers lose, they could go to the Supreme Court. If not, a jury trial is set for December.

Then again, the insurers could continue to settle on a piecemeal basis, or throw in the towel together. "We're much closer to the end than the beginning," says one Wall Street analyst who declined to be identified.

Lamb says his clients have debated how they should distribute money from a settlement or jury verdict. One option—proposed in the Cigna agreement—is to have physicians resubmit denied or underpaid claims, but that could be a monumental hassle. Another option is simply dividing the money equally among all doctors.

The plaintiffs, however, are more interested in injunctive relief that would force insurers to process and pay claims fairly. Reforms along these lines would accelerate the trend among insurers to ease up on physicians—doing away with preauthorizations for procedures, tests, and referrals, for example. Injunctive relief may cost the defendants far more than monetary damages, says Phillip Seligman, an analyst who follows the managed care industry for Standard & Poor's. A billion dollar settlement, he adds, wouldn't be crippling. "Insurers have re-insurance and good cash flows to cover damages."

Louisville, KY, gynecologist Charles Shane won't be worrying about any pain and suffering of third-party payers, however. Shane and several other doctors filed the first suit that was consolidated into the Miami case. A favorable outcome, he says, would level the playing field between physicians and an overbearing managed care industry.

"We've had no control," says Shane. "We've been powerless. The result has been not only an economic tragedy for physicians, but also a tragedy for patients, who've found their access to health care compromised.

"We've had no choice but to proceed with this litigation."

Software under a legal microscope

ClaimCheck isn't a household word among physicians. But this software program is at the heart of the legal war that physicians and insurers are waging in a federal court in Miami.

Most insurers named in the class-action suit rely on ClaimCheck to analyze CPT codes. They say the program merely finds and corrects miscoded claims. Physicians contend that the program robs them of their rightful fees.

ClaimCheck is sold by McKesson Information Solutions. The doctors' suit asserts that the widespread use of ClaimCheck and similar programs helps justify class-action status.

ClaimCheck subjects claims to "edits" that alter or reject CPT codes. Some are no-brainers. ClaimCheck will deny, for example, a claim coded 55250—a vasectomy—for a female patient. A CPT code that doesn't match a diagnosis code also gets booted.

Physician complaints lie with other edits. Rebundling, for instance, takes a claim with two or more CPT codes and substitutes one overarching code. Doctors contend that insurers too often combine codes that should remain separate.

One controversial form of bundling involves the rejection of CPT modifiers. If you give a child a routine physical, administer immunizations, and treat a case of strep throat in the process, your bill might consist of a CPT code for the preventive medicine visit, another code for a strep test, and a third for the evaluation and management service. You'd attach modifier –25 to the E&M code to distinguish it from the preventive care. However, insurers using software like ClaimCheck frequently deny payment for the modified E&M code anyway.

Then there's downcoding pure and simple. A 99214 office visit gets reduced to a lower-paying 99213.

Insurers have an entirely different take. ClaimCheck was developed in the late 1980s partly to counter widespread miscoding—some deliberate—by physicians, they say. One ploy was unbundling procedures like hysterectomies into multiple operations to maximize reimbursement, says preventive-medicine specialist Robert Bargar, who helped design ClaimCheck.

"Insurance companies asked us how doctors would react when ClaimCheck was introduced," says Bargar, now a consultant in Waban, MA. "We said the doctors who bill honestly and appropriately won't know that it's being used. We estimated that only 5 percent of physicians were bad apples."

Cigna, a defendant in the class-action litigation, also downplays the impact of ClaimCheck. "More than 90 percent of claims are paid as submitted," says company spokesman Wendell Potter. "ClaimCheck adjusts less than 10 percent."

However, insurers using the software see a big impact on their bottom line. McKesson says that ClaimCheck typically cuts reimbursements to health care providers by 3 to 6 percent. Humana once was saving approximately $100 million a year with ClaimCheck and programs like it, according to court documents.

The prospect of big savings prompted Medicare to adopt selected ClaimCheck edits in 1998. Two years later, Medicare dropped it after organized medicine protested that ClaimCheck edits ran contrary to CPT guidelines. What's worse, physicians said, the software amounted to a "black box" since Medicare didn't disclose ClaimCheck edits so doctors could code claims to avoid denials.

McKesson has defended ClaimCheck as a fair and accurate code-auditing tool that automates what had been a manual process. How insurers use the tool is another matter. They can customize the program, and the AMA has complained that their tweaks go over the line, particularly when it comes to modifiers.

"ClaimCheck is like a surgical instrument," admits Robert Bargar. "An insurer can use it to carve out the doctors doing the dirty work and leave the rest alone. Or they can get too aggressive and use the software to beat everybody into submission."

Robert Lowes. The HMO lawsuit: Is the end in sight?

Medical Economics

Jun. 6, 2003;80:33.