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August 5, 2004.

ZEV AND LINDA WACHTEL, et al., Plaintiffs
GUARDIAN LIFE INS. CO., et al., Defendants. RENEE McCOY, individually and on behalf of all others similarly situated, Plaintiffs v. HEALTH NET, INC., HEALTH NET OF THE NORTHEAST, INC., and HEALTH NET OF NEW JERSEY, INC. Defendants.

The opinion of the court was delivered by: FAITH HOCHBERG, District Judge



This Matter is brought pursuant to the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1001 et. seq. and calls upon the Court to determine:1) whether to grant Defendants' motion to dismiss for failure to exhaust;*fn1 and 2) whether to grant class certification in each of the above-captioned cases. "ERISA was enacted to `promote the interests of employees and their beneficiaries in employee benefit plans' and `to protect contractually defined benefits.'" Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 109, 109 S.Ct. 948, 956 (1989) (quoting Shaw v. Delta Airlines Inc., 463 U.S. 85, 90, 103 S.Ct. 2890, 2896 (1983) and Massachusetts Mutual Life Ins. Co. v. Russell, 473 U.S. 134, 148, 105 S.Ct. 3085, 3093 (1985)). Although ERISA plans frequently grant discretion to plan administrators and fiduciaries, giving them more freedom to determine eligibility for benefits and to construe the terms of the plan, the fundamental purpose of ERISA remains the protection of beneficiaries. Ultimately, this Court will have to determine whether Health Net abused the substantial discretion it has by acting contrary to the best interests of its beneficiaries.

  The Plaintiffs sue under ERISA § 502 (a)(1)(B), 29 U.S.C. § 1132(a)(1)(B) which permits a civil action by a plan participant or beneficiary "to recover benefits due to him under the terms of the plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan," and under ERISA § 502(a)(3), 29 U.S.C. § 1132(a)(3) for various alleged breaches of fiduciary duties. 29 U.S.C. § 1132(a)(3) permits a participant or beneficiary to "A) enjoin any act or practice which violates any provision of this title or the terms of the plan or B) to obtain other appropriate relief i) to redress such violations or ii) to enforce any provisions of this title or the terms of the plan." The Plaintiffs also bring claims under ERISA § 104(b)(4), 29 U.S.C. § 1024(b)(4) for failure to supply information upon request and under ERISA § 102, 29 U.S.C. § 1022 for failure to issue appropriate Summary Plan Descriptions.

  This opinion sets forth a detailed analysis of the factual questions presented in order to ensure that the reader understands the Court's determination as to whether common questions of law and fact exist sufficient to warrant class certification. The merits of disputed facts are not reached at this time. Factual Background and Procedural History:*fn2

  I. Overview:

  The named Plaintiffs in both actions are beneficiaries of two different employee benefit health plans offered by Health Net of New Jersey, Inc.*fn3 They seek class certification for Health Net beneficiaries nationwide to address alleged misconduct by Health Net in administering health plans for beneficiaries who utilize out-of-network or non-participating health care providers under the terms of their plans.

  Health Net offers three main types of health benefits plans: 1) health maintenance organizations; 2) preferred provider organizations; and 3) point-of-service plans ("POS plans"). Plaintiffs have point-of-service plans which permit the subscriber to use in-network or out-of-network providers. An out-of-network (or non-participating) provider is a provider who is not part of Health Net's network and does not have a contracted-for rate with Health Net. If a subscriber decides to go to an out-of-network provider, the subscriber is subject to deductible, coinsurance, allowable amounts, reasonable and customary amounts, and/or usual, customary, and reasonable charge limitations.

  Health Net maintains plans for large and small employer groups. A small employer is one with more than two but less than 50 employees. Within the large and small employer categories, Health Net maintains various plans. Therefore, Health Net maintains separate contracts governing the rights and responsibilities of Health Net and its subscribers. The contract is known as the Explanation of Coverage ("EOC"). Beneficiaries receive EOCs and Summary Plan Descriptions ("SPD").*fn4 Although the various POS plans issued by Health Net may vary in their details, the crucial provisions are highly similar. For example, different POS plans will state that out-of-network reimbursements will be calculated based on the usual, customary, and reasonable charge for the particular service, but the plans may use slightly different words to define the usual, customary, and reasonable charge. The crux of the allegations against Health Net for breach of fiduciary duty and breach of contract is its alleged failures to disclose and failures to administer reimbursements to its beneficiaries in accordance with the plans.

  II. Reimbursement Methods For Beneficiaries Who Choose Out-of-Network Providers:

  A. Reductions Based on the Usual, Customary, and Reasonable Charge:

  An important component of the Plaintiffs' allegations is Health Net's use of outdated data to determine Usual, Customary, and Reasonable ("UCR") charges. Health Net's plan contracts do not cover an entire fee charged by an out-of-network provider. Rather, it pays a percentage of a certain allowed charge, which is most often defined as the Usual, Customary, and Reasonable charge for the service provided. The beneficiary pays the remaining percent of the UCR charge and is responsible for the rest of a medical bill that exceeds the UCR charge. The percent of the UCR charge for which the beneficiary is responsible is known as the coinsurance rate.

  Thus, the coverage for out-of-network treatment that a beneficiary receives depends heavily on how UCR is defined. Disclosure of how UCR is defined and calculated for the plan beneficiaries becomes important when patients' doctors are outside Health Net's list of innetwork providers. For example, in order for beneficiaries to estimate in advance the amount of money they may have to pay to make up the difference between the allowed amount and the actual charge, they would need to know how Health Net will determine the UCR calculation. Knowledge about UCR calculations would also facilitate intelligent comparison of two different insurance plans. Plans may have the same coinsurance percentages, and may state that allowed amounts are determined based on UCR rates, but if the plans define UCR in undisclosed ways, beneficiaries may be unable to determine the basis from which their coinsurance rate will be calculated, and thus be left to ask: "I am responsible for a percentage of what?"

  In its Northeast plans, Health Net makes UCR determinations by referring to a nationwide database, compiled by Ingenix, Inc. Ingenix distributes two similar databases, the Prevailing Health Care Charge System ("PHCS") and the MDR/Medicode database.*fn5 The subscriber reference materials for the PHCS database and the MDR database indicate the substantial similarities between the two databases. In Health Net's California and Oregon plans, Health Net uses the MDR database to determine UCR for out-of-network claims.*fn6

  Plaintiffs allege that Ingenix documents incorporate a disclaimer stating that the data in the PHCS database does not constitute UCR. Health Net bases its UCR determination on the PHCS and MDR databases unless the procedure is not included in the database. In July 2001, for example, Health Net issued Operations Alert # 493 which implemented a hierarchy for determining what fee schedule would be used to determine the allowed amount for a provider charge. First, Health Net would consult the 1998 HIAA fee schedule. If the procedure was not included, then Health Net would apply the 2000 PHCS fee schedule. If this schedule did not contain the procedure, then the current MDR fee schedule would apply. If the MDR fee schedule did not contain the procedure, then Health Net used 70% of the V1 price category. (The V1 price category remains unexplained.) Finally, if the procedure was not found in any of these listings, Health Net chose to pay 35% of the billed charges. Plaintiffs allege that Health Net does not disclose to beneficiaries in the small or large employer group plans: 1) the data that comprises the PHCS or other similar databases; 2) the disclaimer accompanying the data; 3) the way these databases are operated; 4) the way that data is compiled nor the way that average charges are determined by Ingenix.*fn7 Plaintiffs allege that Health Net does not independently evaluate the database to ensure its accuracy as a basis for UCR purposes.*fn8 In support of their motions for class certification, the Plaintiffs argue that whether the PHCS and/or MDR database is a valid basis for UCR determinations is common to all members of McCoy's class.

  In New Jersey small employer group plans, New Jersey state regulations require Health Net to use the most recent PHCS data in calculating UCR.*fn9 Health Net's other plans (large employer plans in New Jersey and small and large employer plans outside New Jersey) are not subject to expressed state regulations requiring the use of the most recent PHCS data. Plaintiffs contend that silence does not condone back-dating. Health Net asserts in its Brief opposing class certification that as to these plans it has the right to use "any years' database that it chose." (Health Net's Br. in Opp'n to Class Certification at 8.) Whether such an assertion is true, fair, and reasonable and what disclosures to beneficiaries are required when a fiduciary runs its business based on such an assertion, is at the heart of this litigation.

  Definitions of UCR in Health Net's plans in different states are similar. In most of Health Net's large employer plans in New Jersey, UCR is defined in the EOC as:
the amount [Health Net] determines to be the reasonable charge for a particular Service in the geographical area in which it is performed based upon a percentile of a modified nationwide database used for reimbursement to physicians, providers, and hospitals. Further, UCR shall also be based upon certain rules which [Health Net] utilizes in reimbursing Plan providers (e.g. multiple surgical rules, multiple treatment and/or modality rules, assistant surgeon charges, bundling of charges, and the like) such that the rules by which [Health Net] reimburses Plan Providers shall also be utilized as reimbursement rules for Non-Plan Providers.
Similarly, in small employer plans in New York, UCR means:
the lesser of: (a) the amount charged for a service or supply; and (b) the amount we determine to be the reasonable charge for a service or supply in the geographical area in which it's performed or supplied. UCR charges are based upon: (a) a percentile of a modified nationwide database applicable to the specific type and licensure of provider (e.g. hospital, physician, laboratory etc.); and/or certain industry standards (e.g. multiple surgical rules and assistant surgeon charges, etc.)
  In Health Net's California plans, Customary and Reasonable is "a charge which falls within the common range of fees billed by a majority of physicians for a procedure in a given geographic region or which is justified based on the complexity or the severity of treatment for a specific case. Members who are provided services by out-of-network providers will be reimbursed based on the Customary and Reasonable Charge."

  The definition in the Oregon plan is similarly based on the fee "usually charged by the Provider and data obtained by us regarding fees charged by Providers for the same service within the same geographic area." Health Net distributes a fact sheet to its Oregon subscribers explaining that UCR is based on data from Ingenix and that Health Net uses data from the 70th percentile of the Ingenix database.

  B. Health Net's Use of Outdated PHCS Data to Calculate UCR:

  It is undisputed that on June 7, 1999, Health Net issued Operations Alert # 333, telling its employees to begin using HIAA data from 1998 to calculate UCR for certain treatments and procedures.*fn10 Health Net did so because it believed that its premiums did not reflect current prices. This decision to revert to 1998 data applied to both small and large employer plans in the Northeast. Health Net expanded its rollback to 1998 data in July 2001. Operations Alert # 493 directed that as of July 31, 2001, all out-of-network claims be reimbursed based on the 1998 HIAA fee schedule. Operations Alert # 493 determined that if Health Net staff could not find a price in any designated schedule, then the procedure would be priced at 35% of the provider's billed charge.

  During the Preliminary Injunction hearing, Health Net's canned telephone scripts were produced that instructed customer service agents what to tell beneficiaries who called to ask about lower reimbursement levels. The explanation was to be that Health Net had mistakenly used a different version of the HIAA database and had since adjusted to the appropriate database. The telephone scripts did not mention that the version to which Health Net reverted was based on 1998 data. Beneficiaries who did not affirmatively inquire were not told anything about the UCR data rollback. Beneficiaries who did call were also to be told that their prior reimbursements were too high, but that Health Net would not ask for a refund.

  The New Jersey Commission for Banking and Insurance ("Insurance Commission") investigated Health Net for, inter alia, its use of outdated PHCS data.*fn11 Health Net signed a consent order with the New Jersey Insurance Commissioner on December 23, 2002. In late 2002, Health Net paid $814,000 in restitution to 4,700 subscribers, for the period July 1, 2001 to October 27, 2002. The Plaintiffs allege that Health Net had actually been using outdated data as far back as June 1999. In November 2003, Health Net contacted the Insurance Commission and agreed to reimburse New Jersey small employer beneficiaries approximately $500,000 more for the additional time period.

  C. The FOHP Fee Schedule:

  In some instances, Health Net used its First Option Health Plan (FOHP) fee schedule, to calculate out-of-network reimbursements. This fee schedule is a discounted fee schedule that is based on in-network provider's negotiated discounted amounts. Plaintiffs assert that it is impermissible for Health Net to use a discounted in-network fee schedule to reimburse beneficiaries who choose out-of-network providers, without informing beneficiaries that the schedule is based on in-network providers' negotiated discount charges.

  D. Other Alleged Reimbursement Practices:

  The Plaintiffs object to a variety of other allegedly improper and/or undisclosed methods of reducing reimbursements, such as the multiple surgery (multiple procedure) rule,*fn12 the co-surgeon (assistant surgeon) rule, bundling, downcoding, and Average Wholesale Pricing ("AWP") for prescription drugs. Plaintiffs allege that the multiple surgery rule and the cosurgeon rule are not properly defined and disclosed to beneficiaries. The Plaintiffs allege that the AWP is not properly disclosed and is an unreasonable calculation of UCR for pharmaceuticals because it is much lower than the ordinary retail price. Plaintiffs object to Health Net's alleged use of downcoding*fn13 and bundling,*fn14 alleging that these are not properly defined for beneficiaries.

  III. Plaintiff Representative Wachtel:

  Zev and Linda Wachtel brought this action on behalf of themselves and their children, Tory, Jesse, and Brett. Zev Wachtel was employed by New Jersey Anesthesia, P.A., a small employer. He was a participant in Health Net's Healthcare Solutions plan, a "Choice" plan for which subscribers pay a premium for the option of obtaining health care services from physicians outside Health Net's provider network. Tory Wachtel was struggling with the aftermath of brain cancer suffered during his infancy and childhood. The Wachtels allege that Health Net's reimbursement practices for ...

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