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
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 ...