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McCoy v. Health Net

August 8, 2008

MCCOY, PLAINTIFF
v.
HEALTH NET, INC., ET AL., DEFENDANTS.
WACHTEL, ET AL., PLAINTIFFS,
v.
HEALTH NET, INC., ET AL., DEFENDANTS.
SCHARFMAN, ET AL., PLAINTIFFS,
v.
HEALTH NET, INC., ET AL., DEFENDANTS.



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

FOR PUBLICATION

OPINION

Having reached a settlement in this case of unprecedented intensity and duration, the parties now move for (1) final approval of (a) the proposed Settlement Agreement between Plaintiffs and Defendant Health Net and (b) the proposed Plan of Allocation; and (2) an award of attorneys' fees, expenses, and payment of Plaintiff incentive awards. The Court held a preliminary fairness hearing on April 24, 2008. The final fairness hearing was held on July 24, 2008 and an order approving the Settlement was entered on July 25, 2008. This opinion sets forth the Court's reasons for entering that order.

I. BACKGROUND

Health Net is a health care insurer that offers several kinds of plans, one of which is a "point of service plan." As the Court previously explained, point-of-service plans 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.

Wachtel v. Guardian Life Ins. Co., 223 F.R.D. 196, 199 (D.N.J. 2004). These cases arose from Health Net's treatment of out-of-network ("ONET") claims submitted by insureds with point-of-service plans. Plaintiffs' Complaints challenged Health Net's policies for determining the usual, customary, and reasonable ("UCR") charge limitations used to calculate the amount of an insured's ONET claim that Health Net will reimburse. As the Court previously explained,

Health Net's plan contracts do not cover an entire fee charged by an out-of-network provider. Rather, [Health Net] pays a percentage of a certain allowed charge. . . .[The allowed charge] 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 [i]f a medical bill . . . exceeds the UCR charge. . . .Thus, the coverage for out-of-network treatment that a beneficiary receives depends heavily on how UCR is defined. Wachtel, 223 F.R.D. at 200.

In order to determine UCR charges for ONET claims, Health Net relied on databases licensed from a third-party vendor, Ingenix. Plaintiffs allege that Health Net's reliance on these databases (the "Ingenix databases") was improper and in violation of ERISA, 29 U.S.C. § 1001 et seq. Specifically, Plaintiffs alleged that the Ingenix databases are inherently flawed*fn1 and that each time Health Net determined an ONET reimbursement in reliance upon an Ingenix database, Health Net failed to pay all the benefits due to its insureds and thereby violated ERISA. The Scharfman Plaintiffs also brought a claim pursuant to the Racketeering Influenced and Corrupt Organizations Act ("RICO") arising from the same facts.

A. Procedural History

The instant Settlement comes after seven years of extraordinarily contentious litigation. The Wachtel action was removed to this Court in August 2001; the McCoy complaint was filed as a "related case" in April 2003, followed by the Scharfman complaint in January 2005. The seven years of litigation in these cases defy simple summary. As the Court noted in 2006,

The Wachtel and McCoy cases are two of the oldest on this Court's docket. The litigation has been fierce and without respite, through several changes of defense counsel. . . . In sum, it gives new meaning to the term "scorched earth" litigation tactics.

Wachtel v. Health Net, Inc., 239 F.R.D. 81, 84 (D.N.J. 2006). The Wachtel docket sheet is now 115 pages long, with 141 motions, 283 briefs, 316 other applications, 44 hearings, 11 conferences, and 5 appeals to the Third Circuit. The age of these cases and their extraordinary procedural histories are not solely attributable to the complexity and importance of the databases used to calculate UCR reimbursements.*fn2

Class notice for the Wachtel and McCoy classes was complete as of July 6, 2007. Following the Court's preliminary approval of the Settlement Agreement and preliminary approval of the Scharfman RICO and ERISA classes on April 24, 2008, "smart notice" was mailed to all class members in Wachtel, McCoy, and Scharfman between May 19, 2008 and June 11, 2008. Those Wachtel and McCoy class members who had not previously opted out were given an additional opportunity to opt out. Those Wachtel and McCoy class members who had previously opted out were given an opportunity to waive their opt out and again become Class Members. Class members were given the opportunity to opt out or object by June 23, 2008.

B. Mediation and Settlement

The parties engaged in settlement negotiations before several mediators over the past four years. The first mediation took place in 2004 with a retired state court judge. The second negotiation took place in Florida in January 2005 with a retired federal judge. The third and fourth mediations took place with a private and renowned mediator. In August 2007, the parties informed the Court that they had reached a settlement in principle. This settlement, however, included only the sum of money to fund direct reimbursements; equitable relief and other crucial reforms of the UCR calculation process took many months longer to negotiate.

Between August 9, 2008 and April 17, 2008, the parties continued to negotiate the remaining provisions of this Settlement, including important business practice changes. The Court held several phone and in-person conferences to monitor the parties' progress on the remaining terms. Prior to the preliminary fairness hearing, the Court held a "tutorial" hearing to more fully explore the Ingenix database. The parties submitted a final Settlement Agreement to the Court on April 17, 2008.

C. Settlement Agreement

The present Settlement is among the largest ERISA health insurance settlements on record. The Settlement entails a substantial cash component as well as business practice changes that will have a lasting impact on the way Health Net reimburses its subscribers for out-of-network medical services. It also raises a clarion call for greater disclosure about the databases used for health care coverage. The UCR database flaws are discussed in section III.B.2(g)(1).

Health Net will provide a cash fund of $215 million, divided into three categories. First, Health Net will provide a $40 million prove-up fund for Class Members who were Balance Billed*fn3 by their ONET providers after Health Net reimbursed the ONET provider at a rate lower than the provider's billed charge. Second, Health Net will provide a $160 million cash fund from which all Class Members are entitled to receive a pro rata reimbursement for claims subject to an erroneous ONET determination. Finally, $15 million of the fund will be paid to the New Jersey Department of Banking and Insurance ("DOBI") and used in the discretion of that state agency to reimburse members of the New Jersey small employer plan Class (the Wachtel Class).

The Settlement Agreement divides Class Members who have been Balance Billed by their ONET providers into two groups for purposes of allocating the prove-up fund. Group B consists of those Class Members who received a Balance Bill from their ONET provider after the beginning of their class period and can demonstrate that they paid some or all of the Balance Bill on or before April 24, 2008, the date of the Preliminary Fairness Hearing in this matter. Group C consists of those claims for covered services received by a Class Member on or after May 6, 2005 for which the Class Member received, but did not pay, a Balance Bill from their ONET provider on or before April 24, 2008.*fn4 The closing date for both groups is established by the requirement that Health Net have in its claims system a check payment date for reimbursement to the ONET provider on or before July 31, 2007 (the date set by the Scharfman class definition). The third ground, Group A, consists of all remaining claims, including, for example, those claims for which Health Net reimbursed the ONET provider less than their full billed amount, but where the ONET provider did not Balance Bill the Class Member.

The prove-up fund will be allocated first. Group B Class Members -- those who have paid all or part of a Balance Bill -- will be reimbursed first and they are entitled to receive up to 100% of the amount they paid out of pocket. If any portion of the $40 million prove-up fund remains after all Group B claims are satisfied in full, those funds will be used to satisfy Group C claims on a first-come, first-served basis. Any portion of the $40 million prove-up fund that remains after all Group B and C claims are satisfied reverts to Health Net. Any Group B or C claims that remain after the prove-up fund has been fully allocated become Group A claims for purposes of further distribution. All Group A claims will then be reimbursed pro rata from the $160 million pool. The $160 million pool is non-reversionary. Attorney's fees and expenses will also be drawn from the non-reversionary $160 million cash fund.

Health Net has also agreed to highly significant business practice changes, which it will perform until the four year anniversary of the Effective Date of the Agreement. First, and most importantly, Health Net has agreed to cease using the Ingenix database for determining UCR charges for ONET services or supplies. Indeed, Health Net has agreed to eliminate the use of UCR altogether for determining payments for its subscribers' ONET services or supplies. Pursuant to the agreement, Health Net has agreed to eliminate the use of the Ingenix databases and UCR as soon after the Effective Date of the Settlement Agreement as possible, except where required by law or approved by regulators, or where specifically requested by a plan sponsor. The new methodology that Health Net develops to replace the Ingenix database and UCR will be fully disclosed in its health care plans. The specifics of Health Net's new methodology are not presently before the Court and the Settlement Agreement does not purport to release Health Net from any claims that may arise from its use of new methodologies.

The Settlement Agreement also requires Health Net to make business practices changes until Health Net can implement its new methodology. Health Net agrees that it will determine its reimbursement to ONET providers by reference to the current Ingenix database plus 14.5% (up to the billed charge). This will be referred to as the "Adjusted Allowable Amount." According to the parties, this add-on will result in 80% of ONET claims being covered at 90% or more of the billed charge.

Health Net will also institute a special appeals process for those subscribers who still have large outstanding balances even after the 14.5% add-on described above. A subscriber may take advantage of the special appeals process if the subscriber's Adjusted Allowable Amount is less than 80% of the ONET provider's billed charge and there is a difference of at least $4,500 between the adjusted allowable charge and the provider's billed charge. These special appeals will be sent to an independent arbitrator, who will apply the "UCR Review Factors" set forth in the Settlement Agreement. The arbitrator's decision will be binding on both Health Net and the subscriber. It is not mandatory that a subscriber use this special appeals process, and the decision to engage in binding arbitration is the choice of the Health Net subscriber. The cost of the special appeals process will be paid for by interest generated on the $160 million nonreversionary fund, which was deposited in escrow in January 2008. Those subscribers not eligible for the special appeals process, or who elect not to use it, may still use Health Net's regular appeals process. Health Net will provide prompt and clear notice to beneficiaries who are eligible for the special appeals process.

Health Net will also: (1) establish a "cost estimator process" so that subscribers can obtain accurate UCR amounts in advance of a procedure; (2) comply with the terms of its pre-authorizations and advance UCR determinations; (3) negotiate with the ONET provider in advance of non-emergent surgeries and if Health Net and the ONET provider reach a consensual fee arrangement, the subscriber will not be financially responsible for any amount over the applicable coinsurance and deductible amounts; (4) establish a web portal to keep subscribers appraised of ONET policies and procedures; (5) establish training programs and other procedures so that Health Net employees can provide members with more accurate information; (6) review the use of "adjustment codes" on subscribers' Explanation of Benefits form to ensure that those codes convey meaningful information to the subscriber; (7) provide greater transparency for benefits related to, inter alia, multiple surgical procedures, assistant and co-surgeons. Health Net has estimated the business practices changes are worth between $26 and $38 million, and Plaintiffs concur.

III. ANALYSIS

A. Class Certification of the Scharfman Classes

The Court certified the Wachtel and McCoy classes in an order dated August 5, 2004. See Wachtel DKT#139. On June 30, 2006 the Third Circuit vacated the Court's August 5, 2004 class certification order and remanded to this Court "for a definition of the claims, issues, or defenses to be treated on a class basis." Wachtel v. Guardian Life Ins. Co. of Am., 453 F.3d 179, 190 (3d Cir. 2006). The Court issued a new class certification order on September 25, 2006 in which it set forth the claims, issued, or defenses to be treated on a class basis, but did not alter the class definitions given in the August 5, 2004 opinion. Wachtel DKT#551. The Court certified the Wachtel and McCoy classes as follows:

* Wachtel class: All persons in the United States who are, or were, from July 1, 1995 to August 31, 2004, subscribers or beneficiaries of any New Jersey small employer plan, who received medical services from an out-of-network provider and for whom Defendants made reimbursement determinations less than the providers' actual charge.

* McCoy class: All persons in the United States who are, or were, from April 1, 1997 to August 31, 2004, subscribers or beneficiaries of any large or small employer plan, other than in a New Jersey small employer plan, who received medical services or supplies (including, inter alia, surgery, anesthesia, and the like) from an out-of-network provider and for whom Defendants made reimbursement determinations less than the providers' actual charge.

See McCoy DKT#89.

The Scharfman ERISA and RICO classes were preliminarily certified at the Preliminary Fairness hearing held on April 24, 2008. The Scharfman classes are defined as follows:

* Scharfman ERISA class: All person in the United States who are, or were, from September 1, 2004 through July 31, 2007 members of any large or small employer plan insured or administered by Health Net, and subject to ERISA, who received medical services or supplies (including, inter alia, surgery, anesthesia, and the like) from an outof-network provider and received reimbursement less than the provider's billed charge.

* Scharfman RICO class: All persons in the United States who are, or were, from September 1, 2004 through July 31, 2007 members in any large or small plan insured or administered by Health Net, who received medical services or supplies (including, inter alia, surgery, anesthesia, and the like) from an out-of-network provider and received reimbursement less than the provider's billed charge that was determined by Health Net, Guardian or a Third Party Vendor applying Health Net's ONET Claims Practices, including the use of Ingenix data.

Since preliminarily certifying the Scharfman classes on April 24, 2008, the Court has received no objections to the Scharfman classes as to Rule 23's requirements of numerosity, typicality, adequacy, predominance or superiority. The Court now enters final certification of the Scharfman ERISA and RICO classes for the following reasons.

1. Numerosity

Rule 23(a)(1) provides that the Court may certify a class only if "the class is so numerous that joinder of all members is impracticable." The Third Circuit has held that although "[n]o minimum number of plaintiffs is required to maintain a suit as a class action, . . . generally if the named plaintiff demonstrates that the potential number of plaintiffs exceeds 40, the first prong of Rule 23(a) has been met." Stewart v. Abraham, 275 F.3d 220, 226-27 (3d Cir. 2001). Joinder need not be impossible. "When dealing with a class that numbers in the hundreds, joinder will most often be impracticable." Lenahan v. Sears, Roebuck and Co., No. 02-0045, 2006 WL 2085282, at *7 (D.N.J. July 24, 2006).

The instant classes easily satisfy Rule 23(a)(1)'s numerosity requirement. There are well over 2 million Class Members in the Wachtel, McCoy, and Scharfman classes. The parties have stated that class notice was sent to over 2.5 million individuals who are or were insured by Health Net. The Court finds that Rule 23(a)(1)'s numerosity requirement is satisfied.

2. Commonality and Predominance

Rule 23(a)(2) requires that there be "questions of law or fact common to the class." The "predominance" requirement of Rule 23(b)(3) requires that the common questions predominate over individual issues. As the Court explained when it certified the McCoy and Wachtel classes:

The commonality prong of [Rule] 23(a) overlaps with the predominance requirement of 23(b)(3). Therefore, courts frequently examine the two requirements together. Commonality under 23(a)(2) is satisfied if the named plaintiff shares common questions of law or fact with the grievances of the prospective class. Predominance, however, requires more than the existence of common issues of law and fact. The common issues must be numerically and qualitatively substantial in relation to individual issues.

Wachtel, 223 F.R.D. at 213 (internal citations omitted).

The Third Circuit has instructed that "[t]he commonality requirement will be satisfied if the named plaintiffs share at least one question of fact or law with the grievances of the prospective class." Stewart, 275 F.3d at 227 (emphasis removed). Commonality is easily met by the Scharfman ERISA class. The Scharfman ERISA class brings the same claims as the McCoy and Wachtel ERISA classes, but for a later time period. Consequently, the claims of all three classes are based on common operative facts and questions of law. As the Court explained when it certified the Wachtel and McCoy classes:

The Plaintiffs allege a systematic course of conduct in interpreting contracts of insurance in an improper, undisclosed, and self-serving way in contravention of the plans and of Health Net's fiduciary duty to beneficiaries who chose to use outof-network providers. In both the McCoy class and the Wachtel class, if each member of the potential class were to bring an individual action, each would be required to prove that Health Net's UCR and other policies violated ERISA. The issues of law and fact relating to whether Health Net fully disclosed and properly applied its reimbursement mechanisms for out-of-network provider services are common to the class members and predominate over individual questions. Wachtel, 223 F.R.D. at 213 (internal citation omitted).

The Scharfman RICO class also satisfies the commonality and predominance requirements of Rule 23(a)(2) and (b)(3). The Scharfman RICO class alleged an association-in-fact between Health Net and Ingenix in which Health Net and Ingenix carried out a scheme to underpay benefits to Health Net subscribers. See Scharfman DKT#54 (Second Amended Complaint and RICO Case Statement). The Class's RICO claims raise numerous common questions of law and fact concerning the existence of an association-in-fact, the performance of predicate acts including mail and wire fraud, and the existence of a common plan or scheme to underpay Health Net's subscribers and to improperly shift the cost of medical care to Health Net subscribers. The issues of law and fact raised by the RICO claims are common to the Scharfman RICO class and predominate over any individual issues that may be present among RICO Class Members. The Court finds that Rule 23(a)(2)'s commonality requirement and Rule 23(b)(3)'s predominance requirement are satisfied.

3. Typicality

Rule 23(a)(3) requires that "the claims or defenses of the representative parties are typical of the claims or defenses of the class." As the Third Circuit has noted, "[t]he typicality inquiry centers on whether the interests of the named plaintiffs align with the interests of the absent members." Stewart, 275 F.3d at 227. "[C]ases challenging the same unlawful conduct which affects both the named plaintiffs and the putative class usually satisfy the typicality requirement irrespective of the varying fact patterns underlying the individual claims." Id. "Factual differences will not render a claim atypical if the claim arises from the same event or practice or course of conduct that gives rise to the claims of the [absent] class members, and if it is based on the same legal theory." Id. at 227-28. Both Scharfman classes satisfy the typicality requirement of Rule 23(a)(3) because both classes' claims arise from Health Net's reliance on the Ingenix database to calculate UCR charges. Although facts of individual class members' claims differ in some ways -- the ONET treatments they received or whether they have exhausted the appeals process, for example -- those minor difference do not alter the fact that all Plaintiffs rely on the same legal theories in both the ERISA class and the RICO class. The Court finds that the typicality requirement of Rule 23(a)(3) is satisfied.

4. Adequacy of Representation

Rule 23(a)(4) requires that the "representative parties fairly and adequately protect the interests of the class." The Third Circuit has held that "[a]dequate representation depends on two factors: (a) the plaintiff's attorney must be qualified, experienced, and generally able to conduct the proposed litigation, and (b) the plaintiff must not have interests antagonistic to those of the class." New Directions Treatment Servs. v. City of Reading, 490 F.3d 293, 313 (3d Cir. 2007). "In analyzing this criteria, the court must determine whether the representatives' interests conflict with those of the class and whether the class attorney is capable of representing the class." Johnston v. HBO Film Mgmt., Inc., 265 F.3d 178, 185 (3d Cir. 2001).

The Court found the adequacy requirement met under Rule 23(a)(4) in McCoyand Wachtel, and specifically noted that "Counsel for McCoy and the Wachtels are well-seasoned and have demonstrated adequacy and tenacity during the protracted proceedings that have already occurred in this case." Wachtel, 223 F.R.D. at 216. As evidenced by the lengthy procedural history outlined above, in the years since the Court certified the Wachtel and McCoy classes, Class Counsel have proved themselves more than adequate to face the challenges posed by this litigation. At no time has there been any suggestion that the Scharfman representative Plaintiffs' interests in any way conflict with the interests of the class. Consequently, the Court finds that the adequacy requirement of Rule 23(a)(4) has been met as to the Scharfman classes.

5. Superiority

In addition to the "predominance" requirement, Rule 23(b)(3) also requires "that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy." The rule provides the Court with four non-exhaustive factors to consider.

The matters pertinent to these findings include:

(A) the class members' interests in individually controlling the prosecution or defense of separate actions;

(B) the extent and nature of any litigation concerning the controversy already begun by or against class members;

(C) the desirability or undesirability of concentrating the litigation of the claims in the particular forum; and

(D) the likely difficulties in managing a class action. FED. R. CIV. P. 23(b)(3).

Superiority is also easily satisfied in these cases for the reason given at the time of the Wachtel and McCoy class certifications. As the Court explained Class action is the superior form of litigation in this case because it ensures that potentially meritorious claims will be addressed efficiently and without waste of judicial resources. There is no indication that individual members of the class[es] have a compelling interest in controlling the prosecution of separate actions. Indeed, the high cost of prosecuting this complex case on an individual basis suggests that the opposite is true. This Court is not aware of pending litigation against Health Net by any proposed class members that would undermine the suitability of class litigation. The high cost of this complex litigation also suggests that meritorious claims may go unaddressed unless the Plaintiffs are permitted to proceed as a class. Relitigating the same issues and presenting similar evidence regarding Health Net's policies and practices and non-disclosures for out-of-network charges would be inefficient and wasteful of judicial resources. Joinder or wholesale intervention would result in a multiplicity of repetitive actions.

Wachtel, 223 F.R.D. at 217 (internal citations omitted); see also Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 620 (1997) ("Confronted with a request for settlement-only class certification, a district court need not inquire whether the case, if tried, would present intractable management problems."). Given that the facts that underlie the claims of both Sharfman classes ...


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