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Sutter v. Horizon Blue Cross Blue Shield of New Jersey

March 25, 2009

JOHN IVAN SUTTER, M.D., P.A., ON BEHALF OF HIMSELF AND ALL OTHERS SIMILARLY SITUATED, PLAINTIFF-RESPONDENT/CROSS-APPELLANT, AND MARIO CRISCITO, M.D., BARRY PRYSTOWSKY, M.D., NIRANJAN V. RAO, M.D., ROBERT OBERHAND, M.D., ALEXANDER DLUGI, M.D., PLAINTIFFS/OBJECTORS-APPELLANTS/CROSS-RESPONDENTS,
v.
HORIZON BLUE CROSS BLUE SHIELD OF NEW JERSEY, DEFENDANT-RESPONDENT. UNION COUNTY MEDICAL SOCIETY, MERCER COUNTY MEDICAL SOCIETY, NEW JERSEY PEDIATRIC SOCIETY, NEW JERSEY ASSOCIATION OF OSTEOPATHIC PHYSICIANS AND SURGEONS, AMERICAN COLLEGE OF EMERGENCY PHYSICIANS, VASCULAR SOCIETY OF NEW JERSEY, NEW JERSEY PATHOLOGY SOCIETY, RADIOLOGICAL SOCIETY OF NEW JERSEY, NEW JERSEY ACADEMY OF OPHTHALMOLOGY, NEW JERSEY STATE SOCIETY OF ANESTHESIOLOGISTS, ORTHOPAEDIC SURGEONS OF NEW JERSEY, AND NEW JERSEY CHAPTER OF THE AMERICAN COLLEGE OF CARDIOLOGY, APPELLANTS/CROSS-RESPONDENTS.



On appeal from Superior Court of New Jersey, Law Division, Essex County, Docket No. L-3685-02.

The opinion of the court was delivered by: Parker, J.A.D.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

APPROVED FOR PUBLICATION

Argued January 13, 2009

Before Judges Wefing, Parker and LeWinn.

In this appeal, we address the settlement of a class action that was instituted by New Jersey physicians against Horizon Blue Cross Blue Shield of New Jersey (Horizon). Appellants*fn1 are members of the class who objected to the settlement and the medical societies who sought to intervene, arguing that the settlement is illusory because it requires nothing more of Horizon than is required under the law and under its contracts. Appellants further argue that the attorneys' fees awarded to class counsel were grossly excessive. The medical societies argue that the trial court erred in denying their motion to intervene.

Plaintiff John Ivan Sutter, M.D., is the representative physician of the class of physicians. Plaintiffs argue in their cross-appeal that the appeal should be dismissed because all of the objectors are hostile to the interests of the class and some of the medical society appellants never moved to intervene in the trial court.

After considering the parties' arguments and the voluminous record on appeal in light of the applicable law, we are remanding the matter for a testimonial hearing and more adequate fact finding by the trial court as to the reasonableness of the settlement and for reconsideration of the attorneys' fees awarded.

I.

The facts relevant to this appeal are as follows. The complaint alleged that physicians who rendered medical services to patient-members of Horizon's health care plans were harmed by Horizon's "repeated improper, unfair and deceptive acts and practices . . . which [were] designed to delay, deny, impede and reduce compensation to [plaintiffs]." Plaintiffs first claimed that Horizon failed to make prompt payments of claims and that Horizon engaged in "bundling," that is, it refused to provide compensation for a particular medical procedure by improperly including it in another procedure performed on the same date of service. Plaintiffs further alleged that Horizon engaged in "downcoding" of claims, which meant that it unilaterally and retroactively reduced the amount of compensation paid for medical services by changing the procedure codes to a procedure of lesser complexity. Finally, plaintiffs alleged that Horizon refused to recognize "modifiers" in cases in which additional medical services were required to treat more complex conditions or separate and unrelated conditions.

In certifying the class, the trial court permitted two subclasses for all New Jersey physicians: a "prompt payment" class and a "capitation" class. A separate class of pediatricians was certified for claims of "downcoding," "bundling" and "refusal to recognize modifiers."

In June 2005, the trial court severed the claims of the prompt payment sub-class for trial. On the eve of trial, the parties agreed to a settlement. On October 24, 2006, the court signed a preliminary order of approval. Plaintiffs sent notice of the proposed settlement to the class members. Six members of the class, plaintiffs/objectors-appellants/cross-respondents Mario Criscito, Barry Prystowsky, Niranjan V. Rao, Robert Oberhand, Alexander Dlugi and Myrna Tagayun*fn2 opposed the settlement.

The medical societies of Union and Mercer Counties and the New Jersey Pediatric Society moved to intervene to object to the settlement. The intervention motion was denied in an order entered on December 15, 2006.

On December 20, 2006, the court conducted a fairness hearing pursuant to Rule 4:32-2(e) on the prompt payment settlement proposal and allowed all of the objectors to argue, even those who were not accorded intervenor status. No testimony was taken, however. On February 2, 2007, the court rendered a written decision and entered an order approving the settlement and class counsel's fees and costs in the amount of $6.5 million.

Appellants moved for a stay of the fee award, which class counsel had opposed. The stay was apparently denied, but no order memorializing that ruling has been provided to us.

II.

Appellants are critical of the following sections in the proposed settlement. Section 7.1 concerns "Disclosure of Significant Edits." An "edit" is an "adjustment" of the CPT codes or HCPCS Level II Codes, which were developed by the American Medical Association and used by all doctors to describe certain medical and surgical procedures. A "significant edit" was one that Horizon believed, based on its experience, would cause the denial of or reduction in payment for a particular CPT code or HCPCS Level II code. Under the settlement, once a year on its website, Horizon agreed to list every CPT and HCPCS Level II code combination that resulted in a significant reduction or a denial of payment, if such code edits occurred more than 250 times per year.

Section 7.2 obligates Horizon to give ninety days written notice if it intends to make material adverse changes to the terms of the contract, and allows a physician to terminate his or her contract upon objection to the proposed change.

Section 7.4 establishes a "Capitation Liaison," who would be responsible for resolving capitation inquiries and capitation payment issues. "Capitation" is the payment of a per-member-per-month amount by Horizon to the physician, "by which Horizon transfers to the provider the financial risk for those Covered Services as set forth in the contract between Horizon and the provider."

Section 7.5 permits participating physicians to close their practices to all new Horizon patients.

Section 7.6 obligates Horizon to provide complete fee schedules "typically" used in the participating physician's group, pursuant to their agreement with Horizon, upon the physician's request. Twice a year, the physicians can request the fee-for-service amounts of up to fifty other CPT codes or HCPCS Level II codes that the physician actually billed or anticipates billing.

In Section 7.8, Horizon agrees not to initiate overpayment recovery procedures more than eighteen months after payment is received by a physician.

Section 7.9 precludes Horizon from revoking a "medical necessity" determination once it has been pre-certified.

Section 7.10 precludes Horizon from using "Most Favored Nations" clauses, that is, provisions requiring that Horizon receive the most advantageous contract terms and conditions, including reimbursement rates, that a participating physician agrees to with any other third party.

Section 7.11(b) precludes Horizon from imposing a "Pharmacy Risk Pool," whereby amounts payable to participating physicians could be reduced if plan members used certain pharmacies.

In Section 7.15, the parties estimated the approximate aggregate value of the settlement at $39 million allocated as follows: $30.61 million for disclosure of significant edits, $3.49 million for capitation reporting and dedicated liaison, and $4.13 million for limitations on over-payment recovery for insured lines of business. This provision was based upon a report dated October 9, 2006 by Teresa M. Waters, Ph.D., plaintiffs' economic expert. Waters submitted six reports over the course of the litigation. The first report claimed damages in the amount of $490,502,695. In the October 9, 2006 report, however, she reduced that figure to $39 million, stating:

Because the provisions cannot state with certainty how each and every eventuality will be handled and there is a general lack of data concerning the actual impact of the proposed provisions, my valuation must be based on the best information available at the time of this report and should be interpreted as a reasonable projection, rather than a statistical calculation. [Emphasis added.]

Horizon presented reports by Steven N. Wiggins, Ph.D., criticizing Waters' methodology. Prior to the scheduled trial, Horizon moved to exclude Waters' expert testimony, arguing that she had no factual basis for her presumptions and that her methodology was flawed. The trial court determined that a hearing pursuant to N.J.R.E. 104 "was necessary to determine whether there were adequate factual and scientific bases as well as sufficient reliability to allow the computer analysis and opinions of Dr. Waters to be presented to the jury." Since the matter was settled without having the Rule 104 hearing, appellants never had the opportunity to cross-examine Waters.

The proposed settlement also addresses attorneys' fees, and states that class counsel may apply for an award of attorneys' fees in an amount set by the court, but the application may not exceed $6.5 million. In Section 8.3 of the proposal, Horizon agreed not to oppose class counsel's application and to pay $6.5 million in attorneys' fees. Section 8.2 of the agreement provided a stipend of $15,000 for Sutter as the representative plaintiff. No payments were to be made to any other class members.

Section 9 of the proposal sets forth time frames to implement the changes agreed to in Section 7. Horizon agrees to make reports to class counsel each year and for the court to maintain continuing jurisdiction over settlement issues.

In exchange for Horizon's reforms, plaintiffs agree in Sections 10 and 11 of the proposal to release certain claims for services that were submitted to Horizon prior to the effective date of the agreement. The agreement specifically states that physicians participating in the New Jersey settlement were not prohibited from obtaining any benefits that they may be entitled to as class members in similar actions in the United States District Court for the South District of Florida, Miami Division, captioned Love v. Blue Cross Blue Shield Association, CV-03021296.

III.

In this appeal, ...


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