What Do Health Insurance Litigators Face in 2012 and Beyond?

What Do Health
Insurance Litigators
Face in 2012 and Beyond?
Bryan D. Bolton Eric B. Myers Robert R. Pohls
Funk & Bolton Aetna Inc. Pohls & Associates
Baltimore, MD Philadelphia, PA Walnut Creek, CA

1

What Do Health Insurance Litigators Face in 2012 and Beyond?

Agenda
1. Judicial Challenges to the Affordable Care Act

2. Interim Final Regulation

3. Medical Loss Ratios

4. Questions and Answers

2


A History of Health Care Reform in America
“. . . the hazards of sickness, accident,
invalidism, involuntary unemployment, and old
age should be provided for through insurance.
This should be a charge in whole or in part upon
the industries, the employer, the employee, and
perhaps the people at large. “
Teddy Roosevelt (August 1912)

3


A History of Health Care Reform in America

March 23, 2010 Patient Protection and Affordable Care Act

March 30, 2010 Health Care and Education
Reconciliation Act of 2010
4


Affordable Care Act -- Overview
· Alters rules for private insurers
· Creates health benefit exchanges
· Imposes new requirements on employers
· Mandates individual coverage
· Changes Medicare and Medicaid
· Commits $350 million to fighting waste, fraud and abuse
· Creates incentives for improving the quality of care
· Reforms the health care delivery system
· Modifies the tax code
5


Judicial Challenges -- Timeline
3/23/2010 (Affordable Care Act Passed)
Florida v. DHHS
Virginia v. Sebelius
Liberty University, Inc. v. Geithner
Thomas More Law Center v. Obama
3/24/2010 Bellow v. Sebelius
New Jersey Physicians, Inc. v. Obama
3/25/2010 Taitz v. Obama
3/26/2010 Assoc. of American Physicians and Surgeons,
Inc. v. Sebelius
6


Judicial Challenges -- Timeline
3/30/2010 (Reconciliation Act Passed) 5/14/2010 Baldwin v. Sebelius
4/2/2010 Walters v. Holder 6/3/2010 Physicians Hospitals of America
4/7/2010 Calvey v. Obama v. Sebelius
4/8/2010 Shreeve v. Obama 6/9/2010 Mead v. Holder
4/12/2010 Goudy-Bachman v. DHHS 7/7/2010 Kinder v. Dept. of Treasury
4/22/2010 Fountain Hills Tea Party 7/26/2010 Sissel v. DHHS
Patriots, Inc. v. Sebelius 8/12/2010 Coons v. Geithner
4/27/2010 Burlsworth v. Holder 8/31/2010 Independent American Party of
5/4/2010 Peterson v. Obama Nevada Eagle Forum v. Obama
5/12/2010 U.S. Citizens Association 9/20/2010 Purpura v. Obama
v. Obama 1/25/2011 Pruitt v. Sebelius

http://www.justice.gov/healthcare/
7


Judicial Challenges – Pending Cases
Petitions for Certiorari Filed:
Thomas More Law Center v. Obama (No. 11-117)
Virginia v. Sebelius (11-420)
Liberty University v. Geithner (No. 11-438)

Petitions for Certiorari Granted:
National Fed. of Ind. Business v. Sebelius (No. 11-393)
HHS v. Florida (No. 11-398)
Florida v. HHS (No. 11-400)
8


Judicial Challenges – Key Provisions
The “Individual Mandate”
· All individuals must obtain and maintain “minimal
essential coverage” by January 2014 (unless exempt).
· Anyone without minimum essential coverage will be
required to make a “shared responsibility payment.”
· Tax Year 2014: $95 or 1% of household income
· Tax Year 2015: $325 or 2% of household income
· Tax Year 2016: $695 or 2.5% of household income
9


Judicial Challenges – Key Provisions
Expansion of Medicaid
· Under the Affordable Care Act, Medicaid is a
cornerstone for expanded health care coverage.
· From 2014 to 2016, the federal government will pay
100% of the fees associated with the increased Medicaid
eligibility
· The federal government’s percentage will then drop
gradually each year until reaching 90% in 2020.

10


Supreme Court – Process and Schedule

Oral Arguments: March 2012

Allotted Time: 5 and ½ hours

Issues: 4 specific questions

Decision(s): June 2012 (estimated)

11


Question No. 1: Is the shared responsibility
payment a tax?
· The Tax Anti-Injunction Act generally prohibits any suit
which is filed to restrain the assessment or collection of
a tax. 26 U.S.C. §7421(a)

· If the Court concludes the share responsibility payment
is a tax, it could decide that constitutional challenges to
the individual mandate can be considered only as part of
a suit for a tax refund. 26 U.S.C. §6532; 26 U.S.C. §7422(a)
28 U.S.C. §1346(a); 11 U.S.C. §505(a)(2)

12


Question No. 1: Is the shared responsibility
payment a tax?
Thomas More Law Center
v. Obama (6th Circuit): No

Florida v. HHS (11th Circuit) No
Liberty University
v. Geithner (4th Circuit) Yes

13


Question No. 2: Does the individual mandate
exceed Congress’ powers under
Article I of the Constitution?
Congress has “broad implied powers” under the
Commerce Clause.
McCulloch v. Maryland, 17 U.S. 316, 421 (1819)

Congress has authority under the Necessary and Proper
Clause to regulate local non-economic activities when the
regulation “is a necessary part of a more general
regulation of interstate commerce.”
Gonzales v. Raich, 545 U.S. 1, 16-17 (2005)
14



“The powers of the legislature are defined and limited;
and those limits may not be mistaken or forgotten.”
Marbury v. Madison, 5 U.S. (1 Cranch) 137, 176 (1803)

15


The exercise of Congress’ power under the Commerce
Clause has been limited to three subjects:
· channels of interstate commerce;
· instrumentalities of interstate commerce; and
· activities that “substantially affect” interstate commerce.
United States v. Lopez, 514 U.S. 549 (1995)

16


“Neither the Supreme Court nor any federal circuit court
of appeals has extended Commerce Clause powers to
compel an individual to involuntarily enter the stream of
commerce by purchasing a commodity in the private
market.”
728 F.Supp.2d 768 (E.D. Va. 2010)

17


“The Secretary relies on what is commonly referred to as
an aggregation theory, which is conceptually based on the
hypothesis that the sum of individual decisions to
participate or not in the health insurance market has a
critical collective effect on interstate commerce.”
728 F.Supp.2d 768 (E.D. Va. 2010)

18


“The power of Congress to regulate a class of activities
that in the aggregate has a substantial and direct effect on
interstate commerce is well settled. . . . But these
regulatory powers are triggered by some type of self-
initiated action.”
728 F.Supp.2d 768 (E.D. Va. 2010)

19


“It would be a radical departure from existing case law to hold that
Congress can regulate inactivity under the Commerce Clause. If it
has the power to compel an otherwise passive individual into a
commercial transaction with a third party merely by asserting . . .
that compelling the actual transaction is itself ‘commercial and
economic in nature, and substantially affects interstate commerce,’
it is not hyperbolizing to suggest that Congress could do almost
anything it wanted.”
Florida v. HHS, 648 F.3d 1235 (11th Cir. 2011)
20


The Affordable Care Act recites Congress’ findings that
health care and health insurance:
· affect the nation’s economy;
· are commercial and economic in nature; and
· substantially affect interstate commerce.

21


The mere fact that Congress asserts a particular activity
substantially affects interstate commerce “does not
necessarily make it so.”
United States v. Morrison, 529 U.S. 598, 614 (2000)

22


Under the Commerce Clause, the Supreme Court
traditionally examines two issues:
· Did Congress have a rational basis for finding that the
regulated activity affects interstate commerce?
· Is the means selected to regulate the activity
reasonable and appropriate?
United States v. Morrison, 529 U.S. 598, 614 (2000)
23


“Congress’s insurance industry reforms . . . will encourage
individuals to delay purchasing private insurance until an
acute medical need arises.”

24


“. . . unless the individual mandate forces individuals into
the private insurance pool before they get sick or injured,
Congress’ insurance industry reforms will be unsustainable
by the private insurance companies.”

25


“. . . without full market participation, the financial
foundation supporting the health care system will fail, in
effect causing the entire health care regime to ‘implode’.”
728 F.Supp.2d 768 (E.D. Va. 2010)

26


“. . . the provision regulates economic activity that
Congress had a rational basis to believe has substantial
effects on interstate commerce.”
“Congress had a rational basis to believe that the provision
was essential to its larger economic scheme reforming the
interstate markets in health care and health insurance.”
Thomas More Law Center v. Obama
651 F.3d 529 (6th Cir. 2011)
27



“. . . the conduct regulated by the individual mandate – an
individual’s decision not to purchase health insurance and
the concomitant absence of a commercial transaction – in
no way ‘burdens’ or ‘obstructs’ Congress’s ability to enforce
its regulation of the insurance industry.”

28



“At best, the individual mandate is designed not to enable
the execution of the Act’s regulations, but to counteract
the significant regulatory costs on insurance companies
and adverse consequences stemming from the fully
executed reform.”

29


“That may be a relevant political consideration, but it does
not convert an unconstitutional regulation . . . into a
constitutional means to ameliorate adverse cost
consequences on private insurance companies engendered
by Congress’s broader regulatory reform of their health
insurance products.”

30


Question No. 3: Is the individual mandate
severable from the rest of the Act?

“Unless it is evident that the Legislature would not have
enacted those provisions which are within its power,
independently of that which is not, the invalid part may be
dropped if what is left is fully operative as a law.”
Alaska Airlines, Inc. v. Brock, 480 U.S. 678 (1987)

31


Given the vagaries of the legislative process, “this inquiry
can sometimes be ‘elusive’.”
Virginia v. Sebelius, 728 F.Supp.2d 768 (E.D. Va. 2010)

“. . . it is reasonably ‘evident’ . . . that the individual mandate
was an essential and indispensable part of the health reform
efforts, and that Congress did not believe other parts of the
Act could (or it would want them to) survive independently.”
Florida v. HHS, 780 F.Supp.2d 1286 (N.D. Fla. 2011)

32


“The presumption of severability is rooted in notions of
judicial restraint and respect for the separation of powers in
our constitutional system.”
“The Act’s other provisions remain legally operative after
the mandate’s excision, and the high burden needed under
Supreme Court precedent to rebut the presumption of
severability has not been met.”

33


Question No. 4: Does the expansion of
Medicaid violate state sovereignty?

“Congress shall have power . . . to pay the Debts and provide
for the common Defence and general Welfare of the United
States.”
U.S. Constitution, Art. I, Sec. 8, Cl. 1

34


“. . . legislation enacted pursuant to the spending power is
much in the nature of a contract: in return for federal funds,
the States agree to comply with federally imposed
conditions.” Pennhurst State Sch. & Hosp. v. Halderman
451 U.S. 1, 17 (1981)

“Medicaid is a jointly financed federal-state cooperative
program, designed to help states furnish medical treatment
to their needy citizens.”
Moore ex rel. Moore v. Reese, 637 F.3d 1220, 1235 (11th Cir. 2011)
35


Four primary restrictions on legislation under the Spending
Clause:
· must be in pursuit of the general welfare;
· must be reasonably related to the legislation’s stated goal;
· Congress’ intent to condition funds on a particular action
must be unambiguous so that states can knowingly choose
whether to participate; and
· cannot induce state activities which are unconstitutional.
36


“The powers not delegated to the United States by the
Constitution, nor prohibited by it to the States, are reserved
to the States respectively, or to the people.”
U.S. Constitution, Tenth Amendment

Congress may not employ the spending power in such a way
as to “coerce” the states into compliance with the federal
objective
South Dakota v. Dole, 483 U.S. 203, 211 (1987)

37



“Congress cannot directly compel a state to act, nor can
Congress hinge the state’s right to regulate in an area that
the state has a constitutional right to regulate on the state’s
participation in a federal program.”

38



“Congress cannot place restrictions so burdensome and
threaten the loss of funds so great and important to the
state’s integral function as a state . . . as to compel the state
to participate in the ‘optional’ legislation.”

“This is the point where ‘pressure turns into compulsion’.”

39


“. . . the Act’s expansion of Medicaid is not unduly coercive.”
· Congress reserved the right to make changes
· federal government will bear nearly all of the costs
· states have plenty of notice
· no certainty that states will lose Medicaid funding if they
opt out

40


“. . . the Act’s expansion of Medicaid is not unduly coercive.”
· Congress reserved the right to make changes
· federal government will bear nearly all of the costs
· states have plenty of notice
· no certainty that states will lose Medicaid funding if they
opt out

41


HEALTH CARE REFORM AND THE
CHANGED LITIGATION LANDSCAPE

42


Background: The Interim Final Regulation

The IFR modified the existing DOL claims and appeals
regulations in several respects and imposed a number
of new requirements on plans and insurers.

Expanded the scope of an “adverse benefit
determination” to include rescission of coverage,
regardless of whether the rescission pertains to a
specific adverse decision.

43


The Interim Final Regulation
Reduced the timeframe for deciding urgent care claims from a
maximum of seventy-two (72) hours, to twenty-four (24) hours after
receipt of the claim
Requiring plans and insurers to provide claimants (at no cost) with the
opportunity to review their claim file, as well as any new or additional
evidence considered, relied upon, or generated by the plan or insurer
in connection with a claim, as well as any new or additional rationale
for denial during the internal appeals process, and allow a reasonable
opportunity to respond to any new evidence or rationale
Requiring claims and appeals be adjudicated in a manner designed to
ensure independence and impartiality by the decision-maker.

44


Notices of denial of claims or appeals must include the
following content:
a. sufficient information identifying the claim, such the date
of service, the health care provider, and claim amount;
b. diagnosis and treatment codes and their corresponding
meanings;
c. denial code and corresponding meaning, as well as a
description of any standard applied. A final adverse internal
benefit determination also must include a discussion of the
decision;
d. description of available internal appeals and external
review processes, including how to initiate; and
e. the availability of, and contact information for, an
applicable office of health insurance consumer assistance or
ombudsman
45


If a plan or insurer fails to strictly adhere to the
requirements of the IFR, then the claimant was deemed
to have exhausted the plan or insurer’s internal claims
and appeals process
Regardless of whether the plan or insurer substantially
complied with the IFR or the violation was de minimis
Allowing the claimant to initiate any available external
review process or remedies available under ERISA or
state law
46


Directing all insured (both individual and groups) and non-ERISA self-funded
plans, such as state and local government and church plans), are subject to
state external reviews, consistent with the protections afforded by the NAIC
Uniform Model Act, including:
(a) apply to decisions involving medical necessity, health care setting,
level of care and effectiveness;
(b) allow exceptions to exhaustion requirement consistent with appeals
rules;
(c) require the plan or insurer to pay the costs of an independent
review organization (“IRO”) for the external review;
(d) impose no minimum dollar limit on the claim;
(e) allow four (4) months for an external appeal;
(f) establish rules for the assignment and independence of the
independent reviewer;
(g) decisions on external review are binding on insurer or plan; and
(h) allow expedited review of certain claims.
47


Changes to the Interim Final Rule
The amendment eliminates the IFR requirement that urgent care
claims be decided within twenty-four (24) hours.
The amendment retains the current rule that urgent care claims
must be decided as soon as possible, taking into account medical
exigencies, but not longer than seventy-two (72) hours.
The Preamble states a plan or insurer must defer to an attending
provider’s determination as to whether a claim is “urgent.”
The IFR’s required disclosure of diagnosis and treatment codes
was also eliminated.

48


• The amendment to IFR still requires disclosure of diagnosis and
treatment codes, as well as their meanings, but only if requested.
• A request for diagnosis or treatment codes is not a request for an
internal appeal or an external review.
• The amendment to the IFR also reversed the “deemed denied”
provision, which provided no exception for even a de minimis
violation of the IFR.
• The amended regulation permits the internal review process to
continue if the violation was: (a) de minimis; (b) non-prejudicial; (c)
attributable to good cause or matters beyond the plan or insurer's
control; (d) part of a good faith exchange of information between
the claimant and the plan or insurer; and (e) not indicative of a
pattern or practice of non-compliance.

49



If a claimant files for external or judicial review, but the
attempt at immediate review is rejected based on a de
minimis violation, then the claimant may resubmit the
claim to the plan and pursue an internal appeal.
The plan or insurer must notify the claimant of the right
to resubmit the claim for internal appeal within ten days
after rejection by the external reviewer or court.
The time for re-filing the claim begins upon the
claimant's receipt of the notice from the plan or insurer.
50


Federal External Review
The amendment to the IFR narrowed the scope of the
federal external appeal process for self-funded ERISA
plans, and in so doing, narrowed the scope of appeals
that are subject to external review.
The amendment suspended the requirement that “any”
adverse benefit determination (other than one involving
eligibility) was subject to external review.
During the suspension period, only claims involving
medical judgment and rescissions will be subject to the
federal external review process.
51


The amendment also provides a definition of “medical judgment.”
“Medical judgment” is defined to include claims for: medical
necessity, appropriateness of care, health care setting, level of
care, effectiveness of a covered benefit, or determinations of
whether a treatment is experimental or investigational.
The Preamble also suggests a broad view of what constitutes a
medical judgment, including a claim denied on the basis of a
preexisting condition exclusion would be eligible for external
review.

52


The amendment to the IFR also explains whether a claim involves
a medical judgment is to be “determined by the external
reviewer.”
The Technical Release and Preamble to the amendment further
clarify that plans must rotate external review among contracted
IROs, to minimize the risk that and IRO may become dependent on
the plan.
Careful scrutiny will be applied to any “process other than
rotational assignment” in determining whether a plan qualifies for
the non-enforcement safe-harbor.

53


THE IMPLEMENTATION AND IMPACT
OF MEDICAL LOSS RATIOS
• Insurers offering coverage in the small group or individual market
must meet a minimum MLR of eighty percent (80%). 42 U.S.C. §
300gg-18(b)(1)(A)(ii).
• Insurers offering coverage in a large group market must meet a
minimum MLR target of eighty-five percent (85%). 42 U.S.C. at §
300gg-18(b)(1)(A)(i).
• The MLR regulation adopts a threefold approach to achieving this
goal. (1) public reporting on premium dollar spending; (2) setting
standard percentages of each premium dollar that must be spent
on health claims and quality improvement expenses; (3) requiring
insurers to rebate a pro-rata portion of premium if the MLR is less
than the standard percentage.

54


IMPACT OF MLR

Insurers must pay all other expenses of transacting
business out of this remaining twenty percent (20%).

The remaining expenses insurers must bear include,
but are not limited to, overhead, commissions,
underwriting expenses, fraud prevention/detection,
employee salaries, compliance costs, as well as profit.

55


IMPACT OF MLR

Section 2718(a) requires insurers to submit a public
report detailing the MLR calculations to HHS for each
plan year.
Each insurer is required to submit an aggregate report
to HHS, on a State-by-State basis for each market.
Reports are due by June 1 of the following MLR
reporting year.

56


IMPACT OF MLR

Section 2718(a)(2) of the Act allows insurers to include
any costs spent on “activities that improve health care”
in the MLR numerator.
This could significantly increase the ability to comply
with the applicable MLR requirement.
The question, of course, is what constitutes “activities
that improve health care”?

57


IMPACT OF MLR
The four categories in § 2717 encompass activities and benefits
that:
(A) improve health outcomes through the implementation of
activities such as quality reporting, case management, care
coordination, and chronic disease management;
(B) implement activities to prevent hospital readmissions;
(C) implement activities to improve patient safety and reduce
medical errors through the appropriate use of best clinical
practices, evidence based medicine, and health information
technology; and
(D) implement wellness and health promotion activities.

58


IMPACT OF MLR
The MLR regulation directs an activity can only be classified as a
quality improvement activity if it first falls within one of the
categories provided in § 2717, and further meets all the
requirements in § 158.150.
The regulation requires any proposed quality improvement
activity be both primarily designed to improve patient care and
the effectiveness of any proposed activity must be capable of
objective measurement and produce verifiable results.
An insurer is not required to present initial evidence of
effectiveness, but must demonstrate “measurable results
stemming from the executed quality improvement activity.”
59


IMPACT OF MLR

The MLR regulation contains a specific listing of
activities that definitively are within and without the
category of quality improvement activities.

The list includes such items as blood glucose
monitoring programs and medication adherence
programs.

60


IMPACT OF MLR

An activity primarily designed to “control or contain
costs” cannot be categorized as a quality improvement
activity, even if it meets all of the category’s
requirements.
If an activity’s primary design is to improve health
outcomes, and a secondary effect is a cost savings, then
the activity can qualify as a healthcare quality
improvement activity, assuming all other requirements
are satisfied.
61


IMPACT OF MLR
Most administrative expenses were determined not related or
primarily designed to improve the quality of patient health.
Some traditional administrative expenses may qualify as a quality
improvement activity, provided they meet all other criteria for the
category.
One example is “prospective utilization review” as compared to
“concurrent” and “retrospective utilization reviews.”
Prospective utilization review is considered a quality improvement
activity because it is forward looking, rendered before care is
given and with the goal of ensuring the most appropriate medical
treatment in the most appropriate setting.
62


IMPACT OF MLR
If an insurer fails to meet the minimum MLR
requirement, then the insurer must rebate directly to
the consumers the difference between the insurer’s
actual MLR percentage for the reporting year and the
required MLR standard for that market.
The rebate must be paid directly to the each individual
enrollee in the applicable market.
The rebate must be paid by no later than August 1
following the end of the reporting year.
63


IMPACT OF MLR
An insurer has discretion to choose among a range of options
available to provide the rebate.
The rebate for a current enrollee may be given in the form of
“a premium credit, lump-sum check, or, if an enrolled paid the
premium using a credit card or direct debit, by lump-sum
reimbursement to the account used to pay the premium.”
Rebates for former enrollees must be paid in either a lump-
sum check or, in the case of electronic premium payment, a
lump-sum reimbursement to the account used to pay the
premiums.

64


IMPACT OF MLR
Fraud prevention is not a quality improvement
activity.
Insurers can offset fraud detection and recovery
expenses against actual recoveries, up to the amount
recovered, if the recovery efforts are successful.
By excluding the costs of fraud prevention and
detection from the MLR numerator, the regulations
discourage insurers from devoting resources to fraud
detection and prevention.
65


IMPACT OF MLR
The definition of “Federal Taxes” that could be excluded from the
premium revenue in the MLR denominator created some
controversy.
Chairs of the congressional committees that drafted legislation
wrote to HHS stating the intent was to only exclude “Federal taxes
and fees that relate specifically to revenue derived from the
provision of health insurance coverage that were included in the
PPACA.”
HHS disagreed, defining the exclusion for taxes broadly, to include
most Federal taxes other than taxes on investment income and
capital gains.
66


IMPACT OF MLR

Commissions are not part of the MLR calculation and
must be absorbed as non-claims related
administrative expenses.

Agents are concerned that their commissions will be
reduced and/or jobs eliminated as insurers are forced
to reduce costs to comply with the MLR.

67


Questions?

Bryan D. Bolton Eric B. Myers Robert R. Pohls
Funk & Bolton Aetna Inc. Pohls & Associates
Baltimore, MD Philadelphia, PA Walnut Creek, CA

68

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