382 F.3d 1241 (11th Cir. 2004), 02-16333, Klay v. Humana, Inc.

Docket Nº:02-16333.
Citation:382 F.3d 1241
Party Name:Leonard J. KLAY, M.D., Charles B. Shane, M.D., All Plaintiffs, Price Plaintiffs, Price, Sessa, Katz & Yingling, Provider Plaintiffs, et al., Plaintiffs-Appellees, v. HUMANA, INC., Humana Health Plan, Inc., Foundation Health Systems, Inc., n.k.a. Health Net, Inc., Pacificare Health Systems, Inc., Pacificare Operations, Inc., The Prudential Insurance
Case Date:September 01, 2004
Court:United States Courts of Appeals, Court of Appeals for the Eleventh Circuit

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382 F.3d 1241 (11th Cir. 2004)

Leonard J. KLAY, M.D., Charles B. Shane, M.D., All Plaintiffs, Price Plaintiffs, Price, Sessa, Katz & Yingling, Provider Plaintiffs, et al., Plaintiffs-Appellees,


HUMANA, INC., Humana Health Plan, Inc., Foundation Health Systems, Inc., n.k.a. Health Net, Inc., Pacificare Health Systems, Inc., Pacificare Operations, Inc., The Prudential Insurance Co. of America, United health Group, Inc., f.k.a. United Health Care Corp., Unitedhealth Care, Inc., Wellpoint Health Networks, Inc., Defendants-Appellants.

No. 02-16333.

United States Court of Appeals, Eleventh Circuit

September 1, 2004

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Miguel A. Estrada, Daniel W. Nelson, Andrew S. Tulumello, Gibson, Dunn & Crutcher, LLP, Brian D. Boyle, Brian P. Brooks, O'Melveny & Myers, John D. Aldock, Mark S. Raffman, Shea & Gardner, David A. Bono, Harkins Cunningham, Washington, DC, Edward M. Crane, Mark R. Filip, Skadden, Arps, Slate, Meagher & Flom, Chicago, IL, William E. Grauer, Christopher R.J. Pace, Cooley Godward, LLP, San Diego, CA, Daniel A. Casey, Kirkpatrick & Lockhart, Edward Soto, Weil, Gotshal & Manges LLP, Eduardo W. Gonzalez, Thomas R. Julin, Hunton & Williams, Michael Nachwalter, Kenney, Nachwalter, Seymour, Arnold, Critchlow & Spector PA, Miami, FL, Gregory S. Coleman, Weil, Gotshal & Manges, Austin, TX, Stan Blumenfeld, O'Melveny & Myers, LLP, Richard J. Doren, Gibson, Dunn & Crutcher, LLP, Los Angeles, CA, V. Robert Denham, Kathlynn L. Butler-Polvino, Powell, Goldstein, Frazer & Murphy, Atlanta, GA, for Defendants-Appellants.

Joe R. Whatley, Jr., Charlene P. Ford, Othni J. Lathram, Whatley Drake, L.L.C., Birmingham, AL, Harley S. Tropin, Kozyak, Tropin & Throckmorton, P.A., James B. Tilghman, Jr., Stewart, Tilghman, Fox & Bianchi, P.A., Miami, FL, for Plaintiffs-Appellees.

Appeal from the United States District Court for the Southern District of Florida.

Before TJOFLAT, BIRCH and GOODWIN [*], Circuit Judges.

TJOFLAT, Circuit Judge:

This is a case of almost all doctors versus almost all major health maintenance organizations (HMOs), coming before us for the third time in as many years; there have been twenty-one published orders and opinions in this case from various federal courts. The plaintiffs are a putative class of all doctors who submitted at least one claim to any of the defendant HMOs between 1990 and 2002. They allege that the defendants conspired with each other to program their computer systems to systematically underpay physicians for their services. We affirm the district court's certification of the plaintiffs' federal claims, though we strongly urge the district court to revisit the definition of these classes, and reverse the district court's certification of the plaintiffs' state claims. We do not reach the district court's certification of a California Subclass since the defendants did not specifically challenge the certification on appeal.


The plaintiffs are physicians who were reimbursed by one or more of the defendant HMOs for treating patients covered by those HMOs. The plaintiffs allege that the backbone of their relationship with the HMOs is that they "will be paid, in a timely manner, for the covered, medically

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necessary services they render." Provider Plaintiffs' Second Amended, Consolidated Class Action Complaint, ¶ 4 (Sept. 19, 2002) (hereinafter, Second Complaint). 1 In a phrase that will undoubtedly play well with a jury, the doctors alliteratively claim that the defendants systematically "deny, delay and diminish the payments due to [them]," id. ¶ 5, and fail to tell doctors that they are being underpaid, id. ¶ 78. The complaint alleges that the defendants' reimbursement system is based on

covertly denying payments to physicians based on financially expedient cost and actuarial criteria rather than medical necessity, processing physicians' bills using automated programs which manipulate standard coding practices to artificially reduce the amount they are paid, and ... systematically delaying payments to gain increased use of the physicians' funds.

Id. ¶ 6.

If an agreement between a physician and an HMO exists, its terms govern the physician's reimbursement. The HMOs also "represent to the medical profession at large" that when a physician treats a patient who belongs to an HMO with which the physician does not have a contract, the HMO will still reimburse him. Among the ways in which the defendants allegedly convey this information are "[b]y disseminating billing information to the profession at large," "confirming coverage for medically necessary services when contacted by doctors prior to treatment," and "explaining payments so as to make it appear that doctors are being paid for the covered, medically necessary services they render." Id. pp 77(c), (d), (f).

The complaint alleges that physicians under contract with HMOs are compensated through one of two different methods--fee-for-service or capitation. Physicians who do not have a contractual relationship with an HMO are reimbursed only under a fee-for-service regime. See id. pp 79, 101. Although the plaintiffs allege that they are being systematically underpaid under both payment methods, the exact ways in which this is purportedly accomplished differ; we will consider each reimbursement scheme in turn.


Under a fee-for-service plan, an HMO agrees to reimburse doctors for any medically necessary services they perform on covered individuals, whether or not those doctors are under contract with the HMO. This gives doctors an incentive to perform as many tests and procedures as they can convince the HMO are medically necessary; HMOs, in contrast, have an incentive to approve as few procedures as possible. Both parties claim they are acting in their patients' best medical interests.

To claim reimbursement, physicians are required to fill out an HCFA-1500 form, developed by the federal government and the American Medical Association. These forms employ a "current procedural terminology" coding procedure ("CPT coding") whereby medical procedures are identified by standardized designators. Each designator is comprised of two components: a "base code" that identifies the nature of the procedure and a series of modifiers "for the degree of difficulty, complexity and multiplicity." Id. ¶ 80. Each HCFA-1500 form is processed by the defendants' computer systems, which specify the amount that the physician should be paid.

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The plaintiffs allege that these computer systems are programmed to systematically underpay the plaintiffs through a variety of methods. First, the plaintiffs allege that the systems are programmed to simply deny reimbursement for certain base codes that insurance companies feel are too expensive, notwithstanding their contractual obligations to both physicians and patients. Id. ¶ 84. Second, the plaintiffs allege that when the systems read certain base codes on HCFA-1500 forms, they are programmed to interpret them as requesting reimbursement for less expensive procedures ("downcoding"). Id. ¶ 86. Third, the plaintiffs contend that the system is programmed to simply group certain base codes together, so that if the system reads certain combinations of codes on the forms, they will be interpreted as being only a single code ("grouping"). Id.

Fourth, the system is allegedly programmed to ignore certain modifiers that would drive up physicians' reimbursements. Id. ¶ 90. Fifth, the plaintiffs assert that the system is designed to unnecessarily put their reimbursement claims in a "state of suspense before they are processed even though no additional information is needed or requested.... The end result is that average payment times exceed by multiples the time provided for by law in most states as well as the time set by contract and industry practice." Id. pp 94, 96. Finally, the plaintiffs allege that the forms the HMOs send to physicians explaining the amounts of their reimbursements, called "explanation of benefits" forms ("EOBs"), "misrepresent or conceal the actual manner in which Plaintiffs' ... payment requests were processed so as to induce them to accept reduced payments in reliance thereon." Id. ¶ 98.


Even plaintiffs whose contracts establish a capitation payment plan are not free from the defendants' alleged manipulation. Under a capitation agreement, each patient specifies a physician as his "primary care provider." The HMO is obligated to pay each physician a small monthly fee, called a capitation payment, for each patient registered to him. The physician, in turn, is obligated to provide whatever medical services each registered patient requires. Thus, a capitation system is a flat-rate scheme in which a physician's payments are "based on the number of patients they agree to treat rather than on the services they actually render." Id. ¶ 7. A capitation method gives a physician an incentive to provide as few services as possible to each patient, whether or not medically necessary, because his payments are not tied to the quality or extent of services he provides. The HMOs, in turn, have an incentive to register as few patients as possible with each physician, so as to reduce their monthly per-patient outlays.

The plaintiffs contend that the HMOs are underpaying physicians by failing to pay capitation fees for many patients who have registered with a physician but never visited him. Id. ¶ 105. Consequently, plaintiffs allege, they are receiving capitation payments based on a much smaller pool of patients than that to which they are entitled.

This is not the only way in which the defendants have allegedly...

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