453 F.3d 179 (3rd Cir. 2006), 04-4304, Wachtel ex rel. Jesse v. Guardian Life Ins. Co. of America

• Docket Nº: 04-4304, 04-4433, 04-4434.
• Citation: 453 F.3d 179
• Party Name: Zev WACHTEL; Linda Wachtel, individually and on behalf of their minor children, Tory JESSE and Brett Wachtel, and on behalf of all others similarly situated; v. GUARDIAN LIFE INSURANCE CO. OF AMERICA; Physicians Health Services, Inc.; Physicians Health Services of New Jersey, Inc.; Health Net, Inc.; Health Net of the Northeast, Inc.; Health Net of
• Case Date: June 30, 2006
• Court: United States Courts of Appeals, Court of Appeals for the Third Circuit

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453 F.3d 179 (3rd Cir. 2006)

Zev WACHTEL; Linda Wachtel, individually and on behalf of their minor children, Tory JESSE and Brett Wachtel, and on behalf of all others similarly situated;

v.

GUARDIAN LIFE INSURANCE CO. OF AMERICA; Physicians Health Services, Inc.; Physicians Health Services of New Jersey, Inc.; Health Net, Inc.; Health Net of the Northeast, Inc.; Health Net of New Jersey, Inc. (District of New Jersey D.C. 01-CV-04183)

Renee McCoy, individually and on behalf of all others similarly situated

v.

Health Net, Inc.; Health Net of the Northeast, Inc.; Health Net of New Jersey, Inc. (District of New Jersey D.C. 03-CV-01801)

Health Net, Inc.; Health Net of the Northeast, Inc.; Health Net of New Jersey, Inc., Appellants

Zev Wachtel; Linda Wachtel, individually and on behalf of their minor children, Torrey Jesse and Brett Wachtel, and on behalf of all others similarly situated

v.

Guardian Life Insurance Co. of America; Physicians Health Services, Inc; Physicians Health Services of New Jersey, Inc.; Health Net, Inc.; Health Net of the Northeast, Inc.; Health Net of New Jersey, Inc. Health Net Inc., Health Net of the Northeast, Inc., Health Net of New Jersey, Inc.; Appellants

Renee McCoy, individually and on behalf of all others similarly situated

v.

Health Net, Inc.; Health Net of the Northeast, Inc., Health Net of New Jersey, Inc. Appellants.

Nos. 04-4304, 04-4433, 04-4434.

United States Court of Appeals, Third Circuit.

June 30, 2006

Argued December 15, 2005

On Appeal from the United States District Court for the District of New Jersey District Court Nos. 01-CV-04183; 03-CV-01801 District Judge: The Honorable Faith S. Hochberg

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[Copyrighted Material Omitted]

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Counsel: Peter Buscemi (Argued) Morgan, Lewis & Bockius, Theodore D. Aden Herve Gouraige Epstein, Becker & Green, John J. Gibbons, Gibbons, Del Deo, Dolan, Griffinger & Vecchione, Joseph B.G. Fay Jay H. Calvert, Jr. Morgan, Lewis & Bockius, William S. Greenberg B. John Pendleton, Jr. McCarter & English Counsel for Appellants

Stanley M. Grossman (Argued), D. Brian Hufford, Pomerantz, Haudek, Block, Grossman & Gross, Stuart M. Feinblatt, Sills, Cummis, Epstein & Gross Counsel for Appellees

Mary Ellen Signorille American Associations of Retired Persons Counsel for Amicus-Appellee

Before: SLOVITER, SMITH, and VAN ANTWERPEN, Circuit Judges

OPINION

SMITH, Circuit Judge

The central question presented by this interlocutory appeal is whether the District Court properly certified the underlying consolidated matters as class actions. Appellants Health Net, Inc., Health Net of the Northeast, Inc., and Health Net of New Jersey, Inc. (collectively, "Health Net") attack the District Court's Certification Order based, inter alia, on the assertion that the Order failed properly to define the class claims, issues or defenses pursuant to Federal Rule of Civil Procedure 23(c)(1)(B). Because we agree with Health Net that the District Court erred by failing to define the claims, issues, or defenses to be treated on a class basis, we will vacate the Certification Order and remand the case to the District Court.¹

I.

A.

Health Net appeals the District Court's Order certifying two nationwide classes in actions against Health Net, Wachtel v. Guardian Life Ins. Co.² ("Wachtel") and McCoy v. Health Net, Inc. ("McCoy"). Health Net of New Jersey is a New Jersey health benefit plan that provides medical benefits to members; its corporate parent is Health Net of the Northeast, and Health Net, Inc. is the ultimate corporate parent of both companies. Health Net of the Northeast is Health Net, Inc.'s eastern division and also owns Health Net of New York, Inc. and Health Net of Connecticut, Inc. Health Net, Inc. (the nationwide corporate

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parent of all Health Net subsidiaries) also owns licensed state plans in three western states, Health Net of California, Inc., Health Net of Arizona, Inc., and Health Net of Oregon, Inc.

Within the relevant states, Health Net subsidiaries offer medical benefits through three different types of network health plans: health maintenance organizations ("HMOs"), preferred provider organizations ("PPOs"), and point-of-service ("POS") plans. Plaintiff-appellees Zev and Linda Wachtel and Renee McCoy ("Plaintiffs") are beneficiaries in POS plans offered and administered by Health Net.³ A POS plan permits a participant to obtain health care from either in-network ("INET") or out-of-network ("ONET") medical providers. Providers are INET by virtue of negotiating with a Health Net subsidiary to offer cost savings to plan subscribers via significantly discounted fee rates. ONET providers have not negotiated lower rates and are free to charge their normal fees. Beneficiaries pay higher premiums for POS and other plans that permit access to ONET providers.

The issues in these consolidated cases involve reimbursement in connection with services from ONET providers. As noted by the District Court, "Health Net's plan contracts do not cover an entire fee charged by an out-of-network provider." Plan participants may be held responsible (through "balance billing") by such providers for charges in excess of the amount Health Net determines to be usual, customary, and reasonable charges ("UCR") for the services provided. The amount for which beneficiaries are liable for ONET services is almost entirely dependent on how Health Net calculates UCR. Health Net plan terms, contained in various Health Net contracts, or Evidence of Coverage ("EOCs")⁴ state that Health Net uses a national third-party database to determine UCR. The District Court found that Health Net relies on two "substantially similar" databases provided by Ingenix, Inc., known as the Prevailing Health Charge System ("PHCS") and Medical Data Research ("MDR") (collectively, the "Ingenix databases").

Plaintiffs sue under four provisions of the Employee Retirement Income Security Act ("ERISA"). The first is ERISA § 502(a)(1)(B), 29 U .S.C. § 1132(a)(1)(B), which perm its a civil action by a plan participant or beneficiary "to recover benefits due to him under the terms of his 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." Id. the second is § 502(a)(3), 29 U.S.C. § 1132(a)(3), which permits a participant or beneficiary to "(A) enjoin any act or practice which violates any provision of this subchapter or the terms of the plan, or (B) to obtain other appropriate equitable relief (i) to redress such violations or (ii) to enforce any provisions of this subchapter or the terms of the plan." Id. plaintiffs sue under § 502(a)(3) for various alleged breaches of fiduciary duties. 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,

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for failure to issue appropriate SPDs.

Plaintiffs allege that, although Health Net admits that it is required to use databases that are "valid and appropriate for determining UCR,"⁵ Health Net uniformly uses the Ingenix databases, which Plaintiffs allege are invalid in that fundamental flaws in the data "result in the systematic manipulation and downward skewing of the database UCR numbers." Assuming the Ingenix databases are invalid, their use to calculate UCR charges breaches the terms of the plans and leads to systematic under-reimbursement of providers, resulting in inappropriately high financial liability for beneficiaries in the form of outstanding "balances" to providers. Plaintiffs allege actual out-of-pocket losses as a result of under-reimbursement. Plaintiffs contend that Health Net must pay unpaid benefits to class members either by using a valid database or by paying the providers' billed charges, whichever is less.

Plaintiffs also challenge other Health Net policies and practices, which they allege Health Net applies uniformly across various plans, providers, and beneficiaries to determine ONET reimbursements. These policies include: (1) relying on an outdated version of an Ingenix database ("outdated data"); (2) reducing ONET reimbursements when multiple procedures are performed on the same day (the "multiple surgery rule"), despite the fact that plan terms fail to disclose the existence or substance of such a rule; (3) systematically reducing or terminating ONET reimbursements for services provided by assistant surgeons or co-surgeons (the "assistant surgeon rule") by use of an undisclosed and incomplete list of services; (4) determining U CR amounts for pharmaceuticals using the Average Wholesale Price ("AWP"), a national number of manufacturers' list prices that is inappropriate for UCR and not disclosed by Health Net; and (5) failing to disclose reimbursement policies in EOCs and SPDs as required by ERISA.

B.

The District Court, by its Opinion and Order dated August 5, 2004, certified the Wachtel and McCoy lawsuits as class actions under Federal Rule of Civil Procedure 23(b)(3), and directed Plaintiffs to submit a plan for notification of the certified classes. Health Net filed a petition in this Court under Rule 23(f) requesting review of the certification order. Health Net also moved the District Court to stay the distribution of the notice pending resolution of the Rule 23(f) petition. The District Court denied the stay on November 12, 2004. On that same day, Health Net filed a notice of appeal and asked this Court for immediate review of the District Court's denial of a stay of the class notice distribution. On November 15, 2004, this Court granted Health Net's Rule 23(f) petition (agreeing to review the certification order) and granted a temporary stay of class notice until November 30, 2004, which it later extended indefinitely pending the resolution of the Rule 23(f) appeal.

The instant appeal involves three consolidated...