Ambrose v. Blue Cross & Blue Shield of Virginia

• Decision Date: 27 June 1995
• Docket Number: Civ. A. No. 3:94cv636.
• Court: U.S. District Court — Eastern District of Virginia
• Parties: Nancy L. AMBROSE, Habib Guirguis, and Richard Grant Bird, Plaintiffs, v. BLUE CROSS & BLUE SHIELD OF VIRGINIA, INC., a/k/a Trigon Blue Cross Blue Shield, and HMO of Virginia Inc., and Healthkeepers, Inc., a/k/a Healthkeepers of Virginia, Inc., Defendants.

891 F. Supp. 1153

Nancy L. AMBROSE, Habib Guirguis, and Richard Grant Bird, Plaintiffs, v. BLUE CROSS & BLUE SHIELD OF VIRGINIA, INC., a/k/a Trigon Blue Cross Blue Shield, and HMO of Virginia Inc., and Healthkeepers, Inc., a/k/a Healthkeepers of Virginia, Inc., Defendants.

Civ. A. No. 3:94cv636.

United States District Court, E.D. Virginia, Richmond Division.

June 27, 1995.

Richard T. McGrath, Kane, Jeffries, Foreman & Gayle, Richmond, VA, Irwin W. Stolz, Gambraell & Stolz, Atlanta, GA, Gene M. Winburn, Winburn, Lewis & Barrow, Athens, GA, for plaintiffs.

Thomas E. Martenstein, Jeanette D. Rogers, Blue Cross & Blue Shield of Virginia Legal Dept., James C. Roberts, Mays & Valentine, R. Gordon Smith, James P. McElligott, Jr., James B. Comey, McGuire, Woods, Battle & Boothe, Richmond, VA, for defendants.

MEMORANDUM OPINION

PAYNE, District Judge.

The Amended Class Action Complaint ("Amended Complaint") contains five counts. In Counts One and Two, Richard G. Bird, and the class he purports to represent, assert claims under the Employee Retirement Income Security Act of 1974, 29 U.S.C. §§ 1001-1461 ("ERISA"). These two counts have been voluntarily dismissed. Consequently, Bird is no longer a plaintiff and there are no ERISA claims remaining. Count Three is asserted by Nancy L. Ambrose and Habib Guirguis, and the classes they purport to represent, under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1961-1968 ("RICO"). In Count Four, the Ambrose and Guirguis Classes assert Virginia state law claims for breach of contract, failure to account and breach of fiduciary duty. Count Five, for reasons not entirely clear, seeks injunctive relief respecting adjustments of allegedly improperly calculated policy holder lifetime benefit caps.

The defendants are three corporations: Blue Cross & Blue Shield of Virginia, Inc., now known as Trigon Blue Cross Blue Shield, Blue Cross Blue Shield HMO of Virginia, Inc. ("HMO Virginia"), and Healthkeepers, Inc. ("Healthkeepers"). HMO Virginia and Healthkeepers are wholly owned subsidiaries of Trigon. The defendants, who will be referred to collectively as "defendants" or "Trigon," have moved to dismiss the action pursuant to Fed.R.Civ.P. 9(b), 12(b)(1), and 12(b)(6), and they claim entitlement to summary judgment pursuant to Fed. R.Civ.P. 56(b).

With the voluntary dismissal of Counts One and Two, RICO provides the only basis for federal jurisdiction and hence resolution of Count Three has become the focal point of this action. The defendants assert that Count Three fails as a matter of law because the application of RICO is precluded by the McCarran-Ferguson Act, 15 U.S.C. §§ 1011-1015. If the defendants' contention is correct, then dismissal is appropriate pursuant to Fed.R.Civ.P. 12(b)(6).

STATEMENT OF FACTS

The stated facts will be confined to those that are pertinent to the RICO claims asserted by Ambrose and Guirguis. The statement of facts assumes that the allegations of the Amended Complaint are true even though the defendants deny many of those allegations.

A. The Policies, the Plaintiffs and the Offending Practices

The insurance policies issued by Trigon and purchased by Ambrose and Guirguis contained, as is standard in the insurance industry, provisions establishing annual deductible thresholds which must be reached before the insurer is obligated to make payments to the health care provider or to reimburse amounts paid by the insured. The "deductible" is that "portion of an insured loss to be borne by the insured before he is entitled to recovery from the insurer." Black's Law Dictionary 413 (6th ed. 1990). The policies also contain copayment provisions which allocate the risk between the insured and the insurer by establishing the percentage of medical charges for which each is responsible after the deductible is exhausted. The plaintiffs entered the insurance contracts as a result, in part, of mail-out marketing and advertising campaigns. Those documents, and other literature delivered with the policy and with correspondence about claims, are said to have misrepresented the truth about the amount of risk borne by the insured and insurer, respectively.

More particularly, the RICO claim charges that the defendants devised and effectuated a discounting scheme under which the respective risks borne by insured and insurer were different than represented in connection with the sale, purchase and performance of the insurance contract. As the plaintiffs put it:

Plaintiffs allege that the defendants, unknown to their customers, had struck secret deals with preferred health care providers for discounts generally based upon the annual volume of billings generated by Blue Cross customers and their beneficiaries under their contract documents. These discounts would arise from the Deductible amounts paid and the copayments made but they would only be applied to the defendants' share of the bills, not the risk retained by the participant and the bills paid by participants in its health plans.

(Amended Complaint, pp. 3-4) (emphasis added). The effect of these practices on the Ambrose class was somewhat different from the effect on the Guirguis Class.

The Ambrose Class consists of insureds whose contracts provided that the insurers "would pay, after a Deductible, 80% of certain covered medical charges with a copayment of 20% from the insureds." (Amended Complaint, p. 3). The insureds in the Ambrose Class incurred medical expenses in a given year that exceeded their deductible and therefore they paid copayments according to the terms of their contracts. Because the negotiated discounts were undisclosed, the insured paid 20% of the providers' stated, undiscounted charge. The insurer then paid only the difference between what the insured had paid and the discounted charge. The net result of that practice was that the insured actually paid more than 20% of the amount owed to the health care provider after exhaustion of the deductible. Consequently, say the Ambrose Class plaintiffs, the advertisements and representations which the defendants made in connection with the sale of the policies and the performance of the policy obligations were fraudulent because they misrepresented the true share of the risk allocated in the copayment.

For example, let us assume that: (1) an insured, whose policy provides for a $200 deductible and a 20%/80% copayment thereafter, undergoes a procedure after having satisfied the deductible; (2) the provider's stated charge for that procedure is $1,000; (3) the insurer and the provider have negotiated a 40% discount for the procedure; and (4) the insured is informed in the statement from the insurer or the provider that the provider's charge is $1,000, of which the insured is to pay 20%, or $200, leaving the insurer to pay the remaining 80% due the provider. In actuality, however, because the provider charged only $600 (the 40% negotiated discount being $400), the insurer has paid only the remaining $400 of the discounted charge of $600. In other words, the insurer has paid 66.67% of the actual charge when it had represented that it would pay 80%; and the insured has paid 33.33%, rather than 20% as was represented.

In general terms, the insured in the example paid 20% of a sum that was higher than the amount actually owed to the provider and, as a consequence, the insured paid more than 20% of the amount actually charged by the provider. The Ambrose Class plaintiffs contend that the representations made by the defendants as to the allocation of risk were therefore fraudulent.

The injury to plaintiffs in the Guirguis Class is somewhat more difficult to discern because their payments for medical treatment were within the deductible amount and thus they made no copayments.¹ The Guirguis Class plaintiffs allege that:

the discounts arose from the total dollar volume of Blue Cross customer traffic at the participating providers and that the customers were given no adjustment to their bills corresponding to the discounts so that such customers were secretly charged an excessive amount for medical services and were injured by implicit price-fixing of medical service charges. The excessive charges occurred even though the Blue Cross' sic defendants' contracts documents with this subclass of individual customers did not provide for a co-payment beyond a deductible amount, but provided instead that the insurer would pay 100% of charges beyond the annual deductible.

(Amended Complaint, p. 6) (emphasis added).² In essence, members of the Guirguis Class complain that the price they paid for medical treatment was not discounted and that this resulted in an unnecessarily and artificially high price for medical services, payment of which benefitted the insurer by permitting the insurer to negotiate other favorable discounts.

B. This Action and the State Investigation

On August 31, 1994, the Ambrose and Guirguis plaintiffs sought redress of these practices by filing this action which the defendants moved to dismiss on September 21, 1994 and answered on October 3, 1994. At the time, Virginia's State Corporation Commission ("SCC") was concluding its investigation of the discounting practices and, on September 22, 1994, the SCC entered an Order Accepting Offer of Settlement. Under the terms of the settlement, Trigon agreed to pay a fine of $5 million and to implement a Coinsurance Refund Program, pursuant to which it would refund the excessive copayments to Trigon policyholders and to members of its HMO affiliates, including HMO Virginia and Healthkeepers, and to their beneficiaries.

The order entered by the SCC followed a special market report prepared by the SCC's Bureau of Insurance which ensued an extensive study of the discounting practices as to which the plaintiffs now seek relief under RICO. That investigation was conducted pursuant to, and as a part of, a comprehensive state statutory and administrative scheme by which Virginia...