Connecticut v. Physicians Health Serv. Of Conn., CIV.A. 3:99CV2402 SR.

Citation103 F.Supp.2d 495
Decision Date13 July 2000
Docket NumberNo. CIV.A. 3:99CV2402 SR.,CIV.A. 3:99CV2402 SR.
CourtUnited States District Courts. 2nd Circuit. United States District Court (Connecticut)
PartiesState of CONNECTICUT v. PHYSICIANS HEALTH SERVICES OF CONNECTICUT, INC.

Richard Blumenthal, Atty. General, State of Conn., Admin. Dept., Hartford, CT, Charles C. Hulin, Office of Atty. Gen., Hartford, CT, Michael E. Cole, Shipman & Goodwin, Hartford, CT, for State of Conn.

David S. Poppick, Elizabeth S. Torkelsen, Epstein, Becker & Green, P.C., Washington, DC, for Physicians Health Services.

RULING ON DEFENDANT'S MOTION TO DISMISS

UNDERHILL, District Judge.

This proposed class action raises allegations that the prescription drug benefit offered by the defendant, Physicians Health Services of Connecticut, Inc. ("PHS"), uses a drug formulary that obstructs enrollees' access to prescription medications that their physicians believe are most safe and effective. The plaintiff, State of Connecticut ("Connecticut" or "the State"), has brought suit in its capacity as parens patriae and as the assignee of certain individual PHS enrollees. The State asserts claims for equitable relief pursuant to Section 502(a)(3) of the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1132(a)(3), which permits a "participant, beneficiary, or fiduciary" in a health care plan established pursuant to ERISA to bring an action "to enjoin any act or practice which violates any provision ... of the plan, or ... to obtain appropriate equitable relief." Currently pending is the defendant's January 24, 2000 Motion to Dismiss, brought pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure.

The fundamental issue raised by the motion to dismiss is whether the State of Connecticut has standing, either under the doctrine of parens patriae or as the assignee of rights of various named participants, to bring an ERISA civil enforcement action under section 502(a)(3). Congress carefully limited the persons authorized to bring an ERISA civil enforcement action, and any such plaintiff must be either "a participant, beneficiary, or fiduciary." The State does not meet any of these statutory requirements of standing, and cannot overcome its omission from section 502(a)(3) either through the doctrine of parens patriae or through assignment of rights from persons who would have standing. Accordingly, the defendant's motion to dismiss (doc. # 10) is granted.

I. Background

In its complaint, the State alleges that PHS uses a drug formulary that obstructs enrollees' access to prescription medications that their physicians believe are most safe and effective. The State's principal allegations regarding PHS' drug formulary system can be paraphrased as follows:

(1) PHS uses a prior approval process that pressures physicians and patients into using medications that PHS prefers. If a medication is not preferred, PHS will deny coverage unless the physician submits and PHS approves a prior approval request. Prior approval may be granted if PHS determines that the non-preferred drug is medically necessary for the particular patient.

(2) PHS' determination whether a drug is "preferred," is based largely on cost factors rather than effectiveness.

(3) Physicians and enrollees are pressured to accept a preferred drug even when it is not the drug originally prescribed by the physician and even when the preferred drug is less safe and less effective than the drug originally prescribed.

(4) PHS uses a variety of techniques to persuade physicians and enrollees to "switch" from a prescribed drug to a preferred drug, including the denial of coverage for non-preferred drugs and the imposition of onerous prior-approval paperwork.

See Compl. at 2-3, ¶ 3.

The State alleges that, although ERISA requires PHS to fully inform enrollees about the nature of their health plan benefits, PHS has failed to disclose the nature of the formulary system. Connecticut also alleges that, although ERISA requires that an enrollee receive written notice when coverage for a plan benefit is denied, including instructions on how to appeal, PHS fails to give enrollees any notice at all. Accordingly, the State claims that PHS has violated its fiduciary duty under ERISA to administer its health plan solely in the interest of its enrollees and has injured enrollees by maintaining a drug formulary in a manner that serves its own financial interest.

The complaint sets forth three claims. The first claim alleges that PHS has breached its fiduciary duty under ERISA. The State alleges that PHS is a "fiduciary" as that term is defined in ERISA section 3(21)(A), 29 U.S.C. § 1003(21)(A), and that ERISA section 404(a)(1), 29 U.S.C. § 1104(a)(1), requires a fiduciary to discharge its duties "solely in the interest of participants [employees] and beneficiaries [their dependents]." See Compl. at 27, ¶ 83. The State claims that PHS has breached its fiduciary duty to enrollees by obstructing enrollees' access to safe, effective and medically necessary prescription medications. Id.

The second claim alleges that PHS breached certain ERISA disclosure obligations. Specifically, the State alleges that:

ERISA requires that each plan participant and beneficiary shall be given a summary plan description written in a manner calculated to be understood by the average plan participant, sufficiently accurate and comprehensive to reasonably apprise participants of their rights and obligations under the plan and containing, among other things, information regarding the plan's requirements respecting eligibility for participation and benefits and the circumstances which may result in disqualification, ineligibility or denial or loss of benefits. ERISA § 102, 29 U.S.C. § 1022. In addition, ERISA § 104(b), 29 U.S.C. § 1024(b), requires that a summary description of any reductions in covered services must be provided to participants and beneficiaries within 60 days after the changes are adopted.

Compl. at 27, ¶ 85. The State alleges that PHS fails to disclose to enrollees the information required by these provisions. The State claims, for example, that PHS fails to disclose that:

(a) PHS lists prescription drugs as preferred not because of their effectiveness but because of their low cost. The preferred drugs are inexpensive because the defendant has received discounts and rebates from pharmaceutical companies in exchange for including their drugs on the preferred list.

(b) PHS will deny coverage for a prescribed medication even though the preferred substitute may be less safe or less effective.

(c) PHS makes no individualized determination whether the medication prescribed by the attending physician is medically necessary for that particular patient unless the attending physician somehow learns of the denial and initiates a time consuming "prior approval process."

(d) When it denies coverage for a non-preferred medication PHS does not inform the attending physician.

(e) When it denies coverage for a non-preferred medication PHS does not give the enrollee a written denial notice or explanation of appeal rights.

Compl. at 28, ¶ 86.

The third claim alleges that PHS breached certain ERISA notice obligations. Specifically, the State alleges that "Section 503(1) of ERISA, 29 U.S.C. § 1133(1), provides that every employee benefit plan must `provide adequate notice in writing to any participant or beneficiary whose claim for benefits has been denied, setting forth specific reasons for such denial ....'" Compl. at 29, ¶ 89. The State further alleges that the written denial must include:

(1) The specific reason or reasons for the denial;

(2) Specific reference to pertinent plan provisions on which the denial is based;

(3) A description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary; and

(4) Appropriate information as to the steps to be taken if the participant or beneficiary wishes to submit his or her claim for review.

Compl. at 29, ¶ 89, citing 29 C.F.R. 2560.503-1(b). The State alleges that PHS fails to provide enrollees with the detailed notices that the State claims are required by law.

In support of these claims, the complaint identifies eight individual PHS members that the State alleges are representative enrollees who have had access to safe and effective prescription medicines obstructed by the PHS drug formulary. Attached to the complaint are the affidavits of all of the representative enrollees, setting forth allegations of the significant difficulty they experienced in obtaining coverage for certain necessary medication that their physicians prescribed and allegations of the considerable suffering they endured as a result. The State claims that these representative enrollees have experienced serious pain and suffering, delays in recovery of benefits and unnecessary out-of-pocket expense because PHS: obstructed their access to prescription medications their physicians prescribed; failed to disclose to them the full nature of the PHS formulary system; and failed to give them proper notice of the denial of coverage and instructions on how to appeal.1

All eight individuals have executed an "Assignment of Cause of Action Under ERISA," copies of which are attached to the complaint. In those assignments, each individual states:

I hereby assign to the State of Connecticut any cause of action I may have arising from my status as a participant in or beneficiary of an employee welfare benefit plan established pursuant to the Federal Employee Retirement Income Security Act of 1974 ("ERISA"), upon the following conditions:

1. I believe my managed care organization has improperly and illegally obstructed my access to safe and effective prescription medications. I believe many other Connecticut residents have been injured in a similar way. I cannot afford to hire private attorneys to protect my rights under ERISA.

2. By this assignment I intend to empower the State of...

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