2. healthlawyers.org 33
T
he Affordable Care Act (ACA) and the sweeping
healthcare insurance reforms it introduces are
in part a culmination of years of public concern
over the millions of Americans without health
insurance and the rising costs for those who
have coverage. In garnering support for ACA, many politi-
cians and interest groups were critical of the health insurance
industry and scrutinized several of its core business practices.
Advocates of the ACA targeted practices like lifetime maxi-
mums, rescissions of individual health insurance policies, and
coverage denials for preexisting conditions—a tactic designed
to show that the system was broken and in need of reform.
Now that ACA’s reforms are beginning to be implemented,
interest groups and entrepreneurial plaintiffs’ attorneys have
begun to articulate various new (and some familiar) avenues
for potential litigation against insurers. Although key aspects
of ACA have yet to take full effect—such as guaranteed-issue
provisions, expanded coverage for essential health benefits,
and bans on denials of coverage based on preexisting condi-
tions—politicians, journalists, and interest groups have
introduced these concepts to the American dialogue. And other
lesser-known aspects of the law—such as Medical Loss Ratio
(MLR) requirements and risk-adjusted premiums—are also
gaining exposure within industry circles. As politicians and
interest groups continue to tout ACA’s various provisions as
newfound entitlements, insurers are likely to face expanded liti-
gation risks. Indeed, the ACA creates expectations that at least
in some measure may not be met, through no fault of insurers.
There are already indications of how this new litigation
environment may take shape. For starters, insurers should
expect to litigate more in state court. Historically, entities
that provide or administer coverage for employer-sponsored
health plans have invoked federal law—most notably, the
Employee Retirement Income Security Act of 1974 (ERISA)—
to remove cases to federal court or obtain dismissal of lawsuits
on preemption grounds. While the ACA does not disturb this
framework, it may lead more Americans to purchase indi-
vidual health insurance policies, and reduce the employer-
sponsored health coverage regulated under ERISA.1
Unlike
ERISA, which broadly preempts state laws relating to employee
benefit plans, the ACA establishes a federal minimum stan-
dard but leaves much of the implementation and regulation
of health insurance reform to the states. This may enable the
plaintiffs’ bar and state attorneys general, bringing actions on
behalf of consumers, to keep individual cases based on indi-
vidual policies in friendlier state court venues. While insurers
may try to remove to federal court (on the basis, for example,
that the ACA’s regulatory regime completely preempts state
law), there is a risk of remand to state court.
ACA-related litigation will likely flow from two funda-
mental expectations—that everyone is guaranteed robust
health insurance coverage and that costs associated with
providing that coverage will stabilize or even go down
over time. If unfulfilled, these expectations could prompt
consumers to bring their disappointments to those who are
eager to expand upon and defend the perceived entitlements
established by ACA. And, in much the same way, state and
federal enforcement authorities may also seek to hold insurers
accountable to the public’s perceptions of ACA’s reforms. Risk-
bearing providers, such as Accountable Care Organizations,2
could similarly find themselves a target of such challenges. The
issue-spotting discussion set forth below identifies several key
litigation risks that may arise because of these two funda-
mental public expectations.
The Affordable Care Act, Public Expectations,
and the Road to Litigation: An Issue Spotter
for Insurers and Risk-Bearing Providers
By David M. Deaton & Stephen M. Sullivan, O’Melveny & Myers LLP, Los Angeles, CA
3. 34 AHLA Connections February 2013
Expectation of Guaranteed, Robust Coverage
ACA pushes a greater number of individuals into the health
insurance market by requiring most Americans to maintain
some form of health insurance coverage or—as Chief Justice
Roberts clarified—pay a tax.3
Indeed, ACA guarantees health
insurance coverage for most Americans.4
It also guarantees
that this coverage will extend to certain minimum “essential
health benefits.” Combined with a lack of clarity in federal and
state guidance, these guarantees may lead to litigation related
to scope of coverage and benefit determinations by insurers.
This risk could be aggravated by the potential for miscommu-
nications with consumers that could result from the rapid pace
at which states and the federal government must establish the
complex Exchanges that will serve as clearinghouses for ACA-
related products.
Risk Area #1: Challenges to insurer scope of coverage and
benefit determinations
As ACA’s insurance reforms continue to roll out over the
next several years, insurers will be dealing with many new
consumers who may not fully understand how their insur-
ance policies work, and who may expect complete coverage
for all their healthcare expenses. What they receive in fact
will fall short of that expectation. ACA requires insurers to
cover certain preventive services (without cost sharing by
members) and ten categories of “essential health benefits”
(EHBs) (with limited cost sharing by members).5
These EHB
categories include hospitalizations, maternity and newborn
care, prescription drugs, preventive and wellness services, and
chronic disease management.6
Based on guidance from the
U.S. Department of Health and Human Services (HHS), states
will individually set and define coverage levels within each of
these EHB categories.7
Insurers will have to take pains to communicate clearly
with applicants and members to manage expectations
regarding the extent of coverage provided by their policies.
This task will be made more difficult if available guidance from
HHS and state regulators lacks clarity, which may embolden
those looking to expand the limits of coverage beyond what
ACA sets forth to sue. Indeed, HHS’ decision to permit each
state to establish its own levels of required EHB coverage, thus
creating a patchwork of coverage standards, will provide an envi-
ronment ripe for miscommunications and, in turn, litigation.
For example, some states have already announced that EHB
coverage will include hospice care, in vitro fertilization, and
treatments for morbid obesity.8
In states where these benefits
are not clearly treated as EHBs, some advocacy groups are
already highlighting the lack of these “essential” benefits.9
As
state regulators continue to publish guidance regarding EHBs,
additional differences among—and public disputes over—
these state-by-state EHB levels likely will emerge.
Insurers, and risk-bearing providers that have undertaken
utilization management obligations, can expect enterprising
plaintiffs’ lawyers to pursue litigation under murky state laws
that arguably allow for benefits to be treated as EHBs even
where they are not specifically required or addressed. Simi-
larly, aggressive litigants may seize on favorable EHB coverage
levels from one state in arguing the extent of EHB coverage
levels in other states.
And while employer-sponsored health plans are not
obligated to cover all EHBs, the terms of such plans typically
include coverage for treatments that are “medically necessary,”
or use a similar standard. The plaintiffs’ bar could seek to use
individual state EHB determinations to provide support for
their view of what is “medically necessary” under such plans.
Risk Area #2: Challenges due to the rapid implementation of
federal and state insurance Exchanges
ACA requires all states to establish an insurance Exchange or
elect to use a federally facilitated Exchange.10
These Exchanges
will operate as virtual insurance markets that, for example,
will (1) allow consumers to compare and select from available
health plans, (2) track consumer tax credits and cost-sharing
reductions, and (3) administer exemptions from the indi-
vidual insurance market. Developing and implementing these
Exchanges is “a herculean task.”11
Because the Exchanges must
be in place and functional before ACA’s first open enroll-
ment period in October 2013, states that choose to establish
an Exchange must design, fund, and implement it over the
course of the next several months. Although some states are
further along in this process than others, the abbreviated
timeframe will likely create challenges for all states and HHS.
Indeed, states and HHS will need to make critical policy and
implementation decisions in short order, and inevitably will be
rushed to finalize myriad practical and technical aspects of the
Exchanges.
In light of the daunting task facing states that choose to
implement Exchanges, the potential exists for many miscom-
munications due to system errors or other technical limita-
tions that are beyond the control of insurers. Nonetheless,
confusion over items such as the scope and price of coverage
could lead to potential consumer complaints, and the first
instinct of some may be to sue insurers for misunderstand-
ings or any problems that result from the operation of the
Exchanges.
Expectation of Lower Costs Associated with Health
Insurance Coverage
ACA also purports to control healthcare costs. It does so by
pushing most Americans to procure health insurance. As is
the case with all health insurance risk pools, premiums from
healthy members will help pay for the healthcare expenses of
those less healthy in the risk pool. ACA also seeks to regulate
insurer profits by requiring insurers to spend certain amounts
of each premium dollar on medical expenses. As consumers
enter these risk pools and as insurers comply with ACA’s finan-
cial reporting obligations, consumers may expect their health
insurance costs to decrease. In the case of the MLR, data
reporting will have a direct financial impact on consumers. In
the case of risk adjustment, on the other hand, data reporting
4. healthlawyers.org 35
will cause some insurers and risk-bearing providers to benefit
at the expense of others, but consumers likely will not be
directly impacted.
In both cases, the expectation of lower costs may drive
litigation risk for insurers. State attorneys general and federal
prosecutors may rely on the public’s expectation of lower costs
to fuel enforcement actions related to insurer data reports.
In the case of MLR reporting, consumers may attempt to sue
directly.
Risk Area #3: Challenges to insurers’ Medical Loss Ratio
calculations and payments
For years, states have regulated insurers and their profits
through the use of MLR rules, which measure the proportion
of premium dollars spent paying medical claims. With the
passage of ACA, there is now a federal minimum standard for
MLR.12
Except in states that have been granted an exemption,
insurers were required to meet this new minimum stan-
dard starting in 2012 for payments covering the 2011 benefit
year. This new MLR is calculated by adding the amounts
paid on medical claims and quality improvement activities
and dividing that number by total premiums (less taxes and
certain fees). Insurers in large group markets must maintain
a minimum of an 85% MLR and those in the small group and
individual markets must meet an MLR of at least 80%. Under
ACA, for each year that an insurer fails to meet the applicable
MLR, it must issue a rebate to its members. In June 2012,
insurers reported under this new minimum standard for the
first time. In August, insurers paid out at least $1.1 billion in
rebates to 12.8 million health plan participants.13
HHS has provided some guidance concerning the catego-
ries of expenses that will qualify as medical expenses and
quality improvement expenses.14
However, most insurers
engage in a variety of complex functions that further the
delivery of healthcare in various direct and indirect ways.
As HHS further refines its guidelines, these activities may
be difficult for MLR regulations to capture and address fully.
Some ambiguity will undoubtedly remain, which may lead to
meritless lawsuits.
While there have not yet been any reported cases under
ACA’s new MLR rules, insurers can expect scrutiny in this
area.15
In fact, certain advocacy groups have already criticized
insurers for their MLR decisions. One insurer, for example,
classified its nurse hotline as a quality improvement activity,
which seems reasonable under HHS’ guidance because the
insurer’s nurses presumably are providing medical advice to
plan members. Based on very little public information, an
advocacy group took issue with the categorization, attacking
it as a profit-driven reclassification of an overhead expense.16
Disagreements such as these are only likely to increase as
insurers continue to determine and implement their clas-
sification criteria. Seizing on the public expectation that
costs—here, in the form of insurer profits—should go down
with ACA, entrepreneurial plaintiffs’ attorneys and state attor-
neys general may challenge the classification MLR criteria of
insurers.17
Risk Area #4: Challenges to insurers’ risk score calculations
Lastly, there is the question of how health insurers calculate
their risk adjustment scores. ACA establishes a system by
which insurers’ premiums can be shifted to competitors based
on the respective health status of their membership pools. This
process, known as risk adjustment, rewards insurers who are
able to demonstrate that their members are less healthy—i.e.,
present more risk—than competitors’ members.18
As public
expectations related to robust coverage and lower costs create
an increasingly competitive marketplace, ACA’s risk adjust-
ment system may be a source of disputes among insurers.
In addition, enforcement agencies, looking to hold insurers
accountable to the cost expectations created by ACA, may
focus on insurers’ risk scores. Risk-bearing providers may also
come under scrutiny because they are responsible for reporting
patient health status to the insurer in the first instance, and
they often are reimbursed based on the amount of premiums
received by the insurer.
Though complex, ACA’s risk adjustment system is not
without precedent. For the last several years, the federal
government has used a risk adjustment model to establish
insurer premiums in the Medicare Advantage (Medicare
Part C) program. In order to mitigate the risk of competitor
disputes and government scrutiny, insurers and providers
could look to the experiences of Medicare Advantage plans for
guidance as they prepare to collect and report member health
status information under ACA’s risk adjustment system. For
example, Medicare Advantage plans have found that healthcare
providers are highly imprecise when it comes to documenting
and reporting health status information to plans.19
In the Medi-
care Advantage program, this provider imprecision has been
exacerbated by vague documentation and data filtering require-
ments that are subject to multiple reasonable interpretations.
Insurers and risk-bearing providers operating under ACA’s risk
ACA-related litigation will likely flow
from two fundamental expectations—
that everyone is guaranteed robust
health insurance coverage and that
costs associated with providing that
coverage will stabilize or even go
down over time.
5. 36 AHLA Connections February 2013
adjustment model will likely face similar challenges.
Not surprisingly, the government has shown recent
enforcement interest in Medicare Advantage plans and risk-
bearing providers with allegedly overstated risk scores and, in
turn, inflated Medicare premiums. In at least two cases, the
government has scrutinized the manner in which defendant
Medicare Advantage plans collected and reported data for risk
adjustment purposes.20
Both cases resulted in multi-million
dollar settlements. There is no reason to think that insurers
operating under ACA’s risk adjustment model will not face
similar government scrutiny. Indeed, in its proposed ACA-
related risk adjustment regulations, HHS specifically reminds
the industry of the government’s remedies under the False
Claims Act.21
Conclusion
Implementation of health reform will be a complex under-
taking for federal and state regulators, insurers, providers and
many others. Rapid implementation and delays in receiving
effective regulatory guidance may contribute to consumer
disappointment and unmet expectations. Plaintiffs’ attorneys
and enforcement agencies may attempt to blame insurers
and certain risk-bearing providers if consumer expectations
are unmet. Accordingly, insurers and risk-bearing providers
would do well to plan ahead for challenges and the risk of
litigation associated with the implementation of key aspects
of reform, such as benefits and coverage determinations, MLR
calculations and payments, and risk adjustment data collection
and submission efforts.
About the Authors
David Deaton (ddeaton@omm.com) is a
partner in O’Melveny Myers LLP’s Los
Angeles office, Co-Chair of the firm’s Health
Care and Life Sciences Practice, and a member
of the White Collar Defense and Corporate
Investigations Practice. He represents major
healthcare organizations in complex, high-
stakes regulatory, enforcement, and business
matters.
Stephen Sullivan (ssullivan@omm.com) is
a counsel in O’Melveny Myers LLP’s Los
Angeles office and a member of the Health
Care Practice and the White Collar Defense
and Corporate Investigations Practice. He
regularly represents healthcare organizations
in connection with regulatory, enforcement, and business
matters. Mr. Sullivan also frequently counsels clients with
respect to both internal and government investigations and
inquiries, and advises healthcare companies on complex stra-
tegic business challenges and opportunities, as well as a variety
of business transactions.
The authors wish to thank Elizabeth M. Bock and Patricia
Verdugo-Chatel for their research assistance and many insights
through the drafting of this article.
Endnotes
1 See Rachel Slajda, Lawmaker Ask HHS to Rethink Essential Benefits
Rules, Law360, Dec. 13, 2012, www.law360.com/health/articles/401411/
lawmaker-asks-hhs-to-rethink-essential-benefits-rules; Austin Frakt, The
Decline of Employer-Sponsored Coverage Under Health Reform: Good,
Bad or Ugly?, Kaiser Health News, May 27, 2010, www.kaiserhealthnews.
org/Columns/2010/May/052710Frakt.aspx.
2 With health reform, the number of risk-bearing providers likely will increase
as insurers look to align providers’ reimbursement with utilization and
costs. See Noam N. Levey, A Shift in how Healthcare is Paid For, L.A.
Times, Dec. 12, 2012, www.latimes.com/health/la-na-healthcare-cost-
control-20121213,0,178263.story.
Thanks go to the leadership of the Payors,
Plans, and Managed Care Practice Group for
sponsoring this month’s feature: Todd M. Ebersole,
Vice President and Senior Associate General Counsel,
Prescription Solutions, a UnitedHealth Group Co., Irvine,
CA (Chair); Anne W. Hance, McDermott Will Emery
LLP, Washington, DC (Vice Chair of Publications);
Mark S. Kopson, Plunkett Cooney PC, Bloomfield
Hills, MI (Vice Chair of Membership); Leah B. Stewart,
Beatty Bangle Strama PC, Austin, TX (Vice Chair of
Educational Programs); Brian R. Stimson, Alston Bird
LLP, Atlanta, GA (Vice Chair of Research and Website);
James P. Wolf, Regional General Counsel, Aetna Inc.,
Alpharetta, GA (Vice Chair of Strategic Activities).
Plaintiffs’ attorneys and enforcement
agencies may attempt to blame
insurers and certain risk-bearing
providers if consumer expectations
are unmet.
6. healthlawyers.org 37
3 In 2014, the penalty is $95 per adult and $47.50 per child (up to $285 for a
family) or 1% of family income, whichever is greater. In 2015 this increases
to $325 per adult and $162.50 per child (up to $975 for a family) or up to
2% of income. Beginning in 2016, the amount going forward is $695 per
adult and $347.50 per child (up to $2,085 per family) or 2.5% of income,
whichever is greater. Patient Protection and Affordable Care Act, Pub. L.
No. 111-148, § 1501 , 124 Stat. 119 (codified at 26 U.S.C. § 5000A) [herein-
after ACA].
4 ACA at § 1201 (codified at 42 U.S.C. § 300gg-1).
5 ACA at § 1302 (codified at 42 U.S.C. § 18022).
6 The EHB categories covered by ACA are: (1) ambulatory patient services;
(2) emergency services; (3) hospitalization; (4) maternity and newborn care;
(5) mental health and substance use disorder services, including behavioral
health treatment; (6) prescription drugs; (7) rehabilitative and habilitative
services and devices; (8) laboratory services; (9) preventive and wellness
services and chronic disease management; and (10) pediatric services,
including oral and vision care. ACA also limits a health plan’s annual cost
sharing to approximately $6,000 for self-only-coverage or $12,000 for
family coverage, as adjusted for medical inflation. Note that this cost-
sharing limit does not apply to premiums, only to deductibles, copayments
and other similar payments by the insured. ACA at § 1302 (codified at 42
U.S.C. § 18022).
7 More specifically, each state will select a “benchmark plan,” and the scope
of EHB coverage provided by the benchmark plan will set the required EHB
coverage level for all plans in the state. Although insurers are not required
to replicate the benchmark plan, they are required to provide “actuari-
ally equivalent” benefits to those in the benchmark plan. See Standards
Related to Essential Health Benefits, Actuarial Value, Accreditation, 77 Fed,
Reg. 70644 (proposed Nov. 26, 2012) (to be codified at 45 C.F.R. pts. 147,
155, and 156).
8 See EHB-benchmark plans and state-required benefits, available at http://
cciio.cms.gov/resources/data/ehb.html.
9 Abby Goodnough, Interest Groups Push to Fill Margins of Health Coverage,
N.Y. Times, Dec. 5, 2012, www.nytimes.com/2012/12/06/health/interest-
groups-push-to-fill-margins-of-health-coverage.html?pagewanted=all.
10 ACA at § 1321 (codified at 42 U.S.C. § 18041). As of December 13, 2012,
only “18 states and the District [of Columbia] say they plan to operate their
own exchanges.” N.C. Aizenman, GOP State Leaders Fumble by Ceding
Control of Health Exchanges to Federal Officials, Critics Say, Wash. Post,
Dec. 13, 2012, http://wpost.com/national/health-science/critics-blast-gop-
state-lawmakers-for-giving-control-of-insurance-exchanges-to-federal-
officials/2012/12/13/a638a4f8-452d-11e2-8061-253bccfc7532_story.html.
11 Robert Pear, U.S. Officials Brace for Huge Task of Operating Health
Exchanges, N.Y. Times, Aug. 4, 2012, www.nytimes.com/2012/08/05/
us/us-officials-brace-for-huge-task-of-running-health-exchanges.
html?pagewanted=all.
12 ACA at § 2718 (codified at 42 U.S.C. § 300gg-18); Medical Loss Ratio
Requirements Under the Affordable Care Act, 77 Fed. Reg. 28790 (May 16,
2012) (to be codified at 45 C.F.R. pt. 158).
13 The 80/20 Rule: Providing Value and Rebates to Millions of Consumers,
www.healthcare.gov/law/resources/reports/mlr-rebates06212012a.html.
14 Medical Loss Ratio Requirements Under the Patient Protection and
Affordable Care Act, 76 Fed. Reg. 76573 (Dec. 7, 2011) (to be codified at 45
C.F.R. § 158).
15 Noam N. Levey, ‘Obamacare’ Saves Consumers Nearly $1.5 Billion, L.A.
Times, Dec. 5, 2012, http://www.latimes.com/health/la-na-insurance-
savings-20121205,0,3226241.story. (“Sara Collins, Commonwealth Fund
vice president for affordable health insurance, said the findings indi-
cated that insurers must continue to be scrutinized. ‘It will be crucial to
monitor insurers’ responses to this regulation over time to ensure that all
purchasers and consumers benefit from the savings the law is designed to
encourage,’ she said.”).
16 See Igor Volsky, Wellpoint Reclassifies Costs as ‘Medical
Care’ to Meet Reform’s Medical Loss Ratio Requirement,
ThinkProgress: Health, Mar. 31, 2010, http://thinkprogress.org/
health/2010/03/31/171352/wellpoint-mlr; see also Lita Epstein,
Medical Insurance Companies Playing Games with the Numbers,
Daily Finance, Apr. 19, 2010, http://www.dailyfinance.com/2010/04/19/
medical-insurance-companies-playing-games-with-the-numbers.
17 ACA does not expressly create a private right of action for challenges
to MLR-related classifications. Nonetheless, enterprising plaintiffs may
attempt to sue under consumer protection or other state laws.
18 Under HHS’ model, insurers will collect information on the health status
of their membership and use this information to calculate the overall risk
score of their members by plan. HHS will assess the accuracy of insurers’
risk score calculations through an elaborate annual validation audit process
designed to test whether members’ medical records support the existence
of the health conditions that went into the insurers’ risk score calcula-
tion. States that choose to operate an Exchange will need to either adopt
HHS’ risk adjustment model and related guidelines or draw up their own.
Standards Related to Reinsurance, Risk Corridors and Risk Adjustment, 77
Fed. Reg. 17220 (Mar. 23, 2012) (to be codified at 45 C.F.R. § 153).
19 Among other reasons, this is because providers have traditionally been
paid based on services rendered, rather than member health status.
Indeed, the 2008 Risk Adjustment Data Technical Assistance For Medicare
Advantage Organizations Participant Guide, published by the Centers for
Medicare Medicaid Services, states the importance of clear messaging
to providers regarding accurate documentation of health status infor-
mation: “Communicating risk adjustment requirements to physicians
and providers can help to improve the quality and quantity of the data
submitted by MA organizations. It can also help physicians and providers
understand the importance of accurate coding and medical record docu-
mentation, and their role in data validation.” Id. at § 3.5.
20 Two noteworthy cases are United States v. Walter Janke, et al.
and United States ex rel. Swoben v. SCAN Health Plan, et al. For
the Janke settlement, see Civil Settlement Agreement dated as of
November 2010 among the United States of America, Walter Janke,
M.D., Lalita Janke, and Medical Resources LLC. For the SCAN settle-
ment, see Civil Settlement Agreement dated as of August 2012 among
the United States of America, the State of California, SCAN Health
Plan, Senior Care Action Network, and Scan Group, and James
M. Swoben, available at http://oag.ca.gov/news/press-releases/
attorney-general-kamala-d-harris-announces-largest-medi-cal-settlement.
21 HHS Notice of Benefit and Payment Parameters for 2014; Proposed Rule,
77 Fed. Reg. 73118 (proposed Dec. 7, 2012) (to be codified at 45 C.F.R.
pts. 153, 155, 156, et. al.).
