5 Major HMOs Targeted in Class-Action Suits

Lawyers saying they represent 32 million members of managed health care plans have launched the largest legal assault yet on HMOs, filing class-action lawsuits against five of the industry’s biggest players.

The suits are expected to further pound the managed health care industry on Wall Street and add to its image problems--even though it is far from clear whether the lawsuits will result in substantial damage awards or even survive initial legal tests.

Alleging violations of federal laws governing health plans and of the Racketeer Influenced and Corrupt Organizations Act, the suits accuse California-based Pacificare Health Systems Inc. and Foundation Health Systems Inc. and three other companies--Cigna Healthcare, Prudential Health Care and Humana Inc.--of violating their responsibilities to their members.

The lawsuits were filed late Monday in federal court in Hattiesburg, Miss., by a consortium of lawyers led by Dick Scruggs. He was one of the chief architects of lawsuits filed by states against the tobacco industry, which led to $246 billion in settlements across the country.

The new lawsuits bring to at least nine the number of recent class-action suits alleging violations of federal law by managed health plans. In addition, class-action suits alleging violations of state consumer protection laws have been filed on behalf of HMO members, including one targeting Aetna/US Health Care of California.

“We’re acting today to fix the broken promises the HMO industry has made to the people who entrust their very lives to these companies,” Scruggs said.

The new lawsuits target the alleged practice of giving financial incentives, such as bonuses, to physicians for restricting patients’ access to expensive procedures, treatments and tests. The lawyers said they are suing several firms because the practice of using such incentives is industrywide, and they are seeking a change in the way all health plans do business.

Most of the health plans charged in the lawsuits had not yet read the court filings and declined comment on the specifics. But several echoed the comments of Pacificare CEO Alan Hoops, who predicted the cases would result in higher costs for patients.

“This again appears to be one of many lawsuits that will ultimately drive up health care costs for consumers by forcing HMOs through unwarranted, costly and protracted litigation,” Hoops said.

The multiple suits are part of an evolving strategy by several consortiums of law firms whose members have won settlements running to hundreds of millions of dollars in mass tort cases and are able to finance increasingly lengthy and complicated litigation on a scale never before possible.

Their current campaign appears quite systematic and sophisticated. For instance, the lawyers are making a concerted effort to contact doctors and state medical associations for information that could be used in making the case against HMOs.

“I have spoken to representatives of virtually every medical association in the country except two,” said attorney Hiram Eastland of Greenwood, Miss., who is working with Scruggs on the cases. “The response has been incredibly strong. The medical associations have not taken a formal role. They have been supportive in providing us documents, general information and opening up their network of contacts.”

Three of these lawyers’ groups met in Washington on Tuesday to discuss whether it would make sense for them to pool their legal talent and resources. One group, led by New Orleans lawyer Russ Herman, who also was involved in major tobacco litigation, is planning to file as many as eight more suits in the coming weeks against managed care companies.

So far, the strategy appears to be aimed in good measure at getting the attention of Wall Street investors, so they will bring pressure on the industry to settle rather than allow the suits to go on for years.

“The plaintiffs’ attorneys . . . have said they want to use as much [Wall Street] leverage as possible against the companies,” said Todd Richter, a health care services analyst for Bank of America Securities. Like other industry analysts, Richter said he has had extensive conversations with the plaintiffs’ attorneys.

“They’ve had conference calls with us and they are very amendable to taking our calls and very responsive,” Richter said.

The prices of health plan stocks have slumped in recent months as public opinion has turned against HMOs and as state and federal lawmakers have begun to increase regulation of the industry.

The legal prospects of the suits are far less certain than their probable effect on stock prices. Even if the claims underlying the suits could be proved, they will not be adjudicated unless plaintiffs’ attorneys can persuade a judge to certify they represent a true class of plaintiffs who share a common cause of action and have similar circumstances.

“The ability to prove that common issues predominate in a case like this is very difficult,” said Jim Jorden, a Washington lawyer who is advising the American Assn. of Health Plans, which represents 1,000 managed care plans nationwide.

There are many different employer plans, and the responsibilities of each plan to its members varies from employer to employer, he said.

In the tobacco litigation, a number of class-action lawsuits were eventually thrown out, in many cases at the certification stage. The suits that led to huge settlements were filed on behalf of state attorneys general by some of the same lawyers. “The critical question here is whether there will be a class certification,” agreed John Coffee, a law professor specializing in mass torts at Columbia University. “It’s not the ultimate truth of your facts. It’s whether you can fit into the legal pigeonholes . . . the standards for class certification have been significantly tightened recently by the Supreme Court.”

The affected health plans certainly do not appear ready to settle the lawsuits any time soon. “We believe these charges are baseless, and we intend to defend ourselves vigorously against them,” said Fred Laberge, a spokesman for Aetna/US Healthcare, which recently bought Prudential and which was the target of two of the earlier suits.

Wall Street analysts said they foresee a lengthy fight. “It’s going to be a very long process. There will be several years of legal action against the industry before there is any resolution,” said James A. Lane, a health care analyst at investment bank Salomon Smith Barney.

Lane said he considers it unlikely that any of the companies sued Monday would settle quickly, because doing so would only invite more lawsuits.

Rubin reported from Washington and Weinstein from Los Angeles.