Antitrust Law Daily Wrap Up, RICO—DHaw: Hospital States RICO Claim Against Health Insurer and Re-Pricing Service for Discounting Payments, (Jun 4, 2013)

By William Zale, J.D.

A hospital stated RICO claims by alleging that Kaiser Foundation Health Plan and health claim “re-pricing” service Stratose submitted remittance advice forms by way of the U.S. mail and wires that misleadingly applied to payments for the hospital’s services millions of dollars of discounts, for which Kaiser and Stratose were ineligible, the federal district court in Honolulu has ruled (Queen’s Medical Center v. Kaiser Foundation Health Plan, Inc., May 31, 2013, Kay, A.). The court also held that the hospital failed to state a claim under the Hawaii Unfair and Deceptive Trade Practices Act, but granted leave to amend in order to allege facts demonstrating competition with Kaiser and Stratose.

A discounted services agreement between the hospital and Kaiser expired on December 31, 2011. During January 2012 and February 2012, Kaiser paid the hospital for 100% or nearly 100% of billed charges. Around March 2012, Kaiser started to take discounts and issued remittance advice forms to the hospital reflecting discounted rates. The remittance advice forms were also accompanied by forms sent by Stratose titled “Payor Repricing Transmittal.” The forms stated that a discounted price in the form of a “Network Allowance” allowed Kaiser to pay less than hospital’s stated charges and also stated as follows: “Payment being made in accordance with HMN/RAN/AMN discount rate agreement.”

Around March 2012, the hospital asked Kaiser about the re-pricing arrangement and, in April 2012, demanded that Kaiser submit documentation explaining Kaiser’s relationship with Stratose. Kaiser refused to provide any contracts and resisted the hospital’s requests for documentation supporting the legitimacy of Kaiser’s discounts via Stratose. Kaiser claimed that its contract with Stratose was “proprietary and confidential.” Around August 30, 2012, Kaiser disclosed to the hospital a letter from Stratose to Kaiser stating that Stratose obtained the discounted prices from Health Management Network, Inc. (HMN), a corporation that had signed a Participating Hospital Agreement (“PPO Agreement”) with the hospital effective July 1, 2005. According to the hospital, Stratose and Kaiser did not qualify to receive discounts under the PPO Agreement. The hospital alleged around $4 million of damages as a result of Kaiser’s improper discounts.

RICO. The hospital alleged that Kaiser and Stratose violated RICO by conducting the affairs of an enterprise consisting of Kaiser, Stratose and HMN through a pattern of mail and wire fraud in claiming discounts on payments for the hospital’s services.

The court found that the hospital alleged mail and wire fraud with the required particularity, and that the alleged acts could constitute a pattern of racketeering activity. The relationship and continuity elements of the pattern requirement were met because the acts shared a common purpose or result of taking allegedly illegitimate discounts and continued from March 2012 through the date of complaint filed October 19, 2012, according to the court.

The alleged association of HMN, Stratose, and Kaiser for the common purpose of arranging discounted medical services could constitute a RICO enterprise, the court determined. The hospital’s RICO allegations supported its theory that the arrangement between Kaiser, Stratose, and HMN constituted a “silent PPO” discounting payments through fraud, the court found.

Unfair and deceptive trade practices. Contrary to Kaiser’s argument that only consumers have a private right of action for unfair and deceptive trade practices under Haw. Rev. Stat. §480-2, the hospital could have standing to sue based on unfair methods of competition. The court noted, however, that the hospital merely alleged that Kaiser and Stratose “operate within the healthcare services industry.” The mere statement that two entities operate in the same general industry did not meet the Twombly plausibility standard or provide sufficient notice to the defendants regarding the nature of the competition. The court granted the hospital leave to amend, noting that it might be able to allege facts demonstrating competition.

The case is No. Civ. No. 12-00565 ACK-KSC.

Attorneys: Crystal K. Rose (Bays Deaver Lung Rose & Holma) for Queen’s Medical Center. Ann C. Kemp (Gary G. Grimmer & Associates) for Kaiser Foundation Health Plan, Inc. Robert A. Creps (O'Connor Playdon & Guben) for Stratose, Inc.

Companies: Queen’s Medical Center; Kaiser Foundation Health Plan, Inc.; Stratose, Inc.

Cases: RICO StateUnfairTradePractices HawaiiNews