New healthcare lien recovery theories by third-party payors: strategies and tactics for the defense.

• Author: Keenan, Matthew

MOST ATTORNEYS remember the "good ole days" when health care liens on recoveries were simple and generally speaking, the "plaintiff attorneys' problem" since no funds were ever paid until plaintiff's counsel had settled the lien. And while this traditional model of third-party payor ("TPP") recovery remains viable, in these days of mass tort, suddenly, health insurance carriers have identified a far more threatening, expensive and dangerous means of recovering all of their losses in one fell-swoop: suing the alleged tortfeasors directly. With this strategic shift, defense counsel must stay attuned to the ever-changing complexity of TPP litigation. This article examines various approaches health insurers are employing to recover losses in the aggregate and also discusses strategies defense counsel should consider using to defeat such claims.

1. The Role of Third Party Payors in the American Health Care System

   Today's health care system is one in which employers provide, either in the form of their own funds or through insurance, for their employees' medical needs. To operate, insurers charge their enrollees an upfront fee, i.e. a "premium", in exchange for insurance coverage. (1) The value of the premium is continually adjusted by the insurer over time to compensate for known risks assumed under that coverage, such as the estimated costs for prescription drugs covered under a policy (2) or for the implantation of a prescription medical device. As the Eleventh Circuit Court of Appeals recently explained:

   Because the value of the estimated claims drives the premium rate, the premium charged for a policy largely depends on the scope of the coverage under that policy. The broader the coverage offered--i.e., the more health care services indemnified by the insurer--the higher the premiums charged for that policy. In other words, covering more health care services creates a likelihood of more claims and, correspondingly, a greater projected claims value. The insurer will fund these higher costs through escalated premiums. (3) The premium is essential to the insurer's goal of profitability. If calculated properly, (4) from the insurer's perspective, the insurer will collect more in premiums than it pays out in claims. However, when the claims exceed the insurer's projections, the insurer bears the risk of loss and, if those losses are due to an event, such as a medical device recall that impacts a significant number of insureds, the TPP will most certainly seek out ways to be made whole. (5)

2. Recovering Aggregate Losses

   Traditionally, TPPs have sought to recoup their losses by asserting their rights to subrogation on a case-by-case basis. Under this approach, a TPP's liens are paid only if and when their insureds recover from their alleged tortfeasors, i.e., prescription drug and medical device manufacturers. TPPs are now trying to recover their losses in the aggregate pursuant to two different theories of direct liability, depending on whether prescription drugs or medical devices are involved. In the context of prescription drugs, the TPPs argue that, as a direct result of the drug manufacturer's fraudulent conduct--falsely touting the off-label benefits of a particular prescription drug--(6) their insureds' treating physicians were induced to prescribe the drug more frequently when cheaper alternative options were available. (7) Under this theory, the insurers seek to recover, in the aggregate, the difference between the amount actually paid and the amount that would have been paid for the less expensive alternative.

   Conversely, when prescription medical devices are at issue, these same insurers allege that, as a direct result of a manufacturer's wrongful conduct-designing, manufacturing, and selling allegedly defective devices--their insureds incurred physical and/or emotional harm, for which otherwise unnecessary medical treatment became necessary. (8) TPPs seek to recover these "otherwise unnecessary" expenses, in the aggregate, directly from the device manufacturers.

   TPPs are filing these aggregate recovery suits with increased frequency and most are doing so on behalf of a proposed class of similarly situated insurers, which, collectively, potentially covered tens of thousands of drug and medical device prescriptions. Since 2000, plaintiffs have filed more than twenty of these TPP direct liability actions in the federal courts, with nearly a dozen of those arising during or immediately following an MDL proceeding. (9) And while the drug and device manufacturers have found some success in dismissing these claims on a Rule 12(b)(6) motion to dismiss for lack of Article III standing, the decisions are hardly uniform. Indeed, some federal courts have refused to reject these TPP claims at the initial pleading stage, which has ultimately resulted in a handful of million dollar settlements and one $237 million judgment. (10)

3. Overview of Defense Strategies

   Successful defense counsels have directed the courts' attention early in the litigation to the practical proof problems and inefficiencies that are involved with establishing Article III standing. By emphasizing the various considerations that may influence each insured's treating physicians' judgment in selecting a particular course of treatment for each individual patient, manufacturers have been able to demonstrate why generalized proof of injury and causation is inadequate to confer standing on these TPPs. Drug and device manufacturers should therefore insist that TPPs be required to present evidence of their alleged injuries on an individualized, insured-by-insured basis.

   1. Legal Principles Of Article III Standing

      The "irreducible constitutional minimum" of Article III standing requires every party invoking federal jurisdiction to bear the burden of establishing three essential elements to show that a justicable case or controversy exists: (1) injury in fact, (2) a causal connection between the injury and the challenged conduct, and (3) redressability of the injury. (11) Described as more than mere pleading requirements, these elements are considered an "indispensible" aspect of every plaintiff's case and, therefore, must be supported "with the manner and degree of evidence required at the successive stages of the litigation." (12) This means that at the initial pleading stage, plaintiffs must allege enough facts to demonstrate a "plausible" entitlement to relief. (13)

      To satisfy the first Article III standing requirement, plaintiffs must show that they suffered an "invasion of a legally protected interest" which is concrete and personal--not conjectural or hypothetical. (14) Next, plaintiffs must show through their factual allegations that their alleged injuries are causally linked to the challenged conduct of the defendant. (15) Their injuries cannot be the result of the "'independent actions of some third party not before the court.'" (16) Finally, it must also be "'likely'" that the plaintiffs' alleged injuries will be redressed if the court were to render a favorable decision. (17)

   2. Aggregate Recovery Theory #1: Fraudulent Over-Pricing Of Prescription Drug Caused Injuries To TPPS

      In an attempt to defeat drug manufacturers' lack of standing arguments, TPPs argue that they have suffered a direct financial injury because they are the "purchasers" of fraudulently overpriced drugs. (18) In this context, TPPs claim that they would not have purchased the drugs at issue had they or their insureds' treating physicians not been misled by manufacturer's off-label misrepresentations, especially when safer, more effective, and cheaper alternatives were available on the market. Under this theory, TPPs contend that their economic injuries are sufficiently direct because they are unaffected by whether any given insured suffered harm through use of the product. (19)

      Drug manufacturers have successfully defeated these "direct purchaser" allegations at the motion to dismiss stage by challenging (1) the TPPs assertion that they have alleged a sufficiently direct economic injury, and (2) whether the alleged injury was proximately caused by the manufacturer's alleged misconduct. Success on either issue, or both, constitutes grounds for immediate dismissal of the action for lack of Article III standing in federal court.

      1. Injury in Fact

         As to the direct injury issue, defense counsel is encouraged to demonstrate the likelihood that the TPPs' insureds, in most cases, received at least some medical benefit from using drug. This is because, unless TPPs can allege that the prescriptions they paid were "medically unnecessary or inappropriate" (as determined by the standards of practice in the medical profession), at least some federal courts have held that these TPPs have not incurred a plausible economic injury. (20) As the Fifth Circuit Court of Appeals recognized, "[m]erely asking for money does not establish an injury in fact." (21)

         To make this showing, TPPs will be forced to investigate why each of their insureds were prescribed the drugs they received an endeavor their direct liability theory of recovery was designed to avoid. Since "[s]everal considerations shape the physician's medical judgment, including both individual patient concerns and drug-specific information regarding the propriety of a drug's use for treatment of a patient's given condition," (22) each TPP should be required to demonstrate through individualized proof that its' economic injuries were actually realized. (23) Certainly, no TPP can demonstrate an economic injury if it did not pay for a single off-label prescription or if the prescriptions it did pay for were medically necessary and appropriate.

         In an effort to circumvent this individualized inquiry, TPPs assert that their economic injuries can be established through aggregate damages models showing that a manufacturer's fraudulent marketing caused a "sharp increase" in the number of prescriptions that TPPs paid for. (24) And while...