Manatt Defeats Putative Class Action in Federal Appeals Decision Interpreting the ACA’s Medical Loss Ratio Provision

On March 18, 2019, the Ninth Circuit affirmed the dismissal of a lawsuit brought against Manatt client Blue Shield of California. The Manatt team working on the case included partners Gregory Pimstone, Craig Bloomgarden, Michael Kolber and Joanna McCallum. In Morris v. California Physicians’ Service, __ F.3d _, 2019 WL 1233466 (9th Cir. Mar. 18, 2019), the court in a published decision interpreted the Medical Loss Ratio (MLR), a provision of the Patient Protection and Affordable Care Act (ACA) “that has not yet been interpreted by our Court or our sister circuits.” Id. at *1.

The MLR provision requires health plans and health insurers to spend at least 80 percent of their premium revenue on healthcare costs and health quality improvement. A plan must make and report this calculation annually in accordance with a regulatory formula. If its healthcare expenditures fall short of 80 percent, the plan is required to rebate to its enrollees the difference between 80 percent of its premium income and the amount actually spent on healthcare costs. “The purpose of the MLR is thus to encourage use of premium income to provide benefits to insureds and discourage its use to offset administrative costs, thus serving the [ACA’s] primary goal of expanding affordable care.” Morris, 2019 WL 1233466, at *2.

The Morris case was a putative class action brought on behalf of nearly half a million Blue Shield enrollees, alleging that Blue Shield had improperly included certain costs in the numerator of its MLR calculation, resulting in a lower rebate to enrollees for 2014. The costs in question were paid out by Blue Shield to resolve an issue arising from confusion over whether particular providers were in-network or out-of-network. Blue Shield’s online provider directories for some of its new ACA products offered through Covered California had identified certain providers as in-network, when they were in fact out-of-network. Enrollees had obtained medical services from these providers, believing they would be entitled to in-network benefits, but the claims had been processed as out-of-network, causing the enrollees to incur more out-of-pocket cost.   

After receiving complaints, the California Department of Managed Health Care (DMHC) conducted an investigation, determined that certain providers listed as in-network were out-of-network and directed Blue Shield to rectify the situation. Blue Shield and the DMHC entered into a settlement by which Blue Shield would re-process the claims at issue at the in-network benefit level. This process resulted in Blue Shield paying approximately $35 million in additional healthcare costs. It is these costs that led to the Morrisdispute.

The Morris plaintiffs alleged that these costs were not properly counted as healthcare costs for purposes of the MLR’s numerator, because they did not pay for services that were covered by the health plans. Rather, these payments were made for services that allegedly were not covered because the providers were out-of-network.

The Ninth Circuit rejected this constricted view of the MLR. Recognizing that “[t]he required [MLR] reporting does not distinguish between in-network and out-of-network providers,” Morris, 2019 WL 1233466, at *4, the court pointed out that the focus of the MLR is to increase the plan’s expenditures on “clinical services” and “medical services,” and to decrease its expenditures on administrative costs. The purpose of the MLR is to further the ACA’s goal of decreasing healthcare costs, to provide greater transparency into the use of premium revenue, to incentivize plans to maximize spending on healthcare and healthcare quality-improving activities, and to ensure that enrollees “receive value for their premium dollars.” Id. at *4. These considerations “strongly indicate[] that the ACA should be interpreted and applied in a manner that encourages insurers to spend premium revenue on medical services.” Id. The plaintiffs’ view, in contrast, would “turn the system on its head by essentially contending that the goal [of the MLR] should be to provide rebates to enrollees rather than insurance benefits. Insureds pay premiums in order to be eligible for reimbursement of healthcare costs, not for rebates.” Id. at *7.

With respect to the plaintiffs’ contention that the payments did not meet the regulatory criteria for inclusion in the MLR numerator because they were not for “incurred claims,” the court explained that “incurred claims” includes “reimbursement for clinical services” without distinguishing between the in- or out-of-network status of the provider. “The critical statutory focus is on health insurers providing coverage for health services. The statute measures total expenditures on health services... [T]he relative amounts required to be paid to in-network as opposed to out-of-network providers is irrelevant. Only the total matters.” Id. at *6.

The Ninth Circuit concluded that the district court had properly dismissed the complaint without leave to amend, that plaintiffs had never asked the court for leave to amend and that the potential amendment they requested on appeal would be inconsistent with the theory of the case. The Ninth Circuit thus affirmed the dismissal. Manatt represented Blue Shield in both the district court and the Ninth Circuit.

The Morris decision clarifies how the MLR works and how it serves the ACA’s primary goal of expanded access to affordable healthcare. With that goal in mind, plans can properly evaluate whether and when to include in the MLR numerator any payments that occur outside of routine claims payment. As the court explained, “the MLR can act as an effective incentive to insurers to provide benefits only if disputes are discouraged and all benefit payments are included in the ratio, whether they go to providers in-network or out-of-network.” Id. at *2.