Spencer Recovery Centers, Inc., vs. Eval Company of America Medical Plan; Spencer Recovery Centers, Inc., vs. Marukyo U.S.A., Inc. Health Plan, CV 02-4270 CBM, CV 02-4272 CBM (Related Cases) (9th Cir. Case Nos. 08-55469 and 08-55478); 350 Fed.Appx. 152 (9th Cir. 2009)
Spencer is an alcohol/drug treatment facility located in Laguna Beach, CA. For more than 25-plus years before these claims arose, it had treated thousands of patients. It was fully licensed by the State of California and for had maintained accreditation by the Joint Commission on Accreditation of Healthcare Organizations (JCAHO) for more than 20 years. This case involved two claims for health benefits for two patients treated at Spencer (approximately a year and a half apart), while covered under their respective medical benefit plans (the Eval and Marukyo Plans).
Patient No. 1 was admitted to Spencer for “Alcohol withdrawal, Alcohol dependence”. He was a 54 year-old male, with a 30-year history of alcohol use. He had been hospitalized for detoxification 5 times before. During the 6-week period preceding his admission, his consumption of alcohol escalated from 8 ounces to 26 ounces of vodka a day. His job functioning deteriorated to the point of his resigning his job a week before admission. He was also cited for DUI a week before his admission. Upon admission he was acutely depressed, with a history of being treated with Wellbutrin and Prozac. He also had cardiac disease. His vital signs were greatly elevated. He also he displayed “suicidal ideations”, but without a plan. The admitting physician placed him on “detoxification” status for 5 days, after which he was stepped down to an “inpatient rehabilitation” level of care. Four days later he was transitioned to “partial hospitalization”. Two weeks after that he was released to an “outpatient” level for one week of follow-up treatment. After release from outpatient care, he entered a “Sober Living” phase. Soon after he was completely released from Spencer’s structured program, he relapsed and started drinking a pint of vodka daily over the next 7 days, before presenting himself for re-admission to Spencer.
Patient No. 2 was also admitted to Spencer for “Alcohol withdrawal, Alcohol dependence”. He was 42-years old and had started drinking heavily and daily 18 months earlier, following the death of his father. He had three previous DUI arrests, the most recent being one week prior to admission. The attending physician placed him on “detoxification” status for 5 days, at which time he was stepped down to “inpatient rehabilitation” for one week, then transitioned to “partial hospitalization” for a week and a follow-up outpatient program for another week, before final discharge.
Both Plans were insured by GE Group Life Assurance Co. (GEGLAC). The Plans’ Medical Administrator, Private Health Care Systems (PHCS), was responsible for case managing and certifying the “medical necessity” of proposed inpatient treatment. Prior to Patient No. 1’s first admission, Spencer verified his Plan benefits. Thereafter, Spencer contacted PHCS, and obtained “pre-certification” for admission. All inpatient treatment, following his first admission was then case-managed and approved by PHCS. Following the patient’s second admission, only 3-days detoxification services were approved. All of Patient No. 2’s treatment was case-managed and approved by PHCS.
Timely benefit claims were submitted, but were never paid. Instead, both claims were diverted to GEGLAC’s Special Investigations Unit (SIU) for a fraud investigation. Once the claims were diverted to the SIU, all routine claims processing ceased, as did all compliance with the ERISA regulations, governing claims review procedures.
Unbeknownst to Spencer, the lead SIU investigator issued an instruction that all of Spencer’s claims were to be singled out and referred to the SIU, as Spencer was dubbed a “flagged provider”. The reason for this was a case of mistaken identity. SIU investigators mistakenly believed there was a connection between Spencer and another entity that GEGLAC was once involved in litigation with, known as Paracelsus. Spencer has never had any connection at all with Paracelsus.
The claim files chronicle the investigator’s exhaustive, but unsuccessful efforts to find some evidence of fraudulent activity by Spencer. Approximately 270 pages of each file were devoted to her unrelenting efforts, undertaken after she had denied the claims, to find evidence to support her many suspicions. She found none. But rather than reverse course, she tenaciously continued on, until ultimately her investigation crossed over the line into an obsessive misconduct.
The SIU investigator checked out Spencer's complaint history with the State Licensing Board, the JCAHO, and the California Department of Alcohol & Drug Programs (CDADP). Of the few complaints she discovered, most were found to be “inconclusive” or “not substantiated”; and those that had any merit were minor and were resolved. Nevertheless, she directed a memo to GEGLAC’s in-house reviewing doctor and to her supervisor, in which she implied that there were numerous complaints about patient care and a number of suspicious unannounced visits and inspections at Spencer’s facility by the CDADP and the State Licensing Board. Her memo concluded with the remark: "I don't understand why they just don't pull their license".
The investigator then actually went so far as to file a criminal fraud complaint with the California Department of Insurance (DOI) against Spencer on behalf of GEGLAC, alleging such things as improper patient solicitation, inaccurate information provided during the pre-certification process, confinements that are not medically necessary, improper living arrangements at the facility, poor quality and level of care provided by the facility, possible waiver of patient financial liability and co-pay. No action was ever taken by the DOI, as her complaint was considered insufficient.
Perhaps most telling of all were approximately 50 pages in each of the claim files, showing that after the lawsuit was filed and after service of process was effected, the investigator was still desperately trying to find some kind of negative information about Spencer to confirm her suspicions. She found none. She put out a request for help, via the Internet, to an information-sharing group of SIU investigators, (the “National Alert Group”). But no one had anything bad to say about Spencer.
This case has the distinction of being the longest case I have ever handled, spanning some eight years in litigation. Because of the judge’s docket it took a very long time to get a trial date. Then, on the eve of trial, the defense threw up a last minute “Hail Mary” motion to remand the claim back to the insurer for further review. Incredibly, the judge granted the motion, which resulted in a further two year delay to get the case back into court. It took the judge months to rule, but I won at trial. By that point in time, Sun Life had taken over GEGLAC, but the same employees continued on at the new company and they were determined to continue with their baseless defense. So an appeal to the Ninth Circuit was filed. That caused another delay of about two years. I won the appeal and then the defense threw up a post-appeal motion for rehearing, which was denied. Finally, we prevailed.
Perhaps the most interesting aspect is that the case was that the two health benefit claims totaled less than $26,000. Ultimately, I was awarded $222,703.25 in fees through trial and an additional $45,368.75 in fees for the appeal. So over a quarter million dollars went to The Hip National Bank of McKuin and no doubt a comparable amount probably went for defense fees. So about a half million dollars was burned up in legal fees to fight a tiny, relatively insignificant claim.
The case demonstrates what can happen when an insurance company digs in its heels and decides to engage in trench warfare. Some would say that the case was silly. In fact, it seems downright irrational for either side to push a case like this so far. Indeed, it should have settled. But it didn’t. So the only choice for the client was to give up or fight on. We decided fighting was better, if for no other reason than perhaps principle. Although it is highly unlikely that an ERISA benefit case will get this far out of control, it’s important to remember – especially for lawyers – it’s not impossible. It CAN happen. And if it does, is the lawyer ready, willing and able to "go the distance"?
Result: Judgment for the Plaintiff and Full Satisfaction of Judgment.