Health Net 2001 Annual Report Download - page 30

STATE OF CONNECTICUT V. PHYSICIANS HEALTH SERVICES, INC.
Physicians Health Services, Inc. (PHS), a subsidiary of ours, was sued on December 14, 1999 in the
United States District Court in Connecticut by the Attorney General of Connecticut, Richard
Blumenthal, acting on behalf of a group of state residents. The lawsuit was premised on ERISA, and
alleged that PHS violated its duties under ERISA by managing its prescription drug formulary in a
manner that served its own financial interest rather than those of plan beneficiaries. The suit sought to
have PHS revamp its formulary system, and to provide patients with written denial notices and
instructions on how to appeal. PHS filed a motion to dismiss which asserted that the state residents the
Attorney General purported to represent all received a prescription drug appropriate for their
conditions and therefore suffered no injuries whatsoever, that his office lacked standing to bring the
suit and that the allegations failed to state a claim under ERISA. On July 12, 2000, the court granted
PHS’ motion and dismissed the action. The State of Connecticut has appealed the dismissal and
argument on the appeal was held before the United States Court of Appeals for the Second Circuit on
May 1, 2001. We intend to vigorously defend the action.
IN RE MANAGED CARE LITIGATION
The Judicial Panel on Multidistrict Litigation has transferred various class action lawsuits against
managed care companies, including us, to the United States District Court for the Southern District of
Florida for coordinated or consolidated pretrial proceedings in In re Managed Care Litigation, MDL
1334. This proceeding is divided into two tracks, the subscriber track, which includes actions brought on
behalf of health plan members, and the provider track, which includes suits brought on behalf of
physicians. We intend to vigorously defend all actions in MDL 1334.
Subscriber Track
The subscriber track includes the following actions involving us: Pay v. Foundation Health Systems,
Inc. (filed in the Southern District of Mississippi on November 22, 1999), Romero v. Foundation Health
Systems, Inc. (filed in the Southern District of Florida on June 23, 2000 as an amendment to a suit filed
in the Southern District of Mississippi), State of Connecticut v. Physicians Health Services of
Connecticut, Inc. (filed in the District of Connecticut on September 7, 2000), and Albert v. CIGNA
Healthcare of Connecticut, Inc., et al. (including Physicians Health Services of Connecticut, Inc. and
Foundation Health Systems, Inc.) (filed in the District of Connecticut on September 7, 2000). The Pay
and Romero actions seek certification of nationwide class actions, unspecified damages and injunctive
relief, and allege that cost containment measures used by our health maintenance organizations,
preferred provider organizations and point-of-service health plans violate provisions of the federal
Racketeer Influenced and Corrupt Organizations Act (RICO) and the federal Employee Retirement
Income Security Act (ERISA). The Albert suit also alleges violations of ERISA and seeks certification
of a nationwide class and unspecified damages and injunctive relief. The State of Connecticut action
asserts claims against our subsidiary, Physicians Health Services of Connecticut, Inc., and us that are
similar, if not identical, to those asserted in the previous lawsuit that was dismissed, as discussed above,
on July 12, 2000.
We filed a motion to dismiss the lead subscriber track case, Romero v. Foundation Health
Systems, Inc., and on June 12, 2001, the court entered an order dismissing all claims in that suit
brought against us with leave for the plaintiffs to re-file an amended complaint. On this same date, the
court stayed discovery until after the court rules upon motions to dismiss the amended complaints and
any motions to compel arbitration. On June 29, 2001, the plaintiffs in Romero filed a third amended
class action complaint which re-alleges causes of action under RICO, ERISA, common law civil
conspiracy and common law unjust enrichment. The third amended class action complaint seeks
unspecified compensatory and treble damages and equitable relief. On July 24, 2001, the court heard
oral argument on class certification issues. On August 13, 2001, we filed a motion to dismiss the third
amended complaint in Romero. On February 20, 2002, the court ruled on our motion to dismiss the
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