Humana, Inc. v. Forsyth (01/20/1999)

By: Eileen Smith, Medill News Service

Questions presented

Does the McCarran-Ferguson Act preempt a lawsuit brought under the federal Racketeer Influenced and Corrupt Organizations (RICO) Act alleging fraud against a health insurer?

Brief

Employees of the Best Glass Company were covered under group health insurance policies issued by Humana Health Insurance of Nevada. On each hospital claim above a designated deductible amount, Humana Insurance was responsible for 80 percent of the charges. The employee, or co-payor, paid the remaining 20 percent.

Humana Insurance, however, cut a clandestine deal with one of its owned and operated facilities, the Las-Vegas based Sunrise Hospital, that provided a significant discount on Humana's 80 percent payment. Accordingly, each time an employee filed a hospital claim and made the 20 percent co-payment, that 20 percent was not just 20 percent--it was substantially higher.

The employees filed a class-action suit in 1989, accusing Humana Insurance of breach of contract and of violating the Employee Retirement Income Security Act (ERISA) since Humana Insurance did not extend the hospital discount to the co-payments.

The suit also contended that Humana had disregarded the Sherman Antitrust Act through attempted monopolization, and engaged in fraudulent activity, violating the federal Racketeer Influenced and Corrupt Organizations (RICO) Act.

The district court found that Forsyth had not sufficiently proven the antitrust claims. A divided 9th Circuit Court of Appeals affirmed in part and reversed in part, holding that Forsyth could proceed on some of its RICO claims.

The appeals court found that the underhanded discounts enabled the hospital to charge higher prices for its medical services, which in turn increased the premiums and co-payments. Although Humana had received the discount from Sunrise Hospital on its portion of the payment, it continued to write checks for the full 80 percent of charges billed. The hospital would reimburse for the discount through intercompany transfers. The employees called this a ""classic kickback scheme,"" devised to deceive and mislead.

The lower court decided that Forsyth's RICO claims were barred by the McCarran-Ferguson Act (MFA). The MFA was originally enacted to yield power to the states in regulating the business of insurance, free from federal statutes.

To file a claim under the RICO act, the employees had to convincingly demonstrate fraudulent conduct of Humana Insurance through an ongoing pattern of racketeering activity, which could include mail and wire fraud, activity alleged in this suit. The criteria of the RICO act are difficult to prove since the act allows private lawsuits to collect triple damages for fraud.

The appeals court affirmed the lower court's ruling that Forsyth's RICO allegations against Humana were counteracted by the MFA. But the court also added that the MFA does not necessarily preempt a RICO claim in all insurance cases. Although the RICO Act does not refer to insurance per se, the appeals court found no conflict between federal and state laws.

Sunrise Hospital has since been acquired by Columbia-HCA.

The U.S. Supreme Court initially denied a petition for certiorari in December 1997, but after inviting the U.S. Solicitor General to file a brief, granted certiorari on June 22, 1998.

On Jan. 20, 1999, the Court affirmed, in a unanimous opinion written by Justice Ruth Bader Ginsburg, concluding that the suit under RICO by policy beneficiaries would not ""impair"" Nevada law and therefore was not precluded by the McCarran-Ferguson Act. Justice Ginsburg cautioned that the ruling does not provide ""a green light for federal regulation whenever the federal law does not collide head on with state regulation.""

The ruling lets customers of Humana Health Insurance of Nevada pursue a class-action lawsuit that claims the insurance company got secret discounts it did not share with them. Following the decision, Humana issued a statement noting that its insurance billing practices, have always been consistent with industry and government practices.