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The Medicare Secondary Payer Act Prohibits Disparate Impact Discrimination, the Sixth Circuit Rules

The Sixth Circuit has issued an important decision that condemns plan provisions that provide different benefits based on a patient’s need for continued dialysis, even if the provision applies to all dialysis patients and not just those with end-stage renal disease (ESRD). 

Last week, the Court revived a dialysis provider’s claims asserting that its patient’s health insurance plan unlawfully discriminated against the patient because of the patient’s Medicare entitlement due to ESRD in violation of the Medicare Secondary Payer Act (the MSP Act) and ERISA.

Dialysis Provider Challenged a Plan Provision Capping Payment for Dialysis at Medicare-Based Rates

In DaVita Inc. et al. v. Marietta Memorial Hospital, et al., DaVita challenged a provision in the Marietta Memorial Hospital’s employee health plan that purported to treat all dialysis providers as “out-of-network,” and capped treatment for dialysis patients at a Medicare-based rate. This provision, DaVita alleged, violated the MSP Act’s prohibition on “differentiation” in plan benefits based on an individual’s ESRD status, and unlawfully “t[ook] into account” the patient’s Medicare eligibility. Even though the provision did not apply only to individuals with ESRD, it disproportionately impacted those individuals because patients with ESRD require multiple dialysis treatments per week for the rest of their lives, or at least until they receive a kidney transplant, to survive. A dialysis cap implicitly targets ESRD patients. DaVita also alleged that this unlawful design caused its patient to terminate commercial health coverage and enroll in Medicare before the end of the patient’s statutory “coordination of benefits” period, during which time commercial plans are required to pay primary to Medicare. DaVita asserted a claim for double damages under the MSP Act, and also ERISA claims for benefits and equitable relief.

The lower court dismissed DaVita’s MSP Act claims, holding (1) that DaVita failed to allege the requisite financial harm to Medicare necessary to prove standing under the MSP Act, and (2) by providing benefits for all dialysis patients on an out-of-network basis, the plan did not discriminate against patients with ESRD-based Medicare entitlement. The lower court also dismissed DaVita’s ERISA benefits claim—premised on the entitlement to in-network benefits in the absence of the discriminatory plan provision—because there was no underlying MSP Act violation, and it also dismissed DaVita’s remaining ERISA claims because DaVita’s assignment of benefits contract with the patient did not properly assign equitable claims under ERISA.

Court Finds That the MSP Act Prohibits Plan Provisions That Disparately Impact ESRD Patients

The Sixth Circuit disagreed as to the lower court’s MSP Act analysis, holding instead that DaVita had pled a viable MSP Act claim. DaVita alleged that Medicare paid earlier than it should under the coordination of benefits rules because the patient terminated his commercial coverage due to the discriminatory plan provision, and thus the element requiring financial harm to the Medicare system was satisfied. The Sixth Circuit also found that the MSP Act’s anti-discrimination provisions and implementing regulations were broad enough to prohibit both direct and indirect discrimination due to a patient’s Medicare entitlement.

The Court rejected the plan’s argument that its provision, which applied to all dialysis patients (not just those with ESRD) was lawful. The MSP Act precludes plan provisions that have a disparate impact on patients that receive ongoing, routine dialysis. “DaVita [had] plausibly alleged that a principal, distinguishing feature of being diagnosed with ESRD is one’s significant need for renal dialysis,” and that the “Plan discriminates against ESRD patients based on their need for dialysis” because most patients that require ongoing dialysis treatments have ESRD, and because ESRD patients need dialysis “with far greater frequency” than non-ESRD dialysis patients. The Court adopted the “well-established principle in anti-discrimination jurisprudence” that challenged activity need not affect only a disfavored group and no one else to be discriminatory. If there is a “near perfect overlap between ESRD patients and dialysis patients, . . . a jury could reasonably conclude that discrimination against the latter constitutes discrimination against the former,” or that ESRD patients are disparately impacted by the offending Plan provision’s “reimbursement system that has the effect of singling out ESRD patients.” 

While reversing on the MSP Act claim, the Court affirmed the lower court’s dismissal of DaVita’s equity-based ERISA claims. DaVita’s assignments of benefits contract that the patient executed assigned DaVita only the patient’s “benefits” under ERISA—not his “rights” under ERISA. But the court revived DaVita’s ERISA benefits claim, premised on the fact that DaVita was entitled to benefits due under the Plan in the absence of the MSP Act-offending dialysis provision. The court remanded the case to the Southern District of Ohio to afford DaVita the opportunity to demonstrate that the plan provided the patient differential benefits based on the patient’s ongoing need for renal dialysis, and that this design motivated the Patient to terminate commercial coverage and enroll in Medicare early.

Decision Could Have Far Reach for Dialysis Coverage; Ninth Circuit to Opine on Nearly Identical Issues

This decision has the potential to upend any plan provision purporting to exclude dialysis treatments from network coverage and/or capping dialysis benefits at Medicare-based rates of payment. And while would-be MSP Act plaintiffs must still plead harm to Medicare when asserting a claim for double damages under the MSP Act under the Sixth Circuit’s opinion, medical providers with valid assignments of all rights and benefits under ERISA may still be able to remedy plan terms that offend the MSP Act by asserting (1) an ERISA benefits claim and (2) an equitable claim for reformation of the plan to strike the unlawful terms. If a provider can plead that Medicare has made some payment, providers faced with unlawful plan provisions like the one at issue in Marietta Memorial Hospital can plead an MSP Act violation on their own behalf, even in the absence of properly assigned ERISA rights.

The Ninth Circuit is set to opine on nearly identical issues in the coming months in DaVita, Inc. et al. v. Amy’s Kitchen, Inc. et al. and DaVita, Inc. v. Virginia Mason Memorial Hospital, et al., arguments for which took place on October 8, 2020. This is a developing area that dialysis providers in particular should continue to monitor closely.

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