Alabama Supreme Court Sides with Blue Cross in Medicare Act Preempting State Law, as appeared in AHLA’s Newsletter

As appeared in AHLA's Newsletter.

On February 17, 2012, the Supreme Court of Alabama (Court) issued a writ of mandamus directing the Bullock Circuit Court to dismiss the claims against Blue Cross Blue Shield (BCBS) by an Alabama Nursing Home, Main & Associates Inc., doing business as Southern Springs Healthcare Facility (Southern Springs), concluding that the claims arose under 42 U.S.C. Section 1395 et seq. (Medicare Act), and are subject to the mandatory administrative procedures and limited judicial review as set forth under the jurisdictional provisions of the Social Security Act (SSA) that apply to Medicare claims, 42 U.S.C. Section 405. Specifically, Section 405 of the SSA requires administrative appeals under the jurisdiction of the U.S. Department of Health and Human Services Secretary to be exhausted prior to judicial review. Accordingly, the Court held that the lower court erred in not dismissing the case for lack of jurisdiction.

Southern Springs filed an action in the Bullock Circuit Court asserting state law claims against BCBS for breach of contract, intentional interference with business relations, negligence and/or wantonness, and unjust enrichment, as well as sought injunctive relief. BCBS brought the case to federal court arguing that the claims arose under the Medicare Act and that the Medicare Act, as amended by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, completely preempts Southern Springs' state law claims. Southern Springs moved to remand the case to circuit court arguing that the federal court lacked jurisdiction over its state law claims. The federal court granted the motion and remanded the case to the Bullock Circuit Court.

BCBS moved for judgment on the pleadings arguing that Southern Springs had not exhausted its administrative remedies under the Medicare Act, and therefore the circuit court did not have subject matter jurisdiction. The circuit court denied BCBS's motion and BCBS petitioned the Court for a writ of mandamus.

Southern Springs contended on appeal that as a Medicare Advantage plan, BCBS was contractually required to provide benefits in parity with traditional Medicare. Further, Southern Springs averred that BCBS breached this contractual obligation by using a third-party case management system that did not reach coverage decisions based on the applicable Medicare Resource Utilization Group guidelines, which resulted in fewer approved claims and fewer approved days in the skilled nursing facility compared to the Medicare System.

BCBS argued that pursuant to Heckler v. Ringer, 466 U.S. 602 (1984), Southern Springs' claims were inextricably intertwined with Medicare benefits. Specifically, BCBS contended that the claims arose under the Medicare Act because Southern Springs requested coverage of skilled nursing facility services for Medicare Advantage enrollees that were not provided in the first instance. Therefore, BCBS took the position that Southern Springs had the ability to request an organization determination under 43 C.F.R. Section 422.566(c)(1)(ii).

Relying on RenCare, Ltd. v. Humana Health Plan of Texas, Inc. 395 F.3d 555 (5th Cir. 2004), Southern Springs argued that the administrative appeal and grievance processes established by Medicare are not available to it because it is not a Medicare enrollee. BCBS distinguished RenCare by arguing that, in that case, the government and the beneficiaries had no interest in the claims as the services had already been provided and the dispute only related to reimbursement due from Humana, not Medicare or the enrollee. Based on the parties' arguments, the Court reasoned that, unlike RenCare, Southern Springs alleged that enrollees were denied services in the first instance, and therefore its claims involved questions of coverage and compliance with the Medicare Act that currently impacted and could continue to affect enrollees. Based on this rationale, the Court concluded that the claims were inextricably intertwined with a claim for Medicare benefits. Therefore, the Court agreed with BCBS that Southern Springs state law claims were preempted by the Medicare Act and issued a writ of mandamus ordering the lower court to dismiss the claims.

This case illustrates the expansiveness of exhaustion requirement under the Medicare Act; healthcare entities servicing Medicare enrollees should be cognizant of this holding as they pursue future contract negotiations.