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Blue Shield of California Reaches $7M Class Action Settlement Over Improper Medical Necessity Criteria Used for Mental Health Coverage

By Jessica Grillo, J.D., Legal Advisor for The Kennedy Forum

On May 26, 2016, a class action lawsuit was filed against California Physicians’ Service (d/b/a Blue Shield of California), Human Affairs International of California, and Magellan Health Services of California, Inc. – Employer Services for the implementation and use of improper medical necessity criteria in the evaluation of residential treatment claims. Plaintiffs alleged that Defendants violated legal and fiduciary duties owed to health insurance plan participants and beneficiaries by improperly restricting the scope of insurance coverage for residential and intensive outpatient mental health and substance abuse treatment. Plaintiffs further alleged that these restrictions were inconsistent with the terms of relevant insurance plans and with generally accepted professional standards in the mental health and substance abuse disorder treatment community.

In its coverage for insurance plan participants, Blue Shield delegated the responsibility for adjudicating mental health and substance abuse claims to Magellan, the Mental Health Service Administrator (MHSA). Pursuant to this delegation, Magellan adopted, and Blue Shield approved, the adoption of Medical Necessity Criteria Guidelines (MNCG) developed by Magellan’s parent company, Magellan Health, Inc. Magellan’s guidelines regarding admission to residential care imposed (1) a “fail-first” criterion, (2) a “serious, imminent” risk of harm standard, (3) a “motivation” condition, (4) a burden-shifting condition that favored denial of coverage for treatment recommended by mental health and substance abuse professionals, and (5) an elevated burden on the claimant with respect to factors demonstrating a dysfunctional living environment or failure to respond to less-intensive treatment regimens. The MNCGs under which mental health and substance abuse claims were adjudicated stipulated that coverage for residential treatment would be authorized only where the claimant had had “recent, appropriate professional intervention at the less intensive level of care” (i.e., satisfied the “fail-first” criterion).

Plaintiffs argued that “fail-first” protocols were inconsistent with generally accepted professional standards in the mental health and substance abuse disorder treatment community and that Magellan’s MNCGs ignored a host of residential placement criteria enumerated by national medical specialty organizations such as the American Academy of Child and Adolescent Psychiatry (AACAP) and American Society of Addiction Medicine (ASAM). Plaintiffs further argued that the MNCGs deviated from ASAM standards by conditioning residential rehabilitation treatment on a “severely” dysfunctional living environment, which was a far more restrictive condition than that which ASAM specified. With respect to intensive outpatient treatment for substance abuse disorders, Plaintiffs argued that the MNCGs were similarly problematic as they imposed an improper “motivation” requirement and required that the treatment plan for a patient be “reasonably expected to bring about significant improvement.” Such requirements, however, had no basis in generally accepted medical practices.

The parties were able to settle this matter and on July 5, 2018, the Court granted the Motion for Settlement, wherein Defendants agreed to not resume use of the challenged guidelines to determine benefit claims for members of Blue Shield health plans and to issue a bulletin to all personnel conducting medical necessity reviews, instructing them not to rely upon previous denials of a class member’s coverage requests to support a future denial of coverage requests on the basis of lack of medical necessity. Additionally, Defendants agreed to pay $7,000,000 for the benefit of the class, to be allocated after deduction of attorneys’ fees, costs, expenses, and incentive awards.

Key Takeaway from this Case

Medical necessity guidelines must comply with generally accepted professional standards in the mental health and substance abuse disorder treatment community. This is just one of several recent lawsuits that challenged internally-created medical necessity criteria guidelines. (See, Wit v. United, case number 3:14-cv-02346, pending in the U.S. District Court for the Northern District of California and Kimberley D. v. United Healthcare Insurance Company, No. 16-56175, 2018 WL 1406643 (9th Cir. Mar. 21, 2018))

The Kennedy Forum Legal Taskforce seeks to create positive case law in ERISA, Federal and State Parity and Disability cases, nationwide. The group is comprised of expert litigators in the field who share a common passion for equality and justice for those who have had their behavioral health insurance benefits wrongfully denied.

Parity Resources from The Kennedy Forum

Parity Registry is a website where consumers can learn to file an appeal with their health plan after being denied coverage for mental health or addiction treatment; send a complaint directly to state enforcement officials; access step-by-step appeals guidance; find a comprehensive listing of state and federal regulators who can help with an appeal; and review FAQs and other information to help advance an appeal. The data shared will help to shape public policy and influence future legislation.

Parity Track is a website where policymakers, journalists, consumers, and others can track legislative, regulatory, and legal parity activities in all 50 states and at the Federal level to monitor implementation and best practices.

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“We stand on the doorstep to make momentous progress in advancing the cause of this new civil rights struggle started by the work of President Kennedy over 50 years ago.”
— Patrick J. Kennedy
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