United States: Class Action Risk In The Healthcare Industry And The Need For Mitigation Strategies

Last Updated: March 31 2013
Article by Daniel P. Shapiro and Patrick C. Harrigan

Benjamin Franklin said that "in this world nothing can be said to be certain, except death and taxes." It would be fair to tack on that today, in the context of any business enterprise, the threat of litigation is also a certainty. In the realm of civil litigation, the most menacing threat for a defendant is a class action law suit. A class action allows a single plaintiff to sue on behalf of many other people who are similarly situated and who have allegedly suffered the same injury at the hands of the same defendant. It is an individual lawsuit on steroids.

Class actions are on the rise in the healthcare space. There are at least three reasons that we can reasonably expect that trend to continue.

First, there is a large segment of the bar in the United States (interestingly, not in other developed countries) that specializes in filing class actions. Plaintiff class action litigation is a practice area and a business model. Class claims are almost always sponsored by plaintiffs' lawyers who advance their time and cover costs in exchange for the possibility of a contingent recovery. These lawyers have an interest in pursuing these cases, and in continuing to develop new opportunities where class action procedures can be used.

Second, and related to the first point, many subject areas where plaintiff class action lawyers have spent their time in the past have become more difficult and challenging for them today. Recent United States Supreme Court decisions have, for example, made class litigation for employees against employers more difficult for plaintiffs.

Other recent Supreme Court decisions have pushed potential consumer plaintiffs who would have sued large consumer sales and services companies toward arbitration and away from class actions. The plaintiff bar might shrink as a result of these changes in the law, but it is more likely that the successful lawyers who bring class actions will look for new opportunities and adapt rather than disappear.

Third, the healthcare industry is in the midst of profound change. The legal and regulatory framework is being fundamentally redrawn. These new laws and regulations create opportunities for plaintiffs' lawyers to file new suits with regard to both the meaning of these new laws and, as a corollary, with regard to the adequacy of compliance efforts. The healthcare industry often delivers identical or similar services on a repeated basis to vast numbers of people. Patients, of course, fit this description, but think too about the business relationships among and between doctors, managed care organization, hospitals and insurers where transactions are repeated again and again, in very large numbers. A mistake in the interpretation of a regulation or in compliance practices is amplified exponentially. An error, or alleged error, occurs many times, not once. In other words, the healthcare industry is an ideal target market for the plaintiff class action bar.

It is no surprise, then, that over the past year or so there seems to have been a meaningful uptick in class action activity in the healthcare space, including:

  • Recent allegations of unnecessary cardiac catheterization procedures have resulted in class action complaints against hospitals;
  • The determination of "usual, customary and reasonable" charges for purposes of calculating payments to outof- network physicians has been the subject of class litigation;
  • A class of 900,000 physicians brought an action challenging the timeliness of insurance payments;
  • An academic medical center was sued in a class action for patient privacy violations as the result of a computer error that exposed patient information to the internet;
  • An antitrust class action was brought to challenge the alleged anticompetitive impact of a hospital acquisition;
  • A class of consumers sued a hospital for pursuing its statutory lien rights to collect the full value of services provided. There are steps to take to mitigate the risk of being tagged with a class action. Class litigation is expensive to defend, and, because it aggregates many smaller claims in a single action, almost always presents a very significant risk of loss for the defendant and the potential for a significant reward to plaintiffs' counsel. Because the stakes are high, class actions are often expensive to settle. Investing in risk minimization at the front end is, therefore, well considered.

Circumstances surrounding class action

To understand where the mitigation opportunities for class action risk can be found, it is essential to understand not only the circumstances where class actions arise, but when and why they are rejected by the courts. That is, it is important to understand when and why plaintiffs' lawyers may be reluctant to commit to the significant front-end investment that they must make to initiate and then move class litigation forward.

Class actions can be an efficient way to resolve many claims all at once, but they also present threshold issues of fairness. Because the premise of a class action is that a single person can bring a lawsuit on behalf of many others who will not actually be present in the court room, but whose rights will be determined there nonetheless, the courts pay particular attention to these fairness issues that accompany class litigation. For example, is it fair to a class member for his or her rights to be finally and forever determined if he or she is not in the courtroom and has never had - on an individual basis - his or her day in court? In fact, as a practical matter, class members may not even know that an action deciding their rights is being conducted, settled or tried. On the other side of things, is it fair to a defendant for a court to make a finding of liability where only one of many hundreds or even thousands of the plaintiff class is available for cross examination? And when is the management of a class action so cumbersome and fragmented that it is no longer fair, or workable, to impose that administrative burden on a court?

To address these questions and safeguard against these problems, the rules for class actions require that the court hearing the case assure that a class action approach will be reasonably fair to all parties. So, the claim by the named plaintiff - the one present in court - must be fundamentally and in all important ways the same as the claims of the absent class members. While some differences are tolerated, for a class action to be permitted, "commonality" must predominate over any material differences. In the absence of commonality, it would not be fair or appropriate to use the results in one proceeding to decide the rights of all class members and defendants. A group approach to litigation only makes sense if it is a group with a truly predominant, common experience. Further, a class action has to be a "superior" way of deciding the dispute. If, for example, the administrative burden on the court of managing a particular class action is too great, individual claims will be insisted upon, and a class action will not be allowed to proceed.

Additionally, the class representative who is the named plaintiff has to be "typical" of the class members generally. Conflicts of interest may exist between the interests of the class representative and the interests of the absent class members. Or, there may be a common question to litigate for the class, but the named plaintiff may not quite represent that typical claim because of the named plaintiff 's unique circumstances. In those instances, there may be a "common" question for the class, but the named plaintiff who has stepped forward, if not "typical," is found to be not the right person to advance the case. If the named plaintiff is not typical, he or she will not be allowed to represent the interests of the class. Often, if the named plaintiff drops out, the case ends. There is not always a substitute named plaintiff waiting in the wings.

How to mitigate risk

Knowing all of this about class actions, are there ways to use that information to mitigate the risk of exposure to class litigation? There are. Keeping in mind that plaintiffs' lawyers are making an investment in each piece of litigation that they bring, one key to risk mitigation is to take steps that make a potential defendant a less attractive target when a plaintiffs' lawyer is surveying the industry.

For example, while the relationships between hospital, physician and patient are complex, the courts have been willing to enforce class action waivers - an agreement at the beginning of a relationship that states that the parties will not use class action litigation in the event of a later dispute. This lessens class action risk because a named plaintiff who has signed a class action waiver will likely not be a "typical" class representative, even if a plaintiff 's lawyer argues later that the waiver should not be enforced. If a large number of people in a proposed class have signed waivers, there may be contract enforcement issues that preclude a finding that a "common" issue predominates.

Another mitigation strategy is to engage in a careful "class action audit" of practices where plaintiffs' lawyers are already well versed - such as billing and collection practices - to identify and remediate likely trouble spots and lower a potential target's risk profile. There may also be opportunities to reflect in transaction documents the unique and individualized nature of a relationship.

Those facts - which might defeat commonality - would come out in litigation as the debate over commonality and typicality proceeds, but only after a suit has been filed. If those facts are reflected in the documents that define the transaction between the parties at the front end of a relationship, a plaintiff 's lawyer may choose to move on to review another potential case rather than step in to an expensive and troubling fight that the plaintiffs' lawyer knows is coming. So, a review of the documents that define the relationships between physicians and hospitals; care givers and patients; insureds and insurers, can identify both trouble spots and opportunities to build in favorable language (arbitration clauses, for example) in appropriate circumstances that will discourage class actions.

The prerequisites for a class action - commonality, superiority, typicality - are also defenses. Understood, anticipated and planned for, these concepts can be used in a sophisticated litigation risk mitigation strategy. We are in the midst of a sea change in the healthcare regulatory landscape at both the state and federal level. With any shift in laws and regulations which impacts such a large population, class action litigation inevitably follows. Businesses in the healthcare space would be wise to examine their own practices now, before ending up on the wrong side of an expensive and disruptive class action.

Previously published in Becker's Hospital Review

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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