The Rogak Report: 03 Jan 2009 ** No-Fault - Medical Supplies - Class Action **
CLASS ACTION AGAINST GEICO BY MEDICAL SUPPLY COMPANIES IS REJECTED, BUT ONLY BECAUSE PROPOSED REPRESENTATIVE HAS PROBLEMS
Globe Surgical Supply a/a/o Remy Gallant v. GEICO Insurance Company 2008 NY Slip Op 10583 Decided on December 30, 2008 Appellate Division, Second Department Dickerson, J. Edited by Lawrence N. Rogak
In this appeal, the Second Department found that a class action lawsuit against GEICO by suppliers of durable medical equipment (DME) in no-fault claims may be appropriate -- but not with this particular plaintiff as the representative of the class, because the owner has been implicated in insurance fraud and has other issues which might prejudice the other members of the class.
"These appeals require us to address whether it is appropriate to certify a class action challenging the validity, under regulations in effect prior to October 6, 2004, of a no-fault insurer's use of the prevailing geographic rate or the reasonable and customary rate for health care services in calculating first-party benefits due to a claimant or health-care provider."
"In 2004 the plaintiff, Globe Surgical Supply (hereinafter Globe), as assignee of Remy Gallant, commenced the instant class action alleging, inter alia, that the defendant, GEICO Insurance Company (hereinafter GEICO), violated the regulations promulgated by the New York State Insurance Department (hereinafter the Insurance Department) pursuant to the no-fault provisions of the Insurance Law, by systematically reducing its reimbursement for medical equipment and supplies, specifically, durable medical equipment (hereinafter DME), based on what it deemed to be the prevailing rate in the geographic location of the provider, or the reasonable and customary rate for the item billed. Specifically, Globe alleges that GEICO wrongfully adjusted or reduced reimbursement payments of claims for DME subject to former Part E of the 23rd Amendment to Insurance Department Regulation 83 (11 NYCRR 68 Appendix 17-C, former Part E) (hereinafter former Part E), to an amount less than the amount charged in the proof of claim."
No-Fault Statutory and Regulatory Scheme
"The Comprehensive Motor Vehicle Reparations Act (Insurance Law §§ 5101-5109, hereinafter the No-Fault Law) provides for the payment of first-party benefits to persons injured in automobile accidents involving New York State residents and/or vehicles registered in the State (see Insurance Law § 5103[a]). "First Party Benefits" are defined as "payments to reimburse a person for basic economic loss" (Insurance Law § 5102[b]). "Basic Economic Loss" includes "all necessary expenses incurred for . . . medical, hospital . . . and prosthetic services," such as DME (Insurance Law § 5102[a]). "Payments for necessary medical expenses shall be subject to the limitations and requirements of section 5108 of the New York Insurance Law" (11 NYCRR 65-1.1[d]). Insurance Law § 5108 authorizes the Superintendent of Insurance (hereinafter the Superintendent) to establish a fee schedule for DME, which had been, at all times relevant to this appeal, set forth in former Part E. Former Part E regulated and set the amount of reimbursement to providers of DME as follows: "[f]or medical equipment and supplies (e.g., TENS units, soft cervical collars) provided by a physician or medical equipment supplier, the maximum permissible charge is 150 percent of documented cost of the equipment to the provider."[FN1]"
"The Superintendent also promulgated Regulation 68, codified at 11 NYCRR 65, to provide the specific procedural details for the payment of benefits. Under Regulation 68, the injured party is required to notify the insurer and to submit a written proof of claim for medical treatment no later than 45 days after services are rendered. Typically, as is the case here, the insured party orders DME from the supplier (e.g. Globe) and the supplier is assigned the right to claim reimbursement. Upon receipt of proof of claim, an insurer has 15 business days within which to request "any additional verification required by the insurer to establish proof of claim" (11 NYCRR 65-3.5[b]). An insurance company must pay or deny the claim within 30 calendar days after receipt of the proof of claim (see Insurance Law § 5106[a]; 11 NYCRR 65-3.8[c]). "In the event any person making a claim for first-party benefits and the Company do not agree regarding any matter related to the claim, such person shall have the option of submitting such disagreement to arbitration" (11 NYCRR 65-1.1)."
"In a complaint dated July 19, 2004, Globe alleged that GEICO 'at some point in time . . . ceased paying claims in accordance with the terms of the [No Fault] regulations and . . . instituted a systematic pattern and practice of reviewing claims for reimbursement against what it deemed to be the prevailing rate in the geographic location of the provider, the reasonable and customary rate for [the] item billed, or similar rationales . . . There is nothing in [former] Part E which permits an insurer to reduce reimbursements for [DME] by such factors as reasonable and customary charges or geographically prevailing rates. Yet, that is precisely what defendant GEICO is doing and has been doing.'"
"Specifically, Globe alleged that its assignor, Remy Gallant, was injured in an accident on February 10, 2001, with a GEICO policyholder. According to the complaint, Gallant purchased a transcutaneous electric nerve stimulator (hereinafter the TENS Unit) from Globe, which cost $340. Globe submitted the claim to GEICO, as assignee of Gallant, in the amount of $510 (representing 150% of the actual cost). On May 23, 2001, GEICO denied the claim for that amount and only reimbursed Globe in the amount of $200. As noted on Gallant's claim form, GEICO partially denied the claim because the cost submitted was 'far in excess of the industry average which is $107.82 . . . Based on this, a reasonable reimbursement is 150% over this amount which is $161.73. However, in consideration of the potential range, $200.00 will be reimbursed.'"
"Globe sought injunctive relief and asserted four causes of action sounding in (1) violation of the No-Fault Law, (2) breach of contract, (3) violation of General Business Law § 349, and (4) unjust enrichment. The Supreme Court granted that branch of GEICO's motion which was to dismiss the first cause of action for failure to state a cause of action, and those branches of GEICO's motion which were to dismiss the third and fourth causes of action for lack of standing. In denying that branch of GEICO's motion which was to dismiss the second cause of action alleging breach of contract, the Supreme Court noted that the 'plaintiff's claim is based upon Insurance Department Regulations, which are part of the policy as a matter of law (see Insurance Law § 5103[h]) and which are specifically set forth in plaintiff's complaint . . . Insurance policies covering other members of the proposed class need not be identified at this stage of the action.'"
"Globe purportedly commenced this action on behalf of itself and all members of a class 'consisting of all persons who had reimbursement payments of claims for medical equipment and supplies subject to [former] Part E of the Twenty-Third Amendment to Regulation No. 83 (11 NYCRR 68) ( Part E Reimbursements') adjusted or reduced by Geico.'"
"GEICO answered the complaint and set forth numerous affirmative defenses and counterclaims alleging fraud and unjust enrichment against Globe and the class. In particular, GEICO asserted that Globe and other prospective class members committed fraud by 'engaging in a scheme to exploit the payment formula . . . in order to collect fraudulent charges for [DME] purportedly provided to individuals who were injured in automobile accidents . . . Among other things, Globe . . . charged grossly inflated prices for the supplies it purportedly sold . . . and submitted false documentation' of its costs . . . GEICO [seeks] to recover the money that Globe . . . has stolen from the GEICO Companies (and if this case is certified as a class action, that other members of the purported class have stolen) by submitting thousands of fraudulent charges for DME.'"
"Prior to the submission of the motion at issue on this appeal, the parties conducted discovery, which included the depositions of Globe's principal, Jean M. Francois, and a supervisor at GEICO, Valerie Coffey. Francois testified that he owned Globe, which dispenses DME to patients. Francois acknowledged that P.Z.F. Management Company, Inc., was the actual name of the company doing business as Globe. During his deposition, Francois invoked the Fifth Amendment to the United States Constitution when asked questions about shareholders' meetings, tax preparation, his arrest for insurance fraud,[FN2] and his knowledge of other supply companies. Francois stated that, during the normal course of business, he paid for DME by check. Repeatedly throughout his deposition, Francois was shown documents that had the same invoice number and dates but represented the purchase of two different items of DME. Francois was also shown documents from Allstate Insurance Company representing the same invoice numbers submitted for various DME items. Francois had no explanation as to why he submitted the same invoice number numerous times to GEICO, representing the purchase of different items of DME. When asked to explain why the same invoice for the purchase of one lumbosacral support custom fabric was submitted 15 times to both GEICO and Allstate, Francois responded: 'since that's what I pay for it and I stick with that one invoice and send it out . . . it wasn't required or specifically by any insurance company to ask me to send that specific invoice that matches the claim.'"
"Valerie Coffey averred that she was the Personal Injury Protection Manager and Supervisor at GEICO's Woodbury office, which processed no-fault claims during the relevant time period. Coffey testified that State guidelines required receipt of proof of claim. She acknowledged that, once received, GEICO had 30 days to deny or pay the bill. Coffey testified that it was her understanding that the 150% reimbursement for DME supplies should be based on reasonable cost, which she defined as a 'bona fide arm's length transaction.' Coffey stated that in cases where GEICO saw inflated pricing for DME supplies, it performed a survey of multiple vendors and wholesalers and provided reimbursement based on the amount determined by the market survey, rather than 150% of the amount set forth on the submitted invoice. The first survey applied to the TENS Unit and the second survey covered cervical collars, pillows, back massagers, lumbosacral support, and thermophore. Coffey explained that, based on the survey, the average price for a TENS unit was in the $160 range. Coffey stated that, to be on the 'fair side,' GEICO decided to reimburse them at the rate of $200 per unit, but that GEICO did not reimburse up to 150% of the amount set forth on the invoice."
"Coffey stated that there were more than 10 DME suppliers who submitted claims to GEICO for reimbursement. When asked if the suppliers who submitted claims for reimbursement numbered more than 100, Coffey responded 'once you get to a hundred, I'd be speculating.'"
"On March 3, 2006, Globe moved, inter alia, pursuant to CPLR 901 and 902 for class certification on behalf of a class of all persons who had reimbursement payments of claims for medical equipment and supplies subject to former Part E adjusted or reduced by GEICO to an amount less than the amount charged in the proof of claim,[FN3] specifically to a 'reasonable reimbursement of 150%' of either the 'industry average' or 'of the average retail price.' GEICO opposed the motion. The Supreme Court denied the motion and, upon granting that branch of Globe's subsequent motion which was for leave to reargue, adhered to the original determination."
Class Certification: Burden of Proof and Liberal Construction
"Article 9 of the CPLR is to be 'liberally construed' in favor of the granting of class certification if all of the prerequisites of CPLR 901(a)(1)-(5) are met. The prerequisites articulated in CPLR 901(a) include proof that the proposed class is so numerous that joinder of all members is impracticable, that common questions of law and fact applicable to the class predominate over questions affecting only individual members, that claims or defenses of the representative parties are typical of the claims or defenses of the class, and that the class action is superior to other available methods for the fair and efficient adjudication of the controversy."
"The proposed class action must also meet the prerequisites of CPLR 902(1)-(5). The relevant factors articulated in CPLR 902(1) ('the interest of members of the class in individually controlling the prosecution or defense of separate actions'), CPLR 902(2) ('the impracticality or inefficiency of prosecuting or defending separate actions') and CPLR 902(3) ('the extent and nature of any litigation concerning the controversy already commenced by or against members of the class') may, under the circumstances of this case, be subsumed under the prerequisite of superiority (see CPLR 901[a]). CPLR 902(4) requires consideration of 'the desirability or undesirability of concentrating the litigation of the claim in the particular forum.' The selected forum is Nassau County, which is appropriate given the nature of the claims asserted and the absence of a forum selection clause."
"Finally, CPLR 902(5) requires consideration of 'the difficulties likely to be encountered in the management of the class action.' The determination to grant class action certification rests in the sound discretion of the trial court. The primary issue on a motion for class certification is whether the claims as set forth in the complaint can be efficiently and economically managed by the court on a classwide basis. The class representative has the burden of establishing the prerequisites of certification."
"On a motion for class certification, the court must be convinced that the proposed class is capable of being identified. Here, the class has been clearly defined as 'all persons who had reimbursement payments of claims for medical equipment and supplies subject to [former] Part E of the Twenty-Third Amendment to Regulation No. 83 (11 NYCRR 68) adjusted or reduced by GEICO based upon an industry average' to a reasonable reimbursement of 150%' of the industry average' or of the average retail price,' to an amount less than the amount charged in the proof of claim.'"
"CPLR 901(a) provides that a class action may be maintained if, inter alia, '(1) the class is so numerous that joinder of all members, whether otherwise required or permitted, is impracticable.' GEICO did not challenge numerosity in its opposition to Globe's original motion, but instead first raised the issue in its opposition to Globe's motion for leave to reargue. As such, GEICO has waived any challenge to numerosity."
"Nonetheless, the minimum number permissible may depend on a variety of factors. "There is no mechanical test' to determine whether . . . numerosity has been met nor is there a set rule for the number of prospective class members which must exist before a class is certified. Each case depends upon the particular circumstances surrounding the proposed class and the court should consider the reasonable inferences and common sense assumptions from the facts before it. In any event, the proposed class herein is, at a minimum, between 10 and 100 DME providers and, hence, the numerosity requirement is met. If the class has more than forty people in it, numerosity is satisfied; if the class has less than twenty-five people in it, numerosity is probably lacking, if the class has between twenty-five and forty, there is no automatic rule and other factors become relevant."
Common Questions Of Law Or Fact
"CPLR 901(a)(2) provides that there must be questions of law or fact common to the class which predominate over any questions affecting only individual members. Since the enactment of CPLR article 9 in 1975, there has been some reluctance on the part of New York courts to certify some types of class actions, e.g., (1) physical injury and property damage mass tort class actions; (2) class actions challenging governmental operations; and (3) class actions seeking a penalty or minimum recovery, which are prohibited by CPLR 901(b), including class actions commenced under General Business Law § 340 (the Donnelly Act) and the Federal Telephone Consumer Protection Act (47 USC § 227). As to the third category of actions, however, if only actual damages are sought, a court may certify a class in actions asserting a violation of General Business Law § 349 and the Federal Telephone Consumer Protection Act. Nonetheless, the courts have uniformly certified breach of contract class actions, notwithstanding differing individual damages, where, as here, there is uniformity in contractual agreements and/or statutorily imposed obligations."
Predominance of Common Questions
"GEICO contends that the following individual issues predominate over any common questions of law or fact: (1) whether GEICO had individual defenses to the various claims of putative class members, based on the timeliness of its coverage determinations or lack of coverage in the first instance, (2) whether the DME claims arose from a fraudulent accident, (3) whether the DME class member can prove its 'documented costs,' and (4) individual damages."
"The Supreme Court found that 'the timeliness of GEICO's denial of all or part of a class member's claim must be considered in order to determine whether defenses other than lack of coverage can be raised.' However, Globe contends that GEICO is precluded from raising any affirmative defenses because it failed to do so within the statutory time period. Also, Globe argues that GEICO waived any lack of coverage claim because GEICO never raised the claim in its answer or counterclaims, and, in any event, the claim is based on unsupported conclusions and speculations. GEICO counters that all defenses relating to lack of coverage are not subject to the waiver rule."
"Contrary to GEICO's contention... in the instant case, GEICO would not be able to present a defense based on fraudulent billing or the inability of the class members to establish 'documented costs.' In the proposed class action it is clear that the factor common to all potential class members is that the DME claims were denied because GEICO found them to be in excess of the industry average. As this Court and the Court of Appeals have made clear, overbilling and invoice recycling do not give rise to a lack of coverage defense. GEICO's failure to claim the fraud defenses within the required 30-day period thus precludes it from raising it in the class action (see e.g. Hospital for Joint Diseases v Travelers Prop. Cas. Ins. Co., 9 NY3d 312)."
"Globe correctly contends that the potential for different individual damages claims is not a valid reason for denying class action status, because damages are easily calculated based on the information contained in the denial-of-claim forms. GEICO argues that the calculation of damages is not subject to a simple formula, and that the trier of fact will have to determine if each claim is excessive or if it meets 150% of documented costs. Contrary to GEICO's assertions, the calculation of individual damages within a breach of contract class action is not dispositive of the issue of class certification, and is clearly manageable in the instant controversy."
Establishing An Individual Class Member's Prima Facie Case
"Upon reargument, the Supreme Court, although adhering to its initial determination, nonetheless did so despite rejecting its initial conclusion that each DME transaction must be examined separately to determine whether each individual class member has a prima facie case. Rather, the court found that each potential class member would not have to set forth a prima facie case proving facts, such as "documented costs," or providing invoices or cancelled checks, but that class certification was still not warranted even if such a standard were applied."
"With respect to this issue, the Supreme Court properly found, upon reargument, that a prima facie case can be easily made out by the class members and that proof of documented costs is not a requirement. This is true, given that GEICO did not seek verification of the documented costs for the invoices submitted."
"CPLR 901(a)(3) provides that the claims and defenses of the representative parties are typical of the claims or defenses of the class. Typical claims are those that arise from the same facts and circumstances as the claims of the class members. Typicality can overlap with the predominance of common questions of law or fact (see CPLR 901[a]) and the adequacy of representation."
Adequacy of Representation
"The three essential factors to consider in determining adequacy of representation are potential conflicts of interest between the representative and the class members, personal characteristics of the proposed class representative (e.g. familiarity with the lawsuit and his or her financial resources), and the quality of the class counsel."
Adequacy of Class Counsel
"In order to be found adequate in representing the interests of the class, class counsel should have some experience in prosecuting class actions. There is no question that Globe's counsel is highly competent in prosecuting class actions."
Adequacy of Class Representative
"However, Francois, the owner of Globe, was properly rejected by the Supreme Court as an adequate representative for the class. Although Globe attempts to couch Francois's problems in terms of 'amorphous and generalized suppositions,' it is clear that Francois was charged with insurance fraud for attempting to stage accidents and thereafter bill insurance companies. While he may have only pleaded guilty to disorderly conduct, he displayed his attempt to put his interest above others by invoking his Fifth Amendment rights at his deposition, although he later withdrew his invocation of the Fifth Amendment in a subsequently-filed reply affidavit. Moreover, there was adequate evidence that Francois was engaged in recycling invoices. In addition, Francois and the class are subject to a class action counterclaim which may or may not be meritorious [FN4]. In any event, Francois's attempt to defend himself against any such counterclaim by GEICO would preoccupy him and detract from his representation of the class."
"Therefore, Globe failed to show that it is an adequate representative of the class. Other appellate courts emphasize, as do we, the challenge presented by a defense unique to a class representativethe representative's interest might not be aligned with those of the class, and the representative might devote time and effort to the defense at the expense of issues that are common and controlling for the class. In other words, a class should not be certified if Globe is the class representative, as there is a danger that absent class members will suffer if their representative is preoccupied with defenses unique to it."
"CPLR 901(a)(5) provides that a class may be certified only if 'a class action is superior to other available methods for the fair and efficient adjudication of the controversy.' The No-Fault Law provides claimants with the option of commencing a plenary action or submitting the dispute to arbitration (see Insurance Law § 5106[b]). In addition, the No-Fault Law provides that the claimant may recover penalty interest at a rate of 24% (see Insurance Law § 5106[a]), a remedy not available in a class action. However, the availability of an arbitration alternative does not mean such a proceeding is superior to a class action which, through the aggregation of many similar claims, provides an incentive to the legal profession to expend the resources necessary to fully litigate often complex cases such as the instant matter, including the pursuit of this very appeal. The very core of the class-action mechanism is to overcome the problem that small recoveries do not provide the incentive for any individual to bring a solo action prosecuting his or her rights. In addition, should individual class members wish to pursue arbitration, and thereby recover statutory penalties unavailable in a class action, they may do so by opting out of the class sought to be certified."
"Moreover, as with the requirements of CPLR 901(a)(2), referable to the issues of liability and damages calculations, the prosecution of this proposed class action is fairly straightforward and quite manageable. Thus, although the motion to certify a class was properly denied because of Globe's inadequacy as a class representative, upon reargument, the denial of the motion should have been without prejudice to renewal."
"Accordingly, the appeal from the order entered July 21, 2006, is dismissed, as that order was superseded by the order entered November 8, 2006, made upon reargument. The order entered November 8, 2006, must be reversed, on the facts and in the exercise of discretion and, upon reargument, that branch of the motion which was to certify a class action should have been denied without prejudice to renewal."
Footnote 1: Regulation 83 was amended, effective October 6, 2004, and now states that where there is no specific schedule for reimbursement, the insurer must pay the "lesser of (1) the acquisition cost . . . to the provider plus 50%; or (2) the usual and customary price charged to the general public" (11 NYCRR 68, Appendix 17-C, Part F[a]). All the parties agree that the former Part E governs in this case.
Footnote 2: In his affidavit sworn to April 21, 2006, Christopher J. Jones, a "Detective with the NYPD's Fraudulent Accident Investigation Squad . . . for the past 2½ years," stated that "[f]raud by DME suppliers against no-fault insurance companies is widespread. It has been a principal focus of our Squad's investigation . . . On or about June 1, 2005, Mr. Francois was arrested as the result of an undercover investigation in which I was involved. He was arrested for offering to pay an undercover agent to stage a phony automobile accident and refer the alleged victims' to a medical clinic. The specific charges were insurance fraud in the third degree and conspiracy in the fifth degree . . . Subsequently, Mr. Francois entered into a plea agreement, pleading guilty to disorderly conduct."
Footnote 3: For other examples of insurer "repricing" of medical bills, see Reyher v State Farm Mutual Automobile Insurance Company (171 P 3d 1263 [Colo App 2007]; LaBerenz v American Family Mutual Insurance Company, 181 P3d 328 [Colo App 2007], cert deniedP3d, 2008 WL 1701094 [Colo 2008]).
Footnote 4: Counterclaims against the class representative and/or the members of the class may be asserted to discourage class participation and render the named class representatives inadequate by creating a seemingly unique defense. The courts must carefully examine the merits and purpose of class action counterclaims (see Van Gemert v Boeing Co., 590 F2d 433, affd 444 US 472 [absent class members who are not parties are not subject to counterclaims under FRCP 13 since such counterclaims may be used to encourage class members to opt out of the class]; Equity Residential Properties Trust v Yates, 910 So 2d 401 [Fla App 2005] ["we find no error in the trial court's denial of the landlord's motion to bring a class-wide counterclaim"]; Purcell & Wardrope Chartered v Hertz Corp., 175 Ill App 3d 1069 [dismissing counterclaim against class representative for lack of evidence]; Shaver v Standard Oil Co., 89 Ohio App 3d 52 [assertion of counterclaim against named plaintiff does not destroy ability of representative to comply with typicality requirements; the counterclaim should be treated as a request for a set-off against the named plaintiff's individual claim]; see also 3 Weinstein Korn & Miller, New York Civil Practice CPLR, at 901.19).
Comment: So GEICO wins the battle, but the war goes on. Watch for a class action on the issue of medical supply reimbursement, next time using a "clean" plaintiff (if they can find one!).