BCBSTX vs. Little River Hospital

I have a fondness for “legal chaos.” Not because I like chaos, but because I love watching?people in positions of authority try to figure out what to do with it. Case, or should I say "Cases" in point, are the amazing number of lawsuits arising from Little River Hospital, a tiny Texas hospital with ?fewer than 20 beds, in the middle of nowhere, which has nevertheless managed to send shock waves through the parent company that owns Blue Cross Blue Shield Texas.

This thing is such a mess, that last summer, when I gave a presentation last summer to the American Health Law Association on “CLIA Labs” . . .(may topic was "what happens when things go wrong,")?I pointed to a stack of cases on my desk, which included (1) federal criminal indictments, (2) federal Civil Investigative Demands, (3) federal bankruptcy cases, (4) Civil False Claims Act Complaints, ?(5) Texas Medical Board Complaints, (6) commercial health insurance arbitration cases, (7) PPO ?contractual mediation cases and (8) civil subpoena cases to non-party doctors.?All involved this ?tiny Texas hospital, called?“Little River.”?

The “Moral Hazard.” ??It all started in the 1980’s, when about 400 rural hospitals were shuttered nationwide, leaving perhaps twenty percent of the U.S. population patients without access to a hospital emergency room. Not only could people die, but this state of affairs also creates a big "consumer protection/state insurance commissioner regulatory problem" for companies which sell health insurance. They can't sell hospital insurance, if there there are no hospitals.

So, Congress sprang into action.?Any hospital that was (1) in the middle of nowhere, (2) had less than 20 beds, and (3) was open for emergency care 24/7, could be overpaid for providing basic services, like CLIA lab testing, at least compared to other free-standing labs.

Because of this higher reimbursement, Medicare’s payer division, CMS decided to waive the patient copayments requirements, which is typically a big “no, no” in health insurance circles. Copayments, which might be 20 percent of the bill, ?typically reduce Medicare costs by making less likely the patient will order services frivolously. Without a copay the services are free of charge to the patient. ?

CMS also modified its rules, which are found in Ch. 16 of the CMS Medicare Benefit Policy Manual, so that these little hospitals (called “critical access hospitals,” or “CAHs”) could treat more customers than just those who showed up as “inpatient” or “outpatients.” ?CMS expanded the definition of “outpatients” to include anyone, anywhere, as long as the patient’s specimen was collected by an employee of the CAH. The idea was, the hospital could go to the patient, who could be at home, or in a doctor’s office. This also meant the office could be in Dallas or Houston, ?as long as a hospital sent an employee to collect the sample. Non-governmental, commercial insurance plans, like BCBSTX, typically follow the same CMS rules. What could possibly go wrong?

Turns out, "plenty." Ch. 16 of the CMS Manual created what, in the insurance world, is an easily identifiable?“moral hazard.” As Maggie Mahar described in her book, Money Driven Medicine, The Real Reason Healthcare Costs So Much, “money is like a loose football, everybody jumps on it.”

Apparently, once the market realized that CAH’s could follow CMS rules to the letter, and legally get paid more than everybody else, and doctor’s realized it was better for patients, who could not afford a copay, you can imagine what happened next. ?

Suddenly, these tiny little hospitals in the middle of nowhere, started billing astronomical amounts for a hospital with only 20 beds, because the patients came from everywhere to get better quality lab test results and customer service, with no copays.

And “all hell followed with.”??When BCBSTX saw this spike in utilization, according to a flurry of lawsuits, they stopped paying Little River’s bills. This resulted in Little River filing for bankruptcy. The bankruptcy trustee, seeing that Little River had a big stack of accounts receivable, then sued BCBSTX’s parent company for payment on the millions in accounts receivable, including claims?of alleged violations of the Texas Free Enterprise and Antitrust Act (“TFEAA”)(Which most of us know from non-compete law as Tex. Bus. & Com. Code 15.05.)

In fact, everybody started suing everybody. There were, as I noted, federal criminal indictments, False Claims Act lawsuits, Civil Investigative Demands—all alleging that “there must be something illegal going on here.”

Then, the unthinkable happened.?In August 2019, ?the Bankruptcy Trustee for Little River won ?a $108 million arbitration award against BCBSTX, which was not appealed. ?This encouraged all those associated with CAH’s, including the Little River Bankruptcy Trustee and the individual owners and officers of Little River, to file additional defamation lawsuits in bankruptcy court, ?and in federal court under the Lanham Act, 15 U.S.C. §1125 cases which allege that BCBSTX’s false or misleading statements hurt Little River and the officers and owners.?When the Trustee also sued the owners of Little for Fraudulent Conveyances, it became a war of "all against all."

I actually feel sorry for BCBSTX, after reading the company’s 12(b)(6) motion to dismiss, in a case filed by the individual owners and officers of Little River, Madson et. al. v Health Care Service Corporation /d/b/a Blue Cross Blue Shield of Texas, in?Case No. 6:20-CV-835-ADA. BCBSTX argued as I read it, “how many times and in different ways, ?can we be sued for the same thing, not paying one 20-bed hospital in the middle of nowhere?”

Meanwhile, apparently, many of the people who sued BCBSTX, didn’t know they had already been indicted under seal by the DOJ.?What this means, is we aren’t going to find out for a while what is going to happen to all these cases, as the civil cases were stayed on February 17,?2023, apparently because of the federal criminal indictments.