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12-year case ends in $14M settlement

A breach of contract case brought by a former Maryland managed health care firm that took 12 years to wind its way through the judicial system has wrapped up with a $14 million settlement.

The case, pitting the now-defunct Doctors Health Inc. against health insurer Aetna U.S. Healthcare Inc., came to settlement on Nov. 3 after the 11th U.S. Circuit Court earlier in the year reversed a lower court’s decision. The U.S. District Court in Southern Florida had determined that Doctors Health’s claims against Aetna were released by a class action settlement agreement.

Nearly 70 people — including lawyers and paralegals — from incarnations of DLA Piper US in Baltimore worked on the Doctors Health case over the last decade. DLA, which worked on a contingency fee basis, got nearly $3 million for its work, with the balance of the settlement going to creditors in Doctors Health’s bankruptcy case.

“We’re satisfied with the outcome,” said Mark Friedman, a partner at DLA and lead counsel on the case. “It’s not the economic model that anyone would suggest, but we’re very happy that we were able to achieve a successful result for the creditors, and we’re pleased with the outcome for the firm as well.”

Doctors Health, once a publicly traded company, had a three-year contract with insurer NYLCare Health Plans of the Mid-Atlantic Inc. to act as intermediary between the Medicare HMO, its customers and their doctors beginning in 1997.

Doctors Health would farm out work to its physician network, make hospital arrangements and take care of prescription medications, with the insurer paying Doctors Health 90 percent of patient premiums.

But, after NYLCare was sold to Aetna, the insurer decided it would cancel its Medicare HMO plan in the Maryland area as of Jan. 1, 1999. Rather than wait for Doctors Health to go out of business — it had filed for Chapter 11 bankruptcy protection in Maryland in November 1998 — Aetna prematurely ended its contract with the company.

In Doctors Health’s bankruptcy case, NYLCare filed a proof of claim, but the company did not pay the claim. Instead, the trustee filed an adversary action against the insurer, alleging it had breached its managed-care contract with Doctors Health, causing damages that exceeded NYLCare’s claim.

During the course of the bankruptcy case, several class action lawsuits were initiated against health insurers in the managed-care industry based on claims that the insurers did not treat providers of medical services fairly, mostly in terms of pay. The consolidated cases were heard in U.S. District Court in Southern Florida, but Doctors Health was not a named party.

In May 2003, Aetna entered into a settlement with the plaintiff class in Shane v. Humana Inc. et al. Any class member who did not opt out of the settlement could not pursue any released claims against Aetna or its subsidiaries.

Meanwhile, the two-month trial in the adversary action against Aetna had begun in October 2001. Friedman said his job was to prove damages in a challenging situation.

“How do you show damages when you have a business who never made a profit, had no chance of making a profit?” he said.

Despite the difficulty, a ruling from the bankruptcy court came down in April 2005, awarding Doctors Health contract damages of $21.3 million.

The insurer took two different actions: first, as NYLCare, it appealed the decision to the U.S. District Court of Maryland in Baltimore; second, as Aetna, it filed a motion to show cause in the U.S. District Court in Southern Florida seeking an order to enforce the release in the class action settlement to bar the bankruptcy court’s award.

Friedman said he received a letter from Aetna’s counsel, Miguel Estrada, of Gibson, Dunn & Crutcher LLP in Washington, D.C., saying he should agree to dismiss the complaint and withdraw the judgment, otherwise Aetna would seek a contempt order against him because of the settlement agreement.

Friedman claimed his client had not received adequate notice of the class action suit, and the lawyer filed an emergency motion to the bankruptcy court seeking an injunction to force Aetna to withdraw its motion in Florida. The bankruptcy court granted the motion.

However, District Judge Benson E. Legg in Baltimore later vacated the bankruptcy court’s injunction and stayed NYLCare’s appeal on the breach of contract judgment pending consideration by the U.S. District Court in Southern Florida as to whether the Shane settlement included Doctors Health.

The Florida court determined that Doctors Health’s claims were released by the settlement agreement and that the company received adequate notice of the settlement but failed to opt out.

Doctors Health appealed the decision to the 11th U.S. Circuit Court, which found the settlement agreement did not release Doctors Health’s claim against NYLCare. The court said Doctors Health’s claim shared “no factual basis with the Shane complaint.”

In Shane, the class alleged providers of medical services were underpaid, while in the adversary action, the case centered on NYLCare’s decision to end its Medicare agreements with the government and prematurely end its contract with Doctors Health.

The 11th Circuit vacated the district court’s order and injunction, leading to the November settlement of $14.3 million.