HMOs Face Racketeering Lawsuits

American actress Halle Berry, left, dances with Australian actor Hugh Jackman during a photo op for the film "X-Men: The Last Stand," at the 59th International film festival in Cannes, southern France, on Monday, May 22, 2006.
AP Photo/Jeff Christensen

If you have ever been angry at your HMO then attorney Dick Scruggs has news.

CBS News Correspondent Wyatt Andrews reports a federal court in Miami has ruled that Scruggs can sue six of America's largest HMOs - Aetna, UnitedHealthcare, Prudential, Cigna, Healthnet, Humana - on the charge they operate a racket. It's the civil version of the same racketeering charge, called RICO, usually aimed at the mob.

"Its absolutely huge," said Scruggs. "There aren't many cases like this one."

Even for Scruggs, that's an understatement. Scruggs, the same lawyer that helped battle Big Tobacco, has teamed with some of the highest priced trial lawyers in the country — like David Boies, the lawyer who took on Microsoft. They are on a mission, they say, to reform managed care.

These lawyers could make tens of millions of dollars from this lawsuit but they say it's not about money, it's about making the HMO's come clean.

"Right now HMOs have been telling subscribers they will get care based on medical need, and that's not true," Boies said.

So how are HMO's a racket?

"I don't know how else you would define it," Scruggs said. "When they reap millions in premiums and don't deliver benefits, it's just garden variety fraud."

That "doesn't make them the mob, but in many ways its just as bad as the mob," he said. "The mob doesn't pretend to be legitimate."

Managed care's response to the racketeering charge is vehement.

"These cases are not sensible law, they are based on sand," said Stephanie Kanwit, counsel for the American Association of Health Plans. "Nobody likes to be called Tony Soprano."

The core of the racketeering charge is that managed care promises medically necessary care, but then conspires to deny care based on cost.

Steve Neuwirth, a partner in the Boies firm, showed CBS documents proving, he said, that Humana paid cash bonuses to workers who denied care. In this case, they were denying admissions to the hospital.

The people answering the phone approving a hospital admission are getting $1,500 "for saying no, and nowhere is there any reference to medical needs," Neuwirth said.

"This is get your bed days down so we can make more money," he said.

The HMOs call cash bonuses ancient history. Three of the companies facing the racket charge – Cigna, UnitedHealthcare, Wellpoint – say they never paid cash bonuses for care reduction. Aetna says it has no record of them. Humana admits it did, but that is has since discontinued the practice.

That's partly why the industry calls the lawsuit a flat out money grab by rich trial lawyers.

"They can't prove criminality here, they can't prove a RICO case," Kanwit said.

Kanwit is suspicious of the intentions of Scrugg and his fellow lawyers who say it's not about the money but the reformation of managed care.

It's "malarkey," she said. "Does Dick Scruggs have a solution to the 40 million uninsured?"

Scruggs and Boies are asking to represent some 90 million Americans who have been in HMOs. And it is not the only multi-billion dollar lawsuit the industry faces.

Part Two: Fate Of HMOs To Be Settled In Court