DROLET v. HEALTHSOURCE
UNITED STATES DISTRICT COURT
DISTRICT OF NEW HAMPSHIRE

CLASS ACTION COMPLAINT



CLASS ACTION COMPLAINT

Plaintiff, by her undersigned attorneys, for her complaint, alleges upon personal knowledge as to herself and her own acts, and upon information and belief as to all other matters, based upon, inter alia, the investigation made by and through her attorneys, as follows:

NATURE OF THE ACTION

1. Plaintiff is a beneficiary in an employee welfare benefit plan, as defined under and regulated pursuant to the Employee Retirement Income Security Act of 1974, 29 U.S.C. New Hampshire, Inc. ("Healthsource-NH"), a health maintenance organization ("HMO") owned, operated and controlled by Healthsource, Inc. ("Healthsource" or the "Company"), has been retained by the employer of plaintiff's husband to provide healthcare coverage as part of the welfare benefit plan it offers to its employees. Except where otherwise indicated, the use of the term Healthsource refers to Healthsource, Inc. and to its subsidiaries, including Healthsource-NH, through which it offers managed care services.

2. Healthsource is a provider of healthcare services to more than 3 million subscribers nationwide. These subscribers accept Healthsource as their healthcare provider in reliance on the Company's representations that they will receive a high quality of care through physicians whose primary interest is in their patients' medical needs. What the subscribers do not know, however, is that Healthsource provides financial incentives to their doctors specifically designed to encourage them to reduce the level of medical treatment they will offer their patients and that many of the decisions concerning their medical care are not made by their doctors, or, indeed, any qualified medical personnel, but by non-medical clerks who rely on computerized data bases that limit what care can be provided -- data bases that are withheld from public scrutiny, even from the eyes of the doctors purportedly serving the interests of the patients on behalf of Healthsource.

3. Healthsource, for example, has represented to its members that its physicians have a contractual relationship "which does not interfere with the exercise of the physician's independent medical judgment." Yet, at the same time, and unknown to its members, Healthsource provides compensation to its physicians that increases if they reduce the level of care they provide. As one internal memorandum from Healthsource to its physicians declares, the Healthsource compensation scheme offers doctors the "[p]otential to increase total physician compensation through cost containment efforts." In other words, the physicians receive greater compensation if they reduce the number of tests, referrals to specialists and hospitalizations they provide to their patients.

4. The need to provide adequate disclosure concerning the incentives that managed care companies provide their physicians was recently recognized in the January 15, 1996 issue of the U.S. News & World Report, which stated:

While no one can see into a doctor's heart, new physician- payment arrangements with managed-care organizations flip the old doctor-patient pact on its head by creating incentives to deny, rather than provide, care. Formerly, when doctors provided care, they made money. Now, when managed-care doctors order a hospital stay, a referral to a specialist or expensive, high-tech procedures, they stand to lose money. Confusing as the new payment systems are, consumers must begin to understand them by asking their doctors tough -- maybe even embarrassing -- economic questions, because how a plan's doctors are paid could compromise care when it is needed the most.
Of course, because of the misrepresentations and omissions by Healthsource, its members are not even aware of the financial incentives that should prompt these "tough questions."

5. Concerns over the conflicts of interest the financial incentives create for doctors has led the American Medical Association ("AMA") to recommend that all managed care companies disclose such incentives to their subscribers, a recommendation which Healthsource has not followed. As Carol O'Brien, a senior attorney in the AMA's Chicago office, told The Boston Globe on January 28, 1996, when summarizing the financial incentives paid by Healthsource to its doctors, "[s]uch arrangements can act as a strong disincentive to provide patients with extra care and can result in ethical conflicts for doctors."

6. Under federal law, it is a crime for a doctor to receive financial remuneration for the referral of a Medicaid patient to a specialist, because such compensation could affect the ability of doctors to make medical judgments unsullied by financial concerns. For similar reasons, Healthsource members should at least have a right to be informed of the fact that their doctors receive financial remuneration for not referring them to specialists.

7. As the provider of healthcare through employee benefit plans, with the authority to grant or deny claims for benefits, Healthsource is a fiduciary under ERISA to the plan participants and beneficiaries. As such, Healthsource owes them the highest fiduciary obligations of good faith, fair dealing and loyalty, as well as the duty of candor and full and fair disclosure. In offering its system of "managed care," however, Healthsource has breached tha hat duty and has thereby interfered with the ability of its plan participants and beneficiaries to make informed medical decisions. In particular, the Company has failed to disclose essential terms and conditions of its healthcare plans which provide its doctors incentives to undertreat their patients, including through

8. Plaintiff brings this action on her own behalf and on behalf of all participants and beneficiaries in employee welfare benefit plans through which healthcare coverage is provided by Healthsource ("Class Members"). She seeks

In addition, the plaintiff, on behalf of the Class, seeks restitution of a fair value of the premiums which have been paid to Healthsource and are attributable to services to which the plan participants and beneficiaries were entitled but were not provided by the Company.

JURISDICTION AND VENUE

9. The claims herein arise under ERISA, 29 U.S.C. et seq.

10. The jurisdiction of this Court is based on Section 502 of ERISA, 29 U.S.C.

11. This Court has subject matter jurisdiction over the action and has personal jurisdiction over both Healthsource, Inc. and Healthsource-NH, each of which is based in New Hampshire.

12. This Court is a proper venue for this action given that it is the chosen forum of the named plaintiff who receives her Healthsource healthcare benefits in this district and given that it is the location of the defendants' headquarters.

THE PARTIES

13. Plaintiff Robin Drolet is a resident of Derry, New Hampshire. She is a beneficiary of an employee welfare benefit plan offered by her husband's employer pursuant to which she is entitled to receive healthcare benefits through Healthsource, as specified in the Plan. Her employer pays for a portion of her healthcare costs, while Drolet's family is also responsible for a share of the Healthsource premiums. The Plan is subject to the terms of ERISA, the federal statute designed to regulate employee benefit plans.

14. Defendant Healthsource is a holding company which owns, operates and controls numerous subsidiaries throughout the United States which offer managed care services to more than three million subscribers. The Company's headquarters are located at 54 Regional Drive, Concord, New Hampshire 03302-2041.

15. Defendant Healthsource-NH is a wholly owned subsidiary of Healthsource, Inc. which is licensed to offer healthcare services in New Hampshire and Massachusetts. It shares headquarters with Healthsource, Inc.

16. Healthsource controls the policies and practices of each of its wholly owned HMOs, including Healthsource-NH. Through the exercise of this control, Healthsource has the power to grant or deny, or to order its subsidiaries to grant or deny, healthcare benefits offered to plan participants and beneficiaries. Thus, Healthsource, including Healthsource-NH, is a fiduciar ary under ERISA to the Class Members as participants and beneficiaries of employee benefit plans with which Healthsource has contracted to provide healthcare coverage.

17. Healthsource is a publicly traded managed care company. As a result, its primary goal is to maximize profits for itself and its shareholders. It has thereby structured its healthcare plans around the goal of increasing membership while reducing medical costs. The Company's profit-oriented approach has proven highly successful. On February 14, 1996, Healthsource announced that its revenues doubled in 1995, to $1.17 billion, and that it posted a 44 percent increase in its earnings, to $56.3 million. At the same time, its founder and current President and Chief Executive Officer, Norman C. Payson, has reportedly earned the most of any major managed care executive over the past two years, being awarding annual compensation and stock options worth more than $14 million.

CLASS ACTION ALLEGATIONS

18. Plaintiff brings this action on her own behalf and, pursuant to Rules 23(a) and (b)(1) and (2) of the Federal Rules of Civil Procedure, as a class action on behalf of all participants and beneficiaries in employee welfare benefit plans through which healthcare benefits are provided by Healthsource.

19. The members of the Class ("Class Members") are so numerous that joinder of all members is impracticable. Healthsource offers managed care services to over 3 million subscribers nationwide, including over 180,000 Healthsource-NH members.

20. Common questions of law and fact exist as to all Class Members and predominate over any questions affecting solely individual members of the Class. Among the questions of law and fact common to the Class are whether Healthsource violated ERISA by misrepresenting the nature and extent of the coverage provided by the HMO plans insured by the Company; by violating the express and implied terms of the employee welfare benefit plans to which it provided healthcare coverage; and by interfering with the practice of medicine and creating inherent conflicts of interest in the medical judgments of the Healthsource participating physicians.

21. The plaintiff's claims are typical of the claims of the Class Members because, as a result of the conduct alleged herein, Healthsource has breached its fiduciary obligations to the plaintiff and the Class.

22. The plaintiff will fairly and adequately protect the interests of the members of the Class, is committed to the vigorous prosecution of this action, has retained counsel competent and experienced in class litigation and has no interests antagonistic to or in conflict with those of the Class. As such, the plaintiff is an adequate Class representative.

23. The prosecution of separate actions by individual members of the Class would create a risk of inconsistent or varying adjudications with respect to individual members of the Class which would establish incompatible standards of conduct for the party opposing the Class.

24. Adjudications with respect to individual members of the Class would, as a practical matter, be dispositive of the interests of the other members of the Class who are not parties to the action or could substantially impair or impede their ability to protect their interests.

25. Defendants have acted or refused to act on grounds generally applicable to the Class, making appropriate final injunctive relief or corresponding declaratory relief with respect to the Class as a whole.

26. A class action is superior to other available methods for the fair and efficient adjudication of this controversy since joinder of all members of the Class is impracticable. There will be no difficulty in the management of this action as a class action.

SUBSTANTIVE ALLEGATIONS

27. As part of its obligation under ERISA, and in an effort to encourage employees who are offered Healthsource as an option to accept its managed care plan, Healthsource disseminates a package of information to employees which purports to describe the material terms and conditions of the benefits offered to them by the Company. As alleged herein, this information is materially false and misleading, in violation of Healthsource's fiduciary obligations under ERISA.

I. Financial Incentives