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Lawsuits accuse Magellan Health of civil racketeering

Magellan Health Services Inc. — the nation's largest provider of managed care for psychiatric disorders and substance abuse — is accused of violating civil racketeering laws in two lawsuits filed Oct. 26 in federal court in St. Louis, Mo.

The suit alleges the premiums paid by members exceed the value of the services they receive.

The lawsuits, which seek class action status, charge that Magellan uses undisclosed financial incentives and internal controls to limit the care delivered to plan members. As a result of these practices, the suit alleges, the premiums paid by members exceed the value of the services they receive. The complaints say plan members are owed the difference.

Magellan, based in Columbia, Md., delivers benefits and administers third-party plans for 70 million policyholders. Its customers include Aetna, AT&T, and the U.S. Postal Service. A Magellan spokesperson says the company has yet to see the complaint and could not comment.

The two lawsuits contend Magellan's misrepresentation of its benefits to plan members violates the federal Employee Retirement Income Security Act (ERISA) and the Racketeer Influenced and Corrupt Organizations (RICO) law. Under the RICO law, a guilty finding against Magellan by a jury would entitle the class action members to triple damages. The suits seek suitable reimbursement of plan members' money and unspecified damages.

One lawsuit against Magellan was filed by Berger & Montague, a law firm in Philadelphia, Penn. The other suit was brought by the Washington, D.C., firm of Cohen, Milstein, Hausfeld & Toll. Both firms specialize in class action litigation and have filed dozens of lawsuits targeting the managed care industry.

Magellan takes in $19 billion annually, according to the complaint filed by Cohen, Milstein, Haufeld & Toll. The lawyers contend the company makes money by pocketing the difference between the premiums paid for promised coverage and the value of the coverage actually supplied. It does this, they allege, by administering behavioral health care services for employers and insurers in such a way as to keep the number of times patients use these services as low as possible. Magellan saves money, they say, by engaging in a variety of practices, including:

  • Imposing cost-based, restrictive criteria to limit approvals of coverage.
  • Providing financial incentives to physicians for not recommending covered services.
  • Pressuring claims reviewers to deny claims.
  • Instituting unreasonable approval and appeal requirements to prevent, discourage, and delay policyholders from attaining their right to coverage under the terms of their plans.
  • Arranging to profit directly from under-treatment by assuming the role of an insurance company, not merely a claims processor.

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