United States District Court, District of Columbia
July 27, 2001
UNITED STATES OF AMERICA, PLAINTIFF,
PHILIP MORRIS INCORPORATED, ET AL., DEFENDANTS.
The opinion of the court was delivered by: Gladys Kessler, United States District Judge.
MEMORANDUM OPINION — ORDER # 72
The United States of America ("Plaintiff" or "the Government") brought
suit against nine tobacco companies and two related entities
(collectively "Defendants")*fn1 to recover health care expenditures the
Government has paid for or will pay for to treat tobacco-related injuries
allegedly caused by Defendants' tortious conduct, and to disgorge the
proceeds of that unlawful conduct. The Court previously dismissed Count
One (the Medical Care Recovery Act or "MCRA" Count) and Count Two (the
Medicare Secondary Payer provisions or "MSP" Count) of the Government's
original complaint, United States v. Philip Morris, 116 F. Supp.2d 131
(D.D.C. 2000) ("Philip Morris" or the "Memorandum Opinion"); dismissed
Defendant B.A.T. Industries p.l.c. ("BAT Ind.") for lack of personal
jurisdiction, United States v. Philip Morris, 116 F. Supp.2d 116 (D.D.C.
2000); and denied the Government's request to reconsider the dismissal of
BAT Ind. United States v. Philip Morris, 130 F. Supp.2d 96 (D.D.C.
The Government subsequently filed an amended complaint, which added a
revised Count Two (the MSP Count).*fn2 Defendants moved to dismiss that
Count pursuant to Fed.R.Civ.P. 12(b)(6) for failure to
state a claim.*fn3
Upon consideration of Defendants' Motion, the Opposition, the Reply, and
the entire record herein, Defendants' Motion to Dismiss Count Two of the
Amended Complaint [#272] is granted. The Government shall not be
permitted to further amend its complaint with respect to the MSP Count.
Neither this ruling nor the companion ruling on Defendants' Motion to
Amend changes the current posture of the case. The parties are proceeding
with extensive discovery and are preparing for trial.
II. Standard of Review
The legal standard for judging the adequacy of a complaint is well
established. A "complaint should not be dismissed for failure to state a
claim unless it appears beyond doubt that the plaintiff can prove no set
of facts in support of his claim which would entitle him to relief."
Conley v. Gibson, 355 U.S. 41, 45-46 (1957); see also Davis v. Monroe
County Bd. of Educ., 526 U.S. 629, 654 (1999). At the motion to dismiss
stage, "the only relevant factual allegations are the plaintiffs'," and
they must be presumed to be true. Ramirez de Arellano v. Weinberger,
745 F.2d 1500, 1506 (D.C. Cir. 1984), vacated on other grounds,
471 U.S. 1113 (1985); Shear v. National Rifle Ass'n of Am., 606 F.2d 1251,
1253 (D.C. Cir. 1979).
However, a court may not "accept legal conclusions cast in the form of
factual allegations" or "inferences drawn by plaintiffs if such
inferences are unsupported by the facts set out in the complaint."
Western Assocs. Ltd. Partnership v. Market Square Assocs., 235 F.3d 629,
634 (D.C. Cir. 2001) (citing Kowal v. MCI Communications Corp.,
16 F.3d 1271, 1276 (D.C. Cir. 1994)) (internal quotations omitted); see
also Papasan v. Allain, 478 U.S. 265, 286 (1986) (holding that courts
"are not bound to accept as true a legal conclusion couched as a factual
A. Overview of the Medicare Secondary Payer Provisions
The Medicare Secondary Payer provisions ("MSP"), a series of amendments
to Medicare enacted in 1980 and further amended thereafter,*fn4 provide
the Government with statutory authority to obtain reimbursement for
certain Medicare expenditures. MSP essentially makes Medicare a
"secondary" payer where another entity is required to pay under a
"primary plan" for an individual's health care. See
42 U.S.C. § 1395y(b)(2).
Under certain circumstances, the Government may make a conditional
payment "with respect to [an] item or service" provided for an injured
Medicare recipient and then, if not reimbursed, may "bring an action
against [the] entity which is required or responsible (directly, as a
third-party administrator, or otherwise) to make payment with respect to
such item or service (or any portion thereof) under a primary plan . . ."
42 U.S.C. § 1395y(b)(2)(A) and (B)(ii) (emphasis added).*fn5
A "primary plan" is defined in the statute as "a group health plan or
large group health plan, . . . a workmen's compensation law or plan, an
automobile or liability insurance policy or plan (including a
self-insured plan) . . ." 42 U.S.C. § 1395y(b)(2)(A) (emphasis
added). As stated in the Memorandum Opinion, it is this last phrase
("self-insured plan") from which the Government draws its legal support
for the MSP Count.
B. Whether the Amended MSP Count States a Claim
In dismissing the MSP Count as alleged in the original complaint, the
Court explained that "[a]lthough MSP . . . allows the Government to bring
suit against non-insurance entities required to pay for health care costs
under a `self-insured plan,' the Government's complaint contains no
allegation that Defendants have at any time maintained a `self-insured
plan,' as that term is defined by MSP and the relevant regulations."
Philip Morris, 116 F. Supp.2d at 135.*fn6 The Court also determined
that the Government was attempting to improperly use the MSP statute as
"an across-the-board procedural vehicle for suing tortfeasors." Id.
In response, and with the intention of revitalizing its MSP claim, the
Government amended Count Two of its complaint, adding four paragraphs and
nine pages thereto. The amended complaint contains a number of new
allegations, including that:
* "[i]n the first half of the 1900's, Defendants
apparently chose a plan of insurance under which
they were entirely self-insured against liability
arising from their manufacture, sale, and promotion
of tobacco products." Am. Compl. ¶ 167a.
* certain research reports on the dangers of tobacco
use published in the 1940's and 1950's "prompted
Defendants to explore the possibility of obtaining
liability insurance coverage for the harms caused by
tobacco products." Am. Compl. ¶ 167b.
* in 1957, an individual with "Corporate Insurance
Services, Inc." "predicted" that the tobacco
industry would need "catastrophe protection" "in the
next ten year period." Am. Compl. ¶ 167c, e.
* "at least some Defendants resisted purchasing
insurance coverage through the early 1960's," and
one Defendant (R.J. Reynolds Tobacco Co.) wrote to a
shareholder in 1963 that it has "never carried
[products liability] insurance but [has] chosen to
be self-insurers in this field." Am. Compl. ¶
* "in the mid-1960's, Defendants obtained, in
earnest, insurance policies that explicitly insured
against the risks of injury from their tobacco
products." Am. Compl. ¶ 167h.
* Defendants discussed "[d]eveloping a plan of
insurance and self-insurance" and at some point in
the past "had considered an industry insurance
company" but "declined to go that route." Am.
Compl. ¶ 167k.
Relying on these new allegations, the Government concludes in its amended
complaint that Defendants "recognized the
risks associated with their
manufacture, sale, and promotion of tobacco products," "considered the
possibility of insuring against such risks through contract, agreement, or
arrangement with one another, and[/]or, third party insurers," and "made
the business decision" to "obtain partial third party insurance" and/or
to "self-insure, in whole or in part," against those risks. Am. Compl.
In contrast to the original MSP Count, the amended count does assert
that Defendants have maintained "plans of self-insurance" — an
allegation which is necessary, at a bare minimum, to state an MSP claim.
*fn7 See Philip Morris, 116 F. Supp.2d at 145-46 (stating that original
complaint "[did] not allege, in even the most conclusory fashion, the
existence of any `primary plan' under which Defendants pay health care
costs" and that even if it had, "it fail[ed] to allege, or even suggest,
that Defendants specifically maintain any form of self-insured plan")
(emphasis in original). Defendants, however, argue that the Government is
once again attempting to use MSP as a means of proceeding against them as
tortfeasors, rather than as insurers, and that the allegations contained
in the amended complaint are still insufficient to state a claim.
MSP liability attaches only to an entity that is "required or
responsible" to pay under a "primary plan." See
42 U.S.C. § 1395y(b)(2). MSP defines the term "primary plan" as "a
group health plan[,] large group health plan, . . . a workmen's
compensation law or plan, an automobile or liability insurance policy
or plan (including a self-insured plan) or no fault insurance"
42 U.S.C. § 1395y(b)(2)(A). As is apparent, the phrase "self-insured
plan" is a limited type of "primary plan," and of the eight types of
plans named in the statute, it is the only one to be relegated to a
parenthetical phrase. Perhaps not surprisingly, the statute has
apparently never been successfully used to pursue a non-insurance
entity.*fn8 Indeed, "[c]ourts have uniformly recognized that the
statute's clear purpose was to grant the Government a right to
recover Medicare costs from insurance entities." Philip Morris,
116 F. Supp.2d at 146 n. 22 (citing cases).
On the other hand, there is certainly no indication that the phrase
"self-insured plan" was meant to be, or should be viewed as,
superfluous. Under the appropriate circumstances, the statutory inclusion
of that phrase will permit the Government to pursue non-insurance
entities under MSP. See id. at 146 (noting that "the typical factual
scenario" is that MSP is used to "seek recovery from entities that are
unquestionably providers of insurance"). To the extent that the literal
language of certain decisions seems to suggest otherwise, see, e.g.,
Health Ins. Ass'n of Am. v. Shalala, 23 F.3d 412, 427 n. * (D.C. Cir.
1994) ("[T]he MSP statute plainly intends to allow recovery only from an
insurer.") (Henderson, J., concurring), it is apparent that those courts
simply were not faced with a factual
scenario in which the term
"self-insured plan" was analytically relevant.*fn9
To explicate the meaning of the term "self-insured plan," as it is used
in MSP, it is necessary to look at various interpretative sources,
particularly the one which both parties agree is highly relevant: the
regulations and comments issued by the Health Care Financing
Administration ("HFCA") which administers Medicare. HCFA has concluded
that "the mere absence of insurance purchased from a carrier does not
necessarily constitute a `plan' of self-insurance." Medicare as Secondary
Payer and Medicare Recovery Against Third Parties, 54 Fed. Reg. 41716,
417272 (Oct. 11, 1989). Rather, HCFA regulations, when considered in
tandem, define the term "self-insured plan" as an "arrangement, oral or
written . . . to provide health benefits or medical care or [to] assume
legal liability for injury or illness" under which an entity "carries its
own risk instead of taking out insurance with a carrier." See
42 C.F.R. § 411.21 (defining the term "plan") and 411.50(b) (defining
the term "self-insured plan").
The requirements for such an "arrangement" have been spelled out in
various cases and treatises. HCFA itself has ruled that "[o]ne of the
conditions for a self-insurance program is that the provider must
establish a fund with an independent fiduciary which is documented by a
written agreement that includes legal responsibilities and obligations
required by State laws." Mt. Diablo Med. Ctr. v. Blue Cross & Blue Shield
Ass'n, Dec. No. 96-D40, 1996 WL 862610, at *6 (P.R.R.B. July 1, 1996).
One of the leading treatises on insurance law has adopted the same basic
To meet the conceptual definition of self-insurance, an
entity would have to engage in the same sorts of
underwriting procedures that insurance companies employ;
estimating likely losses during the period, setting up a
mechanism for creating sufficient reserves to meet those
losses as they occur, and, usually, arranging for
commercial insurance for losses in excess of some stated
1 Couch on Insurance 3d 1:1 (1997), quoted approvingly in In re Diet
Drugs Prods. Liab. Litig., No. MDL 1203, C.A. No. 99-20593, 2001 WL
283163, at *10 (E.D.Pa. Mar. 21, 2001). "It is implicit in the term,
`self-insurer,' that such person maintains a fund, or a reserve, to cover
possible losses, from which it pays out valid claims, and that the
self-insurer have a procedure for considering such claims and for
managing that reserve." Alderson v. Insurance Co. of N. Am.,
273 Cal.Rptr. 7, 13 (Cal.Ct.App. 1990).
Clearly, the amended complaint does not allege any of the requirements
delineated above. It does not allege the existence of reserves or
procedures for establishing and calculating them; of claims-handling
procedures; of a fiduciary (or other independent body) to perform these
tasks; or of written documents allocating legal responsibilities and
obligations. Conceding that such requirements must ultimately be proven
at trial to establish MSP liability, the Government takes the position
that they need not be included in the complaint. See Govt's Mem. of
Points and Auth. in Supp. of its Opp'n to Defs.' Mot. to Dismiss Count
Two of Am. Compl. ("Gov't Opp'n") at 19.
What, then, does the Government assert must be alleged to state an MSP
claim? At an early point in its brief, the Government appears to argue
that it need only allege that Defendants are "required or
pay for an injured party's medical expenses under a "primary plan." See
Govt's Opp'n at 3 ("To plead an MSP claim, the United States need only
allege. . . ."). To the extent that this is the Government's argument,
however, it has already been squarely rejected and warrants no further
response. See Philip Morris, 116 F. Supp.2d at 145-46 (acknowledging that
the original complaint alleged that Defendants are "required or
responsible . . . to make payment," and holding that this allegation was
insufficient to state a claim).
In another part of its brief, the Government contends that because
Defendants are "sophisticated corporations, undeniably aware of the
liability risks posed by their products, making business decisions
concerning insurance against such risks," their choice to retain certain
amounts of risk, and not others, should be treated as a decision to
self-insure, thus subjecting them to MSP's reach. See Govt's Opp'n at 6,
4; Compl. ¶ 167i-j, l (summarized at pages 5-6 supra). Yet, the
Government never advances any reason why a distinction should be made
under MSP between "sophisticated corporations" and other parties, and how
such a dichotomy could hold up in practice. Indeed, in responding to
whether its understanding of the term "self-insured" would (or should)
encompass, for example, a homeowner who had not purchased homeowners'
insurance, or a sufficient amount thereof, the Government takes no
position and simply suggests that the issue not be addressed.*fn10
Finally, the Government argues that, even if MSP liability does
necessitate the formal arrangements spelled out in Mt. Diablo Med. Ctr.,
Couch on Insurance, and Alderson, it need only be able to prove their
existence after discovery, which it intends to do. It states: "The United
States fully expects that, at the appropriate time, it will be capable of
presenting evidence showing the Defendants have utilized formal
arrangements by which they undertook to set aside funds, and a formal
procedure for processing claims." Id. at 19. Of course, this begs the
question, namely, why, if the Government "expects" to ultimately produce
such evidence, it does not make the necessary allegations in its
Having fully considered the Government's position on what a plaintiff
needs to allege in its complaint to make out an MSP claim, the Court
concludes that such a theory cannot withstand serious scrutiny and must
be rejected. Its logical implication is that any entity with a risk of
legal liability which chooses to retain any portion of that risk, no
matter how small, may be pursued under MSP on the ground that it is a
"self-insured plan." The Government attempts to evade the far-ranging
implications of its theory of MSP liability, contending that "such
questions can be left for another day." Govt's Opp'n at 7. However, a
party's theory of statutory liability, and the implications that flow
therefrom, are extremely important in interpreting the statute. See
Dowling v. United States, 473 U.S. 207, 226 (1985) (holding that the
"broad consequences of the Government's theory" of statutory liability
"provide a final and dispositive factor against reading [the statute] in
the manner suggested"). The practical effects of the Government's
conception of MSP liability would transform that statute, meant primarily
for use against insurers, see Philip Morris, 116 F. Supp.2d at 146 n.
22, into the very
"across-the-board procedural vehicle for suing
tortfeasors," which this Court has already declared impermissible. Id. at
135. Significantly, the Government is unable to provide any logically
consistent way in which this outcome could be averted.
The Government makes one final argument that must be addressed. It
contends that, "should discovery reveal" that Defendants obtained
insurance policies but elected to "pay any liability out of pocket"
(i.e., to make "liability insurance payment[s]" as defined by
42 C.F.R. § 411.50(b)) rather than "claiming against available
insurance coverage," they would also be liable under MSP. See Govt's
Opp'n at 17-18. However, even assuming this theory has merit, nowhere in
its amended complaint does the Government allege that Defendants elected
to make such payments, or that by making such payments, they exposed
themselves to MSP liability. Further, neither in its brief nor in its
complaint does the Government describe the actual circumstances in which
"a tortfeasor that elects to carry its own risk of liability in a lawsuit
rather than to claim against its insurance [would], by that election,
make itself subject to an MSP claim." Id.
Accordingly, for the reasons stated, the MSP Count contained in the
amended complaint will be dismissed.*fn11
For the reasons stated, Defendants' Motion to Dismiss Count Two of the
Amended Complaint is granted and Count Two (the Medicare Secondary Payer
provisions or "MSP" Count) is dismissed with prejudice. The Government
shall not be permitted to bring a cause of action pursuant to MSP.
An appropriate Order will accompany this Opinion.
O R D E R # 72
This matter is before the Court on Defendants' Motion to Dismiss Count
Two of the Amended Complaint [## 272, 277]. Upon consideration of the
Motion, the Opposition, the Reply, and the entire record herein, for the
reasons discussed in the accompanying Memorandum Opinion, it is this
day of July 2001
ORDERED, that Defendants' Motion [## 272, 277] is granted; it is
ORDERED, that Count Two of the Amended Complaint is dismissed with