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Lawsuit Against Oregon Health Authority Runs Up $23.4 Million Legal Tab

FamilyCare’s seven-year battle against the state agency has generated massive legal bills for both sides, and there is no end in sight.
The building on Southwest Broadway in Portland that housed FamilyCare's corporate offices. | EMILY GREEN/THE LUND REPORT
October 8, 2021

Years ago, the prominent Oregon Medicaid insurer FamilyCare drew rapt attention from Oregon’s health care industry when it alleged that the state was using defective data to underpay it for insuring 120,000 Medicaid members. 

But now, with FamilyCare largely defunct and nearly four years out of the Medicaid business, the lawsuit has become so old that it has been widely forgotten.

Yet it grinds on unresolved, creating massive legal bills for both sides and generating hundreds of documents that cram the federal court system’s docket.

Key to the lawsuit’s longevity: FamilyCare has plenty of money to press its case. Over its decades as a Medicaid insurer, FamilyCare accumulated big reserves that now total over $100 million.

Since it began filing lawsuits against Oregon Health Authority seven years ago, the nonprofit said it has spent more than $16 million on attorney fees for lawsuits alleging the Oregon Health Authority underpaid it.

In response, the state has spent $7.5 million on law firms defending itself in federal court, including for senior law firm attorneys who charge the state $495 an hour, state records obtained by The Lund Report show.

In its duration and attorney costs, the dispute may rank among the hardest fought lawsuits the state has faced in recent years.

And no end is in sight. A tentative trial date has been set for April in U.S. District Court in Portland — and preparation for it will likely drive costs up further.

FamilyCare has not considered dropping the lawsuit, the nonprofit told The Lund Report.

“The purpose of the lawsuit is to expose how the OHA conducted its business with FamilyCare,” FamilyCare spokesman Art Suchorzewski said. “The purpose of this litigation is accountability.”

Nor has the nonprofit, which now has a staff of just four people and runs no health care programs, considered donating its reserves to the state to help fund Oregon’s Medicaid program, the nonprofit told The Lund Report in response to questions. 

“Since the beginning of the managed care model, the managed care companies have been told (by the state) that if they make money, they can keep it, and if they lose money, it comes out of reserves. There is no provision or requirement on any (Medicaid insurer) to return profits made” to the state, Suchorzewski said.

Oregon lawmakers tried to put safeguards on CCO reserves in 2017, but the bill died in committee.

That push followed the 2016 sale by the owners of a for-profit Lane County Medicaid insurer, Trillium Community Health Plan, to for-profit Centene Corp. for $109 million. The sale included the business and $41 million in reserves that Trillium had accumulated from its Medicaid work.

FamilyCare is seeking $125 million in damages for the OHA’s alleged breaches of contract and failure to act fairly and in good faith.

The nonprofit said it will eventually distribute its assets, including any damages awarded by a jury, to charities.

The state has insistently denied FamilyCare’s claims, fighting back against what it calls FamilyCare’s “staggering” claim for $125 million. It argued OHA’s payment calculations were legal and appropriate. In filings, the state claimed OHA had a legal right to set payment rates annually for FamilyCare and that those rates were approved by the federal Centers for Medicare and Medicaid Services, the main funder of the state’s Medicaid program. Every year, at rate re-set time, if FamilyCare didn’t like the offered rates, it could quit the work — as it did in 2018 — the state said in its filings.

The state agency declined to comment on the lawsuit or the massive tab for lawyers.

In the decades the state has operated its Medicaid program, which pays for health care insurance for low-income residents, disputes have periodically broken out between state administrators and the regional Medicaid insurers that use money from the state to pay the medical bills of members. Insurers have sometimes complained that the state is unfair or heavy-handed, too intent on seeking cost efficiencies.

But those spats have never approached the pitch of FamilyCare’s battle with the agency.

One mark of the hostility: In 2017, Portland Tribune revealed the head of the agency at the time, Lynne Saxton, had orchestrated a smear campaign intended to hurt FamilyCare’s credibility. Saxton resigned soon after and later admitted to deleting public records in a move FamilyCare called an “intentional destruction of relevant evidence” in a court filing. 

Years Of Growth And Profits

A group of doctors founded FamilyCare in 1985 to care for Medicaid patients with money it received from the state.

Under CEO Jeff Heatherington, FamilyCare expanded steadily and became one of the state’s largest Medicaid insurers, also known as coordinated care organizations. By its last full year in business, 2017, it covered 120,000 Medicaid members, mostly in the Portland area, and had 411 employees and revenues of $521 million, according to its annual filing with the Internal Revenue Service. And it had become very wealthy: Its investment portfolio totaled $104 million, the result of salting away profits from the Medicaid work and investing in the stock market over many years. FamilyCare paid its executives well. Heatherington received $520,000 in salary that year.

But from 2014 onward, FamilyCare and Heatherington had been sinking into acrimony with the state, claiming the state was using faulty methods to calculate how much it would pay FamilyCare. The state typically paid FamilyCare and the state’s dozen or more other Medicaid insurers fixed per-member amounts each year, with the insurer keeping any profits and eating any losses. FamilyCare was incensed that the state kept pushing to drop the per-member amounts it was paying FamilyCare.

In 2015, FamilyCare sued the Oregon Health Authority in state court, saying it needed higher payments and was losing money on the amounts the state was paying. The sides settled in 2016. FamilyCare dropped the lawsuit and signed an agreement that said OHA overpaid FamilyCare in 2015 by $29 million, which the state withheld from future payments to FamilyCare. In the settlement, the sides also agreed that the state had wanted to cut the rates it paid to FamilyCare by 19% from 2014 to 2015..

But the following year, FamilyCare sued again in state court, claiming the OHA was still underpaying and forcing the nonprofit to operate in the red.

In 2018, the state set FamilyCare’s reimbursement rate at $377.57 per member per month – compared to $409.75 at Health Share, FamilyCare said.

FamilyCare refused to accept the reduced payment rates, according to the lawsuit. So the nonprofit was terminated as a Medicaid insurer effective the end of January 2018. Its members were transferred to another Medicaid insurer, Health Share of Oregon.

Shortly after, the OHA shifted the lawsuit into federal court, where it has gone from U.S. District Court in Portland to the Ninth Circuit Court of Appeals and back to the Portland federal court.

FamilyCare said its exit hurt workers and members. 

“The following people were harmed: 350 employees who lost their jobs and some 120,000 members who were transferred to Health Share, which did not have the access to assimilate them and whose contracts with providers were more restrictive and paid far less for behavioral health and primary care,” Suchorzewski told The Lund Report.

In public comments submitted to Oregon Health Authority in 2019, providers and social workers lamented the loss of service options and access that followed FamilyCare’s closure.

FamilyCare wound down its business and almost all its workers were gone by the end of 2018, shrinking it to a corporate shell whose main activities are now suing the state and periodically distributing grants to charities.

Executive Compensation

According to its annual filing with the IRS, FamilyCare by 2019 had trimmed down to 13 employees, nine of whom were listed as officers or other key employees.

That year, it paid those nine a total of $3.1 million, including $553,000 to Heatherington and $795,000 to chief operating officer William Murray.

The 2019 filing, the latest available, was filed by FamilyCare this summer.

Many of those payments were severance payments, FamilyCare said.

“Closing the company require(d) a large number of staff and senior staff to oversee the closure. Nearly all FamilyCare executives ended their employment in December 2018, but elected to take severance and incentive pay in 2019. All employees received incentive and/or severance pay in 2018 and 2019,” FamilyCare told The Lund Report.

FamilyCare is now down to four employees: Heatherington, Murray, Suchorzweski and a staff person.

The money FamilyCare accumulated from its Medicaid work is the fuel for the lawsuit.

FamilyCare hit a financial high in 2016, when its net assets — its investment portfolio of $125 million plus cash and other money, minus liabilities — totaled $168 million.

In 2014, FamilyCare created a charitable trust, The Heatherington Foundation for Innovation and Education in Health Care, and began transferring some of its wealth there. The board members of FamilyCare and the foundation are largely identical.

In 2014, FamilyCare shifted $15 million to the foundation to start it up, and in 2018 it shifted another $20 million there. FamilyCare is the sole donor to the foundation.

After these donations, FamilyCare’s stock market investment portfolio remained large.

It’s now worth about $100 million, the nonprofit said.

“Just like any nonprofit, prudent financial management facilitates growth in assets over time,” Suchorzewski said.

FamilyCare and the Heatherington Foundation have donated about $22 million to charities and other nonprofits, and will distribute a further $12 million this month, FamilyCare told The Lund Report.

In the last couple of years, the Heatherington Foundation has spread its largesse widely, including $3 million for Heatherington’s alma mater, Willamette University; $1 million to Lebanon Community Hospital; $1 million to the American Osteopathic Association for student scholarships; and $100,000 to the Oregon Symphony Association; plus donations to community groups around the state. Since 2019, the foundation has donated $200,000 to The Lund Report, which is a nonprofit. The foundation has no say in The Lund Report’s news content or editorial policy, Lund Board President Diane Lund-Muzikant said.

A Ballooning Docket  

In nearly four years of litigation in the federal court system, the FamilyCare and OHA legal teams have exchanged volleys over myriad issues.

These include whether, under contract law, OHA’s Medicaid agreement with FamilyCare was a single five-year contract, or in effect five one-year contracts. FamilyCare said it was a five-year contract that OHA breached. OHA said it was a series of one-year contracts that OHA could re-set each year.

They’ve argued about what, if any, “good faith and fair dealing” requirements OHA was under in its negotiations with FamilyCare. FamilyCare said those contract-related requirements applied, while OHA said they didn’t.

They have fought over whether financial projections used by OHA to set per-member rates for FamilyCare could simply be “actuarially certified,” as OHA believes, or had to meet a stricter “actuarially sound” standard, as FamilyCare asserts.

In pursuing discovery — the process of securing documents from the opposition — each has accused the other of withholding or deleting important internal text messages.

To date, the lawsuit docket in federal court has amassed well over 500 documents, totaling many thousands of pages. These include strings of complaints, amended complaints, answers and motions to dismiss, along with 77 court orders, 131 declarations by various people or entities and 69 exhibits, many of them scores of pages long.

And payments have flowed to lawyers.

Since 2017, FamilyCare has exclusively used Seattle law firm Perkins Coie, for the case. FamilyCare said it has paid that firm about $16 million to date. Prior to the federal case, FamilyCare spent about $1.5 million on other law firms to handle the cases in state court, FamilyCare filings with the IRS indicate.

The state, meanwhile, has thus far paid $6.2 million for a specialty law firm, Markowitz Herbold of Portland, to handle the bulk of the federal case, according to records released to The Lund Report under a public records request. Under that firm’s contract, it charges $495 per hour for partner work, and hourly rates of $369-$315 for associates. The state has approved paying up to $10 million total on Markowitz.

The state has also hired other Portland law firms to handle niche aspects of the case: $322,000 for Cable Huston, $132,000 for Barran Liebman, and $214,000 for Mersereau Shannon. Plus, the Oregon Department of Justice has spent $616,000 worth of its time on the case.

Prior to the federal case, the state spent an unspecified amount defending against FamilyCare’s lawsuits in state court.

You can reach Christian Wihtol at [email protected].