A little HIPAA law has raised big questions in Big Sky country. (AP Photo/Mark Duncan)

A 3-judge panel on the 9th U.S. Circuit Court of Appeals has ruled on a Montana case involving a conflict between the federal Health Insurance Portability and Accountability Act of 1996 (HIPAA) and a Montanta state law known as the “little HIAA law.”

One of the lawyers representing the consumers involved in the case — Dale Fossen et al. vs. Blue Cross and Blue Shield of Montana Inc., a health service corporation (Number 10-36001) – is John Morrison, a former Montana insurance commissioner.

Dale Fossen and other plaintiffs in the case, including two brothers, the brothers’ wives, and a family business, Fossen Brothers Farms, sued Blue Cross and Blue Shield of Montana Inc., Helena, Mont., over whether health insurers operating in Montana can charge different premiums to similarly situated participants on account of factors related to the participants’ health status.

In 2006, Montana Blue said it would increase the Fossens’ premiums by more than 20%. After the Fossens complained to insurance regulators, Montana Blue reduced the increase to 4%, Judge Milan Smith Jr. writes in an opinion discussing the court’s ruling.

In 2008, Montana Blue increased the Fossens’ premiums by more than 40%. The insurer refused to reduce that increase, and the Fossens sued in state court in September 2009.

The Fossens argued that the 40% increase violated a Montana little HIPAA provision that prohibits state-regulated group health plans from taking health status-related factors into account when setting small group rates.

The Fossens also argued that the increase violated the Montana Unfair Trade Practices Act, which prohibits discimination in disability insurance prices. In Montana, a related law defines the term “disability insurance” to include insurance that protects against medical expenses resulting from accident or sickness, Smith says.

In addition, the Fossens said the 40% increase amounted to a breach of their contract with Montana Blue.

Montana Blue moved the case to federal court, arguing that the little HIPAA complaint was preempted by the federal Employee Retirement Income Security Act of 1974 (ERISA) and by federal HIPAA provisions.

A federal district court awarded summary judgment in favor of Montana Blue and declined to consider the state law claims or let the Fossens take the case back to state court.

The 9th Circuit found that the district court was right to exercise jurisdiction over the Fossens’ state HIPAA claims, which could been brought under ERISA Section 502(a).

Because the Fossens’ did not directly ask the court to treat the state HIPAA claim as a federal HIPAA claim, the court need not have taken the trouble to review the state HIPAA claim as a federal HIPAA claim, Smith says.

But the 9th Circuit did grant the Fossens’ request to let them proceed with arguments based on the claim that Montana Blue violated the state unfair insurance practices laws.

The statute is exempt from ERISA preemption of state health benefits laws because it is “plainly directed at insurance companies” and “falls within the insurance savings clause,” Smith says.

“We disagree with Blue Cross’s argument that the unfair insurance practices claim is ‘inextricably interwined’ with the state HIPAA claim and accordingly fails as a matter of law,” Smith says. The state unfair practices law is separate from the state HIPAA law, and claims concerning the law require a separate legal analysis, he says.

Representatives for the Fossens and Montana Blue were not immediately available to comment on the case.