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Compliance October 5, 2009
Court Dismisses Stock-Drop Case against Humana
A district court has dismissed claims by retirement plan participants that Humana officials violated their fiduciary duties by holding plan assets in company stock after mistakes made in pricing Medicare Prescription Drug Plans led to decreased company earnings.
Reported by Rebecca Moore
In his opinion, Judge John G. Heyburn, II, of the U.S. District Court for the Western District of Kentucky said defendants were following the plan’s explicit terms by investing plan assets in Humana stock, and that the “allegations do not suggest anything more than poor judgment on the part of the fiduciaries who relied on well-reasoned and researched advice in determining the earnings projections.”
According to Heyburn, the plaintiffs did not provide facts to support the allegations that a fiduciary would have discovered the problems with the PDP premiums and the projected earnings. The court said that in hindsight, there was no doubt the calculations were erroneous, and the plaintiffs may even be able to prove that some employees made mistakes, but that does not mean that defendants, who relied on third parties, should have recognized these mistakes. The plaintiffs did not allege that the defendants themselves actually made the mistakes, but blamed the mistakes on “internal control problems” and “old software.”
Heyburn noted in his opinion that the process of making projections and setting prices is a complex one. Humana uses a variety of projections and actuarial data to determine the amount of co-payment for each drug tier. Its Pharmacy Business Unit negotiated prescription prices with pharmacy chains. That PB Unit gathered the relevant actuarial data through its claims-processing software, and then sent its data to Argus Health Systems, an independent company that acted as the middle man between Humana and the pharmacies, to determine the appropriate price for each category of prescriptions.
The plaintiffs alleged that the PB Unit software was outdated and failed to properly organize and track claims data, and that based on flawed information, Argus set inconsistent prescription prices, and Humana projected earnings per share based on the belief that its Medicare Prescription Drug Plans would positively affect the next fiscal year. However, that didn’t happen, and adjusted earnings numbers were announced in a press release and in a conference call with analysts, after which Humana’s stock immediately dropped about 14%.
The incorrect projections also resulted in a direct loss to the company of more than $300 million represented by the shift of drug costs to Humana, new higher-cost members who joined the Humana plan to take advantage of the lowered co-pays, and the ratio of low income customers to low cost costumers.
The case is Benitez v. Humana Inc., W.D. Ky., No. 3:08CV-211-H, 9/30/09.