In a landmark case that could have far-reaching implications for the tech and healthcare industries, Practice Fusion, Inc. has filed a complaint against Freedom Specialty Insurance Company. The lawsuit was filed in the Court of Appeal of the State of California, First Appellate District, Division Two on June 21, 2024.
Practice Fusion, a company specializing in electronic health record (EHR) software, is embroiled in a legal battle over the applicability of professional services coverage exclusions in its directors and officers (D&O) liability insurance policies. These policies were issued by multiple insurers including Freedom Specialty Insurance Company. The dispute arose after Practice Fusion entered into a civil settlement with the United States Department of Justice (DOJ), which alleged that the company violated the federal Anti-Kickback Statute by accepting payments from pharmaceutical manufacturers to deploy "Clinical Decision Support" (CDS) alerts designed to boost drug sales.
The DOJ's investigation revealed that between November 2013 and August 2017, Practice Fusion received improper remuneration from pharmaceutical companies. These payments were allegedly made in exchange for embedding CDS alerts within its EHR software to promote specific drugs. According to federal regulations, CDS alerts are intended to provide evidence-based information to support patient care. However, the DOJ contended that these alerts did not always adhere to accepted medical standards and were sometimes crafted to favor certain pharmaceutical products under the guise of unbiased medical advice.
When Practice Fusion sought coverage for its civil settlement under its D&O insurance policies, its insurers denied the claim citing professional services exclusions. The trial court sided with the insurers, granting their motion for summary adjudication on grounds that the claims related to CDS alerts fell under these exclusions. The court concluded that designing and implementing these alerts constituted professional services provided by Practice Fusion under contracts with pharmaceutical companies.
Practice Fusion's appeal challenges this ruling, arguing that it merely sold advertising space within its software rather than providing professional services. However, evidence presented during the trial indicated otherwise. Contracts between Practice Fusion and pharmaceutical companies detailed collaborative efforts in designing CDS alerts tailored to promote specific drugs. These agreements included provisions for technical expertise and narrative depictions of how alerts would appear on healthcare providers' screens.
The settlement with the DOJ required Practice Fusion to pay $118 million plus interest to resolve claims related to both meaningful use certifications and CDS alerts. While only the latter is at issue in this appeal, it underscores significant regulatory scrutiny over how EHR vendors interact with pharmaceutical companies.
Representing Practice Fusion are attorneys from prominent law firms who argue that coding CDS alerts should not be classified as professional services performed for others but rather as part of developing their own software product. On the other hand, judges Miller, Stewart, and Richman upheld that such activities indeed fall within professional service exclusions outlined in D&O policies.