Baptist Physician v. Humana Military

• Court: Court of Appeals for the Sixth Circuit
• Decided: May 25, 2004
• Docket: 03-5084
• Status: Published

Opinion

RECOMMENDED FOR FULL-TEXT PUBLICATION Pursuant to Sixth Circuit Rule 206 2 Baptist Physician, et al. No. 03-5084 ELECTRONIC CITATION: 2004 FED App. 0152P (6th Cir.) v. Humana Military File Name: 04a0152p.06 _________________ UNITED STATES COURT OF APPEALS COUNSEL FOR THE SIXTH CIRCUIT ARGUED: Reuben N. Pelot IV, EGERTON, McAFEE, _________________ ARMISTEAD & DAVIS, Knoxville, Tennessee, for Appellants. J. Bruce Miller, J. BRUCE MILLER LAW BAPTIST PHYSICIAN HOSPITAL X GROUP, Louisville, Kentucky, for Appellee. ON BRIEF: ORGANIZATION , INC.; - Reuben N. Pelot IV, Cheryl G. Rice, EGERTON, McAFEE, BAPTIST HOSPITAL OF EAST - ARMISTEAD & DAVIS, Knoxville, Tennessee, for - No. 03-5084 Appellants. J. Bruce Miller, Michael J. Kitchen, J. BRUCE TENNESSEE, - MILLER LAW GROUP, Louisville, Kentucky, for Appellee. Plaintiffs-Appellants, > , _________________ - v. - OPINION - _________________ HUMANA MILITARY - HEALTHCARE SERVICES, INC., - MERRITT, Circuit Judge. In this diversity contract action Defendant-Appellee. - governed by the substantive law of Tennessee, Baptist alleges - that Humana, a private government contractor administering N the managed healthcare program in Regions 3 and 4 for the Department of Defense, underpaid Baptist for eighty-five separate claims for a total underpayment of over $1.3 million. Appeal from the United States District Court The Humana Baptist contract defines a reimbursement for the Eastern District of Tennessee at Knoxville. scheme that is the center of the controversy. Humana has No. 01-00588—Thomas W. Phillips, District Judge. raised a defense to payment based on federal regulations limiting amounts that the government itself will pay to Argued: March 11, 2004 Humana as reimbursement on individual medical claims, and the question is whether these regulations place a limit on the Decided and Filed: May 25, 2004 amount Humana must pay Baptist. On cross-motions for summary judgment, the district court granted summary Before: MERRITT and DAUGHTREY, Circuit Judges; judgment in favor of Humana. We conclude that the federal HOOD, District Judge.* regulations incorporated by reference into the agreement between Baptist and Humana regulate only the amount the government can contract to pay Humana and not the amount * Humana as an independent contractor can promise to pay The Honorable Joseph M. Hood, United States District Judge for the Baptist. Because these regulations do not prohibit the Eastern District of Kentucky, sitting by designation.

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reimbursement provisions in the Baptist-Humana network lower reimbursement rates than those authorized under the provider agreement, we REVERSE. CHAMPUS reimbursement system, with the understanding that in exchange they would see an increase in directed BACKGROUND volume. These discounted rates might be expressed as discounts from the maximum allowable rate under the Pursuant to authority delegated to it by Congress, the CHAMPUS diagnostic grouping system (DRG),1 or as a fixed Department of Defense established the Civilian Health and per diem rate, or as some other agreed-upon rate of Medical Program of the Uniformed Services, called reimbursement. CHAMPUS, in 1967. CHAMPUS beneficiaries include retired armed forces personnel and dependents of both active In the early spring of 1996, Baptist Physician Hospital and retired military personnel. In 1995, the Department of Organization, Inc. and Baptist Hospital of East Tennessee, or Defense established TRICARE, a managed health care more simply “Baptist,” entered into negotiations with program operating as a supplement to CHAMPUS and Humana to become a TRICARE preferred network provider. involving the competitive selection of private contractors to In the course of negotiations, Baptist offered a three-tiered financially underwrite the delivery of health care services system of discounted reimbursement from the CHAMPUS under CHAMPUS. The overall goal of the TRICARE rates depending on the number of other TRICARE providers program is to improve the quality, cost, and accessibility of in the area. On August 6, 1996, the parties entered into a healthcare to the nation’s military through the mechanism of letter-of-agreement by which Humana agreed to the three- a managed care program, and one aspect of the new tiered system, the “Hospital Payment Arrangement,” which TRICARE program was the establishment of “Civilian was expressed as a percentage discount off the CHAMPUS Preferred Provider Networks.” See 32 C.F.R. § 199.17(p). DRG reimbursement rate with a “stop loss” provision (in the TRICARE Management Activity, which was previously italicized language below) consisting of an increased rate of known as Office of CHAMPUS, is the government office payment for certain high-dollar inpatient claims as an charged with the responsibility of administering alternative to a percentage discount from standard TRICARE/CHAMPUS. government rates. The purpose of the stop-loss provision is to reduce the risk of losses to Baptist in large individual cases In January 1996, Humana Military Healthcare Services, that Baptist believed the percentage discount off CHAMPUS Inc. was awarded the TRICARE contract for Regions 3 and DRG rates would create. The contractual provision was 4, which covers seven states and includes the State of expressed as follows: Tennessee. Under the contract, Humana became the managed care support contractor charged with the responsibility of establishing and managing a Civilian Preferred Provider Network throughout the seven state area. Humana established the preferred provider network by entering into contractual 1 Diagnostic related groups (DRG s) are “a method of dividing arrangements with individual CHAMPUS participating hospital patients into clinically coherent groups based on the consumption providers of medical services, one of which was Baptist. of resources.” 32 C.F.R. § 199.2. “Patients are assigned to the groups Broadly speaking, TRICARE preferred network providers based on their principle diagnosis (the reason for admission, determined after study), secondary diagnoses, procedures performed, and the patient’s agreed to accept from a managed care support contractor age, sex, and discharge status.” Id. No. 03-5084 Baptist Physician, et al. 5 6 Baptist Physician, et al. No. 03-5084 v. Humana Military v. Humana Military

Baptist Health System as Exclusive Provider charges the hospital would otherwise charge for the services rendered. Inpatient 20% Discount from CHAMPUS DRG rates; An example illustrates how the “stop loss” provision would Any case with provider charges greater than work. Suppose a certain hospital stay resulted in provider $30,000 reverting to a 45% discount from charges of $77,098, but the maximum CHAMPUS DRG provider charges. reimbursement rate for this particular stay is only $27,755.00. Outpatient Without the stop loss provision, Baptist as the exclusive 30% Discount from CHAMPUS allowables. TRICARE provider under the above agreement would receive $22,204, which represents a 20% discount from the Baptist Health System + 1 Additional Provider CHAMPUS DRG rate and an effective 71% discount from provider charges. Under the stop loss provision, however, Inpatient Baptist would receive $42,404, or a 45% discount from the 20% Discount from CHAMPUS DRG rates; provider charges. In effect, the stop loss provision operates Any case with provider charges greater than to increase the net overall discount for the business associated $25,000 reverting to a 35% discount from with the TRICARE program. provider charges. Outpatient As illustrated above, for certain claims the reimbursement 25% Discount from CHAMPUS allowables. amount calculated as a percentage of provider charges was greater than 100% of the CHAMPUS DRG rate. For each of Baptist Health System + 2 Additional Providers these claims, Humana unilaterally capped the reimbursement amount at 100% of the CHAMPUS DRG rate. After Inpatient discovering in 1998 that Humana was not paying these claims 15% Discount from CHAMPUS DRG rates; in full according to the terms of the stop loss provision, Any case with provider charges greater than Baptist demanded payment of the difference. According to $25,000 reverting to a 30% discount from Baptist, Humana refused to honor the provision, insisting provider charges. instead on renegotiating the contract. Attempts to renegotiate Outpatient were unsuccessful, and Humana exercised its right to 25% Discount from CHAMPUS allowables. terminate the agreement. On December 7, 2001, Baptist filed a one-count complaint alleging breach of contract and seeking (Emphasis added.) Under each tier, Baptist and Humana just over $1 million in damages. On May 1, 2002, Humana agreed to the “stop loss” language which increased filed a motion for summary judgment. On that same day, reimbursement to Baptist when a particular inpatient hospital Baptist filed a motion to amend its complaint to add claims stay exceeded a certain dollar amount. In such cases, the for promissory fraud, promissory estoppel and violations of reimbursement rate would not be a percentage discount off the Tennessee Consumer Protection Act. Baptist moved for the CHAMPUS DRG rate, but rather would “revert” to a partial summary judgment on its breach of contract claim. percentage discount off the provider charges, which are the The district court granted Humana’s motion for summary judgment on the breach of contract claim, and in a separate No. 03-5084 Baptist Physician, et al. 7 8 Baptist Physician, et al. No. 03-5084 v. Humana Military v. Humana Military

opinion and order, dismissed the remaining claims as having purpose of modifying or enlarging or curtailing its terms, but been filed out of time under the applicable limitations periods. to aid in determining’” the contract’s meaning. Hamblen, 656 S.W.2d at 334 (internal quotation marks omitted). Baptist appeals the grant of summary judgment in favor of Humana on the breach of contract claim and the dismissal of Humana does not dispute that, on its face, the stop loss the promissory estoppel claim for failure to file within three clause provides that in the event a particular claim exceeds a years of accrual. We review de novo the district court’s order certain dollar amount, the reimbursement rate reverts to a granting summary judgment de novo, see Peters v. Lincoln discounted amount off billed charges rather than a discount Elec. Co., 285 F.3d 456, 464 (6th Cir. 2002), as well as the off the CHAMPUS DRG rates. Likewise, Humana does not the district court’s order dismissing Baptist’s claim based on dispute that there is no other provision in the agreement on its promissory estoppel, see Valassis Communications v. Aetna face that would indicate that Humana could cap the payments Cas. & Sur. Co., 97 F.3d 870, 873 (6th Cir. 1996). at 100% of CHAMPUS DRG rates despite the express language of the reimbursement provision. Humana argues DISCUSSION that Baptist understood and agreed that payments under the stop loss provision would be capped pursuant to Under Tennessee law, in reviewing a contract for CHAMPUS/TRICARE policies and regulations incorporated ambiguities, the court considers the contract as a whole. by reference into the agreement. Humana asserts that these Williamson County Broad. Co. v. Intermedia Partners, 987 policies and regulations make clear the parties’ agreement S.W.2d 550, 552 (Tenn. Ct. App. 1998); Gredig v. Tennessee that payments made in accordance with the stop loss Farmers Mut. Ins. Co., 891 S.W.2d 909, 912 (Tenn. Ct. App. provision would nevertheless be capped at 100% of 1994). “A contract is ambiguous only when it is of uncertain CHAMPUS DRG allowables. meaning and may fairly be understood in more ways than one. A strained construction may not be placed on the language The district court ruled that “the regulations and federal law used to find ambiguity where none exists.” Farmers-Peoples incorporated by reference into the Agreement by the Provider Bank v. Clemmer, 519 S.W.2d 801, 805 (Tenn. 1975). Handbook prohibit payments in excess of the maximum However, “[a] contract is not rendered ambiguous simply DRG,” and that as a CHAMPUS provider bound by the because the parties disagree as to the interpretation of one or regulations, Baptist “agreed to accept the CHAMPUS- more of its provisions.” International Flight Ctr. v. City of determined allowable as payment in full for its services Murfreesboro, 45 S.W.3d 565, 570 n.5 (Tenn. Ct. App. 2000). provided to CHAMPUS beneficiaries when the ‘Stop Loss’ Interpretation of an unambiguous contract is a question of law provision proved inapplicable.” for the court to decide. Hamblen County v. City of Morristown, 656 S.W.2d 331, 335-36 (Tenn. 1983). “Where Paragraph C of the provider agreement between Baptist and a contract is clear and unambiguous, parties’ intentions are to Humana states: be determined from the four corners of the contract.” Bokor v. Holder, 722 S.W.2d 676, 679 (Tenn. Ct. App. 1986). Even [Provider] agrees to abide by all quality assurance, when the agreement is unambiguous, however, the court may utilization review, credentialing, grievance, and other “‘consider the situation of the parties and the accompanying policies and procedures as are established and revised by circumstances at the time it was entered into – not for the Humana, and as applicable to CHAMPUS. Such No. 03-5084 Baptist Physician, et al. 9 10 Baptist Physician, et al. No. 03-5084 v. Humana Military v. Humana Military

CHAMPUS policies and procedures are set forth in the The regulations governing the CHAMPUS program in Provider Handbook which is hereby incorporated by general are set forth in 32 C.F.R. part 199. Reimbursement reference and made part of this Interim Agreement. methods and rates for the CHAMPUS program are set forth at 32 C.F.R. § 199.14. The CHAMPUS DRG-based system We agree with the district court that, through the operation of is based on maximum allowable rates and lists diagnoses for Paragraph C, the entire Provider Handbook is incorporated by which a fixed fee rate is set by the government for inpatient reference into the agreement. care. See 32 C.F.R. § 199.14(a)(1). The groupings used are the same as those used in the Medicare Prospective Payment Section 5.4.3 of the Handbook, entitled “TRICARE System. See id. § 199.14(a)(1)(i)(A). In order to participate Payment,” states: in the CHAMPUS program, a CHAMPUS provider must agree “to accept the CHAMPUS-determined allowable PROVIDERS WILL ACCEPT THE TRICARE payment amount as payment in full for medical services and supplies as payment in full for services rendered, not counting the provided to the CHAMPUS beneficiary.” Id. § 199.6(a)(8). applicable deductible, co-payment or cost share to be collected from the beneficiary. This payment will be the According to special rules and procedures adopted for lower of the TRICARE discounted fee or your normal TRICARE, the reimbursement system for the TRICARE charge. Providers accepting the TRICARE payment managed care system can deviate from the CHAMPUS cannot use balance billing to beneficiaries for any reimbursement system. See 32 C.F.R. § 199.17(p)(6). In the amount that exceeds the TRICARE payment. event of conflict between the special TRICARE rules set forth in § 199.17 and those rules generally applicable to The term “TRICARE discounted fee” is not defined in the CHAMPUS, the specific TRICARE rules take precedence. Handbook. According to Baptist, it could reasonably Id. § 199.17(a)(4). The special rule relating to reimbursement interpret “TRICARE discounted fee” to mean a payment to TRICARE network providers states: made pursuant to the stop loss provision because such payment is in fact based on a discounted fee pursuant to a Special reimbursement methods for network providers. TRICARE provider agreement. In response, Humana sets out The Director, [Office of CHAMPUS], may establish, for a lengthy recitation of parol evidence relating to the parties’ preferred provider networks, reimbursement rates and disputed “understandings” during negotiations, concluding methods different from those established pursuant to with an apparent reference to section 1.0 of the Handbook. § 199.14. Such provisions may be expressed in terms of That section specifies that in the event of a conflict between percentage discounts off CHAMPUS allowable amounts, the agreement, the handbook and the regulations, the or in other terms. In circumstances in which payments regulations control. Setting aside the parol evidence for the are based on hospital-specific rates (or other rates moment, we turn to the regulations to determine whether the specific to particular institutional providers), special terms of the agreement itself evidence the parties’ agreement reimbursement methods may permit payments based on that payments made under the stop loss provision would be discounts off national or regional prevailing payment capped at the maximum government CHAMPUS DRG rate. levels, even if higher than particular institution-specific payment rates. No. 03-5084 Baptist Physician, et al. 11 12 Baptist Physician, et al. No. 03-5084 v. Humana Military v. Humana Military

Id. § 199.17(p)(6). Administrative rulemaking history not restricted to: negotiated or discounted fee schedules; indicates that the intent of subsection (p)(6) is to provide usual and customary fees; salary; flat fee; global or regional managed care contractors the flexibility to negotiate profit/risk sharing arrangements for noninstitutional reimbursement methods that vary from the payment providers; and per diems and capitation payments for provisions established by regulation: institutional providers. Regarding the suggestion that we provide additional (J.A. at 323.) On September 19, 2000 the Office of the specificity concerning the special reimbursement Assistant Secretary of Defense, Health Affairs issued a methods for network providers, we do not agree that “Memorandum for Regions 3/4 Contract Administrator” in additional specifics should be provided. The rule response to Humana’s letter requesting clarification that all provides added flexibility to vary payment provisions claims payments for individual services are subject to from those established by regulation, to accommodate maximum payment methodology: local market conditions. To attempt to specify in advance the possible reimbursement approaches would defeat our Humana is correct in stating Chapter 13, Section 1.1, purpose of providing a flexible mechanism. We also Paragraph IIB of the TRICARE/CHAMPUS Policy disagree that network rate setting should be the same as Manual can be misleading when read in the absence of under standard CHAMPUS rules; a key aim of managed associated TMA policy. The intent of the statement care programs is to negotiate lower rates of “reimbursement is neither, subject to, nor restricted by” reimbursement with networks of preferred providers. is as Humana states, to allow contractors to pay network providers sums in addition to individual claims payments TRICARE Program, 60 Fed. Reg. 52, 086, 52,094 (Oct. 5, if it is deemed necessary to entice providers into the 1995). network. Health care dollars may not be used to pay amounts in excess of the maximum payment In Chapter 13, section 1.1 of the 1999 methodology set forth by federal law, e.g. DRG, TRICARE/CHAMPUS Policy manual, the Director cites 32 allowable charge, etc., unless approved by the Director C.F.R. § 199.17(p)(6) and answers the question “How are OCHAMPUS. network providers reimbursed under TRICARE?”: (J.A. at 514.) According to this same memorandum, the Network provider reimbursement is neither subject to, policy prohibiting a managed care support contractor from nor restricted by, amounts that would have otherwise using health care dollars to pay sums in excess of government been paid under the standard TRICARE reimbursement allowables would be “clarified” in an “upcoming consolidated methodologies outlined in this chapter (i.e. those manual change.” (Id.) reimbursement methodologies applicable only to non- network providers). Managed Care Support (MCS) We conclude that federal regulations and associated contractors are free to establish alternative TRICARE policies incorporated into the parties’ agreement reimbursement systems that will ensure adequate by reference do not categorically bar an independent managed beneficiary access to quality network providers. These care support contractor, such as Humana, from paying sums alternative reimbursement systems may include, but are in excess of government allowables on certain claims. As No. 03-5084 Baptist Physician, et al. 13 14 Baptist Physician, et al. No. 03-5084 v. Humana Military v. Humana Military

provided by Chapter 13, Section 1.1 of the Policy Manual, the agreed-upon reimbursement amounts by capping those Director has promulgated a general policy that managed care amounts at maximum government allowables. In addressing support contractors are “free to establish alternative various motions to dismiss, including a motion by Humana to reimbursement systems that will ensure adequate beneficiary dismiss on the ground that the United States is 100% liable access to quality network providers.” The “clarifying” Health for any breach of the network provider contracts entered into Affairs memorandum limits that freedom only to the extent by Humana, the court interpreted Humana’s contract with the that, absent approval by the Director of the Office of government and concluded in relevant part: CHAMPUS, “health care dollars” may not be used to pay sums in excess of government allowables. As a result, we The [Managed Care Support] contracts created an need not look beyond the four corners of the agreement to arrangement whereby the contractor (Humana) received determine that, by its terms, the parties agreed that Humana control over a monthly allotment of governmental funds would pay certain high-dollar claims as a percentage discount that the federal government electronically transferred to off provider charges, and that federal law and regulations do the contractor’s bank account. The [Managed Care not prohibit such payments so long as the payments are not Support] contractor has ownership over the funds and made with government “health care dollars.” can distribute those funds to network providers as it sees fit. The contractor cannot pay any claim beyond what Our job of interpretation is aided, and our conclusion federal law allows from the healthcare portion of the reinforced, by a reimbursement provision in the contract allotment; however, the contractor is permitted to pay between Humana and the Department of Defense, as well as network providers beyond the Government’s allowed by a recent district court decision examining the relationship amounts. If the contractor chooses to do so, then any between TRICARE managed care support contractors, such overage is paid for out of the contractor’s administrative as Humana, and the Department of Defense. Section C-5, portion of the allotment, which results in less profit to the j.(2) of the DoD-Humana contract, which was made part of contractor. the appellate record through a supplemental filing pursuant to Fed. R. App. P. 28(j), specifies: “All claims payments for Bay Med. Ctr v. Humana Military Health Care Servs., No. individual services (whether in-system or out-of-system) are 5:03-cv-144/MCR (N.D. Fla. Mar. 16, 2004) (denying, inter subject to the maximum payment methodology set forth by alia, Humana’s motion to dismiss for lack of subject matter federal law . . . . The contractor may pay network providers jurisdiction on the ground that Humana is the real party in (on an annual basis or other arrangement) sums in addition to interest for the breach of contract claim) (emphasis added). individual claims payments if it is deemed necessary to entice The reimbursement provision cited above, along with the providers into the network.” (Appellee’s Response to Supp. Florida district court’s rejection of Humana’s argument that Filing, Ex. 2.) This provision, which aids in the interpretation any liability for its breach of a provider contract is directly of the Humana-Baptist contract, was not disclosed by chargeable to the Treasury, serve to refute Humana’s Humana in the trial court. assertion in this case that payments made in excess of CHAMPUS allowables would ultimately come out of the In a case filed in a Florida district court, the plaintiffs, a pockets of taxpayers. group of institutional providers of outpatient non-surgical services, allege that Humana breached its agreement to pay No. 03-5084 Baptist Physician, et al. 15 v. Humana Military

Humana proposes that, in the event the Court concludes that the stop loss provision is not subject to a regulatory cap based on government allowables, the Court should nevertheless affirm the grant of summary judgment in its favor on the ground that Baptist waived its claims. This issue was pretermitted below by the district court’s decision and is more appropriately decided by the district court in the first instance. Finally, we need not reach the question whether the district court erred in dismissing Baptist’s promissory estoppel claim as untimely filed. As Baptist explains, its promissory estoppel claim is brought as an alternative to its breach of contract claim should this Court conclude that the terms of the agreement pertaining to the stop loss provision are unenforceable or invalid. (See Reply Br. of Appellant at 26.) CONCLUSION For the foregoing reasons, the order of the district court granting Humana’s motion for summary judgment to Humana is REVERSED. This matter is REMANDED to the district court for proceedings not inconsistent with this opinion.