Ethicare Advisors, Inc. v. Nancy G. Atkins in Her Capacity as Commissioner of the Kentucky

• Court: Court of Appeals of Kentucky
• Decided: May 27, 2021
• Docket: 2019 CA 001889
• Status: Unknown

Opinion

RENDERED: MAY 28, 2021; 10:00 A.M. TO BE PUBLISHED

Commonwealth of Kentucky Court of Appeals

NO. 2019-CA-1889-MR

ETHICARE ADVISORS, INC. APPELLANT

APPEAL FROM FRANKLIN CIRCUIT COURT v. HONORABLE PHILLIP J. SHEPHERD, JUDGE ACTION NO. 15-CI-01144

NANCY G. ATKINS, IN HER CAPACITY AS COMMISSIONER OF THE KENTUCKY DEPARTMENT OF INSURANCE AND LIQUIDATOR OF KENTUCKY HEALTH COOPERATIVE, INC. APPELLEE

AND NO. 2020-CA-0024-MR

NANCY G. ATKINS, IN HER CAPACITY AS LIQUIDATOR OF KENTUCKY HEALTH COOPERATIVE, INC. CROSS-APPELLANT CROSS-APPEAL FROM FRANKLIN CIRCUIT COURT v. HONORABLE PHILLIP J. SHEPHERD, JUDGE ACTION NO. 15-CI-01144

ETHICARE ADVISORS, INC. CROSS-APPELLEE

OPINION AFFIRMING IN PART, REVERSING IN PART, AND REMANDING

** ** ** ** **

BEFORE: CLAYTON, CHIEF JUDGE; CALDWELL AND COMBS, JUDGES.

CLAYTON, CHIEF JUDGE: EthiCare Advisors, Inc. (EthiCare) appeals from a

Franklin Circuit Court opinion and order which affirmed in part and reversed in

part the Referee’s proposed findings of fact, conclusions of law and recommended

order pursuant to Kentucky’s Insurers Rehabilitation and Liquidation Law (IRLL),

Kentucky Revised Statutes (KRS) 304.33-010, et seq. EthiCare entered into a

contract to provide services for Kentucky Health Cooperative, Inc. (KYHC), a

private, not-for-profit health maintenance organization. KYHC was subsequently

placed into Rehabilitation and then into Liquidation under the IRLL. The disputed

issues on appeal concern the amount and priority level of EthiCare’s claim against

KYHC’s estate. Nancy G. Atkins, in her capacity as Liquidator of KYHC, has

filed a cross-appeal.

-2- Background

EthiCare reduces the costs of health insurers and cooperatives, such as

KYHC, by negotiating claims settlements on their behalf with healthcare

providers. On April 1, 2015, KYHC and EthiCare entered into a Master Services

Agreement (MSA) under which EthiCare agreed to negotiate claims settlements

for KYHC in exchange for 12.5% of the savings generated by EthiCare’s services.

In its description of EthiCare’s services, the MSA defined “Negotiated Claims

Settlement” as follows:

A signed release between EthiCare Advisors and the healthcare provider which lowers [KYHC’s] reimbursement. Such settlement could be a single patient agreement for one prior date of service, multiple prior dates of services or future dates of service. . . . Our fee for this service is a percentage of savings determined by calculating the difference between the allowable before [EthiCare’s] settlement with the allowable after [EthiCare’s] settlement and multiplying it by our rate.

Elsewhere, the MSA provided:

Negotiated Claims SettlementTM means the settlement of medical claims including a signed release between EthiCare Advisors and the healthcare provider which lowers [KYHC’s] reimbursement. . . . [KYHC] agrees to pay [EthiCare] 12.5% of savings generated by [EthiCare] for out-of-network claims and 12.5% of realized savings generated by [EthiCare] for in-network claims. Savings are calculated by determining the difference between the allowable before [EthiCare’s] settlement with the allowable after [EthiCare’s] settlement.

-3- Several months later, the Commissioner of the Department of

Insurance filed a verified petition for Rehabilitation against KYHC, upon finding

that it was, or was about to become, insolvent. On October 29, 2015, the Franklin

Circuit Court entered an order granting the petition, placed KYHC into

Rehabilitation and appointed the Commissioner as Rehabilitator. The court’s

Rehabilitation order required vendors such as EthiCare to continue complying with

their contracts during the Rehabilitation period, stating that “[a]ll third party

vendor contracts and provider contracts with KYHC shall continue to be

maintained and administered according to the terms of the agreements between

KYHC and the third party vendor or provider, regardless of any prior notice of or

attempt at cancellation, until such time as the Rehabilitator or this Court directs

otherwise, and any action by the parties to the contrary is stayed by entry of this

order[.]”

The Rehabilitator sent a form letter with a copy of the Rehabilitation

order to all KYHC’s service providers, including EthiCare, notifying them of the

Rehabilitation and advising them that the order “specifically requires all third party

vendor contracts to continue to be maintained and administered according to the

terms of the agreements regardless of any prior notice or attempt at cancellation.”

Accordingly, EthiCare continued to provide negotiated settlement services for

-4- KYHC and in December 2015 and January 2016 settled nine claims for which it

submitted invoices totaling $403,600.47.

On January 15, 2016, the circuit court found that KYHC was

insolvent as defined by the IRLL, KRS 304.33-030(18). It entered an order

placing KYHC into Liquidation and appointed the Commissioner as Liquidator.

The Liquidation order authorized the Liquidators “to pay as administrative

expenses, all Special Deputies’ fees, attorneys’ fees, accounting fees, consulting

fees, the fees of other service providers and other administrative expenses in

connection with the Rehabilitation and Liquidation of KYHC from the assets of

KYHC’s estate under the general supervision of this Court.” The Liquidation

order also explained the proof-of-claim process under the IRLL.

At that time, KYHC had not paid EthiCare for the services it had

performed in December 2015 and January 2016 and submitted for payment.

EthiCare filed a timely proof of claim seeking payment in the amount of

$403,600.47 as a Class 1 administration cost pursuant to KRS 304.33-430. Under

the IRLL, this is the category of claims with the highest priority.

The Deputy Liquidator sent a final determination letter on December

14, 2018, which approved EthiCare’s claim in the reduced amount of $188,080.53,

which represents the amount derived from the negotiated claims that KYHC had

actually paid to the providers. Additionally, the Liquidator classified EthiCare’s

-5- claim as a Class 6, rather than Class 1, administrative cost. Class 6 is a residual

classification for “[a]ll other claims including claims of the federal or any state or

local government, not falling within other classes under this section.” KRS

304.33-430(6). This classification significantly reduced the likelihood that

EthiCare’s claim against KYHC would be satisfied.

EthiCare filed an objection to the final determination letter and a

hearing was held before the Referee. The Referee approved the Deputy

Liquidator’s determination that EthiCare’s claims fell within Class 6. Based on his

interpretation of the MSA, however, the Referee disagreed with the reduction of

EthiCare’s claim to only those claims that KYHC had actually paid. The Referee

concluded that “[t]here is no persuasive proof advanced or found in the evidence

that EthiCare’s contractual rights were conditioned by the actual payment by

KYHC of the reduced claims successfully negotiated on its behalf by EthiCare. . . .

EthiCare had done all it was required to do under its agreement – negotiate and

obtain reduced claims from the providers on behalf of KYHC. Having done so,

EthiCare’s own claim should not have been reduced by circumstances beyond its

control.”

Thus, the Referee’s recommended order approved EthiCare’s claim

for the full amount of $403,600.47 and assigned the full amount Class 6 priority.

-6- EthiCare then appealed the Referee’s ruling to the Franklin Circuit

Court, which issued an opinion and order which affirmed the Referee’s holding

that EthiCare had a claim for the full amount of $403,600.47. It reversed the

Referee’s characterization of the entire amount as Class 6, however, instead ruling

that the portion of that amount which was derived from the renegotiated claims that

were actually paid by KYHC, $188,080.53, should be classified as a Class 1

administrative cost. This appeal and cross-appeal followed.

Standard of Review

Resolving this appeal involves the interpretation of the MSA entered

into by EthiCare and KYHC. “[I]n the absence of ambiguity, a written instrument

will be strictly enforced according to its terms, and a court will interpret the

contract’s terms by assigning language its ordinary meaning and without resort to

extrinsic evidence.” Frear v. P.T.A. Industries, Inc., 103 S.W.3d 99, 106 (Ky.

2003) (internal quotation marks and footnote omitted). “Generally, the

interpretation of a contract, including determining whether a contract is

ambiguous, is a question of law for the courts and is subject to de novo review.”

Cantrell Supply, Inc. v. Liberty Mut. Ins. Co., 94 S.W.3d 381, 385 (Ky. App.

2002).

This appeal also involves the interpretation of the provision in the

IRLL which describes and prioritizes the classes of claims for purposes of

-7- distribution from the estate, KRS 304.33-430. This requires us to “first look to the

plain language of the statute to ascertain and give effect to the intent of the General

Assembly.” Barnett v. Central Kentucky Hauling, LLC, 617 S.W.3d 339, 341 (Ky.

2021) (citations and internal quotation marks omitted). “Only if the language is

unclear do we consider the legislatures’ [sic] unspoken intent, the statute’s

purpose, and the broader statutory scheme.” Id. at 341-42. Because “[t]he

interpretation of statutes is a matter of law which we review de novo . . . [w]e

afford no deference to the statutory interpretations of the lower courts.” Blackaby

v. Barnes, 614 S.W.3d 897, 901 (Ky. 2021) (citations and internal quotation marks

omitted).

Analysis

Our analysis requires us to address two questions: first, what is the

total amount of EthiCare’s claim against the KYHC estate; and second, into which

class, or classes, does its claim fall for purposes of priority under the IRLL.

i. The amount of EthiCare’s claim

EthiCare argues that under the unambiguous terms of the MSA, once

EthiCare had signed the negotiated claims settlements with the healthcare

providers, it had done all it was required to do under the MSA in order to be

entitled to its 12.5% share of the full amount of the savings it had negotiated for

KYHC. The Referee and the circuit court agreed that EthiCare is owed the full

-8- amount of $403,600.47 for the services it performed in December 2015 and

January 2016 pursuant to its contract with KYHC, regardless whether or not

KYHC actually paid the underlying claims.

The Commissioner argues that the Liquidator properly reduced the

total amount of EthiCare’s claim from $403,600.47 to $188,080.53, as this lower

amount reflects the reality that KYHC will never fully benefit from the settlements

EthiCare negotiated on its behalf. The Commissioner points out that since the

commencement of the Liquidation on January 15, 2016, KYHC has been

prohibited from paying any claims and consequently cannot meet the prompt

payment requirements of some of the negotiated settlements, and therefore some

providers will not honor these negotiated discounts. They contend that the

Liquidator’s final determination was based upon the value that KYHC may

ultimately receive as a result of EthiCare’s claims settlement services and reflects

the statutory discretion the Liquidator has to make such determinations for the

benefit of policyholders. Essentially, the Commissioner contends it is inequitable

to allow EthiCare the full amount of its claim because KYHC has not realized any

of the negotiated savings and has been prohibited from paying the underlying

claims until the court enters an Order of Distribution.

These concerns may be well founded, but do not alter the amount of

EthiCare’s claim. EthiCare performed its part of the MSA with KYHC and

-9- complied with the directive of the Rehabilitation order in continuing to provide its

services to KHYC during the Rehabilitation period. The amount of EthiCare’s

claim should not be dependent on circumstances beyond its control or on KYHC’s

ability to pay.

ii. The characterization of EthiCare’s claim

KRS 304.33-430 provides eleven classes of claims, in descending

order of priority, that govern the distribution of the Liquidated insurer’s estate.

The parties agree that if EthiCare’s claim does not fall within the first class, it

should be placed in the sixth, “residual” class.

The first class encompasses “administration costs,” which are defined

as follows: “The costs and expenses of administration, including but not limited to

the following: the actual and necessary costs of preserving or recovering the

assets of the insurer; compensation for all services rendered in the liquidation;

any necessary filing fees; the fees and mileage payable to witnesses; and

reasonable attorney’s fees.” KRS 304.33-430(1) (emphasis added). At issue is

whether EthiCare’s claim qualifies as one of the “actual and necessary costs of

preserving or recovering the assets” of KYHC.

The Commissioner argues that no part of EthiCare’s claim qualifies as

a Class 1 administrative expense because this class includes only expenses incurred

during the Liquidation period, whereas these expenses were incurred during the

-10- preceding Rehabilitation period. Although there is no Kentucky case law

addressing this issue, the Commissioner points to case law from other jurisdictions

interpreting identical provisions of state insurance codes. For instance, the

Supreme Court of New Hampshire held that legal services provided by a law firm

prior to the liquidation of a home insurance company did not qualify as

“administration costs” because the statutory text draws a clear distinction between

the period before and after the order to liquidate. In re Liquidation of Home Ins.

Co., 158 N.H. 396, 399, 965 A.2d 1143, 1145 (2009). The Court explained that

the term “administer” (and by extension “administration”) “appears within the

statutory scheme only in relation to authorized activities undertaken in furtherance

of the liquidation. . . . Accordingly, general litigation services rendered and

payable prior to the liquidation do not constitute administration costs.” Id.

(citations omitted).

The Referee rejected EthiCare’s claim on similar grounds, stating that

the statute clearly limits the types of claims that may be characterized as

administration costs to those “actual and necessary” for the administration of the

estate, including costs incurred by the Liquidator in recovering assets of the estate.

The Referee concluded that “[b]ecause EthiCare’s claims all arose prior to the

liquidation, they necessarily could not have been costs related to either the

administration of the liquidation or to preserve the assets of the liquidation estate.”

-11- The Referee held that the priority framework of KRS 304.33-430 does not apply

until there is a Liquidation and does not apply to work performed during the

Rehabilitation period. As the underlying policy justification for his ruling, the

Referee pointed out that many vendors provided services to KYHC pursuant to a

contract, including the pharmacy benefits manager, software vendors, and

healthcare providers, and that these services, while important to KYHC, were not

essential to the operation of the Rehabilitation or Liquidation and cannot be

classified as administrative expenses. The Referee concluded that if EthiCare’s

claim was adjudicated as a Class 1 administrative cost, it would be difficult to

conceive of a claim that would not be a Class 1 administrative cost.

By contrast, the Franklin Circuit Court construed the language of the

definition as not requiring “the actual and necessary costs of preserving or

recovering the assets of the insured” to be incurred during the Liquidation to

qualify as a first priority claim. Because EthiCare’s negotiated claims services

during the Rehabilitation period lowered the outstanding monetary liability of

KYHC and thus preserved KYHC’s assets, the circuit court reasoned that the

claims qualified as an administration cost. The court further held, however, that

only the claims negotiated by EthiCare which KYHC actually paid represented a

benefit to KYHC and therefore only that amount, $188,080.53, qualified as a Class

-12- 1 administrative expense whereas the remainder of the claim fell into the residual

category.

Even if we accept the circuit court’s interpretation of the first category

of claims to include costs incurred during Rehabilitation, administration costs by

definition cannot include the normal, day-to-day expenses associated with a course

of business that would occur regardless of whether a Rehabilitation or Liquidation

was underway. Our interpretation of the phrases in a statute must be logical in

context. Pearce v. University of Louisville, by and through its Board of Trustees,

448 S.W.3d 746, 749 (Ky. 2014). We agree with the Referee that administration

costs must by definition be those “actual and necessary” to the administration of

the estate. EthiCare was required to perform its negotiated claims services for

KYHC under the terms of its MSA. Although the Rehabilitation order specifically

directed vendors to continue providing services to KYHC, it did not thereby

transform EthiCare’s contractually mandated services into a cost of administration.

EthiCare does not point to any section of the MSA which released it from

continuing to perform its services pursuant to the contract in the event of a

Rehabilitation or a Liquidation.

Conclusion

For the foregoing reasons, the opinion and order of the Franklin

Circuit Court is affirmed insofar as it held that the total amount of EthiCare’s claim

-13- against the estate is $403,600.47. Its holding that $188,080.53 of that amount is an

administration cost under KRS 304.33-430(1) is reversed and the matter is

remanded for entry of an order designating the entire amount of $403,600.47 as a

residual claim under KRS 304.33-430(6).

ALL CONCUR.

BRIEFS FOR APPELLANT/ BRIEFS FOR APPELLEE/ CROSS-APPELLEE: CROSS-APPELLANT:

Jonathan D. Goldberg Paul C. Harnice Jan M. West Sarah J. Bishop Mark J. Sandlin Matthew D. Wingate Prospect, Kentucky Frankfort, Kentucky

-14-