Temple University Hospital, Inc. v. Healthcare Management Alternatives, Inc.

832 A.2d 501, 2003 Pa. Super. 332, 2003 Pa. Super. LEXIS 2823

• Court: Superior Court of Pennsylvania
• Decided: September 8, 2003
• Status: Published

Opinions

BOWES, J.

¶ 1 Healthcare Management Alternatives, Inc. a/k/a Americhoice of Pennsylvania (“Healthcare”) appeals a judgment in the amount of $4,310,494.34 plus pre-judgment interest entered against it in this action instituted by Temple University Hospital (the “Hospital”).¹ We reverse and remand for a determination of damages in accordance with this adjudication.

¶ 2 This matter has been before us on a prior occasion. See Temple University Hospital, Inc. v. Healthcare Management Alternatives, Inc., 764 A.2d 587, 589-93 (Pa.Super.2000). In that appeal, the Honorable Kate Ford Elliott authored an opinion that comprehensively sets forth the facts necessary for a proper understanding of the matter. We paraphrase those facts as follows.

¶ 3 The Hospital, a teaching hospital, is located in Philadelphia and historically has provided services to individuals who are not able to afford medical care. Most of the Hospital’s patients are eligible for Medicaid benefits from the Pennsylvania Department of Public Welfare (“DPW”). The Commonwealth and the United States Government fund the Medicaid program.

¶ 4 Federal law governing Medicaid programs authorizes states to develop their own Medicaid reimbursement standards and methods of payment for hospital services. However, these standards and methods are subject to federal requirements. These requirements include establishing rates that take into account the situation of hospitals that serve a disproportionately high number of low-income patients. The Hospital historically was entitled to additional Medicaid funds because it served a disproportionately large share of indigent patients. Federal constraints also require states to set rates that are reasonable and adequate to meet the necessary costs of an efficiently-operated hospital and to assure that Medicaid patients have reasonable access to inpatient care.

¶ 5 Under the Pennsylvania Medicaid program, which is known as the Medical Assistance Program (“MAP”), DPW, which operates the MAP, traditionally made payments directly to medical providers on a fee-for-service basis. Until 1984, payments were based on actual costs. In 1984, due to spiraling health care costs, DPW established a method of payment that was dependent upon the diagnosis rather than length of stay or number of services provided during that stay. A relative value was placed on a diagnostic related group (“DRG”), and the DRG determined the payment amount. Thus, the patient’s diagnosis, rather than the actual services provided, became the touchstone for reimbursement. After 1984, the Hospital remained entitled to additional payments since it served a disproportionately high number of indigent patients. Further, in recognition of its status as a teaching hospital, which increased the costs of care, the Hospital received additional payments to defray capital costs.

¶ 6 In the mid-1980s, pursuant to section 1915(b) of the Social Security Act, 42 U.S.C. § 1396(n)(b), Pennsylvania obtained a waiver from some of the federal Medicaid requirements. This section allowed states flexibility, subject to some limitations, in the development of innovative and more efficient programs to provide medical care to indigent people.

¶ 7 Under that waiver provision, DPW initiated an experimental program called “HealthPASS.” HealthPASS required Medicaid recipients in certain sections of southern and eastern Philadelphia to enroll in a managed care program operated by Healthcare, a for-profit corporation. Healthcare contracted with DPW to provide, among other things, inpatient hospital services to persons in the designated region who were eligible for Medicaid benefits. Thereafter, Healthcare entered into contracts with other health care providers, including the Hospital, who agreed to provide medical services due under the DPW contract. These contracts had to be approved by DPW, which then reimbursed Healthcare for services rendered.

¶ 8 On April 1, 1991, the Hospital entered into a contract with Healthcare to provide services to HealthPASS participants. The contract, which remained in effect until June 30,1993 provided that the Hospital would be reimbursed at a rate of 114% of the applicable DRG rate. By its terms, the contract remained in effect until June 30, 1993. During this contract period, the Hospital used forms UB-82 and UB-92 to bill Healthcare. Since Healthcare lacked the software necessary to calculate the amount due, the Hospital would write the amount under the remarks section of those forms as a service to Healthcare.

¶ 9 On April 20, 1993, the Hospital notified Healthcare that it would not extend the contract because the payments it was receiving under the contract were inadequate. Thus, when the contract expired on June 30, 1993, the parties began negotiating a new contract. During the course of the negotiations, which lasted until January 1997, the Hospital continued to provide emergency medical services for HealthPASS participants and continued to bill Healthcare for inpatient treatment using UB-82 and UB-92 forms with handwritten billing amounts posted in the remarks section. By letter dated March 24, 1994, the Hospital advised Healthcare that it intended to collect its published rates while the parties were not under contract; Healthcare countered that it would pay the Hospital at its standard rate for out-of-state hospitals, or $705 per day. At that time, the Hospital’s medical assistance cost-per-day amounted to $1,204.

¶ 10 When the Hospital indicated that the proposed amount was unacceptable, Healthcare represented that it would pay at the 1991 contract rates. The Hospital again rejected this payment arrangement, demanding payment at its published rates.

¶ 11 During the negotiation period, the Hospital sent Healthcare bills reflecting its published rates as well as the hand-posted DRG rate. Healthcare usually paid the DRG rate but on other occasions, it paid the $705 per diem rate that it set for out-of-area non-contracting providers.

¶ 12 The Hospital instituted this action in December 1997 seeking to recover the difference between published charges and the amount actually paid by Healthcare. After a nonjury trial, the trial court found an implied contract in favor of Healthcare at the 1991 contract rates. The trial court concluded that the Hospital evidenced its intent to accept Healthcare’s offer to continue the terms of the 1991 contract when it continued to hand-post the adjusted DRG rates on its bills to Healthcare. The Hospital appealed and we reversed and remanded, finding that the Hospital’s actions did not manifest assent to an extension of the 1991 contract and therefore no implied contract existed. Id.

¶ 13 Upon remand, the parties jointly moved to present additional evidence. The motion was granted and hearings were held December 10 and December 11, 2001. Robert Lux, the Vice President, Chief Financial Officer, and Treasurer of Temple University Health System testified that the Hospital was paid eighty percent or more of its full published charges only six percent of the time. In other words, ninety-four percent of the time, the Hospital received less than eighty percent of the Hospital’s published rates. Allen Dobson, PhD., Healthcare’s expert economist, offered similar testimony. Dr. Dobson estimated that the Hospital was paid its full published charges only one to three percent of the time. Dr. Dobson also testified that the Hospital’s data established that, in 1994, its full published rates were 172% of its actual costs and, in 1995 and 1996, the full published charges represented 300% of the Hospital’s costs.

¶ 14 After the hearings, the trial court found in favor of the Hospital, concluding that it was entitled to recover under the doctrine of unjust enrichment. The court awarded the Hospital the difference between what Healthcare had paid, which was approximately two million dollars, and the Hospital’s published rates. Post-trial motions were filed, and a hearing was held. At that hearing, the court stated that it did not “care whether [the published rates] are reasonable or unreasonable from a commercial point of view” and that it awarded the published rates because they were “not unconscionable,” and the court was “not shocked by the amount.” N.T., 3/26/02, at 31; see also Trial Court Opinion, 4/10/02, at 12. Healthcare’s post trial motions were denied, and this appeal followed. On appeal Healthcare raises the following issues for our consideration:²

A. The trial court abused its discretion when it denied HMA’s request for post-trial relief and awarded Temple its full published charges on a quasi-contract theory where Temple did not meet its burden of proving that HMA had been unjustly enriched.

B. The trial court committed an error of law when it denied HMA’s request for post-trial relief and awarded Temple its full published charges based on its finding that those charges were “not unconscionable” instead of determining the reasonable value of the services provided by Temple as required by Pennsylvania law.

C. The trial court abused its discretion when it denied HMA’s request for post-trial relief and awarded Temple its full published charges although the court acknowledged that those charges were “commercially unreasonable.”

D. The trial court abused its discretion to the extent it relied on a theory of estoppel in awarding Temple its full published charges where there was no record evidence of detrimental reliance by Temple.

Appellant’s brief at i-ii.

¶ 15 Initially, we reiterate our standard of review of a decision rendered by a court sitting in equity. The findings of fact of the equity court will not be disturbed unless they are not supported by the evidence or are demonstrably capricious; however, we may reverse if the equity court committed an error of law or abused its discretion. Daddona v. Thorpe, 749 A.2d 475 (Pa.Super.2000).

¶ 16 Healthcare first contends that the Hospital did not establish the elements of unjust enrichment because Healthcare paid approximately two million dollars for the services rendered. When there is no express contract between the parties, a plaintiff may still recover under a quasi-contract theory. In this situation, a contract is implied by the law:

A quasi-contract imposes a duty, not as a result of any agreement, whether express or implied, but in spite of the absence of an agreement, when one party receives unjust enrichment at the expense of another. In determining if the doctrine applies, we focus not on the intention of the parties, but rather on whether the defendant has been unjustly enriched. The elements of unjust enrichment are benefits conferred on defendant by plaintiff, appreciation of such benefits by defendant, and acceptance and retention of such benefits under such circumstances that it would be inequitable for defendant to retain the benefit without payment of value. The most significant element of the doctrine is whether the enrichment of the defendant is unjust; the doctrine does not apply simply because the defendant may have benefited as a result of the actions of the plaintiff. Where unjust enrichment is found, the law implies a quasi-contract which requires the defendant to pay to plaintiff the value of the benefit conferred. In other words, the defendant makes restitution to the plaintiff in quantum meruit.

AmeriPro Search Inc. v. Fleming Steel Co., 787 A.2d 988 (Pa.Super.2001) (citations omitted).

¶ 17 Healthcare argues that since the Hospital did not receive a benefit without being paid some value, the elements of unjust enrichment are not present. We disagree. Under the recited principles, we must focus on whether Healthcare has been unjustly enriched and a benefit conferred on it under circumstances that make it inequitable for it to retain the benefit without additional payment. We believe the circumstances herein compel a finding that unjust enrichment has occurred. In reaching this conclusion, we note that the Hospital was compelled under federal law to provide services to individuals covered under the HealthPass program; conversely, Healthcare did not have the ability to prevent its members from seeking emergency treatment at the Hospital. As a result, the parties virtually were compelled to operate in this manner; equitable principles are therefore particularly appropriate to apply.

¶ 18 Healthcare maintains that it adequately compensated the Hospital for services provided during the negotiation period. We disagree. Dr. Dobson testified that Medicaid covered only eighty to eighty-three percent of the costs incurred by hospitals that treat indigent patients. Thus, Healthcare retained a benefit in this instance because it did not pay reasonable value for the services rendered. Accordingly, we find that all of the elements of unjust enrichment were established, see River Park Hospital, Inc. v. BlueCross BlueShield of Tennessee, Inc., 2002 WL 31302926 (Tenn.Ct.App.2002) (finding that doctrine of unjust enrichment was applicable where parties were operating under same circumstances presented herein), and that Healthcare’s payment of two million dollars did not render the doctrine inapplicable. If we adopted Healthcare’s position, entities like Healthcare could pay a fraction of the value of the benefit supplied by health care providers who treat Medicaid recipients and successfully argue that the doctrine of unjust enrichment was not applicable. The very thought of permitting such a result is absurd; payment of less than actual costs in unreasonable and thus, inequitable.

¶ 19 We now address Healthcare’s three final contentions, which can be distilled into one essential point: that the trial court did not apply the applicable law in rendering its decision. Healthcare argues that the trial court, rather than determining the reasonable value of the services provided, improperly focused on whether the Hospital’s published rates were unconscionable or shocking. We agree. The court erred in awarding the Hospital an amount it deemed to be commercially unreasonable based on its determination that the amount requested was not unconscionable and did not shock its conscience. The decision to award the Hospital its published rates is both inequitable in light of the facts of this case and unwarranted under governing legal principles.

¶ 20 Unjust enrichment is an equitable doctrine, and when unjust enrichment is present, the law implies the existence of a contract requiring the defendant to pay to the plaintiff the reasonable value of the benefit conferred. Mitchell v. Moore, 729 A.2d 1200 (Pa.Super.1999). The crux of our disagreement with the trial court is its determination regarding the value of the benefit conferred. Herein, the trial court improperly focused on the conscionability of the published rates rather than determining whether the published rates were commercially reasonable.

¶21 Utilization of the published rates ignores the equities in this case, as well as the realities of the current state of the health care industry and the impact of that reality on the relevant law regarding value conferred in the context of the doctrine of unjust enrichment. First, the importance of the manner in which these two parties were required to operate cannot be ignored. The Hospital was servicing patients because it was required to do so under federal law, and Healthcare could not prevent people covered by its program from going to the Hospital for treatment. Since both parties were legally required to act as they did, commensurately, neither party should be provided a windfall, which is the result reached by the trial court.

¶22 Where, as here, there is no express agreement to pay, the law implies a promise to pay a reasonable fee for a health provider’s services. Eagle v. Snyder, 412 Pa.Super. 557, 604 A.2d 253 (1992). Thus, in a situation such as this, the defendant should pay for what the services are ordinarily worth in the community. Id. Services are worth what people ordinarily pay for them. Id. Whether the amount charged is unconscionable and whether it shocks the conscience is irrelevant.

¶ 23 While the Hospital’s published rates for services may be the same or less than rates at other Philadelphia hospitals, the more important question is what healthcare providers actually receive for those services. As Mr. Lux readily admitted, the Hospital rarely recovers its published rates. Therefore, those rates cannot be considered the value of the benefit conferred because that is not what people in the community ordinarily pay for medical services.

¶24 As noted, Mr. Lux testified that ninety-four percent of the time, the Temple University Health System received eighty percent or less of its full published charges. Healthcare’s expert economist, Dr. Dobson, testified similarly. He stated that the Hospital was paid its full published charges in only one to three percent of its cases. Courts have also recognized this discrepancy between amounts billed and amounts received under Medicare. See, e.g., Vencor Inc. v. National States Insurance Co., 303 F.3d 1024, 1029 n. 9 (9th Cir.2002) (“It is worth noting that in a world in which patients are covered by Medicare and various other kinds of medical insurance schemes that negotiate rates with providers, providers’ supposed ordinary or standard rates may be paid by a small minority of patients.”). Dr. Dobson also testified that based on the Hospital’s data, the full published charges in 1994 were approximately 172% of its actual costs, while in 1995 and 1996, the published rates were approximately 300% of its actual costs. In addition, Dr. Dobson testified that private payors typically paid 121% of the cost of hospital services in 1994, 119% in 1995, and 112% in 1996. Government payors generally pay less. Mr. Lux acknowledged that the Hospital had twelve contracts with commercial insurance companies and that none of those contracts provided for payment at published rates.

¶ 25 The renowned contracts expert, Dr. John E. Murray, Jr., has explained the remedy applicable when one party has been unjustly enriched at the expense of the other, stating, “To avoid unjust enrichment, the law permits the party who has conferred the benefit to recover the reasonable value of the benefit. Through this action, he is restored to status quo, ie., he is placed in the position he would have been in if there had been no unjust enrichment.” John Edward Murray, Jr., Murray on Contracts § 19, 35 (3rd ed.1990). Since the Hospital would not have been able to recover its published rates from the HealthPASS patients who received medical treatment during the relevant time frame if they were not covered by Healthcare, the trial court’s resolution was improper because it failed to restore the status quo.

¶ 26 Instead, the Hospital is placed in an immensely better position than it would have been had the services been performed for the majority of its other patients; in fact, it has been awarded a windfall. Under the law, the Hospital is entitled to the reasonable value of its services, i.e., what people pay for those services, not what the Hospital receives in one to three percent of its cases. Accordingly, the damage award in this unjust enrichment action simply is unwarranted.

¶ 27 In light of the applicable law, the Hospital should be awarded its average collection rate for each year in question. This value would be reasonable. See River Park Hospital Inc., supra (health care provider was awarded the reasonable value of its services, not its published rates, when the health care provider and the payor were operating under circumstances similar to those presented herein).

¶ 28 Furthermore, in light of the facts of this case, we agree with Healthcare’s position that the trial court’s utilization of an estoppel analysis in awarding the published rates was improper. The trial court indicated that its award was appropriate because the “defendant, knowing it would be charged at retail rate did nothing to control this cost by seeking relief.” Trial Court Opinion, 4/10/02, at 8. We reiterate that the Hospital was servicing patients because it was required to do so under applicable law, and Healthcare could not prevent people in its program from seeking services at the Hospital. Since both parties were forced to operate as they did, the court’s estoppel analysis was wholly inappropriate.

¶ 29 The Hospital’s response to Healthcare’s argument hinges primarily upon the manner in which it calculated its published rates, which were designed to offset the shortfall caused by its federal mandate to treat indigent patients. It also focused on how the reduction in published rates were negotiated by health insurers. We acknowledge the factual honesty of its position but note that these facts are not relevant in this case. The law of unjust enrichment, the theory upon which the Hospital rests its right of recovery, does not take these extraneous factors into account. The law permits an award of reasonable fees. Healthcare should not be required to compensate the Hospital for losses incurred as a result of federal requirements and the Hospital’s own negotiations with insurers. If the Hospital recovers its published rates in only one to three percent of its cases, those rates clearly do not reflect the amount that members of the community ordinarily pay for medical services.

¶ 30 Alternatively, the Hospital argues that the trial court’s holding is not rooted in unjust enrichment but is a third party beneficiary analysis. In support of this claim, it points to language in the trial court’s opinion which suggests that the Hospital is a third party beneficiary of the contract between Healthcare and DPW which provided that Healthcare would pay for medical services rendered to its patients. However, conspicuously absent from the contract between Healthcare and DPW is any payment term. The Hospital does not cite any language in the contract between the Commonwealth and Healthcare requiring Healthcare to pay the Hospital’s full published rates.

¶ 31 Ironically, the Hospital presently asserts that Healthcare’s approach in this action inappropriately requires the courts to function as rate-setting agencies, suggesting that its rates should prevail. Meanwhile, the Hospital instituted this common law action seeking recovery under contractual theories. We determined in the prior appeal that the evidence did not support the existence of an express contract in this case. Thus, the Hospital can recover in this action only under a quasi-contract theory of unjust enrichment. Unjust enrichment permits recovery of the reasonable value of a given service. The Hospital, as plaintiff, has the burden of proving damages to a reasonable degree of certainty in this action. Spang & Co. v. United States Steel Corp., 519 Pa. 14, 545 A.2d 861 (1988). Hence, the Hospital is asking us to become a rate-setting agency, not Healthcare.

¶ 32 The Hospital’s contention that it can unilaterally set a price for its services that bears no relationship to the amount typically paid for those service is untenable. Both parties maintain that they are entitled to pay or collect an amount that they subjectively believe to be appropriate and assert that we are bound to accept that amount. We, as an appellate court, are required to apply the law. In the absence of an express contract, the law requires the payment of reasonable value. Reasonable value is what someone normally receives for a given service in the ordinary course of its business from the community that it serves. Eagle, supra.

¶ 33 In accordance with the foregoing, we remand for a hearing so that the Hospital can establish the reasonable value of its services. Reasonable value, in accordance with the above-cited case law, is the value paid by the relevant community. The relevant community in this case comprises the Hospital’s patients who are covered by insurance policies and federal programs. Thus, the Hospital should be awarded the average charge for the services at issue contained in contracts with governmental agencies and insurance companies.

¶ 34 Judgment reversed. Case remanded for proceedings consistent with this adjudication. Jurisdiction relinquished.

¶ 35 Judge Tamilia files a Dissenting Opinion.

1 . Having determined that the majority of the original record was misplaced prior to the time for filing the certified record with this Court, this Court questioned the parties at oral argument with respect to the missing record. Conceding that the original record was lost and choosing not to have the trial court reconstruct the original record, the parties agreed to this Court’s reliance upon the documents contained within the Reproduced Record for purposes of this appeal. Accordingly, the certified record in this case shall be comprised of the following: the small portion of the original record filed with this Court (Part I) and Volumes 1-4 of the Reproduced Record (now, Parts II-V of the certified record).

2 . DPW has filed an amicus curiae brief in support of Healthcare. In that brief, DPW has raised issues that were not raised by Healthcare. These contentions are not properly before us for resolution. “An amicus curiae is not a party and cannot raise issues that have not been raised or preserved by the parties. See Pa. R.A.P. 531(a) (amicus curiae may file brief regarding only those questions that are before the Court).” Commonwealth v. Tharp, 562 Pa. 231, 236 n. 5, 754 A.2d 1251, 1254 n. 5 (2000).