Baptist Physician v. Humana Military ( 2004 )

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.
1
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v. Humana Military v. Humana Military
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.
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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
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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
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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.
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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
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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.