Fox Insurance Company, Inc. v. Centers for Medicare and Medic ( 2013 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
FOX INSURANCE COMPANY, INC., No. 11-16286
Plaintiff-Appellant,
D.C. No.
v. 2:10-cv-02154-
RJB
CENTERS FOR MEDICARE AND
MEDICAID SERVICES; UNITED
STATES DEPARTMENT OF HEALTH
AND HUMAN SERVICES; DONALD
BERWICK, Administrator, Centers for
Medicare and Medicaid Services;
KATHLEEN SEBELIUS, Secretary,
United States Department of Health
and Human Services,
Defendants-Appellees.
2 FOX INS. CO. V. CENTERS FOR MEDICARE/MEDICAID
FOX INSURANCE COMPANY No. 11-17890
INCORPORATED,
Plaintiff-Appellant, D.C. No.
2:11-cv-00134-
v. RJB
CENTERS FOR MEDICARE AND
MEDICAID SERVICES; UNITED OPINION
STATES DEPARTMENT OF HEALTH
AND HUMAN SERVICES; DONALD
BERWICK, Administrator, Centers
for Medicare and Medicaid
Services; KATHLEEN SEBELIUS,
Secretary, United States Department
of Health and Human Services,
Defendants-Appellees.
Appeal from the United States District Court
for the District of Arizona
Robert J. Bryan, Senior District Judge, Presiding
Argued and Submitted
November 6, 2012—San Francisco, California
Filed May 14, 2013
Before: Mary M. Schroeder, Andrew J. Kleinfeld,
and Marsha S. Berzon, Circuit Judges.
Opinion by Judge Schroeder
FOX INS. CO. V. CENTERS FOR MEDICARE/MEDICAID 3
SUMMARY*
Medicare
The panel affirmed the district court’s judgments in favor
of the federal government in an action challenging the
government’s immediate termination of a Medicare Part D
services contract with a prescription drug insurance coverage
provider.
The panel held that the Centers for Medicare and
Medicaid Services properly terminated the Medicare Part D
contract with prescription drug insurance provider Fox
Insurance Company, Inc. The panel also affirmed the district
court’s ruling that governing regulations authorized the
government’s demand for immediate repayment of a prorated
share of the funds that had been paid to Fox at the beginning
of March 2010 and that Fox would not utilize after the
contract’s termination on March 9, 2010.
COUNSEL
Steven J. Rosenbaum (argued) and Peter D. Saharko,
Covington & Burling LLP, Washington, D.C., for Plaintiff-
Appellant.
*
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
4 FOX INS. CO. V. CENTERS FOR MEDICARE/MEDICAID
Tony West, Assistant Attorney General, Stuart F. Delery,
Acting Assistant Attorney General, Ann Birmingham Scheel,
Acting United States Attorney, Mark B. Stern and Sarang V.
Damle (argued), Appellate Staff, United States Department
of Justice, Washington, D.C. for Defendants-Appellees.
OPINION
SCHROEDER, Senior Circuit Judge:
These are two appeals stemming from the government’s
immediate termination of a Medicare Part D services contract
with a prescription drug insurance coverage provider,
Plaintiff-Appellant Fox Insurance Company, Inc. The
government terminated the contract in March of 2010 after it
had warned Fox of delays in patients’ access to needed
medication. Fox had frequently delayed and sometimes
completely denied patients’ access to medically necessary
drugs by subjecting its enrollees to improper hurdles, such as
unnecessary tests and invasive medical procedures, as a
condition to receiving their already delayed medications for
serious medical conditions. This misconduct is not now
disputed.
Medicare Part D was enacted in 2003. 42 U.S.C.
§ 1395w-101 et seq. The government administers the
program through the Centers for Medicare and Medicaid
Services, within the Department of Health and Human
Services. This is the first Medicare Part D contract
termination to reach a federal appeals court. The government
acted pursuant to a statutory provision authorizing immediate
termination, without pretermination hearing, upon a finding
that delay would create an “imminent and serious risk” to the
FOX INS. CO. V. CENTERS FOR MEDICARE/MEDICAID 5
health of plan enrollees. 42 U.S.C. § 1395w-27(h)(2).
Following the termination, the government, pursuant to a
related regulation, ordered Fox to immediately repay funds
the government had paid to Fox at the beginning of the month
of March and that were intended to cover the prescription
payments that Fox would have been obligated to make had
the contract remained in effect for the entire month.
42 C.F.R. § 423.509(b)(2)(i) (2008).
After an unsuccessful administrative appeal, Fox filed
actions in the district court for the District of Arizona
challenging both the termination and the order for immediate
repayment. The district court had jurisdiction pursuant to
42 U.S.C. § 405(g), providing for judicial review of Social
Security claims, and made applicable to Medicare provider
disputes by 42 U.S.C. § 1395cc(h)(1). The court granted
summary judgment for the government, holding that the
immediate termination was valid. The district court also
dismissed Fox’s action challenging the order for immediate
repayment, holding that the repayment order was authorized
by the controlling regulations and rejecting Fox’s contention
that it was entitled to retain the funds pending a year-end
reconciliation of all of the obligations between the parties.
In an earlier Fox appeal, without expressing any views on
the merits, we affirmed the denial of a preliminary injunction
to reinstate the contract. Fox Ins. Co. v. Ctrs. for Medicare
& Medicaid Servs., 439 F. App’x 651 (9th Cir. 2011). We
now affirm on the merits the district court’s holding that the
contract was properly terminated. We also affirm its ruling
that governing regulations authorized the government’s
demand for immediate repayment of a prorated share of the
funds that had been paid to Fox at the beginning of the month
and that Fox would not utilize after the contract’s termination
6 FOX INS. CO. V. CENTERS FOR MEDICARE/MEDICAID
March 9, 2010. The government’s actions were more than
justified, as Fox had risked permanent damage to its enrollees
by, inter alia, improperly denying coverage of critical HIV,
cancer, and seizure medications, and having no compliance
structure in place.
BACKGROUND
Title XVIII of the Social Security Act, known as the
Medicare Act, establishes a federally subsidized health
insurance program for the elderly and disabled. 42 U.S.C.
§ 1395 et seq. The Centers for Medicare and Medicaid
Services (“CMS”), a component of the Department of Health
and Human Services, administers the Medicare program.
Medicare Part D provides prescription drug coverage through
voluntary enrollment in plans offered by private insurers.
42 U.S.C. § 1395w-101(a). CMS contracts with insurance
company plan sponsors to offer drug plans to Medicare
beneficiaries. 42 U.S.C. § 1395w-112. These contracts
incorporate the requirements of Medicare Part D. Under the
statute, CMS is authorized to terminate a contract if the plan
sponsor “has failed substantially to carry out the contract; is
carrying out the contract in a manner inconsistent with the
efficient and effective administration of this part; or no longer
substantially meets the applicable conditions of this part.”
42 U.S.C. § 1395w-27(c)(2) (incorporated into Medicare Part
D by 42 U.S.C. § 1395w-112(b)(3)(B)); 42 C.F.R.
§ 423.509(a) (2008).
The Act has two provisions concerning terminations.
With respect to most terminations, where no emergency
exists, CMS must give reasonable notice, an opportunity for
a hearing, and a chance to cure defects. 42 U.S.C. § 1395w-
27(h)(1) (incorporated by 42 U.S.C. § 1395w-112(b)(3)(F)).
FOX INS. CO. V. CENTERS FOR MEDICARE/MEDICAID 7
Where a situation is urgent and patients are at risk, however,
the Act provides that CMS may terminate a contract
immediately. Such immediate termination is authorized if a
delay “would pose an imminent and serious risk” to the health
of plan enrollees. 42 U.S.C. § 1395w-27(h)(2).1
1
42 U.S.C. § 1395w-27(h) provides as follows:
(h) Procedures for termination
(1) In general
The Secretary may terminate a contract with a
Medicare+Choice organization under this section
in accordance with formal investigation and
compliance procedures established by the
Secretary under which–
(A) the Secretary provides the organization
with the reasonable opportunity to develop
and implement a corrective action plan to
correct the deficiencies that were the basis of
the Secretary’s determination under
subsection (c)(2) of this section; and
(B) the Secretary provides the organization
with reasonable notice and opportunity for
hearing (including the right to appeal an initial
decision) before terminating the contract.
(2) Exception for imminent and serious risk to
health Paragraph (1) shall not apply if the
Secretary determines that a delay in termination,
resulting from compliance with the procedures
specified in such paragraph prior to termination,
would pose an imminent and serious risk to the
health of individuals enrolled under this part with
the organization.
8 FOX INS. CO. V. CENTERS FOR MEDICARE/MEDICAID
In the event that CMS terminates a contract immediately,
but after the beginning of the month, the provider will have
already been paid for the entire month, and thus have
received compensation for obligations it will never incur.
The reason is that CMS subsidizes the prescription drug plan
coverage by making regular payments called “capitation
payments” to plan sponsors on a prospective, monthly basis.
42 U.S.C. § 1395w-115. These payments are based on a
number of factors including the number of participants
enrolled in the plan, participants’ health status and income,
the amount a plan sponsor pays for prescription drugs, and
the plan sponsor’s administrative costs. 42 C.F.R.
§§ 423.315; 423.329. The payments are calculated on the
basis of an estimate by CMS of the prospective monthly costs
of the plan sponsor, after the plan sponsor submits a bid.
70 Fed. Reg. 4194, 4309–13 (Jan. 28, 2005); 42 C.F.R.
§ 423.315. In promulgating the regulations, CMS explained
that the reason for the advance payments is that they prevent
“cash flow problems” that would result if the plan sponsors
had to front the costs. 70 Fed. Reg. 4194, 4313.
A regulation implementing the Act therefore provides that
where CMS terminates a contract immediately and before the
end of the month, it can recover the excess payment: “CMS
has the right to recover the prorated share of the capitation
payments made to the Part D plan sponsor covering the
period of the month following the contract termination.”
42 C.F.R. § 423.509(b)(2)(i) (2008). The regulation further
explains that the immediate termination provision is for
situations when serious harm is threatened. The provision
applies to terminations where CMS has determined that the
plan sponsor is committing false, fraudulent or abusive
activities, or is experiencing severe financial difficulties that
impair its ability to provide necessary prescription drug
FOX INS. CO. V. CENTERS FOR MEDICARE/MEDICAID 9
coverage “to the point of posing an imminent and serious risk
to the health of its enrollees” or when the plan sponsor
“otherwise fails to make services available to the extent that
a risk to health exists.” 42 C.F.R. § 423.509(a)(4)–(5) (2008).
In this case, CMS awarded a contract to Fox on
September 22, 2005, authorizing Fox to operate prescription
drug plans starting on January 1, 2006. The contract was
renewed each of the four subsequent years. In early 2010,
however, CMS received complaints from plan enrollees and
physicians regarding Fox’s practices. The complaints stated
that Fox had improperly denied coverage for certain critical
medications, including medications for HIV, cancer, and
seizures. On February 11, 2010, CMS contacted Fox for a
response to these complaints. Fox replied to CMS, stating
that it had fixed the system error that had caused the problem.
After some investigation, however, CMS on February 26
suspended Fox’s authorization to enroll new beneficiaries and
to market its plan to potential beneficiaries. See 42 C.F.R.
§ 423.750. This action is not challenged.
On March 2–4, CMS conducted an on-site audit of Fox.
See 42 C.F.R. § 423.505(e). Fox sent CMS a letter on
March 8, listing the changes it had made or was making; most
of those changes did not begin until after CMS’s audit began
on March 2. CMS determined that Fox had not only failed to
provide required benefits, but had “expose[d] Fox’s enrollees
to imminent and serious risk to their health.” On March 9,
CMS terminated Fox’s contract, effective immediately. In its
letter, CMS detailed the reasons for the termination,
concluding that Fox lacked the “necessary administrative
capabilities and infrastructure to redress [its] severe
deficiencies,” and that it was not “in the public interest to
give Fox time to attempt to ameliorate these deficiencies.”
10 FOX INS. CO. V. CENTERS FOR MEDICARE/MEDICAID
CMS’s conclusions were supported by declarations
executed on March 9 from Dr. Jeffrey Kelman, Chief Medical
Officer of the Center for Drug and Health Plan Choice, and
Dr. Cynthia Tudor, Director of the Medicare Drug Benefit
and C&D Data Group of the Center. Dr. Kelman stated that
Fox had “inappropriately denied drugs . . . for the treatment
of cancer, HIV/AIDS, for the protection of transplants, and
for the prevention of seizures, lack of access to which can be
associated with immediate risks of major exacerbation
of underlying health conditions.” The inappropriate
requirements imposed by Fox “impacted beneficiaries during
courses of chemotherapy and in maintenance treatment for
HIV/AIDS,” forcing them “to leave the pharmacy without
needed medications.” Dr. Kelman further noted that the
enrollees in the plan were “90% low income individuals,
[who] had no option for cash payment access.” The potential
negative effects of Fox’s actions were “likely to be life
threatening for many of the enrollees impacted,” and
demonstrated “a blatant and reckless disregard for the health
and welfare of the beneficiaries involved.”
Dr. Tudor was similarly outraged by Fox’s conduct. Dr.
Tudor’s review found that Fox’s enrollees were required to
obtain “unnecessary, invasive and/or costly medical
procedures in at least some cases that resulted in significant
delays in beneficiaries’ receipt of necessary drugs.” These
unnecessary procedures included cardiac catheterizations,
which involve passing a catheter into the heart from the groin
or arm, and PET scans, which involve injecting a small
amount of radioactive material into a patient’s vein. See
National Institutes of Health, MedlinePlus Medical
Encyclopedia, available at http://www.nlm.nih.gov/
medlineplus/encyclopedia.html. Dr. Tudor also stated that
Fox’s Compliance Officer “admitted that Fox has no
FOX INS. CO. V. CENTERS FOR MEDICARE/MEDICAID 11
compliance plan or structure in effect and no internal auditing
or monitoring of Fox’s business operations is conducted.”
Because CMS terminated the contract March 9, Fox had
already been advanced funds for the entire month in the
capitation payment received March 1. CMS, acting pursuant
to 42 C.F.R. § 423.509(b)(2)(i) (2008), therefore promptly
demanded repayment of the funds it had advanced to Fox and
that had been intended to satisfy the now terminated
insurance coverage. CMS endeavored to calculate the
amount it was owed, sending a letter to Fox on August 19,
2010 demanding $21,399,603, which it described as the
prorated amount of the March 2010 capitation payment of
$30,153,987.
Fox requested that CMS review the demand. Fox argued
that it was entitled to hold the entire March payment until
completion of the “general reconciliation” that would not
begin until the end of 2010, and that CMS also owed it
money for various unreimbursed expenses. The
“reconciliation” to which Fox referred is the term for the
accounting CMS conducts after the end of each year with
each of its contractors. This process reconciles all of the
payments made to each plan with the actual subsidies to
which the plan was entitled and any risk sharing adjustments.
See 42 C.F.R. § 423.343. The plan “sponsors” or contractors
have six months after the end of the year to provide CMS
their relevant data, so the process is not completed until the
following fall. Fox relied on the general regulation governing
the annual accounting, or reconciliation, of all payments
made to each sponsor. Id. The substance of Fox’s position
with respect to repayment was, therefore, that it could retain
all of the amounts paid for March 2010 until the conclusion
of the reconciliation expected in the fall of 2011.
12 FOX INS. CO. V. CENTERS FOR MEDICARE/MEDICAID
CMS responded that it had acted on the basis of the more
specific regulation relating to the situation where a contract
is immediately terminated during a given month and the
contractor has already been paid for the entire month. That
regulation provides for a government recovery of the share of
payments that would not be used: “CMS has the right to
recover the prorated share of the capitation payments made to
the Part D plan sponsor covering the period of the month
following the contract termination.” 42 C.F.R.
2
§ 423.509(b)(2)(i) (2008). CMS contended that this
2
42 C.F.R. § 423.509(b) (2008) in its entirety provided as follows:
(b) Notice. If CMS decides to terminate a contract for
reasons other than the grounds specified in
§ 423.509(a)(4) or § 423.509(a)(5), it gives notice of
the termination as follows:
(1) Termination of contract by CMS. (i) CMS notifies
the Part D plan in writing 90 days before the intended
date of the termination.
(ii) The Part D plan sponsor notifies its Medicare
enrollees of the termination by mail at least 30 days
before the effective date of the termination.
(iii) The Part D plan sponsor notifies the general public
of the termination at least 30 days before the effective
date of the termination by publishing a notice in one or
more newspapers of general circulation in each
community or county located in the Part D plan
sponsor’s service area.
(iv) If a Part D plan sponsor’s contract is terminated
under paragraph (a) of this section, it must ensure the
timely transfer of any data or files.
FOX INS. CO. V. CENTERS FOR MEDICARE/MEDICAID 13
regulation, authorizing prompt action, necessarily applied
because CMS had determined that Fox’s actions created such
an imminent and serious risk to the health of its enrollees that
immediate termination was required. See 42 C.F.R.
§ 423.509(a)(5) (2008). CMS reviewed and upheld the
demand for repayment as authorized under 42 C.F.R.
§ 423.509(b)(2).
Fox’s appeal of the termination decision was then heard
by a CMS Hearing Officer designated by the CMS
Administrator. The Hearing Officer upheld CMS’s
(2) Immediate termination of contract by CMS. (i) For
terminations based on violations prescribed in
§ 423.509(a)(4) or § 423.509(a)(5), CMS notifies the
Part D plan sponsor in writing that its contract will be
terminated on a date specified by CMS. If termination
is effective in the middle of a month, CMS has the right
to recover the prorated share of the capitation payments
made to the Part D plan sponsor covering the period of
the month following the contract termination.
(ii) CMS notifies the Part D plan sponsor’s Medicare
enrollees in writing of CMS’s decision to terminate the
Part D plan sponsor’s contract. This notice occurs no
later than 30 days after CMS notifies the plan of its
decision to terminate the Part D plan sponsor’s contract.
CMS simultaneously informs the Medicare enrollees of
alternative options for obtaining qualified prescription
drug coverage, including alternative PDP sponsors and
MA-PDs in a similar geographic area.
(iii) CMS notifies the general public of the termination
no later than 30 days after notifying the plan of CMS’s
decision to terminate the Part D plan sponsor’s contract.
This notice is published in one or more newspapers of
general circulation in each community or county
located in the Part D plan sponsor’s service area.
14 FOX INS. CO. V. CENTERS FOR MEDICARE/MEDICAID
termination decision on the basis of CMS’s authority under
42 U.S.C. § 1395w-27(h) and 42 C.F.R. § 423.509(a). He
concluded that the deficiencies exposed by the audit
“independently or together, warranted immediate
termination.” Fox then requested that the Administrator
review the Hearing Officer’s decision. The Administrator
declined Fox’s request, and Fox’s administrative remedies
were exhausted. See 42 C.F.R. § 423.666.
Fox filed its complaint in district court on October 7,
2010 challenging the demand for repayment. Fox then filed
a separate suit on January 20, 2011 to challenge the
termination decision. The same judge considered both.
The district court first heard Fox’s challenge to the
demand for repayment. Fox claimed that CMS violated the
reconciliation regulations and further claimed that CMS in
fact owed Fox significant sums of money that should be set
off against CMS’s demand. The district court granted
without prejudice CMS’s motion to dismiss the complaint.
The district court stated that it would defer to CMS’s
reasonable interpretation of its own regulations. The district
court noted that 42 C.F.R. § 423.509(b)(2), the provision
cited by CMS in demanding repayment, creates an exception
to the usual annual reconciliation process, and that it was
appropriate for CMS to demand immediate repayment in this
case. The district court also ruled that Fox had no right to
setoff because it had shown no basis for a setoff and also
because the regulation permits immediate recovery by CMS.
Fox filed its first amended complaint, alleging once again
that CMS violated the reconciliation regulations, and that Fox
was entitled to a setoff. The district court granted CMS’s
motion to dismiss the action, because Fox’s contentions were
FOX INS. CO. V. CENTERS FOR MEDICARE/MEDICAID 15
materially the same as those in the original complaint and
barred by the law of the case.
In the meantime, the same district court judge heard Fox’s
challenge to the termination decision. Fox sought injunctive
relief ordering the Secretary to reinstate the contract. The
district court denied Fox’s request, and this court affirmed in
a brief unpublished decision. Fox Ins. Co. v. Ctrs. for
Medicare & Medicaid Servs., 439 F. App’x 651 (9th Cir.
2011).
On November 8, 2011, the district court granted CMS’s
motion for summary judgment on the merits of the
termination. The district court stated that CMS had
reasonably interpreted its regulation authorizing such a
termination and that substantial evidence supported the
finding that Fox failed substantially to comply with its
obligations. The district court noted that Fox’s misconduct
could be distinguished from the problems of other plan
sponsors, cited by Fox, whose contracts had not been
terminated. Finally, the court ruled that Fox had no property
interest on which it could base a due process claim.
Fox filed timely notices of appeal of both the repayment
case and the termination decision. We consolidated the
appeals for briefing and argument. With respect to the
termination, Fox’s principal argument on appeal is that the
regulation authorizing immediate termination is invalid as
inconsistent with the statute, because it does not use identical
language. With respect to the demand for repayment, Fox
argues it was entitled to keep the March overpayment until
completion of the annual reconciliation, despite the language
of the specific regulation authorizing CMS’s demand. We
affirm.
16 FOX INS. CO. V. CENTERS FOR MEDICARE/MEDICAID
DISCUSSION
I. The Lawfulness of the Contract Termination
The district court rejected all of Fox’s numerous
contentions challenging the lawfulness of the government’s
termination. In this appeal, Fox makes three arguments. It
contends that the regulation relied upon by the government
to authorize such a termination, 42 C.F.R. § 423.509(a)(5)
(2008), was itself unlawful. Second, Fox contends that, even
if the regulation was valid, the termination was unlawful
because Fox had in fact achieved substantial compliance with
all the legal requirements it had to meet. Third, Fox contends
that the government could not terminate its contract because
it had not earlier terminated contracts of other providers that
Fox contends had engaged in even more egregious
misconduct. We deal with each of these contentions in turn
and conclude that none has merit.
A. CMS Acted Pursuant to a Lawful Regulation
Fox claims there is an inconsistency between the statute
and the regulation by comparing the language of the statute
with the language of the regulation in effect at the time of the
termination. Under the statutory scheme, when terminating
a contract, CMS ordinarily must give reasonable notice, an
opportunity for a hearing, and a chance to cure defects.
42 U.S.C. § 1395w-27(h)(1) (incorporated by 42 U.S.C.
§ 1395w-112(b)(3)(F)). CMS, however, is authorized to
terminate a contract immediately if a delay “would pose an
imminent and serious risk” to the health of plan enrollees.
42 U.S.C. § 1395w-27(h)(2).
FOX INS. CO. V. CENTERS FOR MEDICARE/MEDICAID 17
The regulation implementing this statutory scheme,
42 C.F.R. § 423.509(a)(5), as it existed in 2010, authorized
CMS to terminate a contract immediately in situations where
the sponsor’s financial difficulties create a risk to health or
the sponsor is not delivering services for other reasons that
create a risk to health. The relevant regulatory language
provides that CMS may terminate if the sponsor
[e]xperiences financial difficulties so severe
that its ability to provide necessary
prescription drug coverage is impaired to the
point of posing an imminent and serious risk
to the health of its enrollees, or otherwise fails
to make services available to the extent that a
risk to health exists.
42 C.F.R. § 423.509(a)(5) (2008). In such situations,
“[i]mmediate termination of [the] contract by CMS” is
authorized. 42 C.F.R. § 423.509(b)(2) (2008).
Fox’s argument, in comparing the statute with the
regulation, focuses on the last phrase of the regulation that
refers to “a risk to health.” The statute provides that CMS
may terminate a contract immediately where delay “would
pose an imminent and serious risk to the health of individuals
enrolled.” 42 U.S.C. § 1395w-27(h)(2). According to Fox,
because the last phrase of the regulation omitted the words
“imminent and serious,” the regulation purported to give the
agency power the statute does not: to terminate upon a
finding of a risk to health, not a risk that is “imminent and
serious” as provided in the statute.
This, however, is not the way that the agency has
interpreted or applied the regulation. CMS has explained that
18 FOX INS. CO. V. CENTERS FOR MEDICARE/MEDICAID
it has interpreted the regulation’s reference to a “risk to
health” as incorporating the statutory standard of “imminent
and serious” risk as set forth in 42 U.S.C. § 1395w-27(h)(2)
and in the preceding clause of the regulation. More
important, this is the interpretation CMS actually used when
it terminated Fox’s contract in this case. CMS, in its
termination letter to Fox, said that Fox’s deficiencies
“expose[d] Fox’s enrollees to imminent and serious risk to
their health, thus warranting the immediate termination of
Fox’s contract with CMS.” (emphasis added).
The language of the disputed last phrase of the regulation
has now been changed, perhaps as a result of this litigation,
and now expressly contains the same words as the statute.
The regulation thus now permits CMS to terminate a contract
immediately where CMS determines that “a delay in
termination . . . would pose an imminent and serious risk to
the health of the individuals enrolled with the Part D plan
sponsor,” or where the “plan sponsor experiences financial
difficulties so severe that its ability to make necessary health
services available is impaired to the point of posing an
imminent and serious risk to the health of its enrollees, or
otherwise fails to make services available to the extent that
such a risk to health exists.” 42 C.F.R. § 423.509(b)(2)(i)
(emphasis added).
The key point for our purposes is that CMS’s
interpretation of the regulation as it applied it in this case is
fully consistent with the relevant statutory language. CMS
told Fox its conduct exposed its enrollees to “imminent and
serious risk.” 42 U.S.C. § 1395w-27(h)(2). Fox cannot
legitimately complain that it is a victim of governmental
overreaching.
FOX INS. CO. V. CENTERS FOR MEDICARE/MEDICAID 19
B. When CMS Terminated Its Contract Fox Had Not
Brought Itself Into Substantial Compliance With
the Contractual and Statutory Requirements
Medicare Part D insurance providers must remain in
substantial compliance with all of their contractual and legal
obligations or risk termination. The statute gives the
Secretary authority to terminate a contract if the organization
“has failed substantially to carry out the contract; is carrying
out the contract in a manner inconsistent with the efficient
and effective administration of this part; or no longer
substantially meets the applicable conditions of this part.”
42 U.S.C. § 1395w-27(c)(2). To carry out this statutory
authority, the Secretary promulgated 42 C.F.R. § 423.650(b)
(2008), which stated that the plan sponsor “bears the burden
of proof to demonstrate that it was in substantial compliance
with the requirements of the Part D program.”
CMS gave Fox the opportunity to show substantial
compliance. On February 11, 2010, CMS contacted Fox, in
response to complaints from patients and doctors that Fox had
improperly denied coverage for critical medications, thus
putting Fox on notice of a problem. Fox told CMS that it was
taking remedial measures in response to these complaints.
After an initial investigation, however, CMS suspended Fox’s
authorization to enroll new beneficiaries and to market its
plan to potential beneficiaries. CMS followed up with an on-
site audit of Fox on March 2–4. See 42 C.F.R. § 423.505(e).
CMS concluded that Fox had failed to provide required
benefits and could not address its compliance deficiencies
because it lacked any compliance infrastructure.
Fox takes issue with the agency’s conclusion. It contends
that it had taken steps to bring itself into “substantial
20 FOX INS. CO. V. CENTERS FOR MEDICARE/MEDICAID
compliance” by the completion of the audit. The evidence
supporting CMS’s noncompliance conclusion, however, is
more than substantial. CMS found that Fox imposed
unauthorized prior-authorization and step-therapy as
conditions on various drugs up through the audit that took
place March 2–4. These additional conditions could only
properly have been imposed if CMS had pre-approved them.
See 42 C.F.R. § 423.272(b)(2) (2008). In addition, a plan
sponsor may not condition access to certain “protected”
classes of drugs. 42 C.F.R. § 423.120(b)(2)(v). Despite these
regulations, Fox, according to Dr. Kelman’s March 9 findings
on behalf of CMS, imposed unauthorized restrictions on
many drugs, which led to the denial of claims for drugs for
“cancer, HIV/AIDS, for the protection of transplants, and for
the prevention of seizures.” Dr. Kelman in his declaration
further stated that “[t]he potential negative effects to patients
with cancer, HIV/AIDS, as well as many other chronic
diseases is clearly significant in terms of clinical
exacerbations, and is likely to be life threatening for many of
the enrollees impacted.”
Dr. Tudor reported that Fox also lacked the required
internal compliance mechanisms. The “Compliance Officer”
at Fox admitted to Dr. Tudor during the onsite audit that Fox
“has no compliance plan or structure in effect.” CMS found
that Fox had “not developed any written compliance policies
or procedures and Standards of Conduct,” and did “no
internal auditing or monitoring of Fox’s business operations.”
All of these failures were violations of CMS regulations. See
42 C.F.R. § 423.504(b)(4)(vi) (2008). Based on this
evidence, CMS correctly concluded on March 9 that Fox’s
performance suffered from “serious [] deficiencies” and that
a delay would create an “imminent and serious risk to the
health” of the Medicare beneficiaries enrolled in Fox’s plans.
FOX INS. CO. V. CENTERS FOR MEDICARE/MEDICAID 21
CMS was justified in terminating the contract with Fox
because it was not in substantial compliance.
Fox’s legal argument to us amounts to no more than the
assertion that it was in substantial compliance so long as it
indicated it had taken steps to improve. It adopts as its legal
standard for substantial compliance a factual statement from
an Eleventh Circuit decision. That court said that the
company at issue in the case before it “had already taken
steps to rectify the problem and would be clearly compliant
soon after.” Emerald Shores Health Care Assocs., LLC v.
U.S. Dep’t of Health & Human Servs., 545 F.3d 1292, 1299
(11th Cir. 2008). We do not agree with Fox that this
language constitutes the Eleventh Circuit’s definition of
“substantial compliance,” or even that Fox had satisfied it.
Nor can we agree that it would create a workable definition.
The phrase “substantial compliance” is defined elsewhere in
the Medicare regulations as the situation where “identified
deficiencies pose no greater risk to resident health or safety
than the potential for causing minimum harm.” 42 C.F.R.
§ 488.301. This is the definition of substantial compliance
under Medicare Part A, which is part of the same statutory
framework as Part D. The term should have the same
meaning under both Parts. Cf. Ratzlaf v. United States,
510 U.S. 135, 143 (1994) (“A term appearing in several
places in a statutory text is generally read the same way each
time it appears.”). “Substantial compliance” means the risk
of harm is minimal. It cannot be equated with “still making
needed improvements,” where the risk of harm in the interim
is not minimal.
Moreover, the record in this case, as summarized above,
demonstrates that Fox did not meet even its own definition of
substantial compliance, much less the controlling agency
22 FOX INS. CO. V. CENTERS FOR MEDICARE/MEDICAID
definition. There is no indication that Fox could have
become compliant in the foreseeable future. What it did was
too little, too late.
C. CMS Was Not Required to Treat Fox the Same
Way It Had Earlier Treated Other Companies in
Different Cases
Fox’s next contention is that CMS’s immediate
termination decision was inconsistent with CMS’s treatment
of other nonperforming sponsors, against whom CMS
imposed various sanctions, including termination, but only
after affording those sponsors an opportunity to develop and
implement a plan to correct the deficiencies CMS had
identified. Fox urges that, as a matter of administrative law,
CMS had to provide a legitimate reason for treating Fox
differently.
With regard to this argument, the district court ruled that
Fox’s case was not materially similar to the six previously
terminated sponsors. Five of the six involved situations of
fiscal insolvency not comparable to Fox’s situation. The
sixth, Health Net, did expose enrollees to imminent and
serious health risks because of deficient administration, but
the possibility of improvement was at least in sight. The
district court quoted CMS’s March 9 termination letter, in
which CMS observed in Fox’s case that it had “no confidence
that Fox has the necessary administrative capabilities and
infrastructure to redress the severe deficiencies . . .
uncovered.” In other words, CMS concluded that Fox, unlike
other non-compliant sponsors, could not fix the problems.
In this court Fox makes a similar contention that it cannot
be treated in a manner that differs from the way CMS treated
FOX INS. CO. V. CENTERS FOR MEDICARE/MEDICAID 23
others in the past. The only authority Fox cites to support its
position here are three D.C. Circuit cases in which an agency
arguably made a ruling with respect to particular evidence or
particular parties that differed without explanation from an
earlier ruling. County of Los Angeles v. Shalala, 192 F.3d
1005 (D.C. Cir. 1999) involved a ruling that data were
unreliable when the same data had been considered reliable
in an earlier year; Indep. Petroleum Ass’n of Am. v. Babbitt,
92 F.3d 1248 (D.C. Cir. 1996) involved treatment of certain
settlement payments as subject to royalties despite earlier
adherence to a Fifth Circuit opinion that these payments were
not; Caiola v. Carroll, 851 F.2d 395 (D.C. Cir. 1988)
involved treating some corporate officers differently from
others in the same case. These cases all focused on
comparing specific legal or factual rulings. They do not
create any principle that a court should second guess an
agency’s result in light of the result the agency may have
reached in an earlier case that is not now before the court.
Our review must be of the lawfulness of the agency’s action
according to the record before us, giving deference to the
agency’s interpretation of the statutory standards.
Administrative Procedure Act, 5 U.S.C. § 706(2); Chevron,
U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837,
842 (1984).
Fox also contends that the contract termination violated
its constitutional rights. This contention essentially rehashes
its previous arguments, but dresses them in constitutional
garb. At best, Fox contends that it was deprived of its
property, in the form of its contract with the government,
without due process of law. Even if we were to accept the
questionable proposition that Fox has a protectable property
interest in its government contract, see Erickson v. United
States, 67 F.3d 858, 862 (9th Cir. 1995) (holding that
24 FOX INS. CO. V. CENTERS FOR MEDICARE/MEDICAID
physicians do not have a property interest in their continued
participation in Medicare and related programs), Fox’s
argument still would fail. CMS notified Fox of the
complaints about its performance, completed an on-site audit,
and conducted an administrative hearing which reviewed the
termination decision. CMS was authorized to terminate
Fox’s contract immediately, and Fox received the process it
was due. See Morrissey v. Brewer, 408 U.S. 471, 481 (1972).
II. CMS’s Demand for Immediate Repayment of the
Prorated Portion of the Monthly Advance Was In
Accord With the Controlling Regulation and Resort to
Common Law Setoff Was Not Required
Fox contends that even if the immediate termination was
proper, CMS was not entitled to demand immediate
repayment of advanced funds. It challenges CMS’s action in
demanding repayment of the prorated portion of the amount
CMS had advanced to Fox for obligations Fox would have
incurred in March had its contract not been terminated.
Demand was made pursuant to 42 C.F.R. § 423.509(b)(2)(i)
(2008). That regulation provides as follows: “If termination
is effective in the middle of a month, CMS has the right to
recover the prorated share of the capitation payments made to
the Part D plan sponsor covering the period of the month
following the contract termination.” 42 C.F.R.
§ 423.509(b)(2)(i) (2008).
The regulation applies specifically to the termination of
a contract where there is an imminent and serious risk to
enrollees’ health, and thus tracks the circumstances under
which CMS may terminate a contract immediately without
notice or hearing. See 42 U.S.C. § 1395w-27(h)(2). The
regulation authorizes CMS to recover, and hence to demand,
FOX INS. CO. V. CENTERS FOR MEDICARE/MEDICAID 25
immediate repayment of funds that will not be utilized by the
contractor after the termination.
Fox essentially denies that § 423.509 applies and, not
surprisingly, would prefer to keep the funds over the period
of many months before there is a final reconciliation of the
obligations of the parties. Fox says the applicable regulation
is the one that applies to the final reconciliation, 42 C.F.R.
§ 423.343.3 The substance of that regulation constitutes
technical instructions for accountants who manage the
reconciliation process. It applies generally to all Medicare
contractors who have performed during the course of the year
and must settle their financial relationship with CMS at the
end of each year.
We deal with a situation, however, that the Medicare
statute regards as exceptional. The provision for repayment
after immediate termination is expressly directed to a specific
situation in which a contractor has been paid in anticipation
of services that it will not perform as a result of the
termination. The fundamental problem with Fox’s position
is that it ignores the specific regulation that applies to its
situation. That regulation authorizes repayment.
Our law requires this court to give effect to all of a
regulation’s sections where possible. Barboza v. Cal. Ass’n
of Prof’l Firefighters, 651 F.3d 1073, 1078 (9th Cir. 2011);
Boeing Co. v. United States, 258 F.3d 958, 967 (9th Cir.
2001). In doing so, we favor the application of a specific
provision over a general one. See Crawford Fitting Co. v.
J.T. Gibbons, Inc., 482 U.S. 437, 445 (1987) (stating that
3
42 C.F.R. § 423.343 provides the procedures for “Retroactive
adjustments and reconciliations.”
26 FOX INS. CO. V. CENTERS FOR MEDICARE/MEDICAID
absent clear intention otherwise, “a specific statute will not be
controlled or nullified by a general one”) (internal quotation
and citations omitted).
We cannot accept Fox’s interpretation of the general
provision without ignoring the existence of the more specific
provision. Fox’s misinterpretation is evidenced by its
reliance on the preamble to the general regulation, which
states that reconciliation includes “any difference between the
actual number . . . of enrollees and the number . . .on which
[CMS] had based the organization’s advance monthly
payments.” 70 Fed. Reg. 4194, 4315 (Jan. 28, 2005). This
does not refer to a mid-month termination, and therefore does
not by its terms delay the contractor’s repayment of the
prorated amount until an end of the year reconciliation. The
language of the preamble contemplates the routine month-by-
month reconciliation process for all contractors, independent
of the demand for immediate repayment of prorated amounts
from a contractor that has been terminated.
Indeed it would make little sense for a government
concerned about the expenditure of taxpayer funds to permit
a delinquent contractor to keep overpayments for a period of
months, without demanding repayment. This is particularly
true when a contractor who has been paid for the entire month
is terminated before the month is over, so that some
overpayment is virtually certain to have been made.
Fox also contends that CMS cannot rely on
§ 423.509(b)(2)(i) because the regulation does not apply the
common law principle of setoff. Courts read statutes and
regulations to preserve common law principles, like setoff,
absent an evident statutory purpose to the contrary. See
United States v. Texas, 507 U.S. 529, 533–34 (1993).
FOX INS. CO. V. CENTERS FOR MEDICARE/MEDICAID 27
Fox’s argument is unconvincing. The annual
reconciliation process provides an opportunity for Fox to
assert any claims that the government owes it money. See
42 C.F.R. § 423.343. That administrative process is ongoing
as to Fox. This case therefore does not present the issue
whether the Medicare regulations broadly abrogate the
common law setoff principle. The only question here is more
limited: who holds the excess capitation payments when CMS
terminates a contract mid-month pending the final results of
the reconciliation process. The applicable regulation,
42 C.F.R. § 423.509(b)(2), answers that circumscribed
question clearly and in the government’s favor, reflecting
Congress’s intent to bring a quick end to the government’s
relationship with contractors whose malfeasance has created
a serious risk to the health of Medicare enrollees.
CONCLUSION
The district court correctly held that the immediate
termination was valid and the repayment order was
authorized by the controlling regulations. Its judgments are
AFFIRMED.