Ingham Regional Medical Center v. United States , 874 F.3d 1341 ( 2017 )


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  •   United States Court of Appeals
    for the Federal Circuit
    ______________________
    INGHAM REGIONAL MEDICAL CENTER,
    MCLAREN NORTHERN MICHIGAN, BAY
    REGIONAL MEDICAL CENTER, LAKEWOOD
    HEALTH SYSTEM, GIFFORD MEDICAL CENTER,
    INC.,
    Plaintiffs-Appellants
    v.
    UNITED STATES,
    Defendant-Appellee
    ______________________
    2016-2081
    ______________________
    Appeal from the United States Court of Federal
    Claims in No. 1:13-cv-00821-MBH, Judge Marian Blank
    Horn.
    ______________________
    Decided: November 3, 2017
    ______________________
    DIANE ELIZABETH COOLEY, Pires Cooley, Washington,
    DC, argued for plaintiffs-appellants. Also represented by
    ALEXANDER JOHN PIRES, JR.
    PHYLLIS JO BAUNACH, Commercial Litigation Branch,
    Civil Division, United States Department of Justice,
    Washington, DC, argued for defendant-appellee. Also
    represented by BENJAMIN C. MIZER, ROBERT E.
    2       INGHAM REGIONAL MEDICAL CENTER    v. UNITED STATES
    KIRSCHMAN, JR., STEVEN J. GILLINGHAM; GERALD
    ANTHONY WESLEY, Defense Legal Services Agency, United
    States Department of Defense, Aurora, CO.
    ______________________
    Before PROST, Chief Judge, DYK and HUGHES, Circuit
    Judges.
    HUGHES, Circuit Judge.
    Ingham Regional Medical Center, Mclaren Northern
    Michigan, Bay Regional Medical Center, Lakewood
    Health System, and Gifford Medical Center, Inc. brought
    suit against the Government alleging that they were
    underpaid for certain outpatient medical services. The
    Court of Federal Claims dismissed Appellants’ complaint
    for failure to state a claim upon which relief can be grant-
    ed. We find that Ingham may bring a claim for breach of
    contract but that Appellants may not bring money-
    mandating claims under 
    10 U.S.C. § 1079
    (j)(2) and
    
    32 C.F.R. § 199.7
    (h)(2) because the Government’s inter-
    pretation of the statute was reasonable. Accordingly, we
    reverse-in-part, affirm-in-part, and remand.
    I
    In 1956, Congress established TRICARE, a military
    health care system (previously called the Civilian Health
    and Medical Program of the Uniformed Services
    (CHAMPUS)). TRICARE provides medical and dental
    care for current and former members of the military and
    their dependents. The Secretary of Defense is responsible
    for contracting with outside health care providers to
    deliver medical care to TRICARE recipients. See 
    10 U.S.C. § 1073
    (a)(2); 
    32 C.F.R. § 199.1
    . Hospitals that
    provide TRICARE services are reimbursed in accordance
    with guidelines set forth by the Department of Defense
    (DoD). See 
    32 C.F.R. § 199.14
    .
    INGHAM REGIONAL MEDICAL CENTER   v. UNITED STATES        3
    In 2001, Congress amended the TRICARE statute
    governing the reimbursements for outside healthcare
    providers. The statute previously permitted, but did not
    require, DoD to use Medicare reimbursement rules. The
    amendment replaced the permissive word “may” with
    “shall” such that the statute read:
    The amount to be paid to a provider of services for
    services provided under a plan covered by this
    section shall be determined under joint regula-
    tions to be prescribed by the administering Secre-
    taries which provide that the amount of such
    payments shall be determined to the extent prac-
    ticable in accordance with the same reimburse-
    ment rules as apply to payments to providers of
    services of the same type under title XVII of the
    Social Security Act [Medicare].
    
    10 U.S.C. § 1079
    (j)(2) (2002) (emphasis added). 1 Thus,
    § 1079(j)(2) required TRICARE to use the same reim-
    bursement rules as Medicare to the extent practicable.
    DoD responded to the statutory change by issuing an
    Interim Final Rule, effective August 12, 2002. TRICARE;
    Sub-Acute Care Program; Uniform Skilled Nursing Facili-
    ty Benefit; Home Health Care Benefit; Adopting Medicare
    Payment Methods for Skilled Nursing Facilities and
    Home Health Care Providers, 
    67 Fed. Reg. 40,597
    -02
    (June 13, 2002). The Interim Final Rule noted that
    Medicare was phasing in a new Outpatient Prospective
    Payment System (OPPS) methodology for outpatient
    services and that DoD:
    plan[ned] to follow the Medicare approach. How-
    ever, because of complexities of the Medicare
    transition process and the lack of TRICARE cost
    1
    The statute has since been amended, and this
    language is currently found at § 1079(i)(2) (2014).
    4      INGHAM REGIONAL MEDICAL CENTER    v. UNITED STATES
    report data comparable to Medicare’s, it is not
    practicable for the Department to adopt Medicare
    OPPS for hospital outpatient services at this time.
    Id. at 40,601; J.A. 4. The Interim Final Rule adopted new
    methods of payment for four categories of hospital-based
    outpatient services. DoD issued a Final Rule in 2005,
    which provided a more detailed explanation of the pay-
    ment rules for hospital-based outpatient services. See
    TRICARE; Sub-Acute Care Program; Uniform Skilled
    Nursing Facility Benefit; Home Health Care Benefit;
    Adopting Medicare Payment Methods for Skilled Nursing
    Facilities and Home Health Care Providers, 
    70 Fed. Reg. 61,368
    -01 (October 24, 2005). For most outpatient ser-
    vices, hospitals would receive payments “based on the
    TRICARE-allowable cost method in effect for professional
    providers or the CHAMPUS Maximum Allowable Charge
    (CMAC).” 
    Id. at 61,371
    . These payment rules applied
    until 2009, when TRICARE introduced a new payment
    system for hospital outpatient services that was similar to
    the Medicare OPPS rules.
    Hospitals complained that CMAC was only intended
    to be used for individual health care providers, not insti-
    tutions with large overhead costs. TRICARE responded
    to these complaints by hiring a consultant, Kennel and
    Associates, Inc., to undertake a study of the accuracy of
    its payments to the hospitals. The Kennel Study com-
    pared CMAC payments to the payments that would have
    been made using Medicare payment principles, and
    determined that DoD “(1) underpaid hospitals for outpa-
    tient radiology but, (2) correctly paid hospitals for all
    other outpatient services.” J.A. 5 (emphasis in original).
    Subsequently, DoD created a discretionary payment
    process and notified the hospitals via letter on April 25,
    2011. The letter explained that DoD would permit the
    hospitals to request a review of their TRICARE reim-
    bursements:
    INGHAM REGIONAL MEDICAL CENTER   v. UNITED STATES         5
    Based on the request, your hospital may be paid
    an adjustment, subject to the availability of ap-
    propriations, in return for your acceptance of
    DoD’s offer of additional payment based on crite-
    ria established by the agency . . . . [P]ayment of
    the discretionary adjustments will also be contin-
    gent on the execution of a release by the hospital
    of any hospital outpatient service claims against
    the agency.
    J.A. 91–92.
    On the TRICARE webpage, DoD published a docu-
    ment titled “NOTICE TO HOPSITALS OF POTENTIAL
    ADJUSTMENT         TO      PAST      PAYMENTS    FOR
    OUTPATIENT RADIOLOGY SERVICES” (the Notice)
    and answers to Frequently Asked Questions (the FAQs).
    The Notice explained, in relevant part, that:
    The TRICARE regulation provisions on hospital
    outpatient services, in the absence of adoption of
    the Medicare OPPS methodology, adopted compa-
    rable Medicare payments for similar services pro-
    vided in other sites (i.e., physician offices). That
    is, TRICARE looked to the similarity of services
    being provided, not the site of services, in adopt-
    ing a reimbursement methodology for hospital
    outpatient services. . . .
    [I]n reviewing payments for hospital services,
    DoD has determined that, for radiology ser-
    vices . . . the technical component of the allowable
    charge did not approximate the Medicare fair
    payment for such hospital services as well as it
    could have. That is, looking at the Medicare re-
    imbursement methodologies in existence prior to
    adoption of Medicare OPPS in 2000, . . . some ra-
    diology services were underpaid in compari-
    son. . . . Thus, although payments to hospitals for
    radiology services were consistent with the duly
    6      INGHAM REGIONAL MEDICAL CENTER    v. UNITED STATES
    promulgated regulation, there is a basis for
    TRICARE to provide an opportunity to make some
    discretionary net payment adjustments to approx-
    imate more closely Medicare payment meth-
    ods. . . .
    General TRICARE policy is that payment meth-
    odologies follow to the extent practicable Medicare
    payments. Prior to adopting [OPPS], Medicare
    used a blended rate that factored in a percentage
    of hospital costs and a percentage of the global
    physician fee schedule to reimburse hospital out-
    patient radiology services. In contrast, TRICARE
    regulation limited reimbursement to hospitals for
    individual outpatient radiology services to the
    technical component portion of the CHAMPUS
    Maximum Allowable Charge (CMAC), which was
    one component of Medicare’s physician fee sched-
    ule. Consistent with TRICARE policy under stat-
    ute to pay similar to Medicare, we have
    determined that discretionary adjusted payments
    may better reflect the Medicare payment amounts
    for outpatient radiology claims.
    J.A. 96–97.
    The Notice also described the nine-step process by
    which hospitals could request review of payments for
    outpatient radiology services. Steps 1 and 2 instructed
    hospitals to submit a request for review and described the
    procedure for submitting the request, including filling an
    Excel spreadsheet (the Spreadsheet) with identification
    and contact information. Steps 3 through 7 described the
    review process, including the methodology TRICARE
    would follow to extract claims for outpatient radiology
    services and the formula and calculations TRICARE
    would use to determine the adjusted payments. The
    hospitals were informed that TRICARE had the necessary
    INGHAM REGIONAL MEDICAL CENTER   v. UNITED STATES         7
    information in its possession and that they should not
    submit claims-level data.
    Step 8 explained that the hospitals would receive a
    written response (the Payment Adjustment Worksheet)
    that would “provide the calculated discretionary adjusted
    payment and the calculations from which the adjustment
    was derived.” J.A. 100. Step 8 also stated that although
    “the methodology for calculating the adjusted rate is not
    subject to questions,” the hospitals could submit “ques-
    tions regarding the data used in the calculations,” “ac-
    companied by detailed explanation of the alleged errors
    and the proposed corrections with supporting documenta-
    tion.” J.A. 100.
    Step 9 explained that TRICARE’s response would in-
    clude “a release and agreement to accept the discretionary
    adjusted payment by the hospital.” J.A. 100. The hospi-
    tals would receive the payment after signing and return-
    ing the release and agreement. The Release reads, in
    part:
    By accepting the offer of the Department of De-
    fense (“DoD”) to provide a net adjustment to prior
    payments of hospital outpatient radiology services
    as described in the DoD’s letter dated April, 25,
    2011, and in consideration of any future net ad-
    justments to prior payments of hospital outpatient
    radiology services made by the DoD . . . [the Hos-
    pital] shall completely release, acquit, and forever
    discharge the Government, TRICARE beneficiar-
    ies, and any MCSCs . . . from any and all claims,
    demands, actions, suits, causes of action, ap-
    peals . . . that Releasor ever had, now has, or
    hereafter can, shall, or may have against Re-
    leasees, whether known or unknown, on account
    of or arising out of or resulting from or in any way
    relating to payments, reimbursements, adjust-
    ments, recoupments, or any other means of com-
    8      INGHAM REGIONAL MEDICAL CENTER    v. UNITED STATES
    pensation by Releasees made at any time for out-
    patient services rendered to TRICARE beneficiar-
    ies by Releasor . . . .
    J.A. 112.
    Each Appellant submitted a request for discretionary
    payment. The government agreed “to provide a net
    adjustment to prior payments of hospital outpatient
    radiology services as described in the DoD’s letter dated
    April, 25, 2011 . . . .” J.A. 112. In return, Ingham agreed
    to release “any and all claims . . . whether known or
    unknown” related to payments for TRICARE outpatient
    services. 
    Id.
     McLaren, Gifford and Lakewood refused to
    sign the Release because they believed the proposed
    payment amounts were incorrect. Therefore, they did not
    receive any payments. Bay Regional Medical Center
    received a response stating that it had been overpaid for
    radiology services and was owed nothing.
    Certain other hospitals were represented by counsel
    during the discretionary payment process and contested
    TRICARE’s calculations. TRICARE acknowledged that
    there were errors in the calculations that it had not been
    aware of, and agreed to pay the represented hospitals 77%
    more than the originally offered payments for outpatient
    radiology. J.A. 12. TRICARE did not recalculate the
    payments for any of the hospitals that did not contest
    their discretionary payment offer.
    Pursuant to a Freedom of Information Act request,
    Appellants received redacted versions of the Kennel
    Study. Appellants allege that the Kennel Study contains
    multiple errors and that if it had been done correctly, the
    study would have revealed that all outpatient services
    were underpaid, not only radiology. Appellants filed suit
    in the Court of Federal Claims alleging that DoD had
    miscalculated the payments for outpatient radiology
    during the discretionary payment process and that they
    had been underpaid for all outpatient services.
    INGHAM REGIONAL MEDICAL CENTER    v. UNITED STATES         9
    The Court of Federal Claims dismissed Appellants’
    case for failure to state a claim. They appeal three
    claims: (1) breach of express contract between Ingham
    and DoD based on the discretionary payment process;
    (2) revision of Ingham’s contract based on mutual mis-
    take, in light of the errors in the calculations of radiology
    outpatient services and the Kennel study; and (3) viola-
    tions of money-mandating statutes and regulations, 
    10 U.S.C. §§ 1079
     and 1086 and 
    32 C.F.R. § 199.7
    (h)(2).
    We have jurisdiction under 
    28 U.S.C. § 1295
    (a)(3).
    II
    The Court of Federal Claims found that Ingham failed
    to state a claim for breach of contract after determining
    that Ingham’s claim was barred by the Release. We
    review de novo “[w]hether the complaint was properly
    dismissed for failure to state a claim.” Gould, Inc. v.
    United States, 
    935 F.2d 1271
    , 1273 (Fed. Cir. 1991). We
    also review contract interpretation and statutory inter-
    pretation de novo. Id.; Am. Airlines, Inc. v. United States,
    
    551 F.3d 1294
    , 1299 (Fed. Cir. 2008).
    The Court of Federal Claims determined that Ingham
    and the agency entered into a contract that consisted of
    the April 25, 2011 letter, the Notice, the FAQs, the
    Spreadsheet, the Payment Adjustment Worksheet, and
    the Release. J.A. 30–31. Ingham alleges that the agency
    breached the contract because it failed to follow the
    agreed upon methodology in calculating the payment
    adjustment. The Court of Federal Claims found that
    although Ingham’s allegations were sufficient to plead a
    10       INGHAM REGIONAL MEDICAL CENTER    v. UNITED STATES
    breach of contract, 2 the Release was “sufficiently broad to
    bar all of plaintiffs’ breach of contract claims.” J.A. 40.
    We find that the Release does not bar Ingham’s
    breach of contract claim. Absent special circumstances, “a
    general release bars claims based upon events occurring
    prior to the date of the release.” Augustine Med., Inc. v.
    Progressive Dynamics, Inc., 
    194 F.3d 1367
    , 1373 (Fed. Cir.
    1999). But here, the release the Government relies on is
    in the very same contract it is accused of breaching. In
    these circumstances, a release cannot bar claims for
    breach of contract. In Link v. Department of Treasury, 
    51 F.3d 1577
     (Fed. Cir. 1995), we held that the agency could
    not enforce an appeal waiver in a last-chance settlement
    agreement because the agency had failed to carry out its
    responsibilities under the agreement. 
    Id.
     at 1583–84. We
    concluded that the agency’s breach of contract released
    Mr. Link from his obligation not to appeal his removal.
    
    Id.
     To hold otherwise would allow an agency to flout its
    contractual commitments with impunity. See McCall v.
    U.S. Postal Serv., 
    839 F.2d 664
    , 667 (Fed. Cir. 1988).
    Similarly here, the Release cannot be enforced against
    a claim for breach of the underlying contract. Ingham
    asserts that DoD failed to follow the methodology for
    calculating payment adjustments in the contract. Indeed,
    DoD’s promise to follow the agreed upon methodology was
    part of the consideration for Ingham’s agreement to the
    Release in the first place. DoD cannot then use the Re-
    lease to bar Ingham’s claim that DoD did not adhere to its
    2  DoD concedes that “[t]he court correctly found
    that appellants had pled sufficient facts to state a claim
    that the Government had breached the contract . . . .”
    Appellee Br. at 20. The only issue on appeal relating to
    Ingham’s breach of contract claim is whether the release
    in question could apply to a breach of the contract includ-
    ing that same release.
    INGHAM REGIONAL MEDICAL CENTER    v. UNITED STATES      11
    obligations under the same contract. Accordingly, the
    court erred in finding that Ingham could not bring a claim
    for breach of contract. 3
    III
    Appellants also argue that the Court of Federal
    Claims improperly dismissed their money-mandating
    claims for failure to state a claim.
    In 2002 and 2005, DoD issued Interim and Final
    Rules that adopted CMAC payment rules because it was
    not practicable at that time to adopt Medicare OPPS for
    hospital outpatient services.      Appellants argue that
    adopting CMAC caused TRICARE to underpay the hospi-
    tals, and therefore, DoD violated § 1079(j), which required
    TRICARE to pay providers “to the extent practicable in
    accordance with the same reimbursement rules as apply
    to payments to providers of services of the same type”
    under Medicare.
    The Court of Federal Claims concluded that because
    “defendant’s obligation was to attempt to emulate OPPS,
    rather than any prior Medicare reimbursement methods,”
    J.A. 59, Appellants “failed to adequately plead any facts
    showing that the reimbursement rates instituted by the
    Interim Final and Final Rules represented an unreasona-
    ble interpretation of 
    10 U.S.C. § 1079
    (j)(2),” J.A. 60.
    The parties agree that the statute is ambiguous and
    that Chevron deference applies. See Biodiversity Legal
    Found. v. Babbitt, 
    146 F.3d 1249
    , 1253–56 (10th Cir.
    1998) (applying the Chevron approach to similar statutory
    language). We must defer to DoD’s construction of the
    3    Ingham alternatively seeks a claim for contract
    reformation based on mutual mistake. Because we re-
    verse the dismissal of Ingham’s breach of contract claim,
    we do not reach the issue of mutual mistake.
    12      INGHAM REGIONAL MEDICAL CENTER    v. UNITED STATES
    statute as long as it “reflects a plausible construction of
    the plain language of the statute and does not otherwise
    conflict with Congress’ expressed intent.” Rust v. Sulli-
    van, 
    500 U.S. 173
    , 184 (1991).
    Appellants do not argue that TRICARE was required
    to implement OPPS. Rather, they contend that TRICARE
    was required to implement a system that was similar to
    pre-OPPS Medicare reimbursement rules for hospitals.
    CMAC did not satisfy this requirement because it was
    only intended to reimburse individual providers, not
    hospitals. Therefore, Appellants assert that DoD’s im-
    plementation of CMAC rates was not a reasonable inter-
    pretation of § 1079(j)(2).
    We hold that Appellants failed to state a claim in this
    case. Section 1079(j)(2) is money-mandating in the sense
    that it directs the agency to determine payment amounts
    “in accordance with the same reimbursement rules” as
    Medicare to the extent practicable. During the relevant
    time period, Medicare was transitioning to the OPPS
    methodology. The use of that methodology was admitted-
    ly impractical, and nothing in the statute compelled the
    DoD to utilize the pre-OPPS Medicare approach. Con-
    gress did not prescribe the types of rules that the agency
    was required to use if the Medicare methodology was
    impractical, so long as the choice was a reasonable one in
    light of the statute. Adoption of the CMAC rates was
    reasonable and not inconsistent with § 1079(j)(2). Be-
    cause Appellants were paid in accordance with the rea-
    sonable approach the agency adopted, they cannot state a
    money-mandating claim.
    Appellants also argue that their reading of the statute
    is consistent with DoD’s own interpretation of its statuto-
    ry obligations. For support, they point to DoD’s state-
    ments that CMAC “did not approximate the Medicare fair
    payment for such hospital services as well as it could
    have.” J.A. 96. Appellants contend that through such
    INGHAM REGIONAL MEDICAL CENTER    v. UNITED STATES        13
    statements and the institution of the discretionary pay-
    ment process, the agency admitted that its actions did not
    abide by the statute.
    We disagree. DoD’s offer of discretionary payment ad-
    justments does not mean it lacked the authority to im-
    plement the CMAC rules.         The Notice states that
    TRICARE had chosen to “make some discretionary net
    payment adjustments to approximate more closely Medi-
    care payment methods.” J.A. 97. Nevertheless, both
    actions—implementing CMAC and offering discretionary
    payment adjustments—were within DoD’s discretion in
    interpreting § 1079(j)(2).
    Because DoD was not required to implement any spe-
    cific reimbursement rules and the approach adopted was
    reasonable, we affirm the trial court’s dismissal of Appel-
    lants’ money-mandating claims.
    IV
    For the reasons set for this in this opinion, we reverse
    the dismissal of Ingham’s breach of contract claim, affirm
    the dismissal of Appellants’ money-mandating claim, and
    do not reach the claim for mutual mistake. We remand
    for further proceedings on the breach of contract claim.
    AFFIRMED-IN-PART, REVERSED-IN-PART, AND
    REMANDED
    No costs.