T. Zenon Pharmaceuticals LLC, (d/b/a Pharmacy Matters) v. Wellmark, Inc. and Wellmark Health Plan of Iowa ( 2018 )

IN THE COURT OF APPEALS OF IOWA
No. 17-0966
Filed November 21, 2018
T. ZENON PHARMACEUTICALS LLC, (d/b/a PHARMACY MATTERS),
Plaintiff-Appellee/Cross-Appellant,
vs.
WELLMARK, INC.,
Defendant-Appellant/Cross-Appellee,
WELLMARK HEALTH PLAN OF IOWA,
Intervenor-Appellant/Cross-Appellee.
________________________________________________________________
Appeal from the Iowa District Court for Johnson County, Paul D. Miller,
Judge.
A mutual insurance company appeals a damage award for its breach of
contract with an Iowa pharmacy and contests the common-law attorney fees. The
pharmacy cross appeals on an interest-rate issue. AFFIRMED IN PART AND
REVERSED IN PART ON APPEAL; AFFIRMED ON CROSS APPEAL.
John F. Lorentzen of Nyemaster Goode, PC, Des Moines, and Kevin H.
Collins and Sarah J. Gayer of Nyemaster Goode, PC, Cedar Rapids, for appellant.
Anthony Paduano and Jason Joseph Snyder of Paduano & Weintraub LLP,
New York, New York, and Richard C. Garberson and Nancy J. Penner of
Shuttleworth & Ingersoll, PLC, Cedar Rapids, for appellee.
Heard by Vogel, P.J., Tabor, J., and Carr, S.J.*
*Senior judge assigned by order under Iowa Code section 602.9206 (2018).
2
TABOR, Judge.
This appeal marks the second time our court has considered the breach-of-
contract dispute between T. Zenon Pharmaceuticals (doing business as Pharmacy
Matters) and mutual insurance company Wellmark, Inc. Pharmacy Matters sued
Wellmark after the insurer refused to reimburse more than six million dollars in
claims for Factor drugs, a blood clotting treatment prescribed to hemophilia
patients. Wellmark (and intervenor Wellmark Health Plan of Iowa, Inc. (WHPI))
counterclaimed with allegations Pharmacy Matters breached its contracts.
In the first appeal, we reversed the district court’s finding Pharmacy Matters
materially breached anti-assignment clauses in the contracts, or, in the alternative,
did not provide “covered services” to patients. T. Zenon Pharmaceuticals, LLC v.
Wellmark, Inc., No. 14-0769, 2015 WL 9450469, at *15 (Iowa Ct. App. Dec. 23,
2015). We concluded Wellmark breached its contracts with Pharmacy Matters by
refusing to reimburse claims submitted for 114 drug shipments. Id. We remanded
for the district court to determine the proper amount of damages. Id. On remand,
the district court awarded Pharmacy Matters $6,335,388 in damages and
$3,106,313.49 in common-law attorney fees, plus interest on both awards.
In the instant appeal, Wellmark attacks those awards on many fronts.
Contesting the damages, Wellmark claims (1) Pharmacy Matters suffered no
actual loss; (2) if it did suffer a loss, Pharmacy Matters failed to prove the amount
of damages; (3) the district court should have excluded an award of $138,093 to
WHPI; and (4) the district court miscalculated interest on the damages. In its cross
appeal, Pharmacy Matters asserts the district court should have awarded 10%
interest on the unpaid claims under Iowa Code section 507B.4A(2) (2018). Finding
3
no error in the district court’s determination of damages or interest rates, we
decline to disturb the awards.
As for common-law attorney fees, Wellmark argues (1) Pharmacy Matters
did not specifically plead entitlement to attorney fees; (2) the district court used the
wrong standard and, under the correct standard, fees were not warranted;
(3) Pharmacy Matters had no obligation to pay attorney fees; and (4) pre-judgment
interest was improper. Because Pharmacy Matters did not prove Wellmark’s
conduct was oppressive or a connivance to harass or injure the pharmacy, we
reverse the award of common-law attorney fees.
I. Factual Background
Pharmacy Matters entered contracts with Wellmark to provide “covered
services” to patients in return for claim reimbursement by the insurer. The covered
services at issue entailed the distribution of Factor drugs to twenty-four patients
with hemophilia, a blood-clotting disorder. Those patients had insurance plans
administered by a Blue Cross Blue Shield Association (BCBSA) licensee, and were
clients of Factor Health Management (FHM), a disease-management company
and pharmaceutical wholesaler based in Florida.1
One of those patients was A.K., a child living in Iowa and insured through
hawk-i (Healthy and Well Kids in Iowa). The hawk-i program covered A.K.’s Factor
drugs only if obtained from a provider within Wellmark’s network. As part of
1
FHM coordinated care for hemophilia patients across the country. Part of that
coordination involved ownership of FCS Pharmacy, a Florida-licensed pharmacy
possessing a non-resident pharmacy license in Iowa.
4
coordinating A.K.’s care, FHM searched online for an in-network provider of home-
infusion therapy and found Pharmacy Matters in Iowa City.
That pharmacy belonged to Michael Stein, who was its only full-time
pharmacist. In July 2008, Pharmacy Matters and FHM entered a “contract
pharmacy agreement” to deliver Factor drugs to patients around the country.
Because Pharmacy Matters was an in-network provider, the patients could receive
the drugs at a lower cost.
To carry out the pharmacy’s agreement, Stein received Factor shipments
from FCS and dispensed the drugs to the hemophilia patients according to their
prescriptions. After shipping the drugs, Pharmacy Matters sought reimbursement
from Wellmark. Under its contract with FHM, Pharmacy Matters agreed to pay
FHM the entire reimbursement from Wellmark. Then FHM would remit a 1.5%
dispensing fee to Pharmacy Matters.
After noticing Stein’s submission of a large volume of claims for the
expensive Factor drugs, Wellmark launched an investigation into Pharmacy
Matters. Wellmark’s investigator first met with Stein in November 2008. Stein
explained FHM’s referral of hemophilia patients to his pharmacy. Wellmark
declined to reimburse Pharmacy Matters while its inquiry progressed but advised
Stein to continue submitting claims. He did so—filing 118 claims between August
2008 and July 2009. All remained unpaid. Wellmark’s reasons for rejecting Stein’s
claims shifted during its investigation.2
2
For a more thorough recitation of the tactics Wellmark used to avoid reimbursing
Pharmacy Matters, see T. Zenon Pharmaceuticals, 2015 WL 9450469, at *2–4.
5
After Pharmacy Matters filed its lawsuit, Wellmark finally denied all the
claims, alleging Stein did not provide covered services. In the first appeal, we
rejected Wellmark’s rationale for denying the claims.3 We then remanded for the
district court to determine what damages Wellmark owed Pharmacy Matters. The
district court’s determination of damages is the subject of this second appeal.
II. Damage Award
A. Scope and Standard of Review
We review breach-of-contract claims for correction of legal error.
NevadaCare, Inc. v. Dep’t of Human Servs., 783 N.W.2d 459, 465 (Iowa 2010). If
we find the district court misapplied the law in a manner materially affecting its
decision, we will reverse its judgment. Id. But the district court’s factual findings
are binding when supported by substantial evidence. Id.B. Actual Loss
As its initial salvo, Wellmark argues the district court erred in failing to find
Pharmacy Matters suffered actual loss before calculating the amount of damages.
Wellmark insists our court did not decide Pharmacy Matters incurred damages in
the first appeal. Thus, in Wellmark’s view, the district court needed to make a
specific finding of actual loss rather than presupposing Wellmark owed some
amount in unpaid claims to Pharmacy Matters. Wellmark asserts on remand the
district court could have, and should have, decided Pharmacy Matters was entitled
to zero dollars.
3
We held Wellmark responsible for 114 of the 118 claims. FCS sent four shipments
directly to patients in response to health emergencies. For those shipments, we reasoned
Stein could not dispense drugs that never passed through Iowa. Id. at *11. As a result,
we decided Pharmacy Matters was not entitled to reimbursement for those four claims
which amounted to $1,025,025.20. Id.
6
Neither the law nor the procedural history supports Wellmark’s premise.
The elements of breach of contract include
(1) the existence of a contract, (2) the terms and conditions of the
contract, (3) that [plaintiff] has performed all the terms and conditions
required under the contract, (4) the defendant’s breach of the
contract in some particular way, and (5) that plaintiff has suffered
damages as a result of defendant’s breach.
Royal Indem. Co. v. Factory Mut. Ins. Co., 786 N.W.2d 839, 846 (Iowa) (quoting
Molo Oil Co. v. River City Ford Truck Sales, Inc., 578 N.W.2d 222, 224 (Iowa
1998)). In the 2015 appeal, our court decided Wellmark breached its contract with
Pharmacy Matters by not paying 114 claims submitted for Factor drugs dispensed
by Stein.4 In doing so, we reversed the district court’s order to the contrary. By
finding Pharmacy Matters prevailed in its breach-of-contract claim, we necessarily
decided it suffered damages as a result of Wellmark’s breach.5
After finding the breach, we directed the district court to determine what
damages Wellmark owed to Pharmacy Matters, consistent with our opinion. The
moment our supreme court denied Wellmark’s application for further review, our
4
Wellmark asserts Pharmacy Matters suffered no actual loss because it had not yet paid
FHM for the Factor drugs, and Pharmacy Matters’s contract with FHM included a “pay-if-
paid” clause relieving Pharmacy Matters of liability if not reimbursed by the third-party
insurer. Wellmark maintains this arrangement ensured Pharmacy Matters incurred no out-
of-pocket costs. Thus, Pharmacy Matters was not entitled to recovery. The contract
language at issue stated: “Contractor shall not be responsible for payment to FHM for
Factor Products in the event that a customer or third party payer denies prior approve
adjudication or if prior approval is withdraw after the product has been dispensed for claims
prequalified by FHM.” Even if this clause could be read as requiring Pharmacy Matters to
pay only if paid, Wellmark cites no authority within or outside Iowa—nor did our search
reveal any—in which a court determined the breaching party could defend based on an
ancillary contract between the non-breaching party and a third party.
5
Wellmark presented this same argument in the first appeal, offering Stein’s lack of
damages as an alternate grounds to affirm the district court’s ruling in favor of Wellmark.
We rejected the argument then, and we reject Wellmark’s attempt to relitigate it now.
7
ruling became binding on the parties. See Sutton v. Iowa Trenchless, L.C., No.
12-0931, 2013 WL 988816, at *3 (Iowa Ct. App. Mar. 13, 2013) (determining district
court could not have properly awarded zero dollars in attorney fees when our
remand order directed it to “determine the amount of attorney fees” owed); see
also Bahl v. City of Asbury, 725 N.W.2d 317, 321 (Iowa 2006) (“Under the law of
the case doctrine, an appellate decision becomes the law of the case and is
controlling on both the trial court and on any further appeals in the same case.”).
Because we decided Pharmacy Matters prevailed in its breach-of-contract action,
and incurring damage was an element of that action, the district court properly
determined its sole responsibility was to calculate the amount of damages owed
to Pharmacy Matters.
C. Substantial Evidence for Amount of Damage Award
1. Billed versus Contract Amounts.
Wellmark next argues the district court’s award is not supported by
substantial evidence. In arriving at the $6,335,388 figure, the district court relied
on claim forms submitted by Pharmacy Matters to Wellmark showing the amount
billed for the Factor drugs. On appeal, Wellmark contends the district court should
have relied on the “contractual amount” instead. Wellmark describes “the lower
contractual amount” as the reimbursement Pharmacy Matters “expected to be paid
for its claims.”6
It is true Wellmark mentioned the contract-versus-billed-amount issue
during the remand hearing. The insurer suggested Pharmacy Matters
6
Stein testified he billed his “usual and customary rate” for the Factor drugs dispensed,
but that Wellmark did “not generally” pay that price when reimbursing claims.
8
acknowledged in two filings that an “adjustment” of the billed amount would be
appropriate. Given those filings, Wellmark maintained it did not have to offer any
evidence about “what the adjustments might be.”
After evaluating the trial evidence and arguments offered during the remand
hearing, the district court decided the billing forms provided a reasonable measure
of damages. The district court deducted billed amounts for emergency out-of-state
claims, paid claims relating to two patients, and two claims for which Pharmacy
Matters did not submit reimbursement forms. In its post-judgment motion,
Wellmark argued the billed amount adopted by the district court was inconsistent
with our court’s decision in the first appeal.7
In response to Wellmark’s motion, the district court modified its order to
deduct a greater amount from the damage award to account for the emergency
shipment claims.8 But the district court also expressed its frustration with
Wellmark’s belated assertion the contract amounts were the appropriate rate for
the damage calculation: “This is the first time in these lengthy proceedings that
Wellmark has unequivocally made that statement, despite the Court asking
Wellmark’s counsel several times what the appropriate reimbursement rates
should be.” The district court noted that during trial Wellmark’s counsel said it
could not figure out the expected reimbursement rates “because the claims were
stopped.”
7
Wellmark highlighted the portion of our holding that Pharmacy Matters was not entitled
to reimbursement for the four emergency shipments and noted our reference to the
contractual amount for those claims.
8
The district court’s first order deducted the estimated settlement amount, $1,025,025.25,
for the claims relating to the emergency shipments. The modification decreased the award
by another $130,412.80 so the figure used to deduct the value of the emergency claims
tracked the figure used to calculate the total damage award (the “billed” amount).
9
The bottom line is the district court could reasonably rely on the billed
amounts to calculate the damages incurred by Pharmacy Matters. Our contract
cases recognize “a distinction between proof of the fact that damages have been
sustained and proof of the amount of those damages.” Pavone v. Kirke, 801
N.W.2d 477, 495 (Iowa 2011) (quoting Olson v. Nieman’s, Ltd., 579 N.W.2d 299,
309 (Iowa 1998)). Courts cannot award damages if uncertainty or speculation
surrounds whether the non-breaching party sustained damages. Id. But “if the
uncertainty merely lies in the amount of damages sustained, ‘recovery may be had
if there is proof of a reasonable basis from which the amount can be inferred or
approximated.’” Id. (quoting Olson, 579 N.W.2d at 309) (emphasis added).
Applying that test, the district court observed, the billing statements
reflected the pharmacy’s “usual and customary price” which was the average
wholesale price (AWP) plus a dispensing fee. The AWP is published by the
Medispan database.9 During the remand hearing, Wellmark rebutted these
calculations mainly by asserting Pharmacy Matters suffered no loss. Contrary to
Wellmark’s position, the uncertainty lies not in the pharmacy’s suffering of
damages from the insurer’s breach, but with the amount owed. The amounts billed
by Pharmacy Matters formed a reasonable basis from which the court derived the
damage award. See Pavone, 801 N.W.2d at 495. We affirm on that question.
2. Damages for claims relating to patient A.K.
On a smaller scale, Wellmark faults the district court for including $138,093
in the damage award to reimburse Pharmacy Matters for benefits provided to
9
Wellmark’s and WHPI’s contracts with Pharmacy Matters list the Medispan database as
a resource for obtaining average wholesale prices of drugs.
10
patient A.K. under the hawk-i program, then administered by WHPI.10 Wellmark
refutes responsibility for claims involving patients insured by its affiliate WHPI
because Pharmacy Matters failed to establish those damages resulted from
Wellmark’s breach. The proper result, according to Wellmark, would have been
for the district court to hold WHPI responsible as A.K.’s insurer.
We find no error in the district court’s inclusion of the claims involving A.K.
in the damage award against Wellmark. Pharmacy Matters submitted its claims
for the Factor dispensed to patient A.K. to Wellmark, in the same manner it
submitted the claims for patients covered by non-intervening insurers. Wellmark
was not the coverage provider for any of the patients to whom Pharmacy Matters
dispensed the Factor. Wellmark acknowledged it played the same role, as
authorized by its contract with Pharmacy Matters, in the dispute over claims
relating to A.K.—it reviewed and processed—or here, denied—the claims.
Substantial evidence supported the district court’s finding that Wellmark’s breach
of its contract with Pharmacy Matters resulted in the pharmacy’s loss on claims
involving drugs dispensed to A.K.. See Midland Mut. Life Ins. Co. v. Mercy Clinics,
Inc., 579 N.W.2d 823, 834 (Iowa 1998).
D. Damages versus Equitable Remedy
As another reason to reverse, Wellmark contends the district court
“exceeded its jurisdiction” by imposing an equitable remedy—specific
performance—when Pharmacy Matters sought only damages and suffered no
10
Represented by the same counsel as Wellmark, WHPI successfully moved to intervene
in the fall of 2009. WHPI participated in the first appeal. After at first joining Wellmark in
the instant action, WHPI voluntarily dismissed its appeal in August 2017, asserting it had
“no adverse judgment entered against” it by the district court.
11
loss. Wellmark believes the district court invoked specific performance by saying
the insurer must fulfill its “end of the agreement, i.e., pay for the Factor drugs
dispensed by Pharmacy Matters.”
Damages don’t transform into an equitable remedy just because the party’s
performance under the contract happens to include reimbursement. See Berry
Seed Co. v. Hutchings, 74 N.W.2d 233, 237 (Iowa 1956) (“It may therefore be said
that whenever one person has in his hands money equitably belonging to another,
that other person may recover it by an action for money had and received, and the
remedy at law is adequate and complete.”). Here, the district court did not order
Wellmark to perform its contract with Pharmacy Matters. Instead, the court
calculated the damages Wellmark owed for its failure to perform under the
contract.11 For these reasons, we reject Wellmark’s assertion the court exceeded
its jurisdiction by ordering an equitable remedy for an action at law.
E. Statutory Interest on the Damage Award
1. Pre-judgment Interest
Next Wellmark assigns error to the district court’s imposition of 5% interest
“per annum from the date of filing of the petition,” under Iowa Code section 535.2.
11
Additionally, Wellmark’s argument the damage award exceeded the contractual amount,
discussed above, illustrates the absence of an equitable remedy. Had the remedy been
specific performance, Wellmark would have been asked to process the claims and
determine the reimbursement amount. As it stands, the court calculated the amount. See
Davenport Osteopathic Hosp. Ass’n v. Hosp. Serv., Inc., 154 N.W.2d 153, 162–63 (Iowa
1967) (“The question now to be resolved is whether the refusal by Blue Cross to reimburse
Hospital pursuant to terms of the contract was in fact a breach. . . . We are satisfied any
failure by Blue Cross to pay in accord with the reimbursement cost formula contained in
the original contract constituted a breach. Under the existing factual situation Hospital
had the right to, (1) ask damages under the terms of the contract; (2) disaffirm the contract
and ask for value of services performed; or (3) ask specific performance.”).
12
Wellmark misreads the district court’s statement as directing post-judgment
interest accrual at a pre-judgment rate.
Iowa Code section 535.2(1) sets a 5% pre-judgment interest rate on “money
due by express contract” and “money after the same becomes due.” Pre-judgment
interest accrues from the date the action begins to “prevent persons obligated to
pay money to another from profiting through delays in litigation.” Hughes v.
Burlington Northern R.R. Co., 545 N.W.2d 318, 321 (Iowa 1996). Here, the district
court properly assigned the statutorily authorized pre-judgment interest to accrue
from the date of filing the petition. After the court entered judgment, the
accumulated pre-judgment interest aggregated with the contract judgment, and
that aggregated amount “began to draw post[-]judgment interest under Iowa Code
section 535.3, just like any civil judgment.” See Wilson v. Farm Bureau Mut. Ins.
Co., 770 N.W.2d 324, 334 (Iowa 2009).
2. Clean Claim Interest
Pharmacy Matters cross-appeals, alleging the district court erred in refusing
to award 10% annual interest on unpaid claims under Iowa Code section 507B.4A.
Pharmacy Matters argues Wellmark must pay interest because the claim
submitted by Pharmacy Matters was “clean,” defined by the code as “a properly
completed paper or electronic billing instrument containing all reasonably
necessary information.” Iowa Code § 507B.4A(2)(b). The code provides payment
of a clean claim “shall include interest at the rate of ten percent per annum when
an insurer . . . fails to timely[12] pay a claim.” Id. § 507B.4A(2)(d).
12
The corresponding administrative code provision provides: “Insurers subject to this
subrule shall either accept and pay or deny a clean claim for health care benefits under a
13
Our supreme court does not recognize a private cause of action under
chapter 507B. See Bates v. Allied Mut. Ins. Co., 467 N.W.2d 255, (Iowa 1991);
Seeman v. Liberty Mut. Ins. Co., 322 N.W.2d 35, 42–43 (Iowa 1982); see also
Mueller v. Wellmark, Inc., 818 N.W.2d 244, 254–55 (Iowa 2012) (“[Chapter 514]
provided the insurance commissioner with specified administrative powers to
investigate, adjudicate, remedy, and sanction prohibited acts of unfair practices.”).
Only the Insurance Commissioner may impose the “prompt pay” remedies
contained within section 507B.4A. To find otherwise would defy precedent and
invade the province of the Commissioner. See Bates, 467 N.W.2d at 259–60;
Seeman, 322 N.W.2d at 42–43; Mueller, 818 N.W.2d at 254–55. The district court
thus properly declined the pharmacy’s request to impose 10% interest on the
reimbursement payments under Iowa Code section 507B.4A(2).
III. Attorney Fees
A. Scope and Standard of Review
We review an award of common law attorney fees de novo. Wolf v. Wolf,
690 N.W.2d 887, 896 (Iowa 2005) (citing Hockenberg Equip. Co. v. Hockenberg’s
Equip. & Supply Co., 510 N.W.2d 153, 158 (Iowa 1993)).
B. Analysis
Wellmark asks us to reverse the award of common law attorney fees
because the district court applied the wrong standard.13 Courts generally award
benefit certificate or policy issued by the insurer within 30 days after the insurer’s receipt
of such claim.” Iowa Admin. Code r. 191-15.32(2)(a).
13
Wellmark advances several objections to the district court’s award of attorney fees.
Because we find Pharmacy Matters failed to prove Wellmark acted with oppression or
connivance, we need not address Wellmark’s remaining arguments.
14
attorney fees only when authorized by statute or contract. See Hockenberg Equip.
Co., 510 N.W.2d at 158. But Iowa courts recognize a rare exception when a
plaintiff proves “the culpability of the defendant’s conduct exceeds the ‘willful and
wanton disregard for the rights of another.’” Id. at 159. “[S]uch conduct must rise
to the level of oppression or connivance to harass or injure another.” Id. at 159–
60. “Oppressive conduct” is “difficult to bear, harsh, tyrannical, or cruel.” Id. at
159. “Connivance” means either willful blindness or intentional failure to discover
or prevent wrongdoing. See Thornton v. Am. Interstate Ins. Co., 897 N.W.2d 445,
475 (Iowa 2017). These terms envision more than bad faith. Id.In awarding attorney fees, the district court emphasized the lengthy nature
of the proceedings:
the complexity of this case; the responsibility assumed by Plaintiff’s
attorneys; the underlying subject matter of the claims themselves
involving 24 patients, mostly children, who required the [f]actor drugs
to treat a rare inherited disease of hemophilia and prevent possible
fatal bleeds; the length of this claim process and litigation and
expense incurred by Plaintiff in enforcing its rights under the contract;
the results obtained . . . [.] [I]t is not possible to even remotely make
Pharmacy Matters “whole again” without allowing Pharmacy Matters
to recover an amount sufficient to pay their attorneys.
All this may be true, but Pharmacy Matters did not prove Wellmark’s
conduct reached levels of oppression or connivance. See id. Pharmacy Matters
cites Wellmark’s shifting justifications for denying claims, and alleges Wellmark
falsely denied knowledge of reimbursement rates. Those actions may display bad
faith, but do not exhibit an intentional gambit to harass or harm Pharmacy Matters.
See id. at 475 (citing Wolf, 690 N.W.2d at 896).
On our de novo review, we find Wellmark’s conduct did not satisfy the
Hockenberg test. See id. Wellmark zealously litigated its case, but it did not
15
engage in harsh, cruel, or tyrannical conduct.14 For these reasons, we consider
the award of common law attorney fees unjustified.15
To recap, we affirm the damage award and reverse the attorney fee award.
AFFIRMED IN PART AND REVERSED IN PART ON APPEAL;
AFFIRMED ON CROSS APPEAL.
14
As indicia of the insurer’s misconduct, Pharmacy Matters also points to Wellmark’s
accusations that Stein committed insurance fraud, its effort to submit Stein’s criminal
indictment into evidence, and its continued references to Stein’s alleged dishonesty.
While advancing toward the line, these acts by Wellmark do not cross into the heightened
standard of oppression or connivance to harass or injure Pharmacy Matters.
15
The district court’s rejection of punitive damages bolsters our conclusion. The level of
culpability meriting common law attorney fees exceeds the willful-and-wanton-disregard
standard required to prove punitive damages. See Williams v. Van Sickel, 659 N.W.2d
572, 579 (Iowa 2003).