Ingham Regional Medical Center v. United States , 2016 U.S. Claims LEXIS 216 ( 2016 )

In the United States Court of Federal Claims
No. 13-821C
Filed: March 22, 2016
* * * * * * * * * * * * * * * *
*
INGHAM REGIONAL MEDICAL * Money-Mandating Statute and
CENTER, ET AL., * Regulation; Failure to State a Claim;
* Breach of Express and/or Implied in
Plaintiffs, * Fact Contract; Release; Mutual
v. * Mistake; Breach of the Covenant of
* Good Faith and Fair Dealing; Statute
UNITED STATES, * of Limitations.
*
Defendant. *
*
* * * * * * * * * * * * * * * *
Alexander J. Pires, Pires Cooley, Washington, DC, for plaintiffs. Of counsel,
Gregory A. Brodek, Duane Morris LLP, Bangor, ME.
Phyllis Jo Baunach, Senior Trial Counsel, Commercial Litigation Branch, Civil
Division, Department of Justice, Washington, D.C. With her were Steven J. Gillingham,
Assistant Director, Civil Division, Robert E. Kirschman, Jr. Director, Commercial
Litigation Branch, and Benjamin C. Mizer, Principal Deputy Assistant Attorney General,
Civil Division. Of counsel, Gerald A. Wesley, Associate General Counsel, Defense Health
Agency, Department of Defense, Washington, D.C.
OPINION
HORN, J.
Plaintiffs Ingham Regional Medical Center (Ingham), Bay Regional Medical Center
(BRMC), McLaren Northern Michigan (McLaren), Gifford Medical Center, Inc. (Gifford),
and Lakewood Health System (Lakewood) operate hospitals that participated in the
TRICARE program, a federal program providing health care to uniformed service
members, retirees, and certain others. Plaintiffs allege that from at least August 1, 2003
to May 1, 2009 (the Relevant Period), the defendant, United States of America, acting
through the Secretary of the United States Department of Defense (DoD) in his official
capacity as operator of TRICARE, underpaid them for certain services they provided as
part of the TRICARE program, which plaintiffs allege resulted in the breach of two
contracts and violations of applicable statutory and regulatory provisions.1 They seek to
bring a class action2 on behalf of every hospital in the United States that (1) provided
outpatient services to individuals enrolled in the TRICARE program during the Relevant
Period, and (2) participated in the defendant’s Discretionary Payment Process, described
below, announced April 25, 2011. Plaintiffs estimate their proposed class size to be
approximately 5,200 hospitals.
FINDINGS OF FACT
In 1956, Congress established a military health care system, now known as
TRICARE, to “create and maintain high morale in the uniformed services by providing an
improved and uniform program of medical and dental care for members and certain
former members of those services, and for their dependents.” See 10 U.S.C. § 1071(2012).3 Although the program initially covered only active duty members and their
dependents, coverage was later expanded to include retirees, eligible dependents of
retirees, and survivors, i.e., certain surviving dependents of deceased service members
killed on active duty. See Military Medical Benefits Amendments of 1966, Pub. L. No. 89-
1 Plaintiffs allege that all hospitals in their purported class were underpaid from August 1,
2003 to May 1, 2009, but that “small rural hospitals” continued to be underpaid through
December 31, 2009, and that “children’s hospitals, cancer hospitals, and critical access
hospitals,” continue to be underpaid through the present. Plaintiffs do not state whether
the five named plaintiffs were small rural hospitals, children’s hospitals, cancer hospitals,
or critical access hospitals. Therefore, according to plaintiffs, to the extent that the named
plaintiffs qualified as such hospitals, the Relevant Period could include the additional
periods of alleged underpayment described above. The court also notes that, without
explanation, the plaintiffs in their opposition to defendant’s motion to dismiss define the
Relevant Period as ending on April 30, 2009 rather than May 1, 2009. As discussed
below, April 30, 2009 was the last day on which TRICARE used CHAMPUS Maximum
Allowable Charge (CMAC) rates to reimburse health care providers such as plaintiffs.
2 Plaintiffs have not yet filed a motion for class certification.
3 From 1966 to 1995, after the passage of Military Medical Benefits Amendments of 1966,
Pub. L. No. 89-614, §2(6), 80 Stat. 862, 863–65 (1966), the program was popularly known
as the Civilian Health and Medical Program of the Uniformed Services (CHAMPUS). See
Department of Defense, Under Secretary of Defense for Personnel and Readiness,
Military Compensation Background Papers: Compensation Elements and Related
Manpower Cost Items. Their Purposes and Legislative Backgrounds 715 (7th ed. 2011),
http://www.loc.gov/rr/frd/pdf-files/Military_Comp-2011.pdf (last visited March 18, 2016).
From 1995 to the present day, after a number of significant reforms were implemented by
the Department of Defense, the program has operated under the name TRICARE. See
id. at 719-20; see generally id. at 715-20 (describing the history of the Federal
Government’s attempts to provide medical care to members of the uniformed services
and their dependents). The parties appear to use the terms CHAMPUS and TRICARE
interchangeably in their filings.
2
614, 80 Stat. at 865; see also 10 U.S.C. § 1086(c) (2012). The law empowers the
Secretary of Defense to administer TRICARE and the Secretary has used that power to
promulgate regulations and manuals that, together with the underlying statutes, govern
the TRICARE program. See 10 U.S.C. 1073(a)(2) (2012); see generally 32 C.F.R. § 199(2015). Among other provisions, the law provides the Secretary of Defense with the
authority to contract with outside providers, such as the plaintiff hospitals, for medical care
for dependents of service members, retirees, dependents of retirees, and survivors. See
10 U.S.C. §§ 1079(a), 1086(a) (2012).4
TMA/DHA, as part of its management responsibilities, contracts with three
managed care support contractors (MCSCs), which in turn are responsible for
establishing networks of health care providers in their national region to provide health
care services to TRICARE beneficiaries (there are three national regions: North, South,
and West) and for receiving and processing individual claims. See 10 U.S.C. § 1072(7)
(2012); DoD Directive 5136.13 (September 30, 2013). DHA/TMA does not typically enter
into reimbursement contracts directly with medical care providers, including hospitals
such as the plaintiffs, but rather with these MCSCs, which in turn receive and process the
providers’ claims for medical reimbursement. If an individual claim qualifies for payment
under the TRICARE Program, then the claim is reimbursed in accordance with the
guidelines set forth in 32 C.F.R. § 199.14.
The event which appears to have set in motion the events leading to this lawsuit
was the alteration by Congress in 2001 of a single word in the portion of the TRICARE
statute governing the reimbursements for outside providers of health care services. Prior
to 2001, 10 U.S.C. § 1079(j)(2) stated:
The amount to be paid to a provider of services for services provided under
a plan covered by this section may be determined under joint regulations to
be prescribed by the administering Secretaries which provide that the
amount of such payments shall be determined to the extent practicable in
accordance with the same reimbursement rules as apply to payments to
providers of services of the same type under title XVIII of the Social Security
Act (42 U.S.C. 1395 et seq.) [i.e., Medicare].
10 U.S.C. § 1079(j)(2) (2000) (emphasis added). In 2001, Congress altered 10 U.S.C.
§ 1079(j)(2) by replacing “may be determined under joint regulations” with “shall be
determined under joint regulations.” National Defense Authorization Act for Fiscal Year
2002, Pub. L. No. 107-107, § 707, 115 Stat. 1012, 1163 (2001); see 10 U.S.C. 1079(j)(2)
4 Prior to October 1, 2013, the TRICARE Management Activity (TMA) managed and
administered the TRICARE program pursuant to DoD Directive 5136.12 (May 31, 2001).
Effective October 1, 2013 and pursuant to DoD Directive 5136.13 (September 30, 2013),
the Defense Health Agency (DHA) was established to manage and administer the
TRICARE program, replacing TMA. In their submissions to this court, the parties refer to
TMA and DHA interchangeably.
3
(2006) (emphasis added).5 To implement this change, TRICARE issued an interim final
rule on June 13, 2002, see 67 Fed. Reg. 40597–02 (June 13, 2002) (the Interim Final
Rule), and then a final rule on October 24, 2005, see 70 Fed. Reg. 61368–79 (Oct. 24,
2005) (the Final Rule). The Interim Final Rule explained that, from 2000 to 2004, Medicare
was phasing in a new Outpatient Prospective Payment System (OPPS) methodology for
facility charges in hospital outpatient departments and emergency departments. See 67
Fed. Reg. 40597–02, 40601. The Interim Final Rule then stated that the DoD planned to
follow the Medicare rule, but that “because of complexities of the Medicare transition
process and the lack of TRICARE cost 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. Instead, the Interim Final Rule, effective August 12, 2002, adopted new
methods of payment for four categories of hospital-based outpatient services, with the
anticipation of the “eventual adoption of the Medicare OPPS for most TRICARE hospital
outpatient services covered by the Medicare OPPS.” Id.; see id. at 40598 (stating effective
date of rule). For clinical laboratory services, rehabilitation therapy services, and
venipuncture, payments would be based on “the TRICARE-allowable cost method in
effect for professional providers,” while for outpatient radiology services, a fixed maximum
allowable charge, the CHAMPUS Maximum Allowable Charge (CMAC), would be used.
Id. at 40601; see id. at 40604-05 (describing additions to be codified at 32 C.F.R.
§ 199.14(a)(5)).
The 2005 Final Rule repeated the language in the Interim Final Rule regarding the
impracticability of fully adopting Medicare OPPS for hospital outpatient services at that
time. See 70 Fed. Reg. at 61371. The Final Rule then set forth reimbursement methods
for hospital outpatient services that had “established allowable TRICARE charges,”
including: laboratory services, including clinical laboratory; rehabilitation therapy services;
radiology services; diagnostic services; ambulance services; durable medical equipment
(DME) and supplies; oxygen and related supplies; drugs administered other than oral
method; all professional provider services that are provided in an emergency room, clinic,
or hospital outpatient department, etc.; and routine venipuncture. Id.; see also id. at
61378–79 (describing amendments to 32 C.F.R. § 199.14(a)(5)(i)–(xii)). Plaintiffs refer to
these categories as “All Outpatient Services.” The 2005 Final Rule then explained: “For
these services, payments are based on the TRICARE-allowable cost method in effect for
professional providers or the CHAMPUS Maximum Allowable Charge (CMAC).” Id. at
61371. All other outpatient hospital services, except for ambulatory surgery services,
which had their own payment methodology, were to paid as billed. Id. at 61371–72. The
5 As defendant identifies: “The current citation is 10 U.S.C. § 1079(i)(2). The National
Defense Authorization Act for Fiscal Year 2015 changed the citation ‘by striking
subsection (i) and . . . by redesigning subsections (j) through (q).’” (quoting Carl Levin
and Howard “Buck” McKeon National Defense Authorization Act for Fiscal Year 2015,
Pub. L. No. 113-291, § 703, 128 Stat. 3292, 3411 (2014)). To avoid confusion, however,
the court will continue throughout this opinion to refer to the statutory section as 10 U.S.C.
§ 1079(j)(2).
4
2005 Final Rule made these changes retroactively effective to August 1, 2003. Id. at
61368.
In late 2008, TRICARE introduced a new payment system for hospital outpatient
services that was similar to the OPPS rules used by Medicare. The effective date for the
new payment system was May 1, 2009 for most hospitals, and January 1, 2010 for small
rural hospitals. See 73 Fed. Reg. 74945–74966 (December 10, 2008) (publishing a final
rule implementing the TRICARE Hospital OPPS with an effective date of February 9,
2009); see also 74 Fed. Reg. 6228 (February 6, 2009) (extending the effective date of
TRICARE’s OPPS until May 1, 2009).
Plaintiffs allege that the use of CMAC rates to reimburse hospitals did not
approximate Medicare payment rates and resulted in significant underpayment to
hospitals that treated TRICARE beneficiaries. According to plaintiffs, “CMAC was
intended as a payment methodology used to reimburse ‘individual health care providers’
(such as doctors) and not institutions, such as hospitals, which invariably have more
overhead.” (emphasis in original). Thus, plaintiffs allege, CMAC was never intended to be
the exclusive reimbursement paid to hospitals for providing hospital outpatient services.
Plaintiffs allege that TRICARE’s use of CMAC rather than Medicare’s hospital
reimbursement methodology violated 10 U.S.C §§ 1079(a), (j)(2) and 1086(a), (g), which,
according to plaintiffs, required the DoD to reimburse health care providers in accordance
with Medicare payment rules to the extent practicable. Plaintiffs allege that from 2003 to
2008, the hospitals made “substantial efforts,” both orally and in writing, to advise
TRICARE of this alleged error, but TRICARE insisted CMAC was the appropriate
reimbursement methodology for hospitals. Plaintiffs allege that, as a result, they and the
proposed class members were “consistently and continually” underpaid during the sixty-
nine months of the Relevant Period.
Plaintiffs also allege that, as a result of complaints from certain hospitals, at some
undefined point in time, TRICARE directed that a study be undertaken of the accuracy of
its payments to hospitals for all outpatient services rendered during the Relevant Period
(the Kennel Study). This study was performed by Kennel and Associates, Inc. (Kennel),
an independent consultant, which had previously been used by defendant as an outside
subject matter expert. The Kennel Study allegedly compared CMAC payments to the
payments that would have been made using Medicare payment principles. According to
the plaintiffs, the Kennel Study determined that the defendant “(1) underpaid hospitals for
outpatient radiology but, (2) correctly paid hospitals for all other outpatient services.”
(emphasis in original).
According to plaintiffs, several of the hospitals asked the defendant to
acknowledge certain problems with the Kennel Study, to release the Kennel Study, and
to calculate monies owed to proposed class members for all outpatient services, not just
radiology, but the defendant refused. Instead, according to plaintiffs, the defendant, acting
through the Deputy Director of TRICARE, Rear Admiral Christine S. Hunter, “unilaterally,
and without notice to the hospitals,” created and announced a “discretionary payment
process,” notice of which was sent to every hospital in the United States via a letter signed
5
by Deputy Director Hunter and dated April 25, 2011 (the April 25, 2011 Letter). A copy of
this letter was attached as an exhibit to plaintiffs’ amended complaint.
The April 25, 2011 Letter begans by stating that “[t]he Department of Defense
(DoD) is currently analyzing whether your institution qualifies for any net adjustments to
payments for hospital outpatient radiology services for the period August 1, 2003, until
the TRICARE hospital Outpatient Prospective Payment System (OPPS) began on May
1, 2009.” The April 25, 2011 Letter continued by stating that “[d]etailed instructions will be
posted on the TRICARE Management Activity Web site, [sic]
www.tricare.mil/RadiologyDiscretionaryAppealAdjustments explaining the manner in
which a hospital may request that your institution’s claims data be reviewed for
appropriate discretionary adjusted payments.” The April 25, 2011 Letter continued:
For purposes of this process, DoD will treat your submission as an untimely
but discretionary appeal under 32 Code of Federal Regulations
199.10(a)(5) and (c), provided it is received no later than 60 days from the
date of this letter. Based on the request, your hospital may be paid an
adjustment, subject to the availability of appropriations, in return for your
acceptance of DoD’s offer of additional payment based on criteria
established by the agency. . . . In order to bring closure to any concerns
regarding payment of hospital outpatient services under the TRICARE
regulation prior to implementation of OPPS, payment of the discretionary
adjustments will also be contingent on the execution of a release by the
hospital of any hospital outpatient service claims against the agency,
TRICARE beneficiaries, and TRICARE MCSCs. We value your hospital as
a partner in this effort and remain committed to working with you to complete
the analysis of claims data and determine if any additional payments may
be allowed.
In addition to the April 25, 2011 Letter, the agency made available on the TRICARE
webpage mentioned in the Letter a document titled “NOTICE TO HOSPITALS OF
POTENTIAL ADJUSTMENT TO PAST PAYMENTS FOR OUTPATIENT RADIOLOGY
SERVICES” (the Notice) and answers to certain Frequently Asked Questions (the FAQs).
(capitalization in original). Plaintiffs attached the Notice and an undated version of the
FAQs as exhibits to their amended complaint.6
6 Pursuant to this court’s order and related to an identical attachment in the plaintiffs’
original complaint, plaintiffs filed a document with the court identifying “when and where
the undated frequently asked questions, included as an exhibit to the plaintiffs’ complaint,
was originally made available.” Plaintiffs indicated:
To the best of our knowledge and belief, the FAQs as originally published
in or around April 2011, consisted of 12 questions and answers; the FAQs
included as Exhibit D to Plaintiff’s [sic] Complaint consisted of 17 questions
6
The Notice described the legislative and regulatory background for the
“discretionary net adjusted payments” discussed in the April 25, 2011 Letter, the agency’s
rationale in providing the payments, and a nine-step methodology hospitals were to follow
to request these payments. The background section described: how the National Defense
Authorization Act for Fiscal Year 2002 changed the relevant law “to require use of
Medicare rates for hospitals to the extent practicable”; how the 2002 Interim Final Rule
partially implemented this statutory change, specifying payments for four categories of
hospital outpatient services, including that the CMAC rate would be used to reimburse
radiology services, while explaining that it was not practicable to adopt Medicare’s OPPS
payment system for hospital outpatient services at that time; how the 2005 Final Rule
applied the CMAC to All Outpatient Services, retroactively effective August 1, 2003; and
how TRICARE eventually adopted an OPPS payment methodology modeled after
Medicare’s, effective May 1, 2009.
In discussing the rationale behind the discretionary payments, the Notice began
by stating that “[a] question has arisen about DoD’s interpretation and implementation of
the TRICARE regulation provision on reimbursement of hospital outpatient services as
issued in the Final Rule on October 24, 2005.” The Notice continues:
The TRICARE regulation provisions on hospital outpatient services, in the
absence of adoption of the Medicare OPPS methodology, adopted
comparable Medicare payments for similar services provided in other sites
(i.e., physician offices). That is, TRICARE looked to the similarity of services
being provided, not the site of services, in adopting a reimbursement
methodology for hospital outpatient services. By this approach, the
technical component of the TRICARE allowable charge rates for similar
services was used to reimburse the hospital for similar services furnished
on an outpatient basis.
The Notice went on to state that:
[I]n reviewing payments for hospital services, DoD has determined that, for
radiology services specified in the regulation as being reimbursed under the
allowable charge methodology, 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, in looking at the Medicare
reimbursement methodologies in existence prior to adoption of Medicare
OPPS in 2000, (methodologies resulting in fair payment for Federal health
and answers; and, the FAQs that were updated on August 2, 2011
consisted of 20 questions and answers.
Plaintiffs attached copies of the April 2011 and August 2011 versions of the FAQs to this
filing and indicated they did not know exact dates the documents were published.
Defendant states that the FAQs were posted to the TRICARE website and “[b]ecause the
hospitals raised questions throughout the process, the agency periodically revised the
FAQ.”
7
care, which TRICARE allowable charges for hospital outpatient services
were intended to be emulated), some radiology services were underpaid in
comparison. Although a majority of the hospital outpatient services were
paid based on fee schedules, etc., which were comparable with what
Medicare would have paid, radiology services would need to have some
TRICARE payments adjusted to reach a comparable payment level. Thus,
although payments to hospitals for radiology services were consistent with
the duly promulgated regulation, there is a basis for TRICARE to provide an
opportunity to make some discretionary net payment adjustments to
approximate more closely Medicare payment methods.
The Notice then discussed an analysis TRICARE had performed, which plaintiffs
later learned was the Kennel Study, that “compared TRICARE hospital outpatient
services reimbursement with the intended comparable Medicare fair payment.” The
Notice stated that this analysis concluded that “[i]n all cases, except radiology services,
TRICARE payments for hospital outpatient services were either comparable to what
Medicare would have paid or TRICARE paid more.” According to the Notice, the potential
net underpayment for all hospitals was “approximately $98 million.” In view of these
findings, the Notice stated that TRICARE was “offering hospitals an opportunity for
discretionary adjusted payments for radiology services for which TRICARE allowable
charges were not comparable to the pre-OPPS Medicare fair rates for the period August
1, 2003, to May 1, 2009 (or other appropriate end date for OPPS-exempt hospitals.”
The Notice then went on to explain why TRICARE would make these “net
adjustments to payments of hospital outpatient radiology services”:
For hospital outpatient services during [the period August 1, 2003 until the
TRICARE OPPS began on May 1, 2009], payments by the TRICARE
Managed Care Support Contractors (MSCSs) consistent with the applicable
TRICARE regulation, policy and TRICARE directions were correct. As
specifically concerns hospital outpatient radiology services, however,
TRICARE may have directed payment of amounts which in some cases
were less and in some cases were more than the comparable Medicare fair
payment. General TRICARE policy is that payment methodologies follow to
the extent practicable Medicare payments. Prior to adopting the Outpatient
Prospective Payment System (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 outpatient radiology services.
In contrast, TRICARE regulation limited reimbursement to hospitals for
individual outpatient radiology services to the technical component of the
CHAMPUS Maximum Allowable Charge (CMAC), which was one
component of Medicare’s physician fee schedule. Consistent with
TRICARE policy under statute to pay similar to Medicare, we have
determined that discretionary adjusted payments may better reflect the
Medicare payment amounts for outpatient radiology claims.
8
The Notice stated, similar to the April 25, 2011 Letter, that any submission would be
treated as “an untimely but discretionary appeal under 32 CFR 199.10(a)(5) and (c)
provided it is received no later than June 23, 2011.” The Notice also indicated that
“[b]ased on the request and subject to the availability of funds, each hospital will receive
adjusted payments in return for acceptance of DoD’s offer of additional payment based
on criteria established by the agency,” and that “payment of the discretionary adjustments
will also be conditioned on the execution of a release by the hospital of any hospital
outpatient service claims against the agency, TRICARE beneficiaries and the TRICARE
MCSCs.”
The Notice then laid out the nine-step process by which hospitals could “request
an analysis of their claims data for possible discretionary adjustment” and to “govern the
review of payments for hospital outpatient radiology services and payment of any
discretionary net adjustments.” Step 1 instructed hospitals to submit “a request for
analysis of their claims data (process defined in Step 2) for hospital outpatient department
radiology charges” during the period August 1, 2003 to April 30, 2009, the last day before
TRICARE OPPS became effective. Step 1 also stated that “[s]mall rural hospitals,” which
were “not subject to TRICARE’s OPPS until January 1, 2010,” should submit requests for
the period August 1, 2003 to December 31, 2009, that “Critical Access Hospitals,” which
“are not subject to TRICARE’s OPPS,” should submit requests for the period August 1,
2003 to November 30, 2009, and that other “[h]ospitals not subject to OPPS (such as
Cancer and Children’s hospitals)” should submit requests for the period August 1, 2003
to December 31, 2010. Step 2 described the procedure for submitting a request,
instructing hospitals to submit their data, including name, address, zip code, Tax ID
number, TRICARE sub ID number, the 6-digit Medicare OSCAR provider number, NPI
number, and contact names and addresses for formal response and informal questions.
Step 2 explained that “[a] separate Excel spreadsheet must be completed for each
hospital in the TMA-specified format,” following an example posted on the TRICARE
website, and emailed to TMA. Plaintiffs attached a blank example of this spreadsheet to
their amended complaint (the Spreadsheet).
Steps 3 through 7 described the review process. Step 3 detailed TMA’s
methodology to “extract the claims for each hospital for claims for outpatient radiology
services during the relevant period,” and indicated which types of radiology claims TMA
would exclude and which types it would consider. Step 4 detailed the “‘Medicare’ method,”
the formula TMA would use to “calculate what would have been paid under the approach
that Medicare used to pay hospital outpatient radiology claims prior to CMS’s
implementation of the Medicare OPPS in 2000.” Step 5 explained how TMA would “adjust
the ‘Medicare’ amount calculated in Step 4 on each claim using the ratio of the actual
allowed amount on the claim to the TRICARE Standard allowed amount (the technical
component of the CMAC).” Step 6 described how TMA would “then compare the adjusted
‘Medicare’ amount for each claim with the actual allowed amounts on that claim” and “will
calculate the difference between the two amounts.” Step 7 explained that, “[i]f the
calculations in Step 6 indicate that an additional payment shall be made to the hospital,
then a hospital-specific offset for cost sharing shall be calculated.”
9
With regard to the particular claims that would be considered in this process,
plaintiffs contend that the “[h]ospitals were advised that TRICARE had in its possession
all of the data needed to make the proposed calculation and that they should not submit
claims level data.” Question 2 of the FAQs addressed claims-level data and, in response
to the question, “[w]ill I need to provide further information such as claims-level data or
identify the relevant claims or patients,” the government answered, “[n]o, you will not.
TRICARE will do this. You need to submit only the information in the Excel sheet. Do not
submit patient-level data.” Question 11 of the FAQs, in response to the question, “[w]ill
the adjustment for a hospital be done in one bulk check or will it be done at the claim
level,” indicated that, “[t]he hospital will receive one check with a summary of the results
of the calculations. Claims-level detail will not be provided due to the number of
adjustments over this 7-year period.” Moreover, in what plaintiffs allege was a later
version of the FAQs, question 18 asked, “[c]an the government provide the individual
claims records, including patient identifiers and CPT codes, for each of the radiology
claims that were subject to adjustment” and the answer indicated, “[n]o, the government
will not provide individual claims data to each hospital. The adjustment process described
in the notice posted on this website indicates that if a hospital has questions about the
data used, it should submit a detailed explanation of the alleged errors and proposed
corrections with supporting documentation.”
Step 8 in the Notice explained that “[a] written response to the hospital’s request
will be sent to the individual at the address provided by the hospital. The response will
provide the calculated discretionary adjusted payment and the calculations from which
the adjustment was derived.” An alleged example of such a written response from TMA
was attached as an exhibit to plaintiffs’ amended complaint. The document is labelled
“Hospital Radiology Payment Adjustment Worksheet,” and, after listing the hospital’s
identifying information, contains a table listing, for various time periods during the
Relevant Period, the “Number of Radiology Line Items,” the “TRICARE Allowed
Amounts,” the “Allowed Amount Under Medicare Method,” and the difference between
the Medicare and the TRICARE amount for each period. The differences for all periods
were then summed to get the “Adjusted Allowed Amount.” Step 8 further specified that:
While the methodology for calculating the adjustment is not subject to
questions, any questions regarding the data used in the calculations should
be received by TMA within 30 days of the date of TMA’s response as
specified in the response. Any questions should be accompanied by
detailed explanation of the alleged errors and the proposed corrections with
supporting documentation.
Finally, Step 9 explained that:
TMA’s written response will include a release and agreement to accept the
discretionary adjusted payment by the hospital. The signed release and
agreement should be returned to TMA within 30 days of the date of initial
response or TMA response to any questions raised in step 8, whichever
date is later. Following receipt of the signed release and agreement,
payment will be made to the hospital.
10
A copy of the release and agreement mentioned in Step 9 of the Notice was
attached to plaintiffs’ amended complaint (the Release). Plaintiffs allege that, “Defendant
drafted the Release without any input from the hospitals.” The Release is titled “Release”
(emphasis in original) and provides:
By accepting the offer of the Department of Defense (“DoD”) to provide a
net adjustment to prior payments of hospital outpatient radiology services
as described in the DoD’s letter dated April, [sic] 25, 2011, and in
consideration of any future net adjustments to prior payments of hospital
outpatient radiology services made by the DoD or the TRICARE [MCSCs],
Hospital:___________ Provider Number:___________ (including, but not
limited to, its past and present officers, directors, employees, agents,
stockholders, attorneys, servants, representatives, divisions, departments,
acquisitions, offices, parents, subsidiaries, affiliates, and partners, and the
predecessors, successors, heirs, executors, administrators, and assigns of
each of the foregoing) (hereinafter collectively referred to as “Releasor”)
shall completely release, acquit, and forever discharge the Government,
TRICARE beneficiaries, and any MCSCs (including, but not limited to, their
and its past and present officers, directors, employees, agents,
stockholders, attorneys, servants, representatives, divisions, departments,
acquisitions, offices, parents, subsidiaries, affiliates, and partners, and the
predecessors, successors, heirs, executors, administrators, and assigns of
each of the foregoing) (hereinafter collectively referred to as “Releasees”)
from any and all claims, demands, actions, suits, causes of action, appeals,
whether asserted as a class, individually, or otherwise, damages whenever
incurred, and liabilities of any nature whatsoever (including costs, penalties,
and attorney’s fees) that Releasor ever had, now has, or hereafter can,
shall, or may have against Releasees, whether known or unknown, on
account of or arising out of or resulting from or in any way relating to
payments, reimbursements, adjustments, recoupments, or any other
means of compensation by Releasees made at any time for outpatient
services rendered to TRICARE beneficiaries by Releasor prior to the date
Releasor became subject to the TRICARE Outpatient Prospective Payment
System (“OPPS”), or December 31, 2010 if Releasor was never subject to
the TRICARE OPPS.
RELEASOR UNDERSTANDS THE SIGNIFICANCE OF THIS RELEASE
OF UNKNOWN CLAIMS AND ITS WAIVER OF STATUTORY
PROTECTION AGAINS A RELEASE OF UNKNOWN CLAIMS.
ACCORDINGLY, RELEASOR EXPRESSLY WAIVES ANY AND ALL
RIGHTS AND BENEFITS UNDER SECTION 1542 OF THE CALIFORNIA
CIVIL CODE (WHICH STATES: “A GENERAL RELEASE DOES NOT
EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR
SUPSECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY
AFFECTED HIS SETTLEMENT WITH THE DEBTOR.”) OR ANY OTHER
11
LAW, RULE, PROVISION OR STATUTE OF ANY OTHER JURISDICTION
THAT OPERATES TO BAR THE RELEASE OF UNKNOWN CLAIMS.
(capitalization in original). The bottom of the Release contains lines for a “Releasor
Signature” and the date.
“On information and belief,” plaintiffs allege that approximately 5,200 hospitals,
including the named plaintiffs, submitted the Spreadsheet to TMA within 60 days of the
April 15, 2011 Letter as required by Step 2 of the Notice. According to plaintiffs, defendant
then assigned the 5,200 Spreadsheets and the responsibility to undertake the
calculations called for in the Notice to Kennel, the same group that had performed the
Study. All five of the named plaintiffs were subsequently provided with the written
responses described in Step 8, which contained TMA’s calculations and proposed
payment amounts. Plaintiff Ingham signed the Release and received the proposed
payment, but now alleges that, due to multiple errors in the Kennel Study and TMA’s
calculations, the payment it received for outpatient radiology services was less than the
amount it was owed. Plaintiff BRMC received a response stating that it had in fact been
overpaid for outpatient radiology services and was owed nothing. Plaintiffs McLaren,
Gifford, and Lakewood refused to sign the Release after receiving proposed payment
amounts that they believed, due to multiple errors in the Study and TMA’s calculations,
understated the amount they were owed for outpatient radiology services. All plaintiffs
allege that they were underpaid not just for outpatient radiology services, but for All
Outpatient Services.
According to plaintiffs, “[s]everal hundred hospitals” were represented by counsel
during the Discretionary Payment Process (the Represented Hospitals). According to
plaintiffs, when these hospitals received their proposed payment amounts they contacted
TRICARE complaining of certain errors in the calculations, which they claimed
understated the total amount they were owed by 129%. Eventually, TRICARE allegedly
acknowledged to the Represented Hospitals that there were errors in the calculations for
the amounts owed for outpatient radiology services and that it was not aware of these
errors before sending out the calculations and proposed payment amounts to participating
hospitals. Defendant then allegedly agreed, in recognition of these errors, to pay the
Represented Hospitals 77% more than the amounts it originally had offered. According
to plaintiffs, the other 5,200 hospitals that submitted Spreadsheets did not receive any
such recalculated payment amounts. Plaintiffs do not specify if the named plaintiffs were
among the Represented Hospitals. Plaintiffs allege in their amended complaint that,
“[s]hortly after TRICARE paid the Represented Hospitals,” plaintiffs contacted TRICARE
requesting that all hospitals be paid correctly for radiology services and stating that other
outpatient services had likewise been underpaid.
Plaintiffs allege that, in February and July 2013, in response to Freedom of
Information Act requests, TRICARE provided them with redacted versions of the Kennel
Study, which they have attached as exhibits to the amended complaint. Plaintiffs allege
in their complaint that their analysis of the Kennel Study revealed two errors:
12
a) With respect to outpatient radiology services, the statement in the Notice
that the underpayment was $98 million is mathematically incorrect.
Using Defendant’s own methodology and inaccurate data yields a figure
significantly higher . . .
b) With respect to All Outpatient Services, the calculations and data
showing the difference between monies paid under TRICARE versus
what would have been paid under Medicare were incorrect. . . . [T]hese
errors were due to multiple flaws in the Study, all of which insured that
Defendant’s representation to Plaintiffs and the Class that no outpatient
services except radiology were unpaid was not true.
With respect to plaintiffs’ second alleged error above, plaintiffs allege in their amended
complaint that the errors underlying the Kennel Study’s conclusions regarding All
Outpatient Services included:
(1) the use of incorrect assumptions of fact; (2) intentional exclusion of
claims that should have been included; (3) failure to properly capture claims
data; (4) failure to accurately capture claims-related services rendered from
a referring Military Treatment Facility; (5) failure to capture claims provided
by a hospital providing services at multiple locations; (6) failure to
accommodate changes in hospital locations; (7) failure of Managed Care
Support Contractors to maintain claims data, preventing TRICARE from
accessing this data; (8) use of erroneous formulae that resulted in incorrect
calculations; (9) comparison of incomplete outpatient service categories;
(10) comparison of “averages” that were not accurate; and (11) failure to
address and account for unique hospital (as opposed to physician offices)
costs.
Plaintiffs’ amended complaint alleges five counts against the defendant. In Count
I, plaintiffs allege the breach of two express contracts between themselves and the
defendant, composed of the various documents which they have attached to their
complaint. In Count II, plaintiffs allege, in the alternative, the breach of two implied-in-fact
contracts identical to those alleged under Count I. In Count III, plaintiffs allege mutual
mistake. In Count IV, plaintiffs allege the breach of the covenant of good faith and fair
dealing. Finally, in Count V, plaintiffs allege violations of two allegedly money-mandating
statutes, 10 U.S.C. §§ 1079 and 1086 (2000), as well as an allegedly money-mandating
regulation, 32 C.F.R. § 199.7(h)(2) (2002).
As relief, plaintiffs seek the following judgments against the defendant: (1) for
breach of an express or implied in fact contract, amounts “sufficient to reflect the correct
amounts due each member of the [alleged] Class for All Outpatient Services during the
[Relevant Period]”; (2) on the grounds of mutual mistake, to reform the alleged contracts
“to reflect the correct amounts due each member of the [alleged] Class for All Outpatient
Services during the Relevant Time”; (3) for the alleged breach of the covenant of good
faith and fair dealing, amounts “sufficient to reflect the correct amounts due each member
of the [alleged] Class for All Outpatient Services during the Relevant Time”; (4) for the
alleged violation of the statutes and regulation, “the amount owed to them pursuant to the
13
money-mandates of 10 U.S.C. §§ 1079, 1086 and 32 C.F.R. § 199.7(h)(2)”; as well as,
(5) fees, costs, and such other relief as the Court deems just and proper. Defendant has
moved to dismiss plaintiffs’ first amended complaint for failure to state a claim pursuant
to Rule 12(b)(6) (2012) of the Rules of the United States Court of Federal Claims (RCFC).
DISCUSSION
It is well established that “‘subject-matter jurisdiction, because it involves a court’s
power to hear a case, can never be forfeited or waived.’” Arbaugh v. Y & H Corp., 546
U.S. 500, 514 (2006) (quoting United States v. Cotton, 535 U.S. 625, 630 (2002)).
“[F]ederal courts have an independent obligation to ensure that they do not exceed the
scope of their jurisdiction, and therefore they must raise and decide jurisdictional
questions that the parties either overlook or elect not to press.” Henderson ex rel.
Henderson v. Shinseki, 131 S. Ct. 1197, 1202 (2011); see also Gonzalez v. Thaler, 132
S. Ct. 641, 648 (2012) (“When a requirement goes to subject-matter jurisdiction, courts
are obligated to consider sua sponte issues that the parties have disclaimed or have not
presented.”); Hertz Corp. v. Friend, 559 U.S. 77, 94 (2010) (“Courts have an independent
obligation to determine whether subject-matter jurisdiction exists, even when no party
challenges it.” (citing Arbaugh v. Y & H Corp., 546 U.S. at 514)); Special Devices, Inc. v.
OEA, Inc., 269 F.3d 1340, 1342 (Fed. Cir. 2001) (“[A] court has a duty to inquire into its
jurisdiction to hear and decide a case.” (citing Johannsen v. Pay Less Drug Stores N.W.,
Inc., 918 F.2d 160, 161 (Fed. Cir. 1990)); View Eng’g, Inc. v. Robotic Vision Sys., Inc.,
115 F.3d 962, 963 (Fed. Cir. 1997) (“[C]ourts must always look to their jurisdiction,
whether the parties raise the issue or not.”). “Objections to a tribunal’s jurisdiction can be
raised at any time, even by a party that once conceded the tribunal’s subject-matter
jurisdiction over the controversy.” Sebelius v. Auburn Reg’l Med. Ctr., 133 S. Ct. 817, 824
(2013); see also Arbaugh v. Y & H Corp., 546 U.S. at 506 (“The objection that a federal
court lacks subject-matter jurisdiction . . . may be raised by a party, or by a court on its
own initiative, at any stage in the litigation, even after trial and the entry of judgment.”);
Cent. Pines Land Co., L.L.C. v. United States, 697 F.3d 1360, 1364 n.1 (Fed. Cir. 2012)
(“An objection to a court’s subject matter jurisdiction can be raised by any party or the
court at any stage of litigation, including after trial and the entry of judgment.” (citing
Arbaugh v. Y & H Corp., 546 U.S. at 506–07)); Rick’s Mushroom Serv., Inc. v. United
States, 521 F.3d 1338, 1346 (Fed. Cir. 2008) (“[A]ny party may challenge, or the court
may raise sua sponte, subject matter jurisdiction at any time.” (citing Arbaugh v. Y & H
Corp., 546 U.S. at 506; Folden v. United States, 379 F.3d 1344, 1354 (Fed. Cir.), reh’g
and reh’g en banc denied (Fed. Cir. 2004), cert. denied, 545 U.S. 1127 (2005); and
Fanning, Phillips & Molnar v. West, 160 F.3d 717, 720 (Fed. Cir. 1998))); Pikulin v. United
States, 97 Fed. Cl. 71, 76, appeal dismissed, 425 F. App’x 902 (Fed. Cir. 2011). In fact,
“[s]ubject matter jurisdiction is an inquiry that this court must raise sua sponte, even where
. . . neither party has raised this issue.” Metabolite Labs., Inc. v. Lab. Corp. of Am.
Holdings, 370 F.3d 1354, 1369 (Fed. Cir.) (citing Textile Prods., Inc. v. Mead Corp., 134
F.3d 1481, 1485 (Fed. Cir.), reh’g denied and en banc suggestion declined (Fed. Cir.),
cert. denied, 525 U.S. 826 (1998)), reh’g and reh’g en banc denied (Fed. Cir. 2004), cert.
granted in part sub. nom Lab. Corp. of Am. Holdings v. Metabolite Labs., Inc., 546 U.S.
975 (2005), cert. dismissed as improvidently granted, 548 U.S. 124 (2006); see also Avid
14
Identification Sys., Inc. v. Crystal Import Corp., 603 F.3d 967, 971 (Fed. Cir.) (“This court
must always determine for itself whether it has jurisdiction to hear the case before it, even
when the parties do not raise or contest the issue.”), reh’g and reh’g en banc denied, 614
F.3d 1330 (Fed. Cir. 2010), cert. denied, 5 U.S. 1169 (2011).
Under both RCFC 8(a)(2) and Rule (8)(a)(2) of the Federal Rules of Civil
Procedure, a plaintiff need only state in the complaint “a short and plain statement of the
claim showing that the pleader is entitled to relief.” RCFC 8(a)(2) (2015); Fed. R. Civ. P.
8(a)(2) (2016); see also Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). The United
States Supreme Court stated:
While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not
need detailed factual allegations, [Conley v. Gibson, 355 U.S. 41, 47
(1957)]; Sanjuan v. American Bd. of Psychiatry and Neurology, Inc., 40 F.3d
247, 251 (7th Cir. 1994), a plaintiff’s obligation to provide the “grounds” of
his “entitle[ment] to relief” requires more than labels and conclusions, and a
formulaic recitation of the elements of a cause of action will not do, see
Papasan v. Allain, 478 U.S. 265, 286 (1986) (on a motion to dismiss, courts
“are not bound to accept as true a legal conclusion couched as a factual
allegation”). Factual allegations must be enough to raise a right to relief
above the speculative level, see 5 C. Wright & A. Miller, Federal Practice
and Procedure § 1216, pp. 235-36 (3d ed. 2004) (hereinafter Wright &
Miller) (“[T]he pleading must contain something more . . . than . . . a
statement of facts that merely creates a suspicion [of] a legally cognizable
right of action”), on the assumption that all the allegations in the complaint
are true (even if doubtful in fact), see, e.g., Swierkiewicz v. Sorema N.A.,
534 U.S. 506, 508, n.1 (2002); Neitzke v. Williams, 490 U.S. 319, 327
(1989) (“Rule 12(b)(6) does not countenance . . . dismissals based on a
judge’s disbelief of a complaint’s factual allegations”); Scheuer v. Rhodes,
416 U.S. 232, 236 (1974) (a well-pleaded complaint may proceed even if it
appears “that a recovery is very remote and unlikely”). . . . [W]e do not
require heightened fact pleading of specifics, but only enough facts to state
a claim to relief that is plausible on its face.
Bell Atl. Corp. v. Twombly, 550 U.S. at 555–56, 570 (footnote and other citations
omitted; omissions in original); see also Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing
Bell Atl. Corp. v. Twombly, 550 U.S. at 555–57, 570); Resource Investments, Inc. v.
United States, 785 F.3d 660, 669 (Fed. Cir. 2015) (“[A] plaintiff's obligation to provide the
grounds of his entitlement to relief requires more than labels and conclusions, and a
formulaic recitation of the elements of a cause of action will not do.”) (quoting Bell Atl.
Corp. v. Twombly, 550 U.S.at 555); A&D Auto Sales, Inc. v. United States, 748 F.3d 1142,
1157 (Fed. Cir. 2014); Bell/Heery v. United States, 739 F.3d 1324, 1330 (Fed. Cir.), reh’g
and reh’g en banc denied (Fed. Cir. 2014); Kam-Almaz v. United States, 682 F.3d 1364,
1367 (Fed. Cir. 2012) (“The facts as alleged ‘must be enough to raise a right to relief
above the speculative level, on the assumption that all the allegations in the complaint
are true (even if doubtful in fact).’” (quoting Bell Atl. Corp. v. Twombly, 550 U.S. at 557));
15
Totes-Isotoner Corp. v. United States, 594 F.3d 1346, 1354–55 (Fed. Cir.), cert. denied,
131 S. Ct. 92 (2010); Bank of Guam v. United States, 578 F.3d 1318, 1326 (Fed. Cir.)
(“In order to avoid dismissal for failure to state a claim, the complaint must allege facts
‘plausibly suggesting (not merely consistent with)’ a showing of entitlement to relief.”
(quoting Bell Atl. Corp. v. Twombly, 550 U.S. at 557)), reh’g and reh’g en banc denied
(Fed. Cir. 2009), cert. denied, 561 U.S. 1006 (2010); Cambridge v. United States, 558
F.3d 1331, 1335 (Fed. Cir. 2009) (“[A] plaintiff must plead factual allegations that support
a facially ‘plausible’ claim to relief in order to avoid dismissal for failure to state a claim.”
(quoting Bell Atl. Corp. v. Twombly, 550 U.S. at 570)); Cary v. United States, 552 F.3d
1373, 1376 (Fed. Cir.) (“The factual allegations must be enough to raise a right to relief
above the speculative level. This does not require the plaintiff to set out in detail the facts
upon which the claim is based, but enough facts to state a claim to relief that is plausible
on its face.” (citing Bell Atl. Corp. v. Twombly, 550 U.S. at 555, 570)), reh’g denied (Fed.
Cir.), cert. denied, 557 U.S. 937 (2009). “Conclusory allegations of law and unwarranted
inferences of fact do not suffice to support a claim.” Bradley v. Chiron Corp., 136 F.3d
1317, 1322 (Fed. Cir. 1998); see also Solaria Corp. v. United States, 123 Fed. Cl. 105,
113 (2015); Vargas v. United States, 114 Fed. Cl. 226, 232 (2014); Fredericksburg Non-
Profit Housing Corp. v. United States, 113 Fed. Cl. 244, 253 (2013), aff’d, 579 F. App’x
1004 (Fed. Cir. 2014); Three S Consulting v. United States, 104 Fed. Cl. 510, 523 (2012),
aff’d, 562 F. App’x 964 (Fed. Cir. 2014), reh’g denied (Fed. Cir. 2014); Peninsula Grp.
Capital Corp. v. United States, 93 Fed. Cl. 720, 726–27 (2010), appeal dismissed, 454 F.
App’x 900 (Fed. Cir. 2011); Legal Aid Soc’y of New York v. United States, 92 Fed. Cl.
285, 292, 298, 298 n.14 (2010). As stated in Ashcroft v. Iqbal, “[a] pleading that offers
‘labels and conclusions’ or ‘a formulaic recitation of the elements of a cause of action will
not do.’ 550 U.S. at 555. Nor does a complaint suffice if it tenders ‘naked assertion[s]’
devoid of ‘further factual enhancement.’” Ashcroft v. Iqbal, 556 U.S. at 678 (quoting Bell
Atl. Corp. v. Twombly, 550 U.S. at 555).
In addition to the complaint, the court also may consider exhibits to the complaint.
See RCFC 10(c) (“A copy of a written instrument that is an exhibit to a pleading is part of
the pleading for all purposes.”). Moreover, “the court ‘must . . . consider documents
incorporated into the complaint by reference and matters of which a court may take
judicial notice.’” Bell/Heery v. United States, 106 Fed. Cl. 300, 307 (2012), aff’d, 739 F.3d
1324 (Fed. Cir.), reh’g and reh’g en banc denied (Fed. Cir. 2014) (quoting Tellabs, Inc. v.
Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007)) (omission in Bell/Heery v. United
States). The court may also consider a document when the complaint relies heavily upon
its terms and effect, which render the document integral to the complaint. See id. at 307-
08. Moreover, “[i]n deciding whether to dismiss a complaint under Rule 12(b)(6), the court
may consider matters of public record.” Sebastian v. United States, 185 F.3d 1368, 1374
(Fed. Cir. 1999), cert. denied, 529 U.S. 1065 (2000); see also Bristol Bay Area Health
Corp. v. United States, 110 Fed. Cl. 251 261–62 (2013); DeKalb Cnty., Ga. v. United
States, 108 Fed. Cl. 681, 692 (2013).
16
Count I: Breach of Express Contract
Count I of plaintiffs’ amended complaint alleges the creation, and breach, of two
express contracts between the defendant and the hospitals in the purported class.
Because plaintiffs have not yet moved to certify their purported class, the court will
examine only whether the two alleged contracts existed between defendant and the five
named plaintiffs. Plaintiffs’ First Alleged Contract was allegedly formed through the
exchange of four documents between defendant and plaintiffs: the April 25, 2011 Letter,
the Notice, the FAQs, and the Spreadsheet. Plaintiffs allege that the terms of the offer for
the First Alleged Contract were expressed in the April 25, 2011 Letter, the Notice, and the
FAQs, and “included an obligation on the part of the Defendant to calculate the amount
owed to each hospital” using the nine-step process described in the Notice. Plaintiffs
allegedly accepted this offer by completing and returning the Spreadsheet to the
Defendant. The alleged consideration for the First Alleged Contract was “Defendant
undertaking the evaluation and Plaintiffs’ agreement to be paid an amount to be
determined through the nine-step process proposed by Defendant.” According to
plaintiffs, defendant breached the First Alleged Contract when it “failed to accurately
calculate all the monies owed to each hospital for All Outpatient Services during the
Relevant Time, as promised, in manner [sic] specified in Defendant’s offer.” In their
opposition brief, plaintiffs clarify that the First Alleged Contract was allegedly entered into
only between defendant and those “hospitals that did not sign and execute the Release
and receive money.” Three of the named plaintiffs, plaintiffs, McLaren, Gifford, and
Lakewood, did not execute the Release, and plaintiff BRMC was notified it had been
overpaid monies due. Therefore, the court will examine whether the First Alleged Contract
was formed only between defendant and plaintiffs BRMC, McLaren, Gifford and
Lakewood.
Plaintiffs’ Second Alleged Contract allegedly consisted of six documents: the April
25, 2011 Letter; the Notice; the FAQs; the Spreadsheet; the Payment Adjustment
Worksheet; and the Release. Plaintiffs allege that, “[u]nder this contract, Defendant
agreed to make a proposed payment to the hospitals in return for a release of all their
rights to reimbursement for All Outpatient Services for the Relevant Time.” Plaintiffs
contend that Second Alleged Contract “was breached when Defendant failed to abide by
the terms of the Release, which required Defendant, inter alia, to calculate and pay the
amount that was owed to each hospital for all outpatient services in the manner specified
in ‘DoD’s letter dated April 25, 2011.’” In their opposition brief, plaintiffs clarify that the
Second Alleged Contract was allegedly “entered into between Defendant and hospitals,
like Plaintiff Ingham, that accepted Defendant’s calculation and proposed payment,
signed the Release, and received the payment.” The only named plaintiff alleged to have
signed the release and receive a payment from the defendant is plaintiff Ingham.
Therefore, the court will examine only whether the Second Alleged Contract existed
between defendant and plaintiff Ingham.
Defendant contends plaintiffs’ claims for breach of express contracts should be
dismissed for failure to state a claim because, for both of plaintiffs’ Alleged Contracts,
17
plaintiffs have failed to allege facts demonstrating (1) the existence of a valid, binding
contract with the government and (2) the breach of an identified contractual duty.
Contract claims against the United States are governed by the Tucker Act, which
grants jurisdiction to this court as follows:
The United States Court of Federal Claims shall have jurisdiction to render
judgment upon any claim against the United States founded either upon the
Constitution, or any Act of Congress or any regulation of an executive
department, or upon any express or implied contract with the United States,
or for liquidated or unliquidated damages in cases not sounding in tort.
28 U.S.C. § 1491(a)(1) (2012). As interpreted by the United States Supreme Court, the
Tucker Act waives sovereign immunity to allow jurisdiction over claims against the United
States (1) founded on an express or implied contract with the United States, (2) seeking
a refund from a prior payment made to the government, or (3) based on federal
constitutional, statutory, or regulatory law mandating compensation by the federal
government for damages sustained. See United States v. Navajo Nation, 556 U.S. 287,
289-90 (2009); United States v. Mitchell, 463 U.S. 206, 215 (1983); see also Kam-Almaz
v. United States, 682 F.3d at 1368; Greenlee Cnty., Ariz. v. United States, 487 F.3d 871,
875 (Fed. Cir.), reh’g and reh’g en banc denied (Fed. Cir. 2007), cert. denied, 552 U.S.
1142 (2008); Palmer v. United States, 168 F.3d 1310, 1314 (Fed. Cir. 1999). To invoke
the jurisdiction of the United States Court of Federal Claims for breach of contract claims,
plaintiffs “must show that either an express or implied-in-fact contract underlies [their]
claim.” Trauma Serv. Grp. v. United States, 104 F.3d 1321, 1325 (Fed. Cir. 1997). If
plaintiffs’ complaint “alleges that an express and, in the alternative, an implied-in-fact
contract underlies its claim[s, t]his allegation suffices to confer subject matter jurisdiction
in the Court of Federal Claims.” Trauma Serv. Grp. v. United States, 104 F.3d at 1324–
25 (citing Gould, Inc. v. United States, 67 F.3d 925, 929 (Fed. Cir. 1995); Do–Well Mach.
Shop, Inc. v. United States, 870 F.2d 637, 639–40 (Fed. Cir. 1989)); Engage Learning,
Inc. v. Salazar, 660 F.3d 1346, 1354 (Fed. Cir. 2011) (noting that, in Gould, the court
found that “alleging a contract with the government suffices to trigger the Tucker Act’s
grant of jurisdiction ‘upon any express or implied contract with the United States,’ and that
the proper basis for a dismissal, if warranted, was the failure to state a claim upon which
relief can be granted” (quoting Gould, Inc. v. United States, 67 F.3d at 929–30)).
It is well settled that “[t]o recover for breach of contract, a party must allege and
establish: (1) a valid contract between the parties, (2) an obligation or duty arising out of
the contract, (3) a breach of that duty, and (4) damages caused by the breach.” San
Carlos Irr. & Drainage Dist. v. United States, 877 F.2d 957, 959 (Fed. Cir.), reh’g denied
(Fed. Cir. 1989). See also Barlow & Haun, Inc. v. United States, 118 Fed. Cl. 597, 620
(2014); Cooley v. United States, 76 Fed. Cl. 549, 555–56 (2007) (citing San Carlos Irr. &
Drainage Dist. v. United States, 877 F.2d at 959). A breach of contract claim requires:
“(1) an obligation or duty arising out of the contract and (2) factual allegations sufficient
to support the conclusion that there has been a breach of the identified contractual duty.”
Bell/Heery v. United States, 739 F.3d at 1330 (citing Hercules Inc. v. United States, 24
F.3d 188, 198 (Fed. Cir.), reh’g denied, in banc suggestion declined (Fed. Cir. 1994),
18
aff’d, 516 U.S. 417 (1996); Trauma Serv. Grp. v. United States, 104 F.3d at 1325 (“To
state a claim upon which relief can be granted, [plaintiff] must allege either an express or
an implied-in-fact contract, and the breach of that contract.”); San Carlos Irr. & Drainage
Dist. v. United States, 877 F.2d at 959.
Defendant argues that plaintiffs’ breach of contract claims based on the First
Alleged Contract should be dismissed because plaintiffs fail to allege facts to demonstrate
that the April 25 Letter, the Notice, the FAQs, and the Spreadsheet comprise a valid,
binding contract with the government. In particular defendant argues that plaintiffs fail to
allege: (1) facts to show mutuality of intent to contract; (2) an unambiguous offer and
acceptance; (3) any indication of consideration; and (4) facts demonstrating that the
Director of Deputy Director of TMA had authority to bind the government in contract.
A party alleging either an express or implied-in-fact contract with the
government “must show a mutual intent to contract including an offer, an
acceptance, and consideration.” Furthermore, “[a] contract with the United
States also requires that the Government representative who entered or
ratified the agreement had actual authority to bind the United States.”
Bank of Guam v. United States, 578 F.3d at 1326 (quoting Trauma Serv. Grp. v. United
States, 104 F.3d at 1325) (alteration in Bank of Guam v. United States); see also Chattler
v. United States, 632 F.3d 1324, 1330 (Fed. Cir.) (citing Trauma Serv. Grp. v. United
States, 104 F.3d at 1325), reh’g en banc denied (Fed. Cir. 2011); Hanlin v. United States,
316 F.3d 1325, 1328 (Fed. Cir. 2003) (citing City of Cincinnati v. United States, 153 F.3d
1375, 1377 (Fed. Cir. 1998)); Total Med. Mgmt., Inc. v. United States, 104 F.3d 1314,
1319 (Fed. Cir.) (“The requirements for a valid contract with the United States are: a
mutual intent to contract including offer, acceptance, and consideration; and authority on
the part of the government representative who entered or ratified the agreement to bind
the United States in contract.”) (citations omitted), reh’g denied and en banc suggestion
declined (Fed. Cir.), cert. denied, 522 U.S. 857 (1997); Huntington Promotional & Supply,
LLC v. United States, 114 Fed. Cl. 760, 767 (2014); Eden Isle Marina, Inc. v. United
States, 113 Fed. Cl. 372, 492 (2013); Council for Tribal Emp’t Rights v. United States,
112 Fed. Cl. 231, 243 (2013), aff’d, 556 F. App’x 965. “‘A well pleaded allegation of an
express, or implied-in-fact, contract necessarily includes allegations going to each of the
requisite elements of a contract.’” De Archibold v. United States, 57 Fed. Cl. 29, 32 (2003)
(quoting McAfee v. United States, 46 Fed. Cl. 428, 432, appeal dismissed, 243 F.3d 565(Fed. Cir. 2000)). “For there to be an express contract, the parties must have intended
to be bound and must have expressed their intention in a manner capable of
understanding. A definite offer and an unconditional acceptance must be established.”
Russell Corp. v. United States, 210 Ct. Cl. 596, at 606, 537 F.2d 474, at 481 (1976), cert.
denied, 429 U.S. 1073 (1977).
Regarding the offer for the First Alleged Contract between the defendant and the
four plaintiffs which did not sign the Release, plaintiffs BRMC, McLaren, Gifford, and
Lakewood, plaintiffs argue that “[t]hrough the issuance of the April 25 Letter, the Notice,
and the Frequently Asked Questions, the Government offered to analyze Plaintiffs’
outpatient claims for possible additional payment and specified the terms on which the
19
analysis would take place.” Plaintiffs also argue that Step 2 of the process outlined in the
Notice specified how this offer was to be accepted: by the hospitals submitting a
completed Spreadsheet to the defendant. Plaintiffs argue that the language of these
documents shows that the government intended to contract with the plaintiffs, pointing to
the statement in the April 25, 2011 Letter that “hospitals may be paid an adjustment . . .
in return for your acceptance of DoD’s offer of additional payment based on criteria
established by the agency.” Plaintiffs also argue that defendant showed an intent to enter
into a contract by advising hospitals that payment was contingent upon the signing of the
Release.
“To satisfy its burden to prove mutual intent to contract, a plaintiff must proffer
objective evidence demonstrating the existence of an offer and a reciprocal acceptance.”
Am. Fed. Bank, FSB v. United States, 62 Fed. Cl. 185, 194 (2004) (citing Anderson v.
United States, 344 F.3d at 1353 (citing Estate of Bogley v. United States, 206 Ct. Cl. 695,
704–05, 514 F.2d 1027, 1032 (1975); Restatement (Second) of Contracts § 22(1)
(1981))). With regard to an implied-in-fact contract, “[a]lthough an express offer and
acceptance are not necessary, the parties’ conduct must indicate mutual assent” to the
proposed bargain. AG Route Seven P’ship v. United States, 57 Fed. Cl. 521, 536–37
(2003) (citing City of Cincinnati v. United States, 153 F.3d at 1377), aff’d sub nom. AG
Route Seven P’ship v F.D.I.C., 104 F. App’x 184 (Fed. Cir.), reh’g and reh’g en banc
denied (Fed. Cir. 2004).
As plaintiffs recognize, “an offer is made by ‘the manifestation of willingness to
enter into a bargain, so made as to justify another person in understanding that his assent
to that bargain is invited and will conclude it.’” Anderson v. United States, 344 F.3d at
1353 (quoting Restatement (Second) of Contracts § 24 (1981)); see also Am. Fed. Bank,
FSB v. United States, 62 Fed. Cl. at 194. Yet, “[a]n offer does not exist unless the offeror
manifests an intent to be bound.” Neenan v. United States, 112 Fed. Cl. 325, 329 (2013),
aff’d, 570 F. App’x 937 (Fed. Cir. 2014) (citing Linear Tech. Corp. v. Micrel, Inc., 275 F.3d
1040, 1050 (Fed. Cir. 2001), reh’g en banc denied (Fed. Cir. 2002), cert. denied, 538 U.S.
1052 (2003)); see also Estate of Bogley v. United States, 514 F.2d at 1032 (“An
expression of intention is not an offer.”).
As defendant notes in its reply to plaintiffs’ opposition to the motion to dismiss,
quoting Estate of Bogley v. United States, 514 F.2d at 1032, even despite detailed terms,
“[s]ince an offer must be a promise, a mere expression of intention or general willingness
to do something on the happening of a particular event or in return for something to be
received does not amount to an offer.” Estate of Bogley v. United States, 514 F.2d at
1032; see also Neenan v. United States, 112 Fed. Cl. at 329 (“A document may show the
‘willingness to enter a bargain’ but it ‘is not an offer if the person to whom it is addressed
knows or has reason to know that the person making it does not intend to conclude a
bargain until he has made a further manifestation of assent.’” (quoting Restatement
(Second) of Contracts § 26 (1981))). Moreover, “[f]or a contract to be formed once an
offer is made, there must be an acceptance, i.e., a ‘manifestation of assent to the terms
thereof made by the offeree in a manner invited or required by the offer.’” Anderson v.
United States, 344 F.3d at 1355 (quoting Restatement (Second) of Contracts § 50(1)
20
(1981)). “[W]hether an offeree’s conduct ‘constitutes an acceptance will depend upon
whether the offeror reasonably understands it to be an acceptance and whether it
reasonably appears to conclude a contract or whether it leaves matters yet to be
concluded.’” Am. Fed. Bank, FSB v. United States, 62 Fed. Cl. at 198 (quoting Williston
on Contracts § 6.10, at 71 (4th ed. 1990)). “‘This rule, espoused by the Restatement
(Second), operates to protect the offeror who acts reasonably in relation to what he
supposes is intended to operate as an acceptance, yet provides the offeror with significant
flexibility as the master of his offer.’” Id. (quoting Williston on Contracts § 6.10, at 74).
“The Court may read all the documents together in order to find the intention of the
parties.” Advanced Team Concepts, Inc. v. United States, 68 Fed. Cl. 147, 151 (2005)
opinion clarified, 77 Fed. Cl. 111 (2007) (citing AG Route Seven P’ship v. United States,
57 Fed. Cl. at 536); see also Restatement (Second) of Contracts § 26, cmt. f (1981)
(“Preliminary manifestations as terms of later offer. Even though a communication is not
an offer, it may contain promises or representations which are incorporated in a
subsequent offer and hence become part of the contract made when the offer is
accepted.” (emphasis in original)).
Plaintiffs’ alleged offer for the First Alleged Contract, the April 25, 2011 Letter, the
Notice, and the FAQs, may have shown a willingness on the part of the agency to enter
into a bargain. The language of the documents, however, also established that the agency
did not intend to conclude a bargain by virtue of the hospitals’ submission of the
Spreadsheet. Instead, the language of these documents demonstrates that defendant
would not enter into a bargain until after analysis of the information submitted by the
hospitals and the execution of the Release by the hospitals. The April 25, 2011 Letter
provided that “[d]etailed instructions will be posted on the TRICARE Management Activity
Web site . . . explaining the manner in which a hospital may request that your institution’s
claims data be reviewed for appropriate discretionary adjusted payments.” (emphasis
added). The April 25, 2011 Letter did not indicate that the request for review would
conclude the bargain and result in payment. Instead, the April 25, 2011 Letter indicated
that, even after the request for review, payment was uncertain and subject to availability
of appropriations and the hospital’s acceptance of DoD’s offer of additional payment,
stating: “Based on the request, your hospital may be paid an adjustment, subject to the
availability of appropriations, in return for your acceptance of DoD’s offer of additional
payment based on criteria established by the agency.” (emphasis added). The April 25,
2011 Letter further provided that payment was contingent on the hospital’s execution of
the Release, and concluded by indicating the agency “remain[s] committed to working
with you to complete the analysis of claims data and determine if any additional payments
may be allowed.” (emphasis added).
Similarly, the Notice established that any alleged offer related to conditional
payments, not simply calculations. The Notice stated that “TRICARE is now offering
hospitals an opportunity for discretionary adjusted payments” and “TMA is offering
hospitals an opportunity for any net adjustments to payments of hospital outpatient
radiology services.” (emphasis added). Moreover, the Notice provided that “[h]ospitals
may request an analysis of their claims data for possible discretionary adjustment,”
(emphasis added), refers to such a request as a “submission,” and does not use the
21
phrase, or invoke the concept of, acceptance. Similar to the April 25 Letter, the Notice
provided that “[b]ased on the request and subject to the availability of funds, each hospital
will receive adjusted payments in return for acceptance of DoD’s offer of additional
payment based on criteria established by the agency,” (emphasis added), and included
the same language regarding the contingency of payment upon the hospital’s execution
of the Release. Like the April 25, 2011 Letter, the Notice contemplated that a number of
further steps were required to conclude a bargain, even after the hospitals’ submission of
the Spreadsheet.
The strongest indication that submission of the Spreadsheet did not result in a
contract, and that the agency intended further actions before a contract was formed, is
the description of the nine-step process in the Notice outlining “the review of payments
for hospital outpatient radiology services and payment of any discretionary net
adjustments.” The methodology itself begins with Steps 1 and 2 describing the
submission of the Spreadsheet and how a “[h]ospital submits a request for analysis of
their claims data” and ends with Steps 8 and 9, explaining how the agency will send a
“written response to the hospital’s request” that will “include a release and agreement to
accept the discretionary adjusted payment by the hospital.” (emphasis added). Step 9 of
methodology concludes by indicating that “[f]ollowing receipt of the signed release and
agreement, payment will be made to the hospital.” (emphasis added). The nine-step
process demonstrates that the Spreadsheet was merely the beginning of a negotiating
process between the agency and a requesting hospital. See Am. Fed. Bank, FSB v.
United States, 62 Fed. Cl. at 198 (“[W]hether an offeree’s conduct ‘constitutes an
acceptance will depend upon whether the offeror reasonably understands it to be an
acceptance and whether it reasonably appears to conclude a contract or whether it leaves
matters yet to be concluded.’” (quoting Williston on Contracts § 6.10, at 71)).
Plaintiffs’ First Alleged Contract also fails to establish a contract between plaintiffs
and defendant because plaintiffs have not sufficiently pled facts to establish valid
consideration for the four named plaintiffs alleged to have accepted the contract, which
did not sign the Release. It is “fundamental that a contract must be supported by sufficient
and valuable consideration.” Estate of Bogley v. United States, 514 F.2d at 1033.
“Consideration is defined as a ‘detriment incurred by the promisee, or a benefit received
by the promisor at the request of the promisor.’” Woll v. United States, 45 Fed. Cl. at 477
(quoting Estate of Bogley v. United States, 514 F.2d at 1033 (quoting 1 Williston,
Contracts § 102 (1957)); see also Carter v. United States, 102 Fed. Cl. at 66
(“Consideration is generally a bargained for exchange consisting of an act, forbearance,
or return promise” (citing Restatement (Second) Contracts §§ 71, 72 (1981); J. Cooper &
Assocs., Inc. v. United States, 53 Fed. Cl. 8, 18 (2002), aff’d, 65 F. App’x 731 (Fed. Cir.
2003)). Yet, “‘[a] promise or apparent promise is not consideration if by its terms the
promisor or purported promisor reserves a choice of alternative performances.’” Crewzers
Fire Crew Transp., Inc. v. United States, 741 F.3d 1380, 1382 (Fed. Cir. 2014) (quoting
Restatement (Second) of Contracts § 77 (1979)); Ridge Runner Forestry v. Veneman,
287 F.3d at 1061 (quoting Restatement (Second of Contracts § 77). An illusory promise
is “words in promissory form that promise nothing; they do not purport to put any limitation
on the freedom of the alleged promisor, but leave his future action subject to his own
22
future will, just as it would have been had he said no words at all.” Ridge Runner Forestry
v. Veneman, 287 F.3d at 1061 (citing Torncello v. United States, 231 Ct. Cl. 20, 42, 681
F.2d 756, 769 (1982) (quoting 1 Corbin on Contracts § 145 (1963)). “‘It is axiomatic that
a valid contract cannot be based upon the illusory promise of one party, much less illusory
promises of both parties.’” Crewzers Fire Crew Transp., Inc. v. United States, 741 F.3d
at 1383 (quoting Ridge Runner Forestry v. Veneman, 287 F.3d at 1062 (citing
Restatement (Second) of Contracts § 71(1))).
Plaintiffs argue that by submitting the Spreadsheet to defendant, “they were
accepting Defendant’s offer to contract and agreeing to be bound to the conditions and
procedures set forth in the offering documents, which agreement is sufficient
consideration for an enforceable contract.” Tellingly, plaintiffs do not specify any
“conditions and procedures” the submission of the Spreadsheet allegedly bound them to
when submitted. In fact, submission of the Spreadsheet did not commit plaintiffs to take,
or refrain from taking, any particular course of action, as demonstrated by the fact that
three of the five plaintiffs submitted Spreadsheets, but did not ultimately sign the Release
and accept the adjusted payments, and plaintiff BRMC was found not to be eligible. Nor
have plaintiffs alleged that the defendant received any sort of benefit from the submission
of their completed Spreadsheets. Thus, as defendant states in its motion to dismiss,
“Plaintiffs confuse a binding ‘agreement to be paid’ with an inquiry as to how much they
would be paid, if they signed a release.” Such an “agreement” as alleged by plaintiffs
lacks valid consideration.
Plaintiffs also allege an express contract between defendant and those hospitals
that signed that Release, the Second Alleged Contract, which plaintiffs allege involved
“an agreement by Defendant to make a proposed payment to the hospitals in return for
their release of all their rights to reimbursement for All Outpatient Services for the
Relevant Time.” The only hospital among the named plaintiffs that signed the Release,
and, thus, the only named plaintiff alleged to be a party to the Second Alleged Contract,
is plaintiff Ingham. Plaintiffs allege the Second Alleged Contract was composed of six
documents: the April 25, 2011 Letter, the Notice, the FAQs, the Spreadsheet, the
Payment Adjustment Worksheet, and the Release.7 Quoting the Release, plaintiffs allege
that the terms of the Second Alleged Contract “required Defendant, inter alia, to calculate
and pay the amount that was owed to each hospital for All Outpatient Services in the
manner specified in ‘DoD’s letter dated April 25, 2011.’” According to plaintiffs, under the
terms of the April 25, 2011 Letter, this payment was required “to be calculated pursuant
to the nine-step process set forth in the Notice.” Plaintiffs also argue that the defendant’s
labelling of the process involved in the Second Alleged Contract as a regulatory-based
“discretionary payment process” is without legal support or effect because the regulation
defendant claimed authorized the process, 32 C.F.R. § 199.10 (2010), was “inapplicable
and did not provide the authority for TRICARE to do what it did.”
7 As noted above the, first five documents, the April 25, 2011 Letter, the Notice, the FAQs,
the Spreadsheet, and the Payment Adjustment Worksheet were alleged to form the First
Alleged Contract.
23
Defendant challenges the validity of the Second Alleged Contract on the grounds
that plaintiffs have failed to adequately: (1) allege the existence of a mutual intent to
contract; (2) identify a valid offer and acceptance; and (3) demonstrate that the contract
was entered into by a person with actual authority to bind the United States. Defendant
also argues that, even if the Second Alleged Contract were found to be valid, plaintiffs
have failed to allege a breach of the contract. Finally, defendant argues that the court
lacks jurisdiction to hear any claims arising out of the Second Alleged Contract because
any hospitals alleged to be parties to the Second Alleged Contract signed the Release
and, thus, waived their right to bring any claims for breach of the Second Alleged Contract.
Turning first to mutual intent to contract, defendant argues that the government did
not intend to enter into any contracts as part of the Discretionary Payment Process, but
instead “[t]he stated intent of the agency was to offer the hospitals an opportunity to apply
for net adjustments in payments for outpatient radiology services, within the framework
of the TRICARE regulatory scheme, not as part of a contractual relationship.” In support
of this argument, defendant points to language in both the April 25, 2011 Letter and the
Notice stating that the defendant would treat the submission as an “untimely but
discretionary appeal” under 32 C.F.R. § 199.10(a)(5) and (c). Defendant argues that the
agency had the authority to create the Discretionary Payment Process under 32 C.F.R.
§ 199.1(n) (2010). The court notes, “[a]s a threshold condition for contract formation, there
must be an objective manifestation of voluntary, mutual assent.” Anderson v. United
States, 344 F.3d at 1353 (citing Restatement (Second) of Contracts § 18). The United
States Court of Appeals for the Federal Circuit recognized in D&N Bank v. United States,
331 F.3d 1374, 1378–79 (Fed. Cir.), reh’g en banc denied (Fed. Cir. 2003) that, “[a]n
agency’s performance of its regulatory or sovereign functions does not create contractual
obligations. Something more is necessary.” Id. (citing New Era Constr. v. United States,
890 F.2d 1152, 1155 (Fed. Cir. 1989), reh’g denied (Fed. Cir. 1990)) (internal citation
omitted). In Anderson v. United States, the Federal Circuit elaborated on what constitutes
“something more,” indicating “[t]hat ‘something more’ must be, according to our
precedent, a ‘manifest assent to the same bargain proposed by the offer.’” Anderson v.
United States, 344 F.3d at 1356. As the Federal Circuit recognized in Fifth Third Bank of
Western Ohio v. United States, 402 F.3d 1221, 1234 (Fed. Cir.), reh’g denied (Fed. Cir.
2005), however, Anderson v. United States and D&N Bank v. United States “do not stand
for the proposition that contractual terms cannot be found in agency regulatory
documents.” Fifth Third Bank of Western Ohio v. United States, 402 F.3d at 1234. The
Federal Circuit stated in First Commerce Corp. v. United States:
If the elements of contract formation are absent, then the government was
acting solely in its regulatory capacity; if a contract was formed, then the
government may be liable for its breach. To assert that the government was
acting solely in its regulatory capacity is to assert a conclusion about
contractual liability, not a premise that negates it. As we held in D & N Bank,
the supervisory nature of the business transaction is not “probative of the
government’s intent to contract.” D & N Bank, at 1380. Nor can the
characterization of “regulatory” or “supervisory” absolve the government of
24
its contractual liability if it is shown that the government has indeed bound
itself by contract.
First Commerce Corp. v. United States, 335 F.3d 1373, 1383 (Fed. Cir.), reh’g and reh’g
en banc denied (Fed. Cir. 2003).
In the case currently before the court, the government was making an offer to issue
discretionary payments to hospitals which had performed outpatient radiology services if
the formula developed by defendant showed the hospitals were due payments and the
hospitals signed the Release. The court finds that the regulations cited by defendant, 32
C.F.R. § 199.10(a)(5) and (c), are not a neat fit for the program defendant was trying to
implement. In the versions of the regulations in effect at the time the April 25, 2011 Letter
was issued, 32 C.F.R. § 199.10 provided for “[a]ppeal and hearing procedures” and 32
C.F.R. § 199.10(a) provided “General” information regarding “policies and procedures for
appealing decisions made by OCHAMPUS [Office of the Civilian Health and Medical
Program], OCHAMPUSEUR [Office of the Civilian Health and Medical Program
Uniformed Services Europe], and CHAMPUS contractors adversely affecting the rights
and liabilities of CHAMPUS beneficiaries, CHAMPUS participating providers, and
providers denied the status of authorized provider under CHAMPUS.” 32 C.F.R.
§ 199.10(a) (2010). 32 C.F.R. § 199.10(a)(5) provided:
Late filing. If a request for reconsideration, formal review, or hearings is filed
after the time permitted in this section, written notice shall be issued denying
the request. Late filing may be permitted only if the appealing party
reasonably can demonstrate to the satisfaction of the Director,
OCHAMPUS, or a designee, that the timely filing of the request was not
feasible due to extraordinary circumstances over which the appealing party
had no practical control. Each request for an exception to the filing
requirement will be considered on its own merits. The decision of the
Director, OCHAMPUS, or a designee, on the request for an exception to the
filing requirement shall be final.
32 C.F.R. § 199.10(a)(5) (2010). 32 C.F.R. § 199.10(c) provided the process for “Formal
review.” 32 C.F.R. § 199.10(c) (2010).
Defendant alleges that 32 C.F.R. § 199.10(a)(5) granted the Director of
OCHAMPUS the discretion to grant “an exception to the timely filing of an appeal,” and
that the Director used this power to implement the Discretionary Payment Process as, in
the words of the April 25, 2011 Letter, means by which hospitals could apply for an
“untimely but discretionary appeal.” As noted above, the Discretionary Payment Process
is not a neat fit into the provisions of 32 C.F.R. § 199.10(a)(5). The language of 32 C.F.R.
§ 199.10(a)(5) provides that the appealing party must demonstrate “that the timely filing
of the request was not feasible due to extraordinary circumstances over which the
appealing party had no practical control” and “[e]ach request for an exception to the filing
requirement will be considered on its own merits.” 32 C.F.R. § 199.10(a)(5) (2010). The
hospitals were not asked to make such a demonstration of extraordinary circumstances
as part of the Discretionary Payment Process. However, the defendant did indicate in the
25
Notice that it was responding to an unusual set of circumstances regarding its own
“interpretation and implementation of the TRICARE regulation provision on
reimbursement of hospital outpatient services as issued in the Final Rule on October 24,
2005,” which affected a potential large number of providers and was designed as a one-
time fix for a defendant-identified problem. Moreover, this was defendant’s initiative and
much of the relevant data necessary to make any adjustments was held by the defendant.
Even if 32 C.F.R. § 199.10(a)(5) did provide the DHA Director with broad
discretion, including the discretion to set up the Discretionary Payment Process, certain
provisions of 32 C.F.R. § 199.10(c) governing formal review were not strictly followed.
The version of 32 C.F.R §199.10(c)(2) in place at the time of the Discretionary Payment
Process states: “[t]he formal review determination shall be based on the information, upon
which the initial determination and/or reconsideration determination was based, and any
additional information the appealing party may submit or OCHAMPUS may obtain.” 32
C.F.R. § 199.10(c)(2) (2010)). In the present case, the exhibits reflect that the hospitals
were clearly instructed that the hospitals should not submit any additional information with
their requests for analysis of claims data, other than to request an analysis based on the
application of defendant’s new payment formula to their original submissions. Thus, in
answer to question 2 of the FAQs, “Will I need to provide further information such as
claims-level data or identify the relevant claims or patients?,” the defendant’s response
was, “No, you will not. TRICARE will do this. You need to submit only the information in
the Excel sheet. Do not submit patient-level data.”” Moreover, under 32 C.F.R.
§ 199.10(c)(4), the regulations required that “[t]he Chief, Office of Appeals and Hearings,
OCHAMPUS, or a designee shall issue a written notice of the formal review determination
to the appealing party at his or her last known address.” 32 C.F.R. § 199.10(c)(4). Under
this section, the regulations instructed that:
The notice of the formal review determination must contain the following
elements:
(i) A statement of the issue or issues under appeal.
(ii) The provisions of law, regulation, policies, and guidelines that apply to
the issue or issues under appeal.
(iii) A discussion of the original and additional information that is relevant to
the issue or issues under appeal.
(iv) Whether the formal review upholds the prior determination or
determinations or reverses the prior determination or determinations in
whole or in part and the rationale for the action.
(v) A statement of the right to request a hearing in any case when the formal
review determination is less than fully favorable, the issue is appealable,
and the amount in dispute is $300 or more.
26
32 C.F.R. § 199.10(c)(4) (2010). Plaintiffs assert in their opposition to defendant’s motion
to dismiss that “[n]o such notice was provided to the Plaintiffs,” in other words, the Notice
to plaintiffs did not contain the elements of notification required under 32 C.F.R. § 199.10.
Although the hospitals were notified of the dollar recalculations in the Payment
Adjustment Worksheets, defendant has not argued that the Payment Adjustment
Worksheet or any other document met any of the requirements of 32 C.F.R.
§ 199.10(c)(4).
Defendant also argues that the authority to devise the Discretionary Payment
Process is found in 32 C.F.R. § 199.1(a) and (n). The applicable version of 32 C.F.R.
§ 199.1(a) states that the purpose of the section is to “prescribe[] guidelines and policies
for the administration of the Civilian Health and Medical Program of the Uniformed
Services (CHAMPUS),” while sub-section (n) states:
(n) Discretionary authority. When it is determined to be in the best interest
of CHAMPUS, the Director, OCHAMPUS, or a designee, is granted
discretionary authority to waive any requirements of this part [32 C.F.R.
part 199, the TRICARE/CHAMPUS regulations], except that any
requirement specifically set forth in 10 U.S.C. chapter 55 [10 U.S.C.
§§ 1071 – 1110b, the TRICARE/CHAMPUS statute], or otherwise
imposed by law, may not be waived. It is the intent that such discretionary
authority be used only under very unusual and limited circumstances and
not to deny any individual any right, benefit, or privilege provided to him or
her by statute or this part. Any such exception granted by the Director,
OCHAMPUS, or a designee, shall apply only to the individual
circumstance or case involved and will in no way be construed to be
precedent-setting.
32 C.F.R. § 199.1(a), (n) (2010).
Defendant argues that because CMAC fixed maximum payment rates are not
specifically set forth in 10 U.S.C., Chapter 55, the Director had authority “to ‘waive’ the
CMAC requirement for radiology in an unusual and limited circumstance,” despite the fact
that the documents in the record do not reveal contemporaneous documentation that
discusses the Director’s authority to act as was done under 32 C.F.R. § 199.1. Although
defendant has not offered an explanation as to why the Discretionary Payment Process,
which plaintiffs allege could have affected a large number of hospitals, might qualify as a
“very unusual and limited circumstance[],” 32 C.F.R. § 199.1(n) (2010), the defendant’s
actions were limited to a one-time adjustment related only to outpatient radiology
services. However, even if 32 C.F.R § 199.1(n) did give defendant the power to “waive”
the CMAC rate with respect to outpatient radiology payments, it did not grant defendant
the affirmative power to, years after such payments had already been made, set up a
process to provide hospitals with additional payments designed to approximate “pre-
OPPS Medicare fair rates” and to actually make such payments, as was done during the
Discretionary Payment Process. Such actions should not be characterized solely as a
waiver of existing regulations, and, therefore, the authority to create the Discretionary
Payment Process is not found in 32 C.F.R § 199.1, alone, as defendant claims.
27
Whereas the Discretionary Payment Process set up by defendant may not have
strictly met the standard steps for processing appeals, the program’s goals were
consistent with the regulatory framework. The hospitals were offered a possible benefit,
which is consistent with the purpose of the “discretionary authority” in 32 C.F.R § 199.1(a).
The relevant documents before the court indicate that at least the TRICARE’s goal was
to resolve the ongoing concerns on the part of the hospitals regarding alleged past
payments due for outpatient services in exchange for the hospitals’ agreement to waive
all claims regarding those payments once payments for outpatient radiology services
were adjusted. Both the April 25, 2011 Letter and the Notice indicated, as stated in the
April 25, 2011 Letter, that:
In order to bring closure to any concerns regarding payment of hospital
outpatient services under the TRICARE regulation prior to implementation
of OPPS, payment of the discretionary adjustments will also be contingent
[or, as stated in the Notice, “conditioned”] on the execution of a release by
the hospital of any hospital outpatient service claims against the agency,
TRICARE beneficiaries, and TRICARE MCSCs.
Indeed, Step 9 of the Notice provided that plaintiffs would not receive the adjusted
payment until they sent the agency a signed release. Finally, the Release itself explicitly
stated these terms using the language of contract:
By accepting the offer of the Department of Defense (“DoD”) to provide a
net adjustment to prior payments of hospital radiology services as described
in the DoD’s letter dated April, [sic] 25, 2011 . . . Hospital . . . shall completely
release, acquit, and forever discharge the Government, TRICARE
beneficiaries, and any MCSCs . . . .
(emphasis added).
Defendant also argues that plaintiffs’ claims regarding the Second Alleged
Contract should be dismissed because plaintiffs fail to identify which of the six documents
allegedly comprising the Second Alleged Contract constitute the alleged offer and which
the acceptance. Defendant argues that, of the six documents composing the Second
Alleged Contract, only the Release actually commits or requires plaintiffs to do anything,
and that the only action required of the defendant was to provide “a net adjustment,”
which, it argues, was done. Plaintiffs respond by stating that all six documents allegedly
composing the Second Alleged Contract “read together set forth the terms of the
contract.” Plaintiffs further argue that, even standing alone, the Release, as a “settlement
agreement,” constituted a contract between the parties. As to what was required of
defendant by the Release, plaintiffs point out that the Release stated that defendant would
provide a “net adjustment to prior payments . . . as set forth in DoD’s letter of April 25,
2011.” (emphasis added by plaintiffs). According to plaintiffs, this language incorporated
by reference the terms of the April 25, 2011 Letter into the Release. Further, plaintiffs
point to language in the April 25, 2011 Letter stating that hospitals “may be paid an
adjustment . . . in return for your acceptance of DoD’s offer of additional payment based
on criteria established by the agency,” and argue that the “criteria established by the
28
agency” was the nine-step process outlined in the Notice. (emphasis added by plaintiffs).
Plaintiffs also argue that the statement in the April 25, 2011 Letter that “Detailed
instructions will be posted on the TRICARE Management Activity Web site,” incorporated
by reference materials posted to the website, which it alleges included the Notice and the
FAQs. Thus, plaintiffs argue, under the Second Alleged Contract, “[t]he government was
not free to provide any net adjustment it saw fit to provide, it was bound to provide the net
adjustment that proper application of the nine-step process would have yielded and its
failure to do so was a breach.”
Both parties appear to agree that, if an eligible hospital signed the Release after
proceeding through each of the offer steps outlined by the defendant, the defendant
agreed to bind itself to “provide a net adjustment to prior payments of hospital outpatient
radiology services as described in the DoD’s letter dated April, [sic] 25, 2011,” in
exchange for plaintiffs’ agreement to waive all reimbursement related claims. The parties
disagree, however, as to whether the language of the Release incorporates the other
documents on which plaintiffs try to rely to allege the Second Alleged Contract came into
existence.
“[T]o incorporate material by reference, the host document must identify with
detailed particularity what specific material it incorporates and clearly indicate where that
material is found in the various documents [identified].” Northrop Grumman Info. Tech.,
Inc. v. United States, 535 F.3d 1339, 1344 (Fed. Cir. 2008) (quoting Cook Biotech Inc. v.
Acell, Inc., 460 F.3d 1365, 1376 (Fed. Cir.) (quoting Advanced Display Sys. v. Kent State
Univ., 212 F.3d 1272, 1282 (Fed. Cir. 2000), cert. denied, 532 U.S. 904 (2001)), reh’g
and reh’g en banc denied (Fed. Cir. 2006)) (second alteration in original). “In other words,
the incorporating contract must use language that is express and clear, so as to leave no
ambiguity about the identity of the document being referenced, nor any reasonable doubt
about the fact that the referenced document is being incorporated into the contract.” Id.;
see also Precision Pine & Timber, Inc. v. United States, 596 F.3d 817, 826 (Fed. Cir.
2010) (“To incorporate material by reference, a contract must use clear and express
language of incorporation, which unambiguously communicates that the purpose is to
incorporate the referenced material, rather than merely acknowledge that the referenced
material is relevant to the contract.”) (citing Northrop Grumman Info. Tech., Inc. v. United
States, 535 F.3d at 1344-45); 11 Richard A. Lord, Williston on Contracts § 30.25 (4th ed.
1999) (“So long as the contract makes clear reference to the document and describes it
in such terms that its identity may be ascertained beyond doubt, the parties to a contract
may incorporate contractual terms by reference to a separate, noncontemporaneous
document. . . .”). This requirement, however, “does not amount to a rule that contracting
parties must use a rote phrase or a formalistic template to effect an incorporation by
reference.” Northrop Grumman Info. Tech., Inc. v. United States, 535 F.3d at 1345.
The language of the Release clearly and expressly incorporated the terms of the
April 25, 2011 Letter. Defendant’s argument that, “[h]ad the government intended to
‘incorporate’ the April 25, 2011 letter . . . in the release, it would have so stated,” fails
because incorporation by reference “does not require ‘magic words’ of reference or of
incorporation.” Northrop Grumman Info. Tech., Inc. v. United States, 535 F.3d at 1346.
29
The Release specifically referenced the April 25, 2011 Letter by stating: “By accepting
the offer of the Department of Defense (‘DoD’) to provide a net adjustment to prior
payments of hospital outpatient radiology services as described in the DoD’s letter dated
April, [sic] 25, 2011 . . . .” The April 25, 2011 Letter, in turn, stated that “[d]etailed
instructions” would be posted on a specific page on TRICARE’s website,
www.tricare.mil/RadiologyDiscretionaryAppealAdjustment, “explaining the manner in
which a hospital may request that your institution’s claims data be reviewed for
appropriate discretionary adjusted payments.” Plaintiffs allege in their amended complaint
that both the FAQ and the Notice were posted on this webpage. The April 25, 2011 Letter
continued that, based on this request, a payment may be made “in return for your
acceptance of DoD’s offer of additional payment based on criteria established by the
agency.” Although the April 25, 2011 Letter did not mention the Notice and FAQs by
name, it did identify a specific page on TRICARE’s website where “[d]etailed instructions”
could be found. That both the Notice and the FAQs contained what could reasonably be
considered “[d]etailed instructions” regarding the Discretionary Payment Process and
both were, allegedly, found on the specific webpage identified in the April 25, 2011 Letter,
indicates that the plaintiffs have pled sufficient facts to show that the Letter provided the
required “detailed particularity” to make clear it was referring to the Notice and the FAQ.
Whether there is reasonable doubt as to whether these documents were incorporated
into the terms of the Release is a closer question. When considered in the light most
favorable to plaintiffs, the following facts suggest that there is sufficient evidence showing
that they were being incorporated into the Release: the April 25, 2011 Letter refers to the
referenced documents as “[d]etailed instructions . . . explaining the manner in which a
hospital may request that [its] claims data be reviewed”; the Notice included “detailed
instructions,” in the form of the nine-step process, for both for hospitals to follow in
submitting their claims and for the defendant to follow in computing payment offers, while
the FAQs provide clarifications regarding these instructions; immediately after mentioning
these instructions, the April 25, 2011 Letter stated that a hospital may be paid in return
for DoD’s “offer of additional payment”; and that the April 25, 2011 Letter stated that this
offer will be “based on criteria established by the agency,” although no other possible
source for this criteria is mentioned. Thus, plaintiffs have pled sufficient facts to show that
the Release incorporated by reference the April 25, 2011 Letter, which, in turn,
incorporated the nine-step process included in the Notice, as clarified in the FAQs.
The terms of the offer by the defendant in the Release, thus, included a promise
on the part of the defendant to “provide a net adjustment to prior payments of hospital
outpatient radiology services,” if the hospital and defendant complied with the nine-step
process laid out in the Notice and if, after analysis, the hospital was eligible according to
the determination of the defendant to receive the additional payment. Step 8 of the
Notice’s process stated that a “written response” including “the calculated adjusted
payment and the calculations from which the adjustment was derived,” that is the
Payment Adjustment Worksheet, would be sent to those hospitals requesting additional
payments, and step 9 stated that the Release would be included along with the Payment
Adjustment Worksheet. Step 9 also stated that if, within 30 days, the Release was then
returned to TMA, payment would be made to the hospital. Thus, the sending of the
Payment Adjustment Worksheet and the Release to the plaintiffs constituted the
30
defendant’s offer under the Second Alleged Contract. Both the Release, which stated that
this offer was made in return for the hospital’s agreement to waive all payment related
claims against the DoD, and included a signature line at the bottom, and the Notice made
clear that return of the signed Release, which plaintiff Ingham did, constituted acceptance
of this offer. Plaintiffs, therefore, have sufficiently pled the existence of an unambiguous
offer and acceptance of the Second Alleged Contract, as between defendant and plaintiff
Ingham.
With respect to the existence of a government representative with the authority to
bind the government to the apparent Second Alleged Contract, plaintiffs allege that TMA
Deputy Director Hunter, who signed the April 25, 2011 Letter, had authority to contract
with plaintiffs. Plaintiffs also contend, that “at all times relevant herein,” Deputy Director
Hunter was acting at the direction of, and with the approval of, the Director of TMA, who
also had the authority to contract with plaintiffs. Defendant denies that either the deputy
director or the director of TMA had such authority.
It is well established that the government is not bound by the acts of its agents
beyond the scope of their actual authority. See Fed. Crop Ins. Corp. v. Merrill, 332 U.S.
380, 384 (1947); Trauma Serv. Grp. v. United States, 104 F.3d at 1325; Urban Data Sys.,
Inc. v. United States, 699 F.2d 1147, 1153 (Fed. Cir. 1983). Contractors dealing with the
United States must inform themselves of a representative’s authority and the limits of that
authority. See Fed. Crop Ins. Corp. v. Merrill, 332 U.S. at 384 (“[A]nyone entering into an
arrangement with the Government takes the risk of having accurately ascertained that he
who purports to act for the Government stays within the bounds of his authority.”); Trauma
Serv. Grp. v. United States, 104 F.3d at 1325 (“[T]his risk remains with the contractor
even when the Government agents themselves may have been unaware of the limitations
on their authority.”); see also Flexfab, LLC v. United States, 424 F.3d at 1260; Total Med.
Mgmt., Inc. v. United States, 104 F.3d at 1321; Council for Tribal Emp’t Rights v. United
States, 112 Fed. Cl. at 243; Jumah v. United States, 90 Fed. Cl. 603, 612 (2009), aff’d,
385 F. App’x 987 (Fed. Cir. 2010); Aboo v. United States, 86 Fed. Cl. 618, 627, aff’d, 347
F. App’x 581 (Fed. Cir. 2009).
A government representative with the requisite authority generally is a required
element of both express and implied-in-fact federal contracts. An officer of the United
States who does not possess express contracting authority may bind the United States
under limited circumstances, but only if he or she has “implied actual authority.” See
Winter v. Cath-dr/Balti Joint Venture, 497 F.3d 1339, 1344, 1346 (Fed. Cir.), reh’g and
reh’g en banc denied (Fed. Cir. 2007); see also Salles v. United States, 156 F.3d 1383,
1384 (Fed. Cir. 1998); H. Landau & Co. v. United States, 886 F.2d 322, 324 (Fed. Cir.
1989) (“Authority to bind the [g]overnment is generally implied when such authority is
considered to be an integral part of the duties assigned to a [g]overnment employee.”)
(quoting J. Cibinic & R. Nash, Formation of Government Contracts 43 (1982)); Vargas v.
United States, 114 Fed. Cl. 226, 235 (2014); Son Broad., Inc. v. United States, 52 Fed.
Cl. 815, 820 (2002) (“Actual authority may be implied when such authority is ‘an integral
part of the duties assigned to a [g]overnment employee.’” (quoting Roy v. United States,
38 Fed. Cl. 184, 189, dismissed, 124 F.3d 224 (Fed. Cir. 1997))). Plaintiffs bear the
31
burden of proving that the Deputy Director of TMA, Rear Admiral Hunter, or the TMA
Director had such authority. The fact that plaintiffs may have believed Deputy Director
Hunter or the TMA Director held such authority is not sufficient. See Harbert/Lummus
Agrifuels Projects v. United States, 142 F.3d 1429, 1432 (Fed. Cir.), reh’g denied and en
banc suggestion declined (Fed. Cir. 1998), cert. denied, 525 U.S. 1177 (1999); see also
Trauma Serv. Grp. v. United States, 104 F.3d at 1327 (The plaintiff “must prove all of the
requirements for a binding contract in order to prevail” and “must allege facts sufficient to
show that the Government representative who entered into its alleged implied-in-fact
contract was a contracting officer or had implied actual authority to bind the
Government.”). Although apparent authority will not suffice to hold the government bound
by the acts of its agents, see Fed. Crop Ins. Corp. v. Merrill, 332 U.S. at 384, implied
actual authority, like express actual authority, will suffice.
Plaintiffs do not allege that the Director or Deputy Director of TMA possessed
express authority to enter into the alleged contracts. Instead, plaintiffs apparently argue
that Deputy Director Hunter possessed implied authority to enter into the alleged
contracts, focusing on their allegations on the extent of her duties. Plaintiffs allege in their
amended complaint that, “[a]s the Deputy Director of TRICARE[,] Rear Admiral Hunter
coordinated health care for 9.6 million military beneficiaries and managed TRICARE’s
multi-billion dollar portfolio.” In their opposition to defendant’s motion to dismiss, plaintiffs
also offer excerpts from a DoD report, titled “A Report to Congress on the Organizational
Structure of the Office of the Assistant Secretary of Defense for Health Affairs and the
TRICARE Management Activity,” in support of their argument. The excerpted portions of
the report describe the position of the Deputy Director, TMA, stating that she “[s]erves as
the principal advisor to, and acts at all times on behalf of, the TMA Director and Principal
Deputy Director on all operational aspects of development and execution of TRICARE.
Under the general supervision of TMA Director and Principal Deputy Director, the
incumbent directs and manages TMA.” The excerpts then go on to list the Deputy
Director’s “functions,” stating that she “[m]anages health and medical resources of the
TRICARE managed care benefit program” and “[d]evelops, maintains, and provides
guidance for the integrated system for contracting and acquisition support for health care,
dental pharmacy, and other health programs, claims processing services, and other
administrative functions to support TRICARE.”
In its motion to dismiss, defendant argues that Deputy Director Hunter’s high level
position does not necessarily mean that she had any authority, implied or actual, to enter
into contracts with the plaintiffs. Defendant further argues that the authority of the Director
and Deputy Director of TMA is derived from DoD Directive Number 5136.12, dated May
31, 2001, and, that, under that directive, neither the Director nor the Deputy Director of
TMA would have the authority to enter into the contracts plaintiffs allege. Defendant first
points to paragraph 6.2.9 of Directive 5136.12, which sets forth the following
“responsibilities and functions” of the Director with respect to contracting: “Contract for
managed care support, dental support, other health programs, claims processing
services, studies and research support, supplies, equipment, and other services
necessary to carry out the TRICARE and support the MHS [Military Health System].” DoD
Directive 5136.12, ¶ 6.2.9 (May 31, 2001). Defendant argues that the establishment of
32
the Discretionary Payment Process was not among the “services necessary to carry out
the TRICARE.” Defendant next points to Directive 5136.12, paragraph 8.1.4, which grants
the “specifically delegated authority” to the Director TMA to “[e]xercise the administrative
authorities contained in enclosure 3.” Defendant then quotes a portion of enclosure 3 to
Directive 5136.12, which states that “the Director, TMA, or in the absence of the Director,
the person acting for the Director, is delegated authority as required in the administration
and operation of the TMA to”:
Enter into and administer contracts, through the TMA Directorate of
Acquisition Management and Support or through a Military Department, a
DoD contract administration services component, or other Federal Agency,
as appropriate, for supplies, equipment, and services required to
accomplish the mission of the TMA. The Director, AM&S [Acquisition
Management and Support], shall be the head of the contracting activity.
DoD Directive 5136.12, Enclosure 3, ¶ E3.1.1.16. Defendant argues, similar to its
argument regarding Directive 5136.12, paragraph 6.2.9, that the Discretionary Payment
Process did not involve “supplies, equipment, and services required to accomplish the
mission of the TMA.” Additionally, defendant argues that this language shows that the
Director has “no independent contracting authority” but must instead contract through the
Director of Acquisition Management and Support. Defendant finally argues that the
powers of the Deputy Director could not have been greater than those of the Director,
pointing to the provision of enclosure 3 granting the Director the power to “redelegate
these authorities [enumerated in enclosure 3] as appropriate, with the approval of the
ASD(HA) and in writing, except as otherwise specifically indicated above or as otherwise
provided by law or regulation.” DoD Directive 5136.12, Enclosure 3, ¶ E3.1.2.
Upon review, the court, when drawing all reasonable inferences in favor of
plaintiffs, does not read Directive 5136.12 to be as limiting as defendant argues. Initially,
the grant of areas for which the Deputy Director has the power to contract contained in
Directive 5136.12, includes not only “services required to accomplish the mission of the
TMA,” DoD Directive 5136.12, Enclosure 3, ¶ E3.1.1.16, but also includes “managed care
support,” “other health programs,” and “claims processing services,” DoD Directive
5136.12, paragraph 6.2.9, a broad range of categories related to the management of the
TMA/DHA program, which might indeed encompass the type of contracts that were the
predicate for the offer of the Discretionary Payment Process. The language of the April
25, 2011 Letter supports this finding, explaining that: “Because this issue affects all three
TRICARE regions and multiple years of claimed services, DoD has decided to calculate
the net adjustments itself, rather than through the MCSCs [Managed Care Support
Contractors] . . . .” Moreover, plaintiffs’ allegations and facts shown by the exhibits
attached to the amended complaint, in particular, that Deputy Director Rear Admiral
Hunter signed the April 25, 2011 Letter and the broad offer to a large number of hospitals
to apply for additional payments, suggest that even more senior DoD officers, certain of
whom no doubt had contract authority, could have been involved with the offer to provide
the benefits if the proposed conditions were met by both sides. Further, Directive 5136.12,
paragraph 8.0 and enclosure 3 do not suggest that the specifically delegated authorities
33
encompassed in enclosure 3 were intended to limit the responsibilities and functions of
the Director or the Deputy Director of TMA. As such, and particularly when all reasonable
inferences are drawn in favor of plaintiffs, the defendant’s arguments related to Directive
5136.12 and enclosure 3 do not convince the court that the Director or the Deputy Director
lacked management authority to take the actions to effect compensation to eligible
hospitals, such as plaintiff Ingham.
Defendant also argues that, under 32 C.F.R. § 199.1(f), the services listed in
Directive 5136.12, paragraph 6.2.9 required contracting pursuant to the Federal
Acquisition Regulations (FAR). According to defendant, this means that contracts were
required to be awarded by a warranted contracting officer, which Deputy Director Hunter
was not because she lacked a contracting officer’s warrant, pursuant to 48 C.F.R. § 1.602(2010). The version of 32 C.F.R. § 199.1(f) in effect at the time of the alleged contracts,
provided, in relevant part:
(f) Claims adjudication and processing. The Director, OCHAMPUS, is
responsible for making such arrangements as are necessary to adjudicate
and process CHAMPUS claims worldwide.
(1) The United States—(i) Contracting out. The primary method of
processing CHAMPUS claims in the United States is through competitively
procured, fixed-price contracts. The Director, OCHAMPUS, or a designee,
is responsible for negotiating, under the provisions of the FAR, contracts for
the purpose of adjudicating and processing CHAMPUS claims (and related
supporting activities).
(ii) In-house. The Director, OCHAMPUS, or a designee, is authorized to
adjudicate and process certain CHAMPUS claims in-house at OCHAMPUS,
when it is determined to be in the best interests of CHAMPUS subject to
applicable considerations set forth in OMB Circular A–76. Such in-house
claims processing may involve special or unique claims, or all claims for a
specific geographic area.
32 C.F.R. § 199.1(f) (2010). At issue is whether the appropriate regulation to cover the
Discretionary Payment Process fell under 32 C.F.R. § 199.1(f)(1)(i) of the regulations,
which required negotiation of contracts under the FAR for contracting out, or under 32
C.F.R. § 199.1(f)(ii) for in-house processing, which is reserved for special or unique
claims. Even if these circumstances were to fall under 32 C.F.R. § 199.1(f)(1)(i) for the
contracting out of claims adjudication and processing, however, the FAR likely would still
be inapplicable to the above captioned case. The applicable 2010 version of the FAR
provides that “[t]he FAR applies to all acquisitions as defined in part 2 of the FAR.” 48
C.F.R. § 1.104 (2010). As plaintiffs note, the FAR defines “Acquisition,” (emphasis in
original) as “the acquiring by contract with appropriated funds of supplies or services
(including construction) by and for the use of the Federal Government through purchase
or lease, whether the supplies or services are already in existence or must be created,
developed, demonstrated, and evaluated.” 48 C.F.R. § 2.101(b). The Discretionary
Payment Process did not involve awarding a contract or task order. It was a broadly
34
applicable price adjustment to existing arrangements available to all hospitals which
opted to go through the process and then met certain conditions, including signing a
release. Payment adjustments to hospitals already doing business with the government
engaging in the Discretionary Payment Process do not appear to fall within the purview
of acquisitions.
The Discretionary Payment Process also was not a claim adjustment, analogous
to a Request for an Equitable Adjustment (REA) or a claim, which generally are reviewed
and approved by a contracting officer with warrant authority. 48 C.F.R. 552.243–71
(detailing the equitable adjustment process); 48 C.F.R. § 2.101(b) (defining a claim).
Contracting officers have warrants to exercise discretionary authority to expend taxpayer
money. By its very nature, the Discretionary Payment Process was effected by a broad
based management policy directive. Applications by the hospitals for additional funds
were offered to all by virtue of a public announcement based on a uniform process, and
assuming hospitals submitted the proper documents and signed the Release, calculation
of the sums owed was done mechanically according to formulas set up by the agency,
and not subject to the contracting officer’s discretion regarding individual claimants, as is
the case with an REA or claim.
If the Second Alleged Contract can be considered a contract, assuming a plaintiff
signed the Release, the next issue is whether plaintiffs have sufficiently pled that
defendant breached the Second Alleged Contract. As noted above, “[t]o state a claim
upon which relief can be granted, [plaintiff] must allege either an express or an implied-
in-fact contract, and the breach of that contract.” Trauma Serv. Grp. v. United States, 104
F.3d at 1325; see also Bell/Heery v. United States, 739 F.3d at 1330 (“A breach of
contract claim requires two components: (1) an obligation or duty arising out of the
contract and (2) factual allegations sufficient to support the conclusion that there has been
a breach of the identified contractual duty.”). “In making this assessment, the court must
interpret the contract's provisions to ascertain whether the facts plaintiff alleges would, if
true, establish a breach of contract.” Bell/Heery v. United States, 739 at 1330 (citing S.
Cal. Edison v. United States, 58 Fed. Cl. 313, 321 (2003)).
With regard to the Second Alleged Contract, plaintiffs, therefore, must show that
Defendant breached a duty owed to plaintiff Ingham, the only plaintiff which signed the
Release. Plaintiffs allege: “[t]he second contract was breached when Defendant failed to
abide by the terms of the Release, which required Defendant, inter alia, to calculate and
pay the amount that was owed to each hospital for all outpatient services in the manner
specified in ‘DoD’s letter dated April 25, 2011.’” Plaintiffs allege defendant breached the
Second Alleged Contract when defendant failed to correctly compute the amounts due
“pursuant to the methodology as set forth in each Class Member’s contract.” Plaintiffs
also, more broadly, allege certain specific miscalculations made in proposed payments
to the Represented Hospitals during the Discretionary Payment Process. These alleged
miscalculations, plaintiffs allege, were the result of defendant’s use of incomplete claim
information and inappropriate exclusion of certain categories of claims. Plaintiffs further
argue that for all hospitals in their purported class, Kennel, which performed the
calculations called for in the Discretionary payment process, “failed to correctly compute
35
the amount due Plaintiffs and the Class as set forth in the contracts between Class
members and Defendant.” As relates to plaintiff Ingham in particular, plaintiffs allege that
the amount Ingham was ultimately paid was less than it was owed for radiology services
by the defendant “[d]ue to multiple errors in the [Kennel] Study and in the calculation for
additional radiology payments owed.”
As discussed above, the Second Alleged Contract, provided that if all
circumstances were met, including availability of funds, then eligible hospitals could
receive a payment that was to be calculated pursuant to the nine-step process set forth
in the Notice. Steps 3 through 7 of the Notice announced the methodology defendant
proposed to calculate the radiology payments. Under this methodology, the defendant
was to: “extract the claims for each hospital for claims for outpatient radiology services
during the relevant period”; calculate what would have been paid under Medicare’s pre-
OPPS approach for each of these claims using the formula previously used by Medicare,
“.42(BC [the billed charge for that line item] * CCR [the hospital-specific cost-to-charge
ratio used for each period according to the Center of Medicare and Medicaid Services
Pricier File]) + .58 (.62 global CMAC [amount for that line item])”; adjust this amount
“using the ratio of the actual allowed amount on the claim to the TRICARE Standard
allowed amount”; determine the difference if any, between this amount and the actual
amount paid on the particular claim; sum these claim specific amounts for all of a hospitals
claims; and then adjust this number using the “hospital-specific offset for cost sharing.”
When issued, this choice of method was created and chosen by agency personnel, even
if the Kennel Study was used to inform agency choices. Thus, any errors in the Kennel
Study would not be decisive on to the issue of whether defendant breached the Second
Alleged Contract.
As stated above, plaintiffs also allege defendant failed to properly calculate
payments due to hospitals according to the methodology set forth in the Notice. In
particular, plaintiffs allege that there were “multiple errors” in the Defendant’s calculation
of the amount owed to plaintiff Ingham, resulting in an underpayment to Ingham. Plaintiffs
allegation of the existence of such errors is bolstered by its additional allegations that
defendant has acknowledged that it made miscalculations in computing the proposed
payment amounts offered to the Represented Hospitals during the Discretionary Payment
Process and, in recognition of these errors, agreed to pay the Represented Hospitals 77%
more than was originally offered. Plaintiffs allege that these miscalculations were the
result of defendant’s use of incomplete claim information and the inappropriate exclusion
of certain categories of claims. Defendant has failed, at this time, to offer any evidence
that rebuts these allegations. Given that plaintiff Ingham signed the release, which entitled
it to receive a payment calculated according to the process outlined in the Notice,
plaintiffs’ allegations that Ingham was not provided with such a payment are sufficient to
plead a breach of the Second Alleged Contract by defendant, for the purposes of the
present motion.
Regarding the Release, defendant offers a further argument to try to defeat
plaintiffs’ case and to argue that plaintiff Ingham and all other hospitals that signed the
Release are barred from bringing any claims related to the Discretionary Payment
36
Process, because, by signing the Release, they “released the very cause they present.”
Plaintiffs respond, without citing support, that, “[w]hen, as here, the terms of a release are
breached, the party damaged by the breach can bring suit; if this were not the case the
consideration promised in exchange for the release of claims could be withheld with
impunity.”
To determine if a claim is barred by a release, it is necessary to consider the scope
of the release. The United States Supreme Court has stated, “[t]o rightly understand the
scope of this release we must consider the conditions of the contract, and especially the
clause in it which calls for a release.” United States v. William Cramp & Sons Ship &
Engine Bldg. Co., 206 U.S. 118, 126 (1907). Settlement agreements and releases are
contractual in nature and are interpreted under the same rules as contracts, and their
interpretation is a matter of law. See Mays v. United States Postal Service, 995 F.2d 1056,
1059 (Fed. Cir. 1993) (citing Greco v. Dep’t of the Army, 852 F.2d 558, 560 (Fed. Cir.
1988)); H.J. Lyness Constr., Inc. v. United States, 120 Fed. Cl. 1, 4 (2015); K-Con Bldg.
Sys., Inc. v. United States, 107 Fed. Cl. 571, 600 (2012); Raytheon Co. v. United States,
96 Fed. Cl. 548, 553 (2011); Kenbridge Constr. Co. v. United States, 328 Fed. Cl. at 765.
Under those rules, courts determine the intent of the parties by considering the language
of the contract. See Jowett, Inc. v. United States, 234 F.3d at 1368. To determine which
claims a release is intended to bar, courts consider the entirety of the instrument of the
release and the “facts and circumstances attending its execution.” See Thorn Wire Hedge
Co. v. Washburn & M. Mfg. Co., 159 U.S. 423, 441 (1895); Dureiko v. United States, 209
F.3d 1345, 1356 (Fed. Cir. 2000) (“In interpreting the release, we first ascertain whether
its language clearly bars the asserted claim.” (citing King v. Dep’t of the Navy, 130 F.3d
1031, 1033 (Fed. Cir. 1997)). While “[t]he general rule is that extrinsic evidence will not
be received to change the terms of a contract that is clear on its face.” If a contract is
found to be uncertain or ambiguous, then parties may assert extrinsic evidence and the
interpretation becomes a matter of fact. Beta Sys., Inc. v. United States, 838 F.2d at 1183
(citing S.C.M. Corp. v. United States, 230 Ct. Cl. at 206, 675 F.2d at 284); see also H.L.C.
& Assocs. Constr. Co. v. United States, 176 Ct. Cl. at 295, 367 F.2d 586 (1966); J.G.
Watts Constr. Co. v. United States, 161 Ct. Cl. 801, 807 (1963).
General language in a release may bar a party from asserting any claims arising
out of the contract and intended by the parties. See United States v. William Cramp &
Sons Ship & Engine Bldg. Co., 206 U.S. at 127–28; Johnson, Drake & Piper, Inc. v. United
States, 209 Ct. Cl. 313, 330, 531 F.2d 1037, 1047 (1976) (“[A] general release bars claims
based upon events occurring prior to the date of the release.”); H.J. Lyness Constr., Inc.
v. United States, 120 Fed. Cl. at 4; Raytheon Co. v. United States, 96 Fed. Cl. at 553; K-
Con Bldg. Sys., Inc. v. United States, 107 Fed. Cl. at 600; IMS Eng’rs-Architects, P.C. v.
United States, 92 Fed. Cl. 52, 64 (2010), aff’d, 418 F. App’x 920 (Fed. Cir.), reh’g and
reh’g en banc denied (Fed. Cir. 2011) (“As a general rule, after executing a release, a
contractor ‘is thereafter barred from maintaining a suit for damages or for additional
compensation under the contract based upon events that occurred prior to the execution
of the release.’” (quoting B.D. Click Co. v. United States, 222 Ct. Cl. 290, 614 F.2d 748,
756 (1980))); Dairyland Power Coop. v. United States, 27 Fed. Cl. at 811; A & A Insulation
Contractors, Inc. v. United States, 26 Cl. Ct. at 373.
37
Regarding general releases, the United States Court of Appeals for the Federal
Circuit stated in Augustine v. Progressive Dynamics, Inc.:
The rule for releases is that absent special vitiating circumstances, a
general release bars claims based upon events occurring prior to the date
of the release. And no exception to this rule should be implied for a claim
whose facts were well enough known for the maker of the release to frame
a general description of it and request an explicit reservation.
Augustine Med., Inc. v. Progressive Dynamics, Inc., 194 F.3d 1367, 1373 (Fed. Cir. 1999)
(quoting Johnson, Drake & Piper, Inc. v. United States, 209 Ct. Cl. at 330, 531 F.2d at
1047) (emphasis added in Augustine Med., Inc. v. Progressive Dynamics, Inc.).
Plaintiffs argue, however, that “[w]hen, as here, the terms of a release are
breached, the party damaged by the breach can bring suit.” The law provides that the
execution of a general release without exceptions discharges the released party “from all
claims and demands in law and equity arising out of the contract.” Hellander v. United
States, 147 Ct. Cl. 550, 561, 178 F. Supp. 932, 939 (1959) (citation omitted). “If a
contractor wishes to preserve a right to assert a claim under that contract later, it bears
the burden to modify the release, before signing it.” Dairyland Power Coop. v. United
States, 27 Fed. Cl. at 811 (citing Mingus Constructors, Inc. v. United States, 812 F.2d at
1393-94, 1396). In Kenbridge, the court stated:
Where a contractor fails to exercise its right to reserve claims from the
operation of a release, “it is neither improper nor unfair, absent some
vitiating or aggravated circumstance, to preclude the contractor from
maintaining a suit based on events which occurred prior to the execution of
the release.”
Kenbridge Constr. Co. v. United States, 28 Fed. Cl. at 765 (quoting Clark Mech.
Contractors, Inc. v. United States, 5 Cl. Ct. at 86) (citing H.L.C. & Assocs. Constr. Co. v.
United States, 176 Ct. Cl. at 293, 367 F.2d at 590)); see also IMS Eng’rs-Architects, P.C.
v. United States, 92 Fed. Cl. at 64. The burden to identify and specify claims to be
excepted from a general release lies with the parties before signing the release. See
Mingus Constructors, Inc. v. United States, 812 F.2d at 1393–94 (citing Inland Empire
Builders, Inc. v. United States, 424 F.2d at 1376). Generally, exceptions to releases are
viewed narrowly and are strictly construed against the contractor. Gresham, Smith &
Partners v. United States, 24 Cl. Ct. 796, 801 (1991) (citing Mingus Constructors, Inc. v.
United States, 812 F.2d at 1394). “Vague, broad exceptions . . . are insufficient as a matter
of law to constitute ‘claims’ sufficient to be excluded from the required release.” Mingus
Constructors, Inc. v. United States, 812 F.2d at 1394 (citing Vann v. United States, 190
Ct. Cl. 546, 555, 420 F.2d 968, 972 (1970) (“A claim not specifically delineated in an
exception to a release is thereafter barred.”)). “The rationale behind construing exceptions
in releases narrowly is that the purpose of a release is to put an end to the matter in
controversy.” Mingus Constructors, Inc. v. United States, 812 F.2d at 1394. If a party
executing a general release has knowledge of facts sufficient to constitute a claim and
wishes to except that claim from the release, the party must clearly manifest its intent to
38
do so with an explicit reservation. See Augustine Med., Inc. v. Progressive Dynamics,
Inc., 194 F.3d at 1373.
There are, however, circumstances when a party may bring a claim despite the
execution of an otherwise applicable release. Such vitiating circumstances include
economic duress, fraud, mutual mistake, lack of consideration, lack of performance and
other special circumstances that would invalidate a contract or otherwise indicate that the
parties intended to allow some claims to remain despite the release. See Mingus
Constructors, Inc. v. United States, 812 F.2d at 1395; Axion Corp. v. United States, 68
Fed. Cl. 468, 475 (2005) (citing Jackson Constr. Co. v. United States, 62 Fed. Cl. 84, 93
(2004). “[W]here it is shown that, by reason of a mutual mistake, neither party intended
that the release cover a certain claim, the court will reform the release.” J.G. Watts Constr.
Co. v. United States, 161 Ct. Cl. at 806 (citations omitted); Harrison Eng’g & Constr. Co.
v. United States, 107 Ct. Cl. 205, 208, 68 F. Supp. 350, 351 (1946). A unilateral mistake,
however, does not allow for an exception to a general release unless the other party knew
of the mistake. See Rocky River Co., Inc. v. United States, 169 Ct. Cl. 203, 207–08 (1965)
(citations omitted). If a court finds a release does not express the intent of the parties, it
may reform the release in accordance with the parties’ intentions. See Nippon Hodo Co.,
Ltd. v. United States, 142 Ct. Cl. 1, 4, 160 F. Supp. 501, 502 (1958).
In the present case, the Release clearly provides for a broad release of claims,
stating, in relevant part, that a hospital which signs the release:
shall completely release, acquit, and forever discharge the Government,
TRICARE beneficiaries, and any MCSCs . . . (hereinafter collectively
referred to as “Releasees”) from any and all claims, demands, actions, suits,
causes of action, appeals, whether asserted as a class, individually, or
otherwise, damages whenever incurred, and liabilities of any nature
whatsoever (including costs, penalties, and attorney’s fees) that Releasor
ever had, now has, or hereafter can, shall, or may have against Releasees,
whether known or unknown, on account of or arising out of or resulting from
or in any way relating to payments, reimbursements, adjustments,
recoupments, or any other means of compensation by Releasees made at
any time for outpatient services rendered to TRICARE beneficiaries by
Releasor prior to the date Releasor became subject to the TRICARE
Outpatient Prospective Payment System (“OPPS”), or December 31, 2010
if Releasor was never subject to the TRICARE OPPS.
A second paragraph below the portion just quoted and above the signature line
also states:
RELEASOR UNDERSTANDS THE SIGNIFICANCE OF THIS RELEASE
OF UNKNOWN CLAIMS AND ITS WAIVER OF STATUTORY
PROTECTION AGAINS A RELEASE OF UNKNOWN CLAIMS.
ACCORDINGLY, RELEASOR EXPRESSLY WAIVES ANY AND ALL
RIGHTS AND BENEFITS UNDER SECTION 1542 OF THE CALIFORNIA
CIVIL CODE (WHICH STATES: “A GENERAL RELEASE DOES NOT
39
EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR
SUPSECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY
AFFECTED HIS SETTLEMENT WITH THE DEBTOR.”) OR ANY OTHER
LAW, RULE, PROVISION OR STATUTE OF ANY OTHER JURISDICTION
THAT OPERATES TO BAR THE RELEASE OF UNKNOWN CLAIMS.
(capitalization in original).
The court finds that the Release is unambiguous on its face and sufficiently broad
to bar all of plaintiffs’ breach of contract claims alleged in their amended complaint, which
“aris[e] out of” the government’s reimbursements for outpatient services made prior to
institution of the OPPS payment methodology. As stated, the burden to identify and
specify claims to be excepted from a general release lies with the parties before signing
the release. See Mingus Constructors, Inc. v. United States, 812 F.2d at 1393–94 (citing
Inland Empire Builders, Inc. v. United States, 424 F.2d at 1376). Plaintiffs do not appear
to allege in their amended complaint, or to have argued before the court in their opposition
to defendant’s motion to dismiss, that plaintiff Ingham, or any other similarly situated
hospitals which signed the Release, requested an exception or reservation of specific
claims from the general release before signing and becoming eligible to receive an
adjusted payment.
Therefore, the court is left only with the question of whether plaintiffs have
sufficiently pled facts alleging a vitiating circumstances to allow plaintiff Ingham to bring
a claim, despite the execution of an otherwise applicable release. See J.G. Watts Constr.
Co. v. United States, 161 Ct. Cl. at 807 (“[W]here the conduct of the parties in continuing
to consider a claim after the execution of the release makes plain that they never
construed the release as constituting an abandonment of the claim, or where it is obvious
that the inclusion of a claim in a release was attributable to a mistake or oversight, or
where fraud or duress is involved, the release will not be held to bar the prosecution of
the claim.” (internal citations omitted)); see also H.J. Lyness Constr., Inc. v. United States,
120 Fed. Cl. at 4–5; Raytheon Co. v. United States, 96 Fed. Cl. at 553–54. The language
of the Release is straightforward and clear and it would be a stretch for any hospital signor
to argue they did not understand that it was relinquishing future claims after signing the
Release and accepting payments. Nor have plaintiffs alleged that they signed Release
was based on fraud or duress. Although plaintiffs do allege the existence of a mutual
mistake, as discussed below, they have failed to adequately plead the elements of such
a mistake. Thus, plaintiffs have failed to adequately plead the existence of a vitiating
circumstance and plaintiff Ingham is barred by the Release from asserting any of the
claims for an express breach of contract alleged in Count I of the amended complaint.
Therefore, all of plaintiffs’ claims for breach of express contracts under Count I of the
amended complaint are dismissed.
Count II: Breach of Implied-In-Fact Contract
Alternative to their claims in Count I for breach of express contracts, plaintiffs
allege the creation, and breach of, two implied-in-fact contracts between defendant and
40
plaintiffs’ purported class in Count II of their amended complaint. The alleged terms of
these two alleged implied-in-fact contracts are identical to those of the two alleged
express contracts, as are the supporting documents offered by plaintiffs. The only
additional allegation made by plaintiffs with respect to the implied-in-fact contracts is that,
“to the extent the documents exchanged by the parties . . . did not form an express
contract, a contract between the parties can be implied-in-fact by reading all of the
documents together in light of the surrounding circumstances.” The alleged surrounding
circumstances plaintiffs point to include: the defendant’s hiring of Kennel in 2010 to
produce the Kennel Study and the use of the Kennel Study to craft a global resolution of
the dispute with the hospitals regarding outpatient services; defendant’s statements in the
FAQs that it had in its possession all of the data and all of the claims needed to determine
what was owed to hospitals for outpatient services; defendant’s establishment of the nine-
step process requiring “affirmative participation by the hospitals” and that that they sign
the Release before receiving payment; the repeated use of the language of offer and
acceptance in the defendant’s documents; and the Release “indisputably” setting forth
the terms of the bargained for exchange.
The elements of a binding contract with the United States are identical for express
and implied-in-fact contracts; only the nature of the evidence differs. See Night Vision
Corp. v. United States, 469 F.3d 1369, 1375 (Fed. Cir. 2006) (“The elements of an
implied-in-fact contract are the same as those of an oral express contract.”), cert. denied,
550 U.S. 934 (2007); Hanlin v. United States, 316 F.3d at 1328 (“Thus, the requirements
for an implied-in-fact contract are the same as for an express contract; only the nature of
the evidence differs.”); City of Cincinnati v. United States, 153 F.3d at 1377 (“Like an
express contract, an implied-in-fact contract requires ‘(1) mutuality of intent to contract;
(2) consideration; and, (3) lack of ambiguity in offer and acceptance.’ . . . When the United
States is a party, a fourth requirement is added: The government representative whose
conduct is relied upon must have actual authority to bind the government in contract.”
(quoting City of El Centro v. United States, 922 F.2d 816, 820 (Fed. Cir. 1990), cert.
denied, 501 U.S. 1230 (1991)); Trauma Serv. Grp. v. United States, 104 F.3d at 1325;
Russell Corp. v. United States, 210 Ct. Cl. 596, 608–09, 537 F.2d 474, 481–82 (1976),
cert. denied, 429 U.S. 1073 (1977)); Huntington Promotional & Supply, LLC v. United
States, 114 Fed. Cl. at 767 (“The elements are the same for an express or implied-in-fact
contract . . .”); Vargas v. United States, 114 Fed. Cl. at 233; Prairie Cnty., Mont. v. United
States, 113 Fed. Cl. 194, 202 (2013), aff’d 782 F.3d 685 (Fed. Cir. 2015); Mastrolia v.
United States, 91 Fed. Cl. 369, 384 (2010) (citing Flexfab, L.L.C. v. United States, 424
F.3d 1254, 1265 (Fed. Cir. 2005)). Implied-in-fact contracts are agreements “founded
upon a meeting of the minds, which, although not embodied in an express contract, is
inferred, as a fact, from conduct of the parties showing, in the light of the surrounding
circumstances, their tacit understanding.” Trauma Serv. Grp. v. United States, 104 F.3d
at 1325 (quoting Hercules, Inc. v. United States, 516 U.S. 417, 424 (1996) (quoting Balt.
& Ohio R.R. Co. v. United States, 261 U.S. 592, 597 (1923))); see also Kam-Almaz v.
United States, 682 F.3d at 1368; Bank of Guam v. United States, 578 F.3d at 1329 (citing
Trauma Serv. Grp. v. United States, 104 F.3d at 1326); Bay View, Inc. v. United States,
278 F.3d 1259, 1265–66 (Fed. Cir. 2001), reh’g and reh’g en banc denied, 285 F.3d 1035(Fed. Cir.), cert. denied, 537 U.S. 826 (2002); Westlands Water Dist. v. United States,
41
109 Fed. Cl. 177, 203 (2013); Peninsula Grp. Capital Corp. v. United States, 93 Fed. Cl.
at 728 (citing Balt. & Ohio R.R. Co. v. United States, 261 U.S. at 597; Russell Corp. v.
United States, 210 Ct. Cl. at 609, 537 F.2d at 482. Such an agreement will not be implied
“unless the meeting of minds was indicated by some intelligible conduct, act or sign.” Balt.
& Ohio R.R. Co. v. United States, 261 U.S. at 598; see also City of Cincinnati v. United
States, 153 F.3d at 1377 (“[A]n implied-in-fact contract arises when an express offer and
acceptance are missing but the parties’ conduct indicates mutual assent.” (citing Chavez
v. United States, 18 Cl. Ct. 540, 544 (1989)); Russell Corp. v. United States, 210 Ct. Cl.
at 609, 537 F.2d at 482. “[A]n implied-in-fact contract cannot exist if an express contract
already covers the same subject matter.” Trauma Serv. Grp. v. United States, 104 F.3d
at 1326.
Plaintiffs’ failure to allege any valid consideration for the First Alleged Contract,
discussed above, means that plaintiffs have failed to adequately plead the existence of
an implied-in-fact version of the First Alleged Contract just as it did for their alleged
express contract. With respect to the Second Alleged Contract, the terms of the implied-
in-fact version of plaintiffs’ Second Alleged Contract are identical to those of their alleged
express version. As discussed above, the Second Alleged Contract was to be accepted
by signing and executing the Release. Thus, as discussed above, only those hospitals
which actually signed and executed the Release are alleged to be parties to the Second
Alleged Contract. Also as noted above, the only such hospital among the named plaintiffs
is plaintiff Ingham. Once Ingham singed the Release, however, the existence of an
express version of the First Alleged Contract between defendant and plaintiff Ingham
does not allow for the existence of any implied-in-fact version. See Trauma Serv. Grp. v.
United States, 104 F.3d at 1326 (“[A]n implied-in-fact contract cannot exist if an express
contract already covers the same subject matter.”). Moreover, plaintiff Ingham is barred
from asserting any claims for any alleged breach by the Release it signed for the same
reasons it was barred from asserting its claims under the alleged express contract.
Plaintiffs’ claims for breach of implied-in-fact contracts under Count II of their amended
complaint must be dismissed.
Count III: Mutual Mistake
Plaintiffs also allege a claim for mutual mistake in Count III of their first amended
complaint. Plaintiffs allege that, at the time the Payment Adjustment Worksheets were
received by eligible hospitals, the parties held two mistaken beliefs:
(1) Defendant had correctly calculated the amounts due to each [alleged]
Class member for radiology services pursuant to the methodology as set
forth in each Class member’s contract with Defendant and (2) Defendant
had correctly determined that no additional amounts were due each Class
member for the other categories of outpatient services.
With regard to the first alleged mistake, plaintiffs allege that defendant’s calculations
violated the calculation methodology. Defendant, however, argues that plaintiffs’ claim
must fail because, under the language of the Notice, plaintiffs assumed the risk of any
errors in the government’s calculations. With regard to the second alleged mistake,
42
plaintiffs allege that defendant incorrectly determined non-radiology services had been
correctly paid. Defendant, however, responds that plaintiffs have not alleged a mistake,
but simply disagree with the methodology used in the Kennel Study. Defendant further
argues that any alleged errors related to non-radiology categories of outpatient services
are “irrelevant” because the Kennel Study was not part of defendant’s payment program
as announced in the Notice. The court notes that the only valid contract that plaintiffs
have pled that could be reformed under the doctrine of mutual mistake is the Second
Alleged Contract between defendant and plaintiff Ingham. Under this contract, defendant
proposed to provide a payment to eligible hospitals calculated according to the nine-step
process laid out in the Notice, in exchange for the hospitals’ agreement to release all
claims related to any additional payments received for outpatient services prior to the
introduction of the TRICARE OPPS payment method at issue.
As stated by the Federal Circuit:
In order to have a contract reformed, the party seeking reformation under
the doctrine of mutual mistake must allege: “(1) the parties to the contract
were mistaken in their belief regarding a fact; (2) that mistaken belief
constituted a basic assumption underlying the contract; (3) the mistake had
a material effect on the bargain; and (4) the contract did not put the risk of
the mistake on the party seeking reformation.”
Bank of Guam v. United States, 578 F.3d at 1329–30 (quoting Atlas Corp. v. United
States, 895 F.2d 745, 750 (Fed. Cir.), cert. denied, 498 U.S. 811 (1990)); see also
Restatement (Second) of Contracts § 152 (1981). The purpose and function of the
reformation of a contract is “to bring the parties’ written contract in accord with their
agreement.” Atlas Corp. v. United States, 895 F.2d at 750. The Federal Circuit also has
indicated that “[r]eformation of a written agreement on the ground of mutual mistake is an
extraordinary remedy, and is available only upon presentation of satisfactory proof” of the
four part test identified above. Nat’l Austl. Bank v. United States, 452 F.3d at 1329.
Defendant argues that plaintiff Ingham bore the risk of at least one of these alleged
mistakes under the terms of the Release. “[A] contractor cannot prevail on a mutual
mistake claim if it assumed the risk of the mistake.” Short Bros., PLC v. United States, 65
Fed. Cl. at 797 (citing Flippin Materials Co. v. United States, 160 Ct. Cl. at 368–69, 312
F.2d at 415–16). “A party bears the risk of mistake when the risk is allocated to him by
agreement of the parties . . . .” Burnside-Ott Aviation Training Ctr., Inc. v. United States,
985 F.2d 1574, 1581 (Fed. Cir. 1993) (quoting Restatement (Second) of Contracts § 154
(1981)) (omission in Burnside-Ott Aviation Training Ctr., Inc. v. United States). “The intent
of the parties . . . is not irrelevant to the question of which party agreed to assume the risk
of mistake and must be considered in making such a determination.” Id. at 1582.
The court turns first to plaintiffs’ first alleged mistake, that defendant failed to
calculate the amounts due correctly under the methodology in their alleged contract with
defendant in accordance with the nine-step process laid out in the Notice. Plaintiffs
allege, and defendant does not challenge, that, at the time the hospitals received their
Payment Adjustment Worksheets, both parties believed that the defendant had “correctly
43
calculated the amount due Plaintiffs and the class.” According to plaintiffs, however, this
was untrue because Kennel, working on behalf of the defendant, had failed to correctly
compute these amounts. Plaintiffs also allege that this mistaken belief constituted a basic
assumption underlying the contract and had a material effect on the bargain because the
payment calculated according to the April 25, 2011 Letter, was, as expressly stated in the
Release, to be the consideration the hospitals received for signing the Release.
While plaintiffs have successfully pled certain elements of mutual mistake, they
have failed to plead or establish that the Second Alleged Contract did not put the risk of
mistake on plaintiff Ingham. Step 8 of the nine-step methodology in the Notice, provided
that “[a] written response to the hospital’s request will be sent to the individual at the
address provided by the hospital. The response will provide the calculated discretionary
adjusted payment and the calculations from which the adjustment was derived.” Step 8
also indicated that:
While the methodology for calculating the adjustment is not subject to
questions, any questions regarding the data used in the calculations should
be received by TMA within 30 days of the date of TMA’s response as
specified in the response. Any questions should be accompanied by
detailed explanation of the alleged errors and the proposed corrections with
supporting documentation.
Step 8 of the Notice, which was a part of the defendant’s offer for the Second Alleged
Contract, thus, created a process by which the hospitals could challenge any perceived
mistakes in the calculations received, putting the onus on the hospitals to do so. The
opportunity to challenge was an important part of the Discretionary Payment Process,
giving hospitals an opportunity to review the defendant’s calculations and to provide
feedback to defendant prior to signing the Release. Plaintiffs argue that if defendant
wished to place the risk of mutual mistake on the hospitals, it should have provided them
the Kennel Study and warned them that the “contract was conditional upon Plaintiff
accepting the conclusions of the Study ‘as is.’” The claims data was originally provided
by the hospitals and then run through a methodology explicitly laid out in steps 3 through
7 of the Notice. The Kennel Study, although part of the background which led to the
defendant’s proposal to adjust hospital payment levels, was not a part of the methodology
and did not affect the calculation of proposed payment amounts by the defendant during
the Discretionary Payment Process. Plaintiffs admit in their amended complaint that
plaintiff Ingham received the Payment Adjustment Worksheet containing the defendant’s
calculations and proposed payments for Ingham discussed in Step 8, and that it signed
and returned the Release rather than challenging the figures it received. Plaintiffs, thus,
have failed to sufficiently plead that plaintiff Ingham did not bear the risk of mistake related
to defendant’s alleged calculations for the adjustments provided for radiology services as
part of the Second Alleged Contract. Therefore, their claims under Count III of plaintiffs’
amended complaint related to their first alleged mistake must be dismissed.
With respect to plaintiffs’ second alleged mistake, that defendant had correctly
determined no additional amounts were due plaintiffs for non-radiology outpatient
services, plaintiffs allege that the Kennel Study incorrectly concluded that, for outpatient
44
services other than radiology, plaintiffs had not been underpaid based on eleven allegedly
“fundamental errors” listed in the amended complaint. These “fundamental errors” were:
(1) [T]he use of incorrect assumptions of fact; (2) intentional exclusion of
claims that should have been included; (3) failure to properly capture claims
data; (4) failure to accurately capture claims-related services rendered from
a referring Military Treatment Facility; (5) failure to capture claims provided
by a hospital providing services at multiple locations; (6) failure to
accommodate changes in hospital locations; (7) failure of Managed Care
Support Contractors to maintain claims data, preventing TRICARE from
accessing this data; (8) use of erroneous formulae that resulted in incorrect
calculations; (9) comparison of incomplete outpatient service categories;
(10) comparison of “averages” that were not accurate; and (11) failure to
address and account for unique hospital (as opposed to physician offices)
accounts.
Plaintiffs allege that the Kennel Study was the analysis defendant mentioned in the Notice
as the basis for its conclusion that “[i]n all cases, except radiology services, TRICARE
payments for hospital outpatient services were either comparable to what Medicare would
have paid [prior to instituting its OPPS rate] or TRICARE paid more.” Plaintiffs allege that
plaintiffs mistakenly believed this conclusion was correct at the time they received the
Payment Adjustment Worksheet. Plaintiffs also have pled that this mistaken belief
constituted a basic assumption underlying the contract and had a material effect on the
bargain, on the grounds that the waiver of additional possible causes of action related to
non-radiology hospital services by the signing hospitals could have constituted the
consideration received by the defendant to support the Second Alleged Contract. See
C.H. Robinson Intern. v. United States, 64 Fed. Cl. 651, 661 (2005) (finding, in case
involving an agreement by plaintiff to pay a mitigated penalty to government agency in
exchange for waiving the right to judicial review of the agreement, that the parties’
mistaken belief about plaintiff’s potential maximum liability could have been a basic
assumption underlying the contract and have had a material effect on the nature of the
bargain).
Thus, the only remaining issue is whether plaintiffs have sufficiently pled that the
Second Alleged Contract did not place the risk of the alleged mistake on plaintiff Ingham.
The information needed to assess the size of what plaintiffs thought was the amount of
consideration they offering defendant when signing the Release was in the hands of the
hospitals. Moreover, in the Release, plaintiff Ingham agreed to release all claims:
on account of or arising out of or resulting from or in any way relating to
payments, reimbursements, adjustments, recoupments, or any other
means of compensation by Releasees made at any time for outpatient
services rendered to TRICARE beneficiaries by Releasor prior to the date
Releasor became subject to the TRICARE Outpatient Prospective Payment
System (“OPPS”), or December 31, 2010 if Releasor was never subject to
the TRICARE OPPS.
45
(emphasis added). Thus, the Release was not limited to payments for radiology services
but included all non-radiology outpatient services as well. Further, the release also
explicitly waived any “UNKNOWN CLAIMS” that the hospitals may have had.
(capitalization in original). Therefore, the language of the Release placed the burden of
defining and raising any issues related to payments for non-radiology outpatient services
during the Relevant Period, including those unknown prior to the time the Release was
signed, on the hospitals which signed the Release. While plaintiffs allege that they never
received a copy of the Kennel Study until after the Payment Adjustment Worksheets had
been sent to them, the breadth of the release makes this immaterial. Because plaintiff
Ingham admittedly signed the Release, plaintiffs have failed to sufficiently plead that
Ingham did not bear the risk of mistake related to the amounts potentially owed by the
defendant for non-radiology outpatient services. Therefore, plaintiffs’ claims under Count
III of their amended complaint related to plaintiffs’ alleged mistakes must be dismissed.
Count IV: Breach of the Covenant of Good Faith and Fair Dealing
In Count IV of plaintiffs’ amended complaint, plaintiffs allege that defendant’s
actions violated the implied covenant of good faith and fair dealing. In particular, plaintiffs
allege that, after the Represented Hospitals received notice of their proposed payments,
the Represented Hospitals informed the defendant “of the errors in the Study and the
underpayment of the [alleged] Class.” Plaintiffs further allege that, despite this knowledge,
“Defendant remained silent and took no steps to notify Plaintiffs and the Class or
otherwise remedy the situation.” According to plaintiffs, “[b]y failing to correct the errors
in the calculation and proposed payments, Defendant breached its covenant of good faith
and fair dealing.”
“Every contract imposes upon each party a duty of good faith and fair dealing in its
performance and enforcement.” Alabama v. North Carolina, 560 U.S. 330 (2010) (quoting
Restatement (Second) of Contracts § 205 (1981). “Failure to fulfill that duty constitutes a
breach of contract, as does failure to fulfill a duty ‘imposed by a promise stated in the
agreement.’” Metcalf Const. Co. v. United States, 742 F.3d 984, 990 (Fed. Cir. 2014)
(quoting Restatement (Second) of Contracts § 235). “The covenant of good faith and fair
dealing . . . imposes obligations on both contracting parties that include the duty not to
interfere with the other party's performance and not to act so as to destroy the reasonable
expectations of the other party regarding the fruits of the contract.” Metcalf Const. Co. v.
United States, 742 F.3d 984, 991 (Fed. Cir. 2014) (quoting Centex Corp. v. United States,
395 F.3d 1283, 1304 (Fed.Cir.2005) (emphasis in Metcalf Const. Co. v. United States)).
“Both the duty not to hinder and the duty to cooperate are aspects of the implied duty of
good faith and fair dealing.” Metcalf Const. Co. v. United States, 742 F.3d 984, 991 (Fed.
Cir. 2014) (quoting Precision Pine [& Timber, Inc. v. United States, 596 F.3d 817, 820 n.
1 (Fed Cir. 2010)).
However, as both parties recognize, “[i]t is well settled that the parties' duty of good
faith and fair dealing must be rooted in promises set forth in the contract.” Helix Elec., Inc.
v. United States, 68 Fed. Cl. 571, 587 (2005). Thus, “[t]he implied duty of good faith and
fair dealing cannot expand a party's contractual duties beyond those in the express
contract or create duties inconsistent with the contract's provisions.” Precision Pine &
46
Timber, Inc. v. United States, 596 F.3d 817, 831 (Fed. Cir. 2010) (citing Centex Corp. v.
United States, 395 F.3d 1283, 1304–06 (Fed. Cir. 2005)); Jarvis v. United States, 43 Fed.
Cl. 529, 534 (1999) (“The implied duty of good faith and fair dealing does not form the
basis for wholly new contract terms, particularly terms which would be inconsistent with
the express terms of the agreement.”).
The only possible valid contract alleged by the plaintiffs, and the only source in
which the duty of good faith and fair dealing could be “rooted,” is the Second Alleged
Contract between defendant and plaintiff Ingham. As discussed above, plaintiff Ingham
signed the Release, and, thus, agreed to:
completely release, acquit, and forever discharge the Government,
TRICARE beneficiaries, and any MCSCs . . . (hereinafter collectively
referred to as “Releasees”) from any and all claims, demands, actions, suits,
causes of action, appeals, whether asserted as a class, individually, or
otherwise, damages whenever incurred, and liabilities of any nature
whatsoever (including costs, penalties, and attorney’s fees) that [Ingham]
ever had, now has, or hereafter can, shall, or may have against Releasees,
whether known or unknown, on account of or arising out of or resulting from
or in any way relating to payments, reimbursements, adjustments,
recoupments, or any other means of compensation by Releasees made at
any time for outpatient services rendered to TRICARE beneficiaries by
Releasor prior to the date [Ingham] became subject to the TRICARE
Outpatient Prospective Payment System (“OPPS”), or December 31, 2010
if Releasor was never subject to the TRICARE OPPS.
Plaintiffs’ allegations regarding the breach of the duty of good faith and fair dealing
involve what plaintiffs allege were “errors in the Study and the underpayment of the Class”
during the Discretionary Payment Process. As stated in the April 25, 2011 Letter, the
Discretionary Payment Process made available to eligible hospitals “net adjustments to
payments for hospital outpatient radiology services for the period August 1, 2003, until
the TRICARE hospital Outpatient Prospective Payment System (OPPS) began on May
1, 2009.” Under the TRICARE regulations implementing OPPS, no hospitals, including
Ingham, became subject to OPPS until May 1, 2009, at the earliest. See 74 Fed. Reg.
6228 (extending the effective date of TRICARE’s OPPS until May 1, 2009). Any errors in
the calculation and proposed payments in the Discretionary Payment Process, therefore,
“relat[e] to” payments made by the government prior to the date eligible hospitals became
subject to TRICARE OPPS. Under the terms of the Release, hospitals that signed the
release waived any claims related to payments made prior to the date the hospitals
became subject to OPPS. Therefore, because plaintiff Ingham signed the Release,
Ingham is barred from pursuing such claims under any form of cause of action, including
a breach of the duty of good faith and fair dealing. Therefore, plaintiffs’ claims under Count
IV of their amended complaint must be dismissed.
47
Count V: Violations of Money-Mandating Statutes and Regulations
In Count V of their Complaint, which plaintiffs allege is made “[s]eparate and apart”
from their breach of contract related claims in Counts I through IV, plaintiffs allege
violations by the defendant of the allegedly money-mandating statutes 10 U.S.C §§ 1079
and 1086 and the allegedly money-mandating regulations 32 C.F.R §§ 199.4(a)(1)(i) and
199.7(h)(2). According to plaintiffs these statutes and regulations are part of a
“framework” that required defendant to make civilian health care available to TRICARE
beneficiaries and mandated that defendant pay Medicare rates, “to the extent
practicable,” for that provided health care. 10 U.S.C. § 1079. In particular, plaintiffs allege
that this “framework” was composed as follows: under 10 U.S.C. §§ 1079(a) and 1086(a),
the defendant was required to enter into contracts under which TRICARE beneficiaries
could receive medical care from civilian health care providers; under 10 U.S.C. §§
1079(j)(2) and 1086(g), the payments for medical care contracted by the defendant were
required to be consistent with Medicare rates “to the extent practicable”; under 32 C.F.R.
§ 199.4(a)(1)(i) the defendant was required to “pay for medically necessary services and
supplies required in the diagnosis and treatment of illness or injury,” which includes
outpatient services; and under C.F.R. § 199.7(h) when authorized providers participated
in TRICARE by submitting claim forms, that provider was required to be paid for that
claim. Plaintiffs allege that defendant violated these statutes and the regulations by failing
to pay plaintiffs the money these statutes and the regulations mandated to be paid.
Defendant argues plaintiffs’ claims should be dismissed on the grounds that (1) the cited
statutes and regulations are not money-mandating and, hence, the court lacks jurisdiction
to hear plaintiffs’ claims, and (2) even should jurisdiction to hear plaintiffs’ claims exist,
plaintiffs have failed to allege facts to demonstrate that defendant violated any of the cited
statutes or regulations.
The court first addresses the issue of jurisdiction. As stated above, this court has
jurisdiction over claims against the United States based on federal constitutional,
statutory, or regulatory law mandating compensation by the federal government for
damages sustained. See United States v. Navajo Nation, 556 U.S. 287, 289-90 (2009);
United States v. Mitchell, 463 U.S. 206, 215 (1983); see also Kam-Almaz v. United States,
682 F.3d at 1368; Greenlee Cnty., Ariz. v. United States, 487 F.3d 871, 875 (Fed. Cir.),
reh’g and reh’g en banc denied (Fed. Cir. 2007), cert. denied, 552 U.S. 1142 (2008);
Palmer v. United States, 168 F.3d 1310, 1314 (Fed. Cir. 1999).
To prove that a statute or regulation is money-mandating, a plaintiff must
demonstrate that an independent source of substantive law relied upon “can fairly be
interpreted as mandating compensation by the Federal Government.” United States v.
Navajo Nation, 556 U.S. at 290 (quoting United States v. Testan, 424 U.S. at 400); see
also United States v. White Mountain Apache Tribe, 537 U.S. at 472; United States v.
Mitchell, 463 U.S. at 217; Roberts v. United States, 745 F.3d at 1162; Blueport Co., LLC
v. United States, 533 F.3d 1374, 1383 (Fed. Cir. 2008), cert. denied, 555 U.S. 1153(2009). The source of law granting monetary relief must be distinct from the Tucker Act
itself. See United States v. Navajo Nation, 556 U.S. at 290 (The Tucker Act does not
create “substantive rights; [it is simply a] jurisdictional provision[] that operate[s] to waive
48
sovereign immunity for claims premised on other sources of law (e.g., statutes or
contracts).”). “If the statute is not money-mandating, the Court of Federal Claims lacks
jurisdiction, and the dismissal should be for lack of subject matter jurisdiction.” Jan’s
Helicopter Serv., Inc. v. Fed. Aviation Admin., 525 F.3d 1299, 1308 (Fed. Cir. 2008)
(quoting Greenlee Cnty., Ariz. v. United States, 487 F.3d at 876); Fisher v. United States,
402 F.3d 1167, 1173 (Fed. Cir. 2005) (The absence of a money-mandating source is
“fatal to the court’s jurisdiction under the Tucker Act.”); Peoples v. United States, 87 Fed.
Cl. 553, 565-66 (2009). “Further, the statute and regulations must be money-mandating
as to the class of which plaintiff claims to be a member.” Roberts v. United States, 745
F.3d at 1162 (citing Casa de Cambio Comdiv S.A. de C.V. v. United States, 291 F.3d
1356, 1361 (Fed. Cir. 2002)).
Plaintiffs allege that 10 U.S.C. §§ 1079 and 1086 are money-mandating because
they required the DoD to obtain health care from civilian providers and pay Medicare rates
for that health care. Plaintiff also argues, in the alternative, that the regulations
implementing 10 U.S.C. §§ 1079 and 1086, 32 C.F.R. §§ 199.4(a)(1)(i) and 199.7(h)(2),
are money-mandating because they require TRICARE to pay authorized civilian health
care providers directly for all covered services when those providers signed and
submitted TRICARE claims forms. Finally, citing Roberts v. United States, 745 F.3d at
1165-66, plaintiffs also argue that the court may find the combination of the cited statutes
and regulations to be money-mandating. Defendant argues that 10 U.S.C. §§ 1079 and
1086 do not mandate payment to providers, but, rather, require the government to issue
certain regulations regarding those payments. Defendant asserts that 32 C.F.R. §
199.7(h)(2) also is not money-mandating.
The version of 10 U.S.C. § 1079(a) applicable throughout the course of the
Relevant Period states:
To assure that medical care is available for dependents . . . of members of
the uniformed services who are on active duty for a period of more than 30
days, the Secretary of Defense, after consulting with the other administering
Secretaries, shall contract, under the authority of this section, for medical
care for those persons under such insurance, medical service, or health
plans as he considers appropriate.
10 U.S.C. § 1079(a) (2000) (emphasis added). The applicable version of 10 U.S.C.
§1086(a) states:
To assure that health benefits are available for the persons covered by
subsection (c), the Secretary of Defense, after consulting with the other
administering Secretaries, shall contract under the authority of this section
for health benefits for those persons under the same insurance, medical
service, or health plans he contracts for under section 1079(a) of this title.
10 U.S.C § 1086(a) (2000) (emphasis added). As referenced in 10 U.S.C. § 1086(a),
persons covered by subsection (c) include: a “member or former member of a uniformed
service who is entitled to retired or retainer pay, or equivalent pay” pursuant to 10 U.S.C.
49
§ 1074(b); certain dependents of retirees pursuant to 10 U.S.C. § 1076(b); and survivors
of a deceased member of the uniformed service, pursuant to 10 U.S.C. § 1086(c)(2). See
10 U.S.C § 1086(c).
The statutes at 10 U.S.C. §§ 1079(j)(2) and 1086(g) set certain guidelines for the
regulations implementing 10 U.S.C. §§ 1079(a) and 1086(a). As discussed above, 10
U.S.C. § 1079(j)(2) was modified by Congress in 2001. See National Defense
Authorization Act for Fiscal Year 2002, Pub. L. No. 107-107, § 707, 115 Stat. 1012, 1163.
The modified law, which was the version applicable throughout the relevant period, states:
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 regulations
to be prescribed by the administering Secretaries which provide that the
amount of such payments shall be determined to the extent practicable in
accordance with the same reimbursement rules as apply to payments to
providers of services of the same type under title XVIII of the Social Security
Act (42 U.S.C. 1395 et seq.) [Medicare].
10 U.S.C. § 1079(j)(2) (2006) (emphasis added). 10 U.S.C. § 1086(g) applies 10 U.S.C.
§ 1079(j) to those beneficiaries described in 10 U.S.C. § 1086(a), stating:
Section 1079(j) of this title shall apply to a plan contracted for under this
section, except that no person eligible for health benefits under this section
may be denied benefits under this section with respect to care or treatment
for any service-connected disability which is compensable under chapter 11
of title 38 solely on the basis that such person is entitled to care or treatment
for such disability in facilities of the Department of Veterans Affairs.
10 U.S.C. § 1086(g) (2000) (emphasis added).
Thus, under 10 U.S.C. §§ 1079(a) and (j)(2), the Secretary “shall contract” for
healthcare for military dependents, and the amount paid for these services “shall be
determined” by regulations issued by the Secretary, which “shall be determined to the
extent practicable” by Medicare’s rates. Under 10 U.S.C. § 1086(a) and (g) the Secretary
“shall” do the same for retirees, their dependents, and the dependents of uniformed
service members killed while on active duty. Although “‘the use of the word “shall”
generally makes a statute money-mandating,’” Greenlee Cnty., Ariz. v. United States, 487
F.3d 871, 877 (Fed. Cir. 2007) (quoting Agwiak v. United States, 347 F.3d 1375, 1380
(Fed. Cir. 2003)), the statutes at 10 U.S.C. §§ 1079 and 1086 do not set out any specific
steps defendant was required to take to provide health care to members of the military,
retirees, or their families. Instead, these statutes required the defendant to issue
regulations in order to provide such health care and set out certain guidelines that
defendant was to follow when it issued these regulations and to contract for medical care
for covered individuals. The program and benefits do not create a money-mandating
provision that flows to the plaintiff hospitals. The hospitals’ eligibility for payment requires
an extra step of authorization into the program. The portions of 10 U.S.C. §§ 1079 and
50
1086 cited by plaintiffs, therefore, are not money-mandating and, standing alone, cannot
serve as a source of jurisdiction for plaintiffs.
Plaintiffs’ also claim that jurisdiction exists under 32 C.F.R §§ 199.4(a)(1)(i) and
199.7(h)(2), either alone or in combination with 10 U.S.C. §§ 1079 and 1086. Throughout
the Relevant Period 32 C.F.R. § 199.4(a)(1)(1) stated:
Subject to all applicable definitions, conditions, limitations, or exclusions
specified in this part, the CHAMPUS Basic Program will pay for medically
necessary services and supplies required in the diagnosis and treatment of
illness or injury, including maternity care and well-baby care. Benefits
include specified medical services and supplies provided to eligible
beneficiaries from authorized civilian sources such as hospitals, other
authorized institutional providers, physicians, other authorized individual
professional providers, and professional ambulance service, prescription
drugs, authorized medical supplies, and rental or purchase of durable
medical equipment.
32 C.F.R. § 199.4(a)(1)(i) (2002) (emphasis added)
During the Relevant Period, 32 C.F.R. § 199.7(h) stated:
(h) Benefit payments. CHAMPUS benefit payments are made either directly
to the beneficiary or sponsor or to the provider, depending on the manner
in which the CHAMPUS claim is submitted.
(1) Benefit payments made to beneficiary or sponsor. When the CHAMPUS
beneficiary or sponsor sings and submits a specific claim form directly to
the appropriate CHAMPUS fiscal intermediary (or OCHAMPUS, including
OCHAMPUSEUR), any CHAMPUS benefit payments due as a result of that
specific claim submission will be made in the name of, and mailed to, the
beneficiary or sponsor. In such circumstances, the beneficiary or sponsor is
responsible to the provider for any amounts billed.
(2) Benefit payments made to participating provider. When the authorized
provider elects to participate by signing a CHAMPUS claim form, indicating
participation in the appropriate space on the claim form, and submitting a
specific claim on behalf of the beneficiary to the appropriate CHAMPUS
fiscal intermediary, any CHAMPUS benefit payments due as a result of that
claim submission will be made in the name of and mailed to the participating
provider. Thus, by signing the claim form, the authorized provider agrees to
abide by the CHAMPUS-determined allowable charge or cost, whether or
not lower than the amount billed. . . .
32 C.F.R. § 199.7(h) (2002) (emphasis added).
51
As plaintiffs point out in their opposition to defendant’s motion to dismiss, in Britell
v. United States, 372 F.3d at 1378, the Federal Circuit held that the combination of 32
C.F.R. §§ 199.4(a)(1)(i) and 32 C.F.R. § 199.7(h)(1) to was money-mandating,
“mandating the payment of money directly to the beneficiaries as reimbursement for
medical services received.” Britell v. United States, 372 F.3d 1370, 1378 (Fed. Cir. 2004).
In particular, the court highlighted the language from 32 C.F.R. § 199.4(a)(1)(i) stating
that “the CHAMPUS Basic Program will pay for medically necessary services and
supplies,” from 32 C.F.R. § 199.7(h) stating that “CHAMPUS benefit payments are made
either directly to the beneficiary or sponsor or to the provider,” and from 32 C.F.R. §
199.7(h)(1) stating that, “[w]hen the CHAMPUS beneficiary or sponsor signs and submits
a specific claim form . . . any CHAMPUS benefit payments due as a result of that specific
claim submission will be made in the name of, and mailed to, the beneficiary or sponsor.”
Id. (emphasis, modification, and omission in Brittel v. United States). According to the
Brittel court, “[the Federal Circuit] and other courts have repeatedly held that this type of
mandatory language, e.g., ‘will pay’ or ‘shall pay,’ creates the necessary ‘money-mandate’
for Tucker Act purposes.” Id.Of the three regulatory provisions on which plaintiffs’ claims are based, two, 32
C.F.R §§ 199.4(a)(1)(i) and 199.7(h), were involved in Brittel v. the United States, while
the third, 32 C.F.R. § 199.7(h)(2), is the sister provision to the final provision cited in
Brittel, 32 C.F.R. § 199.7(h)(1). Although defendant correctly points out that Brittel v.
United States is factually distinguishable from the present case, in that it involved
payments to beneficiaries under 32 C.F.R. § 199.7(h)(1), rather than to providers under
32 C.F.R. § 199.7(h)(2), the distinction does not affect plaintiffs’ claims. The portion of 32
C.F.R. § 199.7(h)(1) quoted by the Brittel court is almost identical to, and contains the
same money-mandating language, as the parallel portion of 32 C.F.R. § 199.7(h)(2) cited
by the plaintiffs, which states that “[w]hen the authorized provider elects to participate by
signing a CHAMPUS claim form . . .any CHAMPUS benefit payments due as a result of
that claim submission will be made in the name of and mailed to the participating
provider.” Thus, following Brittel v. United States, the combination of 32 C.F.R.
§§ 199.4(a)(1)(i) and 199.7(h)(2) is money-mandating with respect to TRICARE
providers, “mandating the payment of money directly to the [providers] as reimbursement
for medical services [provided].” Britell v. United States, 372 F.3d at 1378. The court
further notes that, under 10 U.S.C. §§ 1079(j)(2) and 1086(g), the amount to be paid to
providers providing services under TRICARE plans “shall be determined” by regulations
providing which “to the extent practicable” match the rules used by Medicare. 10 U.S.C.
§ 1079(j)(2). Thus, the combination of 10 U.S.C. § 1079(j)(2) and 32 C.F.R.
§§ 199.4(a)(1)(i) and 199.7(h)(2) mandates the payment of money to providers who have
submitted claims, in amounts which have been “to the extent practicable” determined
under rules which match those used by Medicare. In their complaint, plaintiffs allege both
that they provided outpatient services to individuals enrolled in TRICARE and that they
submitted claims for services provided to these individual on the forms required by 32
C.F.R § 199.7(h)(2). Thus, the combination of 10 U.S.C. § 1079(j)(2) and 32 C.F.R.
§§ 199.4(a)(1)(i) and 199.7(h)(2) is money-mandating as to hospitals such as plaintiffs
52
and, therefore, jurisdiction exists to hear plaintiffs’ claims brought under these statutes
and regulations.8
Before moving on to defendant’s additional grounds for dismissal, the court finds
that plaintiff Ingham’s claims under 10 U.S.C §§ 1079 and 1986 and 32 C.F.R. §§ 199.4and 199.7 are barred by the Release. The Release states that by signing and accepting
the plaintiffs offer of a payment as described in the April 25, 2011 Letter, the signor agrees
to “completely release, acquit and forever discharge the Government . . . from any and
all claims, demands, actions, suits, causes of action . . . arising out of or resulting in any
way relating to payments . . . by [the Government] made at any time for outpatient services
rendered to TRICARE beneficiaries by Releasor prior to the date Releasor became
subject the TRICARE Outpatient Prospective Payment System (‘OPPS’), or December
31, 2010 if Releasor was never subject to TRICARE OPPS.” The Notice similarly states
that “payment of the discretionary adjustments will also be conditioned on the execution
of a release by the hospital of any hospital outpatient service claims against the agency,
TRICARE beneficiaries and the TRICARE MCSCs.” In Count V, plaintiffs, including
plaintiff Ingham, allege that they were underpaid for All Outpatient Services during the
Relevant Period, in other words, plaintiffs allege a cause of action arising out of payments
made by the government for outpatient services prior to the time they became subject to
TRICARE OPPS. Such a cause of action is clearly covered by the Release and, therefore,
for those hospitals which signed the Release and accepted its terms, namely plaintiff
Ingham, Count V is dismissed.
Defendant also moves to dismiss plaintiffs’ alleged money-mandating claims on
the grounds that plaintiffs have failed to allege facts showing that defendant violated a
specific payment rule under the statutes or regulations. Having found that jurisdiction
exists, the court examines the merits of plaintiffs’ claims under 10 U.S.C. §§ 1079 and
1086 and 32 C.F.R. §§ 199.4 and 199.7. In their amended complaint, plaintiffs argue that
defendant violated 10 U.S.C. §§ 1079 and 1086 when it used the CMAC fixed maximum
amounts to reimburse them for claims they submitted for All Outpatient Services. Plaintiffs
allege this caused them to be paid less than they would have been paid if defendant had
complied with the statutory mandate of 10 U.S.C. § 1079, which they allege “required the
hospitals providing health care services to CHAMPUS beneficiaries to be paid consistent
with Medicare.” In their opposition to defendant’s motion to dismiss, plaintiffs clarify that
they do not allege that Defendant should have been paid using the Medicare OPPS rate
during Relevant Period, which they concede was not feasible, but that defendant’s use of
CMAC rates failed to reflect Medicare rates “to the extent practicable” as required by 10
U.S.C. § 1079(j)(2). Plaintiffs argue that defendant’s use of CMAC rates failed to meet
this standard because CMAC “in no way emulated any prior Medicare reimbursement
8Plaintiffs additionally argue, in a notice of additional authority filed with the court, that
defendant’s argument that 32 C.F.R. § 199.7(h)(2) is not money-mandating contradicts a
position it took in a 2007 filing in the case of Lakewood Health System v. Triwest
Healthcare Alliance Corp., No. 07-cv-00069 (D. Del. 2007).
53
method for hospital outpatient services and was never intended to serve as the exclusive
reimbursement paid to hospitals for outpatient services.”
Defendant argues that Count V should be dismissed because plaintiffs have failed
to allege facts to show that the reimbursement rates set forth in the Interim and Final
Rules violated 10 U.S.C. § 1079. Initially, defendant argues that nothing in 10 U.S.C.
§ 1079 required it to pay hospitals using Medicare rates. Instead, defendant points to 10
U.S.C. § 1079’s statement that the amounts paid to the provider should “to the extent
practicable” reflect Medicare rates, and argues that what was “practicable” was “a
quintessential discretionary judgment to be made by the Secretary.” Defendant quotes
GHS Health Maintenance Organization, Inc. v. United States, 76 Fed. Cl. 339, 363 (2007)
for the proposition that an agency’s “[j]udgment about the best regulatory tools to employ
in a particular situation is . . . entitled to considerable deference from the generalist
judiciary.” (omission in GHS Health Maintenance Organization, Inc. v. United States).
Defendant points out that the Interim Final and Final Rules, and later the Notice, all
explained why it was not “practicable” to implement Medicare’s OPPS rates at the time
the Rules were issued. Defendant argues that the use of CMAC to reimburse hospitals
was not improper because, as explained in the Notice, CMAC was “one component of
Medicare’s physician fee schedule” that Medicare used as part of a “blended rate” to
reimburse outpatient radiology services prior to instituting OPPS. As to plaintiffs’ claims
regarding the existence of prior Medicare payment rates that should have been used,
plaintiffs argue that there was nothing in 10 U.S.C. § 1079 that required the defendant to
pay a specific prior Medicare rate or any specific rate and, thus, the existence of previous
reimbursement rates is irrelevant. As to plaintiffs’ argument that CMAC was not intended
to reimburse hospitals, defendant argues that there was nothing in 10 U.S.C. § 1079 that
required the defendant to pay all of plaintiffs’ overhead fees.
The court notes that, in their briefs before this court, neither party conducts an
analysis under Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S.
837, reh’g denied, 468 U.S. 1227 (1984). As the arguments summarized above make
clear, however, their dispute revolves around the issue of whether defendant improperly
exercised its discretion under the statute 10 U.S.C. § 1079 when it issued the Interim
Final and Final Rules establishing CMAC as the payment rate for certain outpatient
services.9
Deference to the agency pursuant to Chevron requires that a court ask the
following questions when reviewing an agency’s construction of a statute that it
9 As noted above, the relevant changes instituted by the Interim Final and Final Rules
related to the use of CMAC were implemented at 32 C.F.R § 199.14(a)(5). Defendant
seems to argue that this court would lack jurisdiction over the challenge of whether a
regulation, such as 32 C.F.R § 199.14(a)(5), contravenes a statute, because the
challenge must be brought under the Administrative Procedure Act in a United States
District Court. Defendant offers no authority, however, to support its claim that such a
challenge cannot also arise under a money-mandating claim, over which this court would
have jurisdiction.
54
administers: first, the court must ask “whether Congress has directly spoken to the precise
question at issue.” Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467
U.S.at 842–43. If the congressional intent is clear, then the court looks no further, “for the
court, as well as the agency, must give effect to the unambiguously expressed intent of
Congress.” Id. (footnote omitted); see also City of Arlington v. FCC, 133 S. Ct. 1863, 1868
(2013) (“‘If the intent of Congress is clear, that is the end of the matter; for the court, as
well as the agency, must give effect to the unambiguously expressed intent of Congress.’”
(quoting Chevron U.S.A. v. Natural Res. Def. Council Inc., 467 U.S. 842–843)).
If the statute, however, is “ambiguous with respect to the specific issue,” the court
must ask the second question: “whether the agency’s answer is based on a permissible
construction of the statute.” Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467
U.S. at 843 (footnotes omitted); see also Judulang v. Holder, 132 S. Ct. 476, 484 n.7
(2011) (“[U]nder Chevron step two, we ask whether an agency interpretation is “‘arbitrary
or capricious in substance.”’” (quoting Mayo Found. for Med. Ed. & Research v. United
States, 131 S. Ct. 704, 711 (2011) (quoting Household Credit Servs., Inc. v. Pfennig, 541
U.S. at 232, 242 (2004)))); Thai Plastic Bags Indus. Co., Ltd. v. United States, 746 F.3d
1358, 1364 (Fed. Cir. 2014) (“In other words, Commerce’s ‘interpretation governs in the
absence of unambiguous statutory language to the contrary or unreasonable resolution
of language that is ambiguous.’” (quoting United States v. Eurodif S.A., 555 U.S. 305, 316
(2009))); Mason v. Shinseki, 743 F.3d 1370, 1374 (Fed. Cir. 2014).
[I]f Congress has not specifically addressed the question, a reviewing court
must respect the agency’s construction of the statute so long as it is
permissible. Such deference is justified because “[t]he responsibilities for
assessing the wisdom of such policy choices and resolving the struggle
between competing views of the public interest are not judicial ones,” and
because of the agency’s greater familiarity with the ever-changing facts and
circumstances surrounding the subjects regulated.
FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120, 132 (2000) (quoting Chevron
U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. at 866) (other citations omitted);
see also E.P.A. v. EME Homer City Generation, L.P., 134 S. Ct. 1584, 1603 (2014)
(“Because ‘“a full understanding of the force of the statutory policy . . . depend[s] upon
more than ordinary knowledge”’ of the situation, the administering agency’s construction
is to be accorded ‘controlling weight unless . . . arbitrary, capricious, or manifestly contrary
to the statute.’” (quoting Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S.
at 844 (quoting United States v. Shimer, 367 U.S. 374, 382 (1961)))) (alterations in E.P.A.
v. EME Homer City Generation, L.P.).
With respect to an agency’s statutory construction: “The court need not conclude
that the agency construction was the only one it permissibly could have adopted to uphold
the construction, or even the reading the court would have reached if the question had
arisen in a judicial proceeding.” Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc.,
467 U.S. at 843 n.11 (citations omitted); see also APEX Exports v. United States, 777
F.3d 1373, 1378–79 (Fed. Cir. 2015); Cooper Techs. Co. v. Dudas, 536 F.3d 1330, 1341
(Fed. Cir. 2008) (“‘Our duty is not to weigh the wisdom of, or to resolve any struggle
55
between, competing views of the public interest, but rather to respect legitimate policy
choices made by the agency in interpreting and applying the statute.’” (quoting
Suramerica de Aleaciones Laminadas, C.A. v. United States, 966 F.2d 660, 665 (Fed.
Cir.), reh’g denied (Fed. Cir.), suggestion for reh’g en banc declined (Fed. Cir. 1992)));
Hawkins v. United States, 469 F.3d 993, 1000 (Fed. Cir. 2006). However, “[d]eference
does not mean acquiescence.” Presley v. Etowah Cnty. Comm’n, 502 U.S. 491, 508
(1992). “The judiciary is the final authority on issues of statutory construction and must
reject administrative constructions which are contrary to clear congressional intent.”
Chevron U.S.A., Inc. v. Natural Resource Defense Council, Inc., 467 U.S. at 843 n.9
(citations omitted); Util. Air Regulatory Grp. v. E.P.A., 134 S. Ct. 2427, 2439 (2014) (“The
question for a reviewing court is whether . . . the agency has acted reasonably and thus
has ‘stayed within the bounds of its statutory authority.’” (quoting City of Arlington v. FCC,
133 S. Ct. at 1868)); GHS Health Maint. Org., Inc. v. United States, 536 F.3d 1293, 1302
(Fed. Cir. 2008) (“If an agency promulgates a regulation without regard for what Congress
has said on the matter, however, the purpose for deference evaporates.”). Thus, this court
should defer to an agency’s construction of the statute if it “reflects a plausible
construction of the plain language of the statute and does not otherwise conflict with
Congress’ express intent.” Rust v. Sullivan, 500 U.S. 173, 184 (1991) (citing Chevron
U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. at 842–43); GHS Health Maint.
Org., Inc. v. United States, 536 F.3d at 1302; Favreau v. United States, 317 F.3d 1346,
1358 (Fed. Cir. 2002), cert. denied, 540 U.S. 810 (2003); Miami Free Zone Corp. v.
Foreign-Trade Zones Bd., 136 F.3d 1310, 1315 (Fed. Cir. 1998). The converse is likewise
true; the court should only defer to the agency’s interpretation if it is not in conflict with the
congressional intent.
Regarding step one in the Chevron deference analysis, the court looks to the plain
meaning of the language of 10 U.S.C. § 1079(j)(2) to determine “whether Congress has
directly spoken to the precise question at issue” and whether congressional intent is clear.
Again, 10 U.S.C. § 1079(j)(2) states:
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 regulations
to be prescribed by the administering Secretaries which provide that the
amount of such payments shall be determined 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].
10 U.S.C. § 1079(j)(2) (emphasis added). Two cases cited by the defendant, Biodiversity
Legal Foundation v. Babbitt, 146 F.3d 1249 (10th Cir. 1998) and SMS Data Products
Group, Inc. v. United States, 853 F.2d 1547 (Fed. Cir. 1988), although factually
distinguishable, examined similar statutory language that combined the terms “shall” and
“to the extent practicable.”
SMS Data Products was a bid protest case involving a provision of the FAR
governing the reprocurement of computer systems for the Department of Health and
Human Services (HHS). See SMS Data Prods. Grp., Inc. v. United States, 853 F.2d at
1553. As quoted by the Federal Circuit, the relevant provision of the FAR required that
56
that the contracting officer “shall obtain competition to the maximum extent practicable
for the repurchase.” Id. (quoting 48 C.F.R. § 49.402–6(b)) (emphasis in SMS Data Prods.
Grp., Inc. v. United States). The Federal Circuit found there was no established
interpretation of 48 C.F.R. § 49.402–6 and, thus, reviewed the plain meaning of the
statute. Id. The Federal Circuit reasoned that:
As one would expect, use of the word “shall” in the phrase “shall obtain
competition to the maximum extent practicable” denotes the imperative.
See 48 CFR § 2.101 (definition). As to the word “practicable,” in common
usage it means “possible to practice or perform,” or “capable of being put
into practice, done, or accomplished: feasible.” Webster's Third New
International Dictionary (1971). Thus, the contracting officer did not have
unbridled discretion in conducting the reprocurement, but was required to
conduct the reprocurement in the most competitive manner feasible.
SMS Data Prods. Grp., Inc. v. United States, 853 F.2d at 1553-54. The Federal Circuit
noted, however, that even with this understanding, there was “obviously a large degree
of ambiguity in a phrase such as ‘shall obtain competition to the maximum extent
practicable,’ which can only be given concrete meaning through a process of case-by-
case adjudication.” Id. at 1554.
In Biodiversity Legal Foundation v. Babbitt, plaintiffs filed suit against the Fish and
Wildlife Service, seeking injunctive and declaratory relief under the Endangered Species
Act (ESA), 16 U.S.C. § 1533(b)(3)(A), and the Administrative Procedure Act, to enforce
a 90-day deadline for finding a specific species endangered. Biodiversity Legal
Foundation v. Babbitt, 146 F.3d at 1251. As quoted by the United States Court of Appeals
for the Tenth Circuit, the relevant section of the ESA stated that the Secretary of the
Interior “shall make a finding as to whether” the addition of a species to the endangered
or threatened species list was warranted, “[t]o the maximum extent practicable, within 90
days after receiving the petition of an interested person.” Id. at 1253 (quoting 16 U.S.C.
§ 1533(b)(3)(A)). The United States Court of Appeals for the Tenth Circuit rejected the
notion that the provision imposed “a mandatory, nondiscretionary duty on the Service to
act on new petitions to list within 90 days.” Id. Instead, the Tenth Circuit, reasoned that:
Since Congress did not define or otherwise explain the meaning of the
facially ambiguous phrase “maximum extent practicable” within the statute,
we assume Congress intended the words to be given their ordinary
meaning, which we may discover through the use of dictionaries. See
United States v. LaBonte, 520 U.S. 751, ––––, 117 S.Ct. 1673, 1677, 137
L.Ed.2d 1001 (1997). “Practicable is . . . that which is performable, feasible,
[or] possible . . . .” Black’s Law Dictionary 1172 (6th ed. 1991); see also
Webster’s Ninth New Collegiate Dictionary 923 (defining “practicable” as
that which is “possible to practice or perform: feasible”). “Maximum” is
defined as “the highest or greatest amount, quality, value or degree.”
Black’s Law Dictionary at 979; see also Webster’s Ninth New Collegiate
Dictionary at 735 (defining “maximum” as “the greatest quantity or value
attainable”). Based on these definitions, the phrase “to the maximum extent
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practicable” “imposes a clear duty on the agency to fulfill the statutory
command to the extent that it is feasible or possible.” Fund for Animals v.
Babbitt, 903 F. Supp. 96, 107 (D.D.C. 1995) (construing same language in
another subsection of the ESA).
Though the ordinary language of the statute speaks in general terms of the
greatest extent feasible or possible, the phrase remains ambiguous
because neither the statutory language nor its ordinary meaning specifies
the circumstances under which the Service may forego the 90–day
deadline.
Biodiversity Legal Foundation v. Babbitt, 146 F.3d at 1253–54.
Although both SMS Data Products and Babbitt involved the phrase “to the
maximum extent practicable” rather than the phrase “to the extent practicable” used in 10
U.S.C. § 1079, the distinction is not particularly significant in the present case. In SMS
Data Products, it was the addition of “shall,” which “denotes the imperative,” to the phrase
“to the maximum extent practicable,” which meant that the government did not have
“unbridled discretion.” SMS Data Prods, Grp., Inc. v. United States, 853 F.2d at 1553-54.
Further, although the phrase “to the maximum extent practicable” actually provides more
emphatic guidance than “to the extent practicable,” the Federal Circuit still found that
there was a “large degree of ambiguity” in the phrase. Id. at 1554. Similarly, although the
Babbitt court found that that the phrase “[t]o the maximum extent practicable” imposed a
“clear duty” on the agency, it also found that the “phrase remain[ed] ambiguous” because,
just as in the present case, the statute at issue did not specify the circumstances where
action would not be “practicable.” Biodiversity Legal Foundation v. Babbitt, 146 F.3d at
1254. Thus, while the word “shall” in 10 U.S.C. § 1079 makes clear that Congress
intended to impose some direction on the defendant with respect to TRICARE’s payment
rates, the nature of the phrase “to the extent practicable” means that the exact
requirements of that duty were ambiguous. Because Congress did not speak directly to
the precise question of when TRICARE’s reimbursement rates could be set different from
Medicare’s, the court moves on to step two of the Chevron deference analysis, whether
the reimbursement methods set forth in the Interim Final and Final Rules represented a
plausible construction of the guidelines set forth in 10 U.S.C. § 1079(j)(2).
Plaintiffs allege that that TRICARE’s use of the CMAC rate in the Interim Final and
Final Rules failed to provide payments which were “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],” as required by 10 U.S.C. § 1079(j)(2), for
two reasons: (1) CMAC allegedly did not emulate prior Medicare reimbursement methods;
and (2) CMAC was allegedly intended to be used as a payment methodology for individual
health care providers, such as doctors, rather than institutions such as hospitals, which
have higher overhead.
With respect to plaintiffs’ first argument, 10 U.S.C. § 1079(j)(2) required defendant
to attempt to emulate the reimbursement rules that then applied to providers under
Medicare. Throughout the Relevant Period, Medicare was using the OPPS
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reimbursement methodology. Thus, defendant’s obligation was to attempt to emulate
OPPS, rather than any prior Medicare reimbursement methods. Defendant’s alleged
failure to emulate these prior methods in promulgating the Interim Final and Final Rules
is irrelevant to the issue of whether the Interim Final and Final Rules were acceptable
interpretations of 10 U.S.C. § 1079(j)(2).10
With respect to plaintiffs’ second argument, 10 U.S.C. § 1079(j)(2) required the
defendant to attempt to ensure that the “amount of such payments” provided to service
providers was in accordance with those that would have been received under Medicare’s
rules. The alleged purpose of CMAC is not, by itself, evidence that the actual payment
amounts that providers would receive using CMAC would be less than those they would
receive under Medicare OPPS rules.11 This is particularly so because plaintiffs have failed
to offer any evidence, or even allege, that the OPPS methodology at use during the
relevant period would have remedied the alleged problem with CMAC by accounting for
the allegedly higher overhead incurred by hospitals. Further, plaintiffs have failed to allege
that it would have been practicable for defendant to apply the Medicare OPPS rate or
10 Defendant’s offer to use of a prior, pre-OPPS Medicare methodology to reimburse
plaintiffs during the Discretionary Payment Process does not support plaintiffs’ argument.
In the Notice, defendant explained that the reason it was making such payments was
because it had determined that the payment rates it had used for radiology services “were
not comparable to the pre-OPPS Medicare fair rates for the period August 1, 2003, to
May 1, 2009 (or other appropriate end date for OPPS-exempt hospitals).” (emphasis
added). Although the defendant stated in the notice that its decision to use of such pre-
OPPS methodologies for the Discretionary Payment Process “must be viewed in the
context of the statute requiring TRICARE to adopt Medicare reimbursement
methodologies for hospitals and DoD’s policy that Medicare reimbursement should be
emulated as fair payment for health care provided to TRICARE beneficiaries,” defendant
nowhere stated that it thought these pre-OPPS reimbursement methodologies actually
better emulated Medicare OPPS rates than CMAC. The Kennel Study did not compare
payments under CMAC and OPPS, but instead concluded that providers would have
been paid more “[u]nder [the] method used by Medicare prior to OPPS.” Defendant’s
apparent policy decision that the use of a pre-OPPS Medicare methodology would better
provide hospitals with “fair payment” than CMAC during the Relevant Period does not
show that it believed that such a methodology would have more effectively emulated
OPPS payment rules, or that such a methodology actually did.
11 In fact, there is evidence in the record that suggests that the use of CMAC during the
relevant period actually resulted in greater payments to hospitals than the use of OPPS
would have. As defendant notes in its motion to dismiss, the rule promulgated by
defendant that ultimately did implement the OPPS methodology concluded that the use
of OPPS would result in a reduction of approximately $460 million per year in payments
to hospitals. See 73 Fed. Reg. 74945-01, 27 (Dec. 10, 2008) (“We estimate the total
reduction . . . in hospital revenue under the OPPS for its first year of implementation . . .
from revenue in the same period without the proposed OPPS changes to be
approximately $460 million.”). Plaintiffs do not challenge this conclusion.
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some other rate that better approximated OPPS during the Relevant Period. Indeed,
plaintiffs do not contest the two statements that defendant made in the documents issuing
the Interim and Interim Final Rules that, at that time, it was impracticable to apply the
OPPS payment methodology being used by Medicare. Such unchallenged statements,
made contemporaneously with the issuance of the Interim Final and Final Rules, are
strong evidence that it would not have been practicable for defendant to have applied the
Medicare OPPS methodology during the Relevant Period. Because plaintiffs have failed
to adequately plead any facts showing that the reimbursement rates instituted by the
Interim Final and Final Rules represented an unreasonable interpretation of 10 U.S.C.
§ 1079(j)(2), plaintiffs’ claims based on 10 U.S.C. §§ 1079 and 1086 and 32 C.F.R
§§ 199.4 and 199.7 must fail at this time.
CONCLUSION
On the grounds discussed above, defendant’s motion to dismiss is GRANTED and
plaintiffs’ first amended complaint is DISMISSED. The Clerk is directed to enter
JUDGMENT consistent with this opinion.
IT IS SO ORDERED.
s/Marian Blank Horn
MARIAN BLANK HORN
Judge
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