Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_06-cv-00132/USCOURTS-azd-2_06-cv-00132-0/pdf.json

Nature of Suit Code: 890
Nature of Suit: Other Statutory Actions
Cause of Action: 42:1395 HHS: Adverse Reimbursement Review

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IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

PacifiCare of Arizona, Inc., 

Plaintiff, 

vs.

Surgical Assistant Associates, L.L.C., an

Arizona limited liability company, 

Defendant. 

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No. CV06-00132-PHX-NVW

FINDINGS OF FACT AND

CONCLUSIONS OF LAW

This action raises the question of whether Defendant Surgical Assistant Associates,

L.L.C., may directly bill the Medicare beneficiaries of Plaintiff PacifiCare of Arizona, Inc.,

for the difference between the Medicare-approved rate of reimbursement for a medical

service and Defendant’s higher price for the same service. The court held a bench trial on

March 1, 2007, with the benefit of stipulated facts and briefing in the form of Plaintiff’s

Motion for Summary Judgment. The parties submitted the case on their Partial Agreed

Statement of Facts (Doc. # 30) and on their respective evidence offered in connection with

the Motion for Summary Judgment (Doc. ## 35, 40, 41, and 43) and additional documentary

evidence offered at trial. Pursuant to Rule 52(a), Fed. R. Civ. P., the court adopts the Partial

Agreed Statement of Facts (Doc. # 30) as the court’s findings of fact, in addition to the

findings of fact stated in this order. Conclusions of law are also stated below. 

Case 2:06-cv-00132-NVW Document 47 Filed 03/02/07 Page 1 of 7
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I. Findings of Fact

Established under the Social Security Act of 1965, Medicare provides federally

subsidized health insurance to eligible elderly and disabled individuals and is divided into

four parts, three of which are relevant here. Medicare Part A provides premium-free

coverage for hospital, home health care, hospice and other related services. Medicare Part

B covers costs pertaining to common physician services and outpatient care for a small

annual premium. Parts A and B are fee-for-service programs directly administered by the

federal government and commonly referred to as “original Medicare.” As an alternative to

Parts A and B, Medicare Part C allows eligible individuals to receive federally subsidized

care through private insurance plans under a program known as “Medicare Advantage” or

“Medicare+Choice.” Insurance companies who participate in this program contract with the

Centers for Medicare and Medicaid Services (“CMS”) to administer Medicare benefits to

eligible beneficiaries by means of private fee-for-service, managed care, and preferred

provider plans. Part C providers are obligated to comply with Medicare’s regulatory scheme

in administering the federal benefits. 

Plaintiff PacifiCare of Arizona, Inc. (“PacifiCare”), is a state-licensed health care

service organization that contracts with employers to arrange for the provision of covered

medical services to eligible employees and their dependents through a network of physicians,

specialists, hospitals, and supporting organizations. Designated as a Medicare Advantage

Health Maintenance Organization under contract with CMS, PacifiCare participates in

Medicare Part C by offering an insurance product known as “Secure Horizons.” In

administering Secure Horizons, PacifiCare maintains terms for reimbursement rates, quality

controls, and compliance with state and federal Medicare regulations for services offered

within its provider network. 

Defendant Surgical Assistant Associates, L.L.C. (“SAA”), is an Arizona limited

liability company that provides surgical assistance to hospitals and surgeons on an

independent-contractor basis. SAA is not a contracting Medicare provider, and it has not

contracted to serve as a provider within the PacifiCare network. Neither SAA nor any of its

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employees hold state surgical assistant certifications or licenses because Arizona does not

offer such credentials. 

Over the course of several years, SAA provided its services to numerous PacifiCare

Secure Horizons beneficiaries. Prior to doing so, however, SAA neglected to explain to the

beneficiaries or other interested parties any intention to accept only its own reimbursement

rates as payment in full, rather than the lower rates prescribed by Medicare, and it explicitly

indicated its acceptance of “assignment” of the Medicare rates in numerous insurance claim

forms submitted to PacifiCare between September 2001 and April 2005. PacifiCare therefore

processed the claims and reimbursed SAA at Medicare rates with the understanding that SAA

acknowledges Medicare reimbursement as full consideration for its services. When

PacifiCare first learned that SAA would not accept those rates in April 2005, it immediately

demanded that the surgeons in its network cease using SAA’s services in connection with the

treatment of Secure Horizons beneficiaries. PacifiCare would not have allowed SAA to

provide its services to any of those beneficiaries if it had known that SAA in fact rejects

Medicare assignment as full payment. 

Shortly after PacifiCare directed the relevant surgeons and hospitals to cease using

SAA’s services, SAA resubmitted “corrected” insurance claim forms to PacifiCare. Some

of the forms were corrected long after the completion of their original counterparts and,

unlike all of the forms previously submitted, indicated that SAA does not accept Medicare

assignment. SAA initially accepted the Medicare rates only because PacifiCare made the

acceptance a precondition of payment, and it now intends on the basis of the “corrected”

forms to engage in “balance billing,” a practice of billing PacifiCare and its beneficiaries for

the cost of SAA services in excess of the Medicare-approved reimbursement rates. The

estimated aggregate value of these disputed bills is approximately $400,000. SAA’s conduct

has harmed and will harm PacifiCare by interfering with the business relationship between

PacifiCare and its beneficiaries and by damaging PacifiCare’s good will with beneficiaries

who receive bills from SSA for services they expected to be covered by PacifiCare. This

injury is inherent in SAA’s conduct and therefore readily inferable.

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Believing that the “corrected” claim forms are not legally operative and that Medicare

does not permit reimbursement in the circumstances of this case beyond the federally

prescribed rates, PacifiCare filed this action seeking (1) a declaratory judgment that SAA

must accept Medicare rates as payment in full for services previously rendered and (2) a

permanent injunction barring SAA from billing PacifiCare and its Secure Horizons

beneficiaries for the balance of the asserted charges for those services. The relief sought

does not address any future services, as PacifiCare ceased allowing SAA to provide services

once SAA began refusing to sign off as accepting assignment of the Medicare payments.

The parties stipulated on April 19, 2006, to a preliminary injunction prohibiting SAA from

engaging in balance billing until a final judgment has been entered. 

II. Conclusions of Law

Plaintiff’s action rests on two principal arguments. First, PacifiCare contends that

federal law prohibits entities such as SAA from engaging in balance billing by requiring

them to accept Medicare-approved reimbursement rates as payment in full for services to

Medicare beneficiaries. Second, PacifiCare argues that even if federal law did not proscribe

balance billing, SAA is prohibited from engaging in that practice in light of its repeated

agreement to accept Medicare rates. 

Approaching the arguments in reverse order, SAA plainly contracted to accept the

Medicare reimbursement rates as full consideration for its services. The insurance claim

forms submitted to PacifiCare in relation to services performed for Secure Horizons

beneficiaries explicitly represent that SAA accepts the Medicare rates and reflect the mutual

assent of the parties. SAA asserted at oral argument that the agreements were contracts of

adhesion because SAA initially assented to the Medicare rates only after PacifiCare

threatened to otherwise withhold payment. However, even assuming that SAA properly

characterizes the agreements, contracts of adhesion are “fully enforceable according to [their]

terms” unless their requirements fall outside the reasonable expectations of the adhering

party or are unconscionable. Broemmer v. Abortion Servs., 173 Ariz. 148, 151, 840 P.2d

1013, 1016 (1992). In this case, the consequences of accepting assignment were both

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actually anticipated and reasonably anticipatable by SAA, an entity familiar with Medicare’s

reimbursement scheme. The fact that PacifiCare created a superior bargaining position for

itself by insisting upon assignment after SAA performed its initial services, moreover, did

not render the contracts unconscionable or otherwise invalid, particularly given that Medicare

assignment still guaranteed SAA’s receipt of federally prescribed compensation. See

Restatement (Second) of Contracts § 208(d) (1981) (“A bargain is not unconscionable merely

because the parties to it are unequal in bargaining position.”); Maxwell v. Fidelity Fin. Servs.,

184 Ariz. 82, 87-89, 907 P.2d 51, 56-58 (1995) (noting that unconscionability is indicated

by contract terms “so one-sided as to oppress or unfairly surprise an innocent party, an

overall imbalance in the obligations and rights imposed by the bargain, and significant costprice disparity”). The course of dealing of the parties, which entailed SAA’s repeated

provision of services to Secure Horizons beneficiaries with full knowledge of PacifiCare’s

reimbursement policy, further establishes the mutual and free assent of the parties to contract

at Medicare-approved rates. See Restatement (Second) of Contracts § 223. Billing the

beneficiaries for the balance of the price of SAA services would violate SAA’s agreements

with PacifiCare. 

Moving to PacifiCare’s first argument that federal law prohibits SAA from billing

Secure Horizons beneficiaries for the cost of services in excess of Medicare rates, the

dispositive issue is whether SAA constitutes a “provider” within the meaning of the Social

Security Act of 1965. In relevant part, that Act states as follows:

a physician or other entity (other than a provider of services)

that does not have a contract establishing payment amounts for

services furnished to an individual enrolled . . . with a

Medicare+Choice organization . . . shall accept as payment in

full for covered services under this title that are furnished to

such an individual the amounts that the physician or other entity

could collect if the individual were not so enrolled.

42 U.S.C. § 1395w-22(k)(1). The implementing regulation for section 1395w-22(k)(1) in

turn states:

[a]ny provider (other than a provider of services as defined in

section 1861(u) of the Act) that does not have in effect a

contract establishing payment amounts for services furnished to

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a beneficiary enrolled in [a Medicare Advantage] coordinated

care plan, [a Medical Savings Account] plan, or [a Medicare

Advantage] private fee-for-service plan must accept, as payment

in full, the amounts that the provider could collect if the

beneficiary were enrolled in original Medicare.

 42 C.F.R. § 422.214(a)(1). The combined effect of sections 1395w-22(k)(1) and

422.214(a)(1) is that a “provider” other than a “provider of services” must accept the

reimbursement rates of “original Medicare” as full payment if the provider does not have a

contract establishing contrary payment amounts for services to Medicare Advantage

beneficiaries. As used in section 422.214(a)(1), “provider” is presumably synonymous with

the statutory phrase “physician or other entity” and means

(1) Any individual who is engaged in the delivery of health care

services in a State and is licensed or certified by the State to

engage in that activity in the State; and

(2) Any entity that is engaged in the delivery of health care

services in a State and is licensed or certified to deliver those

services if such licensing or certification is required by State law

or regulation.

42 C.F.R. § 422.2. Lest “provider” be confused with “provider of services,” the Social

Security Act separately defines the latter as “a hospital, critical access hospital, skilled

nursing facility, comprehensive outpatient rehabilitation facility, home health agency,

hospice program, or . . . a fund.” 42 U.S.C. § 1395x(u).

In light of 42 C.F.R. § 422.2, it is apparent that SAA is a “provider.” As a limited

liability company, SAA is an “entity” under section 422.2. SAA also plainly appears to be

“engaged in the delivery of health care services” because its agents assist surgeons during

medical procedures. Finally, while Arizona has not licensed or certified SAA to deliver its

services, such credentialing is only a prerequisite to “provider” status under section 422.2 “if

[it] is required by State law or regulation.” Id. Because SAA concedes that Arizona does

not offer licensing or certification to surgical assistants, and that the State has not required

licensing or certification of SAA as an entity, its status as an entity engaged in the delivery

of health care services is sufficient under section 422.2. 

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Having concluded that SAA is a “provider,” the remaining requirements for the

application of 42 C.F.R. § 422.214(a)(1) quickly fall into place. There is no argument that

SAA is alternatively a “provider of service” under 42 U.S.C. § 1395x(u). Nor does SAA

have a contract establishing payment amounts for services furnished to PacifiCare’s Secure

Horizons beneficiaries. See Doc. # 41 at Exhibit 1. SAA therefore “must accept, as payment

in full, the amounts that [it] could collect if the [PacifiCare beneficiaries] were enrolled in

original Medicare.” 42 C.F.R. § 422.214(a)(1). Even assuming that balance billing in

relation to Secure Horizons beneficiaries would not violate SAA’s private agreement with

PacifiCare, the practice would still violate federal Medicare law and will be prohibited.

SAA raised a variety of new issues at oral argument on March 1, 2007, including the

contention that it was paid inadequately even under the Medicare regulations, and that this

court lacks jurisdiction over PacifiCare’s claims because they were not first adjudicated by

a federal administrative body. SAA waived these arguments, however, by failing to raise

them until the closing argument and depriving the court and PacifiCare of relevant briefing.

Even had the arguments been timely raised and thus not waived, SAA has made no showing

that the court lacks jurisdiction to adjudicate either PacifiCare’s contract claim or its claim

under federal law in the circumstances of this case. 

At trial, PacifiCare stated its expectation that a declaratory judgment would be

sufficient relief without a permanent injunction at this time. Therefore, only declaratory

relief will be ordered, subject to the possibility of injunctive relief in the future if SAA does

not comply with the declaratory judgment.

 PacifiCare is entitled to declaratory judgment against SAA in the form entered

simultaneously herewith.

DATED this 2nd day of March 2007.

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