2009 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

9-8-2009

N Michigan Hosp Inc v. Health Net Fed Ser

Precedential or Non-Precedential: Non-Precedential

Docket No. 08-2860

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Recommended Citation

"N Michigan Hosp Inc v. Health Net Fed Ser" (2009). 2009 Decisions. Paper 698.

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NOT PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

____________

Nos. 08-2860 and 08-2981

____________

NORTHERN MICHIGAN HOSPITALS, INC.;

GIFFORD MEDICAL CENTER, INC., for themselves and

on behalf of all other similarly situated class members,

 Appellants, No. 08-2860

v.

HEALTH NET FEDERAL SERVICES, LLC

f/k/a HEALTH NET FEDERAL SERVICES INC.

HEALTH NET FEDERAL SERVICES INC.,

 Appellant, No. 08-2981

____________

Nos. 08-2861 and 08-2995

____________

LAKEWOOD HEALTH SYSTEM;

NORTHWEST MEDICAL CENTER,

for themselves and on behalf of all other similarly situated class members,

 Appellants, No. 08-2861

v.

TRIWEST HEALTHCARE ALLIANCE CORP.,

 Appellant, No. 08-2995

____________
Honorable Paul S. Diamond, United States District Judge for the Eastern District *

of Pennsylvania, sitting by designation.

2

On Appeal from the United States District Court

for the District of Delaware

(D.C. Nos. 07-cv-000039 and 07-cv-00069)

District Judge: Gregory M. Sleet

____________

Argued June 2, 2009

Before: FISHER and CHAGARES, Circuit Judges, and DIAMOND, District Judge.

*

(Filed: September 8, 2009)

Teresa N. Cavenagh

John J. Soroko

Duane Morris

30 South 17th Street

United Plaza

Philadelphia, PA 19103-4196

Michael R. Gottfried (Argued)

Duane Morris

470 Atlantic Avenue, Suite 500

Boston, MA 02210

Attorneys for Northern Michigan Hospitals, Inc.,

Gifford Medical Center, Inc., Lakewood Health

System and Northwest Medical Center

Christopher Flynn (Argued)

Tracy A. Roman

April N. Ross

Crowell & Moring

1001 Pennsylvania Avenue, N.W.

Washington, DC 20004-2505

Attorneys for Healthnet Federal Services, LLC

Scott M. Abeles

Robert R. Gasaway (Argued)
3

Ashley C. Parrish

Robert S. Ryland

Kirkland & Ellis

655 15th Street, N.W., Suite 1200

Washington, DC 20005

Lewis H. Lazarus

Matthew F. Lintner

Katherine J. Neikirk

Morris James

500 Delaware Avenue

P.O. Box 2306, Suite 1500

Wilmington, DE 19899

Attorneys for Triwest Healthcare Alliance Corp.

____________

OPINION OF THE COURT

____________

FISHER, Circuit Judge.

Northern Michigan Hospitals, Inc. and Lakewood Hospital System (the Hospitals)

appeal from the District Court’s order granting a motion to dismiss without prejudice in

favor of Health Net Federal Services, LLC (Health Net) and Triwest Healthcare Alliance

Corp. (Triwest). The Hospitals filed putative class actions for breach of implied contract

and unjust enrichment relating to Health Net and Triwest’s alleged failure to properly

reimburse the Hospitals for certain services they provided. The District Court dismissed

the complaints on the basis that the Hospitals had failed to exhaust their administrative

remedies. The Hospitals appealed from the District Court’s order and Health Net and

Triwest cross-appealed. For the reasons below, we will affirm.
4

I.

We write exclusively for the parties, who are familiar with the factual context and

legal history of this case. Therefore, we will set forth only those facts necessary to our

analysis.

A. Background

In 1995, Congress established TRICARE, which is a comprehensive managed

health care program covering active members of the Uniformed Services and their

dependents. TRICARE was designed to improve the delivery and financing of health

care services offered through the Civilian Health and Medical Program of the Uniform

Services (CHAMPUS), the benefits program established in 1967 for former military

personnel, and therefore it supplements but does not replace CHAMPUS. See 32 C.F.R.

§ 199.1(r). TRICARE is managed and administered by the TRICARE Management

Activity (TMA), which is a field office in the Defense Department.

Triwest and Health Net are managed care support contractors for the TRICARE

program, responsible for financially underwriting the delivery of health care services for

TRICARE beneficiaries in the West and North regions respectively. In their roles as

managed care support contractors, Triwest and Health Net are responsible for establishing

networks of health care providers to offer services to TRICARE beneficiaries. Health

services are provided through “Network Providers” – which include hospitals, other

authorized medical facilities, doctors, and other health professionals – who enter into an
5

agreement with a managed care support contractor to provide services for an agreed rate

of reimbursement and “Non-Network Participating Providers” – which include hospitals,

institutions, and individual professionals – who are reimbursed at rates set by TRICARE

regulations. See 32 C.F.R. § 199.14(a). The Hospitals are non-network participating

providers and claim they were not properly reimbursed for their “facility charges.”

The payment method for facility charges is described as follows: “TRICARE

payments for hospital outpatient facility charges that would include the overhead costs of

providing the outpatient service would be paid as billed.” 32 C.F.R. § 199.14(a)(xi). 

“Facility charges” are defined as:

“[T]he charge, either inpatient or outpatient, made by a hospital or other

institutional provider to cover the overhead costs of providing the service.

These costs would include building costs, i.e. depreciation and interest;

staffing costs; drugs and supplies; and overhead costs, i.e., utilities,

housekeeping, maintenance, etc.”

32 C.F.R. § 199.2.

In order to be reimbursed for providing health care services to a covered

beneficiary, Non-Network Participating Providers must submit a specific claim on behalf

of the beneficiary to the appropriate regional contractor, and then any benefit payments

due as a result of that claim submission will be made in the name of and mailed to the

provider. 32 C.F.R. § 199.7(h)(2). “[B]y signing the claim form, the provider agrees to

abide by the CHAMPUS-determined allowable charge or cost, whether or not lower than

the amount billed.” Id. Similarly, by accepting assignment on the claim form,
The Hospitals alleged that they incurred facility charges in connection with 1

providing outpatient services to all of their patients, including TRICARE beneficiaries,

and that they allocate “a portion of these facility charges to each of the procedures

6

participating providers agree to accept the CHAMPUS Maximum Allowable Charge

(CMAC) as the maximum total charge for a service or item rendered to a covered

beneficiary. See 32 C.F.R. § 199.2. Authorized providers seeking payment for services

rendered to TRICARE beneficiaries have a duty to familiarize themselves with, and

comply with, the program requirements. See 32 C.F.R. § 199.6(a).

B. Procedural History

On January 23, 2007, Northern Michigan and Gifford Medical filed their first

amended complaint in the District Court, asserting claims for breach of contract implied

in fact and breach of quasi-contract/unjust enrichment against Health Net. On

February 7, 2007, Lakewood Health and Northwest Medical filed a nearly identical

complaint in the District Court asserting the same claims against Triwest. Both

complaints were filed on behalf of the named hospitals and a putative class of other NonNetwork Participating Provider hospitals. The complaints each alleged damages in

excess of $100 million based on the underpayment of the Hospitals’ bills.

The Hospitals alleged that Health Net and Triwest refused to pay the Hospitals’

facility charges for certain outpatient services rendered by the Hospitals to TRICARE

beneficiaries, despite the fact that the Hospitals submitted claims to Health Net and

Triwest which included such charges. Health Net filed a motion to dismiss the complaint 1
performed at their respective facilit[ies].” They also alleged that “[t]hese facility charges

are included within and constitute a portion of the costs reflected in the bill sent by the

Hospitals for the specific services denoted on such bill.” Additionally, the Hospitals

alleged that they “submit a single unitary charge . . . for each of the services rendered and

the accompanying facility charge associated with the service rendered.”

7

brought against it, arguing that the United States was a necessary and indispensable party,

the United States was the real party in interest and the claims were thus barred by

sovereign immunity, the Hospitals failed to exhaust their administrative remedies, and the

Hospitals failed to state a cause of action. Similarly, Triwest filed a motion to dismiss the

complaint brought against it for the same reasons and also on the grounds that the

Hospitals’ claims were preempted by federal law and TMA had primary jurisdiction.

The United States entered an appearance in the District Court and filed a Statement

of Interest pursuant to 28 U.S.C. § 517. The United States argued that it was not the real

party in interest, it was not a necessary and indispensable party, the “facility charge” issue

underlying the Hospitals’ complaints could be adjudicated under the Defense

Department’s administrative procedures, and the Hospitals misrepresented the Defense

Department’s interpretation of the TRICARE regulations. The parties submitted

supplemental briefing in response to the Government’s Statement of Interest, and the

District Court held a hearing on the motions.

On May 30, 2008, the District Court entered a Memorandum and Order granting

the motions to dismiss both complaints, without prejudice, because the Hospitals failed to
8

exhaust their available administrative remedies prior to seeking redress in the District

Court. The District Court noted:

“There is no dispute that facility charges, as defined under the TRICARE

regulations, are paid ‘as billed’ under 32 C.F.R. § [199.14(a)(5)(xi)]. The

dispute is thus not over the requirement of the regulation. Instead, the

dispute is over whether the hospitals’ claimed charges qualify for

reimbursement as facility charges.”

As a result, the District Court determined that the Hospitals’ claims could be appealed

through the TRICARE administrative review process. Although exhaustion was not

statutorily required, the District Court decided to require exhaustion as an exercise of its

discretion because doing so “would allow the agency to apply its special regulatory

expertise to the dispute,” and “would produce a factual record and the agency’s position

for later judicial review.” Although the District Court dismissed the complaints on the

exhaustion issue, it first held that the claims were not preempted and that the United

States was not the real party in interest nor a necessary party to the litigation. The District

Court did not reach the issue of whether the complaints failed to state a cause of action.

The Hospitals appealed the District Court’s order, and Health Net and Triwest

cross-appealed.

II.

The District Court had subject matter jurisdiction pursuant to 28 U.S.C. § 1332

(a)(1) and 28 U.S.C. § 1332(d)(2) because of diversity between the parties and because

the amount in controversy exceeds the jurisdictional minimum. The parties assert that we
9

have jurisdiction pursuant to 28 U.S.C. § 1291, which authorizes the exercise of appellate

jurisdiction over “final decisions” of the district courts. A final decision is one which

“ends the litigation on the merits and leaves nothing for the court to do but execute the

judgment.” Catlin v. United States, 324 U.S. 233, 234 (1945). But ordinarily, orders

dismissing complaints without prejudice – like the one in this case – are neither final nor

appealable within the meaning of § 1291. See Ghana v. Holland, 226 F.3d 175, 180 (3d

Cir. 2000); Welch v. Folsom, 925 F.2d 666, 668 (3d Cir. 1991); Borelli v. City of Reading,

532 F.2d 950, 951-52 (3d Cir. 1976). Nonetheless, we have recognized a few limited

exceptions to the general rule that dismissals without prejudice are not immediately

appealable. “If the plaintiff cannot cure the defect that led to dismissal or elects to stand

on the dismissed complaint, . . . we have held that the order of dismissal is final and

appealable.” Welch, 925 F.2d at 666; accord Ghana, 226 F.3d at 180-81; Nyhuis v. Reno,

204 F.3d 65, 68 n.2 (3d Cir. 2000). Additionally, “[w]e have stated that an appellant who

does not attempt to avail himself of the administrative process, but who instead files an

appeal raising the argument that exhaustion would be futile, ‘effectively stands on his

original complaint,’ and in such cases we may exercise jurisdiction over an order

dismissing a complaint without prejudice.” Ghana, 226 F.3d at 180-81 (quoting Nyhuis,

204 F.3d at 68 n.2).

Although the Hospitals can cure the defect that led to the dismissal of their

complaints by availing themselves of the administrative process, the Hospitals have
10

instead argued that exhaustion of administrative remedies would be futile and, in doing

so, have effectively declared an intent to stand on their complaints. Therefore, we may

exercise jurisdiction over this appeal consistent with § 1291. As for our standard of

review, we will consider “de novo the applicability of exhaustion principles, because it is

a question of law,” but “[w]hen the District Court declines to grant an exception to the

application of exhaustion principles, we review for abuse of discretion.” Harrow v.

Prudential Ins. Co. of Am., 279 F.3d 244, 248 (3d Cir. 2002).

III.

A.

The Hospitals argue that the District Court erred when it determined that their

claims could be appealed through the TRICARE administrative appeals process, asserting

that the claims they raised in their complaints are not appealable issues under the

TRICARE administrative regulations. More specifically, the dispute in this case is over

whether certain charges that the Hospitals submitted qualify for reimbursement as facility

charges. The Hospitals contend that this issue is not appealable under TRICARE

regulations – and in particular under 32 C.F.R . § 199.10(a) – because the dispute

involves the interpretation of a regulation and is thus solely a legal dispute and not a

factual one.

An appealable issue under TRICARE regulations is one that involves a “[d]isputed

question[] of fact which, if resolved in favor of the appealing party, would result in the
11

authorization of CHAMPUS benefits.” 32 C.F.R. § 199.2. Accordingly, when “no facts

are in dispute,” an issue is not administratively appealable. 32 C.F.R. § 199.2. The

regulations also exclude certain issues from being appealed administratively, such as

when a challenge is made to “the propriety, equity, or legality of any provision of law or

regulation,” 32 C.F.R. § 199.10(a), when the dispute is in regard to “a requirement of the

law or regulation,” 32 C.F.R. § 199.10(a)(6)(i), and when the issue in dispute is “[t]he

amount of the CHAMPUS-determined allowable cost or charge,” 32 C.F.R.

§ 199.10(a)(6)(ii).

Although the Hospitals assert that the issue is whether Health Net and Triwest are

required to pay facility charges in addition to paying maximum allowable charges, this

contention oversimplifies the nature of the dispute. Without question, the regulations

state that certain services are reimbursed based on a maximum allowable charge

calculation and that facility charges, which are not subject to a maximum allowable

charge, are paid as billed. See 32 C.F.R. § 199.14(a)(5)(i)-(xi). But the regulations are

equally clear that the Hospitals are not allowed to simply submit bills for any amount and

then claim that they are entitled to reimbursement for the full amount charged because

any amount above the CMAC represents their “facilities” expenses.

Hence, the real question is whether the Hospitals are entitled to more money

because the regulations have not been properly applied to their claims for reimbursement. 

Considered in this light, the dispute at issue is not a purely legal one, but rather requires
12

factual determinations such as whether expenses that qualify as facility charges were

incurred, whether such charges were properly billed, and how much is owed if they were

incurred and properly billed. Therefore, what is required by the underlying dispute in this

case is an application of the TRICARE regulations to the Hospitals’ specific claims for

reimbursement. If these disputed questions of fact are resolved in the Hospitals’ favor,

then they will be entitled to additional payment, which is the relief they are purportedly

seeking, whereas “resolving” the question of whether facility charges can be paid in

addition to CMACs will not entitle them to additional payment without further

assessment of the actual claims they submitted.

The central claim presented in the Hospitals’ complaints is best understood as a

challenge to the denial of payment, which is an appropriate issue for administrative

appeal. Accordingly, there are administratively appealable issues under the TRICARE

regulatory scheme.

B.

Next, the Hospitals argue that even if their claims are administratively appealable,

exhaustion of administrative remedies would be futile, as well as unnecessarily

burdensome, and therefore the District Court should not have imposed this requirement. 

The statutes and regulations governing TRICARE do not mandate the exhaustion of

administrative remedies. In cases where exhaustion is not required, we have held that the

decision of whether to require exhaustion “is a matter of sound judicial discretion,” which
13

should “be guided by rationales advanced for the judicially created exhaustion doctrine.” 

Cerro Metal Products v. Marshall, 620 F.2d 964, 970 (3d Cir. 1980). The rationales or

purposes for requiring exhaustion are as follows: (1) “promot[ing] administrative

efficiency by preventing premature interference with the agency processes”;

(2) “respect[ing] executive autonomy by allowing an agency the opportunity to correct its

own errors”; (3) “facilitat[ing] judicial review by affording courts the benefits of the

agency’s experience and expertise”; and (4) “serv[ing] judicial economy by having the

agency or other tribunal, rather than the district court, compile a factual record.” Id.

(internal quotation marks omitted); see Wilson v. MVM, Inc., 475 F.3d 166, 173 (3d Cir.

2007) (“[E]xhaustion of administrative remedies serves to promote administrative

efficiency, respect executive autonomy by allowing an agency the opportunity to correct

its own errors, provide courts with the benefit of an agency’s expertise, and serve judicial

economy by having the agency compile the factual record.” (internal quotation marks and

alterations omitted)).

We have referred to judicially created exhaustion as prudential exhaustion and

have explained that “[b]ecause of its nature, prudential exhaustion can be bypassed under

certain circumstances, including waiver, estoppel, tolling or futility.” Wilson, 475 F.3d at

174; see also Facchiano v. U.S. Dep’t of Labor, 859 F.2d 1163, 1167-68 (3d Cir. 1988)

(excusing exhaustion when (1) “the challenged agency action presents a clear and

unambiguous violation of statutory or constitutional rights”; (2) “resort to administrative
14

procedures is clearly shown to be inadequate to prevent irreparable injury”; and

(3) requiring exhaustion is “futile”). “However, merely because exhaustion requirements

are prudential does not mean that they are without teeth. Even prudential exhaustion

requirements will only be excused in a narrow set of circumstances.” Wilson, 475 F.3d at

175. In particular, “[i]n order to invoke the futility exception to exhaustion, a party must

‘provide a clear showing’ of futility before the District Court.” Id. (quoting D’Amico v.

CBS Corp., 297 F.3d 287, 293 (3d Cir. 2002)).

The Hospitals did not establish a “clear and positive showing” of futility before the

District Court, and therefore the District Court acted within its discretion by requiring the

Hospitals to exhaust their available administrative remedies. See Wilson, 475 F.3d at 175. 

Although the Hospitals argue that exhaustion would be futile because TMA has

unambiguously rejected the Hospitals’ interpretation of the controlling regulations, this

argument ignores the fact that the real dispute is not about the meaning of the regulations

but whether the Hospitals submitted claims for expenses that qualify as “facility charges.” 

As to this latter issue, TMA has not had an opportunity to evaluate the specific claims that

the Hospitals allege were underpaid. Thus, the relief the Hospitals seek is not foreclosed

because, as previously discussed, the Hospitals have the opportunity to present evidence

to TMA that they incurred expenses that qualify as facility charges, that they properly

billed these charges, and that Health Net and Triwest did not reimburse them for these

expenses.
15

Far from being futile, it remains possible that recourse through the administrative

appeals process may result in an award of additional reimbursement to the Hospitals. On

this point, Health Net and Triwest persuasively argue that the Hospitals’ real complaint is

that they may not ultimately prevail at the agency level and that exhaustion will be time

consuming. But these reasons are not enough to excuse exhaustion and do not establish

that exhausting administrative remedies would be futile. With respect to their argument

about the “burdensomeness” of requiring exhaustion in a putative class action case, the

District Court pointed out that “the same thousands of claims at issue in the

administrative appeal process would also be at issue in this litigation.” And, more

basically, there are currently only a total of four hospitals involved in this case, and these

are the only parties that have been required to exhaust their administrative remedies.

Additionally, requiring the Hospitals to exhaust their remedies under the

TRICARE regulatory scheme is consistent with the traditional rationales for requiring the

exhaustion of administrative remedies. Requiring the Hospitals to exhaust their

administrative remedies will help to avoid unnecessary intrusion by the judiciary into

Executive Branch affairs and will promote judicial economy by allowing the agency to

utilize its expertise in resolving disputed factual issues, correct its own errors (if any

resulted from Health Net and Triwest’s refusal to provide additional reimbursement), and

develop the factual record for the benefit of a reviewing court in the event that the

administrative process does not resolve the dispute in its entirety.
We will briefly address the argument that the Hospitals lacked standing to bring 2

their claims in light of our independent obligation to ensure that the requirements of

Article III are satisfied. See Interfaith Cmty. Org. v. Honeywell Int’l, Inc., 399 F.3d 248,

254 (3d Cir. 2005) (“Standing is a threshold jurisdictional requirement, and we have an

obligation to examine our own jurisdiction and that of the district courts.” (internal

quotation marks and citation omitted)). The Hospitals have satisfied the injury in fact

requirement of standing by alleging that they provided services to TRICARE

beneficiaries within Triwest and Health Net’s region, submitted claims for reimbursement

to Triwest and Health Net for these services, and that Triwest and Health Net failed to

properly reimburse them for the services they rendered. Additionally, because Triwest

and Health Net are responsible for reimbursing Non-Network Participating Providers,

such as the Hospitals, for the services they provide to TRICARE beneficiaries, it is clear

that the Hospitals injury is traceable to and redressable by Triwest and Health Net. 

Accordingly, we conclude that the Hospitals had standing to pursue their claims. See

Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61 (1992) (describing three

requirements of the “irreducible constitutional minimum” of standing: injury in fact,

traceability, and redressability).

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Accordingly, we conclude that the District Court did not abuse its discretion in

requiring the Hospitals to exhaust their administrative remedies because doing so is

neither futile nor unduly burdensome, and is consistent with the traditional justifications

for prudential exhaustion.

IV.

In their cross-appeals, Health Net and Triwest raise several alternative reasons for

affirming the District Court’s order; however, we need not reach these alternative

arguments. Because the Hospitals’ claims are administratively appealable under the 2

TRICARE regulatory scheme and because requiring the exhaustion of administrative

remedies is not unduly burdensome or futile and is consistent with the traditional
17

justifications for requiring prudential exhaustion of administrative remedies, we will

affirm the order of the District Court.