Opinion ID: 1590134
Heading Depth: 2
Heading Rank: 1

Heading: The Capitation Rates Issue.

Text: 1. Standard of review. A breach-of-contract claim tried at law to the district court is reviewed by us for correction of errors at law. EnviroGas, L.P. v. Cedar Rapids/Linn County Solid Waste Agency, 641 N.W.2d 776, 780 (Iowa 2002). The district court's findings of fact have the effect of a special verdict. Iowa R.App. P. 6.907 (2009). The trial court's `legal conclusions and application of legal principles are not binding on the appellate court.' EnviroGas, L.P., 641 N.W.2d at 781 (quoting Land O'Lakes, Inc. v. Hanig, 610 N.W.2d 518, 522 (Iowa 2000)). We will reverse a district court's judgment if we find the court has applied erroneous rules of law, which materially affected its decision. Falczynski v. Amoco Oil Co., 533 N.W.2d 226, 230 (Iowa 1995). In contrast, the district court's findings of fact are binding on us if they are supported by substantial evidence. Id. In this case, NevadaCare urges us to apply a more exacting standard when reviewing the district court's judgment, due to the district court's alleged wholesale adoption of DHS's proposed findings of fact and legal conclusions. Both parties filed proposed findings of fact and conclusions of law. It appears the district court's findings of fact quoted, essentially verbatim, from DHS's proposed findings of fact. Moreover, the district court's conclusions of law also quoted at length from DHS's proposed conclusions of law. We have recognized counsels' submission of proposed findings of fact and conclusions of law can be extremely valuable in assisting the district court, especially in highly technical or complicated cases. Kroblin v. RDR Motels, Inc., 347 N.W.2d 430, 435 (Iowa 1984). Nonetheless, we have criticized the practice of a district court's verbatim adoption of the proposed findings of fact and conclusions of law prepared by a prevailing attorney because the decision on review reflects the findings of the prevailing litigant rather than the court's own scrutiny of the evidence and articulation of controlling legal principles. Rubes v. Mega Life & Health Ins. Co., 642 N.W.2d 263, 266 (Iowa 2002); see also United States v. El Paso Natural Gas Co., 376 U.S. 651, 656-57, 84 S.Ct. 1044, 1047, 12 L.Ed.2d 12, 17 (1964) (noting the court preferred findings drawn with the insight of a disinterested mind rather than counsel's proposed findings adopted verbatim by the trial court). We have refused to adopt a higher standard of review under similar circumstances. See Quality Refrigerated Servs., Inc. v. City of Spencer, 586 N.W.2d 202, 205 (Iowa 1998); Care Initiatives v. Bd. of Review, 500 N.W.2d 14, 16 (Iowa 1993). We have recognized, however, where a district court adopts a prevailing counsel's proposed findings of fact and conclusions of law verbatim, we must scrutinize the record more carefully when conducting our appellate review. Rubes, 642 N.W.2d at 266. Accordingly, due to the district court's verbatim adoption of DHS's proposed findings of fact and conclusions of law, we will scrutinize the record more closely and carefully when performing our appellate review. Id. We once again encourage our district courts not to adopt verbatim the proposed findings of fact and conclusions of law prepared by counsel. It is the district court's duty to independently determine the facts, articulate the controlling law, and apply the controlling law to the facts. A court should never abdicate this essential duty of the judicial branch of government to counsel or the parties before the court. 2. Principles of contract interpretation. The determination of the intent of the parties at the time they entered into the contract is the cardinal rule of contract interpretation. Walsh v. Nelson, 622 N.W.2d 499, 503 (Iowa 2001). If the principal purpose of the parties is ascertainable from the words and other conduct of the parties in light of all the circumstances, we give those words and conduct great weight when interpreting the contract. Pillsbury Co. v. Wells Dairy, Inc., 752 N.W.2d 430, 436 (Iowa 2008). When interpreting the meaning of a contract we may also look to extrinsic evidence such as, `the situation and relations of the parties, the subject matter of the transaction, preliminary negotiations and statements made therein, usages of trade, and the course of dealing between the parties.' Fausel v. JRJ Enters., Inc., 603 N.W.2d 612, 618 (Iowa 1999) (quoting Restatement (Second) of Contracts § 212 cmt. b, at 126 (1979)). However, the most important evidence of the parties' intentions at the time they entered into the contract is the words of the contract. Pillsbury Co., 752 N.W.2d at 436. 3. Application of contract principles. Although the language of the contracts dealing with the capitation rates varies from year to year, we interpret the contracts as requiring the capitation rates to be set on an actuarially sound basis. We reach this conclusion for the following reasons. First, all the contracts contain language that indicates the capitation rates were to be computed on an actuarially sound basis. The contracts for fiscal years 1998 and 1999 specifically require the capitation rates to be set on an actuarial basis. Even though the contract for fiscal years 2000 to 2002 does not include a reference to actuarial basis in the paragraph concerning the capitation rates, addendum XII to the contract states, [c]alculation of the SFY 2000 HMO rate setting was based on program and policy adjustments and trend adjustments applied to the analysis performed in setting the SFY 1999 rates. This sentence indicates Milliman calculated the capitation rates in this contract the same way it calculated the rates in the contract for fiscal year 1999. Finally, addendum XI to the contract for fiscal year 2003 specifically refers to the actuarial soundness of the rates, while addendum XI to the contract for fiscal years 2004 and 2005 contains a certification acknowledging Milliman calculated the rates by following generally accepted actuarial principles and practices. Second, both federal and state law requires the capitation rates to be computed on an actuarially sound basis. See 42 U.S.C. § 1396b(m)(2)(A)(iii) (1992) (requiring payments to be made on an actuarially sound basis); 42 C.F.R. § 438.6(c)(2) (2001) (same); 42 C.F.R. § 434.61 (1996) (requiring CMS to determine that the capitation rates are computed on an actuarially sound basis); Iowa Admin. Code r. 441-88.12(2) (requiring capitation rates to be actuarially determined for the beginning of each new fiscal year). DHS hired an actuarial firm to compute the rates. In some of the contracts, the parties cited the applicable federal regulations. Both parties were versed in Medicaid law, recognized their dealings involved the Medicaid program, and understood that any contract must comply with the applicable law for setting capitation rates. There is no reason to believe both parties would have intended to enter into a contract that did not comply with the applicable Medicaid regulations. The district court interpreted the contracts as contracts for the specific rates contained in the charts attached to each contract. We disagree with the district court's interpretation by finding the contracts required the capitation rates contained in the charts to be computed on an actuarially sound basis. 4. Substantial evidence of actuarially sound capitation rates. Normally, we would be required to remand the case to the district court to decide if the capitation rates were computed on an actuarially sound basis. However, the district court found, even if there was a contractual promise requiring the rates to be actuarially sound, the concept of actuarial soundness is, as an actuarial matter, susceptible [to] a wide range of appropriate capitation rates in any given situation and multiple methodologies for calculating those rates. The district court further found NevadaCare failed to carry its burden of proof that the rates contained in the charts attached to the contracts were not actuarially sound. In other words, the district court found NevadaCare did not establish that the capitation rates were not computed on an actuarially sound basis. Therefore, we need not remand the case; rather, we can review the record to determine whether substantial evidence supports the district court's finding that NevadaCare did not establish the capitation rates were not computed on an actuarially sound basis. In arguing the capitation rates were not computed on an actuarially sound basis, NevadaCare presented testimony from two consulting actuaries. These actuaries spent considerable time reviewing and reconstructing the Milliman reports. The consulting actuaries took the data DHS provided Milliman and recalculated the capitation rates based on their own assumptions and judgments to obtain rates that they opined were actuarially sound. The first area of concern addressed by the consulting actuaries involved the inclusion of certain data when determining the capitation rates for fiscal years 2004 and 2005. The consulting actuaries determined Milliman improperly used data from foster care children claims, dental claims, and three-legged claims [1] in determining the capitation rates for fiscal years 2004 and 2005. The error in using foster care claims and dental claims data to compute actuarially sound capitation rates was that NevadaCare did not cover those claims. The error in using three-legged claims data to compute actuarially sound capitation rates was that Milliman did not properly account for the refund portion of these claims when it calculated the actual cost of the claims. The consulting actuaries concluded that by using this data, the capitation rates set in fiscal years 2004 and 2005 could not be actuarially sound. They determined these errors caused DHS to pay NevadaCare approximately six million dollars more than it should have been paid if the correct data had been used to set the capitation rates for those years. At trial, the actuary for Milliman who oversaw the preparation of the reports acknowledged that the foster care children claims, dental claims, and three-legged claims data should not have been included when Milliman prepared the reports. He further testified the inclusion of this data did not affect the actuarial soundness of the capitation rates. DHS also had its own consulting actuary testify regarding the Milliman reports. As to using the data from foster care children claims, dental claims, and three-legged claims, the consulting actuary agreed that Milliman should not have used this data when it set the capitation rates for fiscal years 2004 and 2005. He did point out, however, that this six million dollar error was in favor of NevadaCare; therefore, it was a nonissue. Based on this testimony, substantial evidence supports a finding that the capitation rates for the fiscal years 2004 to 2005 contract were not calculated on an actuarially sound basis. However, this breach does not entitle NevadaCare to recover damages. An essential element of a breach of contract claim is that the breach caused a party to incur damages. Kern v. Palmer Coll. of Chiropractic, 757 N.W.2d 651, 657-58 (Iowa 2008). The inclusion of this data caused NevadaCare no damage. Consequently, NevadaCare cannot base a claim for breach of contract upon the inclusion of this data. NevadaCare also claimed the capitation rates were not actuarially sound in eleven additional respects. Its consulting actuaries opined that the areas responsible for the unsoundness are (1) errors in encounter data, (2) calculation of claims incurred but not received, (3) inadequate legislative adjustment for tobacco settlement proceeds, (4) trending that does not reflect actual experience, (5) demographic changes, (6) reduction for co-pays not taken, (7) below cost administrative allowance, (8) inappropriate lag on payment, (9) inadequate MediPASS savings, (10) maternity adjustments errors, and (11) reinsurance issues. The basis for the consulting actuaries' opinions is that the adjustments made by the Milliman actuaries in these eleven areas were not in conformance with generally accepted actuarial principles. NevadaCare's consulting actuaries further opined that the method they used to calculate the capitation rates is the only way to determine the capitation rates on an actuarially sound basis. DHS's actuarial experts opined that in each of the eleven areas, any adjustments made by the Milliman actuaries were dependent on the judgment of the actuaries. They also opined that any adjustments made by the Milliman actuaries were in conformance with generally accepted actuarial principles. When we review a finding for substantial evidence, we view the evidence in a light most favorable to the district court's judgment. EnviroGas, L.P., 641 N.W.2d at 781. `Evidence is substantial for purposes of sustaining a finding of fact when a reasonable mind would accept it as adequate to reach a conclusion.' Land O'Lakes, Inc., 610 N.W.2d at 522 (quoting Falczynski, 533 N.W.2d at 230). Evidence is not insubstantial merely because we may draw different conclusions from it[.] Raper v. State, 688 N.W.2d 29, 36 (Iowa 2004). The ultimate question is whether the evidence supports the court's finding, not whether it would support a different finding. Id. The testimony provided by DHS's actuarial experts constitutes substantial evidence that the capitation rates were determined on an actuarially sound basis. Actuarial science is a discipline that assesses risk in the insurance industry based upon the application of mathematical and statistical methods. It is not an exact science. An actuary must have an understanding of math, probabilities, statistics, finance, and economics. An actuary does not just crunch numbers. Rather, an actuary reviews data, analyzes its significance, and makes certain judgments relating to adjustments that need to be made to the data before the actuary can assess the insurance risks and set insurance premium rates. Different assumptions and judgment calls concerning the data made by different actuaries will lead to different risks and premium rates. Just because two actuaries determine different premium rates by analyzing the same set of data does not mean the premiums were not determined on an actuarially sound basis by both actuaries. As long as the differences are caused by assumptions and judgment calls made by the actuaries in accordance with generally accepted actuarial standards and principles, the final rates calculated by the actuaries are computed on an actuarially sound basis. See Actuarial Standards Board, Introduction to the Actuarial Standards of Practice § 4.5.3 (2008) (recognizing it is appropriate, if not inevitable, for actuaries to exercise their professional judgment when projecting the effect of contingent future events). Here, there is substantial evidence that the judgments and assumptions used by the Milliman actuaries would not have been the same as those used by the consulting actuaries hired by NevadaCare. Nevertheless, substantial evidence supports the finding that the judgments and assumptions made by the Milliman actuaries were in accordance with generally accepted actuarial standards and principles. Accordingly, we affirm the judgment of the district court that NevadaCare has failed to prove the capitation rates contained in the five contracts were not determined on an actuarially sound basis. B. Other Contractual Claims. NevadaCare raises three further claims for reversal based on the district court's interpretation that the contracts were contracts for the capitation rates contained in the charts attached to each contract, rather than contracts requiring the rates to be computed on an actuarially sound basis. First, NevadaCare claims DHS breached the covenant of good faith because the contracts did not comply with the legal requirement that the capitation rates be computed on an actuarially sound basis. Second, NevadaCare claims the contracts should be reformed so that the rates are computed on an actuarially sound basis. Third, NevadaCare claims the law of promissory estoppel requires the contracts to be interpreted so that the rates are computed on an actuarially sound basis. We have interpreted the contracts as requiring that the rates be computed on an actuarially sound basis. Therefore, we need not address these issues in this appeal.