Opinion ID: 867899
Heading Depth: 2
Heading Rank: 1

Heading: The Lawfulness of the Contract Termination

Text: The district court rejected all of Fox’s numerous contentions challenging the lawfulness of the government’s termination. In this appeal, Fox makes three arguments. It contends that the regulation relied upon by the government to authorize such a termination, 42 C.F.R. § 423.509(a)(5) (2008), was itself unlawful. Second, Fox contends that, even if the regulation was valid, the termination was unlawful because Fox had in fact achieved substantial compliance with all the legal requirements it had to meet. Third, Fox contends that the government could not terminate its contract because it had not earlier terminated contracts of other providers that Fox contends had engaged in even more egregious misconduct. We deal with each of these contentions in turn and conclude that none has merit.
Fox claims there is an inconsistency between the statute and the regulation by comparing the language of the statute with the language of the regulation in effect at the time of the termination. Under the statutory scheme, when terminating a contract, CMS ordinarily must give reasonable notice, an opportunity for a hearing, and a chance to cure defects. 42 U.S.C. § 1395w-27(h)(1) (incorporated by 42 U.S.C. § 1395w-112(b)(3)(F)). CMS, however, is authorized to terminate a contract immediately if a delay “would pose an imminent and serious risk” to the health of plan enrollees. 42 U.S.C. § 1395w-27(h)(2). FOX INS. CO. V. CENTERS FOR MEDICARE/MEDICAID 17 The regulation implementing this statutory scheme, 42 C.F.R. § 423.509(a)(5), as it existed in 2010, authorized CMS to terminate a contract immediately in situations where the sponsor’s financial difficulties create a risk to health or the sponsor is not delivering services for other reasons that create a risk to health. The relevant regulatory language provides that CMS may terminate if the sponsor [e]xperiences financial difficulties so severe that its ability to provide necessary prescription drug coverage is impaired to the point of posing an imminent and serious risk to the health of its enrollees, or otherwise fails to make services available to the extent that a risk to health exists. 42 C.F.R. § 423.509(a)(5) (2008). In such situations, “[i]mmediate termination of [the] contract by CMS” is authorized. 42 C.F.R. § 423.509(b)(2) (2008). Fox’s argument, in comparing the statute with the regulation, focuses on the last phrase of the regulation that refers to “a risk to health.” The statute provides that CMS may terminate a contract immediately where delay “would pose an imminent and serious risk to the health of individuals enrolled.” 42 U.S.C. § 1395w-27(h)(2). According to Fox, because the last phrase of the regulation omitted the words “imminent and serious,” the regulation purported to give the agency power the statute does not: to terminate upon a finding of a risk to health, not a risk that is “imminent and serious” as provided in the statute. This, however, is not the way that the agency has interpreted or applied the regulation. CMS has explained that 18 FOX INS. CO. V. CENTERS FOR MEDICARE/MEDICAID it has interpreted the regulation’s reference to a “risk to health” as incorporating the statutory standard of “imminent and serious” risk as set forth in 42 U.S.C. § 1395w-27(h)(2) and in the preceding clause of the regulation. More important, this is the interpretation CMS actually used when it terminated Fox’s contract in this case. CMS, in its termination letter to Fox, said that Fox’s deficiencies “expose[d] Fox’s enrollees to imminent and serious risk to their health, thus warranting the immediate termination of Fox’s contract with CMS.” (emphasis added). The language of the disputed last phrase of the regulation has now been changed, perhaps as a result of this litigation, and now expressly contains the same words as the statute. The regulation thus now permits CMS to terminate a contract immediately where CMS determines that “a delay in termination . . . would pose an imminent and serious risk to the health of the individuals enrolled with the Part D plan sponsor,” or where the “plan sponsor experiences financial difficulties so severe that its ability to make necessary health services available is impaired to the point of posing an imminent and serious risk to the health of its enrollees, or otherwise fails to make services available to the extent that such a risk to health exists.” 42 C.F.R. § 423.509(b)(2)(i) (emphasis added). The key point for our purposes is that CMS’s interpretation of the regulation as it applied it in this case is fully consistent with the relevant statutory language. CMS told Fox its conduct exposed its enrollees to “imminent and serious risk.” 42 U.S.C. § 1395w-27(h)(2). Fox cannot legitimately complain that it is a victim of governmental overreaching. FOX INS. CO. V. CENTERS FOR MEDICARE/MEDICAID 19
Brought Itself Into Substantial Compliance With the Contractual and Statutory Requirements Medicare Part D insurance providers must remain in substantial compliance with all of their contractual and legal obligations or risk termination. The statute gives the Secretary authority to terminate a contract if the organization “has failed substantially to carry out the contract; is carrying out the contract in a manner inconsistent with the efficient and effective administration of this part; or no longer substantially meets the applicable conditions of this part.” 42 U.S.C. § 1395w-27(c)(2). To carry out this statutory authority, the Secretary promulgated 42 C.F.R. § 423.650(b) (2008), which stated that the plan sponsor “bears the burden of proof to demonstrate that it was in substantial compliance with the requirements of the Part D program.” CMS gave Fox the opportunity to show substantial compliance. On February 11, 2010, CMS contacted Fox, in response to complaints from patients and doctors that Fox had improperly denied coverage for critical medications, thus putting Fox on notice of a problem. Fox told CMS that it was taking remedial measures in response to these complaints. After an initial investigation, however, CMS suspended Fox’s authorization to enroll new beneficiaries and to market its plan to potential beneficiaries. CMS followed up with an onsite audit of Fox on March 2–4. See 42 C.F.R. § 423.505(e). CMS concluded that Fox had failed to provide required benefits and could not address its compliance deficiencies because it lacked any compliance infrastructure. Fox takes issue with the agency’s conclusion. It contends that it had taken steps to bring itself into “substantial 20 FOX INS. CO. V. CENTERS FOR MEDICARE/MEDICAID compliance” by the completion of the audit. The evidence supporting CMS’s noncompliance conclusion, however, is more than substantial. CMS found that Fox imposed unauthorized prior-authorization and step-therapy as conditions on various drugs up through the audit that took place March 2–4. These additional conditions could only properly have been imposed if CMS had pre-approved them. See 42 C.F.R. § 423.272(b)(2) (2008). In addition, a plan sponsor may not condition access to certain “protected” classes of drugs. 42 C.F.R. § 423.120(b)(2)(v). Despite these regulations, Fox, according to Dr. Kelman’s March 9 findings on behalf of CMS, imposed unauthorized restrictions on many drugs, which led to the denial of claims for drugs for “cancer, HIV/AIDS, for the protection of transplants, and for the prevention of seizures.” Dr. Kelman in his declaration further stated that “[t]he potential negative effects to patients with cancer, HIV/AIDS, as well as many other chronic diseases is clearly significant in terms of clinical exacerbations, and is likely to be life threatening for many of the enrollees impacted.” Dr. Tudor reported that Fox also lacked the required internal compliance mechanisms. The “Compliance Officer” at Fox admitted to Dr. Tudor during the onsite audit that Fox “has no compliance plan or structure in effect.” CMS found that Fox had “not developed any written compliance policies or procedures and Standards of Conduct,” and did “no internal auditing or monitoring of Fox’s business operations.” All of these failures were violations of CMS regulations. See 42 C.F.R. § 423.504(b)(4)(vi) (2008). Based on this evidence, CMS correctly concluded on March 9 that Fox’s performance suffered from “serious [] deficiencies” and that a delay would create an “imminent and serious risk to the health” of the Medicare beneficiaries enrolled in Fox’s plans. FOX INS. CO. V. CENTERS FOR MEDICARE/MEDICAID 21 CMS was justified in terminating the contract with Fox because it was not in substantial compliance. Fox’s legal argument to us amounts to no more than the assertion that it was in substantial compliance so long as it indicated it had taken steps to improve. It adopts as its legal standard for substantial compliance a factual statement from an Eleventh Circuit decision. That court said that the company at issue in the case before it “had already taken steps to rectify the problem and would be clearly compliant soon after.” Emerald Shores Health Care Assocs., LLC v. U.S. Dep’t of Health & Human Servs., 545 F.3d 1292, 1299 (11th Cir. 2008). We do not agree with Fox that this language constitutes the Eleventh Circuit’s definition of “substantial compliance,” or even that Fox had satisfied it. Nor can we agree that it would create a workable definition. The phrase “substantial compliance” is defined elsewhere in the Medicare regulations as the situation where “identified deficiencies pose no greater risk to resident health or safety than the potential for causing minimum harm.” 42 C.F.R. § 488.301. This is the definition of substantial compliance under Medicare Part A, which is part of the same statutory framework as Part D. The term should have the same meaning under both Parts. Cf. Ratzlaf v. United States, 510 U.S. 135, 143 (1994) (“A term appearing in several places in a statutory text is generally read the same way each time it appears.”). “Substantial compliance” means the risk of harm is minimal. It cannot be equated with “still making needed improvements,” where the risk of harm in the interim is not minimal. Moreover, the record in this case, as summarized above, demonstrates that Fox did not meet even its own definition of substantial compliance, much less the controlling agency 22 FOX INS. CO. V. CENTERS FOR MEDICARE/MEDICAID definition. There is no indication that Fox could have become compliant in the foreseeable future. What it did was too little, too late.
Way It Had Earlier Treated Other Companies in Different Cases Fox’s next contention is that CMS’s immediate termination decision was inconsistent with CMS’s treatment of other nonperforming sponsors, against whom CMS imposed various sanctions, including termination, but only after affording those sponsors an opportunity to develop and implement a plan to correct the deficiencies CMS had identified. Fox urges that, as a matter of administrative law, CMS had to provide a legitimate reason for treating Fox differently. With regard to this argument, the district court ruled that Fox’s case was not materially similar to the six previously terminated sponsors. Five of the six involved situations of fiscal insolvency not comparable to Fox’s situation. The sixth, Health Net, did expose enrollees to imminent and serious health risks because of deficient administration, but the possibility of improvement was at least in sight. The district court quoted CMS’s March 9 termination letter, in which CMS observed in Fox’s case that it had “no confidence that Fox has the necessary administrative capabilities and infrastructure to redress the severe deficiencies . . . uncovered.” In other words, CMS concluded that Fox, unlike other non-compliant sponsors, could not fix the problems. In this court Fox makes a similar contention that it cannot be treated in a manner that differs from the way CMS treated FOX INS. CO. V. CENTERS FOR MEDICARE/MEDICAID 23 others in the past. The only authority Fox cites to support its position here are three D.C. Circuit cases in which an agency arguably made a ruling with respect to particular evidence or particular parties that differed without explanation from an earlier ruling. County of Los Angeles v. Shalala, 192 F.3d 1005 (D.C. Cir. 1999) involved a ruling that data were unreliable when the same data had been considered reliable in an earlier year; Indep. Petroleum Ass’n of Am. v. Babbitt, 92 F.3d 1248 (D.C. Cir. 1996) involved treatment of certain settlement payments as subject to royalties despite earlier adherence to a Fifth Circuit opinion that these payments were not; Caiola v. Carroll, 851 F.2d 395 (D.C. Cir. 1988) involved treating some corporate officers differently from others in the same case. These cases all focused on comparing specific legal or factual rulings. They do not create any principle that a court should second guess an agency’s result in light of the result the agency may have reached in an earlier case that is not now before the court. Our review must be of the lawfulness of the agency’s action according to the record before us, giving deference to the agency’s interpretation of the statutory standards. Administrative Procedure Act, 5 U.S.C. § 706(2); Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 842 (1984). Fox also contends that the contract termination violated its constitutional rights. This contention essentially rehashes its previous arguments, but dresses them in constitutional garb. At best, Fox contends that it was deprived of its property, in the form of its contract with the government, without due process of law. Even if we were to accept the questionable proposition that Fox has a protectable property interest in its government contract, see Erickson v. United States, 67 F.3d 858, 862 (9th Cir. 1995) (holding that 24 FOX INS. CO. V. CENTERS FOR MEDICARE/MEDICAID physicians do not have a property interest in their continued participation in Medicare and related programs), Fox’s argument still would fail. CMS notified Fox of the complaints about its performance, completed an on-site audit, and conducted an administrative hearing which reviewed the termination decision. CMS was authorized to terminate Fox’s contract immediately, and Fox received the process it was due. See Morrissey v. Brewer, 408 U.S. 471, 481 (1972).