Court Opinion

ID: 2971201
Source: CourtListenerOpinion
Date Created: 2015-09-22 16:30:50.794512+00
Date Added: 2024-06-11T11:40:52.751194
License: Public Domain

RECOMMENDED FOR FULL-TEXT PUBLICATION
                Pursuant to Sixth Circuit Rule 206                        2    Baptist Physician, et al.                  No. 03-5084
        ELECTRONIC CITATION: 2004 FED App. 0152P (6th Cir.)                    v. Humana Military
                    File Name: 04a0152p.06
                                                                                             _________________
UNITED STATES COURT OF APPEALS                                                                    COUNSEL
                  FOR THE SIXTH CIRCUIT                                   ARGUED: Reuben N. Pelot IV, EGERTON, McAFEE,
                    _________________                                     ARMISTEAD & DAVIS, Knoxville, Tennessee, for
                                                                          Appellants. J. Bruce Miller, J. BRUCE MILLER LAW
 BAPTIST PHYSICIAN HOSPITAL X                                             GROUP, Louisville, Kentucky, for Appellee. ON BRIEF:
 ORGANIZATION , INC.;            -                                        Reuben N. Pelot IV, Cheryl G. Rice, EGERTON, McAFEE,
 BAPTIST HOSPITAL OF EAST        -                                        ARMISTEAD & DAVIS, Knoxville, Tennessee, for
                                 -            No. 03-5084                 Appellants. J. Bruce Miller, Michael J. Kitchen, J. BRUCE
 TENNESSEE,                      -                                        MILLER LAW GROUP, Louisville, Kentucky, for Appellee.
         Plaintiffs-Appellants, >
                                 ,                                                           _________________
                                 -
           v.                    -                                                               OPINION
                                 -                                                           _________________
 HUMANA MILITARY                 -
 HEALTHCARE SERVICES, INC., -                                               MERRITT, Circuit Judge. In this diversity contract action
          Defendant-Appellee. -                                           governed by the substantive law of Tennessee, Baptist alleges
                                 -                                        that Humana, a private government contractor administering
                                N                                         the managed healthcare program in Regions 3 and 4 for the
                                                                          Department of Defense, underpaid Baptist for eighty-five
                                                                          separate claims for a total underpayment of over $1.3 million.
        Appeal from the United States District Court                      The Humana Baptist contract defines a reimbursement
     for the Eastern District of Tennessee at Knoxville.                  scheme that is the center of the controversy. Humana has
    No. 01-00588—Thomas W. Phillips, District Judge.                      raised a defense to payment based on federal regulations
                                                                          limiting amounts that the government itself will pay to
                    Argued: March 11, 2004                                Humana as reimbursement on individual medical claims, and
                                                                          the question is whether these regulations place a limit on the
               Decided and Filed: May 25, 2004                            amount Humana must pay Baptist. On cross-motions for
                                                                          summary judgment, the district court granted summary
  Before: MERRITT and DAUGHTREY, Circuit Judges;                          judgment in favor of Humana. We conclude that the federal
               HOOD, District Judge.*                                     regulations incorporated by reference into the agreement
                                                                          between Baptist and Humana regulate only the amount the
                                                                          government can contract to pay Humana and not the amount
    *                                                                     Humana as an independent contractor can promise to pay
     The Honorable Joseph M. Hood, United States District Judge for the   Baptist. Because these regulations do not prohibit the
Eastern District of Kentucky, sitting by designation.

                                  1
No. 03-5084                    Baptist Physician, et al.   3    4       Baptist Physician, et al.                         No. 03-5084
                                  v. Humana Military                    v. Humana Military

reimbursement provisions in the Baptist-Humana network          lower reimbursement rates than those authorized under the
provider agreement, we REVERSE.                                 CHAMPUS reimbursement system, with the understanding
                                                                that in exchange they would see an increase in directed
  BACKGROUND                                                    volume. These discounted rates might be expressed as
                                                                discounts from the maximum allowable rate under the
   Pursuant to authority delegated to it by Congress, the       CHAMPUS diagnostic grouping system (DRG),1 or as a fixed
Department of Defense established the Civilian Health and       per diem rate, or as some other agreed-upon rate of
Medical Program of the Uniformed Services, called               reimbursement.
CHAMPUS, in 1967. CHAMPUS beneficiaries include
retired armed forces personnel and dependents of both active       In the early spring of 1996, Baptist Physician Hospital
and retired military personnel. In 1995, the Department of      Organization, Inc. and Baptist Hospital of East Tennessee, or
Defense established TRICARE, a managed health care              more simply “Baptist,” entered into negotiations with
program operating as a supplement to CHAMPUS and                Humana to become a TRICARE preferred network provider.
involving the competitive selection of private contractors to   In the course of negotiations, Baptist offered a three-tiered
financially underwrite the delivery of health care services     system of discounted reimbursement from the CHAMPUS
under CHAMPUS. The overall goal of the TRICARE                  rates depending on the number of other TRICARE providers
program is to improve the quality, cost, and accessibility of   in the area. On August 6, 1996, the parties entered into a
healthcare to the nation’s military through the mechanism of    letter-of-agreement by which Humana agreed to the three-
a managed care program, and one aspect of the new               tiered system, the “Hospital Payment Arrangement,” which
TRICARE program was the establishment of “Civilian              was expressed as a percentage discount off the CHAMPUS
Preferred Provider Networks.” See 32 C.F.R. § 199.17(p).        DRG reimbursement rate with a “stop loss” provision (in the
TRICARE Management Activity, which was previously               italicized language below) consisting of an increased rate of
known as Office of CHAMPUS, is the government office            payment for certain high-dollar inpatient claims as an
charged with the responsibility of administering                alternative to a percentage discount from standard
TRICARE/CHAMPUS.                                                government rates. The purpose of the stop-loss provision is
                                                                to reduce the risk of losses to Baptist in large individual cases
  In January 1996, Humana Military Healthcare Services,         that Baptist believed the percentage discount off CHAMPUS
Inc. was awarded the TRICARE contract for Regions 3 and         DRG rates would create. The contractual provision was
4, which covers seven states and includes the State of          expressed as follows:
Tennessee. Under the contract, Humana became the managed
care support contractor charged with the responsibility of
establishing and managing a Civilian Preferred Provider
Network throughout the seven state area. Humana established
the preferred provider network by entering into contractual         1
                                                                       Diagnostic related groups (DRG s) are “a method of dividing
arrangements with individual CHAMPUS participating              hospital patients into clinically coherent groups based on the consumption
providers of medical services, one of which was Baptist.        of resources.” 32 C.F.R. § 199.2. “Patients are assigned to the groups
Broadly speaking, TRICARE preferred network providers           based on their principle diagnosis (the reason for admission, determined
                                                                after study), secondary diagnoses, procedures performed, and the patient’s
agreed to accept from a managed care support contractor         age, sex, and discharge status.” Id.
No. 03-5084                    Baptist Physician, et al.   5    6    Baptist Physician, et al.                    No. 03-5084
                                  v. Humana Military                 v. Humana Military

    Baptist Health System as Exclusive Provider                 charges the hospital would otherwise charge for the services
                                                                rendered.
      Inpatient
        20% Discount from CHAMPUS DRG rates;                       An example illustrates how the “stop loss” provision would
        Any case with provider charges greater than             work. Suppose a certain hospital stay resulted in provider
        $30,000 reverting to a 45% discount from                charges of $77,098, but the maximum CHAMPUS DRG
        provider charges.                                       reimbursement rate for this particular stay is only $27,755.00.
      Outpatient                                                Without the stop loss provision, Baptist as the exclusive
        30% Discount from CHAMPUS allowables.                   TRICARE provider under the above agreement would receive
                                                                $22,204, which represents a 20% discount from the
    Baptist Health System + 1 Additional Provider               CHAMPUS DRG rate and an effective 71% discount from
                                                                provider charges. Under the stop loss provision, however,
      Inpatient                                                 Baptist would receive $42,404, or a 45% discount from the
        20% Discount from CHAMPUS DRG rates;                    provider charges. In effect, the stop loss provision operates
        Any case with provider charges greater than             to increase the net overall discount for the business associated
        $25,000 reverting to a 35% discount from                with the TRICARE program.
        provider charges.
      Outpatient                                                   As illustrated above, for certain claims the reimbursement
        25% Discount from CHAMPUS allowables.                   amount calculated as a percentage of provider charges was
                                                                greater than 100% of the CHAMPUS DRG rate. For each of
    Baptist Health System + 2 Additional Providers              these claims, Humana unilaterally capped the reimbursement
                                                                amount at 100% of the CHAMPUS DRG rate. After
      Inpatient                                                 discovering in 1998 that Humana was not paying these claims
        15% Discount from CHAMPUS DRG rates;                    in full according to the terms of the stop loss provision,
        Any case with provider charges greater than             Baptist demanded payment of the difference. According to
        $25,000 reverting to a 30% discount from                Baptist, Humana refused to honor the provision, insisting
        provider charges.                                       instead on renegotiating the contract. Attempts to renegotiate
      Outpatient                                                were unsuccessful, and Humana exercised its right to
        25% Discount from CHAMPUS allowables.                   terminate the agreement. On December 7, 2001, Baptist filed
                                                                a one-count complaint alleging breach of contract and seeking
(Emphasis added.) Under each tier, Baptist and Humana           just over $1 million in damages. On May 1, 2002, Humana
agreed to the “stop loss” language which increased              filed a motion for summary judgment. On that same day,
reimbursement to Baptist when a particular inpatient hospital   Baptist filed a motion to amend its complaint to add claims
stay exceeded a certain dollar amount. In such cases, the       for promissory fraud, promissory estoppel and violations of
reimbursement rate would not be a percentage discount off       the Tennessee Consumer Protection Act. Baptist moved for
the CHAMPUS DRG rate, but rather would “revert” to a            partial summary judgment on its breach of contract claim.
percentage discount off the provider charges, which are the     The district court granted Humana’s motion for summary
                                                                judgment on the breach of contract claim, and in a separate
No. 03-5084                     Baptist Physician, et al.     7    8      Baptist Physician, et al.                  No. 03-5084
                                   v. Humana Military                     v. Humana Military

opinion and order, dismissed the remaining claims as having        purpose of modifying or enlarging or curtailing its terms, but
been filed out of time under the applicable limitations periods.   to aid in determining’” the contract’s meaning. Hamblen, 656
S.W.2d at 334 (internal quotation marks omitted).
  Baptist appeals the grant of summary judgment in favor of
Humana on the breach of contract claim and the dismissal of          Humana does not dispute that, on its face, the stop loss
the promissory estoppel claim for failure to file within three     clause provides that in the event a particular claim exceeds a
years of accrual. We review de novo the district court’s order     certain dollar amount, the reimbursement rate reverts to a
granting summary judgment de novo, see Peters v. Lincoln           discounted amount off billed charges rather than a discount
Elec. Co., 285 F.3d 456, 464 (6th Cir. 2002), as well as the       off the CHAMPUS DRG rates. Likewise, Humana does not
the district court’s order dismissing Baptist’s claim based on     dispute that there is no other provision in the agreement on its
promissory estoppel, see Valassis Communications v. Aetna          face that would indicate that Humana could cap the payments
Cas. & Sur. Co., 97 F.3d 870, 873 (6th Cir. 1996).                 at 100% of CHAMPUS DRG rates despite the express
                                                                   language of the reimbursement provision. Humana argues
  DISCUSSION                                                       that Baptist understood and agreed that payments under the
                                                                   stop loss provision would be capped pursuant to
   Under Tennessee law, in reviewing a contract for                CHAMPUS/TRICARE policies and regulations incorporated
ambiguities, the court considers the contract as a whole.          by reference into the agreement. Humana asserts that these
Williamson County Broad. Co. v. Intermedia Partners, 987           policies and regulations make clear the parties’ agreement
S.W.2d 550, 552 (Tenn. Ct. App. 1998); Gredig v. Tennessee         that payments made in accordance with the stop loss
Farmers Mut. Ins. Co., 891 S.W.2d 909, 912 (Tenn. Ct. App.         provision would nevertheless be capped at 100% of
1994). “A contract is ambiguous only when it is of uncertain       CHAMPUS DRG allowables.
meaning and may fairly be understood in more ways than one.
A strained construction may not be placed on the language            The district court ruled that “the regulations and federal law
used to find ambiguity where none exists.” Farmers-Peoples         incorporated by reference into the Agreement by the Provider
Bank v. Clemmer, 519 S.W.2d 801, 805 (Tenn. 1975).                 Handbook prohibit payments in excess of the maximum
However, “[a] contract is not rendered ambiguous simply            DRG,” and that as a CHAMPUS provider bound by the
because the parties disagree as to the interpretation of one or    regulations, Baptist “agreed to accept the CHAMPUS-
more of its provisions.” International Flight Ctr. v. City of      determined allowable as payment in full for its services
Murfreesboro, 45 S.W.3d 565, 570 n.5 (Tenn. Ct. App. 2000).        provided to CHAMPUS beneficiaries when the ‘Stop Loss’
Interpretation of an unambiguous contract is a question of law     provision proved inapplicable.”
for the court to decide. Hamblen County v. City of
Morristown, 656 S.W.2d 331, 335-36 (Tenn. 1983). “Where             Paragraph C of the provider agreement between Baptist and
a contract is clear and unambiguous, parties’ intentions are to    Humana states:
be determined from the four corners of the contract.” Bokor
v. Holder, 722 S.W.2d 676, 679 (Tenn. Ct. App. 1986). Even             [Provider] agrees to abide by all quality assurance,
when the agreement is unambiguous, however, the court may              utilization review, credentialing, grievance, and other
“‘consider the situation of the parties and the accompanying           policies and procedures as are established and revised by
circumstances at the time it was entered into – not for the            Humana, and as applicable to CHAMPUS. Such
No. 03-5084                     Baptist Physician, et al.      9   10   Baptist Physician, et al.                   No. 03-5084
                                   v. Humana Military                   v. Humana Military

  CHAMPUS policies and procedures are set forth in the                The regulations governing the CHAMPUS program in
  Provider Handbook which is hereby incorporated by                general are set forth in 32 C.F.R. part 199. Reimbursement
  reference and made part of this Interim Agreement.               methods and rates for the CHAMPUS program are set forth
                                                                   at 32 C.F.R. § 199.14. The CHAMPUS DRG-based system
We agree with the district court that, through the operation of    is based on maximum allowable rates and lists diagnoses for
Paragraph C, the entire Provider Handbook is incorporated by       which a fixed fee rate is set by the government for inpatient
reference into the agreement.                                      care. See 32 C.F.R. § 199.14(a)(1). The groupings used are
                                                                   the same as those used in the Medicare Prospective Payment
  Section 5.4.3 of the Handbook, entitled “TRICARE                 System. See id. § 199.14(a)(1)(i)(A). In order to participate
Payment,” states:                                                  in the CHAMPUS program, a CHAMPUS provider must
                                                                   agree “to accept the CHAMPUS-determined allowable
  PROVIDERS WILL ACCEPT THE TRICARE payment                        amount as payment in full for medical services and supplies
  as payment in full for services rendered, not counting the       provided to the CHAMPUS beneficiary.” Id. § 199.6(a)(8).
  applicable deductible, co-payment or cost share to be
  collected from the beneficiary. This payment will be the           According to special rules and procedures adopted for
  lower of the TRICARE discounted fee or your normal               TRICARE, the reimbursement system for the TRICARE
  charge. Providers accepting the TRICARE payment                  managed care system can deviate from the CHAMPUS
  cannot use balance billing to beneficiaries for any              reimbursement system. See 32 C.F.R. § 199.17(p)(6). In the
  amount that exceeds the TRICARE payment.                         event of conflict between the special TRICARE rules set forth
                                                                   in § 199.17 and those rules generally applicable to
The term “TRICARE discounted fee” is not defined in the            CHAMPUS, the specific TRICARE rules take precedence.
Handbook. According to Baptist, it could reasonably                Id. § 199.17(a)(4). The special rule relating to reimbursement
interpret “TRICARE discounted fee” to mean a payment               to TRICARE network providers states:
made pursuant to the stop loss provision because such
payment is in fact based on a discounted fee pursuant to a           Special reimbursement methods for network providers.
TRICARE provider agreement. In response, Humana sets out             The Director, [Office of CHAMPUS], may establish, for
a lengthy recitation of parol evidence relating to the parties’      preferred provider networks, reimbursement rates and
disputed “understandings” during negotiations, concluding            methods different from those established pursuant to
with an apparent reference to section 1.0 of the Handbook.           § 199.14. Such provisions may be expressed in terms of
That section specifies that in the event of a conflict between       percentage discounts off CHAMPUS allowable amounts,
the agreement, the handbook and the regulations, the                 or in other terms. In circumstances in which payments
regulations control. Setting aside the parol evidence for the        are based on hospital-specific rates (or other rates
moment, we turn to the regulations to determine whether the          specific to particular institutional providers), special
terms of the agreement itself evidence the parties’ agreement        reimbursement methods may permit payments based on
that payments made under the stop loss provision would be            discounts off national or regional prevailing payment
capped at the maximum government CHAMPUS DRG rate.                   levels, even if higher than particular institution-specific
                                                                     payment rates.
No. 03-5084                    Baptist Physician, et al.   11    12   Baptist Physician, et al.                   No. 03-5084
                                  v. Humana Military                  v. Humana Military

Id. § 199.17(p)(6). Administrative rulemaking history              not restricted to: negotiated or discounted fee schedules;
indicates that the intent of subsection (p)(6) is to provide       usual and customary fees; salary; flat fee; global or
regional managed care contractors the flexibility to negotiate     profit/risk sharing arrangements for noninstitutional
reimbursement methods that vary from the payment                   providers; and per diems and capitation payments for
provisions established by regulation:                              institutional providers.
  Regarding the suggestion that we provide additional            (J.A. at 323.) On September 19, 2000 the Office of the
  specificity concerning the special reimbursement               Assistant Secretary of Defense, Health Affairs issued a
  methods for network providers, we do not agree that            “Memorandum for Regions 3/4 Contract Administrator” in
  additional specifics should be provided. The rule              response to Humana’s letter requesting clarification that all
  provides added flexibility to vary payment provisions          claims payments for individual services are subject to
  from those established by regulation, to accommodate           maximum payment methodology:
  local market conditions. To attempt to specify in advance
  the possible reimbursement approaches would defeat our              Humana is correct in stating Chapter 13, Section 1.1,
  purpose of providing a flexible mechanism. We also               Paragraph IIB of the TRICARE/CHAMPUS Policy
  disagree that network rate setting should be the same as         Manual can be misleading when read in the absence of
  under standard CHAMPUS rules; a key aim of managed               associated TMA policy. The intent of the statement
  care programs is to negotiate lower rates of                     “reimbursement is neither, subject to, nor restricted by”
  reimbursement with networks of preferred providers.              is as Humana states, to allow contractors to pay network
                                                                   providers sums in addition to individual claims payments
TRICARE Program, 60 Fed. Reg. 52, 086, 52,094 (Oct. 5,             if it is deemed necessary to entice providers into the
1995).                                                             network. Health care dollars may not be used to pay
                                                                   amounts in excess of the maximum payment
  In Chapter 13, section 1.1 of the 1999                           methodology set forth by federal law, e.g. DRG,
TRICARE/CHAMPUS Policy manual, the Director cites 32               allowable charge, etc., unless approved by the Director
C.F.R. § 199.17(p)(6) and answers the question “How are            OCHAMPUS.
network providers reimbursed under TRICARE?”:
                                                                 (J.A. at 514.) According to this same memorandum, the
     Network provider reimbursement is neither subject to,       policy prohibiting a managed care support contractor from
  nor restricted by, amounts that would have otherwise           using health care dollars to pay sums in excess of government
  been paid under the standard TRICARE reimbursement             allowables would be “clarified” in an “upcoming consolidated
  methodologies outlined in this chapter (i.e. those             manual change.” (Id.)
  reimbursement methodologies applicable only to non-
  network providers). Managed Care Support (MCS)                   We conclude that federal regulations and associated
  contractors are free to establish alternative                  TRICARE policies incorporated into the parties’ agreement
  reimbursement systems that will ensure adequate                by reference do not categorically bar an independent managed
  beneficiary access to quality network providers. These         care support contractor, such as Humana, from paying sums
  alternative reimbursement systems may include, but are         in excess of government allowables on certain claims. As
No. 03-5084                     Baptist Physician, et al.    13    14   Baptist Physician, et al.                     No. 03-5084
                                   v. Humana Military                   v. Humana Military

provided by Chapter 13, Section 1.1 of the Policy Manual, the      agreed-upon reimbursement amounts by capping those
Director has promulgated a general policy that managed care        amounts at maximum government allowables. In addressing
support contractors are “free to establish alternative             various motions to dismiss, including a motion by Humana to
reimbursement systems that will ensure adequate beneficiary        dismiss on the ground that the United States is 100% liable
access to quality network providers.” The “clarifying” Health      for any breach of the network provider contracts entered into
Affairs memorandum limits that freedom only to the extent          by Humana, the court interpreted Humana’s contract with the
that, absent approval by the Director of the Office of             government and concluded in relevant part:
CHAMPUS, “health care dollars” may not be used to pay
sums in excess of government allowables. As a result, we             The [Managed Care Support] contracts created an
need not look beyond the four corners of the agreement to            arrangement whereby the contractor (Humana) received
determine that, by its terms, the parties agreed that Humana         control over a monthly allotment of governmental funds
would pay certain high-dollar claims as a percentage discount        that the federal government electronically transferred to
off provider charges, and that federal law and regulations do        the contractor’s bank account. The [Managed Care
not prohibit such payments so long as the payments are not           Support] contractor has ownership over the funds and
made with government “health care dollars.”                          can distribute those funds to network providers as it sees
                                                                     fit. The contractor cannot pay any claim beyond what
   Our job of interpretation is aided, and our conclusion            federal law allows from the healthcare portion of the
reinforced, by a reimbursement provision in the contract             allotment; however, the contractor is permitted to pay
between Humana and the Department of Defense, as well as             network providers beyond the Government’s allowed
by a recent district court decision examining the relationship       amounts. If the contractor chooses to do so, then any
between TRICARE managed care support contractors, such               overage is paid for out of the contractor’s administrative
as Humana, and the Department of Defense. Section C-5,               portion of the allotment, which results in less profit to the
j.(2) of the DoD-Humana contract, which was made part of             contractor.
the appellate record through a supplemental filing pursuant to
Fed. R. App. P. 28(j), specifies: “All claims payments for         Bay Med. Ctr v. Humana Military Health Care Servs., No.
individual services (whether in-system or out-of-system) are       5:03-cv-144/MCR (N.D. Fla. Mar. 16, 2004) (denying, inter
subject to the maximum payment methodology set forth by            alia, Humana’s motion to dismiss for lack of subject matter
federal law . . . . The contractor may pay network providers       jurisdiction on the ground that Humana is the real party in
(on an annual basis or other arrangement) sums in addition to      interest for the breach of contract claim) (emphasis added).
individual claims payments if it is deemed necessary to entice     The reimbursement provision cited above, along with the
providers into the network.” (Appellee’s Response to Supp.         Florida district court’s rejection of Humana’s argument that
Filing, Ex. 2.) This provision, which aids in the interpretation   any liability for its breach of a provider contract is directly
of the Humana-Baptist contract, was not disclosed by               chargeable to the Treasury, serve to refute Humana’s
Humana in the trial court.                                         assertion in this case that payments made in excess of
                                                                   CHAMPUS allowables would ultimately come out of the
  In a case filed in a Florida district court, the plaintiffs, a   pockets of taxpayers.
group of institutional providers of outpatient non-surgical
services, allege that Humana breached its agreement to pay
No. 03-5084                     Baptist Physician, et al.   15
                                   v. Humana Military

  Humana proposes that, in the event the Court concludes
that the stop loss provision is not subject to a regulatory cap
based on government allowables, the Court should
nevertheless affirm the grant of summary judgment in its
favor on the ground that Baptist waived its claims. This issue
was pretermitted below by the district court’s decision and is
more appropriately decided by the district court in the first
instance.
  Finally, we need not reach the question whether the district
court erred in dismissing Baptist’s promissory estoppel claim
as untimely filed. As Baptist explains, its promissory
estoppel claim is brought as an alternative to its breach of
contract claim should this Court conclude that the terms of the
agreement pertaining to the stop loss provision are
unenforceable or invalid. (See Reply Br. of Appellant at 26.)
  CONCLUSION
   For the foregoing reasons, the order of the district court
granting Humana’s motion for summary judgment to Humana
is REVERSED. This matter is REMANDED to the district
court for proceedings not inconsistent with this opinion.