Appalachian Regional Healthcare, Inc. et al v. Coventry Health and Life Insurance Company et al
Filing
354
OPINION AND ORDER: (1) Appalachian Regional's 276 Motion for Partial Summary Judgment is GRANTED in part and DENIED in part. The motion is GRANTED to the extent that Appalachian Regional asks the Court to order that Coventry must pay Appalach ian Regional's critical access hospitals 100% of the Medicaid rate for out-of-network hospital services. The motion is otherwise DENIED. (2) Coventry must pay Appalachian Regional's critical access hospitals 100% of the Medicaid rate for out-of-network hospital services rendered to Conventry's Medicaid beneficiaries. Signed by Judge Karen K. Caldwell on September 30, 2016. (AWD) cc: COR
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF KENTUCKY
CENTRAL DIVISION – LEXINGTON
APPALACHIAN REGIONAL
HEALTHCARE, INC., et al.,
CIVIL ACTION NO. 5:12-114-KKC
Plaintiff,
V.
OPINION AND ORDER
COVENTRY HEALTH AND LIFE
INSURANCE CO.,
UNITED STATES DEPARTMENT OF
HEALTH AND HUMAN SERVICES, et al.,
Defendants.
This matter is before the Court on the plaintiffs’ motion for partial summary
judgment (DE 276) against defendant Coventry Health and Life Insurance Co.
I.
Background
The plaintiffs – referred to collectively as Appalachian Regional – provide healthcare
in Kentucky. With their complaint, they challenge certain actions by the state and federal
governments and a private managed care organization in the administration of Kentucky’s
Medicaid program.
The purpose of that program is to provide government funding for medical care of
individuals who cannot afford to pay for that care on their own. Arkansas Dept. of Health
and Human Servs. v. Ahlborn, 547 U.S. 268, 275 (2006). Through the program, the federal
government provides funds to help states deliver healthcare to their needy citizens. Wilder
v. Va. Hosp. Ass’n, 496 U.S. 498, 502 (1990).
The Department of Health and Human Services is the federal agency that
administers the program. Ahlborn, 547 U.S. at 275. It does so through the Centers for
Medicare and Medicaid Services (CMS). Id. The Court will refer to the federal department
and CMS collectively as CMS in this opinion. The Kentucky Cabinet for Health and Family
Services is the state agency that administers Kentucky's Medicaid program.
KRS §§ 194A.010(1), 194A.030(2). CMS and the state cabinet are both defendants in this
action.
To qualify for federal financial assistance to administer their Medicaid programs,
states must comply with certain federal requirements. Va. Hosp. Ass’n, 496 U.S. at 502. For
example, the state must establish a plan for reimbursing healthcare providers for the
medical services they provide to needy citizens. Id.
Prior to November 1, 2011, the Kentucky state cabinet directly reimbursed doctors
and hospitals for the services they provided to Medicaid recipients pursuant to a fee
schedule set by the state. This is known as a fee-for-service system. See Appalachian Reg’l
Healthcare, Inc. v. Coventry Health and Life Ins. Co., 714 F.3d 424, 426 (6th Cir. 2013). In
2011, however, CMS approved Kentucky’s application for a waiver that permits the state to
administer its Medicaid program as a managed-care program instead of reimbursing
providers under the traditional fee-for-service model. (DE 274-2, Glaze Dec. ¶¶ 5, 6.) This
was done in an effort to control “ballooning Medicaid costs and resulting pressures on the
state’s budget.” Appalachian Reg’l, 714 F.3d at 426.
Under a managed-care program, the Cabinet no longer directly reimburses doctors
and hospitals for the healthcare services they provide. Instead, the Cabinet now pays a
group of third-party administrators called managed care organizations (MCOs).
Appalachian Reg’l Healthcare, Inc. v. Coventry Health and Life Ins. Co., 5:12-CV-114, 2012
WL 2359439, at * 1 (E.D. Ky. June 20, 2012). The state awards contracts to certain MCOs,
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which are charged with managing healthcare services for Medicaid beneficiaries who sign
up to become “members” of one of the MCOs. Id.
The Cabinet pays each MCO a flat monthly fee – called a capitation payment – for
the healthcare of each of the MCO’s members who is a Medicaid recipient. Id. The
capitation payment is a set fee that the Cabinet pays for each MCO member, whether or
not the member actually receives any health services that month. 42 C.F.R. § 438.2. The
MCO then pays the healthcare providers for the healthcare services actually rendered to its
members. “So the MCO bears the risk that the costs of care may exceed the capitation
payment. But on the other side, it stands to profit if beneficiaries use fewer services.”
Appalachian Reg'l, 714 F.3d at 426.
The state converted to the managed-care model in order to “improve healthcare
access and quality by eliminating unnecessary care, enhancing coordination among
providers, emphasizing preventative care, and promoting healthy lifestyles.” Id. The state
also believed that the conversion would save it money. Id.
The Cabinet initially awarded contracts to three MCOs: Coventry Health and Life
Insurance Co., Kentucky Spirit Health Plan, Inc., and WellCare of Kentucky, Inc.
Appalachian Reg’l, 714 F.3d at 426. The MCOs were charged with administering healthcare
in seven of the state’s eight Medicaid regions. One of those regions is Region 8 which is
made up of 19 counties in eastern and southeastern Kentucky that “are among the most
economically depressed, underserved, and medically needy in the Commonwealth.” Id. at
426-27.
As part of the waiver approval, CMS must approve both the state’s contracts with
the MCOs and the capitation payments to be paid to the MCOs. 42 C.F.R. §§ 438.6(a),(c),
438.806(c). The capitation payments are set forth in the contracts between the Cabinet and
each MCO. CMS reviewed the contracts for compliance with the Medicaid Act and the
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applicable regulations. 42 U.S.C. §1396b(m); 42 C.F.R. § 438.806. CMS approved each of the
contracts, including the designated capitation rates, for the period of November 1, 2011 to
June 30, 2014. (DE 135-3, CMS Letter Oct. 28, 2011; DE 274-2, Glaze Decl. ¶¶ 7-12.) These
initial MCO contracts expired on June 30, 2014. (DE 274-2, Glaze Decl. ¶13.)
The MCOs, in turn, contracted with healthcare providers who make up each MCO’s
healthcare-provider “network.” Appalachian Reg’l, 2012 WL 2359439, at *1. Each MCO’s
network must meet certain state and federal standards. These “so-called network-adequacy
requirements . . . obligate an MCO to maintain a provider network that guarantees certain
services are accessible to its members within specified times or distances from their homes.”
Appalachian Reg’l, 714 F.3d at 427.
For healthcare services rendered to their members, the MCOs pay healthcare
providers who are in their network the amount set forth in the contracts between the
parties. (DE 278-1, Mem. at 8.) Coventry entered into a temporary agreement with
Appalachian Regional, which made Appalachian Regional a provider in Coventry’s network.
Id. The agreement provided that Coventry would pay 107.5 percent of the Medicaid rate for
inpatient services. (DE 278-19, Agreement, Ex. A.)
For healthcare services rendered to an MCO’s members by healthcare providers who
are not in their network – out-of-network providers – the amounts paid to providers are
governed by other guidelines. For emergency services, federal law prohibits out-of-network
providers from charging more than 100 percent of the Medicaid rate. 42 U.S.C. § 1396u2(b)(2)(D). The MCO agreement between Coventry and the Cabinet provides that “Covered
Services shall be reimbursed at 100 percent of the Medicaid fee schedule/rate until January
1, 2012 and after January 1, 2012, at 90% of the Medicaid fee schedule/rate.” (DE 54-2,
MCO Agreement, § 29.2.) At oral argument, the Cabinet’s counsel argued that this
provision was intended to establish only a “floor, not a ceiling.” (DE 321, Tr. at 74.)
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Appalachian Regional operates hospitals and other medical facilities that serve
citizens in Region 8. Appalachian Reg’l. 714 F.3d at 427. Appalachian Regional’s patients
are generally sicker than other Medicaid patients, meaning it costs MCOs more to provide
healthcare for Appalachian Regional’s patients. Id. at 428. “Initially, when Coventry was
establishing its provider network in Region 8, it was told that it had to include Appalachian
in its network to meet Kentucky’s network-adequacy standards. Coventry assumed its
competitors had to do the same, but it was wrong: the Cabinet did not require Kentucky
Spirit to do so.” Id.
This upset Coventry because having to serve Appalachian Regional’s relatively
costlier patients was causing Coventry to lose money. Id. Coventry believed that a
disproportionate number of the sicker Eastern Kentucky population joined Coventry so they
could receive in-network healthcare from Appalachian Regional. (DE 302, Resp. at 7.) The
capitation rate paid by the state did not cover the medical services these patients incurred.
Appalachian Reg’l, 714 F.3d at 428. This “meant Coventry was disadvantaged relative to a
competitor MCO like Kentucky Spirit that was not required to cover—and pay the higher
cost of caring for—Appalachian's sicker patients.” Id.
The agreement between Coventry and Appalachian Regional provided that it would
remain in force until the sooner of the execution of a final agreement or June 30, 2012. (DE
278-20, Amendment, ¶1.) The agreement further provided that either party could
terminate it, with or without cause, with 30 days written notice. (DE 278-19, Agreement,
¶17.) By letter dated March 29, 2012, Coventry notified Appalachian Regional that it was
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terminating the temporary agreement effective May 4, 2012. Appalachian Reg’l, 714 F.3d at
428. (DE 278-1, Mem. at 10; DE 278-22, Termination Letter.)1
Appalachian Regional then filed this action, asserting claims against Coventry, the
Cabinet, and CMS. (DE 5, First Amended Compl.; DE 135, Second Amended Compl.) The
only claim at issue on this motion is Appalachian Regional’s “unjust enrichment” claim
(Count VI) against Coventry. In later briefs, Appalachian Regional has characterized this
claim as one under the doctrine of “quantum meruit.” (DE 54, Mem. at 15.) Coventry has
also identified this claim as seeking recovery in quantum meruit. (DE 278-1, Mem. at 3334.) Accordingly, the Court has analyzed this as a claim under the doctrine of quantum
meruit, not unjust enrichment.
With this claim, Appalachian Regional asked the Court to declare that it is entitled
to the reasonable value of the non-emergency services it provided to Coventry Medicaid
members after the contract was terminated.
This case was initially assigned to the late U.S. District Judge Karl Forester. By
order dated June 20, 2012, Judge Forester granted Appalachian Regional a preliminary
injunction, ordering that the agreement between Coventry and Appalachian Regional would
stay in effect until November 1, 2012. Appalachian Reg’l Healthcare v. Coventry Health and
Life Ins. Co., No. 5:12-CV-114, 2012 WL 2359439, at *15 (E.D. Ky. June 20, 2012). This
meant that Appalachian Regional remained in Coventry’s healthcare-provider network
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At oral argument, Coventry’s counsel argued that Coventry did not actually terminate the
contract but that instead it let the contract expire on June 30, 2012. (DE 321, Tr. at 66-67.)
Nevertheless, by letter dated March 29, 2012, Coventry’s Executive Vice President Kevin P. Conlin
explicitly stated that “pursuant to Section 17 of the Binding Letter of Agreement. . . notice is hereby
given of Coventry’s decision to terminate the BLOA. The date of termination is May 4, 2012. . . .” (DE
278-22, Termination Letter.) Likewise, in its memorandum, Coventry states, “On March 28, 2012,
Kevin Conlin, Executive Vice President of Coventry, sent ARH a notice of termination per the terms
of the LOA. . . The effective date of the termination was May 4, 2012. . . .” (DE 278-1, Mem. at 10.)
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until November 1, 2012 and Coventry was required to pay Appalachian Regional the
contract rates for services until that date.
Accordingly, the remaining question on Appalachian Regional’s quantum meruit
claim is how much Coventry should have to pay it for non-emergency healthcare services
provided after November 1, 2012 to Coventry members who are Medicaid beneficiaries. By
order dated March 28, 2013, Judge Forester granted Appalachian Regional summary
judgment on this claim and ruled that Coventry must pay Appalachian Regional the
“reasonable value” of non-emergency healthcare services. Appalachian Reg’l, 2013 WL
1314154, at *3-4. Judge Forester declined to determine what that “reasonable value” was,
however, finding that any such finding may require an evidentiary hearing and additional
discovery. Id. (DE 271, Tr. at 7-8.)
Since the injunction expired (and, with it, the contract rate), Coventry has paid
Appalachian Regional 90 percent of the Medicaid fee schedule for non-emergency services
provided to Coventry members. (DE 302, Resp. at 10.) With its quantum meruit claim,
Appalachian Regional asserts that the 90-percent rate is not reasonable.
This motion for partial summary judgment filed by Appalachian Regional deals only
with the amounts paid to a certain kind of hospital – those that are licensed as critical
access hospitals (CAHs). Congress established the critical-access-hospital license in 1997 in
recognition that such hospitals “provide vital services in rural areas and often serve as the
foundations of rural health care delivery systems.” Rural Health Resources, HealthIT.gov
(Nov. 18, 2015), https://www.healthit.gov/providers-professionals/benefits-critical-accesshospitals-and-other-small-rural-hospitals. To be licensed as a CAH, among other
requirements, a hospital must be located in a rural area and more than 35 miles from
another hospital, or have been certified before January 1, 2006 by the state as being a
“necessary provider of health care services.” Id. If a hospital is licensed as a CAH, it is
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entitled to cost-based reimbursement instead of the standard fixed-rate reimbursement
provided to other hospitals. (DE 276-2, CMS Fact Sheet at 2.)
Appalachian Regional owns three CAHs. With this motion, it asks the Court to order
that Coventry must pay these particular hospitals at least 101 percent of the hospital’s
reasonable costs for all out-of-network services provided by the hospitals to Coventry’s
Medicaid members.
II.
Analysis
In its response, Coventry first argues that Appalachian Regional did not assert any
claim for payment to CAHs in its complaint and that it should not be permitted to raise
such a claim in a motion for summary judgment. With its quantum meruit claim, however,
Appalachian Regional asserts a right to the reasonable value of its health-care services.
With this motion, Appalachian Regional asks the Court to declare that, with regard to
CAHs in particular, the reasonable value of its services is a minimum of 101 percent of its
costs in providing such services. Accordingly, this motion for partial summary judgment
simply addresses a particular issue raised by Appalachian Regional’s quantum meruit
claim.
As to the substance of the issue, a Kentucky statute provides that the Cabinet and
any managed care program must provide for reimbursement of services provided to
Medicaid recipients in a critical access hospital at rates that are at least equal to the rates
Medicare pays such hospitals. KRS § 216.380(13). The contract between Coventry and the
Cabinet requires the same. (DE 276-4, MCO Agreement § 29.9.) For both inpatient and
outpatient critical access hospital services, Medicare pays CAHs 101 percent of their
reasonable costs in providing such services. 42 U.S.C. §1395f(l)(1); 42 C.F.R. §§ 413.70(a)(1),
(b)(2)(i); DE 276-2, CMS Fact Sheet, at 2.) Thus, it is clear that Coventry must pay CAHs at
least 101 percent of the hospitals’ reasonable costs in providing Medicaid services.
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In its response, Coventry asserts that 101 percent of the hospital’s reasonable costs
is equal to 100 percent of the Medicaid fee schedule (DE 295, Resp. at 2). Further, Coventry
agrees that “it is required to pay 100% (no more) of the Medicaid fee schedule to CAHs . . . .”
(DE 295, Resp. at 3.) In its reply, Appalachian Regional does not dispute that 101 percent
of the hospital’s reasonable costs is equal to 100 percent of the Medicaid rate. In fact, it
states that Coventry’s admission that it must pay Appalachian Regional’s CAHs 100% of
the Medicaid fee schedule should “settle this matter.” (DE 306, Reply at 1.)
By separate opinion, the Court has determined that the most that Appalachian
Regional is entitled to on its quantum meruit claim for non-emergency healthcare services
rendered by it to Coventry’s members after the injunction (and thus, contract rate) expired
is 100 percent of the Medicaid rate. For emergency services, federal law prohibits out-ofnetwork providers from charging more than 100 percent of the Medicaid rate. 42 U.S.C. §
1396u-2(b)(2)(D). Accordingly, the Court will grant Appalachian Regional’s motion to the
extent that it asks the Court to find that Coventry must pay CAHs 100 percent of the
Medicaid rate for healthcare services rendered to Medicaid beneficiaries. The motion will
otherwise be denied.
Coventry argues that it has paid Appalachian Regional’s CAHs more than 100
percent of the Medicaid fee schedule for the claims at issue and that, therefore, any claim
by Appalachian Regional for additional payments to its CAHs should be dismissed.
Coventry makes this argument only in its response. It has not made a motion for such
relief. Further, in support of this assertion, Coventry cites four pages of the deposition
testimony of Appalachian Regional’s CEO and an exhibit attached to the deposition. The
Court does not find that this evidence proves as a matter of law that Coventry has overpaid
Appalachian Regional by $132,220 as it asserts. An overpayment is an affirmative defense
and, thus, the burden is on Coventry to prove it.
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Further, with this motion, Appalachian Regional asks only that the Court order
that Coventry pay CAHs a minimum of 101 percent of their reasonable costs (or 100
percent of the Medicaid fee schedule) for services rendered to Medicaid beneficiaries after
the contract rate expired. Thus, in this opinion, the Court addresses only whether
Appalachian Regional is entitled to that relief.
For all these reasons, the Court hereby ORDERS as follows:
1) Appalachian Regional’s motion for partial summary judgment (DE 276) is
GRANTED in part and DENIED in part. The motion is GRANTED to the extent
that Appalachian Regional asks the Court to order that Coventry must pay
Appalachian Regional’s critical access hospitals 100 percent of the Medicaid rate
for out-of-network hospital services. The motion is otherwise DENIED; and
2) Coventry must pay Appalachian Regional’s critical access hospitals 100 percent
of the Medicaid rate for out-of-network hospital services rendered to Coventry’s
Medicaid beneficiaries.
Dated September 30, 2016.
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