Ingham Regional Medical Center v. United States , 874 F.3d 1341 ( 2017 )

United States Court of Appeals
for the Federal Circuit
______________________
INGHAM REGIONAL MEDICAL CENTER,
MCLAREN NORTHERN MICHIGAN, BAY
REGIONAL MEDICAL CENTER, LAKEWOOD
HEALTH SYSTEM, GIFFORD MEDICAL CENTER,
INC.,
Plaintiffs-Appellants
v.
UNITED STATES,
Defendant-Appellee
______________________
2016-2081
______________________
Appeal from the United States Court of Federal
Claims in No. 1:13-cv-00821-MBH, Judge Marian Blank
Horn.
______________________
Decided: November 3, 2017
______________________
DIANE ELIZABETH COOLEY, Pires Cooley, Washington,
DC, argued for plaintiffs-appellants. Also represented by
ALEXANDER JOHN PIRES, JR.
PHYLLIS JO BAUNACH, Commercial Litigation Branch,
Civil Division, United States Department of Justice,
Washington, DC, argued for defendant-appellee. Also
represented by BENJAMIN C. MIZER, ROBERT E.
2 INGHAM REGIONAL MEDICAL CENTER v. UNITED STATES
KIRSCHMAN, JR., STEVEN J. GILLINGHAM; GERALD
ANTHONY WESLEY, Defense Legal Services Agency, United
States Department of Defense, Aurora, CO.
______________________
Before PROST, Chief Judge, DYK and HUGHES, Circuit
Judges.
HUGHES, Circuit Judge.
Ingham Regional Medical Center, Mclaren Northern
Michigan, Bay Regional Medical Center, Lakewood
Health System, and Gifford Medical Center, Inc. brought
suit against the Government alleging that they were
underpaid for certain outpatient medical services. The
Court of Federal Claims dismissed Appellants’ complaint
for failure to state a claim upon which relief can be grant-
ed. We find that Ingham may bring a claim for breach of
contract but that Appellants may not bring money-
mandating claims under 10 U.S.C. § 1079(j)(2) and
32 C.F.R. § 199.7(h)(2) because the Government’s inter-
pretation of the statute was reasonable. Accordingly, we
reverse-in-part, affirm-in-part, and remand.
I
In 1956, Congress established TRICARE, a military
health care system (previously called the Civilian Health
and Medical Program of the Uniformed Services
(CHAMPUS)). TRICARE provides medical and dental
care for current and former members of the military and
their dependents. The Secretary of Defense is responsible
for contracting with outside health care providers to
deliver medical care to TRICARE recipients. See 10
U.S.C. § 1073(a)(2); 32 C.F.R. § 199.1. Hospitals that
provide TRICARE services are reimbursed in accordance
with guidelines set forth by the Department of Defense
(DoD). See 32 C.F.R. § 199.14.
INGHAM REGIONAL MEDICAL CENTER v. UNITED STATES 3
In 2001, Congress amended the TRICARE statute
governing the reimbursements for outside healthcare
providers. The statute previously permitted, but did not
require, DoD to use Medicare reimbursement rules. The
amendment replaced the permissive word “may” with
“shall” such that the statute read:
The amount to be paid to a provider of services for
services provided under a plan covered by this
section shall be determined under joint regula-
tions to be prescribed by the administering Secre-
taries which provide that the amount of such
payments shall be determined to the extent prac-
ticable in accordance with the same reimburse-
ment rules as apply to payments to providers of
services of the same type under title XVII of the
Social Security Act [Medicare].
10 U.S.C. § 1079(j)(2) (2002) (emphasis added). 1 Thus,
§ 1079(j)(2) required TRICARE to use the same reim-
bursement rules as Medicare to the extent practicable.
DoD responded to the statutory change by issuing an
Interim Final Rule, effective August 12, 2002. TRICARE;
Sub-Acute Care Program; Uniform Skilled Nursing Facili-
ty Benefit; Home Health Care Benefit; Adopting Medicare
Payment Methods for Skilled Nursing Facilities and
Home Health Care Providers, 67 Fed. Reg. 40,597-02
(June 13, 2002). The Interim Final Rule noted that
Medicare was phasing in a new Outpatient Prospective
Payment System (OPPS) methodology for outpatient
services and that DoD:
plan[ned] to follow the Medicare approach. How-
ever, because of complexities of the Medicare
transition process and the lack of TRICARE cost
1
The statute has since been amended, and this
language is currently found at § 1079(i)(2) (2014).
4 INGHAM REGIONAL MEDICAL CENTER v. UNITED STATES
report data comparable to Medicare’s, it is not
practicable for the Department to adopt Medicare
OPPS for hospital outpatient services at this time.
Id. at 40,601; J.A. 4. The Interim Final Rule adopted new
methods of payment for four categories of hospital-based
outpatient services. DoD issued a Final Rule in 2005,
which provided a more detailed explanation of the pay-
ment rules for hospital-based outpatient services. See
TRICARE; Sub-Acute Care Program; Uniform Skilled
Nursing Facility Benefit; Home Health Care Benefit;
Adopting Medicare Payment Methods for Skilled Nursing
Facilities and Home Health Care Providers, 70 Fed. Reg.
61,368-01 (October 24, 2005). For most outpatient ser-
vices, hospitals would receive payments “based on the
TRICARE-allowable cost method in effect for professional
providers or the CHAMPUS Maximum Allowable Charge
(CMAC).” Id. at 61,371. These payment rules applied
until 2009, when TRICARE introduced a new payment
system for hospital outpatient services that was similar to
the Medicare OPPS rules.
Hospitals complained that CMAC was only intended
to be used for individual health care providers, not insti-
tutions with large overhead costs. TRICARE responded
to these complaints by hiring a consultant, Kennel and
Associates, Inc., to undertake a study of the accuracy of
its payments to the hospitals. The Kennel Study com-
pared CMAC payments to the payments that would have
been made using Medicare payment principles, and
determined that DoD “(1) underpaid hospitals for outpa-
tient radiology but, (2) correctly paid hospitals for all
other outpatient services.” J.A. 5 (emphasis in original).
Subsequently, DoD created a discretionary payment
process and notified the hospitals via letter on April 25,
2011. The letter explained that DoD would permit the
hospitals to request a review of their TRICARE reim-
bursements:
INGHAM REGIONAL MEDICAL CENTER v. UNITED STATES 5
Based on the request, your hospital may be paid
an adjustment, subject to the availability of ap-
propriations, in return for your acceptance of
DoD’s offer of additional payment based on crite-
ria established by the agency . . . . [P]ayment of
the discretionary adjustments will also be contin-
gent on the execution of a release by the hospital
of any hospital outpatient service claims against
the agency.
J.A. 91–92.
On the TRICARE webpage, DoD published a docu-
ment titled “NOTICE TO HOPSITALS OF POTENTIAL
ADJUSTMENT TO PAST PAYMENTS FOR
OUTPATIENT RADIOLOGY SERVICES” (the Notice)
and answers to Frequently Asked Questions (the FAQs).
The Notice explained, in relevant part, that:
The TRICARE regulation provisions on hospital
outpatient services, in the absence of adoption of
the Medicare OPPS methodology, adopted compa-
rable Medicare payments for similar services pro-
vided in other sites (i.e., physician offices). That
is, TRICARE looked to the similarity of services
being provided, not the site of services, in adopt-
ing a reimbursement methodology for hospital
outpatient services. . . .
[I]n reviewing payments for hospital services,
DoD has determined that, for radiology ser-
vices . . . the technical component of the allowable
charge did not approximate the Medicare fair
payment for such hospital services as well as it
could have. That is, looking at the Medicare re-
imbursement methodologies in existence prior to
adoption of Medicare OPPS in 2000, . . . some ra-
diology services were underpaid in compari-
son. . . . Thus, although payments to hospitals for
radiology services were consistent with the duly
6 INGHAM REGIONAL MEDICAL CENTER v. UNITED STATES
promulgated regulation, there is a basis for
TRICARE to provide an opportunity to make some
discretionary net payment adjustments to approx-
imate more closely Medicare payment meth-
ods. . . .
General TRICARE policy is that payment meth-
odologies follow to the extent practicable Medicare
payments. Prior to adopting [OPPS], Medicare
used a blended rate that factored in a percentage
of hospital costs and a percentage of the global
physician fee schedule to reimburse hospital out-
patient radiology services. In contrast, TRICARE
regulation limited reimbursement to hospitals for
individual outpatient radiology services to the
technical component portion of the CHAMPUS
Maximum Allowable Charge (CMAC), which was
one component of Medicare’s physician fee sched-
ule. Consistent with TRICARE policy under stat-
ute to pay similar to Medicare, we have
determined that discretionary adjusted payments
may better reflect the Medicare payment amounts
for outpatient radiology claims.
J.A. 96–97.
The Notice also described the nine-step process by
which hospitals could request review of payments for
outpatient radiology services. Steps 1 and 2 instructed
hospitals to submit a request for review and described the
procedure for submitting the request, including filling an
Excel spreadsheet (the Spreadsheet) with identification
and contact information. Steps 3 through 7 described the
review process, including the methodology TRICARE
would follow to extract claims for outpatient radiology
services and the formula and calculations TRICARE
would use to determine the adjusted payments. The
hospitals were informed that TRICARE had the necessary
INGHAM REGIONAL MEDICAL CENTER v. UNITED STATES 7
information in its possession and that they should not
submit claims-level data.
Step 8 explained that the hospitals would receive a
written response (the Payment Adjustment Worksheet)
that would “provide the calculated discretionary adjusted
payment and the calculations from which the adjustment
was derived.” J.A. 100. Step 8 also stated that although
“the methodology for calculating the adjusted rate is not
subject to questions,” the hospitals could submit “ques-
tions regarding the data used in the calculations,” “ac-
companied by detailed explanation of the alleged errors
and the proposed corrections with supporting documenta-
tion.” J.A. 100.
Step 9 explained that TRICARE’s response would in-
clude “a release and agreement to accept the discretionary
adjusted payment by the hospital.” J.A. 100. The hospi-
tals would receive the payment after signing and return-
ing the release and agreement. The Release reads, in
part:
By accepting the offer of the Department of De-
fense (“DoD”) to provide a net adjustment to prior
payments of hospital outpatient radiology services
as described in the DoD’s letter dated April, 25,
2011, and in consideration of any future net ad-
justments to prior payments of hospital outpatient
radiology services made by the DoD . . . [the Hos-
pital] shall completely release, acquit, and forever
discharge the Government, TRICARE beneficiar-
ies, and any MCSCs . . . from any and all claims,
demands, actions, suits, causes of action, ap-
peals . . . that Releasor ever had, now has, or
hereafter can, shall, or may have against Re-
leasees, whether known or unknown, on account
of or arising out of or resulting from or in any way
relating to payments, reimbursements, adjust-
ments, recoupments, or any other means of com-
8 INGHAM REGIONAL MEDICAL CENTER v. UNITED STATES
pensation by Releasees made at any time for out-
patient services rendered to TRICARE beneficiar-
ies by Releasor . . . .
J.A. 112.
Each Appellant submitted a request for discretionary
payment. The government agreed “to provide a net
adjustment to prior payments of hospital outpatient
radiology services as described in the DoD’s letter dated
April, 25, 2011 . . . .” J.A. 112. In return, Ingham agreed
to release “any and all claims . . . whether known or
unknown” related to payments for TRICARE outpatient
services. Id. McLaren, Gifford and Lakewood refused to
sign the Release because they believed the proposed
payment amounts were incorrect. Therefore, they did not
receive any payments. Bay Regional Medical Center
received a response stating that it had been overpaid for
radiology services and was owed nothing.
Certain other hospitals were represented by counsel
during the discretionary payment process and contested
TRICARE’s calculations. TRICARE acknowledged that
there were errors in the calculations that it had not been
aware of, and agreed to pay the represented hospitals 77%
more than the originally offered payments for outpatient
radiology. J.A. 12. TRICARE did not recalculate the
payments for any of the hospitals that did not contest
their discretionary payment offer.
Pursuant to a Freedom of Information Act request,
Appellants received redacted versions of the Kennel
Study. Appellants allege that the Kennel Study contains
multiple errors and that if it had been done correctly, the
study would have revealed that all outpatient services
were underpaid, not only radiology. Appellants filed suit
in the Court of Federal Claims alleging that DoD had
miscalculated the payments for outpatient radiology
during the discretionary payment process and that they
had been underpaid for all outpatient services.
INGHAM REGIONAL MEDICAL CENTER v. UNITED STATES 9
The Court of Federal Claims dismissed Appellants’
case for failure to state a claim. They appeal three
claims: (1) breach of express contract between Ingham
and DoD based on the discretionary payment process;
(2) revision of Ingham’s contract based on mutual mis-
take, in light of the errors in the calculations of radiology
outpatient services and the Kennel study; and (3) viola-
tions of money-mandating statutes and regulations, 10
U.S.C. §§ 1079 and 1086 and 32 C.F.R. § 199.7(h)(2).
We have jurisdiction under 28 U.S.C. § 1295(a)(3).
II
The Court of Federal Claims found that Ingham failed
to state a claim for breach of contract after determining
that Ingham’s claim was barred by the Release. We
review de novo “[w]hether the complaint was properly
dismissed for failure to state a claim.” Gould, Inc. v.
United States, 935 F.2d 1271, 1273 (Fed. Cir. 1991). We
also review contract interpretation and statutory inter-
pretation de novo. Id.; Am. Airlines, Inc. v. United States,
551 F.3d 1294, 1299 (Fed. Cir. 2008).
The Court of Federal Claims determined that Ingham
and the agency entered into a contract that consisted of
the April 25, 2011 letter, the Notice, the FAQs, the
Spreadsheet, the Payment Adjustment Worksheet, and
the Release. J.A. 30–31. Ingham alleges that the agency
breached the contract because it failed to follow the
agreed upon methodology in calculating the payment
adjustment. The Court of Federal Claims found that
although Ingham’s allegations were sufficient to plead a
10 INGHAM REGIONAL MEDICAL CENTER v. UNITED STATES
breach of contract, 2 the Release was “sufficiently broad to
bar all of plaintiffs’ breach of contract claims.” J.A. 40.
We find that the Release does not bar Ingham’s
breach of contract claim. Absent special circumstances, “a
general release bars claims based upon events occurring
prior to the date of the release.” Augustine Med., Inc. v.
Progressive Dynamics, Inc., 194 F.3d 1367, 1373 (Fed. Cir.
1999). But here, the release the Government relies on is
in the very same contract it is accused of breaching. In
these circumstances, a release cannot bar claims for
breach of contract. In Link v. Department of Treasury, 51
F.3d 1577 (Fed. Cir. 1995), we held that the agency could
not enforce an appeal waiver in a last-chance settlement
agreement because the agency had failed to carry out its
responsibilities under the agreement. Id. at 1583–84. We
concluded that the agency’s breach of contract released
Mr. Link from his obligation not to appeal his removal.
Id. To hold otherwise would allow an agency to flout its
contractual commitments with impunity. See McCall v.
U.S. Postal Serv., 839 F.2d 664, 667 (Fed. Cir. 1988).
Similarly here, the Release cannot be enforced against
a claim for breach of the underlying contract. Ingham
asserts that DoD failed to follow the methodology for
calculating payment adjustments in the contract. Indeed,
DoD’s promise to follow the agreed upon methodology was
part of the consideration for Ingham’s agreement to the
Release in the first place. DoD cannot then use the Re-
lease to bar Ingham’s claim that DoD did not adhere to its
2 DoD concedes that “[t]he court correctly found
that appellants had pled sufficient facts to state a claim
that the Government had breached the contract . . . .”
Appellee Br. at 20. The only issue on appeal relating to
Ingham’s breach of contract claim is whether the release
in question could apply to a breach of the contract includ-
ing that same release.
INGHAM REGIONAL MEDICAL CENTER v. UNITED STATES 11
obligations under the same contract. Accordingly, the
court erred in finding that Ingham could not bring a claim
for breach of contract. 3
III
Appellants also argue that the Court of Federal
Claims improperly dismissed their money-mandating
claims for failure to state a claim.
In 2002 and 2005, DoD issued Interim and Final
Rules that adopted CMAC payment rules because it was
not practicable at that time to adopt Medicare OPPS for
hospital outpatient services. Appellants argue that
adopting CMAC caused TRICARE to underpay the hospi-
tals, and therefore, DoD violated § 1079(j), which required
TRICARE to pay providers “to the extent practicable in
accordance with the same reimbursement rules as apply
to payments to providers of services of the same type”
under Medicare.
The Court of Federal Claims concluded that because
“defendant’s obligation was to attempt to emulate OPPS,
rather than any prior Medicare reimbursement methods,”
J.A. 59, Appellants “failed to adequately plead any facts
showing that the reimbursement rates instituted by the
Interim Final and Final Rules represented an unreasona-
ble interpretation of 10 U.S.C. § 1079(j)(2),” J.A. 60.
The parties agree that the statute is ambiguous and
that Chevron deference applies. See Biodiversity Legal
Found. v. Babbitt, 146 F.3d 1249, 1253–56 (10th Cir.
1998) (applying the Chevron approach to similar statutory
language). We must defer to DoD’s construction of the
3 Ingham alternatively seeks a claim for contract
reformation based on mutual mistake. Because we re-
verse the dismissal of Ingham’s breach of contract claim,
we do not reach the issue of mutual mistake.
12 INGHAM REGIONAL MEDICAL CENTER v. UNITED STATES
statute as long as it “reflects a plausible construction of
the plain language of the statute and does not otherwise
conflict with Congress’ expressed intent.” Rust v. Sulli-
van, 500 U.S. 173, 184 (1991).
Appellants do not argue that TRICARE was required
to implement OPPS. Rather, they contend that TRICARE
was required to implement a system that was similar to
pre-OPPS Medicare reimbursement rules for hospitals.
CMAC did not satisfy this requirement because it was
only intended to reimburse individual providers, not
hospitals. Therefore, Appellants assert that DoD’s im-
plementation of CMAC rates was not a reasonable inter-
pretation of § 1079(j)(2).
We hold that Appellants failed to state a claim in this
case. Section 1079(j)(2) is money-mandating in the sense
that it directs the agency to determine payment amounts
“in accordance with the same reimbursement rules” as
Medicare to the extent practicable. During the relevant
time period, Medicare was transitioning to the OPPS
methodology. The use of that methodology was admitted-
ly impractical, and nothing in the statute compelled the
DoD to utilize the pre-OPPS Medicare approach. Con-
gress did not prescribe the types of rules that the agency
was required to use if the Medicare methodology was
impractical, so long as the choice was a reasonable one in
light of the statute. Adoption of the CMAC rates was
reasonable and not inconsistent with § 1079(j)(2). Be-
cause Appellants were paid in accordance with the rea-
sonable approach the agency adopted, they cannot state a
money-mandating claim.
Appellants also argue that their reading of the statute
is consistent with DoD’s own interpretation of its statuto-
ry obligations. For support, they point to DoD’s state-
ments that CMAC “did not approximate the Medicare fair
payment for such hospital services as well as it could
have.” J.A. 96. Appellants contend that through such
INGHAM REGIONAL MEDICAL CENTER v. UNITED STATES 13
statements and the institution of the discretionary pay-
ment process, the agency admitted that its actions did not
abide by the statute.
We disagree. DoD’s offer of discretionary payment ad-
justments does not mean it lacked the authority to im-
plement the CMAC rules. The Notice states that
TRICARE had chosen to “make some discretionary net
payment adjustments to approximate more closely Medi-
care payment methods.” J.A. 97. Nevertheless, both
actions—implementing CMAC and offering discretionary
payment adjustments—were within DoD’s discretion in
interpreting § 1079(j)(2).
Because DoD was not required to implement any spe-
cific reimbursement rules and the approach adopted was
reasonable, we affirm the trial court’s dismissal of Appel-
lants’ money-mandating claims.
IV
For the reasons set for this in this opinion, we reverse
the dismissal of Ingham’s breach of contract claim, affirm
the dismissal of Appellants’ money-mandating claim, and
do not reach the claim for mutual mistake. We remand
for further proceedings on the breach of contract claim.
AFFIRMED-IN-PART, REVERSED-IN-PART, AND
REMANDED
No costs.