Appalachian Regional Healthcare, Inc. v. Coventry Health & Life Insurance , 714 F.3d 424 ( 2013 )

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit I.O.P. 32.1(b)
File Name: 13a0118p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________
APPALACHIAN REGIONAL HEALTHCARE, INC. X
-
-
and ARH MARY BRECKINRIDGE HEALTH
SERVICES, INC., -
Plaintiffs-Appellees, -
Nos. 12-5779/5785
,
>
-
-
v.
-
-
COVENTRY HEALTH AND LIFE INSURANCE
-
-
COMPANY (12-5779); COMMONWEALTH OF
-
KENTUCKY, CABINET FOR HEALTH AND
-
FAMILY SERVICES and AUDREY HAYNES,
-
sued as, “Secretary, Cabinet for Health and
Family Services” (12-5785), -
Defendants-Appellants. N
Appeal from the United States District Court
for the Eastern District of Kentucky at Lexington.
No. 5:12-cv-00114—Karl S. Forester, District Judge.
Argued: January 17, 2013
Decided and Filed: April 24, 2013
Before: SILER, GRIFFIN, and STRANCH, Circuit Judges.
_________________
COUNSEL
ARGUED: Amy D. Cubbage, McBRAYER, McGINNIS, LESLIE & KIRKLAND,
PLLC, Lexington, Kentucky, for Appellant in 12-5779. Christina M. Heavrin,
CABINET FOR HEALTH AND FAMILY SERVICES, Frankfort, Kentucky, for
Appellants in 12-5785. Stephen R. Price, Sr., WYATT, TARRANT & COMBS,
Louisville, Kentucky, for Appellees. ON BRIEF: Amy D. Cubbage, Stephen G. Amato,
Jason S. Morgan, McBRAYER, McGINNIS, LESLIE & KIRKLAND, PLLC,
Lexington, Kentucky, for Appellant in 12-5779. David Brent Irvin, CABINET FOR
HEALTH AND FAMILY SERVICES, Frankfort, Kentucky, for Appellants in 12-5785.
Stephen R. Price, Sr., Carole D. Christian, John W. Woodard, Jr., Allison Brown
Vermilion, WYATT, TARRANT & COMBS, Louisville, Kentucky, for Appellees.
1
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_________________
OPINION
_________________
JANE B. STRANCH, Circuit Judge. This appeal arises from Kentucky’s
transition to the managed-care model of service delivery for its Medicaid program,
through which more than half-a-million indigent residents receive healthcare coverage.
Kentucky awarded Coventry Health and Life Insurance Company, a managed-care
organization, a contract to administer Medicaid services in southeastern Kentucky.
Coventry, in turn, entered into a temporary agreement with Appalachian Regional
Healthcare, the dominant hospital care provider in that area, to provide its members in-
network hospital care and other services in Appalachian’s facilities.
Soon after the transition occurred in November 2011, Coventry realized it was
losing money on its deal with the state. This was partly because Kentucky required that
Coventry’s network include Appalachian, whose patients, on average, were sicker and
more expensive to treat. Coventry also learned that not all of its competitors were
required to contract with Appalachian. Coventry pressed state policymakers to increase
its payment rates. Finding no success, it noticed termination of Appalachian’s contract,
which would have made thousands of low-income Medicaid recipients unable to access
their healthcare providers at Appalachian’s facilities without first paying (often costly)
fees.
Appalachian sued Coventry and various state defendants to prevent termination
of its contract. The district court issued a preliminary injunction that required Coventry
to keep Appalachian in its network for four months longer than the contract specified.
This order expired on November 1, 2012. The court also denied Coventry’s motion to
require Appalachian to post a security bond. Coventry and the state defendants appeal
from the injunction. Coventry alone appeals from the bond denial. Because no
recognized exception enables us to review the expired injunction, we DISMISS AS
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MOOT the parties’ appeal as to it. And because the district court did not abuse its
discretion in denying bond, we AFFIRM that order.
I. BACKGROUND
For many years, Kentucky provided medical care to its poorest citizens through
Medicaid, a cooperative federal-state funding program, using a traditional fee-for-service
model. See generally 42 U.S.C. § 1396-1. Under it, a state is directly responsible for
paying providers for services that Medicaid beneficiaries receive according to a fee
schedule the state sets. See id. § 1396a(a)(30)(A). But in November 2011—in response
to ballooning Medicaid costs and resulting pressures on the state’s budget—Kentucky
decided to scuttle its fee-for-service plan and transitioned to a managed-care program.
The theory of managed care is relatively simple. Rather than pay providers
directly every time a Medicaid beneficiary receives care, the state instead contracts with
managed-care organizations (MCOs) and pays them a flat “capitation rate” each month
to provide, within certain limits, all of the care a beneficiary needs. The state pays the
same amount regardless of whether the beneficiary receives healthcare services or not.
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.
In exchange for receiving a capitation payment, an MCO is responsible for three
principal tasks: enrolling Medicaid beneficiaries as members; forming a contracted
network of healthcare providers to care for its members; and paying providers for their
services. An MCO then directs its members to in-network providers, with whom the
MCO has negotiated discounted rates. When members go out-of-network, they receive
only limited benefits and may pay more for services.
Echoing managed care’s many proponents, Kentucky decided that injecting
market-based principles into the Medicaid payment model would improve healthcare
access and quality by eliminating unnecessary care, enhancing coordination among
providers, emphasizing preventative care, and promoting healthy lifestyles. Kentucky
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also assumed it would save the state money. But see Michael Sparer, Medicaid managed
care: Costs, access, and quality of care, Robert Wood Johnson Foundation
(Sept. 2012), http://www.rwjf.org/content/dam/farm/reports/reports/2012/rwjf401106
(examining peer-reviewed academic literature on the effects of Medicaid managed care
and finding lower-than-expected fiscal savings, a mixed impact on access to care, and
scant evidence of quality-of-care improvements) (last visited April 23, 2013).
Kentucky obtained permission in September 2011 from the Centers for Medicare
and Medicaid Services (CMS), the federal agency that administers the Medicaid
program, see 42 U.S.C. § 1316(a)(1), to transition to managed care. To implement the
plan, the Cabinet contracted with three MCOs—Coventry, Kentucky Spirit, and
Wellcare—to administer Medicaid benefits to more than 560,000 Kentuckians. The
MCOs were to operate in seven of eight Medicaid regions into which the state is
subdivided. The Medicaid region involved in this case, Region 8, consists of nineteen
counties in eastern and southeastern Kentucky that are among the most
economically depressed, underserved, and medically needy in the Commonwealth.
(They include Bell, Breathitt, Clay, Floyd, Harlan, Johnson, Knott, Knox, Laurel, Lee,
Leslie, Letcher, Magoffin, Martin, Owsley, Perry, Pike, Whitley, and Wolfe counties.)
During the initial implementation phase in November 2011, the Cabinet assigned
each Medicaid beneficiary to one of the three contracted MCOs. See 907 Ky. Admin.
Regs. 17:010 § 1(5). Beneficiaries could change their assigned MCO, but only during
the first 90 days after they were assigned or annually during an open-enrollment period.
Id. § 1(12)(a). Outside of these times, however, a beneficiary could only switch MCOs
“for cause.” This would occur, for example, if a beneficiary lacked access to covered
services or qualified providers. Id. § 7(7)(g). The timeliness of a “for cause” transfer
to another MCO was not guaranteed, though, as the process could take more than 60
days. Id. § 2(6)(a).
A raft of federal and state statutes and regulations, as well as the terms of each
MCO’s agreement with the Cabinet, create reciprocal obligations between MCOs, the
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Cabinet, and the federal government. Two are relevant here. The first are the so-called
network-adequacy requirements, which 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. Network-adequacy requirements are found in federal and
state law. See, e.g., 42 C.F.R. § 438.206(b)(1)(v); 907 Ky. Admin. Regs. 17:015
§§ 2(3)(a), (7). Kentucky’s contract with Coventry incorporates several of these
network-adequacy requirements. And it also requires Coventry to “strictly adhere to all
applicable federal and Commonwealth law (statutory and case law), regulations and
standards.” The second obligation relevant in this case requires providers to be paid on
a timely basis for claims submitted to MCOs. See, e.g., 42 U.S.C. § 1396n(b)(4); Ky.
Rev. Stat. § 304.17A-702. Like the network-adequacy requirements, the prompt-pay
requirements also are incorporated into Kentucky’s MCO contracts.
The Cabinet entered into an MCO agreement with Coventry in July 2011.
Among other things, the agreement required Coventry to establish a provider network
to deliver healthcare services to approximately 64,000 beneficiaries in Region 8. To
build its network, Coventry contracted with Appalachian, which provided healthcare to
an estimated 25,000 beneficiaries in that region. Coventry and Appalachian entered into
a temporary agreement that allowed Coventry’s members there to receive care at
Appalachian’s facilities while the two parties negotiated a more complete contract. The
temporary agreement was set to expire on June 30, 2012, but allowed the parties to
continue it beyond that date or terminate it on 30 days’ notice.
The temporary agreement included three provisions pertinent to this appeal. The
first required Appalachian and Coventry to “recognize and abide by all applicable
Commonwealth and federal laws, regulations and guidelines,” which the agreement
“incorporate[d] by reference.” The second relevant provision mirrored the statutory
prompt-pay requirements described above and obligated Coventry to pay claims within
30 days of receipt. And the third was a continuation-of-benefits clause that protected
certain Coventry members from interruptions in their healthcare in the event the
agreement was terminated. This clause required Appalachian to continue providing
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services to Coventry members who were hospitalized or receiving treatment when the
agreement was terminated, and women who were four or more months pregnant.
The temporary agreement went into effect on November 1, 2011. Coventry and
Appalachian ultimately failed to negotiate a full contract. On March 29, 2012—less than
five months after the managed-care transition occurred, but long after the initial 90-day
period during which Coventry members could switch to another MCO without
cause—Coventry notified Appalachian that it intended to terminate the temporary
agreement on May 4, 2012.
The parties’ inability to come to an agreement was not simply a matter of
hardened bargaining positions. As Coventry explained, the dispute was a by-product of
the company’s mounting troubles with Kentucky, which centered on Coventry’s belief
that the Cabinet was playing favorites with Kentucky Spirit, a competitor MCO.
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.
Coventry was not pleased when it learned of this. The reason for its discontent
was that Appalachian’s Medicaid patients were sicker than other Medicaid patients in
Region 8, which meant they cost more to care for. Having Appalachian in its network
caused Coventry to lose money, as the capitation rate it negotiated with Kentucky was
insufficient to cover the costs of these members’ care. And it 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.
Coventry importuned policymakers to fix the problem. In a letter to Kentucky
Governor Steven L. Beshear written on April 10, 2012, Coventry complained that the
Cabinet’s unequal treatment of MCOs created an “uneven playing field,” resulting in “an
unprecedented shift of higher-risk members to Coventry” that allowed Kentucky Spirit
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to “game the system” for “an unfair advantage.” Coventry warned that “the continued
viability of the Medicaid managed care program is at stake.”
When the time came to negotiate with Appalachian, Coventry did not hesitate to
lay its dispute with the Commonwealth at Appalachian’s feet. Kentucky’s “failure to
ensure that all MCOs meet the same robust standards for network adequacy,” Coventry
told Appalachian, “is at the heart of [Appalachian’s] problem.” Coventry’s stratagem
was to put Appalachian in the middle of its fight with the Cabinet to pressure
policymakers to solve Coventry’s financial problems.
Appalachian sued Coventry, the Cabinet, and the Secretary on April 16, 2012,
alleging numerous claims, including state-law contract and tort claims, and violations
of state and federal prompt-pay laws and network-adequacy requirements. Days later,
Coventry reiterated that it would “not contract with [Appalachian] until we can get the
Commonwealth to do the right thing.” Coventry threatened that the lawsuit would be
“an enormous drain for Appalachian.”
On May 1, 2012, Appalachian moved to enjoin Coventry from terminating the
temporary agreement. It asked the court to order Coventry to maintain Appalachian
facilities in its network or to preauthorize its members to receive out-of-network
treatment in them, and to direct Coventry to comply with its contractual prompt-pay
obligations. Appalachian argued that Coventry’s termination of the agreement was
impermissible because it left Coventry with an inadequate provider network under state
and federal law, which in turn breached the agreement’s requirement that both parties
comply with those laws. Appalachian also charged that Coventry was in violation of the
agreement’s continuation-of-benefits provision because it refused to preauthorize
services for pregnant Appalachian patients that the provision protected.
The court held a day-long evidentiary hearing on the preliminary injunction
that focused on the adequacy of Coventry’s network without Appalachian. On June 20,
2012, it issued a lengthy order granting in part Appalachian’s motion. Critical to this
appeal, the court concluded that Appalachian showed a likelihood of success on its
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breach-of-contract claim due to Coventry’s alleged breaches of network-adequacy
requirements incorporated into the agreement, the agreement’s prompt-pay requirements,
and its continuation-of-benefits provision.
Without the injunction, the court worried, Medicaid beneficiaries in Region 8
would “be cut off from their life-long physicians and hospitals” and have no opportunity
to learn about the choices they had to receive care after the agreement terminated. So
the injunction did two things. It extended the temporary agreement to November 1,
2012, so beneficiaries could switch to a new MCO without cause during the open
enrollment period. And it directed Coventry to furnish Appalachian a list of certain
Coventry members so Appalachian could explain to those individuals how to continue
to receive care in Appalachian facilities after the agreement expired.
As the district court made no provision for bond in granting the injunction,
Coventry moved to require one pursuant to Federal Rule of Civil Procedure 65(c). After
Coventry and Appalachian briefed the matter, the court denied the motion. It reasoned
that the injunction would result in “little, if any” harm to Coventry because Coventry had
voluntarily agreed during the injunction proceedings to maintain Appalachian as a
preauthorized, out-of-network provider through November 1, 2012, and to pay
Appalachian the rates spelled out in the temporary agreement for services provided
under its continuation-of-care clause.
Coventry now appeals from both the preliminary injunction and the motion
denying bond. The Cabinet contests only the injunction.
II. ANALYSIS
A. Mootness
“The case or controversy requirement in Article III of the Constitution
determines the power of the federal courts to entertain a suit[.]” ACLU v. Nat’l Sec.
Agency, 493 F.3d 644, 688 (6th Cir. 2007) (Gibbons, J., concurring). “We have no
power to adjudicate disputes which are moot.” McPherson v. Mich. High Sch. Athletic
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Ass’n, Inc., 119 F.3d 453, 458 (6th Cir. 1997) (en banc) (internal quotation marks
omitted). A case is moot “when the issues presented are no longer live or the parties
lack a legally cognizable interest in the outcome.” Hodges v. Schlinkert Sports Assocs.,
Inc., 89 F.3d 310, 312 (6th Cir. 1996) (internal quotation marks omitted). When an
injunction order expires, there generally is nothing for an appellate court to review.
Because the preliminary injunction here expired by its terms on November 1,
2012, a challenge to its issuance is moot unless a recognized exception applies. In
response to our request for supplemental briefing on the question of mootness (which the
parties did not initially address), the state defendants concede that their appeal is moot.
Coventry, however, seeks shelter under the exception that permits courts to hear moot
cases involving injuries that are “capable of repetition, yet evad[e] review.” See
Weinstein v. Bradford, 423 U.S. 147, 149 (1975) (per curiam). To fit within the
exception, a challenged action must satisfy two requirements. See Sandison v. Mich.
High Sch. Athletic Ass’n, Inc., 64 F.3d 1026, 1030 (6th Cir. 1995). First, it must be too
short in duration to be fully litigated before it ceases. Id. Second, there must be a
reasonable expectation that the same parties will be subjected to the same action again.
Id.The action challenged here is a court order that required Coventry to maintain
a contractual relationship with Appalachian for four months longer than Coventry had
agreed. Whether this duration meets the first prong of the exception is irrelevant
because Coventry cannot satisfy the second one. Coventry argues that it reasonably
expects to be forced into unnegotiated contractual relationships with other hospitals in
the future because the injunction Appalachian obtained has encouraged other dissatisfied
providers with which Coventry contracts to consider similar legal tactics to gain
negotiating leverage against Coventry. Indeed, the district court recently granted one
hospital’s motion to intervene in Appalachian’s case against Coventry. By Coventry’s
lights, this portends that others will follow suit and that the district court will issue
further injunctions.
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But Coventry’s argument fails because our precedents require Coventry to show
that Appalachian—not just any other healthcare provider—will subject Coventry to the
same objectionable action. See Chirco v. Gateway Oaks, LLC, 384 F.3d 307, 309 (6th
Cir. 2004) (“When the suit involves two private parties . . . the complaining party must
show a reasonable expectation that he would again be subjected to the same action by
the same defendant.”). But see Libertarian Party of Ohio v. Blackwell, 462 F.3d 579,
600 (6th Cir. 2006) (describing an exception to the “same party” requirement in the
election-law context). Because Coventry and Appalachian no longer have a contract, no
realistic possibility exists that a court will again enjoin Coventry from breaching its
contract with Appalachian. Coventry is not required to contract with Appalachian, so
the acrimonious dealings that led this appeal are not likely to be repeated.
Further, Coventry has not shown that a court is likely to grant other hospitals’
requests to enjoin Coventry’s termination of their provider agreements. Nor has it
explained why the circumstances animating the injunction here—extending the
contract’s duration to line up its expiration with the window during which Medicaid
beneficiaries can easily transfer to another MCO—will present again. Another
provider’s intervention in Appalachian’s suit is a far cry from an unlawful injunction.
“Should this court be confronted with repeated controversies of this nature . . . it could
determine that the dispute truly was capable of repetition, yet evading review.”
McIntyre v. Levy, No. 06-5989, 2007 WL 7007938, at *1 (6th Cir. Aug. 1, 2007) (order)
(internal quotation marks omitted). As it stands, Coventry’s augury isn’t enough.
In sum, the exception to mootness that enables parties to challenge actions that
are capable of repetition but evade review does not apply here. The expired injunction
the parties’ appeal is moot, which takes away our power to evaluate it.
B. Motion for bond
Coventry also appeals the district court’s denial of its motion for bond. A district
court abuses its discretion in setting a bond amount when it applies the wrong legal
standard, applies the right standard incorrectly, or relies on clearly erroneous factual
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findings. USACO Coal Co. v. Carbomin Energy, Inc., 689 F.2d 94, 100 (6th Cir. 1982);
Paschal v. Flagstar Bank, 297 F.3d 431, 434 (6th Cir. 2002).
A court may issue a preliminary injunction “only if the movant gives security in
an amount that the court considers proper to pay the costs and damages sustained by any
party found to have been wrongfully enjoined.” Fed. R. Civ. P. 65(c). While this
language appears to be mandatory, “the rule in our circuit has long been that the district
court possesses discretion over whether to require the posting of security.” Moltan Co.
v. Eagle-Picher Indus., Inc., 55 F.3d 1171, 1176 (6th Cir. 1995) (citing Roth v. Bank of
the Commonwealth, 583 F.2d 527, 539 (6th Cir. 1978)) (emphasis added). A court errs
when it “fail[s] to . . . expressly consider[] the question of requiring a bond” when the
issue has been raised. Roth, 583 F.2d at 539; accord NACCO Materials Handling Grp.,
Inc. v. Toyota Materials Handling USA, Inc., 246 F. App’x 929, 953 (6th Cir. 2007).
Otherwise, it has “broad discretion in setting the bond amount.” Static Control
Components, Inc. v. Lexmark Int’l, Inc., 697 F.3d 387, 400 (6th Cir. 2012).
There is little doubt that the district court here considered Coventry’s bond
request. Coventry asked the court to require Appalachian to post bond two days after
the injunction issued, Appalachian opposed the motion, and the court issued a two-page
denial. The court reasoned that,
based on the record as well as the evidence and argument presented at the
preliminary injunction hearing on June 12, 2012, the Court has
previously determined that Coventry will suffer “little, if any” harm as
a result of the injunction due to the fact that the preliminary injunction
simply requires Coventry to maintain the contractual obligation it
voluntarily entered into.
Undoubtedly, the court below considered the bond issue. The real issue is whether the
court below relied on erroneous factual findings—and so abused its discretion—when
it concluded that Coventry was unlikely to suffer harm from the injunction because that
order merely memorialized an obligation Coventry had already made. The court was
wrong to characterize the injunction in this way, as that order clearly required Coventry
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to do more than what it had agreed to voluntarily. Given the circumstances, though, this
was not reversible error.
The preliminary injunction required Coventry to “maintain the status quo until
November 1, 2012, including paying [Appalachian] in-network rates,” which the
temporary agreement set at 100% of Kentucky’s Medicaid fee schedule for most
services. Absent the injunction, Coventry would pay claims at the in-network rate only
until June 30, 2012. After that, Coventry says, it would pay Appalachian as an out-of-
network provider at 90% of the fee schedule. The bottom line for Coventry is that the
injunction required it to pay more in claims that it otherwise would have from June 30,
2012, to November 1, 2012.
We might be inclined to agree with Coventry’s position if it were a practical
certainty that Coventry would pay the lower rate during this four-month period. But it
is not. Coventry certainly offered to pay the lower rate when it unsuccessfully
negotiated with Appalachian over a full agreement. The trouble is that Appalachian
never accepted this offer, nor did it have to.
To the contrary, Appalachian submitted that without a contract, it should be paid
on a quantum meruit basis for the reasonable value of its services. It forecasts that this
will be greater than its current contract rates with Coventry, which do not cover the costs
of Appalachian’s services. See, e.g., Cherry v. Augustus, 245 S.W.3d 766, 779 (Ky.
App. 2006) (describing quantum meruit as “an equitable doctrine granting one who has
rendered services in a quasi-contractual relationship the reasonable value of services
rendered” (internal quotation marks omitted)). Indeed, from the start of this litigation,
Appalachian has sought a declaration from the court that it was entitled to recover the
reasonable value of its services. And though the district court recently ruled that
Appalachian is entitled to be compensated for the reasonable value of its services, it has
not yet determined what that value might be.
Against this backdrop—with Appalachian’s claim to a higher rate than it
received under the temporary agreement still undecided, and with Coventry showing
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only that the lower rate was a rejected offer—the district court did not rely on clearly
erroneous factual findings in denying Coventry’s bond motion. Coventry’s assertion that
it would pay less is speculative at best.
The content of Coventry’s bond request supports this conclusion. Although no
rule formally requires it, a party seeking a security bond regularly estimates the damages
it will suffer if it complies with a preliminary injunction. This serves three purposes.
It gives the party seeking the injunction a sense of its liability if the injunction is later
found to have been unlawful. It provides the court with a basis to set the proper amount
(though not necessarily a definitive one). And it furnishes an appellate court with a
marker against which to review the district court’s determination (though, again, not
necessarily an exclusive one).
Here, Coventry could have estimated the costs of complying with the injunction
by, for example, totaling up the difference between in-network rates and out-of-network
rates for services Appalachian provided to Coventry’s members over a prior four-month
period. Instead, the proposed order for bond that Coventry submitted to the district court
featured a blank line in place of a dollar amount. Presented with no estimate of
Coventry’s potential damages to rebut Appalachian’s argument that it was entitled to
more money during this period, the court concluded that “little, if any” harm was shown,
and denied the bond motion. Given these circumstances, the district court did not abuse
its discretion.
III. CONCLUSION
For these reasons, we DISMISS AS MOOT the parties’ appeal of the
preliminary injunction order and AFFIRM the district court’s denial of Coventry’s bond
motion.