Affirmed and Opinion filed
December 28, 2004. In
The Fourteenth Court
of Appeals ____________ NO. 14-03-01281-CV ____________ V. AETNA, INC.
AND AETNA HEALTH, INC.,
Appellees On
Appeal from the 157th District
Court Harris County,
Texas Trial
Court Cause No. 02-39946 O P I N I
O N Appellants,
Christus Health Gulf Coast, Christus Health Southeast Texas, Gulf Coast
Division, Inc., Memorial Hermann Hospital System, and Baptist Hospitals of
Southeast Texas (collectively “the Hospitals”), sued appellees, Aetna,
Inc. and Aetna Health, Inc. (collectively “Aetna”), for breach of
contract, quantum meruit, breach of fiduciary duty, and to collect on
accounts arising from Aetna’s failure to pay the Hospitals for health care
services they provided to Medicare patients enrolled in an Aetna health
maintenance organization (“HMO”).
Aetna moved to dismiss for lack of subject matter jurisdiction,
arguing that the Hospitals failed to exhaust federal administrative
remedies provided under the Medicare program. The trial court agreed and
dismissed for lack of jurisdiction.
In three issues, the Hospitals claim the trial court erred in
granting Aetna’s motion to dismiss.
Because we find that the Hospitals were required to first exhaust
administrative remedies, we affirm.
I. The Medicare
Program Title
XVIII of the Social Security Act, 42 U.S.C. §§ 1395–1395ggg (2000),
commonly known as the Medicare program, is administered by the Department
of Health and Human Services (“HHS”). The Medicare program traditionally
consisted of two parts. Part
A provides insurance against the cost of institutional health services,
such as hospitals and nursing homes.
Part B provides, for a monthly premium, supplemental benefits for
additional medical needs, such as physician services and laboratory
tests. See Schweiker v.
McClure, 456 U.S. 188, 189–90 (1982) (describing Medicare Parts A and
B).
In 1997,
Congress amended the statute and added a new Part C called the
Medicare+Choice or “M+C” program.
Medicare Program; Medicare+Choice Program, Final Rule with Comment
Period, 65 Fed. Reg. 40170, 40171 (June 29, 2000). Congress created the M+C program
to “allow beneficiaries to have access to a wide array of private health
plan choices” in addition to traditional Medicare and to “enable the
Medicare program to utilize innovations that have helped the private
market contain costs and expand health care delivery options.” H.R. Conf. Rep. No. 105-217, at
585 (1997), reprinted in 1997 U.S.C.C.A.N. 205–06. To accomplish these goals, the
Health Care Financing Administration (“HCFA”), now called the Centers for
Medicare and Medicaid Services, contracts with HMOs and other private
firms to provide health care to Medicare patients who choose coverage
under Part C as opposed to the traditional route of Parts A and B. Medicare+Choice Program, 65 Fed.
Reg. at 40172. The entity
that contracts with the HCFA is called an M+C organization. M+C organizations may then
contract with providers to provide health care services to their Medicare
enrollees under the terms and conditions negotiated in the contract. Such providers are contract
providers. Medicare patients
may also seek health care services from providers with no contractual
relationship with an M+C organization. These are noncontract
providers. II. Factual
Background NYLCare 65
is an HMO owned by Aetna, and NYLCare 65 became an M+C organization by
virtue of a contract with the HCFA.[1] Aetna then contracted with North
America Medical Management (“NAMM”) to administer this health care
program. Aetna paid NAMM a
monthly capitation payment,[2]
and NAMM agreed to be responsible for paying claims from health care
providers for services to M+C patients. NAMM then contracted with various
health care providers to offer these services. Each of the Hospitals had such a
contract with NAMM. NAMM
became insolvent and never responded to approximately 6,000 claims from
the Hospitals totaling over $13 million. The Hospitals then demanded that
Aetna pay the claims on the theory that Aetna was statutorily liable to
pay for the health care services provided to its patients, despite having
contracted with NAMM to perform that service. Aetna refused to
pay. The
Hospitals sued Aetna for breach of contract, quantum meruit, breach of
fiduciary duty, and to collect on accounts. The trial court granted Aetna’s
motion to dismiss for lack of subject matter jurisdiction because the
Hospitals did not first pursue their claims through the administrative
process established under the Medicare program. The Hospitals claim this was error
because, for a variety of reasons, this administrative process does not
apply to them. III. Analysis A. The Hospitals’ claims arise under
the Medicare Act. Courts
have subject matter jurisdiction to review claims “arising under” the
Medicare Act only after the claimant unsuccessfully seeks payment and then
exhausts the administrative remedies provided under the Act. See Heckler v. Ringer, 466
U.S. 602, 614–15 (1984). A
claim arises under the Medicare Act if “both the standing and the
substantive basis for the presentation” of the legal claim is the Act
or if it is “inextricably intertwined” with a claim for
benefits. See id. at
614–15, 624. In applying this
standard, it does not matter how a claim is characterized. If, “at bottom,” the plaintiff
seeks Medicare benefits, the claim arises under the Act and must go
through the administrative process.
Id. at 614. The
Supreme Court has instructed that the term “arising under” be construed
“quite broadly.” Id.
at 615. This promotes the
important policy considerations of avoiding premature interference with
agency processes and uniformity and consistency in administration of the
Medicare program. See
Weinberger v. Salfi, 422 U.S. 749, 765 (1975) (“Exhaustion is
generally required as a matter of preventing premature interference with
agency processes, so that the agency may function efficiently and so that
it may have an opportunity to correct its own errors, to afford the
parties and the courts the benefit of its experience and expertise, and to
compile a record which is adequate for judicial review.”); Maximum Home
Health Care, Inc. v. Shalala, 272 F.3d 318, 321 (6th Cir. 2001) (“The
purpose of a regulatory scheme such as Medicare is to provide uniform
rules by which all participants may be treated equally.”); Friedrich v.
Sec’y of Health & Human Servs., 894 F.2d 829, 837 (6th Cir. 1990)
(“National standards are essential if there is to be uniformity and
equality in the administration of Medicare.”). Such
uniformity is crucial on decisions regarding Medicare coverage so that a
Medicare patient’s right to health care services does not vary from state
to state. Thus, all coverage
decisions must go through the administrative procedures of the Medicare
program. See 42 C.F.R.
§ 422.402(b)(3) (2003) (stating that the Medicare Act preempts all state
law coverage determinations); Medicare+Choice Program, 65 Fed. Reg. at
40261 (explaining that state courts are preempted from deciding any claim
“in which the legal issue before the court is . . . whether services are
covered under the terms of an M+C contract”); Medicare Program;
Establishment of the Medicare+Choice Program, Interim Final Rule with
Comment Period, 63 Fed. Reg. 34968, 35013 (June 26, 1998) (noting that the
Medicare appeals process is the exclusive remedy for any dispute over
whether a service is covered under a Medicare contract).[3] For these important policy
reasons, we resolve any doubts in favor of requiring claims to first
proceed through the administrative process. See New York v. Lutheran Ctr.
for the Aging, Inc., 957 F. Supp. 393, 397 (E.D.N.Y. 1997) (holding
that “regardless of whether the services at issue are ultimately
determined to be covered by Medicare, they still must be litigated through
the administrative process”). We hold
that the Hospitals’ claims arise under the Medicare Act. Though their claims are
characterized under state law, such as for breach of contract, they are
“inextricably intertwined” with a claim for benefits because, “at bottom,”
they are seeking payment for services provided to Medicare patients. Heckler, 466 U.S. at
614. As such, the Hospitals
were required to first exhaust the administrative process. See id. Though Heckler was decided
under Parts A and B of Medicare, at least three other courts have applied
this same analysis to claims under Part C, including one involving NAMM,
the very same intermediary in this case. See In re Heritage Southwest
Med. Group, P.A., 309 B.R. 916 (Bankr. N.D. Tex. 2004); Foley v.
Southwest Tex. HMO, Inc., 226 F. Supp. 2d 886 (E.D. Tex. 2002);
Lifecare Hosps., Inc. v. Ochsner Health Plan, Inc., 139 F. Supp. 2d
768 (W.D. La. 2001). We agree
with their analysis of this issue and conclude that the trial court did
not have subject matter jurisdiction over the Hospitals’
claims. B. The Hospitals are not excused from
exhausting administrative remedies. The
Hospitals argue that, for a variety of reasons, the administrative process
does not apply to them and their claims. A detailed description of the
administrative process is necessary to put the Hospitals’ arguments in
context.
1. The administrative
process The
Medicare program contains two separate administrative procedures that are
relevant in this case: one
for pure payment disputes and one for appealing “organization
determinations” from the M+C organization. When
processing payment claims from noncontract providers—that is, providers
with no contractual relationship with an M+C organization—an M+C
organization must provide “prompt payment.” 42 U.S.C. § 1395w-27(f)(1); 42
C.F.R. § 422.520(a) (2003).
The standard for assessing whether payment is prompt is set forth
in federal regulations.
See 42 C.F.R. § 422.520(a). When a payment dispute occurs, the
provider can seek relief from the HCFA. If, after notice and an
opportunity for a hearing, the HCFA determines an M+C organization has
failed to make prompt payment, it can provide direct payment of the claim
and then reduce the payments the HCFA makes to the M+C organization
pursuant to their contract.
42 U.S.C. § 1395w-27(f)(2); 42 C.F.R. § 422.520(c) (2003). This administrative procedure is
not available for pure payment disputes between an M+C organization and a
contract provider because although the contract between the M+C
organization and the provider must contain a prompt payment provision, the
content of that provision is determined by the contract and is therefore a
matter of state law.
See 42 C.F.R. § 422.520(b)
(2003). Procedures
for M+C organizations to determine whether a Medicare patient is entitled
to receive a service and the amount, if any, the patient is required to
pay are called “organization determinations.” 42 U.S.C. § 1395w-22(g)(1)(A); 42
C.F.R. § 422.566(a), (b) (2003).[4] Disputes over organization
determinations are governed by a different and more elaborate
administrative procedure.
Patients can request a reconsideration of an adverse organization
determination and can then appeal through several steps, concluding with
judicial review in federal court in some cases. 42 U.S.C. § 1395w-22(g)(2)–(5); 42
C.F.R. §§ 422.578–.626 (2003).
Though this process is obviously designed to protect patients’
rights regarding decisions such as coverage, providers can have an
interest as well. As such,
providers can request an organization determination and, in some
circumstances, are parties to the organization determination with full
rights of appeal. See
42 C.F.R. §§ 422.574(b), (d), 422.578–.626 (2003).[5] 2. The Hospitals must exhaust
administrative remedies. The
Hospitals argue that they are not required to resort to the administrative
process because (1) the administrative process applies only to patients
and not providers, (2) this is not a coverage dispute, and (3) no
organization determination was made to invoke the administrative
process. We disagree with
each of these arguments. The
Hospitals’ claim that the administrative process does not apply to
providers is belied by the plain language of the statute and
regulations. As discussed
above, noncontract providers can complain to the HCFA about pure payment
disputes. In the organization
determination appeals process, providers may request an organization
determination, and providers who are assignees of the patient or otherwise
have an appealable interest are parties and may appeal an adverse
organization determination.
See 42 C.F.R. §§ 422.566(c), 422.574(b), (d) (2003); see
also Establishment of the Medicare+Choice Program, 63 Fed. Reg. at
35026 (stating the provision allowing any other provider with an
appealable interest to be a party is intended to be broad).[6] Though the interests of patients
is the primary focus of this administrative process, providers have
subsidiary interests (such as in being able to provide services and in
being paid for them) that are clearly contemplated and specifically
provided for in this process.
Thus, a contract provider in a payment dispute with an M+C
organization has an administrative remedy if that dispute is in
conjunction with a patient-focused dispute such as coverage. Three other courts considering
Medicare+Choice provider payment disputes have also required the providers
to exhaust administrative remedies.
See Heritage, 309 B.R. at 919–20; Foley, 226 F. Supp.
2d at 903–07; Lifecare, 139 F. Supp. 2d at 770–72; see also Sono
Tech Enters., Inc. v. New Orleans Reg’l Physician Hosp., No. Civ.A.
04-2024, 2004 WL 2115609, at *3–4 (E.D. La. Sept. 13, 2004) (concluding
that provider claim against M+C organization was properly removed to
federal court because it arises under the Medicare
Act). The
Hospitals also contend that this is not a coverage dispute but is merely a
prompt payment dispute and therefore, as contract providers, they have no
administrative remedies to exhaust.
The Medicare Act mandates that providers supplying services
pursuant to a contract with an M+C organization cover at least all
services covered under Medicare Parts A and B. 42 C.F.R. § 422.100(a), (c)
(2003). The Texas statute
that provides the substance of Aetna’s prompt payment obligation in this
case states that an HMO that violates its prompt payment obligations is
liable “for the full amount of billed charges . . . , less . . . any
charge for a service that is not covered by the health care plan.”[7] Thus, even if Aetna violated its
prompt payment obligation, according to the plain wording of the statute,
it may still assert a defense to payment if the services are not
covered.[8] If coverage issues are even
possible, for the important policy reasons promoted by the administrative
process and ensuring uniformity of Medicare coverage, the dispute must go
through the administrative process.
See Weinberger, 422 U.S. at 765; Maximum Home Health
Care, 272 F.3d at 321; Friedrich, 894 F.2d at 837; Lutheran
Ctr. for the Aging, 957 F. Supp. at
397. In a
related argument, the Hospitals assert that since the administrative
process is designed for coverage-type issues, other matters, such as
contract interpretation, are beyond the HCFA’s expertise, and therefore
exhaustion would be futile.
Even if some of their claims are not within the typical scope of
the HCFA’s review, the agency must first be allowed to consider those
issues on which is has expertise before judicial review; otherwise, the
exhaustion process would be undermined. See Kaiser v. Blue Cross of
Cal., 347 F.3d 1107, 1115 & n.4 (9th Cir. 2003); see also
Lifecare, 139 F. Supp. 2d at 773 (“While it is clear that Lifecare
would prefer an immediate appeal to the district court rather than the
often lengthy administrative review process, in light of the fact that
Lifecare may, in fact, seek judicial review after pursuing its
administrative remedies, the court holds that it would not be an exercise
in futility for Lifecare to comply with the Medicare Act’s exhaustion
requirements.”). Finally,
the Hospitals claim that no organization determination occurred, which is
a necessary precursor of invoking the procedure for challenging an adverse
organization determination.
They contend that NAMM never processed the claims and that
nonpayment by default is not an organization determination. Even if NAMM did not make an
organization determination by failing to pay the Hospitals’ claims,[9]
Aetna clearly made one when it refused the Hospitals’ subsequent demand of
payment for services provided to Medicare patients. See Heritage, 309
B.R. at 920; Lifecare, 139 F. Supp. 2d at 772–73; 42 C.F.R. §
422.566(b)(2), (3). The
Hospitals point to two authorities they claim support their argument that
its dispute with Aetna is not subject to the administrative process. First, four of the five Hospitals
submitted a letter to the HCFA requesting that the agency intervene and
hold Aetna liable on the claims NAMM failed to pay. The agency’s response stated that
“[t]his type of contract dispute between parties is an issue for the state
judiciary to decide” because the regulations “do not . . . contemplate
Federal intervention in provider payment disputes involving contracted M+C
providers that voluntarily enter into contracts with M+C
organizations.” That response
is accurate if the parties’ dispute is solely a prompt payment issue. See 42 U.S.C. §
1395w-27(f); 42 C.F.R. § 422.520.
However, the HCFA, who did not have the benefit of Aetna’s
perspective on the dispute, apparently did not consider the potential
coverage issues, which we have concluded must be resolved through the
portion of the administrative process governing organization
determinations. Further, the
Hospitals did not request the HCFA’s opinion regarding exhaustion of
administrative remedies, and the HCFA never mentioned the issue in its
responding letter. In any
event, we are not bound by an informal, ex parte letter from an
agency. See Lifecare,
139 F. Supp. 2d at 772–73.
Second,
the Hospitals rely on a sentence from an HCFA manual that says “contracted
providers do not have appeal rights.” Medicare Managed Care Manual, ch.
13, § 70.1, available at http://www.cms.hhs.gov/manuals/. This blanket statement that
contract providers have no right of appeal is in direct conflict with the
regulations. Though the
administrative procedure for pure payment disputes is not available to
contract providers, the regulation defining parties to an organization
determination, who by definition have appeal rights, contains no such
limitation on a provider’s rights, and the manual makes no attempt to
explain its position.
Compare 42 C.F.R. § 422.520, with 42 C.F.R. §
422.574. If an agency manual
conflicts with regulations, the regulations control. See Cent. Laborers’ Pension
Fund v. Heinz, 124 S. Ct. 2230, 2238 (2004) (“[N]either an unreasoned
statement in the manual nor allegedly longstanding agency practice can
trump a formal regulation with the procedural history necessary to take on
the force of law.”). The
Hospitals’ claims “arise under” the Medicare Act, which means the
Hospitals must exhaust administrative remedies before litigating their
claims in court. The
Hospitals were not excused from exhausting the administrative process, and
their failure to do so deprived the trial court of subject matter
jurisdiction. Therefore, we
affirm the judgment of the trial court dismissing this action for lack of
jurisdiction. /s/ Leslie
Brock Yates Justice Judgment
rendered and Opinion filed December 28, 2004. Panel
consists of Justices Yates, Anderson, and
Hudson. [1] None
of the contracts involved in this case are part of the record on appeal,
and the parties are not clear whether Aetna itself or NYLCare 65
contracted with the HCFA. As
it does not affect our analysis, for ease of reference, we will assume
Aetna is the contracting party.
We will refer to Aetna as the M+C organization and will not refer
to NYLCare 65 as a separate entity but included in the term
“Aetna.” [2] A
capitation payment is “a fixed per enrollee per month amount paid for
contracted services without regard to the type, cost, or frequency of
services furnished.” 42
C.F.R. § 422.350(b) (2003). [3] The
Hospitals claim that Aetna must also prove that federal law preempts their
claims before they can be required to exhaust administrative
remedies. The Hospitals cite
no authority for this proposition.
Preemption and subject matter jurisdiction are distinct
inquiries. See Baker v.
IBP, Inc., 357 F.3d 685, 688 (7th Cir. 2004) (“[P]reemption is a
defense and thus does not affect subject-matter jurisdiction.”). Because we have determined that
the Hospitals’ failure to exhaust administrative remedies deprived the
trial court of subject matter
jurisdiction, we need not also decide whether their claims are
preempted. Nevertheless,
regulations and commentary regarding preemption are useful in
demonstrating the intent that all coverage issues must go through the
administrative process. [4]
The
regulations define an organization determination in pertinent part as
follows: An organization determination
is any determination made by an M+C organization with respect to any of
the following: . . . .
(2) Payment for any other
health services furnished by a provider other than the M+C organization
that the enrollee believes— (i) Are covered under
Medicare; or (ii) If not covered under
Medicare, should have been furnished, arranged for, or reimbursed by the
M+C organization. (3) The M+C organization’s
refusal to provide or pay for services, in whole or in part, including the
type or level of services, that the enrollee believes should be furnished
or arranged for by the M+C organization. . . . . 42 C.F.R. § 422.566(b). [5]
Section 422.574, which defines parties to the organization
determination, states as follows: The parties to the organization determination are—
(a) The enrollee (including his or her authorized
representative); (b) An assignee of the enrollee (that is, a
physician or other provider who has furnished a service to the enrollee
and formally agrees to waive any right to payment from the enrollee for
that service); (c) The legal representative of a deceased
enrollee’s estate; or (d) Any other provider or entity (other than the
M+C organization) determined to have an appealable interest in the
proceeding. 42 C.F.R. § 422.574
(2003). [6] The
Hospitals claim that although they may be assignees of their patients,
they are not pursuing any rights they might have as assignees but rather
their own separate contractual right to payment, and therefore are not
proper parties to any organization determination under 42 C.F.R. §
422.574(b). Aetna responds that the Hospitals are
most certainly assignees since they are not seeking payment from their
patients and that they cannot choose to disregard this status to avoid the
administrative process. We
need not resolve this issue because we conclude that the Hospitals have an
appealable interest in the proceeding and therefore are parties under 42
C.F.R. § 422.574(d). [7] At
the time this lawsuit arose, this prompt payment language was found at
Tex. Rev. Civ. Stat. Ann.
art. 20A.18B. The statutory
prompt payment scheme has since been repealed and recodified at Tex. Ins. Code Ann. §§
843.336–.353 (Vernon 2004–2005).
See Act of May 1, 2001, 77th Leg., R.S., ch. 1419, 2001 Tex.
Gen. Laws 3568. [8] At
oral argument, the Hospitals asserted that if Aetna has not promptly paid,
it no longer may raise a coverage defense. However, it provided no authority
for that statement, and we have been unable to find any. Rather, based on the clear wording
of the applicable statute, Aetna is not liable for “any charge for a
service that is not covered by the health care plan.” Tex. Rev. Civ. Stat. Ann. art.
20A.18B(f) (repealed). This
makes sense because presumably the contract obligates the provider only to
provide services covered by the contract. [9]
But see 42 C.F.R. § 422.568(f) (2003) (“If the M+C
organization fails to provide the enrollee with timely notice of an
organization determination as specified in this section, this failure
itself constitutes an adverse organization determination and may be
appealed.”). |