South Peninsula Hospital v. Xerox State Healthcare LLC
Docket: Case No. 3:15-cv-00177-TMB
Court: District Court, D. Alaska; September 30, 2016; Federal District Court
Xerox State Healthcare, LLC’s motion to dismiss the First Amended Complaint (FAC) filed by South Peninsula Hospital, Alaska Speech and Language Clinic, Inc., and Kenai Vision Center, LLC is denied by the Court. The plaintiffs initiated the lawsuit on September 24, 2015, claiming violations of the Alaska Unfair Trade Practice and Consumer Protection Act and negligence/reckless indifference, seeking monetary damages for financial injuries from delayed Medicaid reimbursements linked to defects in Alaska's Medicaid payment system, which Xerox designed and implemented. Xerox filed the motion to dismiss on February 8, 2016, citing lack of subject matter jurisdiction and failure to exhaust administrative remedies, supported by affidavits and exhibits. The plaintiffs, all Medicaid providers, alleged reimbursement claims through the State of Alaska’s Medicaid Management Information System (MMIS) from October 1, 2013, onward. The MMIS, known as "Healthcare Enterprise," was developed under a contract awarded to Affiliated Computer Services (ACS) in 2007, with specific requirements for timely claims processing and payment. Xerox, having acquired ACS, is now the successor to the contract, which stipulates it as an independent contractor for the State and benefits only the contracting parties, excluding third-party benefits.
Health Enterprise launched its system on October 1, 2013, allowing Medicaid providers to submit claims exclusively through this new platform, ceasing use of the previous MMIS. Plaintiffs allege that the Department of Health and Social Services (DHSS) relied on misrepresentations from Xerox regarding the system's readiness, including claims of extensive testing. Following the launch, significant operational failures arose, such as the inability to process numerous claims, incorrect denial of authorized claims, and failure to pay various claims categories. These deficiencies resulted in delayed reimbursements for Medicaid providers, causing financial damage, including lost time value of money, increased operational costs, and disruptions in cash flow, with some providers potentially going out of business. The plaintiffs contend that Xerox’s failure to deliver a functional MMIS by the launch date, coupled with its misleading statements, directly led to these consequences. In response to the overwhelming number of erroneous denials, the State issued advance payments to affected providers without requiring administrative reviews. Subsequently, the State initiated legal action against Xerox for specific performance, declaratory and injunctive relief, and damages due to the system's defects. Plaintiffs also filed a class action for negligence and unfair trade practices on behalf of Alaska Medicaid providers whose claims were erroneously denied or suspended from October 1, 2013, onwards. Xerox seeks to dismiss the claims under Rules 12(b)(1) and 12(b)(6), asserting that the court must first address subject matter jurisdiction issues before considering the sufficiency of the claims. According to Alaska law, cases lacking compliance with statutory exhaustion requirements fall outside the court’s jurisdiction. Dismissal under Rule 12(b)(6) is warranted if the complaint does not present a viable claim for relief.
A complaint must meet the "facial plausibility" standard from Ashcroft v. Iqbal, requiring sufficient factual content to support a plausible claim for relief. In addressing Xerox's motion to dismiss under Rule 12(b)(6), the Court accepts all material allegations in the Plaintiffs' First Amended Complaint (FAC) as true and draws reasonable inferences in their favor. However, under Rule 12(b)(1), the Court can consider matters beyond the FAC.
Xerox contends that the Plaintiffs' claims should be dismissed due to failure to exhaust administrative remedies, asserting immunity as the State's fiscal agent, and arguing that the negligence and Alaska Unfair Trade Practices Act (UTPA) claims fail as a matter of law. The exhaustion of remedies is a threshold issue, with Xerox claiming that the Court lacks subject matter jurisdiction since Plaintiffs did not exhaust available administrative remedies. Plaintiffs argue that they were not required to pursue administrative review since the State authorized the payment for delayed reimbursements without it.
Under Alaska law, a party usually cannot seek judicial relief until administrative remedies are exhausted. The Court assesses whether (a) exhaustion was required, (b) the remedies were exhausted, and (c) any failure to exhaust was excused. Generally, exhaustion is mandated if provided by statute or regulation. However, if no effective remedy is available, requiring exhaustion may be an abuse of discretion.
The Alaska Administrative Code (AAC) outlines a two-tiered process for Medicaid payment disputes. Xerox argues that Plaintiffs did not pursue their negligence and UTPA claims through this administrative process. However, Plaintiffs clarified that their lawsuit targets financial injuries from delayed reimbursements due to defects in the Health Enterprise system, not denied claims. This distinction indicates that their case falls outside the administrative review process, leading the Court to deny Xerox’s argument regarding failure to exhaust.
Xerox argues for the dismissal of the First Amended Complaint (FAC) based on its status as the State’s fiscal agent, claiming entitlement to sovereign immunity. Plaintiffs counter that Xerox operates as an independent contractor and thus cannot claim this immunity. Sovereign immunity aims to protect state dignity and state treasuries from lawsuits. Under Ninth Circuit precedent, specifically Del Campo v. Kennedy, entities asserting Eleventh Amendment immunity must demonstrate their entitlement to it. In Del Campo, a private contractor (ACCS) was denied sovereign immunity despite its governmental role, as the Ninth Circuit concluded that such immunity does not extend to private entities.
Plaintiffs assert that the contract language between Xerox and the Department of Health and Human Services (DHHS) mirrors that of ACCS and the government in Del Campo, indicating Xerox's independent contractor status. This contract stipulates that Xerox must indemnify DHHS and maintain its own insurance. Xerox contends that it functions as the State’s fiscal agent, merely processing claims, while DHHS manages the overarching aspects of Medicaid reimbursement. However, the Ninth Circuit’s analysis emphasizes that the determination of sovereign immunity hinges on the contractor's private entity status rather than the specifics of the contract or the nature of claims against it. Consequently, Xerox, as an independent contractor for DHHS, does not qualify as a state agency, nor has it received indemnification from DHHS. The Ninth Circuit is reluctant to extend sovereign immunity to private parties based solely on contractual relationships. Xerox has failed to demonstrate the necessary criteria for asserting sovereign immunity, prompting the Court to move on to evaluate Xerox’s arguments under 12(b)(6).
Count One of the First Amended Complaint (FAC) alleges that Xerox acted negligently and with reckless indifference by failing to exercise reasonable care in the design and implementation of the Healthcare Enterprise system. It is claimed that Xerox falsely represented the system as ready for deployment, resulting in foreseeable economic harm to the Plaintiffs and other Medicaid providers. Under Alaska law, a negligence claim requires proving a duty of care, breach, causation, and harm. Courts assess duty based on statutory, regulatory, contractual, or common law sources, and if absent, they apply the seven D.S.W. factors to determine actionable duty. These factors include foreseeability of harm, certainty of injury, closeness of the connection between conduct and injury, prevention of future harm, burden on the defendant, community consequences, and insurance availability.
Xerox contends that the claim should be dismissed due to a lack of privity of contract, as the MMIS contract disclaims third-party beneficiaries, which typically precludes recovery for pure economic loss. However, the Alaska Supreme Court allows recovery for economic losses without privity when a duty exists as determined by the D.S.W. factors. The Court acknowledges that Plaintiffs have sufficiently alleged foreseeability of harm from the system's failure, which could lead to a duty under these factors, thus denying Xerox's motion to dismiss the negligence claim.
Additionally, Plaintiffs assert a violation of the Unfair Trade Practices Act (UTPA), claiming Xerox falsely represented that the Health Enterprise was adequately tested and operational by its intended launch date. Xerox argues that the UTPA claim should be dismissed because Plaintiffs did not engage in any transaction with Xerox and are not its competitors. The UTPA prohibits unfair competition methods and deceptive acts in trade. A private right of action exists for those who suffer ascertainable losses due to unlawful acts under the UTPA. To establish a prima facie case, a plaintiff must demonstrate that the defendant engaged in trade and that an unfair or deceptive act occurred, where deception does not require proof of actual injury or intent. An act can be deemed unfair even if it is not deceptive.
The determination of whether a practice is unfair hinges on its alignment with established public policy, which may stem from statutes or common law, and whether it is characterized by immoral, unethical, oppressive, or unscrupulous behavior, ultimately causing substantial harm to consumers or competitors. Plaintiffs allege that Xerox misrepresented the readiness of Health Enterprise, leading to economic injuries from delayed reimbursements for valid claims submitted through a defective system. This assertion is sufficient to withstand Xerox's motion to dismiss under Rule 12(b)(6). Additionally, Xerox challenges the adequacy of the class allegations presented by the Plaintiffs, claiming they lack a recognizable class. However, the Court considers this challenge premature and will defer a ruling until a motion for class certification is submitted. Consequently, Xerox's motion to dismiss the First Amended Complaint is denied, requiring Xerox to respond within 21 days.
Xerox's motion to dismiss highlights that Alaska Speech and Kenai Vision have not appealed any claim denied or suspended under Health Enterprise, while South Peninsula has only appealed a small fraction (244 out of 12,363) of denials. The court may need to reassess the exhaustion theory if misunderstood. It agrees with Xerox that plaintiffs can only claim damages for financial losses due to delayed reimbursements caused by system defects, excluding any losses from delays due to provider errors, which is classified as a damages issue rather than an exhaustion issue. Additionally, Alaska law does not recognize reckless indifference as a separate cause of action but as a component of enhanced damages. Relevant case law establishes that in negligence cases, Alaska requires a two-part test for legal causation and considers public policy factors when determining the existence of a duty of care. The court notes that plaintiffs suffering economic injury can pursue negligence claims if a duty is established. Lastly, the Unfair Trade Practices Act (UTPA) aims to protect consumers and honest businesses from unfair or deceptive practices.
The legislative history of the Unfair Trade Practices Act (UTPA) reveals that its primary focus is consumer protection, but it is not restricted to consumer transactions. Xerox has not referenced any Alaska case law that supports the remoteness doctrine, and the court declines to incorporate this doctrine into Alaska law at this time. Furthermore, the appropriateness of striking the plaintiff's class definition is not a valid concern in a motion to dismiss, as compliance with Rule 23 should not be evaluated at this stage. It is uncommon for courts to strike class allegations prior to a motion for class certification. Relevant cases, including Haley v. TalentWise and others, indicate that such motions are generally seen as premature if no certification motion has been filed, and the prevailing practice in class actions is to resolve certification issues following an adequate discovery period.
