Northern Michigan Hospitals, Inc. v. Health Net Federal Services, LLC

Citation: 344 F. App'x 731Docket: Nos. 08-2860, 08-2981, 08-2861, 08-2995

Court: Court of Appeals for the Third Circuit; September 8, 2009; Federal Appellate Court

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Northern Michigan Hospitals, Inc. and Lakewood Hospital System appeal a District Court order granting a motion to dismiss without prejudice favoring Health Net Federal Services, LLC and Triwest Healthcare Alliance Corp. The Hospitals initiated putative class actions for breach of implied contract and unjust enrichment, alleging inadequate reimbursement for services rendered to TRICARE beneficiaries. The District Court dismissed their complaints due to the Hospitals' failure to exhaust administrative remedies. The case relates to the TRICARE program, established by Congress in 1995 to provide managed health care for active military members and their dependents, supplementing the earlier CHAMPUS program. Triwest and Health Net serve as managed care support contractors for TRICARE, responsible for network establishment and reimbursement processes.

The Hospitals, identified as non-network participating providers, contend they were improperly reimbursed for facility charges, which cover overhead costs associated with outpatient services. TRICARE regulations state that such charges must be billed as incurred. Non-network providers must submit claims to the regional contractor, with reimbursements made directly to them, adhering to established allowable charges. Providers are obliged to understand and comply with TRICARE's requirements to receive payment for services. The appellate court affirms the District Court's dismissal based on these grounds.

On January 23, 2007, Northern Michigan and Gifford Medical filed an amended complaint in the District Court against Health Net for breach of contract implied in fact and quasi-contract/unjust enrichment, claiming over $100 million in damages due to underpayment for outpatient services provided to TRICARE beneficiaries. On February 7, 2007, Lakewood Health and Northwest Medical filed a similar complaint against Triwest, representing both the named hospitals and a putative class of other Non-Network Participating Provider hospitals. Health Net and Triwest each filed motions to dismiss, citing reasons such as the necessity of the United States as a party, sovereign immunity, failure to exhaust administrative remedies, and failure to state a claim. The United States entered the case, arguing it was not the real party in interest and that the hospitals had misinterpreted TRICARE regulations.

After supplemental briefing and a hearing, the District Court dismissed both complaints without prejudice on May 30, 2008, for failure to exhaust administrative remedies, noting that while the TRICARE regulations required payment of facility charges 'as billed,' the core dispute was whether the hospitals' charges qualified for such reimbursement. The Court exercised discretion to require exhaustion, emphasizing the benefits of agency expertise and creating a factual record for future judicial review. The Court determined the claims were not preempted and that the United States was neither a real party in interest nor a necessary party, but did not address the adequacy of the complaints. The Hospitals appealed, and Health Net and Triwest cross-appealed. Jurisdiction was confirmed under 28 U.S.C. 1332(a)(1) and 1332(d)(2) due to diversity and the amount in controversy, with appellate jurisdiction under 28 U.S.C. 1291 for final decisions.

Orders dismissing complaints without prejudice are typically not final or appealable under 28 U.S.C. § 1291, as established in case law (Ghana v. Holland, Welch v. Folsom, Borelli v. City of Reading). However, exceptions exist where a plaintiff cannot remedy the defect leading to dismissal or chooses to stand on the dismissed complaint, making the dismissal appealable. In this context, if an appellant argues that exhausting administrative remedies would be futile, they are effectively standing on their complaint, allowing for jurisdiction over the dismissal appeal (Ghana, Nyhuis).

The Hospitals in this case argue that the District Court incorrectly concluded that their claims could go through the TRICARE administrative appeals process. They assert that their claims pertain to the interpretation of regulations rather than disputed factual issues, which are not appealable under TRICARE regulations (32 C.F.R. 199.10(a)). Specifically, the Hospitals contend that the issue revolves around whether they can be reimbursed for facility charges in addition to maximum allowable charges, which they believe simplifies the dispute. TRICARE regulations dictate reimbursement based on maximum allowable charges and stipulate that facility charges, not subject to maximum allowable limits, are reimbursed as billed. However, the Hospitals cannot claim reimbursement for amounts exceeding the CMAC simply based on their facilities expenses. The central issue is whether the Hospitals are entitled to additional funds due to alleged improper application of the reimbursement regulations.

The dispute involves factual issues regarding the incurrence and billing of facility charges under TRICARE regulations, necessitating a resolution of the Hospitals’ claims for reimbursement. If the Hospitals prevail on these factual questions, they may receive additional payment. However, simply determining whether facility charges can be paid alongside CMACs will not result in additional payment without further claim assessment. The Hospitals' primary complaint challenges a denial of payment, which is suitable for administrative appeal. 

The Hospitals contend that exhausting administrative remedies would be futile and burdensome, arguing the District Court should waive this requirement. However, TRICARE statutes do not mandate exhaustion. Judicial discretion is applied in requiring exhaustion, aimed at promoting administrative efficiency, respecting executive autonomy, facilitating judicial review, and serving judicial economy. Although prudential exhaustion can be bypassed under certain circumstances, such as waiver or futility, the Hospitals failed to demonstrate a 'clear and positive showing' of futility. Consequently, the District Court was within its discretion to mandate that the Hospitals exhaust their administrative remedies.

The Hospitals contend that exhausting administrative remedies would be futile since TMA has rejected their interpretation of regulations. However, the core issue is whether the Hospitals submitted claims that qualify as 'facility charges,' which TMA has not yet evaluated. The Hospitals have the opportunity to provide evidence to TMA regarding their incurred expenses and billing practices, and thus seeking administrative relief could potentially yield additional reimbursement. Health Net and Triwest argue that the Hospitals' complaints stem from concerns about the likelihood of success at the agency level and the time involved in the process; however, these concerns do not justify bypassing the exhaustion requirement. The District Court emphasized that the claims in the administrative appeal are the same as those in the litigation, and noted that only four hospitals are involved, all of which must exhaust their remedies. This requirement aligns with traditional rationales for exhaustion, promoting judicial economy and agency expertise while minimizing unnecessary judicial interference. The Court affirmed the District Court's order, concluding that exhaustion is neither futile nor overly burdensome, and consistent with prudential exhaustion principles. The Hospitals claim they incurred facility charges related to outpatient services for TRICARE beneficiaries, which are part of the costs billed for specific services.

The Hospitals asserted that they submitted a unified charge for each service provided, along with a facility charge. The document addresses the Hospitals' standing to bring claims, emphasizing the need to satisfy Article III's requirements, as established in Interfaith Cmty. Org. v. Honeywell Int’l, Inc. Standing is a jurisdictional prerequisite that requires examination of both the court's and the district court's jurisdiction. The Hospitals demonstrated the injury in fact necessary for standing by claiming they provided services to TRICARE beneficiaries and submitted reimbursement claims to Triwest and Health Net, which failed to reimburse them appropriately. Since Triwest and Health Net are obligated to reimburse Non-Network Participating Providers like the Hospitals for services rendered to TRICARE beneficiaries, the Hospitals' injuries are traceable to and redressable by these entities. Thus, it is concluded that the Hospitals possess standing to pursue their claims, referencing Lujan v. Defenders of Wildlife's criteria for standing: injury in fact, traceability, and redressability.