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 (the Hospitals) appealed a District Court decision that granted Health Net Federal Services, LLC (Health Net) and Triwest Healthcare Alliance Corp. (Triwest) a motion to dismiss the Hospitals' putative class actions for breach of implied contract and unjust enrichment due to inadequate reimbursements for services rendered. The District Court dismissed the cases on the grounds that the Hospitals had not exhausted their administrative remedies. The court affirmed this decision. 

Background details include the establishment of TRI-CARE by Congress in 1995, which provides managed health care for active military members and their dependents, supplementing the prior CHAMPUS program. Triwest and Health Net function as managed care support contractors for TRI-CARE, responsible for delivering healthcare services and establishing provider networks. The Hospitals, as non-network participating providers, claimed improper reimbursement for facility charges, which are defined as costs covering overhead for services. 

TRICARE regulations stipulate that non-network providers must submit claims to the appropriate contractor to receive payments, and by signing the claim, they agree to abide by CHAMPUS charge limitations. Providers must also ensure compliance with program requirements to receive payment for services.

On January 23, 2007, Northern Michigan and Gifford Medical filed an amended complaint in the District Court against Health Net, alleging breach of contract and unjust enrichment, with claims exceeding $100 million due to underpayment for outpatient services provided to TRI-CARE beneficiaries. On February 7, 2007, Lakewood Health and Northwest Medical filed a similar complaint against Triwest, representing both the named hospitals and a potential class of other Non-Network Participating Provider hospitals. Health Net and Triwest each moved to dismiss the complaints, asserting that the United States was a necessary party, sovereign immunity barred the claims, the hospitals did not exhaust their administrative remedies, and the complaints failed to state a cause of action. Additionally, Triwest claimed federal law preempted the hospitals' claims and that the TMA had primary jurisdiction. The United States intervened, arguing it was not a necessary party and that the issue of facility charges should be resolved through the Defense Department’s administrative processes. After supplemental briefings and a hearing, the District Court, on May 30, 2008, dismissed both complaints without prejudice, determining that the hospitals had not exhausted available administrative remedies. Although the court noted that the facility charges were defined as payable "as billed" under the TRI-CARE regulations, the dispute centered on the qualification of the claimed charges. The court required exhaustion of administrative remedies to allow the agency to utilize its regulatory expertise and create a factual record for potential judicial review. The District Court concluded that the claims were not preempted, and the United States was neither the real party in interest nor a necessary party, but it did not address whether the complaints failed to state a cause of action.

The Hospitals appealed a District Court order, while Health Net and Triwest cross-appealed. The District Court had subject matter jurisdiction under 28 U.S.C. 1332(a)(1) and 28 U.S.C. 1332(d)(2) due to diversity of parties and the amount in controversy exceeding the jurisdictional minimum. The appellate jurisdiction is asserted under 28 U.S.C. 1291, which covers final decisions of district courts. A final decision concludes litigation on the merits, leaving only execution of judgment. Generally, dismissals without prejudice are not final or appealable, but exceptions exist if the plaintiff cannot rectify the defect leading to the dismissal or chooses to stand on their complaint. The Hospitals claimed that exhaustion of administrative remedies would be futile and opted to stand on their complaints, allowing appellate jurisdiction under 1291.

The standard of review involves de novo consideration of exhaustion principles as a legal question, while the District Court's refusal to grant an exception is reviewed for abuse of discretion. The Hospitals argue that the District Court erred in suggesting their claims could be addressed through the TRICARE administrative process. They assert that the issue of whether certain charges qualify for reimbursement as facility charges is not appealable under TRICARE regulations, specifically 32 C.F.R. 199.10(a), since it pertains solely to legal interpretation without factual dispute. TRICARE regulations limit appealable issues to those involving disputed facts that, if resolved favorably, would authorize CHAMPUS benefits. Issues are not administratively appealable when no facts are in dispute or when they challenge regulations' legality or requirements, including the determination of allowable costs or charges.

The Hospitals argue that the core issue is whether Health Net and Triwest must pay facility charges in addition to maximum allowable charges, but this oversimplifies the dispute. Regulations state that certain services are reimbursed based on maximum allowable charges, while facility charges are paid as billed. However, hospitals cannot simply bill any amount and claim reimbursement for the full amount based on "facilities" expenses. The actual question is whether the Hospitals are entitled to additional reimbursement due to improper application of the regulations to their claims. This involves factual determinations regarding incurred facility charges, proper billing, and the amount owed. If the Hospitals prove their claims, they could receive additional payment, as the dispute centers on the denial of payment, suitable for administrative appeal.

The Hospitals also contend that exhausting administrative remedies would be futile and burdensome, arguing that the District Court should not enforce this requirement. However, TRICARE statutes and regulations do not mandate exhaustion of remedies. Courts exercise discretion regarding exhaustion based on several rationales: promoting administrative efficiency, respecting agency autonomy, facilitating judicial review, and serving judicial economy. Prudential exhaustion can be bypassed under specific circumstances, such as waiver, estoppel, tolling, or futility, particularly when agency actions violate rights, when administrative procedures are inadequate to prevent harm, or when exhausting remedies is deemed futile.

Exhaustion requirements, while prudential, are enforceable and are only excused under specific circumstances. To invoke the futility exception, a party must demonstrate a clear showing of futility, which the Hospitals failed to do before the District Court. Their argument of futility, based on TMA's rejection of their regulatory interpretation, overlooks the key issue of whether their claims qualify as “facility charges,” an issue not yet evaluated by TMA. The Hospitals retain the opportunity to present evidence regarding their claims and potential reimbursement. The prospect of administrative appeals yielding additional reimbursement underscores that recourse is not futile. Concerns about the time and likelihood of success at the agency level do not satisfy the futility standard. The District Court noted that the claims at issue would also arise in litigation, and only four hospitals are required to exhaust remedies. Requiring exhaustion aligns with traditional rationales, promoting judicial economy and allowing the agency to address factual disputes and correct errors. Therefore, the District Court acted within its discretion in mandating the Hospitals to exhaust administrative remedies, as this process is neither futile nor overly burdensome, leading to an affirmation of the District Court’s order.

The Hospitals claimed they incurred facility charges while providing outpatient services to all patients, including TRICARE beneficiaries, and allocated these charges to specific procedures. They stated that these facility charges are part of the total costs presented in the bills sent to patients and that they submit a single unitary charge for each service rendered, which includes the facility charge. The document addresses the Hospitals' standing to bring their claims, emphasizing the necessity of meeting Article III requirements. The Hospitals demonstrated standing by alleging they provided services to TRICARE beneficiaries within the regions of Triwest and Health Net, submitted claims for reimbursement, and experienced failures in receiving proper reimbursements. It was noted that Triwest and Health Net are responsible for reimbursing Non-Network Participating Providers like the Hospitals, establishing that the Hospitals' injuries are traceable to and remediable by these entities. Thus, the Hospitals have met the standing requirements of injury in fact, traceability, and redressability as outlined in Lujan v. Defenders of Wildlife.