350 F.3d 568 (6th Cir. 2003), 02-6078, Highlands Wellmont Health Network, Inc. v. John Deere Health Plan, Inc.

Docket Nº:02-6078
Citation:350 F.3d 568
Party Name:Highlands Wellmont Health Network, Inc. v. John Deere Health Plan, Inc.
Case Date:November 25, 2003
Court:United States Courts of Appeals, Court of Appeals for the Sixth Circuit

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350 F.3d 568 (6th Cir. 2003)

HIGHLANDS WELLMONT HEALTH NETWORK, INC.; Wellmont Health Systems, Inc., doing business as Wellmont Bristol Regional Medical Center, doing business as Wellmont Holston Valley Medical Center, Plaintiffs-Appellees,


JOHN DEERE HEALTH PLAN, INC., Defendant-Appellant.

No. 02-6078.

United States Court of Appeals, Sixth Circuit

November 25, 2003

Submitted Sept. 17, 2003.

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[Copyrighted Material Omitted]

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William C. Bovender (briefed), Jimmie C. Miller (briefed), Hunter, Smith & Davis, Kingsport, TN, for Appellees.

John A. Lucas, James S. Chase (briefed), Hunton & Williams, Knoxville, TN, for Appellant.

Before GUY, and GILMAN, Circuit Judges; REEVES, District Judge. [*]


RALPH B. GUY, JR., Circuit Judge.

Defendant, John Deere Health Plan, Inc. (JDHP), appeals from the denial of its

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motion under the Federal Arbitration Act (FAA), 9 U.S.C. § 4, to compel arbitration of the claims asserted by plaintiffs, Highlands Wellmont Health Network, Inc. and Wellmont Health System (collectivelsseeuot;Wellmont"). JDHP argues that the district court erred in finding that JDHP had waived its rights under the arbitration clause in the parties' medical services agreement. After review of the record, the applicable law, and the arguments presented on appeal, we reverse.


JDHP is a qualified health maintenance organization. Wellmont Health Systems owns and operates the Bristol Regional Medical Center and Wellmont Holston Valley Medical Center in East Tennessee. Each of these hospitals is a member of the Highland Wellmont Health Network, Inc.

In 1997, Wellmont and JDHP entered into a medical services agreement (1997 Contract) under which Wellmont provided medical services to JDHP members. The 1997 Contract did not contain an arbitration clause. It had an initial term of two years and automatically renewed annually thereafter.

In early 2001, the parties entered into a second contract (2001 Contract) that contained the following arbitration clause:


Contracting Hospital agrees that any dispute arising out of this Agreement shall be resolved in accordance with JDHP's written policies and procedures for dispute resolution, which include mandatory, binding arbitration. The parties waive their right to seek remedies in court, including their right to jury trial. If policies and procedures are inconsistent with this provision, then this provision shall prevail. Arbitration in regard to benefit determination, utilization, and quality of care matters shall be conducted in accordance with the Employee Benefit Plans Claims Arbitration Rules of the American Arbitration Association. Arbitration in regard to all other matters arising out of this Agreement including, but not limited to, credentialing/recredentialing, participation, and termination, including termination for quality of care concerns, shall be conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association. With respect to benefit determination, which includes but is not limited to authorization of coverage for medical services and the determination of availability and extent of coverage for services provided to a particular Member, the question for the arbitrator will be whether the decision being arbitrated should be set aside because the decision was arbitrary and capricious. Each party will bear its own costs and attorney fees. The expenses associated with the arbitration will be shared equally by both parties. Arbitration shall be final and binding on all parties. The arbitrator shall have no authority to award exemplary or punitive damages, and the parties waive their right to such damages. Judgment upon the decision of the arbitrator may be entered in any court having jurisdiction, and the court may enforce the decision of the arbitrator.

The 2001 Contract "superceded" the 1997 Contract "to the extent [it applied] to inpatient and outpatient hospital services." All other terms and conditions of the 1997 Contract remained in full force and effect. The 2001 Contract was signed by Wellmont on January 24, 2001, and by JDHP on February 27, 2001. The term of the 2001 Contract for Medicare + Choice

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Product (which includes the services subject to the billing dispute in this case) was made retroactive to October 23, 2000 through December 31, 2003.

In November 2000, prior to the signing of the 2001 Contract, JDHP conducted an audit of Wellmont's billings under the 1997 Contract. JDHP determined that Wellmont had billed rehabilitation services under the rate code called DRG 462, which JDHP believed was inappropriate because, among other things, the rehabilitation services were provided in a hospital skilled nursing unit rather than in a licensed rehabilitation facility as required under the Medicare regulations. 1

Wellmont did not learn that JDHP objected to the rehabilitation services billings until Wellmont was contacted by the FBI on March 9, 2001--after the 2001 Contract was signed. The FBI was investigating allegations made by JDHP to the Office of the Inspector General of the Department of Health and Human Services regarding Wellmont's billing practices. Also on March 9, 2001, JDHP informed Wellmont that it was seeking in excess of $1 million for the alleged overpayments for rehabilitation services, and that after March 2001 JDHP would prospectively reimburse Wellmont at a lower rate applicable to a skilled nursing facility (SNF) for the rehabilitation services performed in Wellmont's skilled nursing units.

On April 13, 2001, Wellmont sent a letter to JDHP regarding the alleged overpayments for rehabilitation services. The letter cited section 12.b of the 1997 Contract in outlining Wellmont's position on the billing dispute. The letter concluded with the following:

Finally, we would like to set a date to discuss alternatives for dispute resolution. As I mentioned, Wellmont would be open to discussion of a range of options, including mediation, possible arbitration, or a possible declaratory judgment action before the Federal court. After we have received your analysis and you have had a chance to review our enclosed documentation, we will be in a better position to have that discussion.

Several months later, on July 13, 2001, JDHP sent a letter to Wellmont referencing both the disputed overpayments and the intervening disputed underpayments. 2 With respect to Wellmont's proposed resolution methods, JDHP stated:

For the reasons stated above, we cannot agree with the assertions made in your May 23 letter that underpayments have occurred. On the contrary, John Deere Health maintains its position that the services were billed inappropriately, resulting in overpayment on John Deere Health's part.

While we appreciate Wellmont's interest in resolving what Wellmont wishes to portray as a contract dispute quietly and expeditiously, we do not at this point agree to arbitration or other alternative dispute resolution. Rather, John Deere Health reiterates its demand for full payment of all amounts overpaid, totaling in excess of $1.3 million before upward adjustment for interest and previously returned withhold. We also expect that Wellmont [sic] take immediate steps to correct its billing practice to avoid future overpayments.

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On February 8, 2002, Wellmont filed a complaint in this action asking for a declaration that it was entitled to reimbursement under the higher DRG 462 rate and asking for damages equal to the difference between the DRG 462 and the SNF rates for rehabilitation services provided after March 2001. The complaint referenced and attached only the 1997 Contract.

After JDHP informed Wellmont that its claims were governed by the 2001 contract, Wellmont filed an amended complaint. The amended complaint alleged that JDHP fraudulently induced Wellmont to enter into the 2001 Contract. Wellmont also asked for damages for JDHP's alleged breach of the implied duty of good faith and fair dealing in negotiating the 2001 Contract and for JDHP's alleged breach of the 2001 Contract in paying the lower SNF rate for the rehabilitation services.

JDHP immediately filed a motion to compel arbitration and stay proceedings. On August 7, 2002, the district court denied the motion. It found that the 2001 Contract contained a binding arbitration clause but concluded that JDHP had waived its right to compel arbitration in the July 13, 2001 letter. This appeal followed.


The FAA provides that arbitration clauses in commercial contracts are "valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. If a court determines that a claim is covered by an arbitration clause, it must stay the proceedings until the arbitration process is complete. 9 U.S.C. § 3.

When faced with a motion to compel arbitration, a district court must follow the procedure set forth in section 4 of the FAA:

The court shall hear the parties, and upon being satisfied that the making of the agreement for arbitration or the failure to comply therewith is not in issue, the court shall make an order directing the parties to proceed to arbitration in accordance with the terms of the agreement.... If the making of the arbitration agreement or the failure, neglect, or refusal to perform the same be in issue, the court shall proceed summarily to the trial thereof.

9 U.S.C. § 4.

It is well established that any doubts regarding arbitrability must be resolved in favor of arbitration. Fazio v. Lehman Bros., Inc., 340 F.3d 386, 392 (6th Cir. 2003). We review a district court's ruling on a motion to compel arbitration de novo. Great Earth Cos. v. Simons, 288 F.3d 878, 888 (6th Cir. 2002).

A. Waiver

An agreement to arbitration may be "waived by the actions of a party which are completely inconsistent with any reliance...

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