ARA Health Services, Inc. v. Department of Public Safety and Correctional Services

• Citation: 344 Md. 85,685 A.2d 435
• Decision Date: 01 September 1995
• Docket Number: No. 138,138
• Parties: ARA HEALTH SERVICES, INC., d/b/a Correctional Medical Systems, v. DEPARTMENT OF PUBLIC SAFETY AND CORRECTIONAL SERVICES. ,
• Court: Maryland Court of Appeals

Page 85

344 Md. 85

685 A.2d 435

ARA HEALTH SERVICES, INC., d/b/a Correctional Medical Systems, v. DEPARTMENT OF PUBLIC SAFETY AND CORRECTIONAL SERVICES.

No. 138, Sept. Term, 1995.

Court of Appeals of Maryland.

Nov. 26, 1996.

Philip M. Andrews (Kevin F. Arthur, Kramon & Graham, P.A., on brief), Baltimore, for Petitioner.

Kathleen Hoke Dachille, Assistant Attorney General (J. Joseph Curran, Jr., Attorney General; Evelyn O. Cannon and Michael O. Doyle, Assistant Attorneys General, on brief), Baltimore, for Respondent.

Argued before MURPHY,C.J., ^* and ELDRIDGE, RODOWSKY, CHASANOW, KARWACKI, BELL and RAKER, JJ.

PER CURIAM.

This case involves a contract dispute between the State, acting through the Department of Public Safety and Correctional Services (the Department), and ARA Health Services Inc., d/b/a Correctional Medical Systems (CMS). The question presented is whether CMS's claim for additional compensation under a health services contract with the Department is barred by the doctrine of sovereign immunity. CMS contends that the waiver of immunity codified at Maryland Code (1984, 1995 Repl.Vol.), State Government Article, § 12-201(a) ¹ prevents the Department from asserting immunity as a defense to this claim. We conclude, however, that CMS's claim does not satisfy the requirements of § 12-201(a) and that the Department is immune from liability.

I.

The specific dispute between the parties is whether CMS is entitled to reimbursement for AIDS medication provided to non-hospitalized prison inmates during the initial 18-month term of its contract with the Department. The facts giving rise to this claim for additional compensation are essentially undisputed.

In September 1988, the Division of Correction (DOC) of the Department of Public Safety and Correctional Services solicited bids from contractors for the provision of medical services to State prison inmates. CMS responded to the solicitation and was subsequently awarded the health services contract at issue in this case. Prior to execution, State procurement law requires review and approval of this type of procurement contract by the Board of Public Works. See Code of Maryland Regulations (COMAR) 21.02.01.05A(1).

The initial term of the contract was from January 1, 1989 to June 30, 1990. The DOC was contractually required to remit monthly payments to CMS for four categories of expenses: (1) primary care services; (2) secondary care services; (3) operating costs; and (4) a management fee. The category relevant to this case is secondary care services, which included hospital services and specialty services, such as radiological, obstetric, and dental procedures. Secondary care services also included "[t]he cost for the medication AZT, also known as Retrovir, and the cost for any newly developed medication for AIDS/ARC patients...." The monthly payment for these services was not based on actual cost, but rather was calculated on a fixed rate per capita basis. The amount of compensation due CMS each month for AIDS medication and other secondary care services, therefore, was fixed by the contract terms.

Notwithstanding the cap on secondary care services, however, CMS was entitled to additional compensation for "the price of eligible AIDS related ... hospital services costs," provided that certain conditions were satisfied; namely, CMS must have expended more on secondary care services than was due under the monthly fixed fee. If this overexpenditure requirement were satisfied, CMS would be entitled to reimbursement for either the actual cost of AIDS related hospital services, or the difference between the secondary care services fixed fee and the actual cost of providing secondary care services, whichever was less. The effect of this provision was that CMS was eligible to receive additional compensation for AIDS medication provided to inmates during hospitalization.

In sum, the express terms of the contract indicated that CMS was not entitled to compensation on a dollar-for-dollar basis for AIDS medication administered to inmates at correctional facilities. However, CMS would receive reimbursement, in the appropriate circumstance, for the actual cost of AIDS medication furnished to inmates at hospitals, in that medication dispensed at hospitals is a "hospital services cost." Despite the different treatment of hospitalized and non-hospitalized inmates prescribed by the contract, CMS submitted invoices to the DOC for the actual cost of AIDS medication provided to inmates at correctional facilities. In contravention to the express terms of the contract and without Board of Public Works approval, the DOC paid these invoices, and from January 1, 1989 to June 30, 1990, reimbursed CMS a total of $135,446.00 for the cost of non-hospital related AIDS medication. The DOC's payment without objection of CMS's invoices for AIDS medication administered at correctional facilities is the course of conduct that forms the basis of CMS's claim.

In April 1991, CMS and the DOC executed a written modification (Modification H) of the original contract provisions pertaining to AIDS medication reimbursement. Modification H provides in pertinent part:

"Beginning July 1, 1990, the [DOC] will reimburse the Contractor for 100% of the cost of AZT and of any other similar medications developed for the treatment of AIDS patients which are approved for use by the appropriate federal government agencies."

This modification obligated the DOC to compensate CMS without limit for costs incurred in providing AIDS medication to all inmates, including those who were not hospitalized. Although the modification was approved by the Board of Public Works, the effective date was July 1, 1990. Therefore, it did not retroactively validate the AIDS medication reimbursements from January 1, 1989 to June 30, 1990.

The erroneous payments during the initial contract term perhaps would have gone unredressed but for a legislative audit of the State's inmate health care services system in November 1991. The report issued by the General Assembly's Division of Audits noted the discrepancy between the contract terms and the parties' conduct as follows:

"During the initial contract period ..., the cost of AIDS medication provided to inmates at the institutions (as opposed to medication provided at hospitals) was paid for as part of the secondary care services payment. * * * However, the [DOC] separately reimbursed the contractor $135,446 related to the contractor's cost for medication (e.g., AZT) which, we were advised by the [DOC], was provided at the institutions to inmates for the treatment of AIDS.... According to the contract in effect during that period, the reimbursement for this AIDS medication was already included in the secondary care payments. Therefore, the [DOC] should not have separately reimbursed the contractor the $135,446 for the cost of the AIDS medication."

Accordingly, the auditors recommended that the DOC recover the $135,446.00 overpayment from CMS. The DOC initially disagreed with the auditors' recommendation; in its response to the auditors' report, the DOC stated that the understanding between the parties was that CMS would be reimbursed for all AIDS medication costs in excess of the secondary care services cap. After legislative hearings on the matter, however, the DOC complied with the auditors' recommendation by withholding $135,446.00 from the payment of CMS's April 1992 invoice.

CMS submitted a claim to the Department for the $135,446.00 withheld by the DOC. The Department denied the claim and CMS appealed to the Board of Contract Appeals. The Board of Contract Appeals similarly rejected the claim on the ground that the plain and unambiguous language of the contract did not provide for the reimbursement sought by CMS. Both the Department and the Board of Contract Appeals placed particular emphasis on the fact that Modification H of the contract did not have retroactive effect. The Circuit Court for Baltimore City, however, reversed the Board of Contract Appeals' decision, reasoning that the Board of Contract Appeals' failure to consider the possibility of an oral modification to the contract was erroneous as a matter of law. The Court of Special Appeals then reversed the circuit court ruling based on its conclusion that CMS's claim was barred by the doctrine of sovereign immunity. We granted certiorari to consider whether sovereign immunity is a valid defense to CMS's claim.

II.

Maryland courts have long applied the doctrine of sovereign immunity in actions against the State. See Katz v. Washington Sub. San. Comm'n, 284 Md. 503, 507, 397 A.2d 1027, 1030 (1979)(observing that "[t]he doctrine of sovereign immunity from suit, rooted in the ancient common law, is firmly embedded in the law of Maryland"); Board v. John K. Ruff, Inc., 278 Md. 580, 584, 366 A.2d 360, 362 (1976)(stating that the Court of Appeals has "applied the doctrine for over a century"). Derived from the ancient view of the sovereign as infallible, Katz, 284 Md. at 507, 397 A.2d at 1030, this doctrine precludes suit against governmental entities absent the State's consent. Dep't of Natural Resources v. Welsh, 308 Md. 54, 58-59, 521 A.2d 313, 315 (1986). While the General Assembly may waive sovereign immunity either directly or by necessary implication, this Court has emphasized that dilution of the doctrine should not be accomplished by "judicial fiat." Welsh, 308 Md. at 59, 521 A.2d at 315. The applicability of sovereign immunity in a particular case, therefore, turns on: (1) whether the entity asserting immunity qualifies for its protection; and, if so, (2) whether the legislature has waived immunity, either directly or by necessary implication, in a manner that would render the defense of immunity unavailable. Ruff, 278 Md. at 586, 366 A.2d at 363.

The Department of Public Safety and Correctional Services is "a principal department of the State government." Md.Code (1957, 1993 Repl.Vol.), Art. 41,...