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

• Decision Date: 01 September 1994
• Docket Number: No. 1987,1987
• Parties: DEPARTMENT OF PUBLIC SAFETY AND CORRECTIONAL SERVICES v. ARA HEALTH SERVICES, INC. d/b/a Correctional Medical Systems. ,
• Court: Court of Special Appeals of Maryland

Page 445

107 Md.App. 445

668 A.2d 960

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

No. 1987, Sept. Term, 1994.

Court of Special Appeals of Maryland.

Dec. 27, 1995.

Kathleen S. Hoke, Staff Attorney (J. Joseph Curran, Jr., Attorney General, Evelyn O. Cannon and Michael O. Doyle Assistant Attorneys General, on the brief), Baltimore, for Appellant.

Philip M. Andrews (Kramon & Graham, P.A., on the brief), Baltimore, for Appellee.

Argued before WENNER, DAVIS and HOLLANDER, JJ.

HOLLANDER, Judge.

This case concerns a contract dispute between the State and a company that provided health care to prison inmates. The State, acting through the Division of Correction ("DOC") of the Department of Public Safety and Correctional Services ("the Department"), appellant, had a contract with ARA Health Services, Inc., d/b/a Correctional Medical Systems ("CMS"), appellee, to provide medical care to inmates incarcerated in Maryland correctional facilities. At issue is CMS's claim for reimbursement for the cost of AIDS medication. After the Board of Contract Appeals denied CMS's contract claim, CMS sought review in the Circuit Court for Baltimore City. The court reversed, based on a contractual "modification by conduct," and entered judgment in favor of CMS in the amount of $135,446.00. In its appeal, the Department presents the following questions for our consideration:

I. Did the Circuit Court exceed its authority when it rejected the Board of Contract Appeals's factual finding that the parties' conduct did not constitute a modification and substituted its own factual findings and judgment that the conduct did constitute a modification?

II. Does sovereign immunity bar an action based on an unwritten modification to a written contract when the contract and State regulations require that all modifications to the contract be in writing and approved by the Board of Public Works?

We conclude that the circuit court erred in finding that the parties' conduct constituted a modification of the contract. We are also of the view that sovereign immunity bars appellee's action. As we answer both questions in the affirmative, we shall reverse.

FACTUAL BACKGROUND

The DOC issued a "Request for Proposals" in September 1988, in which it solicited bids from contractors to provide health care services to Maryland prisoners. CMS was awarded Contract No. 8804-00 ("the Contract"), which the parties executed in November 1988. The Contract, effective January 1, 1989, divided CMS's costs into four categories: (1) primary care; (2) secondary care services ("SCS"); (3) operating costs; and (4) management fee. "Secondary care services" included specialty care, such as obstetrics and radiology, as well as services to inmates hospitalized outside a correctional facility. The Contract also provided that "the cost for the medication AZT ... and the cost for any newly developed medication for AIDS ... shall be considered as a Secondary Care Services cost...."

The Contract specified the manner in which CMS's fees were calculated. Pursuant to § 05.07.01.02.01 of the Contract, the base fee was calculated by multiplying the "average daily population" of prisoners by an agreed upon rate. ¹ In addition, to help defray CMS's costs in furnishing certain high-cost medical services, the Contract also provided a mechanism for CMS to receive an "excess fee" based on these costs; under certain limited circumstances, the DOC was required to reimburse CMS for the cost of services in excess of the base payments otherwise due to CMS for SCS. Section .05.08.04.03 of the Contract provided:

The Division [of Correction] will reimburse the Contractor [CMS] for 100% of the price of eligible AIDS related, disaster related and major disturbance related hospital services costs. In order for hospital services costs to be considered eligible, all of the following conditions must be met:

.05.08.04.03.01. The Contractor expends for all Secondary Care Services during the term of this contract more than the total of all payment due the Contractor by the Division for Secondary Care Services as stated in ATTACHMENT VI;

.02. The potentially eligible hospital services costs are not eligible for reimbursement under another part of this contract;

.03. The total amount of the potentially eligible hospital services costs does not exceed the overexpenditure incurred by the Contractor for Secondary Care Services during the term of this Contract.

.04. The potentially eligible hospital services costs were incurred either:

.05.08.04.03.04.A. In order to treat one or more inmates whose ailments were diagnosed by the hospital as being AIDS related, or

B. In order to treat one or more inmates whose injuries were not self-inflicted and which were sustained as a result of a physical assault during a major disturbance, or

C. In order to treat ten or more inmates as the result of a disaster.

(Emphasis supplied).

The upshot of these provisions is that CMS was entitled to excess compensation for "AIDS related, disaster related and major disturbance related hospital services," if two conditions were met: (1) the total amount that CMS spent in providing SCS was greater than the amount that CMS was entitled to receive as a base fee; and (2) CMS was not entitled to receive reimbursement for the services under another provision of the Contract. If both of those conditions were met, then CMS would receive as an excess fee either the actual costs that it incurred in providing the special hospital services, or the difference between the total costs that CMS incurred in providing SCS and the amount that CMS was entitled to receive as a base fee, whichever was smaller. ² But CMS was not entitled to any excess costs for AIDS medication furnished to inmates who were not hospitalized.

From January 1, 1989 to June 30, 1990, CMS sought, and the DOC paid, a total of $135,446.00 for AIDS medication provided to inmates in correctional facilities, i.e, who were not hospitalized. Subsequently, on April 1, 1991, the parties executed a written modification ("Modification H") to their original Contract. The modification provided that, retroactive to July 1, 1990, the DOC would reimburse CMS for the costs of all AIDS medication that it provided, whether dispensed at a correctional facility or in a hospital setting. Consequently, AIDS medication was no longer part of the excess fee calculation; it was reimbursed on a dollar-for-dollar basis. But, as the modification only applied retroactively to July 1, 1990, it had no bearing on the monies paid for AIDS medication dispensed to non-hospitalized prisoners during the initial eighteen month period.

In late 1991, these initial AIDS payments caught the eyes of auditors with the Legislature's Division of Audits. In a report issued in January 1992, the auditors recommended that the DOC "recover" the funds paid to CMS for AIDS medication during the period from January 1, 1989 to June 30, 1990 dispensed at penal institutions. The auditors concluded that CMS had been reimbursed for AIDS medication as part of the SCS payments. DOC officials initially disputed the auditors' report; the DOC claimed that CMS and the DOC had contemplated from the beginning that the DOC would reimburse CMS for its expenses in providing AIDS medication "if the Secondary Care cap [were] reached," that CMS had not improperly billed the DOC, that the $135,446.00 in disputed payments were in accord with the intent of the parties, and that AIDS medication was part of the secondary care costs under § 05.08.04.03 of the Contract. After legislative hearings at which the Department was severely criticized, the DOC reversed its position. The DOC then unilaterally deducted $135,446.00 from its payment to CMS when CMS submitted its invoice for April 1992.

Thereafter, CMS filed a claim with the Department for the amount withheld. When the Secretary of the Department denied the claim, CMS appealed to the Board of Contract Appeals (the "Board"), which also rejected CMS's claim. The Board concluded that the language of the Contract was "plain and unambiguous" and did not entitle CMS to the reimbursement that it sought. It reasoned that the Contract provided a specific method for calculating CMS's compensation, which did not include 100% reimbursement for all AIDS medication costs. The Board placed particular emphasis on the fact that Modification H, executed in 1991, provided for dollar-for-dollar reimbursement for AIDS medication costs retroactive only to July 1, 1990, rather than to the original date of the Contract. In the Board's view, this established that the parties consciously chose to abide by the terms of the original Contract for the period in issue.

The circuit court reversed. Although it accepted the Board's finding that the Contract was "plain and unambiguous" and did not, on its face, entitle CMS to reimbursement for all AIDS costs, it nevertheless concluded that, by course of conduct, the parties modified the Contract, entitling CMS to an excess fee for all AIDS medication costs that it incurred, regardless of whether the medication was dispensed in a hospital or at a penal institution. The court relied on the fact that, for eighteen months, the DOC reimbursed CMS for all of its AIDS medication costs, and had defended its payments to the legislative auditors and the General Assembly's oversight committee as warranted under the Contract. The court thus entered judgment in favor of CMS for $135,446.00.

DISCUSSION

I.

CMS contends that the Contract was modified by the parties' conduct, so that it is entitled to payment for all the AIDS medication that it provided, regardless of the location at which it was dispensed. ³ The Department denies that such a modification occurred, and contends that the circuit court exceeded its authority by substituting its own factual findings for those of the agency.

We focus initially on...