In re Doctors Health, Inc., Bankruptcy No. 98-6-6211-JFS.
| Decision Date | 31 August 1999 |
| Docket Number | Bankruptcy No. 98-6-6211-JFS. |
| Citation | 238 BR 594 |
| Parties | In re DOCTORS HEALTH, INC., Debtor. |
| Court | U.S. Bankruptcy Court — District of Maryland |
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Gregory Cross, Venable, Baetjer, and Howard, LLP, Baltimore, MD, for Debtor.
Eric G. Waxman, III, Phillips Nizer Benjamin Krim & Ballon LLP, James Seery, Jr., Garden City, NY, for United Healthcare.
John Leo Walter, Leitess, Leitess & Friedberg, P.C., Baltimore, MD, for IVTx, Inc.
Karen H. Moore, Baltimore, MD, Assistant U.S. Trustee.
DECISION RE MOTION OF UNITED HEALTHCARE FOR RELIEF FROM AUTOMATIC STAY
This decision addresses a motion filed by United HealthCare of the Mid-Atlantic ("United") for relief from the automatic stay of 11 U.S.C. § 362(a). United is a health maintenance organization ("HMO") which contracted with the debtor, Doctors Health, Inc., for the debtor to furnish medical services on behalf of United's members electing to use the debtor.1 United maintains that certain funds of the debtor ("the reserve") constitute a segregated fund which a Maryland health care statute requires United to distribute to intended beneficiaries—various "external providers" (a term defined in the contract and discussed below), who acted on the debtor's behalf to provide services to United's members. United's motion seeks relief from the automatic stay to permit United to administer external provider claims under the contract and to pay external provider claims from the reserve. United's motion is based on 11 U.S.C. § 362(d)(1) for cause and based on 11 U.S.C. § 362(d)(2) for lack of equity and lack of necessity of the property for an effective reorganization. The motion will be granted on the basis of § 362(d)(1).
The court first addresses some of the basic contractual background of this dispute before turning to the HMO regulatory background and the specific events that led to this motion. The debtor and United entered into the contract at issue, entitled IPA Percentage of Premium Service Agreement ("the Agreement"), on June 1, 1996.2 The critical part of the Agreement is § 3.2, which required the reserve to be established. But to understand § 3.2, it is first necessary to describe the relationship between the parties under the Agreement.
Under the Agreement, the debtor was designated as "IPA" (meaning an independent practice association). United, as an HMO, provides prepaid health care benefits to member patients through a coordinated system of arrangements with various health care providers. Agreement at 1.
As IPA, the debtor agreed "to provide or arrange for the provision of health services to the Members of the HMO i.e., United." Id. The debtor specifically agreed to "provide or arrange for all those physician services as required in this Agreement." Id. § 3.1.7.
In exchange for its services, the debtor was entitled to a monthly capitation fee, a fixed amount for each United member who selected the debtor to provide health care.3 The capitation payment was to be made on the tenth day of each month (or the next business day if the tenth day was a weekend or holiday). Id. § 3.1.2. The debtor maintains that the debtor itself employed no doctors to furnish services to United's members. Instead, it entered into contracts with physicians to provide services to United's members who had selected the debtor to provide services. These physicians qualified as "external providers" under Agreement § 1.8:
1.8 External Providers—means any physician, health professional, or other health care provider, including IPA Physicians, Health Service Contractors, and Health Centers contracted with IPA to provide Covered Services to all Members of the HMO.4
The debtor was required to "promptly and fully pay all External Providers who provide Medical Services to Members which were arranged or referred by IPA." Id. § 3.6.1. The debtor was required to "pay an External Provider providing services to all Members no later than thirty (30) days after receipt of a complete and undisputed claim for Medical Services, unless a longer period of time has been agreed to by HMO." Id. United was granted the right to contact external providers directly to verify whether the debtor was current in its payment to them. Id. § 3.6.2 The debtor was required to certify to United on a quarterly basis as to its payments to External Providers. Id. §§ 3.6.2 and 5.8.
Under Agreement § 5.9.4, "External Providers will look solely to the IPA for compensation for Covered Services provided to Members, except for any approved and applicable copayments, coinsurance or deductibles to be collected by the External Providers." But Agreement § 5.11 provided:
5.11 Payment of Claims. Notwithstanding any other provision in this Agreement to the contrary, in instances where patient care, the reputation of the HMO, and/or the relationship between HMO and its Members is jeopardized by the IPA\'s nonpayment or late payment to subcontractors or providers for services provided to HMO enrollees, HMO shall have the right to make these payments directly to the subcontractor provider and to recover from the IPA the full amount of any such payments as outlined under Section 3.2. In order to exercise its rights, HMO must give IPA ten (10) days prior notice of HMO\'s intention to pay the subcontractor or provider directly.
Emphasis added.
In addition to rights against the reserve under § 3.2, United was granted rights of indemnification:
2.3 Indemnification. IPA shall indemnify and hold HMO . . . harmless from any and all claims . . . and liabilities incurred as a result of the services provided . . . by IPA or IPA\'s employees, agents or subcontractors pursuant to this Agreement.
That brings the court to Agreement § 3.2:
3.2 Reserve. sic Pursuant to Maryland Health-General 19-713.2, upon contract signature IPA shall provide HMO with reasonably acceptable collateral to secure an amount equal to the immediately preceeding sic sixty (60) days of IPA capitation. The purpose of such Reserve is to ensure that sufficient funds are on hand to reimburse HMO for any payment made to External Providers, as required by law, if IPA fails to make any such payments. HMO agrees that a Standby Letter of Credit from a commercial bank shall be deemed reasonably acceptable collateral for such purposes.
The Agreement was subject to the approval of the Maryland Insurance Administration. Id. § 7.18. Actually, as will be seen, Maryland law requires approval (via non-disapproval within 30 days of filing) of the plan incorporated in the Agreement. (The debtor does not contend that approval of the Agreement itself had to be obtained for it to be effective.) Approval of a form of plan, substantially similar to the plan the Agreement embodied, had been received earlier. But the form of agreement filed for approval included a provision —which the actual Agreement did not include—for withholding ten percent of the capitation payments to fund the reserve.5 However, the Agreement in § 3.2 called for a reserve equal to 60 days of capitation or roughly one-sixth of yearly capitation; that amount exceeds 10 percent. In any event, the parties agree that the Maryland Insurance Commissioner requires that four areas of the form submitted for approval not be modified, but the reserve requirement is not one of those areas.
The Agreement required that all amendments to the Agreement be in writing. Agreement § 7.6. There were one or two amendments, depending on whether amendments are limited to documents altering, as opposed to merely supplementing, the terms of the original Agreement.
First, a "Letter of Agreement," dated April 15, 1997, supplemented the terms of the Agreement by providing in relevant part:
Emphasis added.
Second, a more formal amendment to the Agreement was entered into on January 1, 1998, which altered provisions of the original Agreement. Entitled "Amendment # 1," this amendment altered § 3.1.1 of the Agreement to provide:
3.1.1 Subject to the provisions of Section 3.2, the HMO will pay to the IPA a monthly payment for each Medicare Member selecting the IPA as set forth in Attachment I.6
HMO Act § 19-713.2(a)(2). In turn, "contracting provider" is defined as "a physician or other health care provider who enters into an...
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