In re Gillette Children's Specialty Healthcare

• Decision Date: 17 August 2016
• Docket Number: No. A14–1462.,A14–1462.
• Citation: 883 N.W.2d 778
• Parties: In re Consolidated Hospital Surcharge Appeals of GILLETTE CHILDREN'S SPECIALTY HEALTHCARE, St. Luke's Hospital, North Memorial Health Care, HealthEast Care System, Park Nicollet Health Services, Fairview Health Services, and Children's Hospitals and Clinics of Minnesota.
• Court: Minnesota Supreme Court

883 N.W.2d 778

In re Consolidated Hospital Surcharge Appeals of GILLETTE CHILDREN'S SPECIALTY HEALTHCARE, St. Luke's Hospital, North Memorial Health Care, HealthEast Care System, Park Nicollet Health Services, Fairview Health Services, and Children's Hospitals and Clinics of Minnesota.

No. A14–1462.

Supreme Court of Minnesota.

Aug. 17, 2016.

Salvatore G. Rotella, Jr., David J. Bird, Reed Smith LLP, Philadelphia, PA; and Thomas R. Muck, Samuel D. Orbovich, Sten–Erik Hoidal, Fredrikson & Byron, P.A., Minneapolis, MN, for appellants/cross-respondents Gillette Children's Specialty Healthcare, St. Luke's Hospital, North Memorial Health Care, HealthEast Care System, Park Nicollet Health Services, Fairview Health Services, and Children's Hospitals and Clinics of Minnesota.

Lori Swanson, Attorney General, Patricia A. Sonnenberg, Assistant Attorney General, Saint Paul, MN, for respondent/cross-appellant Minnesota Department of Human Services.

Considered and decided by the court.

OPINION

ANDERSON, Justice.

Respondent Minnesota Department of Human Services (DHS) assessed surcharges against seven hospital and hospital systems (collectively, the Hospitals) under Minn.Stat. § 256.9657, subd. 2 (2014).¹ The Hospitals dispute the authority of DHS to assess the surcharges, contending that the surcharge is preempted by federal law with respect to revenues they receive from insurance carriers participating in both the Federal Employee Health Benefits Program and the TRICARE program. The Commissioner of DHS denied the Hospitals' claim and the court of appeals affirmed, concluding that the surcharge is not preempted. Because federal law does not preempt the surcharge, we affirm.

I.

Under Minnesota law, the Hospitals are subject to a 1.56% surcharge on their net patient revenue, excluding revenue received from Medicare patients. Minn.Stat. § 256.9657, subd. 2. The amount of each hospital's surcharge liability is calculated by DHS and is based on information reported to DHS by each hospital at the end of the fiscal year. DHS then invoices each hospital for its surcharge liability on a monthly basis.²

A hospital may appeal the amount of the surcharge assessed by DHS within 30 days of receiving notice of the amount due. Minn.Stat. § 256.9657, subd. 6 (2014). Because DHS provides notice of each monthly charge, a hospital must perfect an appeal for every monthly assessment that it finds objectionable. Minn. R. 9510.2040, subp. 6 (2015). In this case, the parties have stipulated that the Hospitals all perfected appeals of their surcharge assessments for various months between August 2010 and February 2013.

Each of the appeals asserted the same basic legal theory. The Hospitals claim that federal law preempts the surcharge to the extent that it requires them to pay a surcharge on revenues obtained from insurance carriers that participate in the Federal Employee Health Benefits Act (FEHBA) or the TRICARE program. Both FEHBA and TRICARE are programs through which the federal government provides its employees and uniformed members of the armed services with health insurance benefits.

FEHBA authorizes the federal government to provide health insurance to employees of the federal government, as well as their families and dependents. See generally 5 U.S.C. §§ 8901 –14 (2012). The program is managed by the Office of Personnel Management (OPM). Rather than providing health insurance directly, FEHBA authorizes OPM to enter into contracts with group health insurance carriers. 5 U.S.C. § 8902(a). Premiums are paid by the employing federal agency and the federal employee and are kept in a fund, known as the FEHBA Fund, in the U.S. Treasury. 5 U.S.C. § 8906. OPM administers the FEHBA Fund and manages disbursements from the fund to FEHBA carriers. Id.

Carriers fall into two different categories: community-rated and experience-rated. Premiums paid to community-rated carriers by the FEHBA Fund are based on a capitation rate that charges a set amount for each individual insured by the carrier. 48 C.F.R. § 1602.170–2. Premiums due to community-rated carriers are paid on a monthly basis, regardless of actual costs incurred by the carrier. 48 C.F.R. § 1632.170(a).

Premiums paid to experience-rated carriers, on the other hand, are based on historical data of the actual expenses incurred by the carrier. 48 C.F.R. § 1602.170–7. The premiums due to experience-rated plans are held in the FEHBA Fund under a Letter of Credit (LOC). 48 C.F.R. § 1632.170(b). The premiums are paid to the carrier from the FEHBA Fund on a “checks-presented basis.” 48 C.F.R. § 1632.170(b)(2). In other words, an experience-rated carrier must reimburse the provider, usually based on a pre-negotiated rate, and then seek reimbursement for their expenditures from the FEHBA Fund based on the amount the carrier paid to the provider.

TRICARE, the other federal program at issue, provides health insurance to uniformed members of the United States Armed Services and their dependents. 10 U.S.C. § 1072(7) (2012) ; 32 C.F.R. § 199.17. TRICARE's authorizing statute directs the Secretary of Defense to enter into contracts with group health insurance carriers. 10 U.S.C. § 1074(c)(2)(B) (2012). During the relevant period, TRICARE entered into contracts with regional contractors to administer the TRICARE program.

The TRICARE regional contractor for the West Region, to which Minnesota belongs, entered into contracts with some, but not all, of the Hospitals. If a hospital has a contract with the TRICARE regional contractor, the hospital is reimbursed for care provided to TRICARE patients at a negotiated rate, which cannot exceed TRICARE's maximum-allowable rate and usually represents either a percentage of the maximum-allowable rate or a percentage of the actual charges billed by the hospital. If a hospital does not have a contract with the TRICARE regional contractor, the hospital is usually reimbursed for care provided to TRICARE patients at the maximum-allowable rate.

Both FEHBA and TRICARE's authorizing statutes contain provisions preempting certain state laws. FEHBA's preemption provision provides:

No tax, fee, or other monetary payment may be imposed, directly or indirectly, on a carrier or an underwriting or plan administration subcontractor of an approved health benefits plan by any State ... or by any political subdivision or other governmental authority thereof, with respect to any payment made from the Fund.

5 U.S.C. § 8909(f)(1). FEHBA contains an exception for state or local taxes, fees, or monetary payments “on the net income or profit accruing to or realized by such carrier ... from business conducted under this chapter, if that tax, fee, or payment is applicable to a broad range of business activity.” 5 U.S.C. § 8909(f)(2).

TRICARE's authorizing statute also includes a preemption provision that entrusts the Secretary of Defense with the power to declare that state laws are preempted if they are “inconsistent with a specific provision of [a TRICARE] contract or a regulation” promulgated by the Secretary of Defense. 10 U.S.C. § 1103(a) (2012). Additionally, the Secretary of Defense may determine that a state law is preempted when “preemption of the State or local law or regulation is necessary to implement or administer the provisions of the contract or to achieve any other important Federal interest.” Id. The Secretary of Defense has used this statutory authority to promulgate a regulation with similar language to FEHBA's preemption provision. See 32 C.F.R. § 199.17(a)(7)(iii). The Secretary of Defense has specifically mandated that “interpretations [of the preemption regulation] shall be consistent with those applicable to the Federal Employees Health Benefits Program under 5 U.S.C. 8909(f).” Id. Thus, the preemption provisions of FEHBA and TRICARE with respect to taxes, fees, or other monetary payments imposed on carriers are coextensive.

The Hospitals claim that these preemption provisions apply and preempt Minn.Stat. § 256.9657, subd. 2, to the extent that the Minnesota statute requires the Hospitals to pay a surcharge on revenue received from FEHBA and TRICARE carriers. DHS denied the Hospitals' appeals via letter on September 21, 2012. At the request of the Hospitals, DHS initiated a consolidated contested case proceeding under the Minnesota Administrative Procedure Act (MAPA) to determine whether Minn.Stat. § 256.9657, subd. 2, is preempted. See Minn.Stat. § 14.57 (2014).

The case was assigned to an Administrative Law Judge (ALJ). The parties then entered into an agreement to toll defenses to the Hospitals' claims with respect to years prior to 2010,³ and to select two representative hospitals through which to try the contested case. Using two representative hospitals allowed the consolidated contested case to resolve the legal issues common to all of the Hospitals' claims while expediting discovery.

The two representative hospitals that were chosen are North Memorial Health Care (North Memorial) and Park Nicollet Health Services (Park Nicollet). During the relevant period, North Memorial contracted with various FEHBA carriers, but did not contract with TRICARE. As a result, North Memorial was reimbursed at negotiated rates for services provided to FEHBA patients and at the maximum-allowable rate for services provided to TRICARE patients. During the relevant period, Park Nicollet contracted with both FEHBA carriers and TRICARE. As a result, Park Nicollet was reimbursed at previously negotiated rates for services provided to both FEHBA and TRICARE patients.

Both parties moved for summary disposition, which is the MAPA equivalent of summary judgment. Pietsch v. Minn. Bd. of Chiropractic Exam'rs, 683 N.W.2d 303, 306 (Minn.2004) (citing Minn. R. 1400.5500(K) (2003) ). To support their motion for summary disposition, the Hospitals submitted declarations from senior administrative officials at North Memorial and Park Nicollet to show that the Hospitals passed on the cost of the surcharge to the FEHBA and...