Mercy Medical Center v. United Healthcare of the Mid-Atlantic

• Court: Maryland Court of Appeals
• Writing for the Court: KRAUSER, J.
• Citation: Mercy Medical Center v. United Healthcare of the Mid-Atlantic, 815 A.2d 886, 149 Md. App. 336 (Md. App. 2003)
• Decision Date: 30 January 2003
• Docket Number: No. 1495,1495
• Parties: MERCY MEDICAL CENTER, INC., v. UNITED HEALTHCARE OF THE MID-ATLANTIC, INC.

815 A.2d 886

149 Md. App. 336

MERCY MEDICAL CENTER, INC., v. UNITED HEALTHCARE OF THE MID-ATLANTIC, INC.

No. 1495, Sept. Term, 2001.

Court of Special Appeals of Maryland.

January 30, 2003.

Matthew S. Sturtz (Jacqueline M. Wood and Miles & Stockbridge P.C., on the brief), Baltimore, for appellant.

Richard Harrison (Eric Waxman, David Jacoby, Daniel Kolko, Phillips, Nizer, Benjamin, Krim & Ballon LLP, Garden City, New York; Marcell Solomon and Marcell Solomon & Associates, P.C., Greenbelt, on the brief), for appellee.

Argued Before HOLLANDER, KRAUSER, and THEODORE G. BLOOM, (Retired, Specially Assigned), JJ.

KRAUSER, J.

Appellant, Mercy Medical Center, Inc. ("Mercy"), guaranteed a medical services contract between Maryland Personal Physicians, Inc. ("MPPI"), a physicians' network created by Mercy, and appellee, United Healthcare of the Mid-Atlantic, Inc. ("United"), a health maintenance organization ("HMO").¹ Specifically, Mercy guaranteed the payments MPPI was to make, under that contract, to medical service providers for services rendered by those providers to United's members. When MPPI was unable to make those payments, United turned to Mercy.

Invoking Mercy's guarantee, United demanded that Mercy pay the outstanding medical fees and costs that MPPI had promised to cover. Mercy demurred, insisting that the guarantee had expired and that, even if it had not, Mercy owed substantially less than the total amount claimed by United. Its payment demand rejected, United turned to the Circuit Court for Baltimore City for assistance. That court ordered Mercy to fund a bank account in the amount of $5,108,476.00, from which United could pay outstanding medical service claims but denied United's request for pre-judgment interest on that amount. Cross-appeals followed.

Mercy maintains that the circuit court erred in concluding that it had agreed to guarantee payment of over five million dollars of MPPI's unpaid obligations, and presents the following issues for our review, which, although re-ordered, have been set forth below as they appear in Mercy's brief. They are:

I. Whether the court erred when it ignored the express termination of the April 1998 amendment, which served as the document pursuant to which Mercy's guarantee was given.

II. Whether the court erred when it found that [M]ercy impliedly consented to the drastic modifications to the IPA agreement in October 1998.

III. Whether the court erred when it determined that the language of attachment Q and the guarantee do not limit Mercy's liability to a maximum amount of $1.1 Million.

On cross-appeal, United presents the following question:

Did the circuit court err in denying United's demand for pre-judgment interest for Mercy's breach of its Guarantee?

For the reasons that follow, we shall affirm the judgment of the circuit court.

BACKGROUND

Mercy is a hospital located in Baltimore City. Sometime between 1994 and 1996,² Mercy formed MPPI. According to MPPI's 1997 Annual Report, it was "an integrated network of primary care and specialist physicians in Central Maryland" created for the purpose of "negotiat[ing] service contracts and provid[ing] practice management services." Mercy capitalized MPPI with a $14,000,000.00 investment.

At the outset, Mercy held about 90% of the stock in MPPI, and remained a majority stockholder in 1997 and 1998, with 57% of the stock. Although MPPI had a separate corporate identity from Mercy, Mercy's chief executive officer and chief financial officer sat on MPPI's board of directors and on its Joint Policy Committee in 1997 and 1998. In addition, Mercy provided funding to MPPI, including a $4,000,000.00 line of credit, from which MPPI drew throughout 1997.

Mercy created MPPI to establish a geographically-dispersed network of physicians. That network, Mercy hoped, would send patients to Mercy for treatment. Once MPPI was formed, MPPI entered into "full risk capitated contracts" with health maintenance organizations like United; they, in turn, were to send their members to MPPI and Mercy for medical services. A "full-risk capitated contract" is one in which an "individual practice association"("IPA"), such as MPPI, accepts a fixed monthly payment from an HMO, such as United, for each HMO member who chooses or is assigned to the individual practice association. In consideration for the fixed monthly payment, the individual practice association agrees to accept full responsibility for the medical treatment of each HMO member, even if the cost of that medical treatment exceeds the fixed amount paid to the individual practice association by the HMO.

In the spring of 1997, after months of negotiations, MPPI entered into a contract with United that commenced on April 1, 1997 ("IPA Agreement"). During those negotiations, MPPI and Mercy were represented by Mercy Ventures, Inc., a Maryland Corporation that was formed by Mercy. Mercy Ventures was created by Mercy to provide medical practice management services to physicians, physician groups, and hospitals. One such service was to review and negotiate managed care contracts on behalf of such clients as MPPI and Mercy.

Under the IPA Agreement, United was to compensate MPPI on a "monthly fee for service" basis for each of United's commercial members. But with respect to each Medicaid and Medicare member, United was to pay MPPI a "monthly capitation payment."³ "[I]n consideration of said capitation payments," MPPI agreed to "provide or arrange for all those physician services [ ] required in [the] Agreement and [to] assume the responsibility for the costs of said services." Some of those services were provided by "External Providers." An "External Provider" is defined by the IPA Agreement as "any physician, health professional, or other health care provider, including [MPPI] Physicians, health service contractors, and Health Centers contracted with [MPPI] to provide Covered Services to all Members of [United]."

To comply with the Health Maintenance Organization Act, Maryland Code (2002), § 19-713.2(d)(3) of the Health-General Article ("HMO Act"), the parties added "Attachment Q" to the 1997 IPA Agreement. Section 19-713.2(d)(3) of the HMO Act provides that an HMO cannot enter into an administrative services contract⁴ unless the HMO files a plan with the Insurance Commissioner that:

(3) Require[s] the health maintenance organization to establish and maintain a segregated fund, in a form and an amount approved by the Commissioner, which may include withheld funds, escrow accounts, letters of credit, or similar arrangements, or require the availability of other resources that are sufficient to satisfy the contracting provider's obligations to external providers.

Accordingly, Attachment Q states that

[p]ursuant to Maryland Health-General 19-713.2, [MPPI] shall provide [United] with reasonable acceptable collateral to secure an amount equal to the immediately preceding sixty (60) days of IPA capitation. The purpose of such Reserve is to ensure that sufficient funds are on hand to reimburse [United] for any payments made to External Providers, as required by law, if [MPPI] fails to make any such payments. [United] agrees that a Letter of Guarantee from Mercy Medical Center shall be deemed reasonably acceptable collateral for such purpose. Such Letter of Guarantee shall be delivered prior to contract signature and will be made part of this Agreement.

Although MPPI and United signed the 1997 IPA Agreement in April 1997, the letter of guarantee required by Attachment Q was not provided by MPPI before the execution of the IPA Agreement. Despite MPPI's failure to provide such a letter, United did not discontinue making capitation payments to MPPI.

Instead of providing a letter of guarantee, Mercy informed United in a letter dated April 16, 1997, that it would "accept financial responsibility for any debts up to $100,000 per year incurred by [MPPI] related to its contract dated April 1, 1997 with [United]." That offer was rejected, and the parties continued to negotiate the issue throughout 1997, with Mercy Ventures representing both Mercy and MPPI.

The IPA Agreement, as noted earlier, was effective April 1, 1997; it automatically renewed each year on its anniversary date. As the April 1, 1998 renewal date approached, the guarantee issue remained unresolved. United wanted a fluctuating guarantee, that is, "an amount equal to the immediately preceding sixty (60) days of IPA capitation," as set forth in Attachment Q. But Mercy wanted a fixed amount. Mercy's position was expressed in a letter dated December 16, 1997 from Steven Murphy, a Managed Care Coordinator of Mercy Ventures, to Sharon Pavlos of United:

For auditing purposes, [Mercy] cannot commit to a Letter of Guarantee with a fluctuating monthly balance. It is best if both parties agree to a set amount to be guaranteed in the contract which may be re-negotiable each contract year. [Mercy] would like to set the limit of the 1997-98 Letter of Guarantee at $300,000.

That arrangement was not acceptable to United, but the parties continued to do business, pursuant to the IPA Agreement, without a guarantee.⁵

In December of 1997, MPPI notified United that it was dissatisfied with the capitation rates, and consequently wanted to terminate the IPA Agreement. Negotiations continued. Eventually, United agreed to increase the capitation rates, but the guarantee issue remained unresolved. In a memo dated March 26, 1998, United warned MPPI that it considered their agreement to increase capitation rates was "contingent upon MPPI obtaining and delivering a parent guarantee equivalent to two months current capitation." Despite this warning, no guarantee was signed; the IPA Agreement automatically renewed on April 1, 1998; and the parties continued to do business together.

To memorialize the parties' agreement to increase capitation rates, United drafted and sent to MPPI a proposed amendment to the IPA Agreement dated April 3, 1998 ("...