Nev.Care Inc. D/b/a I/hx Iowa Health Solutions Inc v. Dep't Of Human Serv.

• Decision Date: 22 June 2010
• Docket Number: No. 08-0952.,08-0952.
• Citation: 783 N.W.2d 459
• Parties: NEVADACARE, INC. d/b/a i/hx Iowa Health Solutions, Inc., Appellant,v.DEPARTMENT OF HUMAN SERVICES and Kevin W. Concannon, in His Official Capacity as Director, Department of Human Services, Appellees.
• Court: Iowa Supreme Court

783 N.W.2d 459

NEVADACARE, INC. d/b/a i/hx Iowa Health Solutions, Inc., Appellant,v.DEPARTMENT OF HUMAN SERVICES and Kevin W. Concannon, in His Official Capacity as Director, Department of Human Services, Appellees.

No. 08-0952.

Supreme Court of Iowa.

April 30, 2010.

Rehearing Denied June 22, 2010.

COPYRIGHT MATERIAL OMITTED

Michael A. Dee of Brown, Winick, Graves, Gross, Baskerville and Schoenebaum, P.L.C., Des Moines, David L. Brown of Hansen, McClintock & Riley, Des Moines, and Matthew G. Weber and Stephen G. Masciocchi of Holland & Hart, LLP, Denver, Colorado, for appellant.

Mark E. Weinhardt, David Swinton, Margaret C. Callahan, and Danielle M. Shelton of Belin Lamson McCormick Zumbach Flynn, Des Moines, for appellees.

WIGGINS, Justice.

In this appeal, we must decide if the district court properly determined that NevadaCare, Inc. d/b/a i/hx Iowa Health Solutions, Inc. was not entitled to damages under a series of contracts setting capitation rates payable to it. We must also decide whether the district court correctly awarded the department of human services and Kevin W. Concannon (hereinafter collectively referred to as “DHS”) attorney fees under the contracts. On our review of the record, we find DHS did not breach its contracts with NevadaCare. We find, however, that only one of the contracts entitled DHS to attorney fees and litigation costs. Accordingly, we affirm the judgment of the district court granting judgment in favor of DHS on all claims on the merits, reverse the judgment of the district court awarding DHS attorney fees and litigation costs, and remand the case to the district court for further proceedings to determine an appropriate award of attorney fees and litigation costs limited to the contract for fiscal years 2004 and 2005.

I. Background Facts and Proceedings.

After closely and carefully scrutinizing the record, we find the record supports the following facts found by the district court. Beginning in fiscal year 1998, NevadaCare entered into a series of contracts with DHS in which NevadaCare agreed to provide managed health care services as a health maintenance organization (HMO) for enrollees in Iowa's Medicaid program. In consideration for providing its services, DHS agreed to pay NevadaCare monthly capitation payments for each Medicaid enrollee enrolled with NevadaCare. DHS paid the monthly capitation rates regardless of whether the Medicaid enrollees received medical services from NevadaCare in that month. This relationship lasted until February 1, 2005. During this period, the parties entered into a series of five contracts. Three separate contracts covered fiscal years 1998, 1999, and 2003. One contract covered fiscal years 2000 to 2002, while another contract covered fiscal years 2004 to 2005. The contracts were risk-based contracts, meaning they did not guarantee NevadaCare a profit. Thus, if NevadaCare's actual costs of providing managed health care services to its enrollees were greater than the capitation payments it received, it could incur losses under the contracts.

At the time the parties entered into their first contract, the Centers for Medicare and Medicaid Services (CMS) mandated that capitation rates be less than the upper payment limit (UPL) to ensure the managed care delivery model was more cost efficient than the traditional fee-for-service model. See 42 C.F.R. § 447.361 (1997). The contracts define UPL as the projected cost of providing services to an actuarially equivalent population in a fee-for-service program. In accordance with this federal mandate, the Iowa Administrative Code required capitation rates to be actuarially determined for the beginning of each new fiscal year and stated, “[t]he capitation rate shall not exceed the cost ... of providing the same services on a fee-for-service basis.” Iowa Admin. Code r. 441-88.12(2) (1997). Rather than employ its own actuaries to calculate these rates, DHS contracted with the actuarial accounting firm Milliman U.S.A., Inc. f/k/a Milliman & Robertson, Inc., to calculate the capitation rates.

The contracts for fiscal years 1998, 1999, and 2000 called for capitation payments to NevadaCare at 97% of the UPL. For the fiscal years 2001, 2002, and 2003, these capitation payments increased to 98% of the UPL. In fiscal year 2004, CMS promulgated a new regulation allowing states to set capitation rates above the UPL if necessary to achieve actuarial soundness. See 42 C.F.R. § 438.6(c) (2004). Thus, in fiscal year 2004, DHS abandoned its UPL rate-setting methodology and instead applied a new managed care methodology, which attempted to project the actual cost for a reasonably efficient managed care organization to provide services to Medicaid enrollees for the upcoming fiscal year. Under this new methodology, Milliman developed and used an actuarial tool referred to as degrees of health management to identify a projected cost range for each rate category. Milliman then set specific capitation rates for each category at various points within the actuarially projected ranges. This new methodology was more complex than the previous UPL methodology that DHS utilized in its earlier contracts.

Each contract required DHS to calculate the capitation rates it would pay NevadaCare. Consequently, each contract contained an addendum consisting of a report prepared by Milliman describing the actuarial work it performed and the methodology it used to calculate the capitation rates for the applicable contract. The reports also contained capitation rate charts, which laid out the results of Milliman's work. These rate charts provided the specific capitation rates DHS paid NevadaCare on a monthly basis for each Medicaid enrollee enrolled in NevadaCare's plan.

Before entering each contract, NevadaCare had the opportunity to review the entire contract, including the capitation rates contained in the rate charts, and decide whether to enter into the agreement. NevadaCare financially analyzed the rates to see if they were consistent with its budget, but it never employed its own actuaries to review the accuracy of the rates. It is undisputed that from fiscal years 1998 to 2005, NevadaCare consistently entered into the contracts in issue and DHS paid the capitation rates listed in the rate charts.

The language dealing with the capitation rates for each contract is as follows:

Fiscal year 1998

In full consideration of contract services rendered by the HMO, the DEPARTMENT agrees to pay the HMO monthly payments based on the HMO's decisions concerning optional services and reinsurance as specified in Addendum VI at the capitation rates established for counties within the identified regions as outlined in ADDENDUM XV. Capitation rates are calculated on an actuarial basis recognizing payment limits set forth in 42 CFR 447.361.

Fiscal year 1999

In full consideration of contract services rendered by the HMO, the DEPARTMENT agrees to pay the HMO monthly payments based on the HMO's decisions concerning optional services and reinsurance as specified in Addendum VI at the capitation rates established for counties within the identified regions as outlined in ADDENDUM XV. Capitation rates are calculated on an actuarial basis recognizing payment limits set forth in 42 CFR 447.361. Capitation payments received shall be payment in full for services provided by the HMO and there shall be no adjustments retroactively to reflect the actual cost of services provided.

Fiscal years 2000, 2001, and 2002

In consideration of Contract Services rendered by the HMO, the Department shall make a monthly capitated payment to the HMO. The monthly capitated payment will be established based on the Enrollee's age, sex and county of residence as established in Addendum XII. Capitation rates calculation methodology is outlined in Addendum XII.

Fiscal year 2003

In consideration of Contract Services rendered by the MCO [managed care organization], the Department shall make a monthly capitated payment to the MCO. The monthly capitated payment will be established based on the Enrollee's age, sex and county of residence as established in Addendum XI. Capitation rate calculation methodology is outlined in Addendum XI.

Fiscal years 2004 and 2005

In consideration of Contract Services rendered by the MCO, the Department shall make a monthly capitated payment to the MCO. The monthly capitated payment will be established based on the Enrollee's age, sex and county of residence as established in Addendum XI.

Capitation rate calculation methodology is outlined in Addendum XI.

In 2004 NevadaCare did not receive a new actuary report from DHS relating to the calculation of the fiscal year 2005 capitation rates. NevadaCare contacted DHS and requested the report but was told that there was no need for a new report because the capitation rates would not be changed for the upcoming fiscal year. From this point, the relationship between NevadaCare and DHS started to deteriorate. NevadaCare began to believe DHS was not properly setting the capitation rates and requested information about DHS's rate-setting practices; however, DHS did not comply with its requests. Thus, on October 6, 2004, NevadaCare filed an action alleging, in part, that DHS had violated the contracts at issue, as well as state and federal law, by setting improper capitation rates. Specifically, NevadaCare claimed DHS did not calculate the capitation rates on an actuarially sound basis. On November 29, 2004, NevadaCare exercised its option to terminate the fiscal years 2004 through 2005 contract with DHS. Due to a contractually required sixty-day notification period, the effective date of the termination was February 1, 2005. We will discuss other facts pertinent to deciding this appeal later in this opinion.

After dealing with extensive pretrial motions, the district court held a bench trial. In its decision, the district court concluded it could find no breach of the contracts since both parties performed pursuant to the...