SACRED HEART HEALTH v. HUMANA MILITARY HEALTHCARE

• Decision Date: 30 March 2010
• Docket Number: No. 08-16430.,08-16430.
• Citation: 601 F.3d 1159
• Parties: SACRED HEART HEALTH SYSTEMS, INC., St. Vincents Health System, Inc., et al., Plaintiffs-Counter Defendants-Appellees, v. HUMANA MILITARY HEALTHCARE SERVICES, INC., Defendant-Counter Claimant-Appellant.
• Court: U.S. Court of Appeals — Eleventh Circuit

601 F.3d 1159

SACRED HEART HEALTH SYSTEMS, INC., St. Vincents Health System, Inc., et al., Plaintiffs-Counter Defendants-Appellees, v. HUMANA MILITARY HEALTHCARE SERVICES, INC., Defendant-Counter Claimant-Appellant.

No. 08-16430.

United States Court of Appeals, Eleventh Circuit.

March 30, 2010.

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Scott M. Edson, K. Lee Blalock, II, Brian D. Boyle, Irv Gornstein, O'Melveny & Myers, LLP, Washington, DC, Robert B. Parrish, Charles M. Trippe, David C. Reeves, Moseley, Prictchard, Parrish, Knight & Jones, Jacksonville, FL, for Humana Military Heathcare Services, Inc.

Russell F. Van Sickle, Terrie Lee Didier, J. Nixon Daniel. III, Beggs & Lane, LLP, Pensacola, FL, for Plaintiffs.

Before BLACK, MARCUS and HIGGINBOTHAM,^* Circuit Judges.

MARCUS, Circuit Judge:

Defendant Humana Military Healthcare Services, Inc., a health maintenance organization, appeals the district court's order certifying a class of approximately 260 hospitals in six states, which claim that Humana systematically underpaid them for medical services they rendered to veterans under a federal program, and thereby breached their individual network provider agreements. Humana challenges the district court's determination pursuant to Fed.R.Civ.P. 23(b)(3) that common questions — in particular the question of whether the federal government forced Humana to pay the hospitals lower rates — would predominate over individual ones, and that a class action would be a superior method of resolving the instant dispute. After careful review, we agree with Humana that many important uncommon questions raised by this litigation overwhelm the one common issue and render the case unsuitable for class treatment, and that the district court's contrary conclusion was an abuse of discretion. We, therefore, reverse the district court's certification order and remand for further proceedings consistent with this opinion.

I.

Humana is a managed care organization that contracts with hospitals and other care providers to offer health care services to its members. In 1995, Humana won a Managed Care Support ("MCS") contract with the federal government pursuant to its CHAMPUS/TRICARE ("TRICARE") program, which offers healthcare services for military retirees and their dependents.¹ Pursuant to the contract, Humana entered into individual network agreements with numerous healthcare providers located in TRICARE Regions 3 and 4 to provide outpatient non-surgical services to TRICARE beneficiaries. At the time, Regions 3 and 4 included the states of Alabama, Florida, Georgia, Mississippi, South Carolina, Tennessee, and parts of Louisiana and Arkansas. Under each network agreement, the hospital would render services to TRICARE beneficiaries and Humana would reimburse the hospital in accordance with the terms of the agreement. The government would then pay Humana at fixed rates for healthcare costs, subject to periodic redetermination using a risk-sharing formula by which Humana and the government would share increased costs or savings.

The reimbursement dispute at the heart of this case is permeated by two central and related terms, one or both of which appear in many of the payment provisions of the hospitals' network agreements. The first is the term "CHAMPUS allowable"; the parties agree that the term refers generally to any allowable maximum payment or payment formula set by TRICARE, and it appears to have meant billed charges or a flat rate prior to 1999. The second term is "CMAC," which is short for "CHAMPUS Maximum Allowable Charges," and which designates a specific schedule of fees patterned after the so-called "resource-based relative value scale" ("RBRVS") used by Medicare and other private payers. See Report of Dr. Zachary Dyckman, at 2.² The parties agree that "CMAC" — or "CMAC rates" — is one form of a "CHAMPUS allowable."

Prior to October 1, 1999, Humana paid each of the network providers for hospital outpatient radiology and laboratory services either at a percentage of the charges the hospitals billed or at a flat rate. Humana appears to have done so either because that is what the particular network agreement required, or because the network agreement limited payments to the "CHAMPUS allowable," which at the time was understood to mean billed charges or a flat rate. See, e.g., 1 Hr'g Tr. 26. By a written communication dated November 18, 1999, however, Humana informed the network providers that payment for outpatient laboratory and radiology services rendered after October 1, 1999, would be made on the basis of CHAMPUS Maximum Allowable Charges — i.e., CMAC rates. See, e.g., Letter from Richard J. Mancini, Director, Humana Network Development, to CFO, Baptist Medical Center of Nassau, dated Nov. 18, 1999, Def. Ex. 163.³ The change in payment policy almost uniformly resulted in lower payments to the providers than under the billed charges/flat fee structure.

Humana justified the change on the ground that the TRICARE Management Activity ("TMA"), a unit of the Defense Department that administers TRICARE for the government, had imposed CMAC as the new "CHAMPUS allowable." Whether or not that was true — a question that goes solely to the merits of this case — Humana announced the change in a one-page letter that it claims was sent to all of the hospitals, and which a large majority of the hospitals acknowledge receiving. The letter read in relevant part as follows:

In accordance with TRICARE/CHAMPUS policy, payment of all outpatient technical and professional laboratory and radiology claims will be made on the basis of CHAMPUS Maximum Allowable Charges (CMAC). Beginning October 1st, 1999, CMAC rates will apply to claims payment for these services performed in the hospital outpatient setting.

See, e.g., Letter from Richard J. Mancini, Director, Humana Network Development, to CFO, Baptist Medical Center of Nassau, dated Nov. 18, 1999, Def. Ex. 163.

A small number of hospitals — approximately nine — initially objected to the change in payment methodology, but apparently agreed to accept CMAC payments when reminded again of the federal policy-based explanation offered in the November 1999 letter. No hospital appears to have terminated its contract with Humana as a result of the change in payment policy, even though many of the provider agreements contained a termination clause that either party could invoke after a defined notice period. See 2 Hr'g Tr. 238, June 17, 2008.

In August 2002, however, the Baptist Hospital of Florida and the Healthcare Authority of the City of Huntsville, Alabama, sued Humana in the United States District Court for the Northern District of Florida, asserting that the 1999 change in payment methodology constituted a breach of their network agreements. The plaintiffs sought to represent a class of similarly situated hospitals in former Regions 3 and 4. See Baptist Hospital, Inc. v. Humana Military Healthcare Servs., Inc., Case No. 3:02cv317 (N.D.Fla.) (Collier, J.) ("the Baptist Action"). Class counsel in that case, who represent the hospitals in this case as well, voluntarily dismissed the Baptist Action without prejudice in January 2003. See Baptist Action, Docs. 54, 55. In June 2003, the same two plaintiffs, joined this time by the Bay Medical Center of Florida, sued Humana in the same district court, alleging essentially the same claims. Bd. of Trs. of Bay Med. Ctr. v. Humana Military Healthcare Servs., Inc., Case No. 5:03cv144 (N.D.Fla.) (Rodgers, J.) ("the Bay Medical Action"). That case was dismissed pursuant to settlement prior to a ruling on class certification.

Finally, on February 5, 2007, seven plaintiffs — Florida providers Sacred Heart Health Systems, St. Vincent's Health System, Southern Baptist Hospital, Baptist Medical Center of the Beaches, Baptist Medical Center of Nassau, together with Our Lady of the Lake Hospital of Louisiana and Phoebe Putney Memorial Hospital of Georgia — filed the action underlying this appeal, once again in the Northern District of Florida. Seven months later, they moved for class certification in order to answer the question of whether TRICARE had in fact "mandated" Humana's use of CMAC rates.

To help it determine whether certification was appropriate, the district court held a three-day evidentiary hearing at which the parties offered considerable testimony and documentary evidence. This included copies of the more than 300 contracts that fell within the class definition; evidence of TMA policy before and after November 1999, when Humana announced the change in reimbursement methodology; evidence of Humana's and the hospitals' understanding of the term "CHAMPUS allowable" in the contracts where that term appeared; and the parties' understanding of other contractual provisions, including those governing termination, the timeliness of claims for improper reimbursement, and waiver of defenses to breach.

At the Rule 23 hearing, Humana focused its effort to defeat certification on the terms of the payment clauses themselves, which, although far from the only portions of the contracts relevant to the determination of liability, obviously are central to resolution of the merits of this case. There can be no dispute that those clauses contain a wide variety of language. We discuss that language at length below, but for present purposes, it is enough to observe that some of the contracts contain unqualified reference to billed charges or a flat rate, others limit payment to "any CHAMPUS allowable" and are accompanied by a parenthetical phrase containing one or more such "allowables," still others make partial or exclusive reference to CMAC, and a number of others contain language unique to themselves.

Humana also pointed to a variety of terms other than the payment clauses that might affect whether a breach of the reimbursement provisions is enforceable. These include termination clauses...