Unihealth v. U.S. Healthcare, Inc.
| Decision Date | 10 July 1998 |
| Docket Number | Civil Action No. 95-6037(WHW). |
| Citation | 14 F.Supp.2d 623 |
| Parties | UNIHEALTH, Plaintiff, v. U.S. HEALTHCARE, INC. and The Health Maintenance Organization of New Jersey, Inc., Defendants. |
| Court | U.S. District Court — District of New Jersey |
Kevin R. Jespersen, Slattery, McElwee & Jespersen, Short Hills, NJ, for Plaintiff.
This case concerns a contract dispute between plaintiff, Unihealth, and defendants, U.S. Healthcare, Inc. and The Health Maintenance Organization of New Jersey, Inc. Unihealth represents the Meadowlands Hospital Medical Center, which entered into a "Hospital Services Agreement" with the defendants in 1991. Pursuant to this agreement, Meadowlands Hospital was to provide hospital services to enrollees in U.S. Healthcare's health maintenance organization in exchange for U.S. Healthcare's payment for said services. On November 28, 1995, Unihealth brought this suit against defendants, alleging that defendants breached their contract by failing to make proper reimbursements according to the terms of the contract. A non-jury trial was held before the Court on February 10 and February 11, 1998.
For the reasons discussed herein, the Court finds that: (1) the repeal of the former governmental hospital billing system (the "DRG system") frustrated the Hospital Services Agreement; (2) a modification of this agreement is necessary to provide an equitable remedy for the parties; and (3) the amounts billed for normal newborn babies are to be included in the 1992 and 1993 reconciliations required under the discount clause of this agreement.
With reference to plaintiff's claim for 1992 services, the Court orders defendants to pay plaintiff $39,374.54, which constitutes payment for hospital services and prejudgment interest. With reference to plaintiff's claim for 1993 services, the Court is not satisfied that either party has provided an appropriate method of reconciliation of their respective positions. Accordingly, the Court refers the case to a Special Master. The Special Master shall assist the parties, through mediation, to arrive at a charging formula that is comparable to the DRG system for the purpose of modifying the discount clause in the parties' agreement. In the event the parties are unable to agree upon a suitable charging mechanism, the Special Master shall receive evidentiary submissions from the parties and shall file a Report and Recommendation as to the appropriate standard for plaintiff's billings. The Court assigns the Special Master to subsequently reconcile the amount, including prejudgment interest, that the defendants owe plaintiff for 1993 hospital services pursuant to this formulated rating system.
Unihealth, a nonprofit public benefit corporation organized under the laws of the state of California, was the sole corporate member of Meadowlands Hospital Medical Center ("Meadowlands"), which operated a health care facility until March 29, 1994, when operations were ceased. Unihealth then sold certain of its asserts to Liberty Riverside Health Care, Inc. According to the terms of the sale agreement, Meadowlands retained the rights to any claims against the defendant, among others. On August 3, 1995, Meadowlands was dissolved and all of its claims, including the one against defendants, were distributed to Unihealth.
On April 1, 1991, Meadowlands entered into a "Hospital Services Agreement", ("the Agreement"), with U.S. Healthcare, Inc. and The Health Maintenance Organization of New Jersey, Inc. ("HMO").1 This agreement provided for the terms by which U.S. Healthcare would pay Meadowlands for services rendered to its members. See Ex. P-1 (the Agreement). Schedule A of the contract describes the services covered under the contract. See id. at pp. 1-2 of Schedule A. According to this schedule, "Maternity Care" service includes "semi-private accommodations in a regular maternity bed for the purpose of delivering a baby; inclusive of daily service and all ancillary services for both mother and child." Id. at p. 1 of Schedule A.
The Agreement also provides that "fees to be charged by Hospital for Hospital Services rendered to Members shall be as described in Schedule B, attached hereto and by reference made a part of this Agreement." Id. at p. 1. Schedule B provides a table of rates that Meadowlands could charge for various services. See id. at Schedule B. U.S. Healthcare agreed to pay "per diem" rates for all inpatient medical procedures aside from vaginal and caesarean (C-section) deliveries, which were to be paid through a flat-fee "case" rate system.2 See id. Schedule B states that case rates for both vaginal deliveries and C-sections "include[ ] normal newborn." Id.
Under the "per diem" rate system, defendants were to pay Meadowlands a fixed daily amount when a patient was in the hospital for that particular procedure. See id. According to calculations made during the negotiation of the Agreement, these per diem rates resulted in significantly lower hospital billings than the billings accrued from the rates that Meadowlands ordinarily charged other patients. See Transcript of February 10, 1998 Proceedings, Volume I ("TI"):50-52. To compensate plaintiff for its potential loss in revenue under such terms, the parties incorporated the following clause, which the Court refers to as "the discount clause," at the bottom of Schedule B:
If the overall discount for all Inpatients exceeds 40% during a calendar year, U.S. Healthcare will reimburse Meadowlands Hospital and Medical Center monies beyond the 40% discount. A reconciliation will be completed by HMO within 180 days of the end of the calendar year.
Although the discount clause applies where "the overall discount ... exceeds 40%," the term "discount," specifically, the lodestar from which the discount should be assessed, is not referred to or defined anywhere in the Agreement. The correct interpretation of this clause is one of the primary issues in this case. The resolution of this issue determines the amount of payment that the defendants owe under the Agreement for the year of 1993. The second issue is whether amounts billed for normal newborn babies are to be included in the reconciliation required under the discount clause. The resolution of this issue determines the amount of payment the defendants owe for the years of 1992 and 1993.3
After the parties executed the Agreement in 1991, they began to perform under it. Plaintiff provided services to U.S. Healthcare members, and submitted bills to U.S. Healthcare for those services. See Exs. P-4, and P-5 (Meadowlands Hospital U.S. Healthcare "Patient Account Inquiry Screens" for the Calender Years of 1992, 1993, respectively).4 U.S. Healthcare, in turn, paid for those services in accordance with the rates contained in Schedule B to the Agreement. See id.
Although the Agreement required the defendants to calculate the reimbursement due under the discount clause within 180 days of the end of the calendar year, the parties never agreed upon a reconciliation for any year. See Ex. P-1 at Schedule B; Plaintiff's Proposed Conclusions of Law and Findings of Fact ("PF") at p. 19. Furthermore, the defendants never made any payment under the provisions of the discount clause for the years of 1992 and 1993. See Stipulation of Facts ("SF") ¶ 10.
In its Complaint, plaintiff claims that U.S. Healthcare owes money pursuant to these provisions. Specifically, it charges the defendants with breach of contract, (Count 1), breach of the implied covenant of good faith and fair dealing (Count 2), and unjust enrichment, (Count 3). Plaintiff seeks payment for services rendered in the amount of $33,088.32 for the year of 1992, and $539,420.40 for the year of 1993. See PF at pp. 45-46. In addition, plaintiff seeks prejudgment interest on its award. See id. pp. 48-50.
The negotiation of the Agreement took place in 1991. Since 1979, a regulatory system existed throughout the State of New Jersey that required hospitals to bill for inpatient services at prices set by the New Jersey Department of Health. See N.J.S.A. 26:2H-1 et seq. See SF ¶¶ 11-12. This categorization of mandatory charges was based on the "DRG" (the "Diagnostic Related Groups"), which was a classification of all the medical procedures and treatments that could be rendered on an inpatient basis in a hospital. See id. In contrast with the per diem terms of the Agreement between the parties, the statewide DRG system provided for flat service rates, or "case rates."5 A is a fixed rate for the entire hospital stay for a patient, regardless of how long that patient stayed in the hospital or the amount of services that were provided.6 See TI:9.
The starting point for calculating DRG case rates was the "base rate." The "base rate" was presumed to represent the direct cost of care for a patient with a particular condition corresponding to each of the approximately 500 diagnostic related groups. See TI:13-15. The ultimate DRG case rate was determined by adjusting the base rate by several factors.7 See TI:13-22. Because these factors varied, the DRG rates could fluctuate from time to time during the course of a year.8 TI:12.
Approximately fourteen years after the date of its enactment and two years after the parties entered the Agreement, the New Jersey legislature abolished the DRG rate system, effective January 1, 1993. See SF ¶ 14.
Both before and after the abolition of the DRG system, Meadowlands, like all other hospitals, maintained a "Charge Master." See TI:40. This several hundred paged document was essentially a "big price list" that itemized the prices for all hospital procedures, supplies, medicines, nursing care and staff physician services at Meadowlands. See TI:40, 41. Before the repeal of the DRG system, these prices were "essentially academic," insofar as they...
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