Vencor Inc. v. National States Ins. Co.

• Decision Date: 05 September 2002
• Docket Number: No. 99-17148.,99-17148.
• Citation: 303 F.3d 1024
• Parties: VENCOR INC., Plaintiff-Appellant, v. NATIONAL STATES INSURANCE COMPANY, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

303 F.3d 1024

VENCOR INC., Plaintiff-Appellant, v. NATIONAL STATES INSURANCE COMPANY, Defendant-Appellee.

No. 99-17148.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted July 10, 2001.

Filed September 5, 2002.

Bradley L. Kelly, Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., Washington, DC, for the plaintiff-appellant.

David P. Brooks, Mesa, AR, for the defendant-appellee.

Appeal from the United States District Court for the District of Arizona, Roslyn O. Silver, District Judge, Presiding. D.C. No. CV-97-02350-ROS.

Before SNEED, WARDLAW, and BERZON, Circuit Judges.

Opinion by Judge BERZON; Concurrence by Judge SNEED.

OPINION

BERZON, Circuit Judge.

This case at first glance concerns a private insurance dispute but, as we shall see, implicates important questions of national health policy for senior citizens. Vencor, Inc. ("Vencor"), an operator of several hospital and nursing home facilities, is the subrogee/assignee of a Medicare supplemental insurance contract between National States Insurance Company ("NSIC") and Clarence Rollins, a Medicare-eligible individual. In this diversity case, NSIC paid Vencor Hospital-Phoenix ("Vencor Hospital") $38,760 for Rollins' care, the amount that Medicare would have paid. Vencor argues that NSIC did not pay it nearly enough. According to Vencor, Rollins' supplemental policy obligated NSIC to pay the full amount Vencor would have charged a non-Medicare patient, $171,197.78, so NSIC's failure to pay the full-billed charges constituted a breach of the contract. The district court, on summary judgment, held that there was no breach of contract. We affirm.

I. BACKGROUND

A. Medicare Coverage and Medigap Insurance

Medicare Part A provides limited inpatient hospital benefits to eligible citizens. During the first 90 days of hospitalization, Medicare pays for all covered services except for coinsurance and certain deductibles. 42 U.S.C. § 1395e(a). A patient hospitalized for more than 90 days may draw upon a non-renewable lifetime reserve of 60 days of additional Medicare coverage. 42 U.S.C. § 1395d; 42 C.F.R. § 409.61(a)(1)-(2). In exchange for receiving payments from Medicare, providers agree to accept that payment, along with any coinsurance or deductible, as payment in full. 42 U.S.C. § 1395cc(a)(1).¹

Medicare beneficiaries who desire medical coverage in addition to the coverage provided by Medicare can purchase Medicare supplemental insurance policies, known as Medigap polices. See id. § 1395ss(g)(1). These policies provide purchasers with supplementary hospitalization coverage, including coverage of hospitalization costs after the patient exhausts all the hospitalization days Medicare will pay for. See id. §§ 1395ss(g)(1), 1395d.

After the Medicare program had been in effect for a while, Congress became concerned that older citizens were being exploited by the sale of Medigap policies that did not provide the coverage buyers thought they were purchasing. See Social Security Disability Amendments of 1980, Pub. L. No. 96-265, § 507(a) (June 9, 1980) (codified at 42 U.S.C. § 1395ss(f)(1)) (requiring evaluation of the effectiveness of state regulation of Medigap policies in limiting marketing and agent abuse and assuring dissemination of sufficient information to enable informed choice). Congress therefore amended the Social Security Act to establish a voluntary certification program for Medigap policies. Through that program, private insurers could receive federal certification for Medigap policies that met specific federal standards. Id. (codified as amended at 42 U.S.C. § 1395ss). At Congress's request, the National Association of Insurance Commissioners ("NAIC"), an organization of state insurance commissioners, developed the federal standards.

In 1990, Congress went further in protecting Medigap insurance consumers. Instead of its former voluntary program, Congress mandated that Medigap insurers conform their plans to one of ten model Medigap policies, to be developed by the NAIC.² Omnibus Budget Reconciliation Act of 1990, Pub.L. No. 101-508, § 4351 (Nov. 5, 1990) (codified as amended at 42 U.S.C. § 1395ss(p)). As amended in 1994, the Medigap statute now provides that no Medigap policy may be issued in a state unless that state has provided "for the application and enforcement" of the 1991 NAIC Model Regulation ("Model Regulation"). Social Security Act Amendments of 1994, Pub.L. No. 103-432, § 171 (Oct. 31, 1994) (codified at 42 U.S.C. § 1395ss(a)(2)(A)).³ See also 42 U.S.C. § 1395ss(p)(4)(A)(ii) ("[T]he Secretary may not provide for or permit the grouping of benefits (or language or format with respect to such benefits) under a medicare supplemental policy seeking approval by the Secretary unless such grouping meets the ... 1991 NAIC Model Regulation....").

Arizona, as required, adopted the Model Regulation. Ariz.Rev.Stat. Ann. § 20-1133(A); Ariz. Admin. Code § R20-6-1101 et seq. An Arizona regulation now provides that Medigap policies issued in the state must comply with a set of uniform standards identical to those in the NAIC Model Regulation. Ariz. Admin. Code § R20-6-1105. Under that regulation, all Medigap policies must contain the basic set of core benefits provided for in the Model Regulation, known as package "A."⁴ Id. § R20-6-1105(C); see also 57 Fed. Reg. at 37,991.

Key to this case is the language insurers are required to use in describing the core Medigap benefits provided. In language identical to the Model Regulation, Arizona law requires that the core benefit package include the following coverage:

Upon exhaustion of the Medicare hospital inpatient coverage including the lifetime reserve days, coverage of the Medicare Part A-eligible expenses for hospitalization paid at the Diagnostic Related Group (DRG) day outlier per diem or other appropriate standard of payment, subject to a lifetime maximum benefit of an additional 365 days....

Ariz. Admin. Code § R20-6-1105(C)(3); see also 57 Fed. Reg. at 37,991.⁵ An Arizona regulation, also in language prescribed by the Model Regulation, requires that all Medigap policies solicited or issued for delivery in Arizona contain certain definitions or terms. Ariz. Admin. Code § R20-6-1103(A). One of those definitions, central to this case, provides: "`Medicare eligible expenses' shall be defined as expenses of the kinds covered by Medicare, to the extent recognized as reasonable and medically necessary by Medicare." Id. § R20-6-1103(A)(7); see also 57 Fed. Reg. at 37,988.

Further, in compliance with federal law and the Model Regulation, Arizona law requires that insurers provide all applicants for Medigap insurance with a guide that outlines the benefits provided. Ariz. Admin. Code § R20-6-1113(C) & app. B; 42 U.S.C. § 1395ss(p)(9)(B) (requiring Medigap insurers to provide individuals, "before the sale of the policy, an outline of coverage which describes the benefits under the policy ... on a standard form approved by the State regulatory program or the Secretary (as the case may be) consistent with the 1991 NAIC Model Regulation..."); 57 Fed. Reg. at 37,997-98.⁶ This "Outline of Coverage" ("Outline") must contain a chart explaining that, for an additional 365 days of hospitalization after all lifetime reserve days are used, Medicare pays $0, the Medigap insurer pays "100% of Medicare-Eligible expenses," and the insured pays $0. Ariz. Admin. Code § R20-6-1113(C) & app. B; see also 57 Fed. Reg. at 38,001-31. In accordance with the Model Regulation, the Arizona regulation requires that, beneath the heading "READ YOUR POLICY VERY CAREFULLY," the Outline caution:

This is only an outline describing your policy's most important features. The policy is your insurance contract. You must read the policy itself to understand all of the rights and duties of both you and your insurance company.

Ariz. Admin. Code § R20-6-1113(C) & app. B; 57 Fed. Reg. at 37,998. The state regulations also require that the Outline contain the additional warning: "This policy may not fully cover all of your medical costs."⁷ Ariz. Admin. Code § R20-6-1113(C) & app. B.

B. Rollins' Insurance Policy with NSIC

Rollins was a patient at Vencor Hospital, a long-term intensive-care hospital, from November 6, 1993, until his death on April 23, 1994. The Medigap policy Rollins purchased from NSIC covered Rollins' hospital stay after March 3, 1994, when his Medicare coverage ran out.

During the time Medicare covered Rollins, Vencor billed Medicare directly for his care (except for coinsurance and a deductible, which NSIC paid). The bills listed charges based on Vencor's standard rates, but Medicare reimbursed Vencor for Rollins' hospitalization at a greatly discounted per diem rate, and Vencor accepted this amount as payment in full.⁸ Id. § 1395cc(a)(1)(A).

After Rollins exhausted his Medicare hospitalization benefits, NSIC paid for Rollins' hospital expenses until his death seven weeks later. Vencor billed $171,197.78 for this care, based on its standard rates.⁹ NSIC paid only $38,760, basing its payments on the same much lower per diem rate that Medicare had been paying. As a result, $132,437.78 of Vencor's billed charges for Rollins' care remains unpaid. Vencor's central claim in this case is that the Medigap policy between Rollins and NSIC obligated NSIC to pay that difference.

The question in this case therefore turns on the coverage provided in the Medigap policy that Rollins purchased from NSIC. Only the core benefits provision of that policy, common to all Medigap policies, is here relevant. See Ariz. Admin. Code § R20-6-1105.

The NSIC Medigap policy describes Rollins' hospitalization coverage in language similar to that used in the Arizona Regulation, which incorporates the federally-mandated standards:

HOSPITAL BENEFIT — We will provide:

(a) Coverage of Part A Medicare-eligible expense for hospital confinement to the extent not covered by Medicare, from the 61st day through the 90th day in any...