Preview:

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MARYLAND In re: * * DOCTORS HEALTH, INC., * * Debtor. * Civ. No. L-05-01493 * ************************************** * * NYLCare HEALTH PLANS * OF THE MID-ATLANTIC, INC., * * Appellant/Defendant, * * v. * * DOCTORS HEALTH, INC. * * Appellee/Plaintiff. * * ************** MEMORANDUM This is an appeal of two final judgments entered by the United States Bankruptcy Court for the District of Maryland.1 First, NYLCare Health Plans of the Mid-Atlantic, Inc. ("NYLCare") appeals the bankruptcy court's ruling that NYLCare breached its contract with Doctors Health, Inc. by terminating the contract prior to the expiration of its initial three-year term. Based on this ruling, the bankruptcy court disallowed NYLCare's proof of claim for approximately $29.8 million and awarded damages to Doctors Health in the amount of $21.3 million. Second, NYLCare appeals the bankruptcy court's order enjoining NYLCare and its affiliates from filing a motion before the U.S. District Court for the Southern District of Florida contending that Doctors Health's claims were released as a part of a 2003 class action settlement.

1

On January 26, 2006, the Court granted NYLCare's Motion to Consolidate its two appeals (Civ. No. 05-1493 and Civ. No. 05-3218) under the above-referenced caption. 1

For the reasons that follow, the Court will (i) reverse the bankruptcy court's order enjoining NYLCare from filing its motion before the United States District Court for the Southern District of Florida; and (ii) stay the appeal of the bankruptcy court's ruling on NYLCare's proof of claim and Doctors Health's breach of contract claim pending the Florida court's resolution of the class action settlement dispute. I. FACTUAL BACKGROUND A. The Parties NYLCare is a health maintenance organization ("HMO"). At the time NYLCare first contacted Doctors Health in the summer of 1997, NYLCare had an annually renewable contract with the federal government to provide HMO coverage to Medicare enrollees.2 In short, under the terms of the federal contract, NYLCare agreed to provide health care coverage for Medicare subscribers and to direct that population to certain physicians and hospitals for their health care needs. For providing this coverage, NYLCare received a monthly payment for each enrollee, known as a "capitation payment," from the government. When physicians and hospitals billed NYLCare for the health care services provided, NYLCare paid those provider bills from the government capitation payments, keeping any surplus as profit. Doctors Health was a public company conceived to serve as an intermediary between HMOs and their subscribers, and between HMOs and health care providers.3 As part of its

2

On March 4, 2008, the Court held oral argument on NYLCare's appeals. During the three hour hearing, counsel addressed a number of questions posed by the Court in advance of the hearing. Specifically, counsel provided additional details regarding the Medicare capitation payment system, Doctors Health's business model, and Aetna's withdrawal from certain Medicare markets. This section provides a brief overview of the complex regulatory, economic, and contractual issues underlying the parties' disputes. 3 The parties provide different labels for Doctors Health's business, with NYLCare contending that Doctors Health is properly considered a "physician organization" and Doctors Health 2

business model, Doctors Health developed a network of physicians and "hub hospitals" that would treat patients for discounted rates. Doctors Health also emphasized preventive care in the hopes of lowering Medicare patients' overall health care costs. Believing that this approach could significantly lower health care costs for Medicare patients, Doctors Health agreed to manage HMOs' Medicare enrollees by directing those patients to approved physicians and "hub hospitals" and assuming responsibility for paying those providers' bills.4 In exchange, Doctors Health would receive a percentage of HMOs' capitation payments, less the payments made to physicians and other health care providers. Doctors Health would profit to the extent that the costs of the health care services they arranged were less than the capitation payments they received. B. The Contract In the summer of 1997, faced with the fact that the health care costs incurred by its Medicare enrollees were outpacing the government's capitation payments, NYLCare decided to outsource the management of its Medicare program to Doctors Health. Accordingly, the parties entered into a Contract for Medicare Global Risk Services dated September 30, 1997 and a Medicare Network Management Agreement dated October 1, 1997 (collectively, the "Contract"). The Contract provided for an Initial Term of three years from its effective date of October 1, 1997.5 Under the terms of the Contract, Doctors Health agreed to manage the health care needs of NYLCare's Medicare enrollees in exchange for 88.5% of the capitation payments

arguing that it is, instead, an "administrative services provider." As discussed below, the Court need not resolve this dispute. 4 As discussed below, notwithstanding this contractual arrangement, the HMOs remained ultimately liable for paying provider claims. 5 Although the Contract permitted each party to terminate the agreement "for cause" under certain circumstances prior to the expiration of the Initial Term, neither NYLCare nor Doctors Health contends that these limited circumstances were present in this case. 3

received by NYLCare. The parties agreed that NYLCare would retain responsibility for paying physicians and hospitals directly, and would deduct those payments from the amounts due to Doctors Health. The Contract established a multi-step process for the review and payment of provider claims, which involved both NYLCare and Doctors Health evaluating the claims submitted.6 In theory, after NYLCare and Doctors Health determined which provider claims were covered, NYLCare would pay its Medicare health care providers. NYLCare would then remit to Doctors Health the payment owed under the Contract. In the event the claims submitted by health care providers were greater than the capitation payments due to Doctors Health, NYLCare would invoice Doctors Health for the difference. Under federal law, NYLCare was ultimately liable for payments due to physicians and hospitals providing care to Medicare enrollees. Accordingly, NYLCare requested that Doctors Health obtain an irrevocable letter of credit to be drawn upon by NYLCare in the event that Doctors Health defaulted on its payment obligations. Doctors Health did so, acquiring a $5 million letter of credit from Chase Manhattan Bank. C. The Parties' Contract Disputes For the first eight months of the Contract, the parties' contractual relationship was uneventful.7 In May 1998, however, the amount due to Medicare health care providers exceeded the payments due to Doctors Health for the first time, and NYLCare invoiced Doctors Health for

6

The Contract also provided that the parties "shall meet from time to time and confer in good faith to develop policies and procedures to implement the provisions of this Section [concerning Claims Submission, Review and Disposition]." 7 In March 1998, NYLCare's corporate parent announced its intention to sell NYLCare to Aetna. On July 15, 1998, NYLCare became a subsidiary of Aetna U.S. Healthcare, Inc. ("Aetna"). 4

approximately $970,000.8 Doctors Health did not pay this invoice. By June, the amount owed by Doctors Health had grown to more than $3.6 million. On June 12, 1998, NYLCare sent Doctors Health a notice of default. In response, Doctors Health sent a letter objecting to the May and June capitation reports, contending that NYLCare had violated the Contract by failing to allow Doctors Health to review and approve the claims before paying providers. In order to resolve this dispute, the parties signed a June 29, 1998 letter agreement (the "Letter Agreement") providing that: (1) NYLCare would implement a mutually agreed upon process enabling Doctors Health to preview provider claims prior to payment; (2) Doctors Health would pay the entire amount owed to NYLCare for May and June; and (3) Doctors Health would pay any future deficits within five business days of receiving the capitation report. The Letter Agreement did little to improve the parties' relationship. When NYLCare sent Doctors Health the July capitation report showing a deficit of roughly $2.6 million, Doctors Health refused to pay on the ground that the claim review process had not yet been implemented.9 On August 13, 2008, NYLCare sent Doctors Health written notification that it was in breach of the Letter Agreement for its failure to pay the outstanding deficit. NYLCare

8

Accordingly to NYLCare, the fact that Doctors Health had received approximately $15 million in capitation payments from October 1997 to April 1998 does not indicate the success of Doctors Health's business model. Because of the lag time between when a physician provides health care services and when that physician's claim is processed, the early payments received by Doctors Health would ultimately be offset by claims incurred, but not yet received. NYLCare explains that the first of these inventoried claims came due in May 1998. Doctors Health disputes this explanation, alleging that the May 1998 deficit resulted from NYLCare's delayed processing of a backlog of provider invoices. 9 Doctors Health contends that NYLCare's Chief Executive Officer acknowledged that the claims review process had yet to be established and waived the five day payment deadline for the July deficit, provided that the amount owed did not exceed the amount covered by the letter of credit. 5

also informed Doctors Health that, by its estimate, the inventory of provider claims incurred but not yet received totaled over $10 million. As the parties' relationship deteriorated, NYLCare's new corporate parent Aetna was reevaluating the viability of its position in certain Medicare markets. On or about August 31, 1998, NYLCare notified Doctors Health of Aetna's decision not to renew certain of its government contracts, including NYLCare's Medicare program.10 Doctors Health responded with a letter dated September 24, 1998 alleging that this decision was a material breach of the Contract. Doctors Health's letter stated that it was rescinding the Contract effective immediately, and proposed that the parties take measures "allow[ing] each party to be restored to the relative positions that existed before the contract was negotiated." Doctors Health proposed simultaneous payments of approximately $12.5 million to NYLCare and $11 million from NYLCare to Doctors Health. Doctors Health also noted that, because the Contract constituted a significant percentage of Doctors Health's business, Aetna's withdrawal from NYLCare's Medicare market would likely destroy Doctors Health. Doctors Health's forecast proved accurate. On November 16, 1998, Doctors Health filed for bankruptcy protection in the United States Bankruptcy Court for the District of Maryland. D. The Bankruptcy Court Adversary Proceeding On November 30, 1998, NYLCare submitted a proof of claim in the amount of $19,150,000.11 According to NYLCare, this figure represented the provider claims paid by NYLCare on behalf of Doctors Health through June 1998, plus an estimate of the claims incurred but not yet received, less the proceeds from the letter of credit NYLCare had drawn down to
10

Shortly thereafter, on or about September 9, 1998, NYLCare drew on the $5 million letter of credit with Chase Manhattan Bank. 11 NYLCare subsequently submitted an amended proof of claim updating the amount at issue to $29,796,049.37 on March 30, 2000. 6

cover some of the outstanding liabilities. On July 14, 1999, Doctors Health responded by filing an adversary proceeding before the bankruptcy court against NYLCare asserting claims for, inter alia, breach of contract, fraud, negligent misrepresentation, conversion and intentional interference with prospective business advantage. Doctors Health sought disallowance of NYLCare's proof of claim and also claimed damages for the alleged breach of contract of approximately $30 million. On August 17, 2000, the District Court of Maryland ruled that, because this dispute was a "core proceeding" under 28 U.S.C.

Download NYLCare Health Plans of the Mid-Atlantic, Inc. v. Doctors Health, Inc..pdf

Maryland Law