CHRISTUS HEALTH GULF COAST, CHRISTUS HEALTH SOUTHEAST TEXAS, GULF COAST DIVISION, INC., MEMORIAL HERMANN HOSPITAL SYSTEM AND BAPTIST HOSPITALS OF SOUTHEAST TEXAS v. AETNA, INC. AND AETNA HEALTH, INC.

SUPREME COURT CASES

Laws-info.com » Cases » Texas » Supreme Court » 2007 » CHRISTUS HEALTH GULF COAST, CHRISTUS HEALTH SOUTHEAST TEXAS, GULF COAST DIVISION, INC., MEMORIAL HERMANN HOSPITAL SYSTEM AND BAPTIST HOSPITALS OF SOUTHEAST TEXAS v. AETNA, INC. AND AETNA HEALTH, INC.

State: Texas

Court: Supreme Court

Docket No: 05-0710

Case Date: 08/31/2007

Judge: Wallace B. Jefferson

Plaintiff: CHRISTUS HEALTH GULF COAST, CHRISTUS HEALTH SOUTHEAST TEXAS, GULF COAST DIVISION, INC., MEMORIAL HER

Defendant: AETNA, INC. AND AETNA HEALTH, INC. (Majority)

Preview:CHRISTUS HEALTH GULF COAST, CHRISTUS
HEALTH SOUTHEAST TEXAS, GULF COAST
DIVISION, INC., MEMORIAL HERMANN
HOSPITAL SYSTEM AND BAPTIST HOSPITALS
OF SOUTHEAST TEXAS v. AETNA, INC. AND
AETNA HEALTH, INC. (Majority)
IN THE SUPREME COURT OF TEXAS
No. 05-0710
Christus Health Gulf Coast, Christus Health Southeast Texas, Gulf Coast Division, Inc., Memorial Hermann Hospital
System and Baptist Hospitals of Southeast Texas
Petitioners,
v.
Aetna, Inc. and Aetna Health, Inc.,
Respondents
On Petition for Review from the
Court of Appeals for the Fourteenth District of Texas
Argued December 6, 2006
Chief Justice Jefferson delivered the opinion of the Court.
We must decide whether a Texas court has jurisdiction over certain state-law claims asserted by hospitals against a
Medicare health maintenance organization, or whether the hospitals must first proceed through the federal
administrative machinery. We conclude that the hospitals in this case have alleged facts supporting the trial court s
jurisdiction. Accordingly, we reverse the court of appeals judgment and remand to the trial court for further
proceedings.
I
The Medicare Advantage Program
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Medicare was established in 1965 as part of the Social Security Act. 42 U.S.C. 1395-1395ggg (2000). It is
administered by the Centers for Medicare and Medicaid Services ( CMS ), an agency whose mission is to serve
Medicare and Medicaid beneficiaries, [1] and provides health insurance for most Americans over sixty-five, for certain
disabled persons under sixty-five, and for persons with end-stage renal disease. 42 U.S.C. 1395c. In 1997, Medicare
was amended to include Part C, also known as the Medicare Advantage program.[2] Medicare+Choice Program, 65
Fed. Reg. 40170, 40171 (June 29, 2000). The Medicare Advantage program provides Medicare beneficiaries with a
wider range of health plan choices through which to obtain their Medicare benefits. Establishment of the Medicare
Advantage Program, 70 Fed. Reg. 4588, 4589 (Jan. 28, 2005).
Under Medicare Advantage, CMS contracts with health maintenance organizations and other private entities to provide
health care services to Medicare enrollees. Id. at 4589-90. Those that enter into such contracts with CMS are called
Medicare Advantage organizations, 42 C.F.R. 422.2, and there are detailed requirements for entities that wish to
qualify. 42 C.F.R. 422.503. Once CMS and a Medicare Advantage organization enter into a contract, CMS makes
capitation payments[3] to Medicare Advantage organizations for enrollee health care services. 42 C.F.R. 422.304(a).
Upon payment from CMS, the Medicare Advantage organization assume[s] full financial risk . . . for the provision of
the health care services for which benefits are required to be provided, 42 U.S.C. 1395w-25(b), and must adopt and
maintain arrangements satisfactory to CMS to protect its enrollees from incurring liability (for example, as a result of
an organization s insolvency or other financial difficulties) for payment of any fees that are the legal obligation of the
[Medicare Advantage] organization. 42 C.F.R. 422.504(g)(1). Medicare Advantage organizations may contract with
third parties to provide administrative and health care services to enrollees. 42 C.F.R. 422.214(a). Contracts between
Medicare Advantage organizations or their delegates and downstream providers are freely negotiated, with very few
exceptions. See, e.g., 42 C.F.R. 422.504(g)(1)(i) (requiring Medicare Advantage organizations to [e]nsure that all
contractual or other written arrangements with providers prohibit the organization s providers from holding any
beneficiary enrollee liable for payment of [fees that are the legal obligation of the Medicare Advantage organization.]
).
II
The Hospitals, Aetna, and NAMM
Aetna[4] owned NYLCare, an HMO that became a Medicare Advantage organization by virtue of its contract with
CMS.[5] NYLCare contracted with North American Medical Management of Texas[6] (NAMM) to administer the
plan. CMS made capitation payments to Aetna which, in turn, made monthly payments to NAMM. NAMM was
required to deposit the payments into a fund that was designated to pay covered claims for health care services
rendered by health care providers to NYLCare members. NAMM then contracted with health care providers, including
Christus Health Gulf Coast; Christus Health Southeast Texas; Gulf Coast Division, Inc.; Memorial Hermann Hospital
System; and Baptist Hospitals of Southeast Texas (collectively, the Hospitals), to provide services to NYLCare
enrollees.
The Hospitals allege that NAMM grossly mismanaged its accounting and failed to track claims accurately. Eventually,
NAMM stopped paying the Hospitals for their services. In August 2000, NAMM notified the Hospitals and NYLCare
that it was no longer able to satisfy its financial obligations, and on August 31, 2000, the Texas Department of
Insurance placed NAMM in supervision conservatorship. Aetna (through NYLCare) assumed responsibility for
institutional claims incurred by NYLCare members for covered services rendered on or after August 17, 2000. The
Hospitals sought payment from Aetna for services rendered prior to that date, but Aetna refused the numerous
demands for payment.
On December 5, 2000, four of the five Hospitals wrote CMS, describing in detail the situation and asking CMS to
intervene to require Aetna to pay the Hospitals for the unreimbursed services provided to enrollees. On March 30,
2001, CMS responded, in a four-page, single-spaced letter signed by the Acting Director of the Medicare Managed
Care Group. The letter analyzed the Hospitals claims and concluded:
[Y]ou overstate [CMS s] authority to hold [Aetna] responsible for unpaid claims in this instance. . . . This type of
contract dispute is an issue for the state judiciary to decide.
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[Medicare Advantage] regulations clearly limit [CMS] s ability to intervene in payment disputes between [Medicare
Advantage] organizations and their contracted [Medicare Advantage] providers. In fact, the existence of provider
contracts that can be enforced by the courts is why the Congress limited [CMS] s regulatory authority in comparison to
those afforded non-contracted providers.
The Hospitals contend that they also attempted to pursue remedies through the Texas Department of Insurance, but the
agency denied jurisdiction over the matter and referred the Hospitals to the Texas court system.
The Hospitals sued Aetna in Harris County district court, alleging $13,067,759.19 in unpaid services, for which they
asserted claims under the Texas Insurance Code, suit on an account, breach of contract, breach of fiduciary duty, and
quantum meruit. Aetna answered and filed a third-party petition against NAMM. Aetna sought contribution and
indemnity, alleging that NAMM breached [its agreement with Aetna] and its contracts with each of the [Hospitals] by
failing to pay for covered services rendered to NYLCare 65 members before NAMM s insolvency.
Aetna then moved to dismiss the Hospitals claims, contending that they were governed exclusively by the Medicare
Act and that because the Hospitals had not pursued Medicare s administrative remedies, the trial court lacked subject
matter jurisdiction over the claims. The Hospitals responded, asserting that under the Texas Insurance Code, Aetna was
directly liable to the Hospitals for NAMM s failure to pay. The Hospitals argued that enrollees, not providers, were
required to exhaust remedies before suing and that [t]he administrative review process . . . has no application to the
[H]ospitals and, in fact, provides them with no way to seek an administrative review.
On October 2, 2003, the trial court heard and granted the plea to the jurisdiction, dismissing without prejudice the
Hospitals claims. The Hospitals appealed, and the court of appeals affirmed the trial court s judgment. 167 S.W.3d 879.
The court concluded that the Hospitals claims arose under the Medicare Act and that the Hospital therefore had to
exhaust administrative remedies before suing in state court.
The Hospitals moved for rehearing, alleging that an opinion issued by the United States Court of Appeals for the Fifth
Circuit two days after the court of appeals issued its opinion, was inconsistent with the court of appeals holding. See
Rencare, Ltd. v. Humana Health Plan of Tex., Inc., 395 F.3d 555, 557-560 (5th Cir. 2004). The court denied the
motion for rehearing and issued an opinion on rehearing in which it discussed and distinguished Rencare. 167 S.W.3d
at 888 n.10. We granted the Hospitals petition for review.[7] 49 Tex. Sup. Ct. J. 966 (Sept. 1, 2006).
III
Discussion
A
Plea to the Jurisdiction
As an initial matter, we note that this case comes to us on a plea to the jurisdiction. As such, the abbreviated record a
single volume of trial court pleadings and the reporter s record from the non-evidentiary hearing on the jurisdictional
plea leaves many questions unanswered. For example, none of the contracts referred to are in the record. Nor is there
evidence of the types of services rendered to the NYLCare enrollees; the sparse record simply shows unpaid balances
totalling some thirteen million dollars. Because this is a jurisdictional plea, however, we construe the pleadings
liberally in favor of the plaintiffs and look to the pleaders intent. Texas Dept. of Parks and Wildlife v. Miranda, 133
S.W.3d 217, 226 (Tex. 2004). When a plea to the jurisdiction challenges the pleadings, we determine if the pleader has
alleged facts that affirmatively demonstrate the court's jurisdiction to hear the cause. Id.
B
Medicare Administrative Remedies
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In a case strikingly similar to this one, the United States Court of Appeals for the Fifth Circuit Court recently
considered whether a healthcare provider that contracted with a Medicare Advantage organization had to pursue
administrative remedies before filing suit. Rencare, Ltd. v. Humana Health Plan of Tex., Inc., 395 F.3d 555 (5th Cir.
2004). Humana, a Medicare Advantage HMO, contracted with RenCare to provide kidney dialysis services to Humana
s enrollees. Id. at 556-57. Humana and RenCare then disagreed about reimbursement for end-stage renal dialysis
services that RenCare provided to the enrollees, and RenCare sued Humana in Texas state court, alleging breach of
contract, detrimental reliance, fraud, and violations of state law. Id. at 557. Humana removed the claims to federal
district court, arguing that RenCare s claims were preempted by the Medicare Act. The federal district court ultimately
dismissed RenCare s claims relating to Medicare Advantage enrollees, finding that RenCare had failed to exhaust its
administrative remedies under the Medicare Act. Id.
The Fifth Circuit reversed, concluding that: (1) RenCare s claims did not arise under the Medicare Act, and (2) there
were no administrative remedies for RenCare to exhaust. Id. at 558. As to the first issue, the court considered Heckler
v. Ringer, the seminal case discussing whether a claim arises under the Medicare Act. Id. at 558 (citing Heckler v.
Ringer, 466 U.S. 602 (1984)). In Heckler, three individuals who had been denied reimbursement for bilateral carotid
body resection ( BCBR ) surgery sued the Secretary of Health and Human Services. The plaintiffs sought an
invalidation of the Secretary s policy against BCBR reimbursement, a declaration that the surgery expenses were
reimbursable, and an injunction barring the Secretary from forcing claimants to pursue administrative appeals in order
to obtain payment. 466 U.S. at 611. The Supreme Court concluded that because the claims were not anything more
than, at bottom, a claim that they should be paid, they were inextricably intertwined with a claim for benefits and
therefore arose under the Medicare Act. Id. at 614.
The Fifth Circuit, distinguishing Heckler, concluded that RenCare present[ed] a vastly different situation. RenCare, 395
F.3d at 558. There, Medicare enrollees were not denied services or reimbursement for services. The court noted that
RenCare waived its right to seek payment from enrollees, and the government, having tendered its capitation payment,
no longer had a financial interest in the case. Id. Thus, Humana bore the ultimate responsibility for providing services
to its Medicare Advantage enrollees, and [w]ith the government s risk extinguished, any dispute over payment to
RenCare is solely between RenCare and Humana. Id. at 559.
While the Fifth Circuit s holding on this point is persuasive,[8] it is unclear whether Heckler s arising under test even
applies to Medicare Advantage claims. See Stephen M. Elwell, Note, Preemption of Contract Claims by the Medicare
Act: An Analysis of the Recent Holding in Lifecare Hospitals v. Ochsner Health Plan, 24 Rev. Litig. 125, 127 (2005)
(noting that [c]ourts must also decide whether the test in Heckler applies to claims arising under the Medicare
Advantage program and noting that Heckler was based on claims arising under the traditional Medicare program, not
Medicare Advantage). Amicus HHS urges that Heckler is an unfortunate . . . red herring that has been interjected into
this dispute and that [t]he significance of the arising under analysis set forth in Heckler is relevant only for purposes of
assessing subject matter jurisdictional issues in federal court when plaintiffs pursue action[s] against the United States,
the [Secretary of HHS], or any officer or employee thereof. 42 U.S.C. 405(h) (as applied to Medicare by 42 U.S.C.
1395ii). Aetna contends that it should be considered an officer or employee of the United States or the Secretary and,
therefore, that Heckler s arising under test controls.
We need not decide that question today, however, as we agree with the RenCare court s second conclusion: it appears
that the administrative review process attendant to Part C does not extend to claims in which an enrollee has absolutely
no interest. Rencare, 395 F.3d at 559. The court noted that Part C and CMS's implementing regulations establish
mandatory administrative appeals procedures to resolve disputes over organization determinations. [9] Id. (citing 42
U.S.C. 1395w-22(g); 42 C.F.R. 422.560-422.622).
It considered:
An organization determination is a decision by a Medicare Advantage organization regarding the benefit an enrollee is
entitled to receive under [a Medicare Advantage] plan . . . and the amount, if any, that the enrollee is required to pay
for a health service. 42 C.F.R. 422.566(a). More specifically, an organization determination may be the Medicare
Advantage organization s refusal to provide or pay for services, in whole or in part, . . . that the enrollee believes
should be furnished or arranged for by the [Medicare Advantage] organization. 42 C.F.R. 422.566(b)(3) (emphasis
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added). Enrollees have a right to a timely organization determination, 42 C.F.R. 422.562(b)(2), and a right to appeal
that decision through several levels of review. 42 C.F.R. 422.562(b)(4)(i)-(vi). However, if an enrollee has no further
liability to pay for services that were furnished by [a Medicare Advantage] organization, a determination regarding
these services is not subject to appeal. 42 C.F.R. 422.562(c)(2).
Id. (emphasis added).
It concluded:
As is evident from the regulations, the administrative review process focuses on enrollees, not health care providers,
and is designed to protect enrollees rights to Medicare benefits. Here, Humana s failure to pay RenCare is not an
organization determination subject to the mandatory exhaustion of administrative remedies. No enrollee has requested
an organization determination or appeal. No enrollee has been denied covered service or been required to pay for a
service. Rather, the [Medicare Advantage] enrollees in this case bear no financial risk inasmuch as they have already
received the services for which RenCare seeks reimbursement. In fact, there is a complete absence of [Medicare
Advantage] beneficiary interest in this dispute. The only interest at issue is RenCare's interest in receiving payment
under its contract with Humana.
Rencare, 395 F.3d at 559-60.
Here, although the parties did not contract directly with each other, each had agreements with NAMM. Consequently,
their dispute concerns not whether the services were covered under Medicare, but rather who should bear the loss
associated with NAMM s failure to pay. Aetna staunchly alleges it discharged its duties by making monthly payments
to NAMM; the Hospitals, on the other hand, assert that Aetna is nonetheless ultimately responsible under the Texas
Insurance Code and federal law.
Aetna asserts that NAMM s (and subsequently Aetna s own) failure to pay the claims is tantamount to a denial of
coverage, and the Hospitals should have exhausted administrative remedies under the Medicare Act before proceeding
in state court. We disagree. Aetna s contention that the Hospitals must first seek an administrative determination of
some 6,000 claims misconstrues a claim seeking payment for services provided to Medicare patients as a claim for
Medicare benefits. That is, failing to pay due to insolvency or a dispute about who is contractually obligated to pay is
different from failing to pay due to lack of coverage. The Hospitals are not challenging an organization determination,
as they must to fall under the mandatory statutory scheme, and the court of appeals erred in concluding otherwise. See
42 C.F.R. 422.566(b); 167 S.W.3d at 887. As in RenCare, no enrollee has been denied covered services or been
required to pay for a service, and the federal government s risk has been extinguished. RenCare, 395 F.3d at 559.
Aetna s petition against NAMM asserted that NAMM breached its agreement with Aetna by failing to pay for covered
services ; Aetna s contention that its refusal to pay now means there is no coverage confuses Medicare coverage with
Aetna s potential liability for NAMM s default. The federal administrative scheme exists, first and foremost, to protect
enrollees rights to health care, not to act as a de facto claims administrator for Medicare Advantage organizations and
their delegates. Amicus curiae HHS urges that requiring the Hospitals to exhaust administrative remedies before
coverage decisions have been made would turn the administrative scheme on its head, and we agree.
Nor is it dispositive that there apparently was no contract directly between Aetna and the Hospitals. The regulations
make it clear that enrollees cannot incur liabilities for payment of any fees that the Medicare Advantage organization is
legally obligated to pay. 42 C.F.R. 422.504. This prohibition on enrollee liability extends to providers who contract
directly with the Medicare Advantage organization as well as those that do not. Id. 422.504 (g) (Medicare Advantage
organization must [e]nsure that all contractual or other written arrangements with providers prohibit the organization s
providers from holding any beneficiary enrollee liable for payment of fees that are the legal obligation of the
[Medicare Advantage] organization and [i]ndemnify the beneficiary enrollee for payment of any fees that are the legal
obligation of the Medicare Advantage organization for services furnished by providers that do not contract, or that have
not otherwise entered into an agreement with the [Medicare Advantage] organization, to provide services to the
organization s beneficiary enrollees ). As CMS told the Hospitals in its March 30, 2001 letter, the lack of a contract
directly with an HMO does not necessarily exempt a provider from the prohibition against balance billing, and the 42
C.F.R. 422.502(g)(1) provision applies to contracted downstream providers. As in RenCare, therefore, enrollees are
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protected from liability for fees that the Medicare Advantage organization must pay, and the only interest at issue here
is the Hospitals interest in receiving payment from the Medicare Advantage organization. Whether those fees are in
fact Aetna s legal obligation is a matter within the trial court s jurisdiction.
IV
Conclusion
At this time, there has been no organization determination for the Hospitals to appeal through the federal administrative
channels. The state-law claims the Hospitals have asserted are within the trial court s jurisdiction, and the court of
appeals erred in concluding otherwise. We reverse the court of appeals judgment and remand to the trial court for
further proceedings. Tex. R. App. P. 60.2(d).
Wallace B. Jefferson
Chief Justice
OPINION DELIVERED: August 31, 2007
[1] CMS was previously known as the Health Care Financing Administration. Press Release, Department of Health and
Human Services, The New Centers for Medicare and Medicaid Services (CMS) (June 14, 2001), available at:
http://www.hhs.gov/news/press/2001pres/20010614a.html; see also Acquisition Regulation for Department of Health
and Human Services, 70 Fed. Reg. 38, 39 (Jan. 3, 2005).
[2] The Medicare Advantage program replaced the Medicare + Choice program. 70 Fed. Reg. 4588, 4741 (Jan. 28,
2005).
[3] A capitation payment is a fixed per enrollee per month amount paid for contracted services without regard to the
type, cost, or frequency of services furnished. 42 C.F.R. 422.350(b) (2006).
[4] Aetna refers to Aetna, Inc. and Aetna Health, Inc., respondents herein.
[5] As a Medicare Advantage organization, NYLCare was authorized to provide Medicare benefits to participants in its
NYLCare 65 plan. For ease of reference, we use NYLCare to refer both to NYLCare and to NYLCare 65.
[6] Petitioners assert that NAMM was composed of two entities: IPA Management Associates, L.P. d/b/a North
American Medical Management Texas and IPA Management Services, Inc. We use NAMM to refer to both.
[7] The Texas Hospital Association and the United States Department of Health and Human Services ( HHS )
submitted amicus curiae briefs. Tex. R. App. P. 11.
[8] See Penrod Drilling Corp. v. Williams, 868 S.W.2d 294, 296 (Tex. 1993) ( While Texas courts may certainly draw
upon the precedents of the Fifth Circuit . . . in determining the appropriate federal rule of decision, they are obligated
to follow only higher Texas courts and the United States Supreme Court. )
[9] Disputes between enrollees and Medicare Advantage organizations or any other entity or individual through which
the Medicare Advantage organization provides health care services, over any other matter are not subject to the same
appeals process as organizational determinations, but instead have their own grievance procedure. 42 C.F.R.
422.562(a)(1)(i), 422.564.
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