Vencor, Inc. v. Physicians Mutual Insurance

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued April 6, 2000 Decided May 23, 2000

No. 99-7089

Vencor, Inc. d/b/a Vencor Hospitals Texas, LTD.,
d/b/a Vencor Hospital-Houston Northwest,
d/b/a THC of Texas, Inc.,
d/b/a Vencor Hospital-New Orleans,
d/b/a THC of Louisianna, Inc.,
d/b/a Vencor Hospital-Sycamore,
d/b/a Vencor Hospital-Sacramento,
d/b/a Vencor Hospitals California, Inc.,
d/b/a Vencor Hospital-Houston,
d/b/a Vencor Hospital-Dallas,
Appellant

v.

Physicians Mutual Insurance Co.,
Appellee

Appeal from the United States District Court
for the District of Columbia
(No. 98cv00443)

Bradley L. Kelly argued the cause for appellant. With him
on the briefs was Laura J. Oberbroeckling.

 James J. Frost argued the cause for appellee. With him on
the brief were Stephen A. Fennell and Terrence D. O'Hare.
Roger E. Warin entered an appearance.

Before: Silberman, Williams and Sentelle, Circuit
Judges.

Opinion for the Court filed by Circuit Judge Williams.

Williams, Circuit Judge: Vencor, Inc., a provider of long-
term hospital care, filed a diversity action1 against Physicians
Mutual Insurance Company, seeking reimbursement for ex-
penses incurred by 10 patients who stayed in six of its
hospitals beyond the period covered by Medicare. Each of
the patients held "Medigap" insurance policies issued by
Physicians Mutual; Vencor sues as third party beneficiary.
Among other defenses, Physicians Mutual claimed that cer-
tain provisions of the Medicare Act and associated regulations
barred Vencor from charging patients more than the maxi-
mum rate for Medicare-covered hospital days--a rate at
which Physicians Mutual had already reimbursed Vencor.
The district court granted Physicians Mutual's motion for
summary judgment on that limited ground. Vencor, Inc. v.
Physicians Mutual Insurance Co., 39 F. Supp. 2d 1 (D.D.C.
1999). Finding no such limitation in the cited provisions, we
reverse.

* * *

Medicare, like most health insurance plans, provides bene-
fits of limited duration. For instance, it covers the first 90
days of hospital care for every "spell of illness," plus an
additional, non-renewable reserve of 60 days of coverage
(which, until it is exhausted, can be added to any "spell of
illness"). 42 U.S.C. s 1395d(a)-(b), (g). Once Medicare pa-

__________
1 Vencor also claimed the district court had federal question
jurisdiction, which Physicians Mutual disputed. Given the presence
of diversity jurisdiction, we need not reach the issue.

tients fully exhaust their government-provided hospital bene-
fits, see id. ss 1395c, 1395d, many rely on privately-
purchased "Medigap" policies for extended coverage. These
policies vary in their terms, but (as a result of a federal
regulatory process that we will soon describe) all offer at
least 365 days of post-Medicare hospital benefits. See Medi-
care Program; HHS' Recognition of NAIC Model Standards
for Regulation of Medigap Policies, 57 Fed. Reg. 37,980,
37,991/1 (1992).

While the Medicare reimbursement rates of most hospitals
are governed by the so-called Prospective Payment System,
see 42 U.S.C. s 1395ww(d)(1)(B)(iv), Vencor, as an operator
of long-term care hospitals, can secure reimbursement for the
"reasonable cost" of providing its services. Id.
ss 1395f(b)(1), 1395x(v). For Medicare-covered services, it
must generally accept this amount as payment in full. See
id. s 1395cc(a)(1)(A).

Vencor and Physicians Mutual filed cross motions for par-
tial summary judgment on the limited question of whether
the Medicare statute or associated federal regulations prohib-
ited it from charging patients for post-Medicare services at
more than the Medicare-approved rates. We emphasize the
word "patients" because much of the legislative and regulato-
ry materials that the parties dispute speak only to insurers'
obligations. Of course for a third-party beneficiary's breach
of contract action, the patient's liability is the bedrock--
without patient responsibility, there is no insurer responsibili-
ty. But insurer liability is often less than all of the primary
obligor's; provisions for deductibles and co-insurance are
common, and some items and services may not be covered at
all. Such insurer-specific limitations may affect Physicians
Mutual's liability on these 10 contracts, but no such limita-
tions are before us. The cross-motions for summary judg-
ment frame the issue only in terms of patient liability.

* * *

Physicians Mutual first argues that the Medicare Act itself
prohibits Vencor from charging its patients more than the

Medicare-approved rate. It relies initially on 42 U.S.C.
s 1395cc(a)(1)(A), under which providers are eligible for
Medicare reimbursement only if they execute a contract with
the Secretary of Health and Human Services agreeing,
among other things,

not to charge ... any individual or any other person for
items or services for which such individual is entitled to
have payment made under this subchapter.

Id.

The most obvious difficulty with this provision as support
for Physicians Mutual is that it appears to have nothing to do
with charges for post-Medicare services. The "subchapter"
(Subchapter XVIII, 42 U.S.C. ss 1395-1395ccc) contains pro-
visions under which providers are "entitled" to be paid by
Medicare when their provision of services meets the many
statutory qualifications. These appear to exhaust its provi-
sion of entitlements. Certainly Physicians Mutual points us
to nothing in the subchapter that "entitles" providers to be
paid for services provided after the lapse of Medicare entitle-
ment. For such entitlements, presumably, they must rely on
contract, or perhaps in some cases quasi-contract, under state
law.

Physicians Mutual seeks to get around this impediment by
claiming that because provisions in the subchapter establish
conditions under which the National Association of Insurance
Commissioners ("NAIC") may promulgate standardized Me-
digap insurance contracts, which under certain conditions
become the exclusive form of lawful Medigap insurance con-
tract, see id. s 1395ss(p), the subchapter "entitles" providers
to be paid for services falling in the Medicare gap. But,
skipping over the distinction between the liabilities of insur-
ers and of patients (recall that it is the latter that the parties'
motions for summary judgment have put in play; insurers'
obligations follow only as a corollary), there is all the differ-
ence in the world between the contractual obligations of the
common law, which create the entitlements of providers to be
paid, and federal limitations on those entitlements. Section
1395ss does not entitle anyone to payment.

 In an attempt to sidestep these difficulties, Physicians
Mutual argues that Medicare's general purpose of providing
"basic protection against the costs of hospital ... services,"
id. s 1395c, demonstrates a congressional intent to allow
Medicare recipients to "extend the benefits and protections
under the Medicare Act through the purchase of Medigap
insurance." Appellee's Br. at 15. Even if Physicians Mutual
were correct about the thrust of the statute's purpose, the
Supreme Court has instructed that:

[a]pplication of 'broad purposes' of legislation at the
expense of specific provisions ignores the complexity of
the problems Congress is called upon to address and the
dynamics of legislative action. Congress may be unani-
mous in its intent to stamp out some vague social or
economic evil; however, because its Members may differ
sharply on the means for effectuating that intent, the
final language of the legislation may reflect hard-fought
compromises. Invocation of the 'plain purpose' of legis-
lation at the expense of the terms of the statute itself
takes no account of the processes of compromise and, in
the end, prevents the effectuation of congressional intent.

Board of Governors of the Fed. Reserve Sys. v. Dimension
Financial Corp., 474 U.S. 361, 373-74 (1986). See also
Rodriguez v. United States, 480 U.S. 522, 525-26 (1987)
(noting that "no legislation pursues its purposes at all costs"
and therefore "it frustrates rather than effectuates legislative
intent simplistically to assume that whatever furthers the
statute's primary objective must be the law"). So radical a
scheme as imposition of price controls on medical services not
covered by Medicare requires explicit language, not mere
brooding purposes (which, we should add, are in any event
not discernible in s 1395ss).

Physicians Mutual also points to a specific provision of the
Medicare statute governing "items or services ... in excess
of or more expensive than" a covered service:

Where a provider of services has furnished, at the re-
quest of such individual, items or services which are in
excess of or more expensive than the items or services

 with respect to which payment may be made under this
subchapter, such provider of services may also charge
such individual or other person for such more expensive
items or services to the extent that the amount custom-
arily charged by it for the items or services furnished at
such request exceeds the amount customarily charged by
it for the items or services with respect to which pay-
ment may be made under this subchapter.

42 U.S.C. s 1395cc(a)(2)(B).

The parties curiously agree on the idea that this provision
governs post-Medicare hospital days, differing only as to its
effect. We, by contrast, regard it as altogether inapplica-
ble--because confined to superior versions of covered ser-
vices. (The parties' de facto stipulation of law does not
require us to analyze a statute on a premise we regard as
false. See United States Nat'l Bank of Oregon v. Indepen-
dent Ins. Agents of Am., 508 U.S. 439, 446 (1993).)

The archetypal example of a service that falls within the
ambit of this provision is a medically-unnecessary private
room requested by the patient instead of the semi-private
room covered by Medicare. In such cases, "the provider may
bill the beneficiary for the difference between the private
room and semi-private room charges." Medicare Program;
Elimination of Medicare Indirect Subsidy for Private Rooms,
47 Fed. Reg. 42,676, 42,676 (1982). More generally, HCFA
has referred to items in services subject to s 1395cc(a)(2)(B),
as "luxury items and services," see Medicare Program; Pro-
spective Payments for Medicare Inpatient Hospital Services;
Interim Final Rule with Comment Period, 48 Fed. Reg.
39,752, 39,786/3 (1983), or as "partially covered" items and
services, see Medicare as Secondary Payer and Medicare
Recovery Against Third Parties, 54 Fed. Reg. 41,716, 41,740,
41,743 (1989). The additional days of hospital coverage at
issue here do not fit these descriptions. Indeed, in search of
its desired result, Physicians Mutual is driven to offer a
thoroughly confusing and improbable view of
s 1395cc(a)(2)(B). Physicians Mutual assumes that hospital
services for pre-and post-exhaustion days are identical and
that the "amount customarily charged" is the Medicare rate

because that rate is paid by the majority of Vencor's patients.
But after fitting these assumptions into the statutory lan-
guage, the upshot is that providers would have to offer free
hospital stays to post-exhaustion patients, as the difference
between the two "amounts customarily charged" is zero.
(Insurance would be no help to the provider, as insurers are
obligated to pay only to the extent that the patient is.)

By contrast, applying the statute is simple in the case of a
patient-requested luxury good or service. For example, if a
provider offers a "standard appendectomy" at a customary
charge of $400 (for which Medicare reimbursement is limited
to $300), and a "super appendectomy" at a customary charge
of $600, it would be entitled to charge only $500 (the basic
$300 Medicare rate, plus the $200 premium) for the superior
procedure.

Moreover, the triggering fact, the furnishing of such a
service "at the request" of the recipient, seems to confirm our
reading; the risk that services would be provided long past
the Medicare limit, without a request, seems very limited
(though not zero). The Secretary's implementing regulation
not only requires patient request, see 42 CFR s 489.32(a)(2),
but also requires the provider to inform the beneficiary that
there will be a charge for the service "[t]o avoid misunder-
standing," id. s 489.32(a)(3). It is hard to imagine that an
extended hospital stay of several months' duration (which is
the amount that would be "in excess of" Medicare benefits for
most of the patients here) is the type of items or services for
which a patient might fail to understand that "there will be a
specified charge for that service." Id.

The statutes being rather unpromising material for Physi-
cians Mutual, it turns to a "Model Regulation" written by
NAIC. Again Physicians Mutual encounters a statutory diffi-
culty: the authorizing legislation calls for regulation only of
insurance contracts, not providers' services or compensation.
See 42 U.S.C. s 1395ss(p). NAIC was to amend its existing
Model Regulation to include no more than ten standardized
Medigap insurance plans. See id. s 1395ss(p)(1)(A). Each
plan was to include a minimum common core of benefits and
offer benefits widely available in then-existing policies, while

balancing the objectives of simplifying the market for Medi-
gap insurance, avoiding adverse selection, providing consumer
choice, providing market stability, and promoting competition.
See id. s 1395ss(p)(2)-(3). As a result of the statutory pro-
gram, no Medigap policy may issue unless either the relevant
state insurance regulator, or in some circumstances the Sec-
retary, has a mechanism for ensuring that the policy meets
the 1991 NAIC Model Regulation.2 See id. s 1395ss(a)(2),
(g)(2)(A), (k)(1)(A), (m), (p)(1). Physicians Mutual identifies
nothing in the authorizing statute governing provider-patient
charges, and we see no such grant of power to NAIC. If the
Model Regulation purported to cover such charges, it would
be ultra vires.

Unsurprisingly then, the text of NAIC's Model Regulation
does not purport to cover such charges. The section relied
on by Physicians Mutual reads as follows:

Section 8. Benefit Standards for Policies or Certificates
...

B. Standards for Basic ("Core") Benefits Common to
All Benefit Plans. Every issuer shall make available a
policy or certificate including only the following basic
"core" package of benefits to each prospective in-
sured....

(3). Upon exhaustion of the Medicare hospital inpa-
tient coverage including the lifetime reserve days, cov-
erage of the Medicare Part A eligible expenses for
hospitalization paid at [rates consistent with the ordi-
nary hospital payment scheme] or other appropriate
standard of payment, subject to a lifetime maximum
benefit of an additional 365 days.

57 Fed. Reg. at 37,990-91.

Someone at NAIC has argued that this precludes provider
charges above the Medicare rate because such charges are
__________
2 Three states, Massachusetts, Minnesota, and Wisconsin, took
advantage of a waiver provision available to states with an alterna-
tive simplification program in place as of November 5, 1990, see 42
U.S.C. s 1395ss(p)(6), and therefore need not implement NAIC's
Model Regulation.

not "an appropriate standard of payment," Letter from Guen-
ther Ruch, Chair, NAIC Senior Issues Task Force to Nancy-
Ann Min DeParle, HCFA Administrator at 4, 5 (July 8, 1998)
("1998 NAIC Letter"), reprinted in Joint Appendix ("J.A.")
123, 127. But s 8(B)(3), like s 1395ss(p), makes no mention
of limits on provider charges.

Perhaps recognizing that s 8(B)(3) applies only to insurers'
obligations, Physicians Mutual turns to the Model Regula-
tion's mandatory disclosure provision to support its claim.
Section 16 states, in relevant part:

Section 16. Required Disclosure Provisions
...

C. Outline of Coverage Requirements for Medicare
Supplemental Policies

(1) Issuers shall provide an outline of coverage to all
applicants at the time application is presented to the
prospective applicant ...

...

(4) The following items shall be included in the outline
of coverage in the order prescribed below.
...
Disclosures

Use this outline to compare benefits and premiums
among policies.

Read Your Policy Very Carefully

This is only an outline describing your policy's most
important features. The policy is your insurance con-
tract. You must read the policy itself to understand all
of the rights and duties of both you and your insurance
company.
...
Notice
This policy may not fully cover all of your medical
costs.

...

_____________________________________________________________________________
SERVICES MEDICARE PLAN PAYS YOU PAY
PAYS
______________________________________________________________________________
Hospitalization

...

--Once life-
time reserve
days are used:
---Additional $0 100% of $0
365 days Medicare
eligible
expenses
---Beyond the $0 $0 All costs
additional
365 days
_____________________________________________________________________________
57 Fed. Reg. at 37,997, 37,998, 38,000, 38,001.

Physicians Mutual points to the "YOU PAY" column of this
table, which seems to say that the beneficiary pays "$0" for
an additional 365 days of post-exhaustion hospitalization. 57
Fed. Reg. at 38,001, 38,003, 38,005, 38,008, 38,011, 38,014,
38,017, 38,020, 38,023, 38,027. The question posed is whether
the table has any legal effect on providers' charges.
As a matter of federal law, the answer must be No. As we
have seen, the authorization in s 1395ss(p) to NAIC (and to
the Secretary as an alternative reviser of the Model Regula-
tion) is confined to insurance contracts. Authority to create a
class of standardized insurance contracts does not carry some
implicit authority to regulate transactions that give rise to the
potentially covered obligations.
The parties have nonetheless hotly disputed the meaning of
various expressions of opinion by representatives of NAIC
and the Secretary. Physicians Mutual relies heavily on the
1998 NAIC letter in which a NAIC official claimed that
HCFA, "by adopting the NAIC Model Act and Regulation as
the federal standard for Medicare supplement insurance," has
embraced s 16 of the Model Regulation, which "in substance
limits the providers to charging only the Medicare-approved
amount for hospitalization when Medicare benefits have been
exhausted." 1998 NAIC Letter at 4, 5, J.A. at 126, 127. The
1998 NAIC Letter relies in part on a 1992 letter in which

Thomas Hoyer, a HCFA official, interpreted the "day outlier"
language in s 8(B)(3) of the Model Regulation. Letter from
Thomas E. Hoyer, Jr., Director, Division of Provider Services
Coverage Policy, HCFA, to F. David Wythe, Insurance Ana-
lyst, Forms and Rates Section, Life, Accident and Health
Division, South Carolina Department of Insurance at 3 (Feb.
12, 1992), J.A. at 136. Vencor, however, notes that just seven
months earlier, NAIC had quite candidly admitted that it
"cannot control what providers charge for their services" and
asked HCFA to take action to ensure that providers accept
the Medicare approved rates as payment in full for post-
exhaustion hospital expenses. Letter from Glenn Pomeroy,
Chair, NAIC Senior Issues Task Force to Nancy-Ann Min
DeParle, HCFA Administrator at 3 (Dec. 3, 1997), J.A. at 129,
131. Vencor also offers a more recent letter from HCFA in
which the Deputy Administrator stated that neither Mr.
Hoyer nor anyone else at HCFA has taken a position as to
the 1991 NAIC Model Regulation's effects on providers'
charges for post-exhaustion hospital care. See Letter from
Michael Hash, HCFA Deputy Administrator to Bradley L.
Kelly, Mintz, Levin, Cohen, Ferris, Glovsky & Popeo at 2-3
(Sept. 14, 1999).

To the extent that any of these letters attributes to s 16 of
the Model Regulation any limitation on provider charges to
patients, they exceed the unambiguous limits in the statutory
sections relied upon. Thus, even if we were to assume that
NAIC--a private entity--were entitled to deference, or that
the Secretary were owed deference on her interpretation of
regulations drafted not by her but by NAIC, compare Thom-
as Jefferson University v. Shalala, 512 U.S. 510, 512-13
(1994), the complete absence of statutory authority, even
assuming the full application of deference under Chevron
U.S.A. Inc. v. NRDC, Inc., 467 U.S. 837, 842-843 (1984),
would fatally undercut the interpretation claimed by Physi-
cians Mutual.3

__________
3 Thus we have no occasion to consider the effect of the Su-
preme Court's recent decision in Christensen v. Harris County, No.
98-1167, slip op. (U.S. May 1, 2000) , stating that when an agency

 In theory the following question remains: If a state adopts
the Model Regulation in order to make the sale of Medigap
policies lawful under federal law within its borders, could the
text of s 16(C) have the effect asserted by Physicians Mutu-
al? Recall that s 16(C) is simply a mandatory disclosure
provision in a contract between patient and insurer. As such,
it would seem a weak basis for a claim of a binding restraint
on contracts between patients and providers.

Further, the language required by s 16(C)(4) itself explains
that its purpose is simply to enable the insured to compare
premiums and benefits (which are plainly independent of
providers' rates), and warns patients (1) that the policy rather
than the outline determines coverage, and (2) that the policy
may not cover all of the patient's medical costs. Compare
Vencor Hosps. South v. Blue Cross and Blue Shield of R.I.,
86 F. Supp. 2d 1155, 1159-60 (S.D. Fla. 2000) (concluding that
under Florida Law the outline is not part of the insurance
policy); Vencor, Inc. v. Standard Life & Accident Ins. Co., 65
F. Supp. 2d 573, 578 (W.D. Ky. 1999) (same for Tennessee
law). As Physicians Mutual has invoked the Model Regula-
tion solely as a matter of federal law, however, disputes as to
its meaning under state law are not before us.

Finally, we note that in denying Vencor's motion under
Fed. R. Civ. P. 59(e) to alter or amend the judgment, the
district court said that Vencor had waived its claim that the
1991 NAIC Model Regulation is inapplicable to the six pa-
tients whose policies took effect before August 21, 1992. It is
not clear whether the district court would reach the same
conclusion in light of our decision that the authorities invoked
by Physicians Mutual do not bar Vencor from charging
patients its standard rates for post-exhaustion hospital care.

__________
provides interpretations of an ambiguous statute in documents that
lack the force of law (such as opinion letters and policy statements),
such intepretations "do not warrant Chevron-style deference," id. at
10, but are " 'entitled to respect' under ... Skidmore v. Swift & Co.,
323 U.S. 134, 140 (1944), but only to the extent that those intepreta-
tions have the 'power to persuade,' " id. at 11.

To avoid confusion, we emphasize that the claim remains live.
If the district court on remand is called upon to interpret the
individual insurance contracts, and if it concludes that any
version of NAIC's Model Regulation has any impact on the
outcome, it must determine which version was in effect in
each relevant state at the time that each contract took effect.

* * *

Because we find no statute or regulation that prohibits
Vencor from charging its standard rates to patients who have
exhausted their Medicare hospital benefits, we reverse the
judgment of the district court and remand the case.

So ordered.