Ingham Regional Medical Center v. United States

In the United States Court of Federal Claims

No. 13-821C

Filed: March 22, 2016

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*

INGHAM REGIONAL MEDICAL * Money-Mandating Statute and

CENTER, ET AL., * Regulation; Failure to State a Claim;

* Breach of Express and/or Implied in

Plaintiffs, * Fact Contract; Release; Mutual

v. * Mistake; Breach of the Covenant of

* Good Faith and Fair Dealing; Statute

UNITED STATES, * of Limitations.

*

Defendant. *

*

* * * * * * * * * * * * * * * *

Alexander J. Pires, Pires Cooley, Washington, DC, for plaintiffs. Of counsel,

Gregory A. Brodek, Duane Morris LLP, Bangor, ME.

Phyllis Jo Baunach, Senior Trial Counsel, Commercial Litigation Branch, Civil

Division, Department of Justice, Washington, D.C. With her were Steven J. Gillingham,

Assistant Director, Civil Division, Robert E. Kirschman, Jr. Director, Commercial

Litigation Branch, and Benjamin C. Mizer, Principal Deputy Assistant Attorney General,

Civil Division. Of counsel, Gerald A. Wesley, Associate General Counsel, Defense Health

Agency, Department of Defense, Washington, D.C.

OPINION

HORN, J.

Plaintiffs Ingham Regional Medical Center (Ingham), Bay Regional Medical Center

(BRMC), McLaren Northern Michigan (McLaren), Gifford Medical Center, Inc. (Gifford),

and Lakewood Health System (Lakewood) operate hospitals that participated in the

TRICARE program, a federal program providing health care to uniformed service

members, retirees, and certain others. Plaintiffs allege that from at least August 1, 2003

to May 1, 2009 (the Relevant Period), the defendant, United States of America, acting

through the Secretary of the United States Department of Defense (DoD) in his official

capacity as operator of TRICARE, underpaid them for certain services they provided as

part of the TRICARE program, which plaintiffs allege resulted in the breach of two

contracts and violations of applicable statutory and regulatory provisions.1 They seek to

bring a class action2 on behalf of every hospital in the United States that (1) provided

outpatient services to individuals enrolled in the TRICARE program during the Relevant

Period, and (2) participated in the defendant’s Discretionary Payment Process, described

below, announced April 25, 2011. Plaintiffs estimate their proposed class size to be

approximately 5,200 hospitals.

FINDINGS OF FACT

In 1956, Congress established a military health care system, now known as

TRICARE, to “create and maintain high morale in the uniformed services by providing an

improved and uniform program of medical and dental care for members and certain

former members of those services, and for their dependents.” See 10 U.S.C. § 1071

(2012).3 Although the program initially covered only active duty members and their

dependents, coverage was later expanded to include retirees, eligible dependents of

retirees, and survivors, i.e., certain surviving dependents of deceased service members

killed on active duty. See Military Medical Benefits Amendments of 1966, Pub. L. No. 89-

1 Plaintiffs allege that all hospitals in their purported class were underpaid from August 1,

2003 to May 1, 2009, but that “small rural hospitals” continued to be underpaid through

December 31, 2009, and that “children’s hospitals, cancer hospitals, and critical access

hospitals,” continue to be underpaid through the present. Plaintiffs do not state whether

the five named plaintiffs were small rural hospitals, children’s hospitals, cancer hospitals,

or critical access hospitals. Therefore, according to plaintiffs, to the extent that the named

plaintiffs qualified as such hospitals, the Relevant Period could include the additional

periods of alleged underpayment described above. The court also notes that, without

explanation, the plaintiffs in their opposition to defendant’s motion to dismiss define the

Relevant Period as ending on April 30, 2009 rather than May 1, 2009. As discussed

below, April 30, 2009 was the last day on which TRICARE used CHAMPUS Maximum

Allowable Charge (CMAC) rates to reimburse health care providers such as plaintiffs.

2 Plaintiffs have not yet filed a motion for class certification.

3 From 1966 to 1995, after the passage of Military Medical Benefits Amendments of 1966,

Pub. L. No. 89-614, §2(6), 80 Stat. 862, 863–65 (1966), the program was popularly known

as the Civilian Health and Medical Program of the Uniformed Services (CHAMPUS). See

Department of Defense, Under Secretary of Defense for Personnel and Readiness,

Military Compensation Background Papers: Compensation Elements and Related

Manpower Cost Items. Their Purposes and Legislative Backgrounds 715 (7th ed. 2011),

http://www.loc.gov/rr/frd/pdf-files/Military_Comp-2011.pdf (last visited March 18, 2016).

From 1995 to the present day, after a number of significant reforms were implemented by

the Department of Defense, the program has operated under the name TRICARE. See

id. at 719-20; see generally id. at 715-20 (describing the history of the Federal

Government’s attempts to provide medical care to members of the uniformed services

and their dependents). The parties appear to use the terms CHAMPUS and TRICARE

interchangeably in their filings.

2

614, 80 Stat. at 865; see also 10 U.S.C. § 1086(c) (2012). The law empowers the

Secretary of Defense to administer TRICARE and the Secretary has used that power to

promulgate regulations and manuals that, together with the underlying statutes, govern

the TRICARE program. See 10 U.S.C. 1073(a)(2) (2012); see generally 32 C.F.R. § 199

(2015). Among other provisions, the law provides the Secretary of Defense with the

authority to contract with outside providers, such as the plaintiff hospitals, for medical care

for dependents of service members, retirees, dependents of retirees, and survivors. See

10 U.S.C. §§ 1079(a), 1086(a) (2012).4

TMA/DHA, as part of its management responsibilities, contracts with three

managed care support contractors (MCSCs), which in turn are responsible for

establishing networks of health care providers in their national region to provide health

care services to TRICARE beneficiaries (there are three national regions: North, South,

and West) and for receiving and processing individual claims. See 10 U.S.C. § 1072(7)

(2012); DoD Directive 5136.13 (September 30, 2013). DHA/TMA does not typically enter

into reimbursement contracts directly with medical care providers, including hospitals

such as the plaintiffs, but rather with these MCSCs, which in turn receive and process the

providers’ claims for medical reimbursement. If an individual claim qualifies for payment

under the TRICARE Program, then the claim is reimbursed in accordance with the

guidelines set forth in 32 C.F.R. § 199.14.

The event which appears to have set in motion the events leading to this lawsuit

was the alteration by Congress in 2001 of a single word in the portion of the TRICARE

statute governing the reimbursements for outside providers of health care services. Prior

to 2001, 10 U.S.C. § 1079(j)(2) stated:

The amount to be paid to a provider of services for services provided under

a plan covered by this section may be determined under joint regulations to

be prescribed by the administering Secretaries which provide that the

amount of such payments shall be determined to the extent practicable in

accordance with the same reimbursement rules as apply to payments to

providers of services of the same type under title XVIII of the Social Security

Act (42 U.S.C. 1395 et seq.) [i.e., Medicare].

10 U.S.C. § 1079(j)(2) (2000) (emphasis added). In 2001, Congress altered 10 U.S.C.

§ 1079(j)(2) by replacing “may be determined under joint regulations” with “shall be

determined under joint regulations.” National Defense Authorization Act for Fiscal Year

2002, Pub. L. No. 107-107, § 707, 115 Stat. 1012, 1163 (2001); see 10 U.S.C. 1079(j)(2)

4 Prior to October 1, 2013, the TRICARE Management Activity (TMA) managed and

administered the TRICARE program pursuant to DoD Directive 5136.12 (May 31, 2001).

Effective October 1, 2013 and pursuant to DoD Directive 5136.13 (September 30, 2013),

the Defense Health Agency (DHA) was established to manage and administer the

TRICARE program, replacing TMA. In their submissions to this court, the parties refer to

TMA and DHA interchangeably.

3

(2006) (emphasis added).5 To implement this change, TRICARE issued an interim final

rule on June 13, 2002, see 67 Fed. Reg. 40597–02 (June 13, 2002) (the Interim Final

Rule), and then a final rule on October 24, 2005, see 70 Fed. Reg. 61368–79 (Oct. 24,

2005) (the Final Rule). The Interim Final Rule explained that, from 2000 to 2004, Medicare

was phasing in a new Outpatient Prospective Payment System (OPPS) methodology for

facility charges in hospital outpatient departments and emergency departments. See 67

Fed. Reg. 40597–02, 40601. The Interim Final Rule then stated that the DoD planned to

follow the Medicare rule, but that “because of complexities of the Medicare transition

process and the lack of TRICARE cost report data comparable to Medicare’s, it is not

practicable for the Department to adopt Medicare OPPS for hospital outpatient services

at this time.” Id. Instead, the Interim Final Rule, effective August 12, 2002, adopted new

methods of payment for four categories of hospital-based outpatient services, with the

anticipation of the “eventual adoption of the Medicare OPPS for most TRICARE hospital

outpatient services covered by the Medicare OPPS.” Id.; see id. at 40598 (stating effective

date of rule). For clinical laboratory services, rehabilitation therapy services, and

venipuncture, payments would be based on “the TRICARE-allowable cost method in

effect for professional providers,” while for outpatient radiology services, a fixed maximum

allowable charge, the CHAMPUS Maximum Allowable Charge (CMAC), would be used.

Id. at 40601; see id. at 40604-05 (describing additions to be codified at 32 C.F.R.

§ 199.14(a)(5)).

The 2005 Final Rule repeated the language in the Interim Final Rule regarding the

impracticability of fully adopting Medicare OPPS for hospital outpatient services at that

time. See 70 Fed. Reg. at 61371. The Final Rule then set forth reimbursement methods

for hospital outpatient services that had “established allowable TRICARE charges,”

including: laboratory services, including clinical laboratory; rehabilitation therapy services;

radiology services; diagnostic services; ambulance services; durable medical equipment

(DME) and supplies; oxygen and related supplies; drugs administered other than oral

method; all professional provider services that are provided in an emergency room, clinic,

or hospital outpatient department, etc.; and routine venipuncture. Id.; see also id. at

61378–79 (describing amendments to 32 C.F.R. § 199.14(a)(5)(i)–(xii)). Plaintiffs refer to

these categories as “All Outpatient Services.” The 2005 Final Rule then explained: “For

these services, payments are based on the TRICARE-allowable cost method in effect for

professional providers or the CHAMPUS Maximum Allowable Charge (CMAC).” Id. at

61371. All other outpatient hospital services, except for ambulatory surgery services,

which had their own payment methodology, were to paid as billed. Id. at 61371–72. The

5 As defendant identifies: “The current citation is 10 U.S.C. § 1079(i)(2). The National

Defense Authorization Act for Fiscal Year 2015 changed the citation ‘by striking

subsection (i) and . . . by redesigning subsections (j) through (q).’” (quoting Carl Levin

and Howard “Buck” McKeon National Defense Authorization Act for Fiscal Year 2015,

Pub. L. No. 113-291, § 703, 128 Stat. 3292, 3411 (2014)). To avoid confusion, however,

the court will continue throughout this opinion to refer to the statutory section as 10 U.S.C.

§ 1079(j)(2).

4

2005 Final Rule made these changes retroactively effective to August 1, 2003. Id. at

61368.

In late 2008, TRICARE introduced a new payment system for hospital outpatient

services that was similar to the OPPS rules used by Medicare. The effective date for the

new payment system was May 1, 2009 for most hospitals, and January 1, 2010 for small

rural hospitals. See 73 Fed. Reg. 74945–74966 (December 10, 2008) (publishing a final

rule implementing the TRICARE Hospital OPPS with an effective date of February 9,

2009); see also 74 Fed. Reg. 6228 (February 6, 2009) (extending the effective date of

TRICARE’s OPPS until May 1, 2009).

Plaintiffs allege that the use of CMAC rates to reimburse hospitals did not

approximate Medicare payment rates and resulted in significant underpayment to

hospitals that treated TRICARE beneficiaries. According to plaintiffs, “CMAC was

intended as a payment methodology used to reimburse ‘individual health care providers’

(such as doctors) and not institutions, such as hospitals, which invariably have more

overhead.” (emphasis in original). Thus, plaintiffs allege, CMAC was never intended to be

the exclusive reimbursement paid to hospitals for providing hospital outpatient services.

Plaintiffs allege that TRICARE’s use of CMAC rather than Medicare’s hospital

reimbursement methodology violated 10 U.S.C §§ 1079(a), (j)(2) and 1086(a), (g), which,

according to plaintiffs, required the DoD to reimburse health care providers in accordance

with Medicare payment rules to the extent practicable. Plaintiffs allege that from 2003 to

2008, the hospitals made “substantial efforts,” both orally and in writing, to advise

TRICARE of this alleged error, but TRICARE insisted CMAC was the appropriate

reimbursement methodology for hospitals. Plaintiffs allege that, as a result, they and the

proposed class members were “consistently and continually” underpaid during the sixty-

nine months of the Relevant Period.

Plaintiffs also allege that, as a result of complaints from certain hospitals, at some

undefined point in time, TRICARE directed that a study be undertaken of the accuracy of

its payments to hospitals for all outpatient services rendered during the Relevant Period

(the Kennel Study). This study was performed by Kennel and Associates, Inc. (Kennel),

an independent consultant, which had previously been used by defendant as an outside

subject matter expert. The Kennel Study allegedly compared CMAC payments to the

payments that would have been made using Medicare payment principles. According to

the plaintiffs, the Kennel Study determined that the defendant “(1) underpaid hospitals for

outpatient radiology but, (2) correctly paid hospitals for all other outpatient services.”

(emphasis in original).

According to plaintiffs, several of the hospitals asked the defendant to

acknowledge certain problems with the Kennel Study, to release the Kennel Study, and

to calculate monies owed to proposed class members for all outpatient services, not just

radiology, but the defendant refused. Instead, according to plaintiffs, the defendant, acting

through the Deputy Director of TRICARE, Rear Admiral Christine S. Hunter, “unilaterally,

and without notice to the hospitals,” created and announced a “discretionary payment

process,” notice of which was sent to every hospital in the United States via a letter signed

5

by Deputy Director Hunter and dated April 25, 2011 (the April 25, 2011 Letter). A copy of

this letter was attached as an exhibit to plaintiffs’ amended complaint.

The April 25, 2011 Letter begans by stating that “[t]he Department of Defense

(DoD) is currently analyzing whether your institution qualifies for any net adjustments to

payments for hospital outpatient radiology services for the period August 1, 2003, until

the TRICARE hospital Outpatient Prospective Payment System (OPPS) began on May

1, 2009.” The April 25, 2011 Letter continued by stating that “[d]etailed instructions will be

posted on the TRICARE Management Activity Web site, [sic]

www.tricare.mil/RadiologyDiscretionaryAppealAdjustments explaining the manner in

which a hospital may request that your institution’s claims data be reviewed for

appropriate discretionary adjusted payments.” The April 25, 2011 Letter continued:

For purposes of this process, DoD will treat your submission as an untimely

but discretionary appeal under 32 Code of Federal Regulations

199.10(a)(5) and (c), provided it is received no later than 60 days from the

date of this letter. Based on the request, your hospital may be paid an

adjustment, subject to the availability of appropriations, in return for your

acceptance of DoD’s offer of additional payment based on criteria

established by the agency. . . . In order to bring closure to any concerns

regarding payment of hospital outpatient services under the TRICARE

regulation prior to implementation of OPPS, payment of the discretionary

adjustments will also be contingent on the execution of a release by the

hospital of any hospital outpatient service claims against the agency,

TRICARE beneficiaries, and TRICARE MCSCs. We value your hospital as

a partner in this effort and remain committed to working with you to complete

the analysis of claims data and determine if any additional payments may

be allowed.

In addition to the April 25, 2011 Letter, the agency made available on the TRICARE

webpage mentioned in the Letter a document titled “NOTICE TO HOSPITALS OF

POTENTIAL ADJUSTMENT TO PAST PAYMENTS FOR OUTPATIENT RADIOLOGY

SERVICES” (the Notice) and answers to certain Frequently Asked Questions (the FAQs).

(capitalization in original). Plaintiffs attached the Notice and an undated version of the

FAQs as exhibits to their amended complaint.6

6 Pursuant to this court’s order and related to an identical attachment in the plaintiffs’

original complaint, plaintiffs filed a document with the court identifying “when and where

the undated frequently asked questions, included as an exhibit to the plaintiffs’ complaint,

was originally made available.” Plaintiffs indicated:

To the best of our knowledge and belief, the FAQs as originally published

in or around April 2011, consisted of 12 questions and answers; the FAQs

included as Exhibit D to Plaintiff’s [sic] Complaint consisted of 17 questions

6

The Notice described the legislative and regulatory background for the

“discretionary net adjusted payments” discussed in the April 25, 2011 Letter, the agency’s

rationale in providing the payments, and a nine-step methodology hospitals were to follow

to request these payments. The background section described: how the National Defense

Authorization Act for Fiscal Year 2002 changed the relevant law “to require use of

Medicare rates for hospitals to the extent practicable”; how the 2002 Interim Final Rule

partially implemented this statutory change, specifying payments for four categories of

hospital outpatient services, including that the CMAC rate would be used to reimburse

radiology services, while explaining that it was not practicable to adopt Medicare’s OPPS

payment system for hospital outpatient services at that time; how the 2005 Final Rule

applied the CMAC to All Outpatient Services, retroactively effective August 1, 2003; and

how TRICARE eventually adopted an OPPS payment methodology modeled after

Medicare’s, effective May 1, 2009.

In discussing the rationale behind the discretionary payments, the Notice began

by stating that “[a] question has arisen about DoD’s interpretation and implementation of

the TRICARE regulation provision on reimbursement of hospital outpatient services as

issued in the Final Rule on October 24, 2005.” The Notice continues:

The TRICARE regulation provisions on hospital outpatient services, in the

absence of adoption of the Medicare OPPS methodology, adopted

comparable Medicare payments for similar services provided in other sites

(i.e., physician offices). That is, TRICARE looked to the similarity of services

being provided, not the site of services, in adopting a reimbursement

methodology for hospital outpatient services. By this approach, the

technical component of the TRICARE allowable charge rates for similar

services was used to reimburse the hospital for similar services furnished

on an outpatient basis.

The Notice went on to state that:

[I]n reviewing payments for hospital services, DoD has determined that, for

radiology services specified in the regulation as being reimbursed under the

allowable charge methodology, the technical component of the allowable

charge did not approximate the Medicare fair payment for such hospital

services as well as it could have. That is, in looking at the Medicare

reimbursement methodologies in existence prior to adoption of Medicare

OPPS in 2000, (methodologies resulting in fair payment for Federal health

and answers; and, the FAQs that were updated on August 2, 2011

consisted of 20 questions and answers.

Plaintiffs attached copies of the April 2011 and August 2011 versions of the FAQs to this

filing and indicated they did not know exact dates the documents were published.

Defendant states that the FAQs were posted to the TRICARE website and “[b]ecause the

hospitals raised questions throughout the process, the agency periodically revised the

FAQ.”

7

care, which TRICARE allowable charges for hospital outpatient services

were intended to be emulated), some radiology services were underpaid in

comparison. Although a majority of the hospital outpatient services were

paid based on fee schedules, etc., which were comparable with what

Medicare would have paid, radiology services would need to have some

TRICARE payments adjusted to reach a comparable payment level. Thus,

although payments to hospitals for radiology services were consistent with

the duly promulgated regulation, there is a basis for TRICARE to provide an

opportunity to make some discretionary net payment adjustments to

approximate more closely Medicare payment methods.

The Notice then discussed an analysis TRICARE had performed, which plaintiffs

later learned was the Kennel Study, that “compared TRICARE hospital outpatient

services reimbursement with the intended comparable Medicare fair payment.” The

Notice stated that this analysis concluded that “[i]n all cases, except radiology services,

TRICARE payments for hospital outpatient services were either comparable to what

Medicare would have paid or TRICARE paid more.” According to the Notice, the potential

net underpayment for all hospitals was “approximately $98 million.” In view of these

findings, the Notice stated that TRICARE was “offering hospitals an opportunity for

discretionary adjusted payments for radiology services for which TRICARE allowable

charges were not comparable to the pre-OPPS Medicare fair rates for the period August

1, 2003, to May 1, 2009 (or other appropriate end date for OPPS-exempt hospitals.”

The Notice then went on to explain why TRICARE would make these “net

adjustments to payments of hospital outpatient radiology services”:

For hospital outpatient services during [the period August 1, 2003 until the

TRICARE OPPS began on May 1, 2009], payments by the TRICARE

Managed Care Support Contractors (MSCSs) consistent with the applicable

TRICARE regulation, policy and TRICARE directions were correct. As

specifically concerns hospital outpatient radiology services, however,

TRICARE may have directed payment of amounts which in some cases

were less and in some cases were more than the comparable Medicare fair

payment. General TRICARE policy is that payment methodologies follow to

the extent practicable Medicare payments. Prior to adopting the Outpatient

Prospective Payment System (OPPS), Medicare used a blended rate that

factored in a percentage of hospital costs and a percentage of the global

physician fee schedule to reimburse hospital outpatient radiology services.

In contrast, TRICARE regulation limited reimbursement to hospitals for

individual outpatient radiology services to the technical component of the

CHAMPUS Maximum Allowable Charge (CMAC), which was one

component of Medicare’s physician fee schedule. Consistent with

TRICARE policy under statute to pay similar to Medicare, we have

determined that discretionary adjusted payments may better reflect the

Medicare payment amounts for outpatient radiology claims.

8

The Notice stated, similar to the April 25, 2011 Letter, that any submission would be

treated as “an untimely but discretionary appeal under 32 CFR 199.10(a)(5) and (c)

provided it is received no later than June 23, 2011.” The Notice also indicated that

“[b]ased on the request and subject to the availability of funds, each hospital will receive

adjusted payments in return for acceptance of DoD’s offer of additional payment based

on criteria established by the agency,” and that “payment of the discretionary adjustments

will also be conditioned on the execution of a release by the hospital of any hospital

outpatient service claims against the agency, TRICARE beneficiaries and the TRICARE

MCSCs.”

The Notice then laid out the nine-step process by which hospitals could “request

an analysis of their claims data for possible discretionary adjustment” and to “govern the

review of payments for hospital outpatient radiology services and payment of any

discretionary net adjustments.” Step 1 instructed hospitals to submit “a request for

analysis of their claims data (process defined in Step 2) for hospital outpatient department

radiology charges” during the period August 1, 2003 to April 30, 2009, the last day before

TRICARE OPPS became effective. Step 1 also stated that “[s]mall rural hospitals,” which

were “not subject to TRICARE’s OPPS until January 1, 2010,” should submit requests for

the period August 1, 2003 to December 31, 2009, that “Critical Access Hospitals,” which

“are not subject to TRICARE’s OPPS,” should submit requests for the period August 1,

2003 to November 30, 2009, and that other “[h]ospitals not subject to OPPS (such as

Cancer and Children’s hospitals)” should submit requests for the period August 1, 2003

to December 31, 2010. Step 2 described the procedure for submitting a request,

instructing hospitals to submit their data, including name, address, zip code, Tax ID

number, TRICARE sub ID number, the 6-digit Medicare OSCAR provider number, NPI

number, and contact names and addresses for formal response and informal questions.

Step 2 explained that “[a] separate Excel spreadsheet must be completed for each

hospital in the TMA-specified format,” following an example posted on the TRICARE

website, and emailed to TMA. Plaintiffs attached a blank example of this spreadsheet to

their amended complaint (the Spreadsheet).

Steps 3 through 7 described the review process. Step 3 detailed TMA’s

methodology to “extract the claims for each hospital for claims for outpatient radiology

services during the relevant period,” and indicated which types of radiology claims TMA

would exclude and which types it would consider. Step 4 detailed the “‘Medicare’ method,”

the formula TMA would use to “calculate what would have been paid under the approach

that Medicare used to pay hospital outpatient radiology claims prior to CMS’s

implementation of the Medicare OPPS in 2000.” Step 5 explained how TMA would “adjust

the ‘Medicare’ amount calculated in Step 4 on each claim using the ratio of the actual

allowed amount on the claim to the TRICARE Standard allowed amount (the technical

component of the CMAC).” Step 6 described how TMA would “then compare the adjusted

‘Medicare’ amount for each claim with the actual allowed amounts on that claim” and “will

calculate the difference between the two amounts.” Step 7 explained that, “[i]f the

calculations in Step 6 indicate that an additional payment shall be made to the hospital,

then a hospital-specific offset for cost sharing shall be calculated.”

9

With regard to the particular claims that would be considered in this process,

plaintiffs contend that the “[h]ospitals were advised that TRICARE had in its possession

all of the data needed to make the proposed calculation and that they should not submit

claims level data.” Question 2 of the FAQs addressed claims-level data and, in response

to the question, “[w]ill I need to provide further information such as claims-level data or

identify the relevant claims or patients,” the government answered, “[n]o, you will not.

TRICARE will do this. You need to submit only the information in the Excel sheet. Do not

submit patient-level data.” Question 11 of the FAQs, in response to the question, “[w]ill

the adjustment for a hospital be done in one bulk check or will it be done at the claim

level,” indicated that, “[t]he hospital will receive one check with a summary of the results

of the calculations. Claims-level detail will not be provided due to the number of

adjustments over this 7-year period.” Moreover, in what plaintiffs allege was a later

version of the FAQs, question 18 asked, “[c]an the government provide the individual

claims records, including patient identifiers and CPT codes, for each of the radiology

claims that were subject to adjustment” and the answer indicated, “[n]o, the government

will not provide individual claims data to each hospital. The adjustment process described

in the notice posted on this website indicates that if a hospital has questions about the

data used, it should submit a detailed explanation of the alleged errors and proposed

corrections with supporting documentation.”

Step 8 in the Notice explained that “[a] written response to the hospital’s request

will be sent to the individual at the address provided by the hospital. The response will

provide the calculated discretionary adjusted payment and the calculations from which

the adjustment was derived.” An alleged example of such a written response from TMA

was attached as an exhibit to plaintiffs’ amended complaint. The document is labelled

“Hospital Radiology Payment Adjustment Worksheet,” and, after listing the hospital’s

identifying information, contains a table listing, for various time periods during the

Relevant Period, the “Number of Radiology Line Items,” the “TRICARE Allowed

Amounts,” the “Allowed Amount Under Medicare Method,” and the difference between

the Medicare and the TRICARE amount for each period. The differences for all periods

were then summed to get the “Adjusted Allowed Amount.” Step 8 further specified that:

While the methodology for calculating the adjustment is not subject to

questions, any questions regarding the data used in the calculations should

be received by TMA within 30 days of the date of TMA’s response as

specified in the response. Any questions should be accompanied by

detailed explanation of the alleged errors and the proposed corrections with

supporting documentation.

Finally, Step 9 explained that:

TMA’s written response will include a release and agreement to accept the

discretionary adjusted payment by the hospital. The signed release and

agreement should be returned to TMA within 30 days of the date of initial

response or TMA response to any questions raised in step 8, whichever

date is later. Following receipt of the signed release and agreement,

payment will be made to the hospital.

10

A copy of the release and agreement mentioned in Step 9 of the Notice was

attached to plaintiffs’ amended complaint (the Release). Plaintiffs allege that, “Defendant

drafted the Release without any input from the hospitals.” The Release is titled “Release”

(emphasis in original) and provides:

By accepting the offer of the Department of Defense (“DoD”) to provide a

net adjustment to prior payments of hospital outpatient radiology services

as described in the DoD’s letter dated April, [sic] 25, 2011, and in

consideration of any future net adjustments to prior payments of hospital

outpatient radiology services made by the DoD or the TRICARE [MCSCs],

Hospital:___________ Provider Number:___________ (including, but not

limited to, its past and present officers, directors, employees, agents,

stockholders, attorneys, servants, representatives, divisions, departments,

acquisitions, offices, parents, subsidiaries, affiliates, and partners, and the

predecessors, successors, heirs, executors, administrators, and assigns of

each of the foregoing) (hereinafter collectively referred to as “Releasor”)

shall completely release, acquit, and forever discharge the Government,

TRICARE beneficiaries, and any MCSCs (including, but not limited to, their

and its past and present officers, directors, employees, agents,

stockholders, attorneys, servants, representatives, divisions, departments,

acquisitions, offices, parents, subsidiaries, affiliates, and partners, and the

predecessors, successors, heirs, executors, administrators, and assigns of

each of the foregoing) (hereinafter collectively referred to as “Releasees”)

from any and all claims, demands, actions, suits, causes of action, appeals,

whether asserted as a class, individually, or otherwise, damages whenever

incurred, and liabilities of any nature whatsoever (including costs, penalties,

and attorney’s fees) that Releasor ever had, now has, or hereafter can,

shall, or may have against Releasees, whether known or unknown, on

account of or arising out of or resulting from or in any way relating to

payments, reimbursements, adjustments, recoupments, or any other

means of compensation by Releasees made at any time for outpatient

services rendered to TRICARE beneficiaries by Releasor prior to the date

Releasor became subject to the TRICARE Outpatient Prospective Payment

System (“OPPS”), or December 31, 2010 if Releasor was never subject to

the TRICARE OPPS.

RELEASOR UNDERSTANDS THE SIGNIFICANCE OF THIS RELEASE

OF UNKNOWN CLAIMS AND ITS WAIVER OF STATUTORY

PROTECTION AGAINS A RELEASE OF UNKNOWN CLAIMS.

ACCORDINGLY, RELEASOR EXPRESSLY WAIVES ANY AND ALL

RIGHTS AND BENEFITS UNDER SECTION 1542 OF THE CALIFORNIA

CIVIL CODE (WHICH STATES: “A GENERAL RELEASE DOES NOT

EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR

SUPSECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE

RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY

AFFECTED HIS SETTLEMENT WITH THE DEBTOR.”) OR ANY OTHER

11

LAW, RULE, PROVISION OR STATUTE OF ANY OTHER JURISDICTION

THAT OPERATES TO BAR THE RELEASE OF UNKNOWN CLAIMS.

(capitalization in original). The bottom of the Release contains lines for a “Releasor

Signature” and the date.

“On information and belief,” plaintiffs allege that approximately 5,200 hospitals,

including the named plaintiffs, submitted the Spreadsheet to TMA within 60 days of the

April 15, 2011 Letter as required by Step 2 of the Notice. According to plaintiffs, defendant

then assigned the 5,200 Spreadsheets and the responsibility to undertake the

calculations called for in the Notice to Kennel, the same group that had performed the

Study. All five of the named plaintiffs were subsequently provided with the written

responses described in Step 8, which contained TMA’s calculations and proposed

payment amounts. Plaintiff Ingham signed the Release and received the proposed

payment, but now alleges that, due to multiple errors in the Kennel Study and TMA’s

calculations, the payment it received for outpatient radiology services was less than the

amount it was owed. Plaintiff BRMC received a response stating that it had in fact been

overpaid for outpatient radiology services and was owed nothing. Plaintiffs McLaren,

Gifford, and Lakewood refused to sign the Release after receiving proposed payment

amounts that they believed, due to multiple errors in the Study and TMA’s calculations,

understated the amount they were owed for outpatient radiology services. All plaintiffs

allege that they were underpaid not just for outpatient radiology services, but for All

Outpatient Services.

According to plaintiffs, “[s]everal hundred hospitals” were represented by counsel

during the Discretionary Payment Process (the Represented Hospitals). According to

plaintiffs, when these hospitals received their proposed payment amounts they contacted

TRICARE complaining of certain errors in the calculations, which they claimed

understated the total amount they were owed by 129%. Eventually, TRICARE allegedly

acknowledged to the Represented Hospitals that there were errors in the calculations for

the amounts owed for outpatient radiology services and that it was not aware of these

errors before sending out the calculations and proposed payment amounts to participating

hospitals. Defendant then allegedly agreed, in recognition of these errors, to pay the

Represented Hospitals 77% more than the amounts it originally had offered. According

to plaintiffs, the other 5,200 hospitals that submitted Spreadsheets did not receive any

such recalculated payment amounts. Plaintiffs do not specify if the named plaintiffs were

among the Represented Hospitals. Plaintiffs allege in their amended complaint that,

“[s]hortly after TRICARE paid the Represented Hospitals,” plaintiffs contacted TRICARE

requesting that all hospitals be paid correctly for radiology services and stating that other

outpatient services had likewise been underpaid.

Plaintiffs allege that, in February and July 2013, in response to Freedom of

Information Act requests, TRICARE provided them with redacted versions of the Kennel

Study, which they have attached as exhibits to the amended complaint. Plaintiffs allege

in their complaint that their analysis of the Kennel Study revealed two errors:

12

a) With respect to outpatient radiology services, the statement in the Notice

that the underpayment was $98 million is mathematically incorrect.

Using Defendant’s own methodology and inaccurate data yields a figure

significantly higher . . .

b) With respect to All Outpatient Services, the calculations and data

showing the difference between monies paid under TRICARE versus

what would have been paid under Medicare were incorrect. . . . [T]hese

errors were due to multiple flaws in the Study, all of which insured that

Defendant’s representation to Plaintiffs and the Class that no outpatient

services except radiology were unpaid was not true.

With respect to plaintiffs’ second alleged error above, plaintiffs allege in their amended

complaint that the errors underlying the Kennel Study’s conclusions regarding All

Outpatient Services included:

(1) the use of incorrect assumptions of fact; (2) intentional exclusion of

claims that should have been included; (3) failure to properly capture claims

data; (4) failure to accurately capture claims-related services rendered from

a referring Military Treatment Facility; (5) failure to capture claims provided

by a hospital providing services at multiple locations; (6) failure to

accommodate changes in hospital locations; (7) failure of Managed Care

Support Contractors to maintain claims data, preventing TRICARE from

accessing this data; (8) use of erroneous formulae that resulted in incorrect

calculations; (9) comparison of incomplete outpatient service categories;

(10) comparison of “averages” that were not accurate; and (11) failure to

address and account for unique hospital (as opposed to physician offices)

costs.

Plaintiffs’ amended complaint alleges five counts against the defendant. In Count

I, plaintiffs allege the breach of two express contracts between themselves and the

defendant, composed of the various documents which they have attached to their

complaint. In Count II, plaintiffs allege, in the alternative, the breach of two implied-in-fact

contracts identical to those alleged under Count I. In Count III, plaintiffs allege mutual

mistake. In Count IV, plaintiffs allege the breach of the covenant of good faith and fair

dealing. Finally, in Count V, plaintiffs allege violations of two allegedly money-mandating

statutes, 10 U.S.C. §§ 1079 and 1086 (2000), as well as an allegedly money-mandating

regulation, 32 C.F.R. § 199.7(h)(2) (2002).

As relief, plaintiffs seek the following judgments against the defendant: (1) for

breach of an express or implied in fact contract, amounts “sufficient to reflect the correct

amounts due each member of the [alleged] Class for All Outpatient Services during the

[Relevant Period]”; (2) on the grounds of mutual mistake, to reform the alleged contracts

“to reflect the correct amounts due each member of the [alleged] Class for All Outpatient

Services during the Relevant Time”; (3) for the alleged breach of the covenant of good

faith and fair dealing, amounts “sufficient to reflect the correct amounts due each member

of the [alleged] Class for All Outpatient Services during the Relevant Time”; (4) for the

alleged violation of the statutes and regulation, “the amount owed to them pursuant to the

13

money-mandates of 10 U.S.C. §§ 1079, 1086 and 32 C.F.R. § 199.7(h)(2)”; as well as,

(5) fees, costs, and such other relief as the Court deems just and proper. Defendant has

moved to dismiss plaintiffs’ first amended complaint for failure to state a claim pursuant

to Rule 12(b)(6) (2012) of the Rules of the United States Court of Federal Claims (RCFC).

DISCUSSION

It is well established that “‘subject-matter jurisdiction, because it involves a court’s

power to hear a case, can never be forfeited or waived.’” Arbaugh v. Y & H Corp., 546

U.S. 500, 514 (2006) (quoting United States v. Cotton, 535 U.S. 625, 630 (2002)).

“[F]ederal courts have an independent obligation to ensure that they do not exceed the

scope of their jurisdiction, and therefore they must raise and decide jurisdictional

questions that the parties either overlook or elect not to press.” Henderson ex rel.

Henderson v. Shinseki, 131 S. Ct. 1197, 1202 (2011); see also Gonzalez v. Thaler, 132

S. Ct. 641, 648 (2012) (“When a requirement goes to subject-matter jurisdiction, courts

are obligated to consider sua sponte issues that the parties have disclaimed or have not

presented.”); Hertz Corp. v. Friend, 559 U.S. 77, 94 (2010) (“Courts have an independent

obligation to determine whether subject-matter jurisdiction exists, even when no party

challenges it.” (citing Arbaugh v. Y & H Corp., 546 U.S. at 514)); Special Devices, Inc. v.

OEA, Inc., 269 F.3d 1340, 1342 (Fed. Cir. 2001) (“[A] court has a duty to inquire into its

jurisdiction to hear and decide a case.” (citing Johannsen v. Pay Less Drug Stores N.W.,

Inc., 918 F.2d 160, 161 (Fed. Cir. 1990)); View Eng’g, Inc. v. Robotic Vision Sys., Inc.,

115 F.3d 962, 963 (Fed. Cir. 1997) (“[C]ourts must always look to their jurisdiction,

whether the parties raise the issue or not.”). “Objections to a tribunal’s jurisdiction can be

raised at any time, even by a party that once conceded the tribunal’s subject-matter

jurisdiction over the controversy.” Sebelius v. Auburn Reg’l Med. Ctr., 133 S. Ct. 817, 824

(2013); see also Arbaugh v. Y & H Corp., 546 U.S. at 506 (“The objection that a federal

court lacks subject-matter jurisdiction . . . may be raised by a party, or by a court on its

own initiative, at any stage in the litigation, even after trial and the entry of judgment.”);

Cent. Pines Land Co., L.L.C. v. United States, 697 F.3d 1360, 1364 n.1 (Fed. Cir. 2012)

(“An objection to a court’s subject matter jurisdiction can be raised by any party or the

court at any stage of litigation, including after trial and the entry of judgment.” (citing

Arbaugh v. Y & H Corp., 546 U.S. at 506–07)); Rick’s Mushroom Serv., Inc. v. United

States, 521 F.3d 1338, 1346 (Fed. Cir. 2008) (“[A]ny party may challenge, or the court

may raise sua sponte, subject matter jurisdiction at any time.” (citing Arbaugh v. Y & H

Corp., 546 U.S. at 506; Folden v. United States, 379 F.3d 1344, 1354 (Fed. Cir.), reh’g

and reh’g en banc denied (Fed. Cir. 2004), cert. denied, 545 U.S. 1127 (2005); and

Fanning, Phillips & Molnar v. West, 160 F.3d 717, 720 (Fed. Cir. 1998))); Pikulin v. United

States, 97 Fed. Cl. 71, 76, appeal dismissed, 425 F. App’x 902 (Fed. Cir. 2011). In fact,

“[s]ubject matter jurisdiction is an inquiry that this court must raise sua sponte, even where

. . . neither party has raised this issue.” Metabolite Labs., Inc. v. Lab. Corp. of Am.

Holdings, 370 F.3d 1354, 1369 (Fed. Cir.) (citing Textile Prods., Inc. v. Mead Corp., 134

F.3d 1481, 1485 (Fed. Cir.), reh’g denied and en banc suggestion declined (Fed. Cir.),

cert. denied, 525 U.S. 826 (1998)), reh’g and reh’g en banc denied (Fed. Cir. 2004), cert.

granted in part sub. nom Lab. Corp. of Am. Holdings v. Metabolite Labs., Inc., 546 U.S.

975 (2005), cert. dismissed as improvidently granted, 548 U.S. 124 (2006); see also Avid

14

Identification Sys., Inc. v. Crystal Import Corp., 603 F.3d 967, 971 (Fed. Cir.) (“This court

must always determine for itself whether it has jurisdiction to hear the case before it, even

when the parties do not raise or contest the issue.”), reh’g and reh’g en banc denied, 614

F.3d 1330 (Fed. Cir. 2010), cert. denied, 5 U.S. 1169 (2011).

Under both RCFC 8(a)(2) and Rule (8)(a)(2) of the Federal Rules of Civil

Procedure, a plaintiff need only state in the complaint “a short and plain statement of the

claim showing that the pleader is entitled to relief.” RCFC 8(a)(2) (2015); Fed. R. Civ. P.

8(a)(2) (2016); see also Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). The United

States Supreme Court stated:

While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not

need detailed factual allegations, [Conley v. Gibson, 355 U.S. 41, 47

(1957)]; Sanjuan v. American Bd. of Psychiatry and Neurology, Inc., 40 F.3d

247, 251 (7th Cir. 1994), a plaintiff’s obligation to provide the “grounds” of

his “entitle[ment] to relief” requires more than labels and conclusions, and a

formulaic recitation of the elements of a cause of action will not do, see

Papasan v. Allain, 478 U.S. 265, 286 (1986) (on a motion to dismiss, courts

“are not bound to accept as true a legal conclusion couched as a factual

allegation”). Factual allegations must be enough to raise a right to relief

above the speculative level, see 5 C. Wright & A. Miller, Federal Practice

and Procedure § 1216, pp. 235-36 (3d ed. 2004) (hereinafter Wright &

Miller) (“[T]he pleading must contain something more . . . than . . . a

statement of facts that merely creates a suspicion [of] a legally cognizable

right of action”), on the assumption that all the allegations in the complaint

are true (even if doubtful in fact), see, e.g., Swierkiewicz v. Sorema N.A.,

534 U.S. 506, 508, n.1 (2002); Neitzke v. Williams, 490 U.S. 319, 327

(1989) (“Rule 12(b)(6) does not countenance . . . dismissals based on a

judge’s disbelief of a complaint’s factual allegations”); Scheuer v. Rhodes,

416 U.S. 232, 236 (1974) (a well-pleaded complaint may proceed even if it

appears “that a recovery is very remote and unlikely”). . . . [W]e do not

require heightened fact pleading of specifics, but only enough facts to state

a claim to relief that is plausible on its face.

Bell Atl. Corp. v. Twombly, 550 U.S. at 555–56, 570 (footnote and other citations

omitted; omissions in original); see also Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing

Bell Atl. Corp. v. Twombly, 550 U.S. at 555–57, 570); Resource Investments, Inc. v.

United States, 785 F.3d 660, 669 (Fed. Cir. 2015) (“[A] plaintiff's obligation to provide the

grounds of his entitlement to relief requires more than labels and conclusions, and a

formulaic recitation of the elements of a cause of action will not do.”) (quoting Bell Atl.

Corp. v. Twombly, 550 U.S.at 555); A&D Auto Sales, Inc. v. United States, 748 F.3d 1142,

1157 (Fed. Cir. 2014); Bell/Heery v. United States, 739 F.3d 1324, 1330 (Fed. Cir.), reh’g

and reh’g en banc denied (Fed. Cir. 2014); Kam-Almaz v. United States, 682 F.3d 1364,

1367 (Fed. Cir. 2012) (“The facts as alleged ‘must be enough to raise a right to relief

above the speculative level, on the assumption that all the allegations in the complaint

are true (even if doubtful in fact).’” (quoting Bell Atl. Corp. v. Twombly, 550 U.S. at 557));

15

Totes-Isotoner Corp. v. United States, 594 F.3d 1346, 1354–55 (Fed. Cir.), cert. denied,

131 S. Ct. 92 (2010); Bank of Guam v. United States, 578 F.3d 1318, 1326 (Fed. Cir.)

(“In order to avoid dismissal for failure to state a claim, the complaint must allege facts

‘plausibly suggesting (not merely consistent with)’ a showing of entitlement to relief.”

(quoting Bell Atl. Corp. v. Twombly, 550 U.S. at 557)), reh’g and reh’g en banc denied

(Fed. Cir. 2009), cert. denied, 561 U.S. 1006 (2010); Cambridge v. United States, 558

F.3d 1331, 1335 (Fed. Cir. 2009) (“[A] plaintiff must plead factual allegations that support

a facially ‘plausible’ claim to relief in order to avoid dismissal for failure to state a claim.”

(quoting Bell Atl. Corp. v. Twombly, 550 U.S. at 570)); Cary v. United States, 552 F.3d

1373, 1376 (Fed. Cir.) (“The factual allegations must be enough to raise a right to relief

above the speculative level. This does not require the plaintiff to set out in detail the facts

upon which the claim is based, but enough facts to state a claim to relief that is plausible

on its face.” (citing Bell Atl. Corp. v. Twombly, 550 U.S. at 555, 570)), reh’g denied (Fed.

Cir.), cert. denied, 557 U.S. 937 (2009). “Conclusory allegations of law and unwarranted

inferences of fact do not suffice to support a claim.” Bradley v. Chiron Corp., 136 F.3d

1317, 1322 (Fed. Cir. 1998); see also Solaria Corp. v. United States, 123 Fed. Cl. 105,

113 (2015); Vargas v. United States, 114 Fed. Cl. 226, 232 (2014); Fredericksburg Non-

Profit Housing Corp. v. United States, 113 Fed. Cl. 244, 253 (2013), aff’d, 579 F. App’x

1004 (Fed. Cir. 2014); Three S Consulting v. United States, 104 Fed. Cl. 510, 523 (2012),

aff’d, 562 F. App’x 964 (Fed. Cir. 2014), reh’g denied (Fed. Cir. 2014); Peninsula Grp.

Capital Corp. v. United States, 93 Fed. Cl. 720, 726–27 (2010), appeal dismissed, 454 F.

App’x 900 (Fed. Cir. 2011); Legal Aid Soc’y of New York v. United States, 92 Fed. Cl.

285, 292, 298, 298 n.14 (2010). As stated in Ashcroft v. Iqbal, “[a] pleading that offers

‘labels and conclusions’ or ‘a formulaic recitation of the elements of a cause of action will

not do.’ 550 U.S. at 555. Nor does a complaint suffice if it tenders ‘naked assertion[s]’

devoid of ‘further factual enhancement.’” Ashcroft v. Iqbal, 556 U.S. at 678 (quoting Bell

Atl. Corp. v. Twombly, 550 U.S. at 555).

In addition to the complaint, the court also may consider exhibits to the complaint.

See RCFC 10(c) (“A copy of a written instrument that is an exhibit to a pleading is part of

the pleading for all purposes.”). Moreover, “the court ‘must . . . consider documents

incorporated into the complaint by reference and matters of which a court may take

judicial notice.’” Bell/Heery v. United States, 106 Fed. Cl. 300, 307 (2012), aff’d, 739 F.3d

1324 (Fed. Cir.), reh’g and reh’g en banc denied (Fed. Cir. 2014) (quoting Tellabs, Inc. v.

Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007)) (omission in Bell/Heery v. United

States). The court may also consider a document when the complaint relies heavily upon

its terms and effect, which render the document integral to the complaint. See id. at 307-

08. Moreover, “[i]n deciding whether to dismiss a complaint under Rule 12(b)(6), the court

may consider matters of public record.” Sebastian v. United States, 185 F.3d 1368, 1374

(Fed. Cir. 1999), cert. denied, 529 U.S. 1065 (2000); see also Bristol Bay Area Health

Corp. v. United States, 110 Fed. Cl. 251 261–62 (2013); DeKalb Cnty., Ga. v. United

States, 108 Fed. Cl. 681, 692 (2013).

16

Count I: Breach of Express Contract

Count I of plaintiffs’ amended complaint alleges the creation, and breach, of two

express contracts between the defendant and the hospitals in the purported class.

Because plaintiffs have not yet moved to certify their purported class, the court will

examine only whether the two alleged contracts existed between defendant and the five

named plaintiffs. Plaintiffs’ First Alleged Contract was allegedly formed through the

exchange of four documents between defendant and plaintiffs: the April 25, 2011 Letter,

the Notice, the FAQs, and the Spreadsheet. Plaintiffs allege that the terms of the offer for

the First Alleged Contract were expressed in the April 25, 2011 Letter, the Notice, and the

FAQs, and “included an obligation on the part of the Defendant to calculate the amount

owed to each hospital” using the nine-step process described in the Notice. Plaintiffs

allegedly accepted this offer by completing and returning the Spreadsheet to the

Defendant. The alleged consideration for the First Alleged Contract was “Defendant

undertaking the evaluation and Plaintiffs’ agreement to be paid an amount to be

determined through the nine-step process proposed by Defendant.” According to

plaintiffs, defendant breached the First Alleged Contract when it “failed to accurately

calculate all the monies owed to each hospital for All Outpatient Services during the

Relevant Time, as promised, in manner [sic] specified in Defendant’s offer.” In their

opposition brief, plaintiffs clarify that the First Alleged Contract was allegedly entered into

only between defendant and those “hospitals that did not sign and execute the Release

and receive money.” Three of the named plaintiffs, plaintiffs, McLaren, Gifford, and

Lakewood, did not execute the Release, and plaintiff BRMC was notified it had been

overpaid monies due. Therefore, the court will examine whether the First Alleged Contract

was formed only between defendant and plaintiffs BRMC, McLaren, Gifford and

Lakewood.

Plaintiffs’ Second Alleged Contract allegedly consisted of six documents: the April

25, 2011 Letter; the Notice; the FAQs; the Spreadsheet; the Payment Adjustment

Worksheet; and the Release. Plaintiffs allege that, “[u]nder this contract, Defendant

agreed to make a proposed payment to the hospitals in return for a release of all their

rights to reimbursement for All Outpatient Services for the Relevant Time.” Plaintiffs

contend that Second Alleged Contract “was breached when Defendant failed to abide by

the terms of the Release, which required Defendant, inter alia, to calculate and pay the

amount that was owed to each hospital for all outpatient services in the manner specified

in ‘DoD’s letter dated April 25, 2011.’” In their opposition brief, plaintiffs clarify that the

Second Alleged Contract was allegedly “entered into between Defendant and hospitals,

like Plaintiff Ingham, that accepted Defendant’s calculation and proposed payment,

signed the Release, and received the payment.” The only named plaintiff alleged to have

signed the release and receive a payment from the defendant is plaintiff Ingham.

Therefore, the court will examine only whether the Second Alleged Contract existed

between defendant and plaintiff Ingham.

Defendant contends plaintiffs’ claims for breach of express contracts should be

dismissed for failure to state a claim because, for both of plaintiffs’ Alleged Contracts,

17

plaintiffs have failed to allege facts demonstrating (1) the existence of a valid, binding

contract with the government and (2) the breach of an identified contractual duty.

Contract claims against the United States are governed by the Tucker Act, which

grants jurisdiction to this court as follows:

The United States Court of Federal Claims shall have jurisdiction to render

judgment upon any claim against the United States founded either upon the

Constitution, or any Act of Congress or any regulation of an executive

department, or upon any express or implied contract with the United States,

or for liquidated or unliquidated damages in cases not sounding in tort.

28 U.S.C. § 1491(a)(1) (2012). As interpreted by the United States Supreme Court, the

Tucker Act waives sovereign immunity to allow jurisdiction over claims against the United

States (1) founded on an express or implied contract with the United States, (2) seeking

a refund from a prior payment made to the government, or (3) based on federal

constitutional, statutory, or regulatory law mandating compensation by the federal

government for damages sustained. See United States v. Navajo Nation, 556 U.S. 287,

289-90 (2009); United States v. Mitchell, 463 U.S. 206, 215 (1983); see also Kam-Almaz

v. United States, 682 F.3d at 1368; Greenlee Cnty., Ariz. v. United States, 487 F.3d 871,

875 (Fed. Cir.), reh’g and reh’g en banc denied (Fed. Cir. 2007), cert. denied, 552 U.S.

1142 (2008); Palmer v. United States, 168 F.3d 1310, 1314 (Fed. Cir. 1999). To invoke

the jurisdiction of the United States Court of Federal Claims for breach of contract claims,

plaintiffs “must show that either an express or implied-in-fact contract underlies [their]

claim.” Trauma Serv. Grp. v. United States, 104 F.3d 1321, 1325 (Fed. Cir. 1997). If

plaintiffs’ complaint “alleges that an express and, in the alternative, an implied-in-fact

contract underlies its claim[s, t]his allegation suffices to confer subject matter jurisdiction

in the Court of Federal Claims.” Trauma Serv. Grp. v. United States, 104 F.3d at 1324–

25 (citing Gould, Inc. v. United States, 67 F.3d 925, 929 (Fed. Cir. 1995); Do–Well Mach.

Shop, Inc. v. United States, 870 F.2d 637, 639–40 (Fed. Cir. 1989)); Engage Learning,

Inc. v. Salazar, 660 F.3d 1346, 1354 (Fed. Cir. 2011) (noting that, in Gould, the court

found that “alleging a contract with the government suffices to trigger the Tucker Act’s

grant of jurisdiction ‘upon any express or implied contract with the United States,’ and that

the proper basis for a dismissal, if warranted, was the failure to state a claim upon which

relief can be granted” (quoting Gould, Inc. v. United States, 67 F.3d at 929–30)).

It is well settled that “[t]o recover for breach of contract, a party must allege and

establish: (1) a valid contract between the parties, (2) an obligation or duty arising out of

the contract, (3) a breach of that duty, and (4) damages caused by the breach.” San

Carlos Irr. & Drainage Dist. v. United States, 877 F.2d 957, 959 (Fed. Cir.), reh’g denied

(Fed. Cir. 1989). See also Barlow & Haun, Inc. v. United States, 118 Fed. Cl. 597, 620

(2014); Cooley v. United States, 76 Fed. Cl. 549, 555–56 (2007) (citing San Carlos Irr. &

Drainage Dist. v. United States, 877 F.2d at 959). A breach of contract claim requires:

“(1) an obligation or duty arising out of the contract and (2) factual allegations sufficient

to support the conclusion that there has been a breach of the identified contractual duty.”

Bell/Heery v. United States, 739 F.3d at 1330 (citing Hercules Inc. v. United States, 24

F.3d 188, 198 (Fed. Cir.), reh’g denied, in banc suggestion declined (Fed. Cir. 1994),

18

aff’d, 516 U.S. 417 (1996); Trauma Serv. Grp. v. United States, 104 F.3d at 1325 (“To

state a claim upon which relief can be granted, [plaintiff] must allege either an express or

an implied-in-fact contract, and the breach of that contract.”); San Carlos Irr. & Drainage

Dist. v. United States, 877 F.2d at 959.

Defendant argues that plaintiffs’ breach of contract claims based on the First

Alleged Contract should be dismissed because plaintiffs fail to allege facts to demonstrate

that the April 25 Letter, the Notice, the FAQs, and the Spreadsheet comprise a valid,

binding contract with the government. In particular defendant argues that plaintiffs fail to

allege: (1) facts to show mutuality of intent to contract; (2) an unambiguous offer and

acceptance; (3) any indication of consideration; and (4) facts demonstrating that the

Director of Deputy Director of TMA had authority to bind the government in contract.

A party alleging either an express or implied-in-fact contract with the

government “must show a mutual intent to contract including an offer, an

acceptance, and consideration.” Furthermore, “[a] contract with the United

States also requires that the Government representative who entered or

ratified the agreement had actual authority to bind the United States.”

Bank of Guam v. United States, 578 F.3d at 1326 (quoting Trauma Serv. Grp. v. United

States, 104 F.3d at 1325) (alteration in Bank of Guam v. United States); see also Chattler

v. United States, 632 F.3d 1324, 1330 (Fed. Cir.) (citing Trauma Serv. Grp. v. United

States, 104 F.3d at 1325), reh’g en banc denied (Fed. Cir. 2011); Hanlin v. United States,

316 F.3d 1325, 1328 (Fed. Cir. 2003) (citing City of Cincinnati v. United States, 153 F.3d

1375, 1377 (Fed. Cir. 1998)); Total Med. Mgmt., Inc. v. United States, 104 F.3d 1314,

1319 (Fed. Cir.) (“The requirements for a valid contract with the United States are: a

mutual intent to contract including offer, acceptance, and consideration; and authority on

the part of the government representative who entered or ratified the agreement to bind

the United States in contract.”) (citations omitted), reh’g denied and en banc suggestion

declined (Fed. Cir.), cert. denied, 522 U.S. 857 (1997); Huntington Promotional & Supply,

LLC v. United States, 114 Fed. Cl. 760, 767 (2014); Eden Isle Marina, Inc. v. United

States, 113 Fed. Cl. 372, 492 (2013); Council for Tribal Emp’t Rights v. United States,

112 Fed. Cl. 231, 243 (2013), aff’d, 556 F. App’x 965. “‘A well pleaded allegation of an

express, or implied-in-fact, contract necessarily includes allegations going to each of the

requisite elements of a contract.’” De Archibold v. United States, 57 Fed. Cl. 29, 32 (2003)

(quoting McAfee v. United States, 46 Fed. Cl. 428, 432, appeal dismissed, 243 F.3d 565

(Fed. Cir. 2000)). “For there to be an express contract, the parties must have intended

to be bound and must have expressed their intention in a manner capable of

understanding. A definite offer and an unconditional acceptance must be established.”

Russell Corp. v. United States, 210 Ct. Cl. 596, at 606, 537 F.2d 474, at 481 (1976), cert.

denied, 429 U.S. 1073 (1977).

Regarding the offer for the First Alleged Contract between the defendant and the

four plaintiffs which did not sign the Release, plaintiffs BRMC, McLaren, Gifford, and

Lakewood, plaintiffs argue that “[t]hrough the issuance of the April 25 Letter, the Notice,

and the Frequently Asked Questions, the Government offered to analyze Plaintiffs’

outpatient claims for possible additional payment and specified the terms on which the

19

analysis would take place.” Plaintiffs also argue that Step 2 of the process outlined in the

Notice specified how this offer was to be accepted: by the hospitals submitting a

completed Spreadsheet to the defendant. Plaintiffs argue that the language of these

documents shows that the government intended to contract with the plaintiffs, pointing to

the statement in the April 25, 2011 Letter that “hospitals may be paid an adjustment . . .

in return for your acceptance of DoD’s offer of additional payment based on criteria

established by the agency.” Plaintiffs also argue that defendant showed an intent to enter

into a contract by advising hospitals that payment was contingent upon the signing of the

Release.

“To satisfy its burden to prove mutual intent to contract, a plaintiff must proffer

objective evidence demonstrating the existence of an offer and a reciprocal acceptance.”

Am. Fed. Bank, FSB v. United States, 62 Fed. Cl. 185, 194 (2004) (citing Anderson v.

United States, 344 F.3d at 1353 (citing Estate of Bogley v. United States, 206 Ct. Cl. 695,

704–05, 514 F.2d 1027, 1032 (1975); Restatement (Second) of Contracts § 22(1)

(1981))). With regard to an implied-in-fact contract, “[a]lthough an express offer and

acceptance are not necessary, the parties’ conduct must indicate mutual assent” to the

proposed bargain. AG Route Seven P’ship v. United States, 57 Fed. Cl. 521, 536–37

(2003) (citing City of Cincinnati v. United States, 153 F.3d at 1377), aff’d sub nom. AG

Route Seven P’ship v F.D.I.C., 104 F. App’x 184 (Fed. Cir.), reh’g and reh’g en banc

denied (Fed. Cir. 2004).

As plaintiffs recognize, “an offer is made by ‘the manifestation of willingness to

enter into a bargain, so made as to justify another person in understanding that his assent

to that bargain is invited and will conclude it.’” Anderson v. United States, 344 F.3d at

1353 (quoting Restatement (Second) of Contracts § 24 (1981)); see also Am. Fed. Bank,

FSB v. United States, 62 Fed. Cl. at 194. Yet, “[a]n offer does not exist unless the offeror

manifests an intent to be bound.” Neenan v. United States, 112 Fed. Cl. 325, 329 (2013),

aff’d, 570 F. App’x 937 (Fed. Cir. 2014) (citing Linear Tech. Corp. v. Micrel, Inc., 275 F.3d

1040, 1050 (Fed. Cir. 2001), reh’g en banc denied (Fed. Cir. 2002), cert. denied, 538 U.S.

1052 (2003)); see also Estate of Bogley v. United States, 514 F.2d at 1032 (“An

expression of intention is not an offer.”).

As defendant notes in its reply to plaintiffs’ opposition to the motion to dismiss,

quoting Estate of Bogley v. United States, 514 F.2d at 1032, even despite detailed terms,

“[s]ince an offer must be a promise, a mere expression of intention or general willingness

to do something on the happening of a particular event or in return for something to be

received does not amount to an offer.” Estate of Bogley v. United States, 514 F.2d at

1032; see also Neenan v. United States, 112 Fed. Cl. at 329 (“A document may show the

‘willingness to enter a bargain’ but it ‘is not an offer if the person to whom it is addressed

knows or has reason to know that the person making it does not intend to conclude a

bargain until he has made a further manifestation of assent.’” (quoting Restatement

(Second) of Contracts § 26 (1981))). Moreover, “[f]or a contract to be formed once an

offer is made, there must be an acceptance, i.e., a ‘manifestation of assent to the terms

thereof made by the offeree in a manner invited or required by the offer.’” Anderson v.

United States, 344 F.3d at 1355 (quoting Restatement (Second) of Contracts § 50(1)

20

(1981)). “[W]hether an offeree’s conduct ‘constitutes an acceptance will depend upon

whether the offeror reasonably understands it to be an acceptance and whether it

reasonably appears to conclude a contract or whether it leaves matters yet to be

concluded.’” Am. Fed. Bank, FSB v. United States, 62 Fed. Cl. at 198 (quoting Williston

on Contracts § 6.10, at 71 (4th ed. 1990)). “‘This rule, espoused by the Restatement

(Second), operates to protect the offeror who acts reasonably in relation to what he

supposes is intended to operate as an acceptance, yet provides the offeror with significant

flexibility as the master of his offer.’” Id. (quoting Williston on Contracts § 6.10, at 74).

“The Court may read all the documents together in order to find the intention of the

parties.” Advanced Team Concepts, Inc. v. United States, 68 Fed. Cl. 147, 151 (2005)

opinion clarified, 77 Fed. Cl. 111 (2007) (citing AG Route Seven P’ship v. United States,

57 Fed. Cl. at 536); see also Restatement (Second) of Contracts § 26, cmt. f (1981)

(“Preliminary manifestations as terms of later offer. Even though a communication is not

an offer, it may contain promises or representations which are incorporated in a

subsequent offer and hence become part of the contract made when the offer is

accepted.” (emphasis in original)).

Plaintiffs’ alleged offer for the First Alleged Contract, the April 25, 2011 Letter, the

Notice, and the FAQs, may have shown a willingness on the part of the agency to enter

into a bargain. The language of the documents, however, also established that the agency

did not intend to conclude a bargain by virtue of the hospitals’ submission of the

Spreadsheet. Instead, the language of these documents demonstrates that defendant

would not enter into a bargain until after analysis of the information submitted by the

hospitals and the execution of the Release by the hospitals. The April 25, 2011 Letter

provided that “[d]etailed instructions will be posted on the TRICARE Management Activity

Web site . . . explaining the manner in which a hospital may request that your institution’s

claims data be reviewed for appropriate discretionary adjusted payments.” (emphasis

added). The April 25, 2011 Letter did not indicate that the request for review would

conclude the bargain and result in payment. Instead, the April 25, 2011 Letter indicated

that, even after the request for review, payment was uncertain and subject to availability

of appropriations and the hospital’s acceptance of DoD’s offer of additional payment,

stating: “Based on the request, your hospital may be paid an adjustment, subject to the

availability of appropriations, in return for your acceptance of DoD’s offer of additional

payment based on criteria established by the agency.” (emphasis added). The April 25,

2011 Letter further provided that payment was contingent on the hospital’s execution of

the Release, and concluded by indicating the agency “remain[s] committed to working

with you to complete the analysis of claims data and determine if any additional payments

may be allowed.” (emphasis added).

Similarly, the Notice established that any alleged offer related to conditional

payments, not simply calculations. The Notice stated that “TRICARE is now offering

hospitals an opportunity for discretionary adjusted payments” and “TMA is offering

hospitals an opportunity for any net adjustments to payments of hospital outpatient

radiology services.” (emphasis added). Moreover, the Notice provided that “[h]ospitals

may request an analysis of their claims data for possible discretionary adjustment,”

(emphasis added), refers to such a request as a “submission,” and does not use the

21

phrase, or invoke the concept of, acceptance. Similar to the April 25 Letter, the Notice

provided that “[b]ased on the request and subject to the availability of funds, each hospital

will receive adjusted payments in return for acceptance of DoD’s offer of additional

payment based on criteria established by the agency,” (emphasis added), and included

the same language regarding the contingency of payment upon the hospital’s execution

of the Release. Like the April 25, 2011 Letter, the Notice contemplated that a number of

further steps were required to conclude a bargain, even after the hospitals’ submission of

the Spreadsheet.

The strongest indication that submission of the Spreadsheet did not result in a

contract, and that the agency intended further actions before a contract was formed, is

the description of the nine-step process in the Notice outlining “the review of payments

for hospital outpatient radiology services and payment of any discretionary net

adjustments.” The methodology itself begins with Steps 1 and 2 describing the

submission of the Spreadsheet and how a “[h]ospital submits a request for analysis of

their claims data” and ends with Steps 8 and 9, explaining how the agency will send a

“written response to the hospital’s request” that will “include a release and agreement to

accept the discretionary adjusted payment by the hospital.” (emphasis added). Step 9 of

methodology concludes by indicating that “[f]ollowing receipt of the signed release and

agreement, payment will be made to the hospital.” (emphasis added). The nine-step

process demonstrates that the Spreadsheet was merely the beginning of a negotiating

process between the agency and a requesting hospital. See Am. Fed. Bank, FSB v.

United States, 62 Fed. Cl. at 198 (“[W]hether an offeree’s conduct ‘constitutes an

acceptance will depend upon whether the offeror reasonably understands it to be an

acceptance and whether it reasonably appears to conclude a contract or whether it leaves

matters yet to be concluded.’” (quoting Williston on Contracts § 6.10, at 71)).

Plaintiffs’ First Alleged Contract also fails to establish a contract between plaintiffs

and defendant because plaintiffs have not sufficiently pled facts to establish valid

consideration for the four named plaintiffs alleged to have accepted the contract, which

did not sign the Release. It is “fundamental that a contract must be supported by sufficient

and valuable consideration.” Estate of Bogley v. United States, 514 F.2d at 1033.

“Consideration is defined as a ‘detriment incurred by the promisee, or a benefit received

by the promisor at the request of the promisor.’” Woll v. United States, 45 Fed. Cl. at 477

(quoting Estate of Bogley v. United States, 514 F.2d at 1033 (quoting 1 Williston,

Contracts § 102 (1957)); see also Carter v. United States, 102 Fed. Cl. at 66

(“Consideration is generally a bargained for exchange consisting of an act, forbearance,

or return promise” (citing Restatement (Second) Contracts §§ 71, 72 (1981); J. Cooper &

Assocs., Inc. v. United States, 53 Fed. Cl. 8, 18 (2002), aff’d, 65 F. App’x 731 (Fed. Cir.

2003)). Yet, “‘[a] promise or apparent promise is not consideration if by its terms the

promisor or purported promisor reserves a choice of alternative performances.’” Crewzers

Fire Crew Transp., Inc. v. United States, 741 F.3d 1380, 1382 (Fed. Cir. 2014) (quoting

Restatement (Second) of Contracts § 77 (1979)); Ridge Runner Forestry v. Veneman,

287 F.3d at 1061 (quoting Restatement (Second of Contracts § 77). An illusory promise

is “words in promissory form that promise nothing; they do not purport to put any limitation

on the freedom of the alleged promisor, but leave his future action subject to his own

22

future will, just as it would have been had he said no words at all.” Ridge Runner Forestry

v. Veneman, 287 F.3d at 1061 (citing Torncello v. United States, 231 Ct. Cl. 20, 42, 681

F.2d 756, 769 (1982) (quoting 1 Corbin on Contracts § 145 (1963)). “‘It is axiomatic that

a valid contract cannot be based upon the illusory promise of one party, much less illusory

promises of both parties.’” Crewzers Fire Crew Transp., Inc. v. United States, 741 F.3d

at 1383 (quoting Ridge Runner Forestry v. Veneman, 287 F.3d at 1062 (citing

Restatement (Second) of Contracts § 71(1))).

Plaintiffs argue that by submitting the Spreadsheet to defendant, “they were

accepting Defendant’s offer to contract and agreeing to be bound to the conditions and

procedures set forth in the offering documents, which agreement is sufficient

consideration for an enforceable contract.” Tellingly, plaintiffs do not specify any

“conditions and procedures” the submission of the Spreadsheet allegedly bound them to

when submitted. In fact, submission of the Spreadsheet did not commit plaintiffs to take,

or refrain from taking, any particular course of action, as demonstrated by the fact that

three of the five plaintiffs submitted Spreadsheets, but did not ultimately sign the Release

and accept the adjusted payments, and plaintiff BRMC was found not to be eligible. Nor

have plaintiffs alleged that the defendant received any sort of benefit from the submission

of their completed Spreadsheets. Thus, as defendant states in its motion to dismiss,

“Plaintiffs confuse a binding ‘agreement to be paid’ with an inquiry as to how much they

would be paid, if they signed a release.” Such an “agreement” as alleged by plaintiffs

lacks valid consideration.

Plaintiffs also allege an express contract between defendant and those hospitals

that signed that Release, the Second Alleged Contract, which plaintiffs allege involved

“an agreement by Defendant to make a proposed payment to the hospitals in return for

their release of all their rights to reimbursement for All Outpatient Services for the

Relevant Time.” The only hospital among the named plaintiffs that signed the Release,

and, thus, the only named plaintiff alleged to be a party to the Second Alleged Contract,

is plaintiff Ingham. Plaintiffs allege the Second Alleged Contract was composed of six

documents: the April 25, 2011 Letter, the Notice, the FAQs, the Spreadsheet, the

Payment Adjustment Worksheet, and the Release.7 Quoting the Release, plaintiffs allege

that the terms of the Second Alleged Contract “required Defendant, inter alia, to calculate

and pay the amount that was owed to each hospital for All Outpatient Services in the

manner specified in ‘DoD’s letter dated April 25, 2011.’” According to plaintiffs, under the

terms of the April 25, 2011 Letter, this payment was required “to be calculated pursuant

to the nine-step process set forth in the Notice.” Plaintiffs also argue that the defendant’s

labelling of the process involved in the Second Alleged Contract as a regulatory-based

“discretionary payment process” is without legal support or effect because the regulation

defendant claimed authorized the process, 32 C.F.R. § 199.10 (2010), was “inapplicable

and did not provide the authority for TRICARE to do what it did.”

7 As noted above the, first five documents, the April 25, 2011 Letter, the Notice, the FAQs,

the Spreadsheet, and the Payment Adjustment Worksheet were alleged to form the First

Alleged Contract.

23

Defendant challenges the validity of the Second Alleged Contract on the grounds

that plaintiffs have failed to adequately: (1) allege the existence of a mutual intent to

contract; (2) identify a valid offer and acceptance; and (3) demonstrate that the contract

was entered into by a person with actual authority to bind the United States. Defendant

also argues that, even if the Second Alleged Contract were found to be valid, plaintiffs

have failed to allege a breach of the contract. Finally, defendant argues that the court

lacks jurisdiction to hear any claims arising out of the Second Alleged Contract because

any hospitals alleged to be parties to the Second Alleged Contract signed the Release

and, thus, waived their right to bring any claims for breach of the Second Alleged Contract.

Turning first to mutual intent to contract, defendant argues that the government did

not intend to enter into any contracts as part of the Discretionary Payment Process, but

instead “[t]he stated intent of the agency was to offer the hospitals an opportunity to apply

for net adjustments in payments for outpatient radiology services, within the framework

of the TRICARE regulatory scheme, not as part of a contractual relationship.” In support

of this argument, defendant points to language in both the April 25, 2011 Letter and the

Notice stating that the defendant would treat the submission as an “untimely but

discretionary appeal” under 32 C.F.R. § 199.10(a)(5) and (c). Defendant argues that the

agency had the authority to create the Discretionary Payment Process under 32 C.F.R.

§ 199.1(n) (2010). The court notes, “[a]s a threshold condition for contract formation, there

must be an objective manifestation of voluntary, mutual assent.” Anderson v. United

States, 344 F.3d at 1353 (citing Restatement (Second) of Contracts § 18). The United

States Court of Appeals for the Federal Circuit recognized in D&N Bank v. United States,

331 F.3d 1374, 1378–79 (Fed. Cir.), reh’g en banc denied (Fed. Cir. 2003) that, “[a]n

agency’s performance of its regulatory or sovereign functions does not create contractual

obligations. Something more is necessary.” Id. (citing New Era Constr. v. United States,

890 F.2d 1152, 1155 (Fed. Cir. 1989), reh’g denied (Fed. Cir. 1990)) (internal citation

omitted). In Anderson v. United States, the Federal Circuit elaborated on what constitutes

“something more,” indicating “[t]hat ‘something more’ must be, according to our

precedent, a ‘manifest assent to the same bargain proposed by the offer.’” Anderson v.

United States, 344 F.3d at 1356. As the Federal Circuit recognized in Fifth Third Bank of

Western Ohio v. United States, 402 F.3d 1221, 1234 (Fed. Cir.), reh’g denied (Fed. Cir.

2005), however, Anderson v. United States and D&N Bank v. United States “do not stand

for the proposition that contractual terms cannot be found in agency regulatory

documents.” Fifth Third Bank of Western Ohio v. United States, 402 F.3d at 1234. The

Federal Circuit stated in First Commerce Corp. v. United States:

If the elements of contract formation are absent, then the government was

acting solely in its regulatory capacity; if a contract was formed, then the

government may be liable for its breach. To assert that the government was

acting solely in its regulatory capacity is to assert a conclusion about

contractual liability, not a premise that negates it. As we held in D & N Bank,

the supervisory nature of the business transaction is not “probative of the

government’s intent to contract.” D & N Bank, at 1380. Nor can the

characterization of “regulatory” or “supervisory” absolve the government of

24

its contractual liability if it is shown that the government has indeed bound

itself by contract.

First Commerce Corp. v. United States, 335 F.3d 1373, 1383 (Fed. Cir.), reh’g and reh’g

en banc denied (Fed. Cir. 2003).

In the case currently before the court, the government was making an offer to issue

discretionary payments to hospitals which had performed outpatient radiology services if

the formula developed by defendant showed the hospitals were due payments and the

hospitals signed the Release. The court finds that the regulations cited by defendant, 32

C.F.R. § 199.10(a)(5) and (c), are not a neat fit for the program defendant was trying to

implement. In the versions of the regulations in effect at the time the April 25, 2011 Letter

was issued, 32 C.F.R. § 199.10 provided for “[a]ppeal and hearing procedures” and 32

C.F.R. § 199.10(a) provided “General” information regarding “policies and procedures for

appealing decisions made by OCHAMPUS [Office of the Civilian Health and Medical

Program], OCHAMPUSEUR [Office of the Civilian Health and Medical Program

Uniformed Services Europe], and CHAMPUS contractors adversely affecting the rights

and liabilities of CHAMPUS beneficiaries, CHAMPUS participating providers, and

providers denied the status of authorized provider under CHAMPUS.” 32 C.F.R.

§ 199.10(a) (2010). 32 C.F.R. § 199.10(a)(5) provided:

Late filing. If a request for reconsideration, formal review, or hearings is filed

after the time permitted in this section, written notice shall be issued denying

the request. Late filing may be permitted only if the appealing party

reasonably can demonstrate to the satisfaction of the Director,

OCHAMPUS, or a designee, that the timely filing of the request was not

feasible due to extraordinary circumstances over which the appealing party

had no practical control. Each request for an exception to the filing

requirement will be considered on its own merits. The decision of the

Director, OCHAMPUS, or a designee, on the request for an exception to the

filing requirement shall be final.

32 C.F.R. § 199.10(a)(5) (2010). 32 C.F.R. § 199.10(c) provided the process for “Formal

review.” 32 C.F.R. § 199.10(c) (2010).

Defendant alleges that 32 C.F.R. § 199.10(a)(5) granted the Director of

OCHAMPUS the discretion to grant “an exception to the timely filing of an appeal,” and

that the Director used this power to implement the Discretionary Payment Process as, in

the words of the April 25, 2011 Letter, means by which hospitals could apply for an

“untimely but discretionary appeal.” As noted above, the Discretionary Payment Process

is not a neat fit into the provisions of 32 C.F.R. § 199.10(a)(5). The language of 32 C.F.R.

§ 199.10(a)(5) provides that the appealing party must demonstrate “that the timely filing

of the request was not feasible due to extraordinary circumstances over which the

appealing party had no practical control” and “[e]ach request for an exception to the filing

requirement will be considered on its own merits.” 32 C.F.R. § 199.10(a)(5) (2010). The

hospitals were not asked to make such a demonstration of extraordinary circumstances

as part of the Discretionary Payment Process. However, the defendant did indicate in the

25

Notice that it was responding to an unusual set of circumstances regarding its own

“interpretation and implementation of the TRICARE regulation provision on

reimbursement of hospital outpatient services as issued in the Final Rule on October 24,

2005,” which affected a potential large number of providers and was designed as a one-

time fix for a defendant-identified problem. Moreover, this was defendant’s initiative and

much of the relevant data necessary to make any adjustments was held by the defendant.

Even if 32 C.F.R. § 199.10(a)(5) did provide the DHA Director with broad

discretion, including the discretion to set up the Discretionary Payment Process, certain

provisions of 32 C.F.R. § 199.10(c) governing formal review were not strictly followed.

The version of 32 C.F.R §199.10(c)(2) in place at the time of the Discretionary Payment

Process states: “[t]he formal review determination shall be based on the information, upon

which the initial determination and/or reconsideration determination was based, and any

additional information the appealing party may submit or OCHAMPUS may obtain.” 32

C.F.R. § 199.10(c)(2) (2010)). In the present case, the exhibits reflect that the hospitals

were clearly instructed that the hospitals should not submit any additional information with

their requests for analysis of claims data, other than to request an analysis based on the

application of defendant’s new payment formula to their original submissions. Thus, in

answer to question 2 of the FAQs, “Will I need to provide further information such as

claims-level data or identify the relevant claims or patients?,” the defendant’s response

was, “No, you will not. TRICARE will do this. You need to submit only the information in

the Excel sheet. Do not submit patient-level data.”” Moreover, under 32 C.F.R.

§ 199.10(c)(4), the regulations required that “[t]he Chief, Office of Appeals and Hearings,

OCHAMPUS, or a designee shall issue a written notice of the formal review determination

to the appealing party at his or her last known address.” 32 C.F.R. § 199.10(c)(4). Under

this section, the regulations instructed that:

The notice of the formal review determination must contain the following

elements:

(i) A statement of the issue or issues under appeal.

(ii) The provisions of law, regulation, policies, and guidelines that apply to

the issue or issues under appeal.

(iii) A discussion of the original and additional information that is relevant to

the issue or issues under appeal.

(iv) Whether the formal review upholds the prior determination or

determinations or reverses the prior determination or determinations in

whole or in part and the rationale for the action.

(v) A statement of the right to request a hearing in any case when the formal

review determination is less than fully favorable, the issue is appealable,

and the amount in dispute is $300 or more.

26

32 C.F.R. § 199.10(c)(4) (2010). Plaintiffs assert in their opposition to defendant’s motion

to dismiss that “[n]o such notice was provided to the Plaintiffs,” in other words, the Notice

to plaintiffs did not contain the elements of notification required under 32 C.F.R. § 199.10.

Although the hospitals were notified of the dollar recalculations in the Payment

Adjustment Worksheets, defendant has not argued that the Payment Adjustment

Worksheet or any other document met any of the requirements of 32 C.F.R.

§ 199.10(c)(4).

Defendant also argues that the authority to devise the Discretionary Payment

Process is found in 32 C.F.R. § 199.1(a) and (n). The applicable version of 32 C.F.R.

§ 199.1(a) states that the purpose of the section is to “prescribe[] guidelines and policies

for the administration of the Civilian Health and Medical Program of the Uniformed

Services (CHAMPUS),” while sub-section (n) states:

(n) Discretionary authority. When it is determined to be in the best interest

of CHAMPUS, the Director, OCHAMPUS, or a designee, is granted

discretionary authority to waive any requirements of this part [32 C.F.R.

part 199, the TRICARE/CHAMPUS regulations], except that any

requirement specifically set forth in 10 U.S.C. chapter 55 [10 U.S.C.

§§ 1071 – 1110b, the TRICARE/CHAMPUS statute], or otherwise

imposed by law, may not be waived. It is the intent that such discretionary

authority be used only under very unusual and limited circumstances and

not to deny any individual any right, benefit, or privilege provided to him or

her by statute or this part. Any such exception granted by the Director,

OCHAMPUS, or a designee, shall apply only to the individual

circumstance or case involved and will in no way be construed to be

precedent-setting.

32 C.F.R. § 199.1(a), (n) (2010).

Defendant argues that because CMAC fixed maximum payment rates are not

specifically set forth in 10 U.S.C., Chapter 55, the Director had authority “to ‘waive’ the

CMAC requirement for radiology in an unusual and limited circumstance,” despite the fact

that the documents in the record do not reveal contemporaneous documentation that

discusses the Director’s authority to act as was done under 32 C.F.R. § 199.1. Although

defendant has not offered an explanation as to why the Discretionary Payment Process,

which plaintiffs allege could have affected a large number of hospitals, might qualify as a

“very unusual and limited circumstance[],” 32 C.F.R. § 199.1(n) (2010), the defendant’s

actions were limited to a one-time adjustment related only to outpatient radiology

services. However, even if 32 C.F.R § 199.1(n) did give defendant the power to “waive”

the CMAC rate with respect to outpatient radiology payments, it did not grant defendant

the affirmative power to, years after such payments had already been made, set up a

process to provide hospitals with additional payments designed to approximate “pre-

OPPS Medicare fair rates” and to actually make such payments, as was done during the

Discretionary Payment Process. Such actions should not be characterized solely as a

waiver of existing regulations, and, therefore, the authority to create the Discretionary

Payment Process is not found in 32 C.F.R § 199.1, alone, as defendant claims.

27

Whereas the Discretionary Payment Process set up by defendant may not have

strictly met the standard steps for processing appeals, the program’s goals were

consistent with the regulatory framework. The hospitals were offered a possible benefit,

which is consistent with the purpose of the “discretionary authority” in 32 C.F.R § 199.1(a).

The relevant documents before the court indicate that at least the TRICARE’s goal was

to resolve the ongoing concerns on the part of the hospitals regarding alleged past

payments due for outpatient services in exchange for the hospitals’ agreement to waive

all claims regarding those payments once payments for outpatient radiology services

were adjusted. Both the April 25, 2011 Letter and the Notice indicated, as stated in the

April 25, 2011 Letter, that:

In order to bring closure to any concerns regarding payment of hospital

outpatient services under the TRICARE regulation prior to implementation

of OPPS, payment of the discretionary adjustments will also be contingent

[or, as stated in the Notice, “conditioned”] on the execution of a release by

the hospital of any hospital outpatient service claims against the agency,

TRICARE beneficiaries, and TRICARE MCSCs.

Indeed, Step 9 of the Notice provided that plaintiffs would not receive the adjusted

payment until they sent the agency a signed release. Finally, the Release itself explicitly

stated these terms using the language of contract:

By accepting the offer of the Department of Defense (“DoD”) to provide a

net adjustment to prior payments of hospital radiology services as described

in the DoD’s letter dated April, [sic] 25, 2011 . . . Hospital . . . shall completely

release, acquit, and forever discharge the Government, TRICARE

beneficiaries, and any MCSCs . . . .

(emphasis added).

Defendant also argues that plaintiffs’ claims regarding the Second Alleged

Contract should be dismissed because plaintiffs fail to identify which of the six documents

allegedly comprising the Second Alleged Contract constitute the alleged offer and which

the acceptance. Defendant argues that, of the six documents composing the Second

Alleged Contract, only the Release actually commits or requires plaintiffs to do anything,

and that the only action required of the defendant was to provide “a net adjustment,”

which, it argues, was done. Plaintiffs respond by stating that all six documents allegedly

composing the Second Alleged Contract “read together set forth the terms of the

contract.” Plaintiffs further argue that, even standing alone, the Release, as a “settlement

agreement,” constituted a contract between the parties. As to what was required of

defendant by the Release, plaintiffs point out that the Release stated that defendant would

provide a “net adjustment to prior payments . . . as set forth in DoD’s letter of April 25,

2011.” (emphasis added by plaintiffs). According to plaintiffs, this language incorporated

by reference the terms of the April 25, 2011 Letter into the Release. Further, plaintiffs

point to language in the April 25, 2011 Letter stating that hospitals “may be paid an

adjustment . . . in return for your acceptance of DoD’s offer of additional payment based

on criteria established by the agency,” and argue that the “criteria established by the

28

agency” was the nine-step process outlined in the Notice. (emphasis added by plaintiffs).

Plaintiffs also argue that the statement in the April 25, 2011 Letter that “Detailed

instructions will be posted on the TRICARE Management Activity Web site,” incorporated

by reference materials posted to the website, which it alleges included the Notice and the

FAQs. Thus, plaintiffs argue, under the Second Alleged Contract, “[t]he government was

not free to provide any net adjustment it saw fit to provide, it was bound to provide the net

adjustment that proper application of the nine-step process would have yielded and its

failure to do so was a breach.”

Both parties appear to agree that, if an eligible hospital signed the Release after

proceeding through each of the offer steps outlined by the defendant, the defendant

agreed to bind itself to “provide a net adjustment to prior payments of hospital outpatient

radiology services as described in the DoD’s letter dated April, [sic] 25, 2011,” in

exchange for plaintiffs’ agreement to waive all reimbursement related claims. The parties

disagree, however, as to whether the language of the Release incorporates the other

documents on which plaintiffs try to rely to allege the Second Alleged Contract came into

existence.

“[T]o incorporate material by reference, the host document must identify with

detailed particularity what specific material it incorporates and clearly indicate where that

material is found in the various documents [identified].” Northrop Grumman Info. Tech.,

Inc. v. United States, 535 F.3d 1339, 1344 (Fed. Cir. 2008) (quoting Cook Biotech Inc. v.

Acell, Inc., 460 F.3d 1365, 1376 (Fed. Cir.) (quoting Advanced Display Sys. v. Kent State

Univ., 212 F.3d 1272, 1282 (Fed. Cir. 2000), cert. denied, 532 U.S. 904 (2001)), reh’g

and reh’g en banc denied (Fed. Cir. 2006)) (second alteration in original). “In other words,

the incorporating contract must use language that is express and clear, so as to leave no

ambiguity about the identity of the document being referenced, nor any reasonable doubt

about the fact that the referenced document is being incorporated into the contract.” Id.;

see also Precision Pine & Timber, Inc. v. United States, 596 F.3d 817, 826 (Fed. Cir.

2010) (“To incorporate material by reference, a contract must use clear and express

language of incorporation, which unambiguously communicates that the purpose is to

incorporate the referenced material, rather than merely acknowledge that the referenced

material is relevant to the contract.”) (citing Northrop Grumman Info. Tech., Inc. v. United

States, 535 F.3d at 1344-45); 11 Richard A. Lord, Williston on Contracts § 30.25 (4th ed.

1999) (“So long as the contract makes clear reference to the document and describes it

in such terms that its identity may be ascertained beyond doubt, the parties to a contract

may incorporate contractual terms by reference to a separate, noncontemporaneous

document. . . .”). This requirement, however, “does not amount to a rule that contracting

parties must use a rote phrase or a formalistic template to effect an incorporation by

reference.” Northrop Grumman Info. Tech., Inc. v. United States, 535 F.3d at 1345.

The language of the Release clearly and expressly incorporated the terms of the

April 25, 2011 Letter. Defendant’s argument that, “[h]ad the government intended to

‘incorporate’ the April 25, 2011 letter . . . in the release, it would have so stated,” fails

because incorporation by reference “does not require ‘magic words’ of reference or of

incorporation.” Northrop Grumman Info. Tech., Inc. v. United States, 535 F.3d at 1346.

29

The Release specifically referenced the April 25, 2011 Letter by stating: “By accepting

the offer of the Department of Defense (‘DoD’) to provide a net adjustment to prior

payments of hospital outpatient radiology services as described in the DoD’s letter dated

April, [sic] 25, 2011 . . . .” The April 25, 2011 Letter, in turn, stated that “[d]etailed

instructions” would be posted on a specific page on TRICARE’s website,

www.tricare.mil/RadiologyDiscretionaryAppealAdjustment, “explaining the manner in

which a hospital may request that your institution’s claims data be reviewed for

appropriate discretionary adjusted payments.” Plaintiffs allege in their amended complaint

that both the FAQ and the Notice were posted on this webpage. The April 25, 2011 Letter

continued that, based on this request, a payment may be made “in return for your

acceptance of DoD’s offer of additional payment based on criteria established by the

agency.” Although the April 25, 2011 Letter did not mention the Notice and FAQs by

name, it did identify a specific page on TRICARE’s website where “[d]etailed instructions”

could be found. That both the Notice and the FAQs contained what could reasonably be

considered “[d]etailed instructions” regarding the Discretionary Payment Process and

both were, allegedly, found on the specific webpage identified in the April 25, 2011 Letter,

indicates that the plaintiffs have pled sufficient facts to show that the Letter provided the

required “detailed particularity” to make clear it was referring to the Notice and the FAQ.

Whether there is reasonable doubt as to whether these documents were incorporated

into the terms of the Release is a closer question. When considered in the light most

favorable to plaintiffs, the following facts suggest that there is sufficient evidence showing

that they were being incorporated into the Release: the April 25, 2011 Letter refers to the

referenced documents as “[d]etailed instructions . . . explaining the manner in which a

hospital may request that [its] claims data be reviewed”; the Notice included “detailed

instructions,” in the form of the nine-step process, for both for hospitals to follow in

submitting their claims and for the defendant to follow in computing payment offers, while

the FAQs provide clarifications regarding these instructions; immediately after mentioning

these instructions, the April 25, 2011 Letter stated that a hospital may be paid in return

for DoD’s “offer of additional payment”; and that the April 25, 2011 Letter stated that this

offer will be “based on criteria established by the agency,” although no other possible

source for this criteria is mentioned. Thus, plaintiffs have pled sufficient facts to show that

the Release incorporated by reference the April 25, 2011 Letter, which, in turn,

incorporated the nine-step process included in the Notice, as clarified in the FAQs.

The terms of the offer by the defendant in the Release, thus, included a promise

on the part of the defendant to “provide a net adjustment to prior payments of hospital

outpatient radiology services,” if the hospital and defendant complied with the nine-step

process laid out in the Notice and if, after analysis, the hospital was eligible according to

the determination of the defendant to receive the additional payment. Step 8 of the

Notice’s process stated that a “written response” including “the calculated adjusted

payment and the calculations from which the adjustment was derived,” that is the

Payment Adjustment Worksheet, would be sent to those hospitals requesting additional

payments, and step 9 stated that the Release would be included along with the Payment

Adjustment Worksheet. Step 9 also stated that if, within 30 days, the Release was then

returned to TMA, payment would be made to the hospital. Thus, the sending of the

Payment Adjustment Worksheet and the Release to the plaintiffs constituted the

30

defendant’s offer under the Second Alleged Contract. Both the Release, which stated that

this offer was made in return for the hospital’s agreement to waive all payment related

claims against the DoD, and included a signature line at the bottom, and the Notice made

clear that return of the signed Release, which plaintiff Ingham did, constituted acceptance

of this offer. Plaintiffs, therefore, have sufficiently pled the existence of an unambiguous

offer and acceptance of the Second Alleged Contract, as between defendant and plaintiff

Ingham.

With respect to the existence of a government representative with the authority to

bind the government to the apparent Second Alleged Contract, plaintiffs allege that TMA

Deputy Director Hunter, who signed the April 25, 2011 Letter, had authority to contract

with plaintiffs. Plaintiffs also contend, that “at all times relevant herein,” Deputy Director

Hunter was acting at the direction of, and with the approval of, the Director of TMA, who

also had the authority to contract with plaintiffs. Defendant denies that either the deputy

director or the director of TMA had such authority.

It is well established that the government is not bound by the acts of its agents

beyond the scope of their actual authority. See Fed. Crop Ins. Corp. v. Merrill, 332 U.S.

380, 384 (1947); Trauma Serv. Grp. v. United States, 104 F.3d at 1325; Urban Data Sys.,

Inc. v. United States, 699 F.2d 1147, 1153 (Fed. Cir. 1983). Contractors dealing with the

United States must inform themselves of a representative’s authority and the limits of that

authority. See Fed. Crop Ins. Corp. v. Merrill, 332 U.S. at 384 (“[A]nyone entering into an

arrangement with the Government takes the risk of having accurately ascertained that he

who purports to act for the Government stays within the bounds of his authority.”); Trauma

Serv. Grp. v. United States, 104 F.3d at 1325 (“[T]his risk remains with the contractor

even when the Government agents themselves may have been unaware of the limitations

on their authority.”); see also Flexfab, LLC v. United States, 424 F.3d at 1260; Total Med.

Mgmt., Inc. v. United States, 104 F.3d at 1321; Council for Tribal Emp’t Rights v. United

States, 112 Fed. Cl. at 243; Jumah v. United States, 90 Fed. Cl. 603, 612 (2009), aff’d,

385 F. App’x 987 (Fed. Cir. 2010); Aboo v. United States, 86 Fed. Cl. 618, 627, aff’d, 347

F. App’x 581 (Fed. Cir. 2009).

A government representative with the requisite authority generally is a required

element of both express and implied-in-fact federal contracts. An officer of the United

States who does not possess express contracting authority may bind the United States

under limited circumstances, but only if he or she has “implied actual authority.” See

Winter v. Cath-dr/Balti Joint Venture, 497 F.3d 1339, 1344, 1346 (Fed. Cir.), reh’g and

reh’g en banc denied (Fed. Cir. 2007); see also Salles v. United States, 156 F.3d 1383,

1384 (Fed. Cir. 1998); H. Landau & Co. v. United States, 886 F.2d 322, 324 (Fed. Cir.

1989) (“Authority to bind the [g]overnment is generally implied when such authority is

considered to be an integral part of the duties assigned to a [g]overnment employee.”)

(quoting J. Cibinic & R. Nash, Formation of Government Contracts 43 (1982)); Vargas v.

United States, 114 Fed. Cl. 226, 235 (2014); Son Broad., Inc. v. United States, 52 Fed.

Cl. 815, 820 (2002) (“Actual authority may be implied when such authority is ‘an integral

part of the duties assigned to a [g]overnment employee.’” (quoting Roy v. United States,

38 Fed. Cl. 184, 189, dismissed, 124 F.3d 224 (Fed. Cir. 1997))). Plaintiffs bear the

31

burden of proving that the Deputy Director of TMA, Rear Admiral Hunter, or the TMA

Director had such authority. The fact that plaintiffs may have believed Deputy Director

Hunter or the TMA Director held such authority is not sufficient. See Harbert/Lummus

Agrifuels Projects v. United States, 142 F.3d 1429, 1432 (Fed. Cir.), reh’g denied and en

banc suggestion declined (Fed. Cir. 1998), cert. denied, 525 U.S. 1177 (1999); see also

Trauma Serv. Grp. v. United States, 104 F.3d at 1327 (The plaintiff “must prove all of the

requirements for a binding contract in order to prevail” and “must allege facts sufficient to

show that the Government representative who entered into its alleged implied-in-fact

contract was a contracting officer or had implied actual authority to bind the

Government.”). Although apparent authority will not suffice to hold the government bound

by the acts of its agents, see Fed. Crop Ins. Corp. v. Merrill, 332 U.S. at 384, implied

actual authority, like express actual authority, will suffice.

Plaintiffs do not allege that the Director or Deputy Director of TMA possessed

express authority to enter into the alleged contracts. Instead, plaintiffs apparently argue

that Deputy Director Hunter possessed implied authority to enter into the alleged

contracts, focusing on their allegations on the extent of her duties. Plaintiffs allege in their

amended complaint that, “[a]s the Deputy Director of TRICARE[,] Rear Admiral Hunter

coordinated health care for 9.6 million military beneficiaries and managed TRICARE’s

multi-billion dollar portfolio.” In their opposition to defendant’s motion to dismiss, plaintiffs

also offer excerpts from a DoD report, titled “A Report to Congress on the Organizational

Structure of the Office of the Assistant Secretary of Defense for Health Affairs and the

TRICARE Management Activity,” in support of their argument. The excerpted portions of

the report describe the position of the Deputy Director, TMA, stating that she “[s]erves as

the principal advisor to, and acts at all times on behalf of, the TMA Director and Principal

Deputy Director on all operational aspects of development and execution of TRICARE.

Under the general supervision of TMA Director and Principal Deputy Director, the

incumbent directs and manages TMA.” The excerpts then go on to list the Deputy

Director’s “functions,” stating that she “[m]anages health and medical resources of the

TRICARE managed care benefit program” and “[d]evelops, maintains, and provides

guidance for the integrated system for contracting and acquisition support for health care,

dental pharmacy, and other health programs, claims processing services, and other

administrative functions to support TRICARE.”

In its motion to dismiss, defendant argues that Deputy Director Hunter’s high level

position does not necessarily mean that she had any authority, implied or actual, to enter

into contracts with the plaintiffs. Defendant further argues that the authority of the Director

and Deputy Director of TMA is derived from DoD Directive Number 5136.12, dated May

31, 2001, and, that, under that directive, neither the Director nor the Deputy Director of

TMA would have the authority to enter into the contracts plaintiffs allege. Defendant first

points to paragraph 6.2.9 of Directive 5136.12, which sets forth the following

“responsibilities and functions” of the Director with respect to contracting: “Contract for

managed care support, dental support, other health programs, claims processing

services, studies and research support, supplies, equipment, and other services

necessary to carry out the TRICARE and support the MHS [Military Health System].” DoD

Directive 5136.12, ¶ 6.2.9 (May 31, 2001). Defendant argues that the establishment of

32

the Discretionary Payment Process was not among the “services necessary to carry out

the TRICARE.” Defendant next points to Directive 5136.12, paragraph 8.1.4, which grants

the “specifically delegated authority” to the Director TMA to “[e]xercise the administrative

authorities contained in enclosure 3.” Defendant then quotes a portion of enclosure 3 to

Directive 5136.12, which states that “the Director, TMA, or in the absence of the Director,

the person acting for the Director, is delegated authority as required in the administration

and operation of the TMA to”:

Enter into and administer contracts, through the TMA Directorate of

Acquisition Management and Support or through a Military Department, a

DoD contract administration services component, or other Federal Agency,

as appropriate, for supplies, equipment, and services required to

accomplish the mission of the TMA. The Director, AM&S [Acquisition

Management and Support], shall be the head of the contracting activity.

DoD Directive 5136.12, Enclosure 3, ¶ E3.1.1.16. Defendant argues, similar to its

argument regarding Directive 5136.12, paragraph 6.2.9, that the Discretionary Payment

Process did not involve “supplies, equipment, and services required to accomplish the

mission of the TMA.” Additionally, defendant argues that this language shows that the

Director has “no independent contracting authority” but must instead contract through the

Director of Acquisition Management and Support. Defendant finally argues that the

powers of the Deputy Director could not have been greater than those of the Director,

pointing to the provision of enclosure 3 granting the Director the power to “redelegate

these authorities [enumerated in enclosure 3] as appropriate, with the approval of the

ASD(HA) and in writing, except as otherwise specifically indicated above or as otherwise

provided by law or regulation.” DoD Directive 5136.12, Enclosure 3, ¶ E3.1.2.

Upon review, the court, when drawing all reasonable inferences in favor of

plaintiffs, does not read Directive 5136.12 to be as limiting as defendant argues. Initially,

the grant of areas for which the Deputy Director has the power to contract contained in

Directive 5136.12, includes not only “services required to accomplish the mission of the

TMA,” DoD Directive 5136.12, Enclosure 3, ¶ E3.1.1.16, but also includes “managed care

support,” “other health programs,” and “claims processing services,” DoD Directive

5136.12, paragraph 6.2.9, a broad range of categories related to the management of the

TMA/DHA program, which might indeed encompass the type of contracts that were the

predicate for the offer of the Discretionary Payment Process. The language of the April

25, 2011 Letter supports this finding, explaining that: “Because this issue affects all three

TRICARE regions and multiple years of claimed services, DoD has decided to calculate

the net adjustments itself, rather than through the MCSCs [Managed Care Support

Contractors] . . . .” Moreover, plaintiffs’ allegations and facts shown by the exhibits

attached to the amended complaint, in particular, that Deputy Director Rear Admiral

Hunter signed the April 25, 2011 Letter and the broad offer to a large number of hospitals

to apply for additional payments, suggest that even more senior DoD officers, certain of

whom no doubt had contract authority, could have been involved with the offer to provide

the benefits if the proposed conditions were met by both sides. Further, Directive 5136.12,

paragraph 8.0 and enclosure 3 do not suggest that the specifically delegated authorities

33

encompassed in enclosure 3 were intended to limit the responsibilities and functions of

the Director or the Deputy Director of TMA. As such, and particularly when all reasonable

inferences are drawn in favor of plaintiffs, the defendant’s arguments related to Directive

5136.12 and enclosure 3 do not convince the court that the Director or the Deputy Director

lacked management authority to take the actions to effect compensation to eligible

hospitals, such as plaintiff Ingham.

Defendant also argues that, under 32 C.F.R. § 199.1(f), the services listed in

Directive 5136.12, paragraph 6.2.9 required contracting pursuant to the Federal

Acquisition Regulations (FAR). According to defendant, this means that contracts were

required to be awarded by a warranted contracting officer, which Deputy Director Hunter

was not because she lacked a contracting officer’s warrant, pursuant to 48 C.F.R. § 1.602

(2010). The version of 32 C.F.R. § 199.1(f) in effect at the time of the alleged contracts,

provided, in relevant part:

(f) Claims adjudication and processing. The Director, OCHAMPUS, is

responsible for making such arrangements as are necessary to adjudicate

and process CHAMPUS claims worldwide.

(1) The United States—(i) Contracting out. The primary method of

processing CHAMPUS claims in the United States is through competitively

procured, fixed-price contracts. The Director, OCHAMPUS, or a designee,

is responsible for negotiating, under the provisions of the FAR, contracts for

the purpose of adjudicating and processing CHAMPUS claims (and related

supporting activities).

(ii) In-house. The Director, OCHAMPUS, or a designee, is authorized to

adjudicate and process certain CHAMPUS claims in-house at OCHAMPUS,

when it is determined to be in the best interests of CHAMPUS subject to

applicable considerations set forth in OMB Circular A–76. Such in-house

claims processing may involve special or unique claims, or all claims for a

specific geographic area.

32 C.F.R. § 199.1(f) (2010). At issue is whether the appropriate regulation to cover the

Discretionary Payment Process fell under 32 C.F.R. § 199.1(f)(1)(i) of the regulations,

which required negotiation of contracts under the FAR for contracting out, or under 32

C.F.R. § 199.1(f)(ii) for in-house processing, which is reserved for special or unique

claims. Even if these circumstances were to fall under 32 C.F.R. § 199.1(f)(1)(i) for the

contracting out of claims adjudication and processing, however, the FAR likely would still

be inapplicable to the above captioned case. The applicable 2010 version of the FAR

provides that “[t]he FAR applies to all acquisitions as defined in part 2 of the FAR.” 48

C.F.R. § 1.104 (2010). As plaintiffs note, the FAR defines “Acquisition,” (emphasis in

original) as “the acquiring by contract with appropriated funds of supplies or services

(including construction) by and for the use of the Federal Government through purchase

or lease, whether the supplies or services are already in existence or must be created,

developed, demonstrated, and evaluated.” 48 C.F.R. § 2.101(b). The Discretionary

Payment Process did not involve awarding a contract or task order. It was a broadly

34

applicable price adjustment to existing arrangements available to all hospitals which

opted to go through the process and then met certain conditions, including signing a

release. Payment adjustments to hospitals already doing business with the government

engaging in the Discretionary Payment Process do not appear to fall within the purview

of acquisitions.

The Discretionary Payment Process also was not a claim adjustment, analogous

to a Request for an Equitable Adjustment (REA) or a claim, which generally are reviewed

and approved by a contracting officer with warrant authority. 48 C.F.R. 552.243–71

(detailing the equitable adjustment process); 48 C.F.R. § 2.101(b) (defining a claim).

Contracting officers have warrants to exercise discretionary authority to expend taxpayer

money. By its very nature, the Discretionary Payment Process was effected by a broad

based management policy directive. Applications by the hospitals for additional funds

were offered to all by virtue of a public announcement based on a uniform process, and

assuming hospitals submitted the proper documents and signed the Release, calculation

of the sums owed was done mechanically according to formulas set up by the agency,

and not subject to the contracting officer’s discretion regarding individual claimants, as is

the case with an REA or claim.

If the Second Alleged Contract can be considered a contract, assuming a plaintiff

signed the Release, the next issue is whether plaintiffs have sufficiently pled that

defendant breached the Second Alleged Contract. As noted above, “[t]o state a claim

upon which relief can be granted, [plaintiff] must allege either an express or an implied-

in-fact contract, and the breach of that contract.” Trauma Serv. Grp. v. United States, 104

F.3d at 1325; see also Bell/Heery v. United States, 739 F.3d at 1330 (“A breach of

contract claim requires two components: (1) an obligation or duty arising out of the

contract and (2) factual allegations sufficient to support the conclusion that there has been

a breach of the identified contractual duty.”). “In making this assessment, the court must

interpret the contract's provisions to ascertain whether the facts plaintiff alleges would, if

true, establish a breach of contract.” Bell/Heery v. United States, 739 at 1330 (citing S.

Cal. Edison v. United States, 58 Fed. Cl. 313, 321 (2003)).

With regard to the Second Alleged Contract, plaintiffs, therefore, must show that

Defendant breached a duty owed to plaintiff Ingham, the only plaintiff which signed the

Release. Plaintiffs allege: “[t]he second contract was breached when Defendant failed to

abide by the terms of the Release, which required Defendant, inter alia, to calculate and

pay the amount that was owed to each hospital for all outpatient services in the manner

specified in ‘DoD’s letter dated April 25, 2011.’” Plaintiffs allege defendant breached the

Second Alleged Contract when defendant failed to correctly compute the amounts due

“pursuant to the methodology as set forth in each Class Member’s contract.” Plaintiffs

also, more broadly, allege certain specific miscalculations made in proposed payments

to the Represented Hospitals during the Discretionary Payment Process. These alleged

miscalculations, plaintiffs allege, were the result of defendant’s use of incomplete claim

information and inappropriate exclusion of certain categories of claims. Plaintiffs further

argue that for all hospitals in their purported class, Kennel, which performed the

calculations called for in the Discretionary payment process, “failed to correctly compute

35

the amount due Plaintiffs and the Class as set forth in the contracts between Class

members and Defendant.” As relates to plaintiff Ingham in particular, plaintiffs allege that

the amount Ingham was ultimately paid was less than it was owed for radiology services

by the defendant “[d]ue to multiple errors in the [Kennel] Study and in the calculation for

additional radiology payments owed.”

As discussed above, the Second Alleged Contract, provided that if all

circumstances were met, including availability of funds, then eligible hospitals could

receive a payment that was to be calculated pursuant to the nine-step process set forth

in the Notice. Steps 3 through 7 of the Notice announced the methodology defendant

proposed to calculate the radiology payments. Under this methodology, the defendant

was to: “extract the claims for each hospital for claims for outpatient radiology services

during the relevant period”; calculate what would have been paid under Medicare’s pre-

OPPS approach for each of these claims using the formula previously used by Medicare,

“.42(BC [the billed charge for that line item] * CCR [the hospital-specific cost-to-charge

ratio used for each period according to the Center of Medicare and Medicaid Services

Pricier File]) + .58 (.62 global CMAC [amount for that line item])”; adjust this amount

“using the ratio of the actual allowed amount on the claim to the TRICARE Standard

allowed amount”; determine the difference if any, between this amount and the actual

amount paid on the particular claim; sum these claim specific amounts for all of a hospitals

claims; and then adjust this number using the “hospital-specific offset for cost sharing.”

When issued, this choice of method was created and chosen by agency personnel, even

if the Kennel Study was used to inform agency choices. Thus, any errors in the Kennel

Study would not be decisive on to the issue of whether defendant breached the Second

Alleged Contract.

As stated above, plaintiffs also allege defendant failed to properly calculate

payments due to hospitals according to the methodology set forth in the Notice. In

particular, plaintiffs allege that there were “multiple errors” in the Defendant’s calculation

of the amount owed to plaintiff Ingham, resulting in an underpayment to Ingham. Plaintiffs

allegation of the existence of such errors is bolstered by its additional allegations that

defendant has acknowledged that it made miscalculations in computing the proposed

payment amounts offered to the Represented Hospitals during the Discretionary Payment

Process and, in recognition of these errors, agreed to pay the Represented Hospitals 77%

more than was originally offered. Plaintiffs allege that these miscalculations were the

result of defendant’s use of incomplete claim information and the inappropriate exclusion

of certain categories of claims. Defendant has failed, at this time, to offer any evidence

that rebuts these allegations. Given that plaintiff Ingham signed the release, which entitled

it to receive a payment calculated according to the process outlined in the Notice,

plaintiffs’ allegations that Ingham was not provided with such a payment are sufficient to

plead a breach of the Second Alleged Contract by defendant, for the purposes of the

present motion.

Regarding the Release, defendant offers a further argument to try to defeat

plaintiffs’ case and to argue that plaintiff Ingham and all other hospitals that signed the

Release are barred from bringing any claims related to the Discretionary Payment

36

Process, because, by signing the Release, they “released the very cause they present.”

Plaintiffs respond, without citing support, that, “[w]hen, as here, the terms of a release are

breached, the party damaged by the breach can bring suit; if this were not the case the

consideration promised in exchange for the release of claims could be withheld with

impunity.”

To determine if a claim is barred by a release, it is necessary to consider the scope

of the release. The United States Supreme Court has stated, “[t]o rightly understand the

scope of this release we must consider the conditions of the contract, and especially the

clause in it which calls for a release.” United States v. William Cramp & Sons Ship &

Engine Bldg. Co., 206 U.S. 118, 126 (1907). Settlement agreements and releases are

contractual in nature and are interpreted under the same rules as contracts, and their

interpretation is a matter of law. See Mays v. United States Postal Service, 995 F.2d 1056,

1059 (Fed. Cir. 1993) (citing Greco v. Dep’t of the Army, 852 F.2d 558, 560 (Fed. Cir.

1988)); H.J. Lyness Constr., Inc. v. United States, 120 Fed. Cl. 1, 4 (2015); K-Con Bldg.

Sys., Inc. v. United States, 107 Fed. Cl. 571, 600 (2012); Raytheon Co. v. United States,

96 Fed. Cl. 548, 553 (2011); Kenbridge Constr. Co. v. United States, 328 Fed. Cl. at 765.

Under those rules, courts determine the intent of the parties by considering the language

of the contract. See Jowett, Inc. v. United States, 234 F.3d at 1368. To determine which

claims a release is intended to bar, courts consider the entirety of the instrument of the

release and the “facts and circumstances attending its execution.” See Thorn Wire Hedge

Co. v. Washburn & M. Mfg. Co., 159 U.S. 423, 441 (1895); Dureiko v. United States, 209

F.3d 1345, 1356 (Fed. Cir. 2000) (“In interpreting the release, we first ascertain whether

its language clearly bars the asserted claim.” (citing King v. Dep’t of the Navy, 130 F.3d

1031, 1033 (Fed. Cir. 1997)). While “[t]he general rule is that extrinsic evidence will not

be received to change the terms of a contract that is clear on its face.” If a contract is

found to be uncertain or ambiguous, then parties may assert extrinsic evidence and the

interpretation becomes a matter of fact. Beta Sys., Inc. v. United States, 838 F.2d at 1183

(citing S.C.M. Corp. v. United States, 230 Ct. Cl. at 206, 675 F.2d at 284); see also H.L.C.

& Assocs. Constr. Co. v. United States, 176 Ct. Cl. at 295, 367 F.2d 586 (1966); J.G.

Watts Constr. Co. v. United States, 161 Ct. Cl. 801, 807 (1963).

General language in a release may bar a party from asserting any claims arising

out of the contract and intended by the parties. See United States v. William Cramp &

Sons Ship & Engine Bldg. Co., 206 U.S. at 127–28; Johnson, Drake & Piper, Inc. v. United

States, 209 Ct. Cl. 313, 330, 531 F.2d 1037, 1047 (1976) (“[A] general release bars claims

based upon events occurring prior to the date of the release.”); H.J. Lyness Constr., Inc.

v. United States, 120 Fed. Cl. at 4; Raytheon Co. v. United States, 96 Fed. Cl. at 553; K-

Con Bldg. Sys., Inc. v. United States, 107 Fed. Cl. at 600; IMS Eng’rs-Architects, P.C. v.

United States, 92 Fed. Cl. 52, 64 (2010), aff’d, 418 F. App’x 920 (Fed. Cir.), reh’g and

reh’g en banc denied (Fed. Cir. 2011) (“As a general rule, after executing a release, a

contractor ‘is thereafter barred from maintaining a suit for damages or for additional

compensation under the contract based upon events that occurred prior to the execution

of the release.’” (quoting B.D. Click Co. v. United States, 222 Ct. Cl. 290, 614 F.2d 748,

756 (1980))); Dairyland Power Coop. v. United States, 27 Fed. Cl. at 811; A & A Insulation

Contractors, Inc. v. United States, 26 Cl. Ct. at 373.

37

Regarding general releases, the United States Court of Appeals for the Federal

Circuit stated in Augustine v. Progressive Dynamics, Inc.:

The rule for releases is that absent special vitiating circumstances, a

general release bars claims based upon events occurring prior to the date

of the release. And no exception to this rule should be implied for a claim

whose facts were well enough known for the maker of the release to frame

a general description of it and request an explicit reservation.

Augustine Med., Inc. v. Progressive Dynamics, Inc., 194 F.3d 1367, 1373 (Fed. Cir. 1999)

(quoting Johnson, Drake & Piper, Inc. v. United States, 209 Ct. Cl. at 330, 531 F.2d at

1047) (emphasis added in Augustine Med., Inc. v. Progressive Dynamics, Inc.).

Plaintiffs argue, however, that “[w]hen, as here, the terms of a release are

breached, the party damaged by the breach can bring suit.” The law provides that the

execution of a general release without exceptions discharges the released party “from all

claims and demands in law and equity arising out of the contract.” Hellander v. United

States, 147 Ct. Cl. 550, 561, 178 F. Supp. 932, 939 (1959) (citation omitted). “If a

contractor wishes to preserve a right to assert a claim under that contract later, it bears

the burden to modify the release, before signing it.” Dairyland Power Coop. v. United

States, 27 Fed. Cl. at 811 (citing Mingus Constructors, Inc. v. United States, 812 F.2d at

1393-94, 1396). In Kenbridge, the court stated:

Where a contractor fails to exercise its right to reserve claims from the

operation of a release, “it is neither improper nor unfair, absent some

vitiating or aggravated circumstance, to preclude the contractor from

maintaining a suit based on events which occurred prior to the execution of

the release.”

Kenbridge Constr. Co. v. United States, 28 Fed. Cl. at 765 (quoting Clark Mech.

Contractors, Inc. v. United States, 5 Cl. Ct. at 86) (citing H.L.C. & Assocs. Constr. Co. v.

United States, 176 Ct. Cl. at 293, 367 F.2d at 590)); see also IMS Eng’rs-Architects, P.C.

v. United States, 92 Fed. Cl. at 64. The burden to identify and specify claims to be

excepted from a general release lies with the parties before signing the release. See

Mingus Constructors, Inc. v. United States, 812 F.2d at 1393–94 (citing Inland Empire

Builders, Inc. v. United States, 424 F.2d at 1376). Generally, exceptions to releases are

viewed narrowly and are strictly construed against the contractor. Gresham, Smith &

Partners v. United States, 24 Cl. Ct. 796, 801 (1991) (citing Mingus Constructors, Inc. v.

United States, 812 F.2d at 1394). “Vague, broad exceptions . . . are insufficient as a matter

of law to constitute ‘claims’ sufficient to be excluded from the required release.” Mingus

Constructors, Inc. v. United States, 812 F.2d at 1394 (citing Vann v. United States, 190

Ct. Cl. 546, 555, 420 F.2d 968, 972 (1970) (“A claim not specifically delineated in an

exception to a release is thereafter barred.”)). “The rationale behind construing exceptions

in releases narrowly is that the purpose of a release is to put an end to the matter in

controversy.” Mingus Constructors, Inc. v. United States, 812 F.2d at 1394. If a party

executing a general release has knowledge of facts sufficient to constitute a claim and

wishes to except that claim from the release, the party must clearly manifest its intent to

38

do so with an explicit reservation. See Augustine Med., Inc. v. Progressive Dynamics,

Inc., 194 F.3d at 1373.

There are, however, circumstances when a party may bring a claim despite the

execution of an otherwise applicable release. Such vitiating circumstances include

economic duress, fraud, mutual mistake, lack of consideration, lack of performance and

other special circumstances that would invalidate a contract or otherwise indicate that the

parties intended to allow some claims to remain despite the release. See Mingus

Constructors, Inc. v. United States, 812 F.2d at 1395; Axion Corp. v. United States, 68

Fed. Cl. 468, 475 (2005) (citing Jackson Constr. Co. v. United States, 62 Fed. Cl. 84, 93

(2004). “[W]here it is shown that, by reason of a mutual mistake, neither party intended

that the release cover a certain claim, the court will reform the release.” J.G. Watts Constr.

Co. v. United States, 161 Ct. Cl. at 806 (citations omitted); Harrison Eng’g & Constr. Co.

v. United States, 107 Ct. Cl. 205, 208, 68 F. Supp. 350, 351 (1946). A unilateral mistake,

however, does not allow for an exception to a general release unless the other party knew

of the mistake. See Rocky River Co., Inc. v. United States, 169 Ct. Cl. 203, 207–08 (1965)

(citations omitted). If a court finds a release does not express the intent of the parties, it

may reform the release in accordance with the parties’ intentions. See Nippon Hodo Co.,

Ltd. v. United States, 142 Ct. Cl. 1, 4, 160 F. Supp. 501, 502 (1958).

In the present case, the Release clearly provides for a broad release of claims,

stating, in relevant part, that a hospital which signs the release:

shall completely release, acquit, and forever discharge the Government,

TRICARE beneficiaries, and any MCSCs . . . (hereinafter collectively

referred to as “Releasees”) from any and all claims, demands, actions, suits,

causes of action, appeals, whether asserted as a class, individually, or

otherwise, damages whenever incurred, and liabilities of any nature

whatsoever (including costs, penalties, and attorney’s fees) that Releasor

ever had, now has, or hereafter can, shall, or may have against Releasees,

whether known or unknown, on account of or arising out of or resulting from

or in any way relating to payments, reimbursements, adjustments,

recoupments, or any other means of compensation by Releasees made at

any time for outpatient services rendered to TRICARE beneficiaries by

Releasor prior to the date Releasor became subject to the TRICARE

Outpatient Prospective Payment System (“OPPS”), or December 31, 2010

if Releasor was never subject to the TRICARE OPPS.

A second paragraph below the portion just quoted and above the signature line

also states:

RELEASOR UNDERSTANDS THE SIGNIFICANCE OF THIS RELEASE

OF UNKNOWN CLAIMS AND ITS WAIVER OF STATUTORY

PROTECTION AGAINS A RELEASE OF UNKNOWN CLAIMS.

ACCORDINGLY, RELEASOR EXPRESSLY WAIVES ANY AND ALL

RIGHTS AND BENEFITS UNDER SECTION 1542 OF THE CALIFORNIA

CIVIL CODE (WHICH STATES: “A GENERAL RELEASE DOES NOT

39

EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR

SUPSECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE

RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY

AFFECTED HIS SETTLEMENT WITH THE DEBTOR.”) OR ANY OTHER

LAW, RULE, PROVISION OR STATUTE OF ANY OTHER JURISDICTION

THAT OPERATES TO BAR THE RELEASE OF UNKNOWN CLAIMS.

(capitalization in original).

The court finds that the Release is unambiguous on its face and sufficiently broad

to bar all of plaintiffs’ breach of contract claims alleged in their amended complaint, which

“aris[e] out of” the government’s reimbursements for outpatient services made prior to

institution of the OPPS payment methodology. As stated, the burden to identify and

specify claims to be excepted from a general release lies with the parties before signing

the release. See Mingus Constructors, Inc. v. United States, 812 F.2d at 1393–94 (citing

Inland Empire Builders, Inc. v. United States, 424 F.2d at 1376). Plaintiffs do not appear

to allege in their amended complaint, or to have argued before the court in their opposition

to defendant’s motion to dismiss, that plaintiff Ingham, or any other similarly situated

hospitals which signed the Release, requested an exception or reservation of specific

claims from the general release before signing and becoming eligible to receive an

adjusted payment.

Therefore, the court is left only with the question of whether plaintiffs have

sufficiently pled facts alleging a vitiating circumstances to allow plaintiff Ingham to bring

a claim, despite the execution of an otherwise applicable release. See J.G. Watts Constr.

Co. v. United States, 161 Ct. Cl. at 807 (“[W]here the conduct of the parties in continuing

to consider a claim after the execution of the release makes plain that they never

construed the release as constituting an abandonment of the claim, or where it is obvious

that the inclusion of a claim in a release was attributable to a mistake or oversight, or

where fraud or duress is involved, the release will not be held to bar the prosecution of

the claim.” (internal citations omitted)); see also H.J. Lyness Constr., Inc. v. United States,

120 Fed. Cl. at 4–5; Raytheon Co. v. United States, 96 Fed. Cl. at 553–54. The language

of the Release is straightforward and clear and it would be a stretch for any hospital signor

to argue they did not understand that it was relinquishing future claims after signing the

Release and accepting payments. Nor have plaintiffs alleged that they signed Release

was based on fraud or duress. Although plaintiffs do allege the existence of a mutual

mistake, as discussed below, they have failed to adequately plead the elements of such

a mistake. Thus, plaintiffs have failed to adequately plead the existence of a vitiating

circumstance and plaintiff Ingham is barred by the Release from asserting any of the

claims for an express breach of contract alleged in Count I of the amended complaint.

Therefore, all of plaintiffs’ claims for breach of express contracts under Count I of the

amended complaint are dismissed.

Count II: Breach of Implied-In-Fact Contract

Alternative to their claims in Count I for breach of express contracts, plaintiffs

allege the creation, and breach of, two implied-in-fact contracts between defendant and

40

plaintiffs’ purported class in Count II of their amended complaint. The alleged terms of

these two alleged implied-in-fact contracts are identical to those of the two alleged

express contracts, as are the supporting documents offered by plaintiffs. The only

additional allegation made by plaintiffs with respect to the implied-in-fact contracts is that,

“to the extent the documents exchanged by the parties . . . did not form an express

contract, a contract between the parties can be implied-in-fact by reading all of the

documents together in light of the surrounding circumstances.” The alleged surrounding

circumstances plaintiffs point to include: the defendant’s hiring of Kennel in 2010 to

produce the Kennel Study and the use of the Kennel Study to craft a global resolution of

the dispute with the hospitals regarding outpatient services; defendant’s statements in the

FAQs that it had in its possession all of the data and all of the claims needed to determine

what was owed to hospitals for outpatient services; defendant’s establishment of the nine-

step process requiring “affirmative participation by the hospitals” and that that they sign

the Release before receiving payment; the repeated use of the language of offer and

acceptance in the defendant’s documents; and the Release “indisputably” setting forth

the terms of the bargained for exchange.

The elements of a binding contract with the United States are identical for express

and implied-in-fact contracts; only the nature of the evidence differs. See Night Vision

Corp. v. United States, 469 F.3d 1369, 1375 (Fed. Cir. 2006) (“The elements of an

implied-in-fact contract are the same as those of an oral express contract.”), cert. denied,

550 U.S. 934 (2007); Hanlin v. United States, 316 F.3d at 1328 (“Thus, the requirements

for an implied-in-fact contract are the same as for an express contract; only the nature of

the evidence differs.”); City of Cincinnati v. United States, 153 F.3d at 1377 (“Like an

express contract, an implied-in-fact contract requires ‘(1) mutuality of intent to contract;

(2) consideration; and, (3) lack of ambiguity in offer and acceptance.’ . . . When the United

States is a party, a fourth requirement is added: The government representative whose

conduct is relied upon must have actual authority to bind the government in contract.”

(quoting City of El Centro v. United States, 922 F.2d 816, 820 (Fed. Cir. 1990), cert.

denied, 501 U.S. 1230 (1991)); Trauma Serv. Grp. v. United States, 104 F.3d at 1325;

Russell Corp. v. United States, 210 Ct. Cl. 596, 608–09, 537 F.2d 474, 481–82 (1976),

cert. denied, 429 U.S. 1073 (1977)); Huntington Promotional & Supply, LLC v. United

States, 114 Fed. Cl. at 767 (“The elements are the same for an express or implied-in-fact

contract . . .”); Vargas v. United States, 114 Fed. Cl. at 233; Prairie Cnty., Mont. v. United

States, 113 Fed. Cl. 194, 202 (2013), aff’d 782 F.3d 685 (Fed. Cir. 2015); Mastrolia v.

United States, 91 Fed. Cl. 369, 384 (2010) (citing Flexfab, L.L.C. v. United States, 424

F.3d 1254, 1265 (Fed. Cir. 2005)). Implied-in-fact contracts are agreements “founded

upon a meeting of the minds, which, although not embodied in an express contract, is

inferred, as a fact, from conduct of the parties showing, in the light of the surrounding

circumstances, their tacit understanding.” Trauma Serv. Grp. v. United States, 104 F.3d

at 1325 (quoting Hercules, Inc. v. United States, 516 U.S. 417, 424 (1996) (quoting Balt.

& Ohio R.R. Co. v. United States, 261 U.S. 592, 597 (1923))); see also Kam-Almaz v.

United States, 682 F.3d at 1368; Bank of Guam v. United States, 578 F.3d at 1329 (citing

Trauma Serv. Grp. v. United States, 104 F.3d at 1326); Bay View, Inc. v. United States,

278 F.3d 1259, 1265–66 (Fed. Cir. 2001), reh’g and reh’g en banc denied, 285 F.3d 1035

(Fed. Cir.), cert. denied, 537 U.S. 826 (2002); Westlands Water Dist. v. United States,

41

109 Fed. Cl. 177, 203 (2013); Peninsula Grp. Capital Corp. v. United States, 93 Fed. Cl.

at 728 (citing Balt. & Ohio R.R. Co. v. United States, 261 U.S. at 597; Russell Corp. v.

United States, 210 Ct. Cl. at 609, 537 F.2d at 482. Such an agreement will not be implied

“unless the meeting of minds was indicated by some intelligible conduct, act or sign.” Balt.

& Ohio R.R. Co. v. United States, 261 U.S. at 598; see also City of Cincinnati v. United

States, 153 F.3d at 1377 (“[A]n implied-in-fact contract arises when an express offer and

acceptance are missing but the parties’ conduct indicates mutual assent.” (citing Chavez

v. United States, 18 Cl. Ct. 540, 544 (1989)); Russell Corp. v. United States, 210 Ct. Cl.

at 609, 537 F.2d at 482. “[A]n implied-in-fact contract cannot exist if an express contract

already covers the same subject matter.” Trauma Serv. Grp. v. United States, 104 F.3d

at 1326.

Plaintiffs’ failure to allege any valid consideration for the First Alleged Contract,

discussed above, means that plaintiffs have failed to adequately plead the existence of

an implied-in-fact version of the First Alleged Contract just as it did for their alleged

express contract. With respect to the Second Alleged Contract, the terms of the implied-

in-fact version of plaintiffs’ Second Alleged Contract are identical to those of their alleged

express version. As discussed above, the Second Alleged Contract was to be accepted

by signing and executing the Release. Thus, as discussed above, only those hospitals

which actually signed and executed the Release are alleged to be parties to the Second

Alleged Contract. Also as noted above, the only such hospital among the named plaintiffs

is plaintiff Ingham. Once Ingham singed the Release, however, the existence of an

express version of the First Alleged Contract between defendant and plaintiff Ingham

does not allow for the existence of any implied-in-fact version. See Trauma Serv. Grp. v.

United States, 104 F.3d at 1326 (“[A]n implied-in-fact contract cannot exist if an express

contract already covers the same subject matter.”). Moreover, plaintiff Ingham is barred

from asserting any claims for any alleged breach by the Release it signed for the same

reasons it was barred from asserting its claims under the alleged express contract.

Plaintiffs’ claims for breach of implied-in-fact contracts under Count II of their amended

complaint must be dismissed.

Count III: Mutual Mistake

Plaintiffs also allege a claim for mutual mistake in Count III of their first amended

complaint. Plaintiffs allege that, at the time the Payment Adjustment Worksheets were

received by eligible hospitals, the parties held two mistaken beliefs:

(1) Defendant had correctly calculated the amounts due to each [alleged]

Class member for radiology services pursuant to the methodology as set

forth in each Class member’s contract with Defendant and (2) Defendant

had correctly determined that no additional amounts were due each Class

member for the other categories of outpatient services.

With regard to the first alleged mistake, plaintiffs allege that defendant’s calculations

violated the calculation methodology. Defendant, however, argues that plaintiffs’ claim

must fail because, under the language of the Notice, plaintiffs assumed the risk of any

errors in the government’s calculations. With regard to the second alleged mistake,

42

plaintiffs allege that defendant incorrectly determined non-radiology services had been

correctly paid. Defendant, however, responds that plaintiffs have not alleged a mistake,

but simply disagree with the methodology used in the Kennel Study. Defendant further

argues that any alleged errors related to non-radiology categories of outpatient services

are “irrelevant” because the Kennel Study was not part of defendant’s payment program

as announced in the Notice. The court notes that the only valid contract that plaintiffs

have pled that could be reformed under the doctrine of mutual mistake is the Second

Alleged Contract between defendant and plaintiff Ingham. Under this contract, defendant

proposed to provide a payment to eligible hospitals calculated according to the nine-step

process laid out in the Notice, in exchange for the hospitals’ agreement to release all

claims related to any additional payments received for outpatient services prior to the

introduction of the TRICARE OPPS payment method at issue.

As stated by the Federal Circuit:

In order to have a contract reformed, the party seeking reformation under

the doctrine of mutual mistake must allege: “(1) the parties to the contract

were mistaken in their belief regarding a fact; (2) that mistaken belief

constituted a basic assumption underlying the contract; (3) the mistake had

a material effect on the bargain; and (4) the contract did not put the risk of

the mistake on the party seeking reformation.”

Bank of Guam v. United States, 578 F.3d at 1329–30 (quoting Atlas Corp. v. United

States, 895 F.2d 745, 750 (Fed. Cir.), cert. denied, 498 U.S. 811 (1990)); see also

Restatement (Second) of Contracts § 152 (1981). The purpose and function of the

reformation of a contract is “to bring the parties’ written contract in accord with their

agreement.” Atlas Corp. v. United States, 895 F.2d at 750. The Federal Circuit also has

indicated that “[r]eformation of a written agreement on the ground of mutual mistake is an

extraordinary remedy, and is available only upon presentation of satisfactory proof” of the

four part test identified above. Nat’l Austl. Bank v. United States, 452 F.3d at 1329.

Defendant argues that plaintiff Ingham bore the risk of at least one of these alleged

mistakes under the terms of the Release. “[A] contractor cannot prevail on a mutual

mistake claim if it assumed the risk of the mistake.” Short Bros., PLC v. United States, 65

Fed. Cl. at 797 (citing Flippin Materials Co. v. United States, 160 Ct. Cl. at 368–69, 312

F.2d at 415–16). “A party bears the risk of mistake when the risk is allocated to him by

agreement of the parties . . . .” Burnside-Ott Aviation Training Ctr., Inc. v. United States,

985 F.2d 1574, 1581 (Fed. Cir. 1993) (quoting Restatement (Second) of Contracts § 154

(1981)) (omission in Burnside-Ott Aviation Training Ctr., Inc. v. United States). “The intent

of the parties . . . is not irrelevant to the question of which party agreed to assume the risk

of mistake and must be considered in making such a determination.” Id. at 1582.

The court turns first to plaintiffs’ first alleged mistake, that defendant failed to

calculate the amounts due correctly under the methodology in their alleged contract with

defendant in accordance with the nine-step process laid out in the Notice. Plaintiffs

allege, and defendant does not challenge, that, at the time the hospitals received their

Payment Adjustment Worksheets, both parties believed that the defendant had “correctly

43

calculated the amount due Plaintiffs and the class.” According to plaintiffs, however, this

was untrue because Kennel, working on behalf of the defendant, had failed to correctly

compute these amounts. Plaintiffs also allege that this mistaken belief constituted a basic

assumption underlying the contract and had a material effect on the bargain because the

payment calculated according to the April 25, 2011 Letter, was, as expressly stated in the

Release, to be the consideration the hospitals received for signing the Release.

While plaintiffs have successfully pled certain elements of mutual mistake, they

have failed to plead or establish that the Second Alleged Contract did not put the risk of

mistake on plaintiff Ingham. Step 8 of the nine-step methodology in the Notice, provided

that “[a] written response to the hospital’s request will be sent to the individual at the

address provided by the hospital. The response will provide the calculated discretionary

adjusted payment and the calculations from which the adjustment was derived.” Step 8

also indicated that:

While the methodology for calculating the adjustment is not subject to

questions, any questions regarding the data used in the calculations should

be received by TMA within 30 days of the date of TMA’s response as

specified in the response. Any questions should be accompanied by

detailed explanation of the alleged errors and the proposed corrections with

supporting documentation.

Step 8 of the Notice, which was a part of the defendant’s offer for the Second Alleged

Contract, thus, created a process by which the hospitals could challenge any perceived

mistakes in the calculations received, putting the onus on the hospitals to do so. The

opportunity to challenge was an important part of the Discretionary Payment Process,

giving hospitals an opportunity to review the defendant’s calculations and to provide

feedback to defendant prior to signing the Release. Plaintiffs argue that if defendant

wished to place the risk of mutual mistake on the hospitals, it should have provided them

the Kennel Study and warned them that the “contract was conditional upon Plaintiff

accepting the conclusions of the Study ‘as is.’” The claims data was originally provided

by the hospitals and then run through a methodology explicitly laid out in steps 3 through

7 of the Notice. The Kennel Study, although part of the background which led to the

defendant’s proposal to adjust hospital payment levels, was not a part of the methodology

and did not affect the calculation of proposed payment amounts by the defendant during

the Discretionary Payment Process. Plaintiffs admit in their amended complaint that

plaintiff Ingham received the Payment Adjustment Worksheet containing the defendant’s

calculations and proposed payments for Ingham discussed in Step 8, and that it signed

and returned the Release rather than challenging the figures it received. Plaintiffs, thus,

have failed to sufficiently plead that plaintiff Ingham did not bear the risk of mistake related

to defendant’s alleged calculations for the adjustments provided for radiology services as

part of the Second Alleged Contract. Therefore, their claims under Count III of plaintiffs’

amended complaint related to their first alleged mistake must be dismissed.

With respect to plaintiffs’ second alleged mistake, that defendant had correctly

determined no additional amounts were due plaintiffs for non-radiology outpatient

services, plaintiffs allege that the Kennel Study incorrectly concluded that, for outpatient

44

services other than radiology, plaintiffs had not been underpaid based on eleven allegedly

“fundamental errors” listed in the amended complaint. These “fundamental errors” were:

(1) [T]he use of incorrect assumptions of fact; (2) intentional exclusion of

claims that should have been included; (3) failure to properly capture claims

data; (4) failure to accurately capture claims-related services rendered from

a referring Military Treatment Facility; (5) failure to capture claims provided

by a hospital providing services at multiple locations; (6) failure to

accommodate changes in hospital locations; (7) failure of Managed Care

Support Contractors to maintain claims data, preventing TRICARE from

accessing this data; (8) use of erroneous formulae that resulted in incorrect

calculations; (9) comparison of incomplete outpatient service categories;

(10) comparison of “averages” that were not accurate; and (11) failure to

address and account for unique hospital (as opposed to physician offices)

accounts.

Plaintiffs allege that the Kennel Study was the analysis defendant mentioned in the Notice

as the basis for its conclusion that “[i]n all cases, except radiology services, TRICARE

payments for hospital outpatient services were either comparable to what Medicare would

have paid [prior to instituting its OPPS rate] or TRICARE paid more.” Plaintiffs allege that

plaintiffs mistakenly believed this conclusion was correct at the time they received the

Payment Adjustment Worksheet. Plaintiffs also have pled that this mistaken belief

constituted a basic assumption underlying the contract and had a material effect on the

bargain, on the grounds that the waiver of additional possible causes of action related to

non-radiology hospital services by the signing hospitals could have constituted the

consideration received by the defendant to support the Second Alleged Contract. See

C.H. Robinson Intern. v. United States, 64 Fed. Cl. 651, 661 (2005) (finding, in case

involving an agreement by plaintiff to pay a mitigated penalty to government agency in

exchange for waiving the right to judicial review of the agreement, that the parties’

mistaken belief about plaintiff’s potential maximum liability could have been a basic

assumption underlying the contract and have had a material effect on the nature of the

bargain).

Thus, the only remaining issue is whether plaintiffs have sufficiently pled that the

Second Alleged Contract did not place the risk of the alleged mistake on plaintiff Ingham.

The information needed to assess the size of what plaintiffs thought was the amount of

consideration they offering defendant when signing the Release was in the hands of the

hospitals. Moreover, in the Release, plaintiff Ingham agreed to release all claims:

on account of or arising out of or resulting from or in any way relating to

payments, reimbursements, adjustments, recoupments, or any other

means of compensation by Releasees made at any time for outpatient

services rendered to TRICARE beneficiaries by Releasor prior to the date

Releasor became subject to the TRICARE Outpatient Prospective Payment

System (“OPPS”), or December 31, 2010 if Releasor was never subject to

the TRICARE OPPS.

45

(emphasis added). Thus, the Release was not limited to payments for radiology services

but included all non-radiology outpatient services as well. Further, the release also

explicitly waived any “UNKNOWN CLAIMS” that the hospitals may have had.

(capitalization in original). Therefore, the language of the Release placed the burden of

defining and raising any issues related to payments for non-radiology outpatient services

during the Relevant Period, including those unknown prior to the time the Release was

signed, on the hospitals which signed the Release. While plaintiffs allege that they never

received a copy of the Kennel Study until after the Payment Adjustment Worksheets had

been sent to them, the breadth of the release makes this immaterial. Because plaintiff

Ingham admittedly signed the Release, plaintiffs have failed to sufficiently plead that

Ingham did not bear the risk of mistake related to the amounts potentially owed by the

defendant for non-radiology outpatient services. Therefore, plaintiffs’ claims under Count

III of their amended complaint related to plaintiffs’ alleged mistakes must be dismissed.

Count IV: Breach of the Covenant of Good Faith and Fair Dealing

In Count IV of plaintiffs’ amended complaint, plaintiffs allege that defendant’s

actions violated the implied covenant of good faith and fair dealing. In particular, plaintiffs

allege that, after the Represente

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