Appalachian Regional Healthcare, Inc. v. Coventry Health & Life Insurance

RECOMMENDED FOR FULL-TEXT PUBLICATION

Pursuant to Sixth Circuit I.O.P. 32.1(b)

File Name: 13a0118p.06

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

_________________

APPALACHIAN REGIONAL HEALTHCARE, INC. X

-

-

and ARH MARY BRECKINRIDGE HEALTH

SERVICES, INC., -

Plaintiffs-Appellees, -

Nos. 12-5779/5785

,

>

-

-

v.

-

-

COVENTRY HEALTH AND LIFE INSURANCE

-

-

COMPANY (12-5779); COMMONWEALTH OF

-

KENTUCKY, CABINET FOR HEALTH AND

-

FAMILY SERVICES and AUDREY HAYNES,

-

sued as, “Secretary, Cabinet for Health and

Family Services” (12-5785), -

Defendants-Appellants. N

Appeal from the United States District Court

for the Eastern District of Kentucky at Lexington.

No. 5:12-cv-00114—Karl S. Forester, District Judge.

Argued: January 17, 2013

Decided and Filed: April 24, 2013

Before: SILER, GRIFFIN, and STRANCH, Circuit Judges.

_________________

COUNSEL

ARGUED: Amy D. Cubbage, McBRAYER, McGINNIS, LESLIE & KIRKLAND,

PLLC, Lexington, Kentucky, for Appellant in 12-5779. Christina M. Heavrin,

CABINET FOR HEALTH AND FAMILY SERVICES, Frankfort, Kentucky, for

Appellants in 12-5785. Stephen R. Price, Sr., WYATT, TARRANT & COMBS,

Louisville, Kentucky, for Appellees. ON BRIEF: Amy D. Cubbage, Stephen G. Amato,

Jason S. Morgan, McBRAYER, McGINNIS, LESLIE & KIRKLAND, PLLC,

Lexington, Kentucky, for Appellant in 12-5779. David Brent Irvin, CABINET FOR

HEALTH AND FAMILY SERVICES, Frankfort, Kentucky, for Appellants in 12-5785.

Stephen R. Price, Sr., Carole D. Christian, John W. Woodard, Jr., Allison Brown

Vermilion, WYATT, TARRANT & COMBS, Louisville, Kentucky, for Appellees.

1

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OPINION

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JANE B. STRANCH, Circuit Judge. This appeal arises from Kentucky’s

transition to the managed-care model of service delivery for its Medicaid program,

through which more than half-a-million indigent residents receive healthcare coverage.

Kentucky awarded Coventry Health and Life Insurance Company, a managed-care

organization, a contract to administer Medicaid services in southeastern Kentucky.

Coventry, in turn, entered into a temporary agreement with Appalachian Regional

Healthcare, the dominant hospital care provider in that area, to provide its members in-

network hospital care and other services in Appalachian’s facilities.

Soon after the transition occurred in November 2011, Coventry realized it was

losing money on its deal with the state. This was partly because Kentucky required that

Coventry’s network include Appalachian, whose patients, on average, were sicker and

more expensive to treat. Coventry also learned that not all of its competitors were

required to contract with Appalachian. Coventry pressed state policymakers to increase

its payment rates. Finding no success, it noticed termination of Appalachian’s contract,

which would have made thousands of low-income Medicaid recipients unable to access

their healthcare providers at Appalachian’s facilities without first paying (often costly)

fees.

Appalachian sued Coventry and various state defendants to prevent termination

of its contract. The district court issued a preliminary injunction that required Coventry

to keep Appalachian in its network for four months longer than the contract specified.

This order expired on November 1, 2012. The court also denied Coventry’s motion to

require Appalachian to post a security bond. Coventry and the state defendants appeal

from the injunction. Coventry alone appeals from the bond denial. Because no

recognized exception enables us to review the expired injunction, we DISMISS AS

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MOOT the parties’ appeal as to it. And because the district court did not abuse its

discretion in denying bond, we AFFIRM that order.

I. BACKGROUND

For many years, Kentucky provided medical care to its poorest citizens through

Medicaid, a cooperative federal-state funding program, using a traditional fee-for-service

model. See generally 42 U.S.C. § 1396-1. Under it, a state is directly responsible for

paying providers for services that Medicaid beneficiaries receive according to a fee

schedule the state sets. See id. § 1396a(a)(30)(A). But in November 2011—in response

to ballooning Medicaid costs and resulting pressures on the state’s budget—Kentucky

decided to scuttle its fee-for-service plan and transitioned to a managed-care program.

The theory of managed care is relatively simple. Rather than pay providers

directly every time a Medicaid beneficiary receives care, the state instead contracts with

managed-care organizations (MCOs) and pays them a flat “capitation rate” each month

to provide, within certain limits, all of the care a beneficiary needs. The state pays the

same amount regardless of whether the beneficiary receives healthcare services or not.

So the MCO bears the risk that the costs of care may exceed the capitation payment. But

on the other side, it stands to profit if beneficiaries use fewer services.

In exchange for receiving a capitation payment, an MCO is responsible for three

principal tasks: enrolling Medicaid beneficiaries as members; forming a contracted

network of healthcare providers to care for its members; and paying providers for their

services. An MCO then directs its members to in-network providers, with whom the

MCO has negotiated discounted rates. When members go out-of-network, they receive

only limited benefits and may pay more for services.

Echoing managed care’s many proponents, Kentucky decided that injecting

market-based principles into the Medicaid payment model would improve healthcare

access and quality by eliminating unnecessary care, enhancing coordination among

providers, emphasizing preventative care, and promoting healthy lifestyles. Kentucky

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also assumed it would save the state money. But see Michael Sparer, Medicaid managed

care: Costs, access, and quality of care, Robert Wood Johnson Foundation

(Sept. 2012), http://www.rwjf.org/content/dam/farm/reports/reports/2012/rwjf401106

(examining peer-reviewed academic literature on the effects of Medicaid managed care

and finding lower-than-expected fiscal savings, a mixed impact on access to care, and

scant evidence of quality-of-care improvements) (last visited April 23, 2013).

Kentucky obtained permission in September 2011 from the Centers for Medicare

and Medicaid Services (CMS), the federal agency that administers the Medicaid

program, see 42 U.S.C. § 1316(a)(1), to transition to managed care. To implement the

plan, the Cabinet contracted with three MCOs—Coventry, Kentucky Spirit, and

Wellcare—to administer Medicaid benefits to more than 560,000 Kentuckians. The

MCOs were to operate in seven of eight Medicaid regions into which the state is

subdivided. The Medicaid region involved in this case, Region 8, consists of nineteen

counties in eastern and southeastern Kentucky that are among the most

economically depressed, underserved, and medically needy in the Commonwealth.

(They include Bell, Breathitt, Clay, Floyd, Harlan, Johnson, Knott, Knox, Laurel, Lee,

Leslie, Letcher, Magoffin, Martin, Owsley, Perry, Pike, Whitley, and Wolfe counties.)

During the initial implementation phase in November 2011, the Cabinet assigned

each Medicaid beneficiary to one of the three contracted MCOs. See 907 Ky. Admin.

Regs. 17:010 § 1(5). Beneficiaries could change their assigned MCO, but only during

the first 90 days after they were assigned or annually during an open-enrollment period.

Id. § 1(12)(a). Outside of these times, however, a beneficiary could only switch MCOs

“for cause.” This would occur, for example, if a beneficiary lacked access to covered

services or qualified providers. Id. § 7(7)(g). The timeliness of a “for cause” transfer

to another MCO was not guaranteed, though, as the process could take more than 60

days. Id. § 2(6)(a).

A raft of federal and state statutes and regulations, as well as the terms of each

MCO’s agreement with the Cabinet, create reciprocal obligations between MCOs, the

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Cabinet, and the federal government. Two are relevant here. The first are the so-called

network-adequacy requirements, which obligate an MCO to maintain a provider network

that guarantees certain services are accessible to its members within specified times or

distances from their homes. Network-adequacy requirements are found in federal and

state law. See, e.g., 42 C.F.R. § 438.206(b)(1)(v); 907 Ky. Admin. Regs. 17:015

§§ 2(3)(a), (7). Kentucky’s contract with Coventry incorporates several of these

network-adequacy requirements. And it also requires Coventry to “strictly adhere to all

applicable federal and Commonwealth law (statutory and case law), regulations and

standards.” The second obligation relevant in this case requires providers to be paid on

a timely basis for claims submitted to MCOs. See, e.g., 42 U.S.C. § 1396n(b)(4); Ky.

Rev. Stat. § 304.17A-702. Like the network-adequacy requirements, the prompt-pay

requirements also are incorporated into Kentucky’s MCO contracts.

The Cabinet entered into an MCO agreement with Coventry in July 2011.

Among other things, the agreement required Coventry to establish a provider network

to deliver healthcare services to approximately 64,000 beneficiaries in Region 8. To

build its network, Coventry contracted with Appalachian, which provided healthcare to

an estimated 25,000 beneficiaries in that region. Coventry and Appalachian entered into

a temporary agreement that allowed Coventry’s members there to receive care at

Appalachian’s facilities while the two parties negotiated a more complete contract. The

temporary agreement was set to expire on June 30, 2012, but allowed the parties to

continue it beyond that date or terminate it on 30 days’ notice.

The temporary agreement included three provisions pertinent to this appeal. The

first required Appalachian and Coventry to “recognize and abide by all applicable

Commonwealth and federal laws, regulations and guidelines,” which the agreement

“incorporate[d] by reference.” The second relevant provision mirrored the statutory

prompt-pay requirements described above and obligated Coventry to pay claims within

30 days of receipt. And the third was a continuation-of-benefits clause that protected

certain Coventry members from interruptions in their healthcare in the event the

agreement was terminated. This clause required Appalachian to continue providing

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services to Coventry members who were hospitalized or receiving treatment when the

agreement was terminated, and women who were four or more months pregnant.

The temporary agreement went into effect on November 1, 2011. Coventry and

Appalachian ultimately failed to negotiate a full contract. On March 29, 2012—less than

five months after the managed-care transition occurred, but long after the initial 90-day

period during which Coventry members could switch to another MCO without

cause—Coventry notified Appalachian that it intended to terminate the temporary

agreement on May 4, 2012.

The parties’ inability to come to an agreement was not simply a matter of

hardened bargaining positions. As Coventry explained, the dispute was a by-product of

the company’s mounting troubles with Kentucky, which centered on Coventry’s belief

that the Cabinet was playing favorites with Kentucky Spirit, a competitor MCO.

Initially, when Coventry was establishing its provider network in Region 8, it was told

that it had to include Appalachian in its network to meet Kentucky’s network-adequacy

standards. Coventry assumed its competitors had to do the same, but it was wrong: the

Cabinet did not require Kentucky Spirit to do so.

Coventry was not pleased when it learned of this. The reason for its discontent

was that Appalachian’s Medicaid patients were sicker than other Medicaid patients in

Region 8, which meant they cost more to care for. Having Appalachian in its network

caused Coventry to lose money, as the capitation rate it negotiated with Kentucky was

insufficient to cover the costs of these members’ care. And it meant Coventry was

disadvantaged relative to a competitor MCO like Kentucky Spirit that was not required

to cover—and pay the higher cost of caring for—Appalachian’s sicker patients.

Coventry importuned policymakers to fix the problem. In a letter to Kentucky

Governor Steven L. Beshear written on April 10, 2012, Coventry complained that the

Cabinet’s unequal treatment of MCOs created an “uneven playing field,” resulting in “an

unprecedented shift of higher-risk members to Coventry” that allowed Kentucky Spirit

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to “game the system” for “an unfair advantage.” Coventry warned that “the continued

viability of the Medicaid managed care program is at stake.”

When the time came to negotiate with Appalachian, Coventry did not hesitate to

lay its dispute with the Commonwealth at Appalachian’s feet. Kentucky’s “failure to

ensure that all MCOs meet the same robust standards for network adequacy,” Coventry

told Appalachian, “is at the heart of [Appalachian’s] problem.” Coventry’s stratagem

was to put Appalachian in the middle of its fight with the Cabinet to pressure

policymakers to solve Coventry’s financial problems.

Appalachian sued Coventry, the Cabinet, and the Secretary on April 16, 2012,

alleging numerous claims, including state-law contract and tort claims, and violations

of state and federal prompt-pay laws and network-adequacy requirements. Days later,

Coventry reiterated that it would “not contract with [Appalachian] until we can get the

Commonwealth to do the right thing.” Coventry threatened that the lawsuit would be

“an enormous drain for Appalachian.”

On May 1, 2012, Appalachian moved to enjoin Coventry from terminating the

temporary agreement. It asked the court to order Coventry to maintain Appalachian

facilities in its network or to preauthorize its members to receive out-of-network

treatment in them, and to direct Coventry to comply with its contractual prompt-pay

obligations. Appalachian argued that Coventry’s termination of the agreement was

impermissible because it left Coventry with an inadequate provider network under state

and federal law, which in turn breached the agreement’s requirement that both parties

comply with those laws. Appalachian also charged that Coventry was in violation of the

agreement’s continuation-of-benefits provision because it refused to preauthorize

services for pregnant Appalachian patients that the provision protected.

The court held a day-long evidentiary hearing on the preliminary injunction

that focused on the adequacy of Coventry’s network without Appalachian. On June 20,

2012, it issued a lengthy order granting in part Appalachian’s motion. Critical to this

appeal, the court concluded that Appalachian showed a likelihood of success on its

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breach-of-contract claim due to Coventry’s alleged breaches of network-adequacy

requirements incorporated into the agreement, the agreement’s prompt-pay requirements,

and its continuation-of-benefits provision.

Without the injunction, the court worried, Medicaid beneficiaries in Region 8

would “be cut off from their life-long physicians and hospitals” and have no opportunity

to learn about the choices they had to receive care after the agreement terminated. So

the injunction did two things. It extended the temporary agreement to November 1,

2012, so beneficiaries could switch to a new MCO without cause during the open

enrollment period. And it directed Coventry to furnish Appalachian a list of certain

Coventry members so Appalachian could explain to those individuals how to continue

to receive care in Appalachian facilities after the agreement expired.

As the district court made no provision for bond in granting the injunction,

Coventry moved to require one pursuant to Federal Rule of Civil Procedure 65(c). After

Coventry and Appalachian briefed the matter, the court denied the motion. It reasoned

that the injunction would result in “little, if any” harm to Coventry because Coventry had

voluntarily agreed during the injunction proceedings to maintain Appalachian as a

preauthorized, out-of-network provider through November 1, 2012, and to pay

Appalachian the rates spelled out in the temporary agreement for services provided

under its continuation-of-care clause.

Coventry now appeals from both the preliminary injunction and the motion

denying bond. The Cabinet contests only the injunction.

II. ANALYSIS

A. Mootness

“The case or controversy requirement in Article III of the Constitution

determines the power of the federal courts to entertain a suit[.]” ACLU v. Nat’l Sec.

Agency, 493 F.3d 644, 688 (6th Cir. 2007) (Gibbons, J., concurring). “We have no

power to adjudicate disputes which are moot.” McPherson v. Mich. High Sch. Athletic

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Ass’n, Inc., 119 F.3d 453, 458 (6th Cir. 1997) (en banc) (internal quotation marks

omitted). A case is moot “when the issues presented are no longer live or the parties

lack a legally cognizable interest in the outcome.” Hodges v. Schlinkert Sports Assocs.,

Inc., 89 F.3d 310, 312 (6th Cir. 1996) (internal quotation marks omitted). When an

injunction order expires, there generally is nothing for an appellate court to review.

Because the preliminary injunction here expired by its terms on November 1,

2012, a challenge to its issuance is moot unless a recognized exception applies. In

response to our request for supplemental briefing on the question of mootness (which the

parties did not initially address), the state defendants concede that their appeal is moot.

Coventry, however, seeks shelter under the exception that permits courts to hear moot

cases involving injuries that are “capable of repetition, yet evad[e] review.” See

Weinstein v. Bradford, 423 U.S. 147, 149 (1975) (per curiam). To fit within the

exception, a challenged action must satisfy two requirements. See Sandison v. Mich.

High Sch. Athletic Ass’n, Inc., 64 F.3d 1026, 1030 (6th Cir. 1995). First, it must be too

short in duration to be fully litigated before it ceases. Id. Second, there must be a

reasonable expectation that the same parties will be subjected to the same action again.

Id.

The action challenged here is a court order that required Coventry to maintain

a contractual relationship with Appalachian for four months longer than Coventry had

agreed. Whether this duration meets the first prong of the exception is irrelevant

because Coventry cannot satisfy the second one. Coventry argues that it reasonably

expects to be forced into unnegotiated contractual relationships with other hospitals in

the future because the injunction Appalachian obtained has encouraged other dissatisfied

providers with which Coventry contracts to consider similar legal tactics to gain

negotiating leverage against Coventry. Indeed, the district court recently granted one

hospital’s motion to intervene in Appalachian’s case against Coventry. By Coventry’s

lights, this portends that others will follow suit and that the district court will issue

further injunctions.

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But Coventry’s argument fails because our precedents require Coventry to show

that Appalachian—not just any other healthcare provider—will subject Coventry to the

same objectionable action. See Chirco v. Gateway Oaks, LLC, 384 F.3d 307, 309 (6th

Cir. 2004) (“When the suit involves two private parties . . . the complaining party must

show a reasonable expectation that he would again be subjected to the same action by

the same defendant.”). But see Libertarian Party of Ohio v. Blackwell, 462 F.3d 579,

600 (6th Cir. 2006) (describing an exception to the “same party” requirement in the

election-law context). Because Coventry and Appalachian no longer have a contract, no

realistic possibility exists that a court will again enjoin Coventry from breaching its

contract with Appalachian. Coventry is not required to contract with Appalachian, so

the acrimonious dealings that led this appeal are not likely to be repeated.

Further, Coventry has not shown that a court is likely to grant other hospitals’

requests to enjoin Coventry’s termination of their provider agreements. Nor has it

explained why the circumstances animating the injunction here—extending the

contract’s duration to line up its expiration with the window during which Medicaid

beneficiaries can easily transfer to another MCO—will present again. Another

provider’s intervention in Appalachian’s suit is a far cry from an unlawful injunction.

“Should this court be confronted with repeated controversies of this nature . . . it could

determine that the dispute truly was capable of repetition, yet evading review.”

McIntyre v. Levy, No. 06-5989, 2007 WL 7007938, at *1 (6th Cir. Aug. 1, 2007) (order)

(internal quotation marks omitted). As it stands, Coventry’s augury isn’t enough.

In sum, the exception to mootness that enables parties to challenge actions that

are capable of repetition but evade review does not apply here. The expired injunction

the parties’ appeal is moot, which takes away our power to evaluate it.

B. Motion for bond

Coventry also appeals the district court’s denial of its motion for bond. A district

court abuses its discretion in setting a bond amount when it applies the wrong legal

standard, applies the right standard incorrectly, or relies on clearly erroneous factual

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findings. USACO Coal Co. v. Carbomin Energy, Inc., 689 F.2d 94, 100 (6th Cir. 1982);

Paschal v. Flagstar Bank, 297 F.3d 431, 434 (6th Cir. 2002).

A court may issue a preliminary injunction “only if the movant gives security in

an amount that the court considers proper to pay the costs and damages sustained by any

party found to have been wrongfully enjoined.” Fed. R. Civ. P. 65(c). While this

language appears to be mandatory, “the rule in our circuit has long been that the district

court possesses discretion over whether to require the posting of security.” Moltan Co.

v. Eagle-Picher Indus., Inc., 55 F.3d 1171, 1176 (6th Cir. 1995) (citing Roth v. Bank of

the Commonwealth, 583 F.2d 527, 539 (6th Cir. 1978)) (emphasis added). A court errs

when it “fail[s] to . . . expressly consider[] the question of requiring a bond” when the

issue has been raised. Roth, 583 F.2d at 539; accord NACCO Materials Handling Grp.,

Inc. v. Toyota Materials Handling USA, Inc., 246 F. App’x 929, 953 (6th Cir. 2007).

Otherwise, it has “broad discretion in setting the bond amount.” Static Control

Components, Inc. v. Lexmark Int’l, Inc., 697 F.3d 387, 400 (6th Cir. 2012).

There is little doubt that the district court here considered Coventry’s bond

request. Coventry asked the court to require Appalachian to post bond two days after

the injunction issued, Appalachian opposed the motion, and the court issued a two-page

denial. The court reasoned that,

based on the record as well as the evidence and argument presented at the

preliminary injunction hearing on June 12, 2012, the Court has

previously determined that Coventry will suffer “little, if any” harm as

a result of the injunction due to the fact that the preliminary injunction

simply requires Coventry to maintain the contractual obligation it

voluntarily entered into.

Undoubtedly, the court below considered the bond issue. The real issue is whether the

court below relied on erroneous factual findings—and so abused its discretion—when

it concluded that Coventry was unlikely to suffer harm from the injunction because that

order merely memorialized an obligation Coventry had already made. The court was

wrong to characterize the injunction in this way, as that order clearly required Coventry

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to do more than what it had agreed to voluntarily. Given the circumstances, though, this

was not reversible error.

The preliminary injunction required Coventry to “maintain the status quo until

November 1, 2012, including paying [Appalachian] in-network rates,” which the

temporary agreement set at 100% of Kentucky’s Medicaid fee schedule for most

services. Absent the injunction, Coventry would pay claims at the in-network rate only

until June 30, 2012. After that, Coventry says, it would pay Appalachian as an out-of-

network provider at 90% of the fee schedule. The bottom line for Coventry is that the

injunction required it to pay more in claims that it otherwise would have from June 30,

2012, to November 1, 2012.

We might be inclined to agree with Coventry’s position if it were a practical

certainty that Coventry would pay the lower rate during this four-month period. But it

is not. Coventry certainly offered to pay the lower rate when it unsuccessfully

negotiated with Appalachian over a full agreement. The trouble is that Appalachian

never accepted this offer, nor did it have to.

To the contrary, Appalachian submitted that without a contract, it should be paid

on a quantum meruit basis for the reasonable value of its services. It forecasts that this

will be greater than its current contract rates with Coventry, which do not cover the costs

of Appalachian’s services. See, e.g., Cherry v. Augustus, 245 S.W.3d 766, 779 (Ky.

App. 2006) (describing quantum meruit as “an equitable doctrine granting one who has

rendered services in a quasi-contractual relationship the reasonable value of services

rendered” (internal quotation marks omitted)). Indeed, from the start of this litigation,

Appalachian has sought a declaration from the court that it was entitled to recover the

reasonable value of its services. And though the district court recently ruled that

Appalachian is entitled to be compensated for the reasonable value of its services, it has

not yet determined what that value might be.

Against this backdrop—with Appalachian’s claim to a higher rate than it

received under the temporary agreement still undecided, and with Coventry showing

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only that the lower rate was a rejected offer—the district court did not rely on clearly

erroneous factual findings in denying Coventry’s bond motion. Coventry’s assertion that

it would pay less is speculative at best.

The content of Coventry’s bond request supports this conclusion. Although no

rule formally requires it, a party seeking a security bond regularly estimates the damages

it will suffer if it complies with a preliminary injunction. This serves three purposes.

It gives the party seeking the injunction a sense of its liability if the injunction is later

found to have been unlawful. It provides the court with a basis to set the proper amount

(though not necessarily a definitive one). And it furnishes an appellate court with a

marker against which to review the district court’s determination (though, again, not

necessarily an exclusive one).

Here, Coventry could have estimated the costs of complying with the injunction

by, for example, totaling up the difference between in-network rates and out-of-network

rates for services Appalachian provided to Coventry’s members over a prior four-month

period. Instead, the proposed order for bond that Coventry submitted to the district court

featured a blank line in place of a dollar amount. Presented with no estimate of

Coventry’s potential damages to rebut Appalachian’s argument that it was entitled to

more money during this period, the court concluded that “little, if any” harm was shown,

and denied the bond motion. Given these circumstances, the district court did not abuse

its discretion.

III. CONCLUSION

For these reasons, we DISMISS AS MOOT the parties’ appeal of the

preliminary injunction order and AFFIRM the district court’s denial of Coventry’s bond

motion.