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North Cypress Medical Center Operating Company, Ltd. v. Aetna Life Insurance Co.

United States Court of Appeals, Fifth Circuit

July 31, 2018

NORTH CYPRESS MEDICAL CENTER OPERATING COMPANY, LIMITED; NORTH CYPRESS MEDICAL CENTER OPERATING COMPANY GP, L.L.C., Plaintiffs-Appellees Cross-Appellants,
v.
AETNA LIFE INSURANCE COMPANY, Defendant-Appellant Cross-Appellee.

          Appeals from the United States District Court for the Southern District of Texas

          Before SMITH, WIENER, and WILLETT, Circuit Judges.

          DON R. WILLETT, CIRCUIT JUDGE.

         Under Aetna's insurance plans, patients are responsible for a portion of their bills. That is not to say insurance companies are off the hook: They cover the remainder. But how much is Aetna obligated to pay for medical services provided to its members by an out-of-network hospital?

         Houston medical services provider North Cypress Medical Center Operating Co., Ltd. and North Cypress Medical Center Operating Co. GP, LLC (collectively "NCMC") alleged Aetna underpaid out-of-network providers like NCMC in violation of the Employee Retirement Income Security Act of 1974 ("ERISA") and Texas law.

         Aetna fired back-it counterclaimed, alleging NCMC fraudulently and negligently misrepresented its billing practices by routinely waiving patient responsibilities yet billing Aetna for the total out-of-network cost.

         The result was a stalemate-each party fared no better than when they filed their claims. The district court granted Aetna judgment as a matter of law on NCMC's ERISA claims and granted NCMC judgment as a matter of law on Aetna's fraud and negligent misrepresentation counterclaims. And a jury found in favor of Aetna on NCMC's remaining state law claims.

         We AFFIRM in part and REVERSE in part and REMAND.

         I. Background

         The Byzantine complexity of the United States health care "system" can bamboozle even the savviest of consumers. So perhaps some foundation is helpful.[1]

         A. Aetna's Insurance Plans

         Aetna is a managed care company that offers insurance, administrative services, and health care benefit plans, including employer-sponsored welfare benefit plans governed by ERISA, 29 U.S.C. § 101 et seq. As third-party plan administrator, it details its obligations and rights in "Administrative Service Agreements." Each benefit plan's terms of coverage describe the services covered and how Aetna calculates reimbursement rates.

         Plans can be, and commonly are, sponsored by employers. When that is the case, plans generally fall under one of two categories: "fully insured" or "self-funded." Under fully insured ERISA plans, Aetna acts as a direct insurer; it guarantees a fixed monthly premium for 12 months and bears the financial risk of paying claims. But under self-funded ERISA plans, Aetna acts only as a third-party administrator; the employer is responsible for paying claims and bearing the financial risk. Either way, Aetna plays a key role in its plans. Aetna administers the plans by processing and adjudicating claims and recovering overpayments. And employees contribute by paying monthly premiums. Ultimately, Aetna maintains discretion to construe the plan terms and determine available benefits.

         Aetna also organizes a network of providers and negotiates rates for health care services. In the Houston area, its network extends to 108 hospitals. In-network providers contract with Aetna to provide services at pre-arranged reimbursement rates in exchange for access to Aetna's members as patients. Out-of-network providers do not; they have no contract with Aetna and instead set their own fees for services. When members seek treatment from either provider, they are often still responsible for copayments, deductibles, or coinsurance.

         So Aetna members have a choice-they can seek treatment from medical providers that are either inside or outside Aetna's network. But this choice comes with strings attached; members may pay more for out-of-network providers.[2] This arrangement, Aetna says, helps control medical costs. In essence, incentivizing its members to seek medical treatment from in-network providers at pre-negotiated rates results in predictable, manageable expenses.

         B. The Claims Process

         When Aetna members seek medical services from a provider, the provider then looks to Aetna to reimburse a portion of the expense. Service providers submit their claims to Aetna using standard "UB-04" forms. On that form, providers use a standardized code, called "Current Procedural Terminology" ("CPT"), to show what services they provided. Aetna uses these codes to determine how much of the claim is covered by its plans. To patients, this process is a black box: CPT codes go in, Aetna's payment comes out. Patients do not know what they owe a provider for medical services until Aetna adjudicates the claim.

         Once Aetna determines a service is covered, it determines the "allowed amount." Ultimately, Aetna does not pay the claim at face value; it pays only this allowed amount. Aetna retains discretion to determine the allowed amount. Plans allow Aetna to set the allowed amount for out-of-network claims based on the "usual, customary, and reasonable" ("UCR") rate or in proportion to Centers for Medicare/Medicaid Services ("CMS") rates. The UCR is divorced from what a provider bills. In this case, the allowed amount was treated as the UCR rate, even if plans may have provided for a different calculation.

         For its self-funded plans, Aetna has another option. It can process out-of-network claims through its National Advantage Program ("NAP"). NAP is a network of multiple entities, including Global Claims Services ("GCS"), a wholly owned Aetna subsidiary, and Multi-Plan, a third-party "rental" or "wrapper" network. GCS negotiates with out-of-network providers to price claims on a claim by claim basis. And Multi-Plan contracts with out-of-network providers and payors like Aetna to create a supplementary network, allowing for mass-negotiated repricing. Both entities discount a provider's billed amount to determine the allowed amount.

         C. NCMC and its Billing Practices

         NCMC, a physician-owned, full-service hospital, opened in Houston in January 2007. It offers a plethora of medical services you would expect from a full-service hospital-emergency room, surgery center, oncology unit, pediatrics unit. NCMC granted ownership interests to physicians, and sought patient-referrals from its physician owners. Some of those physicians were under contract with Aetna to provide in-network care to patients through separate practices. Over 500 physicians have admission privileges at NCMC, and about 140 have an ownership stake.

         NCMC treats thousands of patients, including Aetna members, but it does not offer in-network care with Aetna.[3] Before it opened, NCMC unsuccessfully applied to be an Aetna participating provider. As a result, NCMC lacks a participating provider agreement with Aetna dictating reimbursement rates for services provided to Aetna members. After it was denied, NCMC informed Aetna it would operate as an out-of-network facility.

         Proving itself an able market competitor, NCMC offered a "prompt pay discount" program to patients. NCMC insists this program was not publicly advertised, and the discount applied only to elective procedures. Out-of-network patients were first notified of the discount at registration-they were assured they would pay no more than they would at an in-network facility. This hooked patients on NCMC.

         This program permitted out-of-network patients to discount their coinsurance obligation if they paid their bill within 120 days.[4] Ordinarily, NCMC calculates the total cost of care based on its master list of charges called the "Chargemaster."[5] Without the discount, an Aetna patient may be responsible the cost of services at NCMC as an out-of-network facility, sometimes 50% of the total cost.

         Rather than bill patients for the full out-of-network rate, NCMC calculated a much lower amount under its prompt pay discount. NCMC first calculated a patient's in-network cost based on information provided by Aetna. NCMC estimated the in-network price at 125% of the Medicare rate. Then NCMC collected only the patient's responsibility under the in-network coinsurance rate rather than the out-of-network rate.[6] If the patient paid that amount within 120 days, NCMC discounted the remaining balance. Otherwise, NCMC reversed the discount and billed the patient for her full responsibility. NCMC believed that by reducing the total amount owed in this fashion, the discount incentivized patients to-as the name implies-promptly pay their bills.

         Yet the amount NCMC reported to Aetna remained unchanged. NCMC submitted its UB-04 forms just like it would for any insurer. NCMC calculated its "Total Charges" in Box 47 of the claim form based on its Chargemaster prices, excluding its prompt-pay-discount formula. In other words, the forms did not otherwise report what amount NCMC billed out-of-network patients. But they did note a "prompt pay discount" in Box 80 of the claim forms, which provided a space for "Remarks."

         NCMC submitted over 44, 000 forms this way between 2009 and 2013. Aetna processed 90% of NCMC's claims from self-funded plans through NAP between 2007 and 2012. In doing so, Aetna relied on GCS and Multi-Plan to negotiate "Repricing Agreements" to determine the allowable amounts. These agreements paid NCMC's claims more quickly, but at a discounted rate. The discounted charges were then considered the "allowed" charge. In a sense, this process formed a symbiotic relationship between Aetna and NCMC; by processing claims this way, Aetna collected a "savings fee" from the employer-sponsor's account.

         D. Aetna's Response

         Aetna was, and remains, skeptical of NCMC's discount program.

         NCMC informed Aetna about its prompt pay discount early and often. Between January 2007 and April 2009, NCMC sent monthly letters to Aetna advising it of the prompt pay discount. The letters explained that Aetna's members "will be eligible to participate in the NCMC Prompt Payment Out-of-Network Discount Policy on patients['] responsibility amounts for services and items rendered."

         Aetna responded. In January 2007, Aetna wrote that it "appreciates the courtesy" NCMC offered to Aetna members. But it also warned NCMC of its obligations under Texas Insurance Code § 1204.055; Aetna worried NCMC's discount was a "fee-forgiving" discount in violation of the Code.

         Yet NCMC was relentless in keeping Aetna up to speed. Even after it received Aetna's response, NCMC continued to send its monthly letters. Once again, Aetna responded in April 2009, reiterating its appreciation and again reminding NCMC of its obligations under Texas Insurance Code § 1204.055. Aetna also prompted NCMC that members must be responsible for their out-of-network benefits. Needless to say, the discount raised some red flags.

         So Aetna investigated NCMC after it first received notice of the discount. In a November 2007 letter, Aetna accused NCMC of "routinely waiv[ing] deductible and co-insurance and the out-of-network penalty for which our members are normally responsible." NCMC denied it waived patient co-payment amounts, but it admitted to the prompt pay discount. The discount, according to NCMC, motivated prompt settlement of accounts. Apparently satisfied, Aetna closed its investigation and noted that NCMC did not "waive deductibles and co-insurance" or any co-pay amounts.

         Still, Aetna's comprehensive efforts to get to the bottom of NCMC's billing practices did not end there. In March 2008, Aetna reopened the investigation. That same month, Aetna's Special Investigations Unit ("SIU") apparently confirmed NCMC's discount involved patient's paying in-network responsibilities. Yet Aetna's SIU once again cleared NCMC, finding that "it does not appear that North Cypress Medical Center routinely waives the out-of-network penalty nor forgives co-insurance." Even so, Aetna's SIU continued the investigation over a six-year period, flagging NCMC claims to manually scrutinize invoices for fraudulent waiver of patient-responsibility amounts. Despite this added scrutiny, Aetna never denied an NCMC claim for fee-forgiveness, and it never found evidence of fraud.

         Aetna was still worried that NCMC's submitted claims "greatly exceeded those of other local providers." In August 2012, Aetna dismissed NCMC from the NAP claims process and began adjudicating its claims in-house using the UCR under the terms of its health plans rather than the negotiated rate determined by NAP's repricing agreements with NCMC. NCMC believes this caused a drastic reduction in the payment of claims submitted to Aetna.

         E. The District Court Proceedings

         On February 12, 2013, NCMC sued Aetna. NCMC alleged Aetna violated ERISA and Texas law by intentionally under-paying out-of-network providers like NCMC. It argued that Aetna, as an out-of-network provider, was not properly processing NCMC's claims under its plan terms or making a proper determination of the UCR.

         Aetna counterclaimed, alleging common law fraud, negligent misrepresentation related to NCMC's pricing, and unjust enrichment in violation of Texas law. Aetna moved to amend its counterclaims on January 12, 2015 to add claims related to NCMC's kickbacks for referring physicians and unjust enrichment, which the district court denied.

         The district court bifurcated the claims for jury trial.

         First, the court held a five-day bench trial on NCMC's ERISA § 502(a)(1)(B) claim. NCMC argued that Aetna failed to pay under the terms of its plans. Aetna moved for judgment as a matter of law under Rule 52(c), arguing that the assignment of patient rights to NCMC was obtained using illegal means: the prompt pay discount. The court granted Aetna's motion, finding no evidence Aetna (1) abused its discretion in processing claims; (2) failed to comply with plan terms; or (3) otherwise underpaid NCMC on any claim. But the court treated NCMC's discount as lawful, and it found that NCMC advised payors about its program. The court also determined that NCMC was not entitled access to Aetna's database of claims to establish damages. The court therefore dismissed NCMC's ERISA claim.

         Next, the court held a three-week jury trial on both parties' remaining state-law claims. At trial, Aetna's damages expert also testified that Aetna would have paid over $100 million less, had it known the full details of NCMC's "fraudulent scheme." Aetna also offered evidence NCMC compensated physicians for patient referrals. Aetna argued that this evidence showed the full nature of NCMC's scheme, motive, and fraudulent intent. The court rejected Aetna's offer of proof on this matter, finding evidence of NCMC's compensation to physicians both irrelevant and prejudicial.

         At the close of evidence, NCMC moved for judgment as a matter of law under Rule 50(a)(1) on Aetna's fraud and negligent misrepresentation claims. The district court granted NCMC's motion; it found no false information on NCMC's UB-04 forms. The court also explained that NCMC lacked knowledge of any statement's falsity, and NCMC did not intend for Aetna to act on any of its statements. Additionally, the court held that Aetna was not justified in relying on NCMC's statements because Aetna conducted its own internal investigations, had notice of NCMC's discount program, and provided no evidence that it paid more than the UCR, which Aetna had discretion to determine. Finally, the court found no evidence of damages-the court rejected Aetna's damages expert as biased and not reliable as a matter of law.

         The court then sent NCMC's state-law claims to the jury, which returned a verdict in favor of Aetna. The district court entered judgment denying relief to both parties. NCMC moved for attorney fees based on the costs of defending Aetna's counterclaim and prosecuting its affirmative claims. The court denied NCMC's motion.

         Aetna appeals, and NCMC cross-appeals.

         II. Aetna's Appeal

         On appeal, Aetna challenges the district court's ruling in four respects. First, Aetna maintains it sufficiently showed all the elements of its fraud claim, and it at least showed that NCMC negligently misrepresented its billing practices. Thus, Aetna contends, the district court erred in granting NCMC judgment as a matter of law. Second, Aetna argues that the district court erred in excluding its proffered evidence. It believes its expert, excluded as biased and unreliable, was crucial to establishing injury on its fraud and negligent misrepresentation claims. Aetna also maintains the district court erred in excluding "evidence of NCMC's kickbacks to physicians." Finally, Aetna challenges the district court's denial of leave to amend.

         A. Aetna's Fraud and Negligent Misrepresentation Claims

         The district court granted NCMC's Rule 50 motion for judgment as a matter of law on Aetna's fraud and negligent misrepresentation claims. This court reviews a district court's ruling on a motion for judgment as a matter of law de novo, applying the same standard as the district court.[7] Rule 50 entitles a movant to judgment as a matter of law when "a party has been fully heard on an issue . . . and the court finds that a reasonable jury would not have a legally sufficient evidentiary basis to find for the party on that issue."[8]

         In order to survive a Rule 50 motion, "the party opposing the motion must at least establish a conflict in substantial evidence on each essential element of their claim."[9] "Substantial evidence is more than a scintilla, less than a preponderance, and is such relevant evidence as a reasonable mind might accept as adequate to support a conclusion."[10] Evidence is legally insufficient "where the facts and inferences point so strongly and overwhelmingly in favor of the moving party that reasonable jurors could not arrive at a contrary verdict."[11] Evidence is examined as a whole and all inferences are drawn in favor of the non-moving party.[12] "[T]he court may not make credibility determinations or weigh the evidence, as those are jury functions."[13]

         Under Texas law, the elements of fraud are:

(1) that a material representation was made; (2) the representation was false; (3) when the representation was made, the speaker knew it was false or made it recklessly without any knowledge of the truth and as a positive assertion; (4) the speaker made the representation with the intent that the other party should act on it; (5) the party acted in reliance on the representation; and (6) the party thereby suffered injury.[14]

         "Fraud can also occur through non-disclosure of material facts when the non-disclosing party had a duty to disclose."[15] "Material" means "a reasonable person would attach importance to and would be induced to act on the information in determining his choice of actions in the transaction in question."[16] The primary difference between fraud and negligent misrepresentation[17] is that a "negligent misrepresentation claim does not require an actual intent to defraud, only that . . . the party making the false statement acted negligently in doing so."[18]

         The district court found that Aetna failed to establish any element of fraud. More importantly, the district court found no evidence "from which [it] can infer or a jury might infer that Aetna justifiably relied on any information supplied to North Cypress." We agree. Assuming without deciding that Aetna established the other elements of fraud, we find Aetna could not have justifiably relied on any representation by NCMC.

         "Both fraud and negligent misrepresentation require that the plaintiff show actual and justifiable reliance."[19] Reliance is not shown if, based on "a fraud plaintiff's individual characteristics, abilities, and appreciation of facts and circumstances at or before the time of the alleged fraud[, ] it is extremely unlikely that there is actual reliance on the plaintiff's part."[20] A person "may not justifiably rely on a representation if there are red flags indicating such reliance is unwarranted."[21]

         Justifiable reliance "usually presents a question of fact," but "the element can be negated as a matter of law when circumstances exist under which reliance cannot be justified."[22] For example, in a recent case decided by the Texas Supreme Court, Orca Assets, a company formed by an experienced oil-and-gas businessman to acquire unleased acreage, signed an oil-and-gas lease for land that turned out to be already leased.[23] Orca claimed it justifiably relied on statements by JPMorgan, the lessor's agent, that the land was open.[24]But the parties negotiated a written letter of intent that assigned Orca the risk of failure of title, directly contradicting those earlier representations.[25] The court thus concluded that multiple "red flags," plus Orca's sophistication in the oil-and-gas industry, negated any justifiable reliance Orca had on any alleged misrepresentations.[26]

         We have also held that a company's own investigation of the facts may negate "any reasonable reliance upon the supposed misrepresentations."[27] In Highland Crusader Offshore Partners LP v. LifeCare Holdings, Inc., Highland alleged LifeCare and JPMorgan were liable for fraud in representing that all lenders were offered 75 basis points ("bps") when some were offered 125.[28] But Highland had collected information on other lenders and learned that LifeCare and JP Morgan made offers of 125 bps to other lenders before it accepted its offer for 75.[29] Thus, this court found that "no reasonable jury could find that Highland justifiably relied on" the misrepresentation because of "its own investigation of the facts."[30]

         Here, red flags, Aetna's independent investigation, and Aetna's sophistication negate any justifiable reliance Aetna had on NCMC's alleged misrepresentations. Aetna contends that it did not receive information about the discount, but evidence says otherwise. Within three months of NCMC opening, Aetna investigated NCMC's billing practices. Aetna's SIU conducted a six-year investigation and flagged NCMC claims to manually scrutinize invoices for fraudulent waiver of patient-responsibility amounts. Aetna also engaged in repeated audits of NCMC's Chargemaster. And it even filed protests with state agencies responsible for hospital facility oversight. Ultimately, Aetna's investigations resulted in no finding of fraud. More importantly, as early as March 2008, Aetna knew the exact information it alleges NCMC failed to disclose: the rate at which patients paid NCMC for services. Aetna was thus fully aware of the discount.

         Aetna's reliance on any alleged misrepresentation by NCMC was not justifiable. Almost immediately after NCMC notified Aetna of its prompt pay discount, Aetna began investigating. Its investigation revealed NCMC's billing practices. Yet Aetna continued to pay claims marked with the prompt pay discount moniker. Aetna failed to establish a conflict in substantial evidence on this element of its fraud and negligent representation claims.

         B. Aetna's Excluded Evidence

         Aetna argues the district court erred in making two evidentiary decisions: rejecting its damages expert and excluding evidence of NCMC's compensation to physicians for patient referrals. This court reviews evidentiary decisions for abuse of discretion.[31] "A trial court abuses its discretion when its ruling is based on an erroneous view of the law or a clearly erroneous assessment of the evidence."[32] Even if the court abused its discretion, "the error is reviewed under the harmless error doctrine."[33] An evidentiary ruling is reversible only if it affected a party's substantial rights.[34]

         Aetna first argues the district court erred in finding its expert biased and unreliable. Aetna says this expert was crucial to establishing injury on its fraud and negligent misrepresentation claims. Because we affirm the court's judgment as a matter of law in favor of NCMC on other grounds, any error was harmless.[35]

         Next, Aetna argues the district court erred by excluding "evidence of NCMC's kickbacks to physicians." The court found this evidence was "irrelevant to whether North Cypress fraudulently billed Aetna" and the potential prejudice outweighed any probative value. We agree.

         Evidence is relevant if "it has any tendency to make a fact more or less probable than it would be without the evidence" and "the fact is of consequence in determining the action."[36] Irrelevant evidence is not admissible.[37] A district court may "exclude relevant evidence if its probative value is substantially outweighed by a danger of . . . unfair prejudice . . . ."[38] "A trial court's ruling on admissibility under Rule 403's balancing test will not be overturned on appeal absent a clear abuse of discretion."[39]

         In order to show abuse of discretion, Aetna must identify how its excluded evidence relates to a material misrepresentation.[40]

         On appeal, Aetna argues it should "have been permitted to provide a complete, unsanitized picture of how and why NCMC's fraud occurred." This evidence allegedly demonstrated NCMC's scheme, motive, and fraudulent intent.

         Aetna is correct that it is ordinarily not unfairly prejudicial for a jury "to see the entire scheme and its results."[41] And this court errs on the side of admissibility of evidence in fraud cases because a jury must often infer intent.[42] But here, Aetna has not shown how excluded evidence of physician compensation relates to any of NCMC's alleged material misrepresentations. NCMC may have intended to build its business by incentivizing physicians to make patient referrals, but Aetna only alleges fraud based on what NCMC charged its patients and subsequently reported to Aetna.

         Physician compensation is less relevant to these allegations. The UB-04 claim form did not require NCMC to disclose physician compensation. In fact, Aetna concedes that payments to physicians were part of a different fraudulent scheme. Aetna notes that physician shares "were a vehicle to illegally and fraudulently pay for patients referred to [NCMC]." Aetna also argued "[t]his evidence shows . . . the physician-owners' motive." But Aetna never alleges that referring physicians advertised NCMC's prompt pay discount when referring patients to NCMC.[43] In fact, NCMC insists it did not publicly advertise its discount program. NCMC's payments might explain why physicians referred patients to NCMC, or indicate that NCMC violated the terms of Aetna's agreements, but they do not tend to explain NCMC's motive in adopting the prompt pay discount. And these payments do not support allegations that NCMC misrepresented its billing practices.

         To sum up, any error in excluding Aetna's damages expert was harmless, and we cannot say the district court abused its discretion in excluding evidence of physician compensation.

         C. Aetna's Motion for Leave to Amend

         Aetna next argues that the district court erred in denying it leave to amend its counterclaims. We review denial of leave to amend for abuse of discretion.[44] Under the liberal pleading presumption, discretion "may be misleading, because [Rule] 15(a) evinces a bias in favor of granting leave to amend."[45] Rule 15(a) requires a trial court to "freely give leave when justice so requires."[46] Leave to amend is not automatic, but a district court needs "a 'substantial reason' to deny a party's request for leave to amend."[47] Leave to amend may be denied for "undue delay, bad faith or dilatory motive on the part of the movant, repeated failures to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party . . ., and futility of the amendment."[48] In reviewing the timeliness of a motion to amend, delay alone is insufficient: "The delay must be undue, i.e., ...


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