NORTH CYPRESS MEDICAL CENTER OPERATING COMPANY, LIMITED; NORTH CYPRESS MEDICAL CENTER OPERATING COMPANY GP, L.L.C., Plaintiffs-Appellees Cross-Appellants,
AETNA LIFE INSURANCE COMPANY, Defendant-Appellant Cross-Appellee.
Appeals from the United States District Court for the
Southern District of Texas
SMITH, WIENER, and WILLETT, Circuit Judges.
WILLETT, CIRCUIT JUDGE.
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?
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.
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.
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
AFFIRM in part and REVERSE in part and REMAND.
Byzantine complexity of the United States health care
"system" can bamboozle even the savviest of
consumers. So perhaps some foundation is
Aetna's Insurance Plans
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
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.
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
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. 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
The Claims Process
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.
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.
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.
NCMC and its Billing Practices
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.
treats thousands of patients, including Aetna members, but it
does not offer in-network care with Aetna. 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
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.
program permitted out-of-network patients to discount their
coinsurance obligation if they paid their bill within 120
days. Ordinarily, NCMC calculates the total cost
of care based on its master list of charges called the
"Chargemaster." 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.
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. 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.
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."
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.
was, and remains, skeptical of NCMC's discount program.
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."
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.
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.
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.
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.
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.
The District Court Proceedings
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.
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.
district court bifurcated the claims for jury trial.
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.
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.
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.
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.
appeals, and NCMC cross-appeals.
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.
Aetna's Fraud and Negligent Misrepresentation
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. 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."
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." "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." 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." Evidence is examined as a whole and all
inferences are drawn in favor of the non-moving
party. "[T]he court may not make
credibility determinations or weigh the evidence, as those
are jury functions."
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.
can also occur through non-disclosure of material facts when
the non-disclosing party had a duty to
disclose." "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." The primary difference between fraud and
negligent misrepresentation 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."
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.
fraud and negligent misrepresentation require that the
plaintiff show actual and justifiable
reliance." 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." A person "may not justifiably rely
on a representation if there are red flags indicating such
reliance is unwarranted."
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." 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. Orca claimed it justifiably relied on
statements by JPMorgan, the lessor's agent, that the land
was open.But the parties negotiated a written
letter of intent that assigned Orca the risk of failure of
title, directly contradicting those earlier
representations. 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.
also held that a company's own investigation of the facts
may negate "any reasonable reliance upon the supposed
misrepresentations." 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. 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. Thus, this
court found that "no reasonable jury could find that
Highland justifiably relied on" the misrepresentation
because of "its own investigation of the
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.
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.
Aetna's Excluded Evidence
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. "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." Even if the court abused its discretion,
"the error is reviewed under the harmless error
evidentiary ruling is reversible only if it affected a
party's substantial rights.
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.
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.
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
evidence is not admissible. A district court may "exclude
relevant evidence if its probative value is substantially
outweighed by a danger of . . . unfair prejudice . . .
." "A trial court's
ruling on admissibility under Rule 403's balancing test
will not be overturned on appeal absent a clear abuse of
order to show abuse of discretion, Aetna must identify how
its excluded evidence relates to a material
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
is correct that it is ordinarily not unfairly prejudicial for
a jury "to see the entire scheme and its
results." And this
court errs on the side of admissibility of evidence in fraud
cases because a jury must often infer intent. 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
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. 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
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.
Aetna's Motion for Leave to Amend
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. Under the liberal pleading presumption,
discretion "may be misleading, because [Rule] 15(a)
evinces a bias in favor of granting leave to
amend." Rule 15(a)
requires a trial court to "freely give leave when
justice so requires." Leave to amend is not automatic, but a
district court needs "a 'substantial reason' to
deny a party's request for leave to
amend." 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." In reviewing
the timeliness of a motion to amend, delay alone is
insufficient: "The delay must be undue, i.e.,