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Texas Tech Physicians Associates v. United States

United States Court of Appeals, Fifth Circuit

March 8, 2019


          Appeal from the United States District Court for the Northern District of Texas

          Before KING, HIGGINSON, and COSTA, Circuit Judges.


         Medicare incentivizes services, not results. Its fee-for-service model risks not only that beneficiaries may receive treatment they do not need, but also that they may miss out on less expensive treatment that might help. See Medicare Payment Advisory Comm'n, Report to the Congress: Reforming the Delivery System 7 (June 2008). To test whether other approaches could be more efficient, Congress authorizes "experiments and demonstration projects" deviating from the ordinary Medicare reimbursement rules. 42 U.S.C. § 1395b-1. This case arises from one such demonstration project, with a twist: Texas Tech Physicians Associates could keep the additional fees it received for implementing the project only if its care management model achieved cost savings. The government says Texas Tech failed, and so demands return of roughly $8 million in fees. Texas Tech resists that demand.


         One of the alternative payment models the Department of Health and Human Services may explore is whether "payments for services other than those for which payment may" ordinarily be made might reduce costs and improve "utilization of services." 42 U.S.C. § 1395b-1(a)(1)(B). Using that authorization, the Center for Medicare and Medicaid Services (CMS, the agency within HHS that administers Medicare) solicited proposals for a "Care Management for High-Cost Beneficiaries Demonstration." CMS was looking for projects to test whether "intensive management" of patients and coordination between providers might improve care and reduce costs for Medicare beneficiaries with substantial medical needs. On top of the normal fees for services, participating programs could earn monthly fees contingent on achieving cost savings of 5%. These extra fees would count as costs.

         Texas Tech Physicians Associates-together with Texas Tech University Health Sciences Center and Trailblazer Health Enterprises-submitted a proposal. The project would employ a "system of telephone contacts, letters, site visits and physician contacts" to help manage and coordinate care for high-risk beneficiaries treated at Texas Tech's facilities. Interventions would range from home safety assessments to support groups, depending on patients' risk levels. The application indicated it expected to achieve Medicare cost savings of up to 25%.

         CMS took Texas Tech up on its proposal, and the parties signed a "demonstration agreement" in January 2006. Texas Tech agreed to implement the project "as proposed in the demonstration application." In exchange, it would receive a monthly management fee of $117 per participating beneficiary. And as required by the solicitation, it agreed to be responsible for failure to meet the 5% net cost savings figure, up to the amount it would receive in management fees.

         The difficulty-then and now-was selecting an adequate control group. The control group was important because cost savings would be determined by comparing the costs of patients in the control group with those of Texas Tech's participating patients, referred to as the intervention group. The demonstration agreement did not itself identify a control group. Instead, CMS would "contract with an independent evaluator" to "assist CMS in designing features for a suitable comparison group." After the contractor proposed a methodology for matching a control group to the intervention group, Texas Tech would have "the opportunity to review and agree" before beginning the project.

         Agreeing on a control group proved something of a sticking point. Following an initial proposal from a contractor hired by CMS, RTI International, Texas Tech raised various concerns about the populations from which the control group would be drawn. RTI responded with changes to its initial approach.

         Following months of back-and-forth, RTI sent an April 2006 memo summarizing a "physician group practice-based" approach. RTI used a "loyalty algorithm" to identify patients whose loyalty to a practice was similar to that of Texas Tech's patients. Those beneficiaries would be eligible for inclusion in the control group if they were within the 48-county area served by Texas Tech and had high Medicare costs or serious diseases. RTI would then randomly assign eligible beneficiaries to the control group such that, according to historical cost data, it was made up of low-cost, medium-cost, and high-cost patients in percentages nearly identical to Texas Tech's patient population.

          Texas Tech reviewed and accepted the April 2006 methodology and began enrolling participants that month.

         The trouble began less than a year later. In February 2007, Actuarial Research Corporation (another CMS contractor) released a report on the first six months of Texas Tech's project. After adjusting for baseline cost differences, the intervention group's monthly per-member costs were 7% higher than the control group's. Texas Tech chalked the cost differences up to inconsistencies between the groups. It pointed, for instance, to two features of the intervention group that it believed explained its higher costs: more deaths and more patients residing in nursing homes. In light of those differences, Texas Tech asked that the control group be adjusted. But CMS declined; it said doing so was "not feasible" and its investigation of disparities between the groups did not reveal "any reasonable adjustments that could produce a match . . . that mitigated disparities."

         Texas Tech then terminated the program effective July 31, 2007. The demonstration agreement permitted early termination, in which event it required a prompt "final reconciliation."

         Actuarial Research Corporation issued a reconciliation report a year later. It concluded that (1) Texas Tech had received $7.99 million in administrative fees; (2) Texas Tech's savings guarantee required just over $10 million in net savings-$2.05 million in cost reductions[1] plus the $7.99 million in fees; and (3) the intervention group's Medicare costs were $6.79 million higher than the control group's. This meant a "savings shortfall" of $16.79 million, exceeding the contingent monthly fees Texas Tech had received and requiring their return in full.

          Unhappy with that result, Texas Tech hired its own consultant to investigate disparities between the intervention and control groups. Its report raised concerns about whether the control group's historical cost trends matched the intervention group's, and whether differences in death rates made the groups a poor match. CMS asked RTI to look into those concerns, but RTI concluded that the differences between the groups "cannot account for the estimated Texas Tech intervention effect of higher, not lower, cost growth."

         CMS sent a letter to Texas Tech in March 2009 requesting return of the $7.99 million. Texas Tech demurred. Four years passed before CMS sent Texas Tech another letter in September 2013, renewing its demand that Texas Tech return the money. That letter said it would represent CMS's "final decision" unless Texas Tech appealed to HHS's Departmental Appeals Board.

         Texas Tech did appeal to the Board, only to promptly ask for dismissal of its appeal. It argued that the demonstration agreement was a procurement contract and thus governed by the Contract Disputes Act, 41 U.S.C. §§ 7101- 09, which would mean the Board was not the proper forum for resolving this dispute. It also argued that the Act's six-year statute of limitations barred CMS's delayed attempt to collect the debt. The Board denied Texas Tech's motion to dismiss, holding that the demonstration agreement was a grant agreement rather than a procurement contract.

         In the merits appeal that followed, Texas Tech raised a variety of contract theories to avoid CMS's demand for repayment, including three alleged breaches of the agreement as well as common law defenses like mistake and impossibility. In a thorough opinion, the Board rejected those arguments in part because it determined that "[c]ommon law contract theories are inapplicable" to grant agreements. In light of this view, whether CMS breached the agreement mattered only insofar as the demonstration agreement conditioned Texas Tech's repayment obligation on CMS's performance. And in addition to finding that ...

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