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Encompass Office Solutions, Inc. v. Louisiana Health Service

United States Court of Appeals, Fifth Circuit

March 19, 2019

LOUISIANA HEALTH SERVICE & INDEMNITY COMPANY., doing business as BlueCross BlueShield of Louisiana. Defendant-Appellant.

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

          Before JONES, BARKSDALE, and WILLETT, Circuit Judges.


         Encompass Office Solutions, Inc. provided equipment and staffing for doctors to perform surgery in their own offices. Doctors and patients took to this service; insurers did not. Blue Cross and Blue Shield of Louisiana (BCBSLA) began denying Encompass's claims for in-office surgery support. BCBSLA instead paid a "Global Fee" to the doctor who performed the surgery, as compensation for all related services.

         Encompass sued BCBSLA for ERISA violations, breach of contract, defamation, and tortious interference with business relations. BCBSLA largely prevailed at trial. But the district court granted a new trial because of error in the jury charge. At the second trial, Encompass won on all claims and obtained a judgment in its favor. On appeal BCBSLA says that the new trial should never have been granted, that no reasonable jury could have answered the contra non valentem (discovery rule) issue in favor of Encompass, and that BCBSLA did not abuse its discretion in denying Encompass's claims.

         We AFFIRM the judgment of the district court.

         I. Background

         A. Factual

         Encompass provided the equipment, drugs, supplies, and nursing staff necessary for a doctor to perform outpatient surgery in his own office, rather than in a hospital or ambulatory surgical center (ASC). This was a novel arrangement-at the time, neither Texas nor Louisiana licensed such mobile providers of ambulatory surgical care.

         Generally, when a doctor performs surgery at a hospital or ASC, an insurer like BCBSLA receives three claims: one from the doctor for doing the actual surgery; one from the anesthesiologist, if used; and one from the hospital or ASC for services provided to assist the doctor. When a doctor performs surgery in his office, however, there is no facility claim because there is no separate facility. Instead, BCBSLA pays doctors a Global Fee for these in-office surgeries. The Global Fee is greater than the fee paid to doctors for performing surgery at a hospital or ASC and is intended to compensate for all overhead costs of an in-office procedure.

         When Encompass entered the market, it expanded doctors' ability to perform in-office surgeries. Encompass sought compensation from insurers by filing separate claims for its services. At all relevant times, Encompass was an out-of-network service provider for BCBSLA members. Because of this, Encompass obtained an assignment of benefits from each of its BCBSLA-insured patients. BCBSLA paid Encompass's claims for several months after Encompass entered the Louisiana market.

         But in June 2010, BCBSLA received a tip that Encompass was submitting claims for services it had not provided. On investigation, BCBSLA found that Encompass was submitting claims, and being paid, for the same in-office surgeries as the performing doctors. BCBSLA's billing system would normally reject "duplicate" claims for surgery at a doctor's office. But it had been processing Encompass's claims because they used a code modifier. Encompass was using the "TC Modifier," which stands for "technical component" and covers the equipment, staff, and services necessary for surgery.

         BCBSLA began denying Encompass's claims. BCBSLA also learned that other insurance companies were doing the same. In August 2010, BCBSLA Vice President Dawn Cantrell sent a letter to in-network providers directing them not to use Encompass's services. Because this letter is the basis for Encompass's defamation and tortious interference claims, we quote it at length:

Encompass is not eligible to participate in the BlueCross networks and is considered an out-of-network provider. Please do not use Encompass for services provided to BlueCross or [HMO Louisiana, Inc.] members since the facility fees charged by Encompass are not covered, even when they are billed by a network physician. Encompass would have to be a Louisiana licensed [Department of Health and Hospitals]-approved ambulatory surgery facility in order to be eligible for payment of these facility charges.
You should also accept your contracted allowable charge for any eligible in-office surgeries you normally perform to be counted as payment in full and not allow Encompass to submit claims to Blue Cross. Please ensure your Blue Cross patients are able to receive network benefits for the services they receive from you by using participating providers.
If we find that any network physician is repeatedly using Encompass to deliver facility and procedure services that are not eligible for benefits and our members are being billed for these facility charges, the network physician will be subject to termination from the Blue Cross networks.

         Encompass obtained a copy of the Cantrell Letter and gave it to counsel. Encompass sought clarification from BCBSLA by calling Cantrell three times and leaving voicemail messages. It received no response. In October 2010, BCBSLA Audit Consultant Alan Lofton sent Encompass a separate letter demanding repayment of nearly $110, 000 in paid claims. A few months later, Encompass sued.

         B. Procedural

         Encompass initially sued BCBSLA for payment on services provided to BCBSLA insureds.[1] Encompass alleged that BCBSLA had abused its discretion in denying Encompass's claims on ERISA-covered plans and breached its insurance contracts under state law by denying claims on non-ERISA plans.

         In response, BCBSLA pleaded that under its policy a non-facility provider must seek payment from the site-of-service owner, usually the doctor who orders the services, and that Encompass knew this. BCBSLA explained that for surgeries in a "non-facility setting," the doctor's (and any other professional's) reimbursement is all-inclusive. In other words, BCBSLA pleaded its Global Fee policy.

         In February 2013, Encompass deposed Cantrell and Lofton. Cantrell and Lofton testified they were not aware of a BCBSLA policy or benefit plan that said Encompass's services were not covered. And they were similarly unaware of a policy or plan permitting BCBSLA to terminate a physician for partnering with Encompass. This led Encompass to believe that the Cantrell Letter contained false statements. Because the Cantrell Letter damaged Encompass's Louisiana business, Encompass in April 2013 amended its complaint to add claims for defamation and tortious interference with business relations.

         Both parties moved for summary judgment. The district court at first granted summary judgment to BCBSLA on Encompass's defamation and tortious interference claims because it held they were barred by Louisiana's one-year prescriptive period.[2] But on a motion for reconsideration it reversed this decision. It held instead that a genuine dispute of material fact existed as to whether Encompass was entitled to the benefit of a discovery rule-contra non valentem-that would suspend the prescriptive period.[3]

         Trial arrived. Encompass tried its tort claims and non-ERISA contract claims to a jury, and its ERISA claims to the district court. The jury found no liability on the contract claims, and found that Encompass was not entitled to the benefit of contra non valentem on the tort claims. Because it resolved the prescription issue in BCBSLA's favor, the jury did not reach the merits of Encompass's tort claims.

         Encompass moved for a new trial based on error in the jury charge, and the district court granted the motion. It held that the jury charge had imposed an incorrect liability standard for the non-ERISA contract claims. The original charge for these claims required the jury to find that BCBSLA "capriciously and arbitrarily" denied Encompass's claims for benefits. But it should only have required them to find the elements for Louisiana breach of contract. And, citing the potential for confusion, the court held that Encompass's tort claims must also be retried: "A finding that no breach occurred would reasonably cause the jury to find that no tort liability existed because the breach of contract claim underpins the basis for the tort claims." The district court did not rule on Encompass's ERISA claims at this stage.

         At the second trial the jury found for Encompass on both its contract and tort claims, including finding that contra non valentem suspended prescription. The district court also found for Encompass on its ERISA claims. BCBSLA renewed its motion for judgment as a matter of law, moved for reconsideration, and moved for a new trial-all of which the district court denied. The district court entered judgment for Encompass, and BCBSLA appealed.

         II. Jurisdiction and Standards of Review

         A. Jurisdiction

         The district court had jurisdiction based on complete diversity, 28 U.S.C. § 1332; and under ERISA, 29 U.S.C. §§ 1001 et seq. This court has jurisdiction under 28 U.S.C. § 1291.

         B. Standards of Review

         1. Grant of a New Trial

         "We review the district court's grant or denial of a new trial for abuse of discretion."[4] "A greater degree of scrutiny, however, is given to the grant of a new trial."[5] "[W]e exercise broad review of a court's grant of a new trial because of our respect for the jury as an institution and our concern that the party who persuaded the jury should not be stripped unfairly of a favorable decision."[6]

         2. Judgment as a Matter of Law

         "We review de novo the district court's denial of a motion for judgment as a matter of law, applying the same standards as the district court."[7]Judgment as a matter of law is proper if "a party has been fully heard on an issue during a jury trial and . . . a reasonable jury would not have a legally sufficient evidentiary basis to find for the party on that issue."[8]

         "We review all the evidence in the record in the light most favorable to the nonmoving party and draw all reasonable inferences in favor of the nonmoving party; we do not make credibility determinations or weigh the evidence."[9] We "cannot reverse a denial of a motion for judgment as a matter of law unless the jury's factual findings are not supported by substantial evidence, or if the legal conclusions implied from the jury's verdict cannot in law be supported by those findings."[10] In other words, the party moving for judgment as a matter of law can prevail only "if the facts and inferences point so strongly and overwhelmingly in favor of the moving party that reasonable jurors could not have arrived at a contrary verdict."[11] Although our review is de novo, "[a]fter a jury trial, [the] standard of review is especially deferential."[12]

         3. ERISA § 502(a)(1)(B) Claims

         "On appeal from a bench trial, this court review[s] the factual findings of the trial court for clear error and conclusions of law de novo," applying the same standard as the district court.[13] Because the plans at issue grant BCBSLA discretion to determine eligibility for plan benefits and construe the terms of the plans, we apply the abuse of discretion standard.[14] Thus, if BCBSLA's "decision is supported by substantial evidence and is not arbitrary and capricious, it must prevail."[15]

         III. Discussion

         A. District Court's Grant of a New Trial

         In the first trial, the court instructed the jury that BCBSLA was liable on Encompass's non-ERISA claims if it had arbitrarily and capriciously denied claims for benefits:

The burden is on Encompass to prove that BCBS Louisiana had sufficient proof that payment on a claim was due and that the claim was capriciously and arbitrarily denied by BCBS Louisiana. An insurer is arbitrary and capricious when it does not act in a reasonable manner based on the facts known at the time of the decision.

         In its motion for a new trial, Encompass successfully argued that this charge had erroneously imported the arbitrary-and-capricious standard and should, instead, have simply stated the Louisiana elements of contract.

         1. New Trial on the Contract Claims

         BCBSLA contends that the original charge was correct, and the second trial should never have happened. It says that the Louisiana Prompt Payment Statute, [16] not the general contract statute, governs an insurer's breach of a health insurance contract. The Prompt Payment Statute imposes penalties on insurers who do not, within 30 days, pay any claim that does not present reasonable grounds for denial:

All claims arising under the terms of health and accident contracts issued in this state, except as provided in Subsection B of this Section, shall be paid not more than thirty days from the date upon which written notice and proof of claim, in the form required by the terms of the policy, are furnished to the insurer unless just and reasonable grounds, such as would put a reasonable and prudent businessman on his guard, exist. . . . Failure to comply with the provisions of this Section shall subject the insurer to a penalty . . . together with attorney fees to be determined by the court. [17]

         Although the words "arbitrary and capricious" do not appear in this section, Louisiana courts have adopted that standard for insurer liability.[18] This is because the statute is "penal in nature" and must be "strictly construed."[19]BCBSLA says that because the statute governs "[a]ll claims arising under the terms of health and accident contracts issued in this state, "[20] and specific statutes trump general ones, [21] this section provides the appropriate standard of liability for Encompass's contract claims.

         BCBSLA also contends that Encompass itself invoked the Prompt Payment Statute for its non-ERISA contract claims. Besides contract damages, Encompass's operative complaint demanded attorney's fees, costs, and "statutory penalties under Texas and Louisiana law requiring the prompt payment of claims by insurance carriers." And in its submission for the joint pretrial order, Encompass listed "[w]hether BCBSLA abused its discretion by denying Encompass's claims" as a contested legal issue.

         Neither of these theories can rehabilitate the first jury charge. Louisiana contract law governs Encompass's claims for benefits under non-ERISA plans because, although it is true that the Prompt Payment Statute applies to all Louisiana health insurance contracts, "[u]nder Louisiana law, the cause of action under [§ 22:1821] is separate and distinct from the cause of action for the breach of the insurance contract."[22] Encompass alleged a Louisiana contract claim. So even if it also alleged a Prompt Payment Statute claim, it had the right to a correct jury instruction on the contract claim.[23] This is particularly true where, as here, it is easier to prove that the defendant breached a contract than that it did so arbitrarily and capriciously.

         BCBSLA has another independent argument. It contends that the first jury charge was correct because the insurance plans, by their terms, granted BCBSLA discretion in choosing whether to allow or deny a claim. And in analogous contexts, "abuse of discretion" and "arbitrary and capricious" are legally equivalent.[24] Thus, BCBSLA says that the jury was properly instructed to find contract liability only if BCBSLA had arbitrarily and capriciously denied a claim.

         This theory is not quite correct. BCBSLA argues that the first jury charge properly included an interpretation of the contracts. But the district court rejected this argument when it granted a new trial, holding in effect that the interpretation was not supported by Louisiana law.[25] We agree. No cited Louisiana authority supports an arbitrary and capricious standard for breach of health insurance contracts-even those that grant discretion to the insurer. And the district court has discretion of its own to either interpret contract terms as a matter of law or leave them to the factfinder.[26] "Although the interpretation of a contract is normally a question of law for the Court, that interpretation frequently depends heavily on the resolution of factual disputes. And it is the function of the trier of fact to resolve such factual disputes."[27]

         In short, charging the jury with an incorrect standard of liability supports granting a new trial.[28] And the jury indicated confusion from the improper instruction.[29] Its note to the court shows that the erroneous legal standard was front and center in deliberations: "Can you clearly define Arbitrary and Capricious in the eyes of the court[?]"[30] The district court did not abuse its discretion when it granted a new trial on Encompass's contract claims.

         2. New Trial on the Tort Claims

         The district court held that Encompass's tort claims should also be retried because they were related to the mischarged contract claims. In the district court's view, breach of the contracts was a basis of the tort claims. BCBSLA disputes this. It contends that the jury could not possibly have been confused by overlap of tort and contract issues because it never reached the merits of the tort claims. Indeed, the jury answered "no" to whether Encompass could invoke contra non ...

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