Dimensions Health Corp. v. Maryland Insurance Administration

WILNER, Judge. Appellants, Dimensions Health Corporation (DHC) and Mercy Medical Center, Inc. (Mercy), challenge a final order of the Maryland Insurance Commissioner which declared that United Healthcare of the Mid-Atlantic, Inc. (United), a health maintenance organization, was not required to reimburse appellants for certain hospital services they rendered to United members. The Circuit Court for Baltimore City affirmed the Commissioner’s order. We agree with that result.

BACKGROUND Appellants’ complaint hinges on the construction of two provisions in the law regulating health maintenance organizations — Maryland Code, §§ 19-712(b) and 19-713.2 of the Health-General Article (HG). Those statutes have meaning, however, only when one first understands some of the relationships that exist (or at least that once existed) in a managed health care system. United is a health maintenance organization (HMO), which is a term defined in HG § 19 — 701(f). For our purposes, it is an organization that agrees to provide certain hospital and medical services for its members in return for predetermined capitation payments made on a periodic basis by or on behalf of the members.

An HMO may carry out its obligation to provide the hospital and medical services in three ways: (1) with respect to physician services, it may provide the services directly, through employees or partners of the HMO (HG § 19 — 701(f)(5)); (2) it may contract with hospitals and physicians or physician groups to provide the services; or (3) under HG §§ 19-712(b) and 19-713.2, it may contract with an Administrative Service Provider (ASP) for the ASP to provide, either directly or through “external providers,” the services ⁵ for which, as between the HMO and its members, the HMO is responsible. In the case before us, United chose the third method. In September, 1996, it entered into an ASP contract with Dimensions Health Network (DHN) for DHN to provide, or arrange for the provision of, hospital and medical services to United’s members who were within a designated service area and who selected DHN as their provider. Under that agreement, United agreed to pay to DHN a monthly capitation payment for each such United member, in return for which DHN agreed to provide, or arrange for the provision of, the agreed-upon hospital and medical services.

The DHN service area was centered in Prince George’s County. In April, 1997, United entered into a similar ASP contract with Maryland Personal Physicians, Inc. (MPPI) for the provision of services within the MPPI service area. The MPPI service area was centered in Baltimore. DHN was a non-profit, non-stock membership corporation.

It had two classes of members. The one Class B member was DHC, which owns and operates three hospitals in Prince George’s County. The Class A members consisted of certain physicians who, among other things, were either on the medical staff of a DHC facility or had a practice that did not mandate such membership, and who had entered into an agreement with DHN to become a participating provider. It was anticipated that most of the services to be provided by DHN under the contract would be provided by its Class A or Class B members — that is, the participating physicians who were the Class A members and the hospitals owned and operated by DHC.

MPPI is a Maryland stock corporation. Its majority (57%) stockholder is Mercy. MPPI and Mercy each had a complex set of ownership and contractual relationships with various physician groups and other health care providers that the Insurance Commissioner regarded as “affiliates” of Mercy. It was anticipated that the hospital services would be provided by Mercy in Baltimore. ⁶ An ASP obviously acts as an intermediary between the HMO and its members, as well as between the HMO and the doctors and hospitals who actually provide the medical and hospital services to the HMO’s members.

Absent an ASP, the relationship in an HMO situation is a tripartite, and essentially triangular, one: the members pay a capitation fee to the HMO to assure the provision and cover the cost of the agreed-upon range of hospital and medical services; the HMO employs or contracts with doctors and hospitals (and other direct health care providers) to provide those services; the doctors and hospitals provide the service to the HMO members and are paid by the HMO. See Riemer v. Columbia Medical, 358 Md. 222, 230-31 , 747 A.2d 677, 681-82 (2000). A principal function of an ASP, in an economic sense, is to “downstream” some of the HMO’s risk. In return for a capitation payment by the HMO, the ASP assumes responsibility for procuring and paying the hospitals, doctors, and other health care providers who actually provide the medical services that the HMO is obliged to provide for its members.

The insertion of an ASP intermediary thus required some refinement or redefinition of the statuses of the HMO and the direct health care providers vis a vis each other. Under an ASP arrangement, the HMO and the ultimate providers, who otherwise would look to each other for the provision of the service, on the one hand, and payment for the services provided, on the other, each look to the ASP for both. That insertion, which is of relatively recent origin, also raised some legislative concerns regarding the assurances that (1) the services called for in the HMO-member agreement would, in fact, be provided, and (2) the direct providers of the service would be paid. Until 1991, Maryland law did not formally recognize.

ASPs or ASP contracts, although they apparently existed. In that year, House Bill 1263 was introduced to deal with a much narrower issue — the situation in which an HMO had a contract with a health care provider who, because of the provider’s inability to render a particular covered service, referred an HMO member to another provider who was able to perform ⁷ the service but who had no contractual relationship with the HMO. Some HMOs had taken the position that the capitation payment they made to their contractual providers covered that service and that the HMO had no additional obligation to pay any other provider, with whom it had no contract — that payment for the referred service was the responsibility of the contractual provider that made the referral. Apparently, contractual providers saw the matter differently, and the persons who, on referral, actually provided the service were caught in the middle.

The purpose of HB 1263, as introduced, was to make clear that the HMO was responsible for paying the provider who rendered the service, even though it had no direct contract with that provider. The bill sought to achieve that end by adding language to § 19-712 to provide that an HMO that entered into a contract with another entity for the provision of health care services to the HMO’s members had to pay claims for health care services covered by the HMO contract that were rendered by a non-contractual provider pursuant to a referral from the contractual provider. At its core, the issue addressed by the bill was the responsibility of HMOs to providers with whom the HMO had no direct contractual relationship. That same issue was inherent, though more complex and substantially broader in scope, when the direct contract for all, or at least a broad range of, services was with an ASP, which, in turn, contracted with the actual providers for the provision of all (or at least most) of those services.

In that situation as well, the HMO would have no direct contractual relationship with the actual providers of the hospital and medical service, 1 and, in the House Economic ⁸ Matters Committee, the bill was substantially amended to deal with that broader issue. This was done through the enactment of a new § 19-713.2 and a new subsection (b) to § 19-712. 2 Section 19-713.2(a) defined an ASP contract as a contract or capitation agreement, between an HMO and a “contracting provider,” in which (1) the contracting provider accepts payments, from the HMO for health care services to be provided to members of the HMO that the contracting provider arranges to be provided by “external providers,” and (2) the contracting provider administers payments to the external providers for the services they perform. A “contracting provider” was defined as a health care provider who enters into an ASP contract with an HMO, and an “external provider” was defined as a health care provider who is not (1) a contracting provider or (2) “an employee, shareholder, or partner of a contracting provider.” The balance of § 19-713.2 set out certain conditions and requirements relating to an ASP contract. 3 Subsection (b) provided that an HMO may not enter into an ASP contract unless it first filed with the Insurance Commissioner a plan that satisfied the conditions in subsection (c) and the Commissioner had not disapproved the plan within 30 days after filing. Subsection (c) imposed five requirements on the plan: (1) that it require the contracting' provider to submit to the HMO at least quarterly reports that identify payments made or owed to external providers, in sufficient detail to determine if the ⁹ payments are being made in compliance with law; 4 (2) that it require the contracting provider to submit annually to the HMO a current annual financial statement; (3) that it require either (i) the creation, by or on behalf of the contracting provider, of a segregated fund or (ii) the availability of other resources, sufficient to satisfy the contracting provider’s obligations to external providers for services rendered to HMO members; (4) that it require an explanation of how the segregated fund or other resource is sufficient for that purpose; and (5) that it permit the HMO, on reasonable notice, to inspect and audit the contracting provider’s books, records, and operations to determine the contracting provider’s compliance with the plan.

Section 19-713.2(e) required the HMO to monitor the contracting provider in order to assure compliance with the plan and to notify the contracting provider of any compliance failure. Following any such notice, the HMO was required to assume the administration of any payments due from the contracting provider to external providers. In new § 19 — 712(b), the Legislature dealt more directly with the initial thrust of the bill. It provided that an HMO that entered into an ASP contract was responsible for all claims or payments for health care services that were (1) covered under the member’s contract, and (2) rendered by “a provider, who is not the person or entity which entered into the [ASP contract with the HMO] pursuant to a referral by a person or entity which entered into the [ASP contract with the HMO].” The ASP contracts that United entered into with DHN and MPPI were, of course, subject to the 1991 law, and they purported to make provision for its requirements. 5 Section ¹⁰ 3.1.7 of both contracts obligated the ASPs, in consideration of the capitation payments made by United, to provide or arrange for the hospital and physician services required under the agreement and to assume responsibility for the cost of those services.

Section 3.2 of the DHN contract, referencing § 19-713.2, required DHN to provide United with acceptable collateral to secure an amount equal to the immediately preceding 60 days of capitation, the purpose being “to ensure that sufficient funds are on hand to reimburse HMO for any payment made to External Providers, as required by law, if [the ASP] fails to make any such payments.” The parties agreed that a Standby Letter of Credit from a commercial bank would be deemed acceptable collateral. The MPPI contract called for a guaranty by Mercy of an amount equal to two months of capitation payments payable to MPPI. 6 Under § 5.2 of both contracts, DHN and MPPI agreed, in consideration of the capitation payments from United, to arrange and pay for “all those Referral Physician and other health professional services which [United] is required to provide as Covered Services and which are Medical Services.” The weakness in this scheme, which the Legislature attempted to correct in the 2000 legislation, was that ASPs such as DHN and MPPI were not subject to direct regulation by the Insurance Commissioner, who could not, therefore, assure their financial stability through devices such as minimum ¹¹ capital and surplus requirements or Maryland Insurance Administration financial examinations, or take control of them in the event of insolvency. These largely unregulated ASPs had, however, undertaken very significant financial responsibilities, only part of which, it turned out, was covered by segregated funds or other committed resources. What led to this case was just that problem.

In March, 1999, MPPI informed United of its intent to terminate the United contract, and on September 2, 1999, MPPI filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code. Upon the bankruptcy, MPPI failed to pay certain claims for services that were covered under United’s contract and were provided by health care providers, including Mercy, with which MPPI had contracted. On November 16, 1999, United was notified of the emergency closing of DHN as of the close of business November 15, which left unpaid claims for covered services provided by health care providers, including DHC, with which DHN had contracted. DHC and Mercy, along with others, immediately looked to United for payment.

DHC was ultimately seeking about $2.5 million for services rendered by its hospitals and the physicians who were Class A members of DHN; Mercy sought about $1.6 million for services rendered' by its hospital. United took a number of interim actions but denied liability on DHC’s and Mercy’s claims. 7 In an order entered on December 27, 1999, the Insurance Commissioner determined that ¹² United was responsible for the payment of claims, regardless of whether sufficient funds had been set aside pursuant to § 19-713.2, and he ordered United to pay “all claims for health care services covered under subscriber contracts and rendered by providers, except claims of providers who are employees, shareholders, or partners of the administrative service provider contractors.” (Emphasis added). MPPI claims were to be paid by March 31, 2000; DHN claims were to be paid by April 30, 2000. United sought a hearing and raised a number of issues, headed by whether the Commissioner had any jurisdiction over the payment of external providers with respect to Medicare, Medicaid, and ERISA-plan patients.

So far as we can tell, United did not raise as an issue, at that time, whether, because of their respective relationships with MPPI and DHN, Mercy or DHC qualified as external providers. On April 4 and April 26, 2000, the Commissioner rejected the defenses asserted by United and confirmed his order that United pay for all covered health care services rendered by external providers, except claims of providers who are employees, shareholders, or partners of MPPI or DHN. That exclusion tracked the definition of “external provider” in § 19-713.2(a)(4), and thus assumed that United had no obligation to any provider who was not an “external provider.” Probably because United had not raised the issue, however, the order did not address whether Mercy and DHC were to be regarded as within that exception. Aggrieved, United petitioned for judicial review in the Circuit Court for Baltimore City, and it was apparently there that the issue of Mercy’s, DHC’s, and certain other providers’ status arose.

Upon stipulation of the parties, execution of the Commissioner’s order was stayed and the case was remanded to him for clarification as to who were the external providers required to be paid under the Commissioner’s order. The Insurance Commissioner held another hearing on remand, at which DHC and Mercy participated. On August 21, 2001, he entered a Final Order in which he concluded that, by ¹³ reason of their respective relationships with DHN and MPPI, DHC and Mercy were not external providers and that, as a result, United bore no responsibility for covered services provided by them to United members. DHC contended that, although § 19-713.2(a)(4) excluded a “shareholder” in an ASP from the definition of an external provider, a “member” of a non-profit, non-stock corporation was not a “shareholder” and was therefore not excluded.

To a large extent, this defense was based on DHN’s status as a non-profit corporation, rather than its status as a non-stock corporation. The Dean of the Villanova University Law School, called as an expert witness by DHC, opined that members of non-profit corporations are not the equivalent of members of for-profit corporations, and were therefore not shareholders, because they have no residual claim to either the assets or the income of the corporation. Though acknowledging a “superficial appeal” to that argument, the Commissioner rejected it for two reasons. First, he noted that, under Maryland Code, § 1-101(t) of the Corporations and Associations Article, a “stockholder” is defined as including “a member of a corporation organized without stock,” and that the definition made no distinction between for-profit and not-for-profit corporations.

Second, he pointed out that the members appointed the directors of DHN, elected the officers,