Maryland Department of Public Safety & Correctional Services v. PHP Healthcare Corp.

KRAUSER, J. This case presents a contract dispute between the Maryland Department of Public Safety and Correctional Services (Department), appellant, and the PHP Healthcare Corporation (PHP), appellee, over the provision of health care services to the State’s prison inmate population in Baltimore, Maryland. It began when the Department issued a solicitation for proposals to provide such services. In response, PHP, among others, submitted a proposal. That proposal was accepted, and the Department and PHP entered into a health services contract.

During the course of that contract, it became apparent to PHP that the facilities housed, on an average, far fewer inmates than PHP anticipated. The miscalculation was costly for PHP. Because it was being paid on a “per inmate” basis, it faced substantially higher monthly costs of operation than it had planned. It blamed its predicament upon what it claimed were misrepresentations by the Department as to the total number of inmates it could expect to service under the contract.

It pointed out that the Department had required it, in preparing its proposal, to use a substantially higher figure of inmates than it was inclined to do. After an exchange of letters failed to produce a solution to this problem, PHP filed a Notice of Claim with the Department’s procurement officer, seeking an equitable adjustment in the amount the Department paid PHP for each inmate. It informed the Department that the per capita price PHP used to calculate its proposal “was based on a projection of a number of inmates that was significantly higher than the actual number of average daily populations calculated each month for the facilities in the region.” The Department ¹⁸⁷ denied PHP’s claim, and PHP appealed that decision to the Maryland State Board of Contract Appeals (Board). When the Board also denied its claim, PHP filed a petition for judicial review of the Board’s decision in the Circuit Court for Baltimore City.

So did the Department. While PHP challenged the Board’s holding that it was not entitled to an equitable adjustment, the Department challenged the Board’s finding that PHP had filed a timely claim. The circuit court agreed that PHP’s claim was timely, but disagreed with the Board’s finding that PHP was not entitled to an equitable adjustment. It therefore remanded this case to the Board for further proceedings on the issue of damages.

The Department then noted this appeal. The Department presents three issues for our review, which we have reworded and consolidated into two. They are: I. Whether the Board of Contract Appeals correctly ruled that PHP was not entitled to additional compensation because the Department had not misrepresented the inmate population and in any event, even if such a misrepresentation had been made, PHP did not reasonably rely on it in preparing its proposal.

II

Whether the Board erred in ruling that PHP’s claim had been timely filed. For the reasons that follow, we shall hold, as to issue I, that the Board did not err in denying PHP’s request for an equitable adjustment. Because we do so, we need not reach issue II. Facts In February 1996, the Department solicited proposals from health care providers to provide health care services to inmates and detainees in correctional and detention facilities located in Baltimore City.

Responding to that request, PHP Vice President of Operations, Thomas W. Burden, sent a letter, dated February 29, 1996, to Myles Carpeneto, the Department’s Director of Procurement Services, requesting, ¹⁸⁸ among other things, that Carpeneto provide PHP with the “expected average inmate population count for each facility-covered by this [request for proposals].” He further asked, “Will the State guarantee a minimum population for each site or for the contract as a whole?” •After receiving Burden’s letter, the Department issued Addendum No. 1, dated March 15, 1996. That addendum stated that the total available beds at the facilities in the Baltimore region was 7,246. It also stated that the number of beds “represent the available beds for each facility as identified by the Department and are not related to the billable population.” It defined the “Billable Population Count” as “the sum of the average daily populations for the month for each of the facilities in the Region less” a certain category of parolees and probationers and “[i]individuals in the booking process.” And, responding directly to Burden’s inquiry about whether the State would “guarantee a minimum population,” the Addendum stated that “[t]he State will not guarantee a minimum population.” After receiving Addendum No. 1, PHP submitted an “Original Proposal,” dated March 26, 1996. This proposal stated that PHP’s per capita price was $2,915.03.

PHP computed that price by adding its “Primary Services Price,” “Secondary Services Price,” “Operating Costs,” and “Equipment Costs” to arrive at a “Total Health Services Price Proposal” of $18,947,715 and then dividing that amount by 6,500, its estimate of the future number of inmates that would be housed in the Baltimore facilities. That estimate, according to PHP, was based on materials provided by the Department and its “own investigation of historical inmate population data.” PHP then submitted a “Best and Final Financial Offer” or a “BAFO Proposal,” dated April 18, 1996. In this proposal, PHP increased its Total Health Services Price Proposal from $18,947,715 to $19,071,846 and its estimate of inmates from 6,500 to 6,850. Dividing the former by the latter, PHP arrived at a new per capita price of $2,784.21.

Shortly after that, PHP submitted a second BAFO Proposal, dated May 16,1996. ¹⁸⁹ In that proposal, the Total Health Services Price Proposal was decreased to $17,436,694 but the divisor remained the same— 6,850. Consequently, PHP’s new per capita price was $2,545.50. PHP increased its estimate from 6,500 to 6,850, according to Burden, based on his “best estimate effort, distilling all of the information available to [him], as to what the actual billable population would be.” This information included, among other things, the number of beds reported in Addendum No. 1, talks with employees of the “incumbent contractor,” and “workload figures” from contracts in other areas of the state. It also included the number of inmates previously serviced, as reported in copies of the incumbent contractor’s contracts, furnished by Carpeneto.

Still, when asked whether he obtained “historical average daily population figures for the [Baltimore] region,” Burden replied, “No. The State wouldn’t provide it to us.” The reason was that “the region was undergoing change,” Burden testified. Specifically, “the two contracts that [PHP] would be replacing were ... being consolidated into one program”; also, the State was “opening up a central [booking] and intake facility,” as well as a new prison. Given these changes, Burden stated, “all historical figures were not to be relied upon,” in estimating the inmate population for PHP’s proposals. After receiving PHP’s second BAFO Proposal, the Department decided that the prices in the proposals submitted by PHP and the only other offeror were too high.

According to Carpeneto’s testimony before the Board, he informed PHP, at a conference with the offerors, of the need to use a divisor of 7,266 inmates, the number of inmates that “was the budgeted figure [the Department] had been given by the legislature.” Carpeneto further stated: “[W]e told [them] ... [the 7,266 number] had a certain amount of reliability to it, however, we could not guarantee that figure, that it could be higher or that it could be lower.” At that conference, Burden questioned Dr. Anthony Swetz, the Department’s Director of Inmate Healthcare Services, ¹⁹⁰ about the inmate population under the contract. Later, he claimed, at his deposition, that Swetz had assured him that the number of inmates would be the “least of your problems.” But he also conceded that “we never for a minute believed that we would have any more than 6850.” As to his confidence that the 7,266 number required by Addendum No. 5 would be the inmate population, Burden said it was “[f]ifty percent.” After the conference, the Department issued Addendum No. 5, stating that “the Agency, is making changes and clarifications ... in order to have you reduce your Total Price and Per Capita Price.” One such change and clarification was that the offerors were to use 7,266 as a divisor. In other words, Addendum No. 5 required the offerors to “base the Total Price and Per Capita Price on the figure of 7,266 inmates.” PHP submitted a third BAFO Proposal, dated May 20, 1996, with a Total Health Services Price of $16,544,508 and a divisor of 7,266 inmates. PHP computed its per capita price as $2,276.98.

In June 1996, the Department awarded the “Baltimore Inmate Health Care” contract to PHP. The contract was for “the provision of inmate health services in the Baltimore Region for the period of July 1, 1996 through June 30, 1997.” The contract provided that PHP would receive payments monthly, based on the “[Per Capita Price] multiplied by the Billable Population Count.” The contract defined the Billable Population Count as “the sum of the average daily populations for the month for the facilities in the Region.” The contract stated that the “average daily population will be based on the figures from the Resident Population column of the Average Daily Population report generated monthly by the [Department], but [will] be calculated to exclude” a class of “[individuals in pretrial status” and of “[probationers and parolees.” In June 1997, the Department “exercised its option to renew the contract for an additional year.” Several months later, PHP Vice President and CEO, Michael D. Starr, sent a letter, dated November 22, 1996, to ¹⁹¹ Swetz. In the letter, Starr pointed out “the revenue shortfall resulting from a variance in the number of inmates and increased operating costs resulting from increased intake processing volumes.” With respect to the revenue shortfall, Starr asserted that “[s]ince the inception of this contract on July 1, 1996, the billable population count has been significantly below the level of 7,266 required as the Per Capita Price Divisor in ... Addendum [No.J 5.” He also noted that “due to our initial uncertainty regarding the population at risk, PHP’s first bid submission used a figure of 6,850 inmates, and we revised this figure upward only after receipt of Addendum [No.] 5.” According to Starr, the inmate population count was 6,644 for July, 6,572 for August, 6,457 for September, and 6,474 for October, resulting in an average inmate population for these four months of 6,536.8.

Noting that PHP’s contract price was comprised of its Primary Care Service Price, Secondary Care Services Price, Operating Cost, and Equipment Costs, he explained that PHP’s “Primary Care Service Price ... is comprised entirely of fixed labor costs resulting directly from the contractually required staffing levels.” And “[s]inee the level of staffing is fixed by the contract, PHP is unable to reduce staffing and [its] associated costs regardless of the billable count.” Consequently, “for each inmate under the prescribed level of 7,266, PHP incurs,” he asserted, “an unreimbursed cost of $113.16 per month.” The “inmate population shortfall,” Starr claimed, had caused a total revenue shortfall of $330,087.72 for July, August, September, and October. “[T]o avoid submission of a claim to the State for an equitable adjustment,” Starr proposed in his letter that the Department consider adding a “Monthly Population Adjustment” to the contract. This adjustment would, according to Starr, “represent the revenue shortfall computed by multiplying the Population Shortfall times the [Primary Care Service Price].” ¹⁹² In a written response to Starr, dated December 19, 1996, Swetz stated that the Department issued Addendum No. 5 “to fix the capita price divisor to eliminate differential pricing and identify the lowest [offeror].” He further stated that the “number represents the number of beds available within the Baltimore region in which the Department may house inmates/detainees. Each offeror had the same opportunity to staff its proposals and to establish its per capita price against that number.” Swetz also questioned the accuracy of Starr’s statement that PHP’s primary care costs were fixed. He proposed that if “PHP can reduce personnel costs and maintain the level of the delivery of treatment services, and amend [its] monthly staffing schedule to our mutual satisfaction, we may be able to reduce your revenue shortfall.” On April 21, 1997, Starr filed, with Carpeneto, a “Notice of Claim” letter requesting modifications to the contract with respect to payment to the contractor and per capita price; and equitable adjustments, damages and other appropriate relief to cover underpayment made to the contractor by the agency because the per capita price was based upon a projection of a number of inmates that was significantly higher than the actual number of average daily populations calculated each month for the facilities in the region, because inmate intakes are substantially higher and therefore, associated expenses for those additional intakes are more costly than projected at the time of contracting.

Following the notice of claim, Starr sent a follow-up letter, dated May 20, 1997, to Carpeneto. Among other things, the letter raised the issue of “Inmate Population Shortages” and claimed that: “By mandating [7,266 as the divisor in Addendum No. 5] and accepting PHP’s Total Price, the Department has de facto created a fixed per capita reimbursement rate for primary services” and thus “[f]or each inmate below the level of 7,266 PHP is inappropriately deprived of reimbursement for a fixed cost portion of the Primary Services Price.” It further asserted that “PHP’s total Primary Services Price of $9,866,664 divided by 7,266 equals $1,357.92 or $113.16 per inmate per month.” The letter included a chart that com ¹⁹³ pared the “specified” inmate population of 7,266 with the “actual” populations from July 1996 to April 1997 and then calculated a “shortfall” number of inmates for each month. The chart showed a total shortfall of 6,848 inmates from July 1996 through April 1997. Thus, the letter requested an equitable adjustment to be calculated as follows: “6,848 inmate X $113.16 = $774,919.68.” In a letter, dated July 2, 1998, Carpeneto denied PHP’s claim, stating that “[a]t no time, either during the solicitation process or in the contract, did the Department state that your firm would be compensated for a specific number of inmates.” He further explained that: [T]he Department specifically stated in the solicitation documents and during negotiations that, although the Department was providing information about the number of beds in the Baltimore Region, the inmate population in the Region and the divisor that the offerors were to use to determine the Per Capita Price, the Department would not guarantee a minimum population.

After the denial of its claim, PHP filed a Notice of Appeal with the Maryland State Board of Contract Appeals. 1 In a written opinion, the Board denied PHP’s appeal. After resolving the issue of the timeliness of PHP’s claim in PHP’s favor, the Board declared “that the Department’s representation in Addendum No. 5 or otherwise of the number of inmates in the Billable Population Count does not constitute an erroneous representation of a material matter that [PHP] was entitled to rely upon.” It added that even if “the Department made a positive and affirmative representation as to the number of inmates to be housed in the Baltimore Region, ... [PHP] did not reasonably rely on that number, and may not, therefore, prevail on its claim for an equitable adjustment.” Following the Board’s decision, PHP filed a petition in the Circuit Court of Baltimore City for judicial review of that ¹⁹⁴ decision; whereupon the Department filed a cross-petition for judicial review. After a hearing, the circuit court issued an order granting PHP’s petition for judicial review, reversing the Board’s denial of PHP’s request for an equitable adjustment, and remanding the matter to the Board to determine the amount of that adjustment. The circuit court also denied the Department’s cross-petition for judicial review, and affirmed the Board’s finding as to the timeliness of PHP’s claim.

From that decision, the Department noted this appeal. Standard of Review When reviewing an administrative agency decision, our role “is precisely the same as that of the circuit court.” Dep’t Of Health & Mental Hygiene v. Shrieves, 100 Md.App. 283, 303-04 , 641 A.2d 899 (1994). We review only the decision of the administrative agency itself. Ahalt v. Montgomery County, 113 Md.App. 14, 20 , 686 A.2d 683 (1996).

We “do not evaluate the findings of fact and conclusions of law made by the circuit court.” Consumer Prot. Div. v. Luskin’s, Inc., 120 Md.App. 1, 22 , 706 A.2d 102 (1998) rev’d in part on other grounds, 353 Md. 335 , 726 A.2d 702 (1999). “Thus, whether the circuit court applied the wrong standard of review is of no consequence if our own review satisfies us that the [Board’s] decision was proper.” Giant Food, Inc. v. Dep’t of Labor, Licensing & Regulation, 124 Md.App. 357, 363 , 722 A.2d 398 (1999), rev’d on other grounds, 356 Md. 180 , 738 A.2d 856 (1999). To conduct a proper inquiry of an administrative agency’s decision, we “ ‘must be able to discern from the record the facts found, the law applied, and the relationship between the two.’ ” Sweeney v. Montgomery County, 107 Md.App. 187, 197 , 667 A.2d 922 (1995) (quoting Forman v. Motor Vehicle Admin., 332 Md. 201, 221 , 630 A.2d 753 (1993)). In reviewing the decision of the Board, our role “is limited to determining if there is substantial evidence in the record as a whole to support the agency’s findings and conclusions, and to determine if the administrative decision is premised upon an erroneous conclusion of law.” United Parcel ¹⁹⁵ Serv., Inc. v. People’s Counsel, 336 Md. 569, 577 , 650 A.2d 226 (1994).

Substantial evidence is “ ‘such relevant evidence as a reasonable mind might accept as adequate to support a conclusion.’ ” Md. State Police v. Warwick Supply & Equip. Co., 330 Md. 474, 494 , 624 A.2d 1238 (1993) (quoting State Admin. Board of Election Laws v. Billhimer, 314 Md. 46, 58 , 548 A.2d 819 (1988)). In making this determination, we must give “ ‘deference ... not only [to the Board’s] fact-findings, but to the drawing of inferences from the facts as well.’ ” Id.

(quoting Billhimer, 314 Md. at 59 , 548 A.2d 819 ). We must also accord deference to the Board’s “ ‘application of law to those [factual findings], if reasonably supported by the administrative record, viewed as a whole.’ ” Berkshire Life Ins. Co. v. Md. Ins. Admin., 142 Md.App. 628, 653, 791 A.2d 942 (2002) (quoting Ins.

Comm’r v. Engelman, 345 Md. 402, 411 , 692 A.2d 474 (1997)). “ ‘When, however, the agency’s decision is predicated solely on an error of law, no deference is appropriate and the reviewing court may substitute its judgment