A system of hospitals was denied recovery of state statutory prompt payment penalties under the terms of its hospital care agreement with a Medicare Advantage (MA) organization. The court found that while the parties had the ability to incorporate state statutory penalties into their agreement, the language of their agreement did not allow for such an interpretation. The court concluded that interest on late payments to the hospital system should be calculated using federal prompt pay rates, as set by the U.S. Treasury. Summary judgment was granted to the MA organization ( South Texas Health System v. Care Improvement Plus Company, February 9, 2016, Crane, R.).
Background. South Texas Health System (STHS) is a Medicare provider that owns and operates a number of hospitals in Hidalgo County, Texas. Care Improvement Plus (Care Improvement) is a MA organization providing health care coverage to Medicare beneficiaries. The parties entered into a Hospital Care Agreement (Agreement) whereby STHS agreed to treat individuals enrolled in Care Improvement’s MA plans. The Agreement included provisions for the timing of payments and for payment of “any interest owing or accruing on a claim under any applicable state or federal law or contract” if the parties fail to comply with the timing provisions. STHS alleged that it made some 453 claims pursuant to the Agreement that were not timely paid by Care Improvement.
The court previously granted summary judgment to Care Improvement. It dismissed STHS claims for violation of the Texas Insurance Code, specifically section 843.342, finding that regulations under Medicare Part C that regulate the prompt payment of claims under MA plans expressly preempted STHS’s claims under the Texas prompt pay statutes.
The only remaining claim before the court was STHS’s claim for breach of contract. STHS claimed that the Agreement incorporated the penalties set out for late payments under the section 843.342 of the Texas Insurance Code. In sum, STHS claimed over $11 million in statutory penalties for late payments of claims totaling roughly $22,000.
Analysis. As a threshold matter, the court decided that just because it previously found that state prompt pay laws were preempted by the federal regulatory scheme, this did not prevent the parties from voluntarily incorporating the penalties laid out in the preempted state regulations into their contractual agreement (i.e., such an private agreement is not regarded as a state-law requirement for the purposes of federal preemption). However, despite the ability to incorporate section 843 penalties into the Agreement, the court found that the language of the Agreement did not allow for such an interpretation. This was because the Agreement called for “interest owing or accruing on a claim under any applicable state or federal law” to be paid for late claims, and, by contrast, the Texas prompt pay provisions set forth “penalties,” not “interest.” The court concluded that the Texas statute clearly referred to “penalties,” and the Agreement provision discussing “interest” could not be reasonably be read to incorporate penalties.
The court further noted its reading of the Agreement coincided with agency guidance in effect at the time the Agreement was signed. Guidance from both the Texas Department of Insurance and CMS make clear that state prompt pay laws do not apply to MA plans generally. This agency guidance, while not determinative of the issue, provided the court with the regulatory context within which to read the Agreement.
With respect to the timeframe in which Care Improvement must pay a valid claim, the court found that the Agreement specifically referenced CMS regulations regarding prompt payment by MA organizations ( 42 C.F.R. 422.520)). The cited CMS regulation requires that MA organizations pay interest on valid claims that are not paid within 30 days in accordance with 42 U.S.C. § 1395h, which, in turn, sets the interest rates to be paid on late MA payments to the same rate used to calculate interest in other federal contracts. These interest rates, known as the Prompt Payment Interest Rates, are set by the Treasury Department. The court concluded that the use of these federal rates is the proper method calculating interest under the Agreement.