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Memorial Hermann Health System v. Blue Cross Blue Shield of Texas

United States District Court, S.D. Texas, Houston Division

November 17, 2017

MEMORIAL HERMANN HEALTH SYSTEM, Plaintiff,
v.
BLUE CROSS BLUE SHIELD OF TEXAS, Defendant.

          MEMORANDUM OPINION AND ORDER

          SIM LAKE, UNITED STATES DISTRICT JUDGE.

         Plaintiff, Memorial Hermann Health System, initiated this action on August 1, 2017, by filing a petition in the 133rd State District Court of Harris County, Texas, Cause No. 2017-50855, against defendant, Blue Cross Blue Shield of Texas ("BCBSTx"), for breach of contract, quantum meruit/unjust enrichment, and declaratory judgment under the Texas Declaratory Judgment Act, Tex. Civ. Prac. & Rem. Code § 37.003.[1] On September 3, 2017, defendant removed plaintiff's action to this court based on diversity jurisdiction.[2] Pending before the court is Defendant Health Care Service Corporation's Motion to Dismiss Pursuant to Rule 12(b)(3) for Improper Venue and Motion to Compel Arbitration ("Defendant's MD, " Docket Entry No. 8). For the reasons set forth below, Defendant's MD will be denied.

         I. Factual Background[3]

         Plaintiff is a non-profit, charitable healthcare system. Defendant offers, issues, and administers insurance plans that provide access to healthcare services. Persons covered by policies issued and administered by the defendant ("insureds") receive health care services from the plaintiff. The benefits that the defendant's insureds receive are governed by a number of different types of agreements between individual insureds and the defendant or an employer health plan administered by the defendant. Separate and apart from the agreements between the defendant and its insureds, the defendant and the plaintiff have entered into agreements that govern compensation and billing for services that plaintiff provides to insureds covered by defendant's various types of health insurance plans, e.g.. Health Maintenance Organization ("HMO"), Preferred Provider Organization ("PPO"), and Traditional Indemnity Business ("Traditional Indemnity") plans.[4] These agreements provide defendant a contractual discount from the plaintiff's usual and customary charges when its insureds receive health care services at plaintiff's facilities.

         One of the agreements that plaintiff and defendant entered into is the "Hospital Contract for Traditional Indemnity Business" ("Indemnity Contract" or "Traditional Contract") executed in 2005. The Traditional Contract provides a discounted rate, i.e., the PAR rate, for insureds covered by defendant's Traditional Indemnity plans. Plaintiff alleges that when the Traditional Contract was negotiated and signed, it was contemplated and agreed that it would cover reimbursement only for medical services provided to members of defendant's Traditional Indemnity plans. Plaintiff alleges that the PAR rate has consistently been applied to claims for all services provided by plaintiff to defendant's insureds covered by a Traditional Indemnity plan. Plaintiff alleges that in 2005 the PAR rate was 80% of billed charges for all inpatient and outpatient claims, excluding co-pays, coinsurance, and non-covered claims. Since 2005, through a series of amendments, the discount increased for the defendant's benefit such that by January 1, 2014, the PAR rate was down to 65% of billed charges, decreasing to 63.6% effective November 1, 2014, 63.2% effective October 15, 2015, 53% effective January 1, 2016, and 52.6% effective August 1, 2016.

         In late 2013 defendant began offering health insurance plans over exchanges created under the Affordable Care Act ("ACA"), with effective start dates of January 1, 2014. One of the ACA plans that defendant offered was the Blue Advantage HMO plan ("BAV HMO Plan"). Plaintiff alleges that because defendant wanted to reimburse plaintiff for care provided to BAV HMO Plan members at rates to which the plaintiff did not agree, defendant excluded the BAV HMO Plan from the parties' HMO contract, and designated the plaintiff as an "out-of-network" provider for BAV HMO Plan members.

         Plaintiff alleges that it has a statutory duty under the federal Emergency Medical Treatment and Active Labor Act ("EMTALA"), 42 U.S.C. § 1395dd et sea., to treat BAV HMO Plan insureds who present to one of its facilities with an emergency medical condition. Plaintiff alleges that under the Texas Insurance Code, defendant must "pay for emergency care performed by non-network physicians or providers at the usual and customary rate or at an agreed rate, " Tex. Ins. Code § 1271.155(a), and must "approve or deny coverage of poststabilization care as requested by a treating physician or provider within . . . one hour from the time of the request." Tex. Ins. Code § 1271.155(c). Plaintiff alleges that when a BAV HMO Plan insured seeks emergency treatment it verifies the insured's coverage and eligibility electronically with the defendant. Plaintiff alleges that if there is a subsequent change in status, such as if the insured is admitted to the hospital, the plaintiff notifies the defendant and requests authorization for treatment. Plaintiff alleges that the defendant typically responds that authorization for treatment is "pending, " but neither refuses nor objects to continued treatment, and does not coordinate, facilitate, or provide instructions to transfer the patient to an in-network facility. Because the defendant does not deny such requests for authorization within one hour as required by the Texas Insurance Code, plaintiff alleges that the defendant must pay for all care, whether emergency or post-stabilization, that plaintiff provides to BAV HMO Plan insureds. Plaintiff alleges that denial of authorization for post-stabilization treatment would require the defendant to coordinate transfer of the patient to an in-network facility and provide transfer instructions to the plaintiff.

         Plaintiff alleges that through negotiation in late 2013 conducted via oral and written communications, the parties agreed that the defendant could use the Traditional Contract's PAR rate to pay for healthcare services that plaintiff provided to BAV HMO Plan insureds when they presented with an emergency condition.[5]Plaintiff alleges that for approximately 18 months, from January 2014 through mid-2015, the defendant generally paid the plaintiff the PAR rate for healthcare services provided to BAV HMO Plan insureds both in the emergency room and in the hospital upon admission for continuing care. Plaintiff alleges that contrary to the parties' agreement and practice for 2014 and the first half of 2015, in mid-2015 the defendant took the position that plaintiff was required to transfer BAV HMO Plan insureds to a different, in-network facility once the patient's condition had - in the defendant's post-hoc opinion - stabilized, even if the insured did not want to be transferred.[6] Plaintiff alleges that it has provided emergency healthcare services to over 700 BAV HMO Plan insureds but that despite repeated demands for payment, defendant has not paid for those services.[7]

         II. Motion to Dismiss and Compel Arbitration

         Plaintiff's Petition asserts claims for breach of contract, quantum meruit/unjust enrichment, and declaratory judgment under the Texas Declaratory Judgment Act, Tex. Civ. Prac. & Rem. Code § 37.003.[8]

         Asserting that "[t]he operative" contract is the "Traditional Contract"[9] that "contains a mandatory arbitration agreement requiring that 'any Contract interpretation or claim issue' be resolved 'by arbitration under the commercial rules and regulations of the American Arbitration [ ("AAA") ], ' "[10] defendant moves the court to dismiss this action pursuant to Federal Rule of Civil Procedure 12(b)(3) for improper venue and to compel arbitration pursuant to the Federal Arbitration Act ("FAA"), 9 U.S.C. §§ 1 et seq., and/or the Texas General Arbitration Act ("TGAA"), Tex. Civ. Prac. & Rem. Code § 171.021(a).[11] Alternatively, the defendant moves the court to stay this action pending arbitration.[12]

         Asserting that it is not suing because defendant breached the Traditional Contract but, instead, because defendant "breached (and continues to breach) a verbal and email-based contract to pay [plaintiff] a particular rate for its treatment of patients covered by the . . . BAV HMO plan . . . (the 'BAV HMO Agreement'), "[13]plaintiff urges the court to deny Defendant's MD because the arbitration clause in the Traditional Contract does not apply to the BAV HMO Agreement.[14]

         A. Standard of Review and Applicable Law

         Defendant's motion to dismiss and to compel arbitration is a challenge to venue based on Federal Rule of Civil Procedure 12(b)(3) and the FAA or, alternatively, the TGAA.[15] The FAA, 9 U.S.C. §§ 1 et seq., creates "a body of federal substantive law of arbitrability, applicable to any arbitration agreement within the coverage of the Act." Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 103 S.Ct. 927, 941 (1983) (citing Prima Paint Corp. v. Flood & Conklin Manufacturing Corp., 87 S.Ct. 1801 (1967)). Section 2 of the FAA states that a written arbitration agreement in any contract involving interstate commerce is valid, irrevocable, and enforceable except on grounds that would permit the revocation of a contract in law or equity. 9 U.S.C. § 2.

         Section 3 of the FAA requires federal courts, on a party's motion, to stay litigation of claims subject to arbitration. 9 U.S.C. § 3. District courts may, in their discretion, dismiss an action instead of staying it when the entire controversy between the parties will be resolved by arbitration. See Fedmet Corp. v. M/V Buyalyk, 194 F.3d 674, 678 (5th Cir. 1999) ("If all of the issues raised before the district court are arbitrable, dismissal of the case is not inappropriate.") (citing Alford v. Dean Witter Reynolds, Inc., 975 F.2d 1161, 1164 (5th Cir. 1992)). The Fifth Circuit has explained that dismissal is appropriate in such circumstances because "[a]ny post-arbitration remedies sought by the parties will not entail renewed consideration and adjudication of the merits of the controversy but would be circumscribed to a judicial review of the arbitrator's award in the limited manner prescribed by law." Fedmet, 194 F.3d at 678 (quoting Alford, 975 F.3d at 1164) . Although Federal Rule of Civil Procedure 12(b) does not specifically provide for dismissal of an action based on enforcement of an arbitration clause, the parties do not dispute that defendant's motion to dismiss is governed by Rule 12(b) (3) .[16]"On a Rule 12(b) (3) motion to dismiss for improper venue, the court must accept as true all allegations in the complaint and resolve all conflicts in favor of the plaintiff." Braspetro Oil Services Co. v. Modec (USA), Inc., 240 Fed.Appx. 612, 615 (5th Cir. 2007) (per curiam). The court may look outside of the complaint and its attachments and review extrinsic materials, including affidavits. Ambraco, Inc. v. Bossclip B.V., 570 F.3d 233, 238 (5th Cir. 2009), cert, denied, 130 S.Ct. 1054 (2010) . Absent an evidentiary-hearing on a Rule 12(b)(3) motion, affidavits and other evidence submitted by the non-moving party are viewed in the light most favorable to that party. Id. (citing Murphy v. Schneider National, Inc., 362 F.3d 1133, 1138-40 (9th Cir. 2004)).

         Section 4 of the FAA permits a party to seek an order compelling arbitration if the other party has failed to arbitrate under a written agreement. 9 U.S.C. § 4. Courts apply a two-step inquiry when determining a motion to compel arbitration. See OPE International LP v. Chet Morrison Contractors, Inc., 258 F.3d 443, 445 (5th Cir. 2001) (per curiam) (citing Webb v. Investacorp, Inc., 89 F.3d 252, 257-58 (5th Cir. 1996) (per curiam) (quoting Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 105 S.Ct. 3346, 3355 (1985))). The first step is to determine whether the parties agreed to arbitrate their dispute. Id. The second step is to determine "whether legal constraints external to the parties' agreement foreclose[] the arbitration of those claims." Id. at 446 (citing Webb, 89 F.3d at 258).

         B. Analysis

         1. Did the Parties Agree to Arbitrate Their Dispute?

         The determination of whether the parties agreed to arbitrate their dispute requires consideration of two questions:

"(1) whether there is a valid agreement to arbitrate between the parties; and (2) whether the dispute in question falls within the scope of that arbitration agreement." Webb, 89 F.3d at 258. See Kubala v. Supreme Production Services, Inc., 830 F.3d 199, 201 (5th Cir. 2016) ("Enforcement of an arbitration agreement involves two analytical steps. The first is contract formation-whether the parties entered into any arbitration agreement at all. The second involves contract interpretation to determine whether this claim is covered by the arbitration agreement."). Challenges to the existence - as opposed to the enforceability, validity, or scope - of an agreement to arbitrate are for a court to decide. See DK Joint Venture 1 v. Weyand, 649 F.3d 310, 317 (5th Cir. 2011) ("[It] is for the courts and not the arbitrator to decide in the first instance[] a dispute over whether the parties entered into any arbitration agreement in the first place."); Will-Drill Resources, Inc. v. Samson Resources Co., 352 F.3d 211, 212 (5th Cir. 2003) ("[when] the very existence of any agreement to arbitrate is at issue, it is for the courts to decide based on state-law contract formation principles"). Courts generally apply "ordinary state-law principles that govern the formation of contracts, " Webb, 89 F.3d at 258 (quoting First Options of Chicago, Inc. v. Kaplan, 115 S.Ct. 1920, 1924 (1995)), but must give due regard to the federal policy favoring arbitration and resolve any ambiguities as to the scope of the arbitration clause itself in favor of arbitration. Id. See also Kubala, 830 F.3d at 202 ("Whether they entered [into] a valid arbitration contract turns on state contract law."). Under Texas law the party seeking to compel arbitration has the initial burden to establish the existence of a valid agreement to arbitrate between the parties and that the dispute at issue falls within the scope of that agreement. Cantella & Co., Inc. v. Goodwin. 924 S.W.2d 943, 944 (Tex. 1996) (per curiam). See also Venture Cotton Cooperative v. Freeman, 435 S.W.3d 222, 227 (Tex. 2014) ("A party-seeking to compel arbitration . . . must establish that the dispute falls within the scope of an existing agreement to arbitrate."). "Upon such proof, the burden shifts to the party opposing arbitration to raise an affirmative defense to the agreement's enforcement." Id. (citing J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223, 227 (Tex. 2003)).

         (a) The Parties Have a Valid Agreement to Arbitrate Defendant cites Article 11.C of the Traditional Contract as a valid agreement to arbitrate between the parties that has existed since 2005.[17] That agreement provides:

After exhausting the remedies contained in this Article 11, any Contract interpretation or claim issue which the HOSPITAL or BCBSTX determines has not been satisfactorily resolved shall be resolved by arbitration under the commercial rules and regulations of the American Arbitration Association, and in accordance with the Texas General Arbitration Act (Chapter 171 Texas Civil Practice and Remedies Code) .[18]

         Plaintiff does not dispute that Article 11.C of the Traditional Contract is a valid agreement to arbitrate between the parties.[19] Instead, plaintiff argues that the claims asserted in this action arise not from defendant's breach of the Traditional Contract but from the defendant's breach of "a verbal and email-based contract to pay [plaintiff] a particular rate for its treatment of patients covered by the Blue Advantage HMO ("BAV HMO") plan, a rate that [defendant] paid for about 18 months until it decided to breach that agreement (the 'BAV HMO Agreement'). "[20]

         Defendant replies:

The parties in this lawsuit are sophisticated entities whose relationship is governed by complex, heavily negotiated, written contracts. . . [Plaintiff] and [defendant] executed the Traditional Contract, as well as separate HMO and PPO Contracts in 2005. . . There is no dispute that each of those three contracts remains in force. Nor is there any dispute that, for more than a decade, the course of dealing between these parties has been to operate under written contracts, executed by duly authorized persons in each company with the power to bind their respective employers in contract.
Both parties agree that the Traditional Contract at issue in this Motion contains a forum selection provision requiring any contract interpretation or claim issue to be resolved by arbitration. . . The only dispute is whether the Traditional Contract reaches BAV [HMO] Plan members; if it does, then the Court must grant [defendant's] motion to compel arbitration.[21]

         By citing Article 11.C of the Traditional Contract defendant has satisfied its burden to show that there is a valid agreement to arbitrate between the parties. Plaintiff does not dispute that the Traditional Contract has been a valid agreement between the parties since 2005 or that Article 11. C of the Traditional Contract contains an arbitration provision. Plaintiff argues that the Traditional Contract does not cover the claims asserted in this action because those claims do not arise from an alleged breach of the Traditional Contract entered in 2005 but, instead, from an alleged breach of an oral and written BAV HMO Agreement entered in 2013. Plaintiff's argument raises the question of contract interpretation not contract formation. See Kubala, 830 F.3d at 201 (the question of contract formation asks "whether the parties entered into any arbitration agreement at all") . See also IQ Products Co. v. WD-40 Co., 871 F.3d 344, 348 (5th Cir. 2017) ("The first step is a question of contract formation only - did the parties form a valid agreement to arbitrate some set of claims.").

         Whether the Traditional Contract governs the claims asserted in this action is a question of contract interpretation that does not factor into the first question courts consider when deciding if a valid agreement to arbitrate exists. As the Fifth Circuit explained in Kubala, 830 F.3d at 202, the question at the first step of the analysis is not "whether there is an agreement to arbitrate the claim currently before the court. . . [T] he only-issue at the first step is whether there is any agreement to arbitrate any set of claims." Plaintiff recognizes as much by citing Buell Door Co. v. Architectural Systems, Inc., No. 3:02-CV-721-AH, 2002 WL 1968223, *6-*7 (N.D. Tex. August 20, 2002), for its holding that the arbitration provision in a written sales agreement did not apply to a dispute arising under a separate, subsequent verbal distributorship agreement.[22] Because the plaintiff in Buell Door - like the plaintiff here - did not dispute the existence of a ...


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