Merrill v. Agnesian Healthcare, Inc. (Summary)

CREDENTIALING

Merrill v. Agnesian Healthcare, Inc., No. 07-C-938 (E.D. Wis. Feb. 23, 2009)

The United States District Court for the Eastern District of Wisconsin denied a hospital’s summary judgment motion in a suit brought by an osteopathic obstetrician/gynecologist whose application for staff privileges was denied solely on the basis that he was an osteopathic physician.

The rules and regulations for the hospital’s Department of Obstetrics required applicants for staff privileges at the hospital to be certified by the American Board of Obstetrics and Gynecology ("ABOG"). The osteopath here was certified by the American Osteopathic Board of Obstetricians and Gynecologists. Accordingly, the hospital informed him that his application was incomplete and could not be processed. Even though the hospital ultimately changed course several months later and extended privileges to the osteopath, he had already moved out of town and incurred considerable expense. The court held that there was sufficient evidence that the hospital "denied" the osteopath’s application on the sole basis that he was an osteopath. According to the court, this conclusion was grounded in the fact that the hospital immediately granted the osteopath privileges once it eliminated its requirement that all applicants be ABOG certified.

The court also found that the hospital’s "Acknowledge, Consent and Release" form, signed by the physician at the time of application, did not protect the hospital because it only released from liability "all representatives and agents of [the hospital] and its Medical Staff" and not the hospital itself. Finally, the court ruled that Wisconsin’s peer review statute did not insulate the hospital from liability because it applied to those acting in good faith and participating in the review or evaluation of the services of health care facilities or charges for such services and not to the initial credentialing process.

 

Merkle v. Health Options, Inc.

DISTRICT COURT OF APPEAL OF THE STATE OF FLORIDA
FOURTH DISTRICT
July Term 2006

PETER F. MERKLE, M.D., P.A., on behalf of itself and all others
similarly situated,
Appellants,

v.

HEALTH OPTIONS, INC., AETNA HEALTH, INC., VISTA
HEALTHPLAN, INC., and NEIGHBORHOOD HEALTH PARTNERSHIP,
INC.,
Appellees.

Nos. 4D05-4552, 4D05-4553, 4D05-4554 & 4D05-4555

[ October 18, 2006 ]

HAZOURI, J.

Peter F. Merkle, M.D., P.A. (Merkle) filed four class action complaints
against Health Options, Inc., Vista Healthplan, Inc., Neighborhood
Health Partnership, Inc., and Aetna Health, Inc., individually (collectively
referred to as the “HMOs”). Merkle is a professional association
providing emergency orthopaedic services, as a non-participating
provider, to patients insured by the HMOs. Merkle raised four claims in
each complaint: (1) violations of section 641.513(5), Florida Statutes
(2003), (2) unjust enrichment and quantum meruit, (3) account stated,
and (4) declaratory and injunctive relief. Merkle appeals from orders
dismissing, with prejudice, each of its four complaints.1 We affirm the
trial court’s dismissal of Merkle’s account stated claims, but reverse the
trial court’s dismissal of the remaining claims.

Emergency service providers like Merkle are required to care for HMO
subscribers regardless of whether the provider participates in the HMO’s
health plan. See § 641.513(2), Fla. Stat. (2003). However, section
641.513(5), Florida Statutes (2003), dictates how an HMO must
reimburse these non-participating providers. The statute mandates that:

1 These four cases were consolidated for the purposes of appeal.

Reimbursement for services pursuant to this section by a
provider who does not have a contract with the health
maintenance organization shall be the lesser of:
(a) The provider’s charges;
(b) The usual and customary provider charges for similar
services in the community where the services were provided;
or
(c) The charge mutually agreed
the health
to by
maintenance organization and the provider within 60 days of
the submittal of the claim.
Such reimbursement shall be net of any applicable
copayment authorized pursuant to subsection (4).

§ 641.513(5), Fla. Stat. (2003). Specifically, Merkle claimed that
beginning in 2003, the HMOs violated section 641.513(5) by paying class
members “artificially reduced payment amounts” equal to 120% of the
Medicare reimbursement schedule, rather than the usual and customary
provider charges.

The HMOs filed four separate motions to dismiss Merkle’s complaints.
Collectively, they argued the following:

1. Merkle’s claims under section 641.513(5) and
for
declaratory relief fail to state a cause of action because
section 641.513(5) does not authorize a private cause of
action for its violation. Thus, Merkle must assert his
claims through an alternative dispute resolution process
provided for in section 408.7057, Florida Statutes.
2. Merkle’s unjust enrichment/quantum meruit claim fails
to state a cause of action because it does not allege any
ultimate facts to show that Merkle conferred a benefit on
the HMOs, or that the HMOs voluntarily and knowingly
accepted any benefit from Merkle.
3. Merkle’s claim for account stated fails to state a cause of
action because the parties never agreed on the amount
the HMOs would pay Merkle.
4. Merkle’s request for declaratory relief is a request for an
impermissible
advisory
opinion
because
section
641.513(5) does not authorize a private cause of action.

The trial court held a consolidated hearing on the motions to dismiss,
and entered four virtually identical orders granting the motions to

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dismiss, with prejudice, and entering final judgment in favor of the
HMOs on all claims. The trial court concluded that:

1. No private right of action exists under section 641.513(5).
2. Merkle’s complaints failed to state a cause of action for
unjust enrichment/quantum meruit because the HMOs
received no benefit from Merkle.
3. The dismissal of Merkle’s unjust enrichment claim did not
violate his fundamental right of access to the courts
because any final agency order would be subject to
appellate review.
4. Merkle’s claims for account stated failed to state a cause
of action because the Explanation of Benefits attached to
Merkle’s complaints showed that the HMOs did not agree
to pay Merkle’s billed charges.
5. Granting Merkle leave to amend would be futile.

“In reviewing a motion to dismiss, a trial court is limited to the four
corners of the complaint, and it must accept all the allegations in the
complaint as true.” Royal & Sunalliance v. Lauderdale Marine Ctr., 877
So. 2d 843, 845 (Fla. 4th DCA 2004) (citing Taylor v. City of Riviera
Beach, 801 So. 2d 259, 262 (Fla. 4th DCA 2001)). “‘Because a ruling on
a motion to dismiss for failure to state a cause of action is an issue of
law, it is reviewable on appeal by the de novo standard of review.’” Royal
& Sunalliance, 877 So. 2d at 845 (quoting Bell v. Indian River Mem’l
Hosp., 778 So. 2d 1030, 1032 (Fla. 4th DCA 2001)).

Merkle argues first that the trial court erred in finding that section
641.513(5) does not imply a private right of action. We agree. Merkle
in Adventist Health
relies on the recent Fifth District decision
System/Sunbelt, Inc. v. Blue Cross & Blue Shield, 934 So. 2d 602 (Fla.
5th DCA 2006).

Adventist Health is directly analogous to the instant case. In
Adventist Health, a hospital providing emergency treatment to HMO
subscribers brought a declaratory judgment complaint against the HMO
seeking an interpretation of section 641.513(5). 934 So. 2d at 603. The
HMO argued that it was obligated only to pay an amount equal to 120%
of Medicare reimbursement rates. Id. The hospital argued that section
641.513(5) required the HMO to pay the “‘usual and customary provider
charges for similar services in the community.’” Adventist Health, 934
So. 2d at 603. The appellate court recognized the distinction set forth in
Murthy v. N. Sinha Corp., 644 So. 2d 983 (Fla. 1994), between statutes

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that “purport to establish civil liability” and statutes that “merely [make]
provision to secure the safety or welfare of the public as an entity.”
Adventist Health, 934 So. 2d at 604 (quoting Murthy, 644 So. 2d at 986).
The court recognized that “‘[i]n general, a statute that does not purport to
establish civil liability but merely makes provision to secure the safety or
welfare of the public as an entity, will not be construed as establishing
civil liability.’” Id. The court concluded that:

[Section 641.513(5)] . . . does establish civil liability. This
the litigants acknowledge. The dispute here is not whether
liability is imposed by the statute, but the methodology for
use in establishing the amount of that liability and the
applicable enforcement remedy. Under these circumstances,
a private right of action may be implied.

Adventist Health, 934 So. 2d at 604 (citing Murthy, 644 So. 2d at 986)
(footnotes omitted).

in Adventist Health

the court
this conclusion,
In reaching
distinguished three cases that the HMOs in the present case rely on:
Villazon v. Prudential Health Care Plan, Inc., 843 So. 2d 842 (Fla. 2003);
Fla. Physicians Union, Inc. v. United Healthcare of Fla., Inc., 837 So. 2d
1133 (Fla. 5th DCA 2003); and Greene v. Well Care HMO, Inc., 778 So. 2d
1037 (Fla. 4th DCA 2001). In Villazon, the personal representative of an
HMO subscriber brought a wrongful death action based on negligence
against the subscriber’s doctor and HMO. 843 So. 2d at 844. The
personal representative claimed that the HMO “‘assumed a non-delegable
duty to render medical care to his wife in a non-negligent manner when
she purchased health care coverage from [the HMO].’” Id. at 852
(quoting Villazon v. Prudential Health Care Plan, Inc., 794 So. 2d 625, 628
(Fla. 3d DCA 2001)). The personal representative claimed that the
nondelegable duty arose under the Health Maintenance Organization Act
(“HMO Act”), sections 641.17-641.3923, Florida Statutes
(2000).
Villazon, 843 So. 2d at 852. The Supreme Court of Florida concluded
that a private right of action could not be implied under the HMO Act
absent an expression of legislative intent to do so. Id. (citing Murthy, 644
So. 2d at 986). The supreme court distinguished the HMO Act from acts
like the nursing home statute, where the legislature expressly recognized
a right of nursing home residents to receive adequate health care and a
corresponding private right of action for deprivation of the residents’
rights. Villazon, 843 So. 2d at 852 (citing § 400.022(1)(l), Fla. Stat.
(1997); § 400.023(1), Fla. Stat. (1997)). The supreme court refused to

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imply a private cause of action where the legislature did not specifically
provide for one.

In Florida Physicians, an organization representing medical care

providers filed suit against an HMO seeking a declaration that the HMO
violated section 641.3903, Florida Statutes, by engaging in various
payment methods. Florida Physicians, 837 So. 2d at 1134. The trial
court dismissed the action, ruling that section 641.3903 did not provide
a private cause of action. Id. at 1134-35. The appellate court agreed,
concluding that the action merely sought an advisory opinion because
the statute did not “expressly or impliedly [authorize] a private suit
brought for purposes of enforcing or declaring violations of the statute.”
Id. at 1137.

In Greene, an HMO subscriber alleged that the HMO’s “failure to

honor her claim for benefits constituted bad faith handling of a claim and
unfair trade practice in violation of sections 641.3901-.3905 and
624.155, Florida Statutes (1997).” 778 So. 2d at 1039. The HMO
subscriber in Greene argued that the trial court erred when it found that
the HMO Act did not authorize a private cause of action. Id. at 1039.
This court disagreed and declined to imply a bad faith or unfair trade
practice cause of action in the HMO Act. Id. at 1040. Instead, this court
directed that the HMO subscriber could pursue breach of contract and
tort law claims against the HMO based on common law principles. Id. at
1041-42.

In Adventist Health, the appellate court found the holdings in Villazon,

Florida Physicians and Greene inapplicable to section 641.513(5).
Adventist Health, 934 So. 2d at 604. In Adventist Health, the appellate
court concluded:

We think Florida Physicians is distinguishable. The statute
at issue there did not purport to establish civil liability.
Rather, it merely made provision for the safety and welfare of
the public by declaring certain business practices by HMOs
to be unfair and deceptive and empowering the Department
of Insurance to investigate and punish offenders.

Adventist Health, 934 So. 2d at 604 (citing Murthy, 644 So. 2d at 986).
The appellate court went on to note that Villazon and Greene were
similarly distinguishable. Adventist Health, 934 So. 2d at 604 n.3.

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As recognized in Adventist Health, the cases of Villazon, Florida
Physicians and Greene are distinguishable from the instant case. First,
Villazon, Florida Physicians and Greene are specifically limited to
provisions
Section
in the HMO Act, sections 641.17-641.3923.
641.513(5), at issue in this case, is not part of the HMO Act. Rather, it is
included within part III of Chapter 641. Second, unlike 641.513(5), each
of the statutory provisions at issue in Villazon, Florida Physicians and
Greene were aimed specifically at protecting the public as an entity; i.e.:
preventing negligence, unfair and deceptive trade practices and bad faith.
Section 641.513(5) is aimed at protecting non-participating providers
who must provide emergency medical services to HMO subscribers,
ensuring they are compensated fairly. The question is not whether the
HMOs are liable under section 641.513(5), but rather what is the
appropriate method for determining the extent of that liability. Adventist
Health, 934 So. 2d at 604.

Not only is the instant case distinguishable from Villazon, Florida
Physicians and Greene, but it is well-settled in Florida that “[i]t must be
assumed that a provision enacted by the legislature is intended to have
some useful purpose.” Smith v. Piezo Tech. & Prof’l Adm’rs, 427 So. 2d
182, 184 (Fla. 1983) (citing Girard Trust Co. v. Tampashores Dev. Co.,
117 So. 786 (Fla. 1928)). In Smith, the Supreme Court of Florida implied
a statutory cause of action for the wrongful discharge of employees who
sought workers’ compensation benefits. 427 So. 2d at 183-84. The
supreme court acknowledged that “because the legislature enacted a
statute that clearly imposes a duty and because the intent of the section
is to preclude retaliatory discharge, the statute confers by implication
every particular power necessary to insure the performance of that duty.”
Id. at 184 (citing Mitchell v. Maxwell, 2 Fla. 594 (1849)). Section
641.513(5) clearly imposes a duty on HMOs to reimburse non-
participating providers according to the statute’s dictates, not based on
Medicare reimbursement rates. The intent of the section is to ensure
that the non-participating providers are adequately paid for a service
they are required by law to perform. See § 641.513(2), Fla. Stat. (2003)
(“[p]rehospital and hospital-based trauma services and emergency
services and care must be provided to a subscriber of a health
maintenance organization as required under ss. 395.1041, 395.4045,
and 401.45”).

The HMOs contend also that this court’s decision in Plantation
General Hospital Ltd. Partnership v. Horowitz, 895 So. 2d 484 (Fla. 4th
DCA 2005), rev. granted, 924 So. 2d 808 (Fla. 2006), supports their
argument that no private right of action may be implied in this case.

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There, the plaintiff, who held an unsatisfied medical malpractice
judgment against an uninsured physician, sought recovery under section
458.320, Florida Statutes (2004), from the hospital which granted staff
privileges to the physician. Horowitz, 895 So. 2d at 485-86. Section
458.320 in part requires licensed physicians to establish financial
responsibility to satisfy malpractice judgments by specified methods.
This court concluded in Horowitz that:

We are unable to find any indication anywhere in the entire
statutory scheme that a money damages remedy against a
hospital is within any legislative purpose discernible from
the text adopted. From the statute itself, we are unable to
find any legal justification for any kind of money damages
remedy against the hospital under any theory.

895 So. 2d at 488. Thus, a court may imply a private cause of action
only where the statutory scheme and statute itself indicate a legislative
purpose to do so. Id. at 487-88.

Horowitz is inapposite to this case. Unlike Horowitz, this is not a case
where we are unable to find any justification in the statutory scheme or
text for any kind of money damages remedy against the HMOs under any
theory. Parties have “the right to maintain a private cause of action as
the persons the legislature intended to protect by the enactment” of a
particular statute. Moyant v. Beattie, 561 So. 2d 1319, 1320 (Fla. 4th
DCA 1990). In enacting 641.513(5), the legislature intended to protect
not only subscribers, but also non-participating providers. As the amici
curiae2 supporting Merkle’s position point out, the terms of section
641.513(5) are obligatory (“shall”). Further, legislative history confirms
that
the
legislature
intended non-participating providers
to be
reimbursed in accordance with the statute. See Fla. H.R. Comm. on
Health Care, CS for HB 979 (1996) Bill Analysis 4 (May 14, 1996) (on file
with comm.) (indicating that the legislature intended “that subscribers
will receive needed services for which hospitals and emergency room
physicians will receive reimbursement”).

2 Two amici curiae briefs were filed in this case on behalf of Merkle’s position.
The first brief was filed by the Florida Hospital Association, Florida College of
Emergency Physicians, Florida Medical Association, the American Medical
Association, the American College of Emergency Physicians and the Florida
Orthopaedic Society. The second brief was filed by the Florida Society of
Pathologists and the American Pathology Foundation.

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The HMOs argue further that the only avenues for vindication of
Merkle’s rights under section 641.513(5) are either (1) filing a claim
under ERISA, the federal Employee Retirement Income Security Act, or
(2) participating in the alternative dispute resolution process established
in section 408.7057, Florida Statutes. We decline to address ERISA’s
applicability to this case, as the issue was not discussed or raised below,
and we disagree with the HMOs’ contention that dispute resolution
under section 408.7057 is mandatory. Section 408.7057(2)(a), Florida
Statutes (2005), provides in pertinent part, that:

[T]he [Florida Agency for Health Care Administration (AHCA)]
shall establish a program by January 1, 2001, to provide
assistance to contracted and noncontracted providers and
health plans for resolution of claim disputes that are not
resolved by the provider and the health plan. The agency
shall contract with a resolution organization to timely review
and consider claim disputes submitted by providers and
health plans and recommend to the agency an appropriate
resolution of those disputes.

There is no indication in section 408.7057 that the dispute resolution
process is mandatory. In Adventist Health, the court noted the following:

We disagree that anything in the language of the statute
manifests an intent by the Legislature to confer upon [AHCA]
exclusive jurisdiction to resolve this dispute, nor do we agree
that the statutory, voluntary dispute resolution process
established pursuant to section 408.7057, Florida Statutes
(2005), must first be exhausted. Although not determinative,
it is noteworthy that the AHCA responded to a complaint
made by Florida Hospital involving the instant dispute by
stating that it “‘does not have specific rule making authority
to determine what specific payment amounts would comply
with Section 641.513(5)(b), Florida Statutes. . . .’” Instead,
the AHCA directed the parties to bring this issue before a
‘court of competent jurisdiction or the provider dispute
resolution program as outlined in section 408.7057.’

934 So. 2d at 604 n.2; see also Found. Health v. Garcia-Rivera, M.D., 814
So. 2d 537, 538 (Fla. 3d DCA 2002) (finding that class action proceedings
may be appropriate despite arbitration provisions in agreements between
providers and HMOs). Thus, while the dispute resolution process under
section 408.7057 may provide an adequate review of a non-participating

– 8 –

provider’s claims under section 641.513(5),3 it is not the only avenue of
review.4

Thus, we find that the trial court erred in concluding that section
641.513(5) does not imply a private cause of action.

Merkle’s next argument on appeal is that the trial court erred in
failing to grant it leave to amend its complaints to assert a third-party
beneficiary claim under Westside EKG Associates v. Foundation Health,
932 So. 2d 214 (Fla. 4th DCA), rev. granted, 917 So. 2d 193 (Fla. 2005).
We disagree. “Failure to seek leave of court or written consent of [the]
adverse party to amend [a] complaint prior to dismissal with prejudice
and failure to then move for a rehearing requesting leave to amend,
precludes raising [the] issue for [the] first time on appeal.” Johnson v.
RCA Corp., 395 So. 2d 1262, 1263 (Fla. 3d DCA 1981); see also Century
21 Admiral’s Port, Inc. v. Walker, 471 So. 2d 544, 544 (Fla. 3d DCA
1985); Hohenberg v. Kirstein, III, 349 So. 2d 765, 766-67 (Fla. 3d DCA
1977). The record reveals that Merkle was aware of Westside’s holding
before the trial court dismissed its claims, but failed to seek leave of
court or consent of the HMOs to amend its complaints. Further, Merkle
never sought leave to amend by moving for a rehearing. Accordingly,
Merkle may not be heard for the first time on appeal regarding its right to
amend its complaint to add a third-party beneficiary claim.

Merkle claims also that the trial court erred in dismissing its unjust
enrichment claims on the basis that Merkle conferred no benefit on the
HMOs. We agree. In Hillman Construction Corp. v. Wainer, 636 So. 2d
576 (Fla. 4th DCA 1994), this court explained:

The elements of a cause of action for unjust enrichment are:
(1) plaintiff has conferred a benefit on the defendant, who

3 The HMOs argue correctly that the dispute resolution process results in final
agency orders that may be appealed to the district courts of appeal, and that
AHCA can order HMOs to make additional payments to providers on disputed
claims submitted to the dispute resolution program. See § 408.7057, Fla. Stat.
(2005); § 120.68(1), Fla. Stat. (2005); Fla. Admin. Code R. 59A-12.030(3)(4)
(2006); Fla. R. App. P. 9.030.
4 Merkle argues also that the dispute resolution process cannot be the exclusive
remedy because the enabling statute, section 408.7057, was passed years after
section 641.513(5). Before the availability of the dispute resolution process,
then, AHCA could presumably only levy fines and impose administrative
sanctions, but not order appropriate reimbursement. A legal action would have
been necessary.

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has knowledge thereof; (2) defendant voluntarily accepts and
retains the benefit conferred; and (3) the circumstances are
such that it would be inequitable for the defendant to retain
the benefit without paying the value thereof to the plaintiff.

Id. at 577 (citing Henry M. Butler, Inc. v. Trizec Props., Inc., 524 So. 2d
710 (Fla. 2d DCA 1988)). This court went on to state that “[c]omplaints
should not be dismissed for failure to state a cause of action unless the
movant can establish beyond any doubt that the claimant could prove no
set of facts whatever in support of his claim.” Hillman Constr. Corp., 636
So. 2d at 578 (citing Martin v. Highway Equip. Supply Co., 172 So. 2d
246 (Fla. 2d DCA 1965)). In reviewing the dismissal of a claim, the
appellate court “do[es] not consider the ultimate merits of [a party’s]
claim, but merely whether [the party] can plead it.” Greenfield v. Manor
Care, Inc., 705 So. 2d 926, 931 (Fla. 4th DCA 1997) (citing Hillman
Constr. Corp., 636 So. 2d at 577), overruled on other grounds, Beverly
Enters.-Fla., Inc. v. Knowles, 766 So. 2d 335 (Fla. 4th DCA 2000).

In the instant case, the trial court found, as a matter of law, that “any
benefit from services rendered by Merkle flowed to emergency room
patients, not [the HMOs].” However, as Merkle argues, this conclusion
defies the dictates of Hillman and Greenfield. The trial court should not
have considered the ultimate merits of Merkle’s unjust enrichment claim
at the motion to dismiss stage. Merkle alleged facts sufficient to support
its argument that Merkle’s treatment of the subscribers conferred a
benefit on the HMOs. The complaints also alleged the elements of an
unjust enrichment/quantum meruit claim.

Merkle’s next argument on appeal is that the trial court erred in
dismissing Merkle’s account stated claims. We disagree. “For an
account stated to exist, there must be agreement between the parties
that a certain balance is correct and due and an express or implicit
promise to pay this balance.” Carpenter Contractors of Am., Inc. v.
Fastener Corp. of Am., Inc., 611 So. 2d 564, 565 (Fla. 4th DCA 1992)
(citing Merrill-Stevens Dry Dock Co. v. Corniche Exp., 400 So. 2d 1286
(Fla. 3d DCA 1981)). Merkle contends that sections 641.513(2) and
641.513(5) create an implied agreement between Merkle and the HMOs
as to the balance owed by the HMOs. However, this argument is
tenuous, at best. Merkle’s entire lawsuit is premised on the HMOs’
failure to pay according to their statutory obligations, which compels the
conclusion that there is no agreement between Merkle and the HMOs as
to the balance that is due and owing. As the HMOs argue, the
Explanation of Benefits attached to each of Merkle’s complaints

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illustrates that the parties have failed to reach an agreement on what
amount is owed to Merkle in these cases. “‘If an exhibit facially negates
the cause of action asserted, the document attached as an exhibit
controls and must be considered in determining a motion to dismiss.’”
Shumrak v. Broken Sound Club, Inc., 898 So. 2d 1018, 1020 (Fla. 4th
DCA 2005) (quoting Fladell v. Palm Beach County Canvassing Bd., 772
So. 2d 1240, 1242 (Fla. 2000)). Accordingly, the trial court did not err in
dismissing Merkle’s account stated claims.

Merkle’s last argument is that the trial court erred in dismissing its
claim for declaratory relief pursuant to section 86.021, Florida Statutes
(2005), to clarify its rights, and those of the putative class, under section
641.513(5). In Adventist Health, the court reversed the trial court’s
dismissal of a provider’s declaratory judgment complaint seeking an
interpretation of section 641.513(5)(b). Adventist Health, 934 So. 2d at
604. The court concluded:

Because a civil remedy exists, whether arising from statute
or common law, a request for declaratory relief is authorized
because an actual dispute, not merely a hypothetical one,
exists between the parties.

Here, the request for a declaration falls squarely within
the plain language of the declaratory judgment statute. The
request involves an actual controversy between two parties
who have an ongoing dispute concerning the meaning of the
statute. Unquestionably, the parties’ transactions are
governed by
the statute.
The request
for
judicial
construction of the statute, therefore, is proper.

Id. Because we agree with the court’s reasoning in Adventist Health, we
conclude that the trial court erred in dismissing Merkle’s claims for
declaratory relief.

We affirm the trial court’s dismissal of Merkle’s account stated claims,
but reverse the trial court’s dismissal of Merkle’s remaining claims and
remand for further proceedings.

Affirmed in Part, Reversed in Part, and Remanded.

SHAHOOD, J., concurs.
STONE, J., concurs in part and dissents in part with opinion.

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STONE, J., concurring in part and dissenting in part.

As to dismissal of the count for unjust enrichment, I would affirm. In
all other respects, I concur fully with the opinion.

* * *

Consolidated appeals from the Circuit Court for the Fifteenth Judicial
Circuit, Palm Beach County; Jonathan D. Gerber, Judge; L.T. Case Nos.
502005CA004514XXXXMB,
502005CA004454XXXXMB,
502005CA004511XXXXMB & 502005CA004516XXXXMB.

Paul J. Geller, Stuart A. Davidson, Marisa N. DeMato and Nicole R.
Avallone of Lerach Coughlin Stoia Geller Rudman & Robbins, LLP, Boca
Raton, Sanford Svetcov of Lerach Coughlin Stoia Geller Rudman &
Robbins, LLP, San Francisco, California, Eric Lee of Lee & Amtzis, P.L.,
Boca Raton, Lawrence Kopelman and Douglas Blankman of Kopelman &
Blankman, P.A., Fort Lauderdale, and Patrick W. Lawlor of Patrick
Lawlor, P.A., Fort Lauderdale, for appellants.

Stephanie Alexander and Edward J. Pozzuoli of Tripp Scott, P.A., Fort
Lauderdale, for Amici Curiae Florida Hospital Association, Florida College
of Emergency Physicians, Florida Medical Association, the American
Medical Association, the American College of Emergency Physicians, and
the Florida Othopaedic Society.

Steven R. Weinstein and William J. Spratt, Jr., of Kirkpatrick &
Lockhart Nicholson Graham, LLP, Miami, for Amici Curiae The Florida
Society of Pathologists and The American Pathology Foundation.

Miguel A. Estrada and Geoffrey M. Sigler of Gibson, Dunn & Crutcher,
LLP, Washington, D.C., and Michael Keith Winston of Carlton Fields,
P.A., West Palm Beach, for appellee Aetna Health, Inc.

W. Edward McIntyre and Nancy W. Gregoire of Bunnell, Woulfe,
Kirschbaum, Keller, McIntyre, Gregoire & Klein, P.A., Fort Lauderdale,
Scott Jared Fisher of Neal, Gerber & Eisenberg, LLP, Chicago, IL, Eileen
M. Considine of Gardner Carton & Douglas, LLP, Albany, NY, and David
S. Almeida of Gardner Carton & Douglas, LLP, Chicago, IL, for appellee
Neighborhood Health Partnership, Inc.

Steven M. Ziegler and Andres Gonzalez of Law Offices of Steven M.
Ziegler, P.A., Hollywood, for appellee Vista Healthplan, Inc.

– 12 –

Steven E. Siff, Justin B. Uhlemann and Michael G. Austin of
McDermott, Will & Emery, LLP, Miami, for appellee Health Options, Inc.

Not final until disposition of timely filed motion for rehearing.

– 13 –

Methven v. Mclaren Med. Management, Inc.

BREACH OF CONTRACT

Methven v. Mclaren Med. Management, Inc.,
No. 242459, 242660 (Mich. Ct. App.
Nov. 20, 2003)

After a physician was awarded $178,225 for breach of employment
contract, he appealed the limitation placed on the award, and the management
company appealed
the award itself. The Michigan Court of Appeals found that the limitation
placed on the award was appropriate since the physician was unable to demonstrate
with reasonable certainty that he would have retained his clinical privileges
after a certain date.

The court also upheld the decision that the termination breached the employment
contract because the management group failed to follow the procedures outlined
in the contract for discharging an employee.

 

Methodist Hosp. v. Shepherd-Sherman (Full Text)

MEDICAL MALPRACTICE – EXPERT REPORT

Methodist Hosp. v. Shepherd-Sherman, No. 14-08-01090-CV (Tex. App. Aug. 20, 2009)

The Texas Court of Appeals affirmed a trial court’s decision to deny a hospital’s motion to dismiss the claims of a patient based on her failure to meet the expert report requirements.

The hospital sought to dismiss on the basis that the expert was not qualified and that his report failed to meet certain requirements. The patient, a sufferer of Marfan’s syndrome, was instructed by her physician to go to the emergency room and to call him whenever she experienced chest pains, and he would call a certain specialist. This all went according to plan once, but when it occurred again, the physician refused to call the specialist, and hospital personnel stated that the specialist no longer worked at the hospital, so another specialist performed surgery, who placed stents which were allegedly contraindicated for Marfan’s syndrome.

The patient produced a physician expert who alleged that the hospital was liable because hospital personnel breached the standard of care by failing to attempt to locate and contact the specialist, while the hospital contended that the expert report was inadequate because it did not identify the specific type of conduct by each type of hospital personnel involved, such as physicians, nurses or admissions staff. The Texas Court of Appeals held that the expert report was adequate because it explained that when a patient requests a specific physician, the standard of care is the same for physicians and hospital staff, and that all breached the standard of care by failing to attempt to locate and contact the specialist.

The expert report also opined that if the hospital had contacted the specialist, the patient would never have received a stent, and would have avoided injury. The hospital argued that this was speculative and conclusory; however, the court held that the expert report described Marfan’s syndrome and explained why a stent was contraindicated and that no reasonable physician would have performed the surgery.

 

Mendez v. White,

MEDICAL MALPRACTICE — VICARIOUS LIABILITY

Mendez v. White, No. 2006-03323 (N.Y. App. Div. May 29, 2007)

The New York appellate court reversed a trial court’s order granting a hospital’s motion to dismiss and held that the defendant-hospital had failed to meet its burden of proof for the motion in a vicarious liability medical malpractice suit against a hospital and physician. The court cited the doctrine of respondeat superior, noting that a hospital can be found liable for the medical malpractice of "physicians who act in an employment or agency capacity," and held that the hospital had failed to show "competent evidence establishing that [the physician] did not act as its agent, or that the Hospital exercised no control over him."

 

Mercy Catholic Med. Ctr. v. Thompson

PRECEDENT IAL

UN ITED STATES
COURT OF APPEALS
FO R THE TH IRD CIR CU IT

No . 03 -2292

ME RC Y C AT HO LIC
MED ICAL CENTER ,
Appe l lan t

v .

TOMMY G . THOM P SON ,
SECRETARY OF HEALTH
AND HUM AN SERV ICES

On Appea l f rom the
Un i ted S ta te s D i s t ric t Cou r t fo r the
Easte rn D istrict of P enns ylvania
D .C . C iv i l Ac t ion No . 02 -cv -00419
(Hon orab le R ona ld L . Buckw a l ter)

A rgued Ap r i l 19 , 2004

Be for e: SCIR ICA , Ch ie f Judge,
GARTH an d BR IGHT * , C i rcu i t Judge s

(F i led : Augu s t 18 , 2004 )

*The Hono rab le M yron H . Brigh t,
Un i ted States C ircuit Judge for the Eigh th
Jud ic ia l C i rcu i t , s i tt ing by de s igna tion .

Ma rk H . Ga l lan t , E squ i re (A rgued )
Cozen & O ‘Conno r
The A t r ium
1900 Ma rke t S t reet
Ph i lade lph ia , Penn sy lvan ia 19103
A t to rney fo r Appe l lan t

M ichae l Leona rd , E squ i re (A rgued )
Depa r tmen t o f Hea lth & Human Se rv ice s
Of fice o f the G enera l Cou nsel,
Reg ion III
The Pub l ic Ledge r Bu i ld ing , Su i te 418
150 Sou th Independ ence M a l l Wes t
Ph i lade lph ia , Penn sy lvan ia 19106
A t to rney fo r Appe l lee

OP IN ION OF THE COURT

SC IRI CA , Ch ie f Judge.
A t issue is an acu te c are hosp i ta l’s
r e im b u r sem e n t
f r om M e d i c a r e
f o r
grad uate med ica l tra in ing . Me rcy Ca tholic
M ed ica l Cen te r1 seek s reve r sa l o f the
P rov ide r Re imbu r semen t Rev iew Board ’s
dec i s ion deny ing rec las s i f ica t ion of certain
grad uate med ical ed ucatio n cos ts2 and its
r e f u s a l
t o
a d j u s t M e d i c a r e ’ s
re imbu rs em en t o f ope ra ting co s ts . The

1M er cy Ca tho l ic Med ica l Cen te r i s an
acute care ho sp i ta l loca ted in Ph i lade lph ia .

2Gra duate M edica l Edu cation costs
re fe r to M edicare payme nts m ade to
ho sp itals to suppo r t Med ica re ’ s sha re o f
costs re la ted to med ica l t ra in in g pr og ram s
and
to sup port h igher p atient co sts
a s soc ia ted w i th the tra in ing and educa t ion
o f res iden ts .

Board a l so found Me rcy Ca tho l ic Med ica l
C e n t e r d i d n o t p ro v i d e
s u f f ic i e n t
documen ta t ion to ju st i fy a rec la s s i fica tion
and rec i s ion of cos ts . Th e D is tr ic t Cou r t
a f f i rmed the P rov ide r Re imbu rsemen t
Rev iew Boa rd ’ s dec is ion and g ran ted
summ ary judgm en t to the Sec re tary o f the
D e p ar tm en t o f H ea l th and Human
Se rv ice s. We w i l l reve r se and remand .
I.
A . S ta tu to ry Ba ckg round
The f e de ra l M e d ic a re p ro g ram ,
adm in i s te red by the Cen ters for M ed icare
and Med ica id Se rv ice s3 o f the Un i ted
S ta te s De partm ent of He alth and Human
Se rv ices , i s the la rges t pub lic p rog ram
f inanc ing health ca re se rv ice s fo r the aged
and d isab led . Ho sp i ta ls tha t p rov ide
s e r v ic e s
t o M e d i c a r e p a ti e n ts a re
re imbu r sed for the ir expe nses u nder Title
XV II of the Soc ial S e cu r i ty Ac t (the
“M ed icare Ac t” ) , 42 U .S .C . § 1395 e t seq.
Par t A o f the M ed i c are Ac t au tho r ize s
p a ym e n t
t o p a r t i c i p at i n g h o sp i t a ls
(“pro v ide r s” ) fo r the ir d i rec t and ind i rec t
costs o f p roviding
to
inpatie nt care
bene f ic ia r ies . 42 C .F .R . § 413.9 (a) , (b) .
M e d i c a r e a l s o
re im b u rs e s
t ea ch in g
hosp itals for the costs o f grad uate med ica l
educa t ion , inc lud ing phy s ic ian time fo r
in s truc t ing and supe rv is ing in te rn s and
re s iden t s . 42 U .S .C . § 1395ww (h ).

3Cen te rs for M edica re and M edica id
Se rv ice s wa s fo rme r ly known a s the
Hea l th Ca re F inanc ing Adm in i s tra t ion .

2

Me d icare serv ices are fu rn i shed by
“prov iders o f se rv ices”4 tha t have en te red
in to p rov ide r a greem ents w ith
th e
Secre tary o f the Un i ted S ta te s Depa r tmen t
o f He alth and Human Se rv ice s . 42 U .S.C .
§§ 1395x(u ), 1395 c c. To rece ive paymen t
f rom the Secre tary , prov iders are requ i red
to com ply with the p rov ide r ag reemen t , a s
we ll a s a l l Med ica re
s ta tu te s and
regu la t ions . 42 U .S .C . § 139 5cc(b)(2) .
incept ion , M ed icare
i t s
F rom
re imbu r sed ho sp i ta l s fo r a l l rea sonab le
incu r red co s t s re la ted to p rov id ing med ica l
care to pa t ien t s . The Med ica re Ac t de f ine s
“reaso nable cost” a s “the c ost a c tu ally
incu rred ,” less any costs “ unn ecess ary in
the effic ient d e l iv ery of ne eded health
serv ices .” 42 U .S .C . § 139 5x(v)(1)(A ) .
Unde r the h i sto r ica l sys tem o f reaso nable
cos t re imbu r semen t , no re imbu rsemen t
d i s tinc t ion tu rned on whe th er cos ts we re
repo r ted as op erating costs ( the day -to -day
expen se s incu r red in runn ing a bus iness )
o r g radua te med ica l educa t ion cos ts .
M edica re paid its fu l l pro ra ta share of all
a ll ow ab le g radua te med ica l educa t ion
costs and o peratin g co s t s actua l ly incu r red ,
con s i s ten t w i th the sta tu to ry requ i remen t
p reven t ing sh i f ting the co s t s o f se rv ices
i n c u r re d o n b e h a l f o f M e d i c a r e
bene f ic ia r ie s to o the r pa t ien t s o r th ird party
payers . 42 U .S .C . § 139 5x(v)(1)(A ) .

4A s de f ined by 42 U.S .C. § 139 5x( u), a
“p rov ide r o f se rv ice s” m eans “ a hos pital,
c r i tica l acc ess h osp ital, sk il led nu rs ing
f a c i l i t y , c o m p r e h e n s i v e o u t p a t i e n t
rehab il i ta t ion fa cil ity, h om e h ea lth ag en cy,
[or a] h osp ice p rog ram .”

In 1982 , Cong re s s mod i f ied the
Me d icare p rog ram to requ i re hosp i t als to
rende r serv ices mo re eco nom ically. In the
Tax E qu i ty and F i sca l Re spon s ib il i ty Ac t
o f 198 2 (“ TE FR A” ), Pu b. L . N o . 97 -248 ,
C ong ress amended the Med ica re Ac t by
impo s ing a ce i ling on the ra te -o f – inc rease
o f inpatie nt op erating costs recove rab le by
a hos pital . Un der T EF RA , costs w ere still
re imbu r sed on a rea sonab le co s t ba si s , bu t
sub ject to ra te -o f – inc rea se l im i t s . The ra te –
o f – inc rease limit wa s compu ted acco rd ing
to a “ ta rg e t amoun t ,” wh ich , in tu rn , wa s
ca lcu la ted accord ing
to a hosp i ta l’s
allow able ne t M ed icare oper ating c osts in
the hos pital ‘s bas e year . See 42 U.S .C. §
1395w w(b) ; 4 2 C .F .R . § 413 .40 (c) (2002) .
In 1983 , Cong re s s amended the
M ed icare Ac t aga in , e s tab li sh ing a
p r o s p e c t iv e p a y m e n t
s y s t e m
f o r
re imbur s ing inpa t ien t ope rat ing co st s o f
acute care hos pital s. See 42 U .S.C . §
1 3 95 w w ( d ) .
H o s p i t a ls n o w a r e
re imbu r sed on the ba s is of pro sp e c tively
de te rm ined na t ional and reg iona l ra te s fo r
each d i scha rge , ra the r than on the ba s i s o f
retrosp ective ly determ ined
re ason able
costs
incurr ed.
U nder
this sys tem ,
paymen t is mad e at a p redete rmine d rate
fo r each ho sp i ta l d ischarge , acco rd ing to
the pa t ien t ‘s d iagnos is .
T he p rospec t ive paymen t sys tem
wa s phas ed in ov e r fou r yea r s , du r ing
wh ich ho sp ita l s we re
re imbu r sed a
comb ina t ion o f the p ro spec t ive paymen t
sy stem hosp i ta l-spec if ic ra t e and
the
p ro spec tive payme nt system natio n a l and
reg iona l ra tes . A ho sp ita l’s spec ific rate is
ba sed on i t s ope ra t ing co s t s du ring a

3

particu lar b a se yea r. See 42 C .F .R . §§
412 .71 , 412 .73 . Fo r mo s t ho sp ita l s the
p ro spec tive paymen t sy stem ba se yea r wa s
FY 1983 . The re fo re , fo r the f i r st fou r
years o f the pro spe ctive paym ent s ystem , a
r e im b u r s em e n t w a s
h o s p i t a l ’ s
s t i l l
s ign if i c antly a f fec ted by
i ts a c tu al
ope ra t ing co s t s in the FY 1983 ba se year .
A s pa r t o f the p ro spec tive paymen t sy stem
t r an si t ion p e r iod ,
th e H e a l th C a r e
F inanc ing Adm in i st ra tion p romu lga ted the
Con s i s tency R u le , wh ich required gra duate
med ica l educ ation c osts fo r co s t repo r t ing
pe r iod s dur ing the p ro spec t ive paymen t
sy stem t ran si t ion pe r iod be de te rmine d in
a manne r “con s is ten t w i th the trea tmen t o f
these co s t s fo r pu rpo se s o f de te rm in ing the
hosp ital-spec ific . . . rate.” 42 C .F.R . §
412 .113 (b)(3) . In e f fec t , the Cons is tency
Ru le
locked
in
the c la s s i fica tion o f
grad uate med ica l educa t ion co s t s and
ope ra t ing co s t s from
the p ro spec t ive
paymen t sy stem ba se yea r (FY 1983 )
fo rwa rd .
The TEFRA and p ro spec tive
payment sy stem re imbu r semen t s app lied
only to inpa tient op erating costs. G radu ate
med ica l educa t ion co s t s we re spec if ically
exc luded f rom the de f in i t ion o f “ inpa tien t
o p e r a t i n g c o s t s . ”
4 2 U . S .C . §
1395w w(a)(4) , 1395w w (d ) (1 ) (A ) . Thus ,
g r a d u a t e m e d i c a l e d u c a t i o n c o s t s
con t inued to be re imbu r sed unde r the
p rev iou s rea sonab le co s t sy s tem until
1986 .

In 1986 , Cong ress en ac ted a
sepa rate p ro s pe c ti ve p aym en t sys tem fo r
grad uate med ica l educa t ion costs f or all
cos t repo r ting pe r iod s beg inn ing on o r

a f te r July 1 , 198 5.
4 2 U .S.C . §
1395w w(h) . Cen t ra l to th is new paymen t
sys tem wa s the de term ina t ion o f the base
ave rage per-re siden t amou n t (“AP RA ”) .
The APRA i s de te rm ined by d iv id ing the
ho sp ita l’s ba se yea r g radua te med ica l
educa tion co s t s by the numbe r o f fu ll – time –
equ iva len t
the
re s iden t s wo rk ing a t
hosp ita l i n the ba se year. T he gr adua te
med ica l educa t ion ba se yea r
i s
the
hosp i ta l’s f i sca l yea r beg inn ing du ring the
fede ra l fisc al year 198 4. 42 U.S .C. §
1395w w(h)(2)(A ) . Fo r mos t Pen nsylvan ia
hosp i ta ls , th i s i s the f i scal yea r ended June
30 , 1985 . The APRA then se rve s a s the
base f ig u re in th e fo rm u la to calcu late
g r a d u a t e m e d i c a l
e d u c a t i o n
reimb ursem ents fo r 1985 and fu tu re cos t
yea rs . 42 U .S .C . § 139 5ww (h)(2)(C) , (D) ;
1395w w(h)(3) .
1 . D e te rm i ni ng th e APRA .
In 1990 ,
to a s su re max imum
accu racy o f each ho sp i t al ’s APRA
de te rm ina t ion , the Secretary requ ired fisca l
in te rmed ia r ie s5 to reau dit all ho sp i ta ls ’

5The Med ica re p rog ram u s e s “ f i sca l
i n t e r m e d i a r i e s , ” g e n e r a l l y p r i v a te
in su rance comp an ies , to perform many o f
the p rog ram ‘s adm in is t ra tive func t ions .
F i sca l in te rmed ia r ie s a re re spon s ib le fo r
de te rm in ing the am oun t of pa yments to be
made to p rov ide r s . In the p re sen t case ,
Me rcy Ca tho l ic Med ica l Cen te r’ s f isca l
in termed iary a t the re levan t t ime wa s
I n d e p e n d e n c e B l u e C r o s s .
T h e
I n t e rm e d i a r y ,
i n
t u rn , e n g a g e d a
th is ca se John ston ,
in
subcon trac tor ,

4

1985 g radua te med ica l educa t ion base year
cos ts . The reaud it wou ld ensure the f u ture
payme nts w ou ld be ba sed o n an a ccura te
de te rm ina t ion o f the ho sp it a ls ‘ gradu ate
med ica l educa t ion cos ts in the base-year .
the
To prev ent ov er-reim bursemen t,
regu la tion s
i ns tr uc t
i nt erm ed iaries
to
deduc t f rom each reaud i ted hosp i ta l ’s base
yea r g radua te med ic a l educa tion amoun t
any ope ra t ing cos ts m i sc la ss i f ied a s
4 2 C .F . R . §
e d u c a t io n c o s t s .
413 .86(e )(1)( i i)(B) . To pre ven t und er-
reimb ursem ent, the regu la tion s au tho r ize
i n t e rm e d i a r i e s , “ u p o n a h o s p i t a l ’ s
req ues t,” to inc lude in the ba se yea r
grad uate med ica l educa t ion amou n t any
teach ing co s t s m isc la ss i f ied a s ope ra ting
cos ts in the base -yea r co s t repo r t. 42
C .F.R . § 413 .86 (e )(1 ) ( ii ) (C ) .
A f te r
de te rm in ing the ho sp ita l ‘s APRA upon
reaud it,
the
in te rmed ia ry no ti f ies
the
ho sp i ta l o f the amoun t by a No t ice o f
A v e r a g e P e r R e s i d e n t A m o u n t
(“NA PRA ”) . 42 C .F .R . § 413 .86(e)(1)(v) .
The ho sp i ta l may ap peal th is amo unt to the
Secre tary w i th in 180 d ays of th e NA PRA .
Id.

f o r
c l a i m
a
s u p p o r t
T o
rec las s i f ica t ion o f m i sc las s i f ied g raduate
med ica l educa t ion co s ts , a hosp i ta l mus t
p re sen t th e in termed ia ry w i th ” su f f ic ien t
documen ta t ion” requ i ring a change in the
c la s si f ica t ion o f cos ts. 42 C.F .R. §
413 .86 ( l) (2 ) (i i ). The regu la t ion s requ i red
ac tua l documen ta tion deve loped dur ing the
ba s e yea r tha t wa s ma in ta ined in an

Young & O ’F r ia , to con duct th e grad uate
me dica l edu catio n re aud it.

 See 42 C .F.R . §
audita ble forma t.
405 .481 (g ) (1986 ) ; Med ica re P r og ram ;
Change s in Paymen t Po l icy fo r D i rec t
Gra duate Med ica l Educa t ion Co s ts , 54
Fed . R eg . 40 ,301 (Sep t . 29 , 198 9) .
The Secretary recogn ized , how ever ,
tha t some hosp i ta l s wou ld no longe r have
the
sup port a
to
requ ired
record s
rec las s i f ica t ion o f c os ts . A s su ch , the
Secre tary a l lowed aud i to rs to a cc e pt tim e
reco rd s from su bseque n t t ime per iod s a s
pr ox y. “G radua te Med ica l Educa tion :
Documen ta t ion to Suppo r t the Phy s ic ian
C o st /T im e A l loca tion” (1 9 90 ), JA 211 –
215 .6 Wh ere sub sequen t yea r records w ere
a lso unava i lab le , hosp itals we re allow ed to
perform
th ree -week
t ime s tud ie s7 o f
cu r ren t phys ic ian wo rk load s to p rov ide a
rough e s t ima te o f the time a l loca t ion o f
teach ing phy s ic ians in th e ba se yea r. See
Me d icare P rog ram ; Chang e s
the
to
Inpa t ien t Ho sp i ta l P ro spect ive Paymen t
Sys tem and F i sca l Yea r 1991 Ra te s , 55
Fed . Re g. 36 ,064 .
t h es e
n o t e d
T h e
Se c r e ta ry
a l terna t ive fo rm s o f documen ta t ion were
t h a n
r e l i a b l e
l e s s
i n h e r e n t l y
c o n t em p o r a n e o u s
reco rd s
f rom
th e

6T h e p o li cy w as la te r pub l ished in the
Fede ra l Reg i s te r a t 55 Fed . Reg . 35 ,990 ,
36 ,063-6 4 (Sep t . 4 , 199 0) .

7 I n p e rf o rm i ng a tim e s tudy, a phys ic ian
wou ld , on a da i ly ba si s , log t ime wo rked
fo r a p rov ide r ove r a pe r iod o f sev e ra l
week s a l loca t ing time to va riou s ac t iv i t ie s
such as adminis tra t ion , supe rv i s ion , o r
teach ing o f in te rns and res iden ts .

5

grad uate med ica l educa t ion bas e year . Id .
A lim i ted excep t ion wa s c rea ted re s tr ic ting
the use o f sub stitu te documen ta t ion f rom
la ter years
to v erify costs origina lly
c la imed a s g radua te med ica l educa t ion
costs in the g radua te med ica l educa tion
base yea r, bu t d isa l low ing th e u se o f
docu men ts f rom la te r years to inc rease the
g r a d u a t e m e d i c a l e d u c a t i o n c o s t s
origina lly c la imed . A s pub l i shed in the
F e d e r a l R e g i s t e r ,
t h e S e c r e t a r y ’ s
interpre tation re ad:
A s an equ itable so lution to
t h e p r o b l e m o f
t h e
nonex i s tence o f phy sic ian
a l loca t ion ag reem e n ts , t im e
r e c o r d s ,
a n d o t h e r
a r e
i n f o r m a t i o n , w e
a l l o w i n g p r o v i d e r s
t o
fu rn ish documen ta t ion f rom
r e p o r t i n g p e r i o d s
c o s t
sub sequen t
to
the base
pe r iod in suppo r t o f the
a l l o ca t i o n o f p h ys i c i a n
compen sa t ion co s t s in the
GM E b a se per iod . . . . In
no even t will the results
ob ta ined f rom the use o f the
r e c o r d s
f r o m
a
c o s t
repo r ting pe r iod la te r than
the base period serve to
inc rease o r add phys ic ian
compen sa t ion co s t s to the
co sts u sed to de te rm ine th e
pe r res iden t amoun ts .
55 Fed . Reg . a t 36 ,063 -64 .

2 . Ad ju s t ing Ho spital-S pecific
Rate and T arge t Amoun t for
M isc lass i f ied Cos ts .
A ho sp i ta l may a l so reque s t the
rec las s i f ica t ion o f m i sc las s i f ied ope ra t ing
cos ts . M i sc la s s if ied ope ra t ing co s t s are
costs that ha d bee n inclu ded a s grad uate
med ica l educ ation c osts in th e grad uate
med ica l educa t ion b a s e year , bu t were
rec las s i f ied by
the
in termed ia ry a s
ope ra t ing cos ts . 42 C .F .R . § 413 .86(e)(1) .
If the m i sc la s s i fied ope ra t ing cos ts w ere
t rea ted a s g raduate med ica l education c osts
in bo th the g radua te medi c a l educa t ion
base yea r and the p ro spec t ive paymen t
sy stem base year , an upwa rd ad ju s tmen t o f
the ho sp i ta l’ s s p ec if ic ra te o r TEFRA
ta rge t amoun t may be wa r ran ted s ince the
ho sp i ta l – spec ific rate and targe t amou n t are
de r ived f rom ope ra t ing cos ts in a base
year . 54 Fed . Reg . 40 ,286 , 40 , 289 (Se pt.
29 , 198 9) . Co nver sely, i f the rea udit
revealed m i sc la ss i f ied g radua te med ica l
educa t ion costs (wh ich w ould inc rease the
ARPA ) , a correspo nd ing d own ward
ad ju s tmen t o f ope ra t ing co s t s fo r the
grad uate med ica l educa t ion ba se yea r wa s
req uire d. Id .
The r eg u la ti on s a ll ow a hosp ital to
“ reques t tha t the in termed ia ry rev iew the
c la s si f ica t ion of th e affe cted c osts in its
ra te -o f – inc re a se ce i ling o r p ro spec t ive
paymen t ba se yea r fo r pu rpo se s o f
ad ju s ting the ho sp ita l ‘s ta rge t amoun t o r
hosp ital-spec ific
rate.” 42 C .F.R . §
413 .86( l)( 1 ) ( i ) . To rec lass i fy these cos ts ,
a ho sp i ta l mus t spec if ica l ly ” reques t
rev iew o f the c lass i f ica t ion o f i ts . . . costs
no la ter than 180 days a f te r the da te o f the

6

[NA PR A ]” an d “ i n c lu d e
s u f f i c ie n t
the
documen ta t ion
to
to demon s t ra te
in termed iary
that ad ju s tmen t o f
the
ho sp ita l’s ho sp i ta l – spec i f ic ra te o r ta rge t
I d . §
a m o u n t

i s w a r r a n t e d . ”
413 .86( l)(1)( i i) .
B . Fa cts
O n Decembe r 21 , 1989 , Me rcy
Cath olic Med ica l Cen te r receiv ed no t ice
the
In te rmed ia ry
(“ Independen t B lue
C ro s s” ) wa s reopen ing i t s co s t repo r t s fo r
FYE ( “F is ca l Y ea r Ended” ) 1985 , 1986 ,
1987 and 1 988 to perf orm the rea udit
unde r the g radua te med ica l educa t ion
regu la tion .
Du r ing
the reaud i t ,
the
In te rmed ia ry made severa l dow nwa rd
adjus tmen ts to Me rcy Ca tho l ic Med ica l
C en ter ‘s g radua te med ica l educ ation c osts
bu t re fused to make o the r ad jus tm ents to
i ts g radua te med ica l educa t ion co s t s and
ope ra t ing co sts .
T he In term ed iar y’s
dow nwa rd ad ju s tmen t o f g radua te med ica l
educa t ion costs a nd re fusa l to rec la s si fy
certain ope ra t ing cos ts a s g radua te med ica l
educa t ion c os ts re du ce d M e rcy Cath olic
Med ica l Cen te r ‘s APRA f rom $81 ,745 to
$73 ,657 . Me rcy Ca tho l ic Med ica l Cen te r
f i led a t ime ly appeal o f the N o t i c e o f
Ave rage Pe r Re s iden t Amoun t w i th the
Boa rd .

t ime , howeve r , Me rcy
the
A t
Cath olic Med ica l Cen te r no
longe r
po s se s sed a l l o f the o r ig ina l suppo r t ing
documen ta t ion o f i ts base year grad uate
med ica l educ ation c osts be caus e
th e
gov erning rules o nly require d ho spitals to

retain physicia n alloca tion ag reem ents 8
(a lso k n ow n a s “339 s” ) fo r fou r yea r s f rom
the clos e of FY E 1 985 (i.e., until June 30 ,
1989) .
Furth ermo re, M ercy Ca tholic
Med ica l Cen te r had expe r ienced a floo d in
the ba semen t s to rage a rea and d i s c arded
all damaged reco rd s that w ere be yond th eir
re ten tion da te.
Me rcy Cath olic Med ica l Cen ter d id ,
how ever , re ta in some of the 33 9s for th e
depa rtmen ts in que s t ion . A t o ra l a rgumen t
be fo re th i s Cou r t , bo th pa r t ie s s t ipu la ted
s ome 3 39 s w e r e
in c lud ed
in
th e
adm i n i s tr a t iv e
r e co rd , a l t hou gh no t
inc luded a s fo rma l exh ib i ts . The P rov ide r
Re imbu r semen t Rev iew Board , howe ver ,
did not ack now ledg e them. See M e r cy
Ca tholic Med . C t r . v . B lue C ro s s B lue
Sh ield Ass’n , PRR B D ec . No . 20 01-D 55
(Sep t. 28 , 2001) , M edica re and M edica id
Gu ide (CCH ) ¶ 80 ,747 , a t 202 ,481
( “PRRB Dec .” ) (“[T ]he re wa s in su f f ic ien t
ev idence
rega rd ing
fo rm s 339 and
phys ic ian a l loca t ion agre emen ts .”) .9
Du r ing l at e 1 9 90 , h owev e r , Me rcy
Cath olic Med ica l Cen te r conduc ted a
t h ree -week t ime s tudy tha t t racked wha t
po r t ion o f ea c h t ea c hi ng p hys ic ia n ‘s tim e

8A p hysician a l locat ion ag reemen t
spec i f ie s the re spec t ive amoun t o f t ime a
phys ic i a n
sp e nd s on
t ea ch in g and
supe rv is ion as op pose d to tim e spen t on
pa t ien t ca re. 55 Fed . Reg . a t 36 ,063 .

9The 339 s we re no t su ppo r ted by
con tempo raneou s t ime sheet s o r “sou rce
d o c u m e n t a t i o n . ”
O r a l A r g u m e n t
T ran sc r ip t a t 29 -30 .

7

wa s devo ted to se rv ice s tha t qua li fy a s
grad uate med ica l educa t ion co s t s . Du r ing
the reaud i t, Me rcy C a tho l ic Med ica l
C en t e r rea l ized i t had m i sc las s i f ied a l l o f
the t ime spen t by phys ic ians in th ree
D e pa rtme nt s—OB /GYN , Labo ra to ry , and
Rad io logy—a s ope ra t ing co s t s in the
g raduate med ica l educa t ion b ase year .
Even thou gh th ese p hysician s had in fac t
been p rov id ing
sub s t antial grad uate
m ed i c al educa t ion se rv ice s , it had been
Me rcy Cath olic Med ica l Cen ter’s histo ric
p rac t ice to repo rt as op erating costs a ll
costs fo r phys ic ian s who se du t ie s we re no t
pr imar i ly teac hin g. Id . T h e 19 9 0 t im e
s tud ie s inc luded a l l o f the phy s ic ian s who
pe r fo rmed
t e ach ing du t ie s
in 1985 ,
inc lud ing tho se in the th ree “m is s ing
depar tmen ts.” In seek ing g radua te m ed ical
educa t ion c red i t, Me rcy Ca tho l ic Med ica l
Cen ter
timely req uested the req uisite
d ownw ard adjus tmen t to its hos pital-
spec ific ra te and ta rge t amoun t unde r 42
C.F .R. § 413 .86( l)(2) .
In per formin g
th e
th e rea udi t,
Subcon t rac to r
(“ John s ton , Young &
O’Fr ia”) accep ted Me rcy Ca tho l ic M ed ical
C en ter ‘s 1990 t ime s tud ie s a s accu ra te and
comp l ian t w i th the H ea l th Care F inanc ing
Adm in is tra t ion’s in s truc t ion s o f June 22 ,
1990 , and re l ied upon them to reduce the
compen sa t ion and re lated teach ing co sts
Me rcy Ca tho l ic Med ica l Cen te r had
c la imed a s g radua te med ica l educa t ion
expen se s . The Subcon t rac to r adv i sed
Me rcy Ca tho l ic Med ica l Cen ter , how ever ,
tha t
the
in s t ructed by
i t had been
In termediary (“Independence B lue C ro s s”)
to strictly limit its reau dit to on ly those

FYE 1985 co s ts that M ercy Ca tholic
Med ica l Cen ter had repo rted as grad uate
med ica l educ ation c osts in th e grad uate
med ica l ed u cation base year— to valid ate
o r reduce tho se co s ts—and to ignore
evid en c e o f any o the r co s ts , inc lud ing
phy s ic ian and suppo r t expen se s, tha t had
prev iously b e e n c la im ed in FYE 1985 a s
op e ra t ing cos ts .
Ac co rd ing ly ,
th e
Sub contra cto r d e c li ne d to re v iew tim e
stud ie s and o the r documen ta t ion pertain ing
to th e s e th ree m is s ing depar tmen t s wh i le ,
on the ba s is o f the 1990 t im e stud ie s, the
In termed iary reclass ified $ 719 ,055
in
grad uate med ica l educa tion co s t s from
FYE 1985 a s ope ra ting co s ts and exc luded
tha t amoun t f rom the APRA ca lcu la tion .
to M ercy Ca tholic
Acco rd ing
Med ica l C en te r ,
the
recla s s if ica tion s
r edu c e d
i ts
to ta l g raduat e m ed i c al
educa t ion costs
to
f rom $6,87 6,731
$6 ,157 ,676 , and its A PRA f rom $81 ,745 to
$73 ,657 . Recogn i t ion o f the m i scla s s if ied
grad uate med ica l educa t ion co s t s from the
th ree m iss ing depa r tmen ts based on the
1990 t im e s tud ies , wh ich the In termed iary
re fu sed , wou ld have resulted in a n APRA
o f $ 7 9 , 6 8 5 .80 .
T he
re t ro spec t ive
app l ica t ion o f th e di sp u te d APRA reduced
M e r c y C a t h o l ic M e d ic a l C e n t e r ’ s
r e i m b u r s e m e n t b y
a p p r o x i m a t e l y
$2 ,500 ,000 f rom FY 1986 -91 , and by
appr oxim ately $250 ,000
to $500 ,000
an nu all y. M ercy Ca tholic Med ica l Cen te r
lo s t app roxim ately $27 5,000
a lso
in
h o s p i t a l -sp e c if i c
r a t e
re im b u r s em e n t
du r ing the p ro spec t ive paymen t sy stem
t ran si t ion period as a res ult o f the re fu sa l
to inc rease the ho sp i ta l- spec if ic rate to

8

inc lude M e rcy Ca tho l ic M ed ica l Cen ter’s
m i sc la ss i f ied ope ra t ing cos ts , and i s lo s ing
appr oxim ately $50 ,000 to $20 0,000 in
annua l re imbursem en t for i ts psychiatric
un i t as a resu l t o f the re fusa l to inc rease
Me rcy Cath olic Med ica l Cen te r’ s targe t
amo unt.
In add i t ion to reque st ing c red i t fo r
g r a d u a t e m e d i c a l e d u c a t i o n c o s t s
a t t r i b u t a b l e
t o
t h e
t h r e e m i s s in g
depa r tmen ts , M e r cy C a tho l ic Med ica l
Cen te r a l so a sked the In te rm ediary to
increase i t s ho sp i ta l – spec i f ic ra te and target
amoun t to inclu de an y operatin g cos ts that,
based upon the 1990 t ime s tud ie s, had
prop erly b e en d et erm in ed to have been
m i sc la ss i f ied in FY E 19 85 as grad uate
med ica l edu catio n co sts. S e e 42 C .F.R . §
413 .86( l) . M ercy Ca tholic Med ica l Cen te r
a lso reque s ted a correspon d ing downw ard
ad ju s tmen t to its hosp ital-spec ific ra te and
t a r g e t
a m o u n t
i f
a n y p h y s i c i a n
compen sa t ion costs origina lly c la s si f ied a s
ope ra t ing co s t s we re
rec las s i f ied a s
grad uate med ica l educa t ion cos ts. See 42
C .F.R . § 413 .86 ( l)(2) . F ina l ly , Me rcy
Cath olic Med ica l Cen te r a sked
the
In term ed iary to incre ase the hosp ital-
specif ic rate an d the ta rget am oun t o f i t s
p r o s p e c ti v e p a ym e n t
s ys tem -e x em p t
p sych ia tr ic un i t to inc lude the ope rat ing
costs determ ined to have been erron eous ly
repo r ted in FY 1985 a s g radua te med ica l
educ ation co s t s under § 413 .86 (e ) (1 )(v )
and (l)(1). Th e Interm ediary ref used to
make the req uested hosp ital-spec ific rate
and ta rge t amoun t ad jus tmen ts .

C . The Prov ider R e imbu rsemen t
Rev iew B oard ’ s Dec i s ion
Me rcy Ca tho l ic Med ica l Cen te r
appea led
two
i s sue s
to
the P rov id e r
Re imbu r semen t Rev iew Boa rd : (1 ) the
In term ed iar y’s re fu sa l to recogn ize the
grad uate med ica l educa t ion co s t s from the
th r e e m i ss in g de p ar tm e n ts in th e APRA
and ; (2 ) the In te rmed ia ry’ s re fu sal to
increase i t s ho sp i ta l – spec i f ic rate and target
amoun t to take into ac coun t tho se co sts
tha t we re rec la s s i fied f rom g radua te
med ica l educ ation c osts to o peratin g cos ts
in the reaud i t . The Boa rd he ld a h e a r ing
and i s sued it s dec is ion on Sep tembe r 28 ,
200 1.

a f f i r m e d
t h e
T h e B o a r d
In termed iary on bo th
As a
issues .
thresh old matte r, the B oard agree d w ith
Me rcy Cath olic Med ica l Cen te r tha t over-
a l loca t ions and unde r -a l loca t ions o f base
yea r grad uate m edica l educ ation c osts
were prop erly subje ct to co r rec tion du r ing
the reaud it under 42 C .F .R . § 413 .86(e) ,
because the s ta tu te and GM E ru le env is ion
“ a
‘ two w a y
s t ree t ’ o f c hang ing
erron eous ly claim ed GM E co sts
to
oper ating costs (‘O C’) and vice ver sa.”
PRRB Dec . a t 20 2 ,480 . In l igh t o f th i s, the
Board
In te rmed ia ry had
the
found
incorr ectly instruc ted its Sub contra ctor to
ignore the t ime s tud ie s and o the r ev idence
o f m i s c l a s s if i e d g r ad u a t e m e d i c a l
e d u c a t io n c o s t s
( a s o p p o s e d
t o
m i sc la ss i f ied ope ra t ing costs). PRRB D ec .
a t 20 2 ,480-81 . In fac t , the Boa rd’s
decisio n inclu ded th e followin g find ing:

15 . The HCFA in s truc t ion s
re in fo rc ed
th is con c ep t;
how ev e r , a n a d d endum
cons isting o f que s t ion s and
inco rrectly
a nsw er s wa s
i n t e r p r e t e d b y
t h e
In te rmed iary a s mean ing
tha t no new G ME cos ts
cou ld be added by the re –
a u di t f rom OC .
a . The In te rmed ia ry, IBC
[ Independence B lue C ross] ,
wro ngf ully
in s truc ted
the
audit subc ontrac tor no t to
inc rease the GME co s t s by
r e c l a s s i f y i n g
a n y
m i sc la ss if ie d OC .1 0
The Board found none the less ” there
[was ] no cr editab le ev idence in the record
to rec las s i fy the m is cl as si fi ed OC to GM E
costs becau se o f the lack o f fo rm 339 ‘ s and
the fac t tha t the 1990 t ime s tud ie s we re no t
aud i ted by the In te rmed ia ry, no r i s there
adeq uate documen ta t ion in the r e cord
rega rd ing t he se tim e stud ies.” PRRB Dec .
at 20 2,48 1.
O n the s eco nd i ssu e, th e Board
ag reed Me r cy Cath olic M ed ica l Cen te r had
timely requ ested r evision of its h ospital-
spec ific r a t e and targ et am oun t. Id . I t
conc luded , howeve r , the In te rmed ia ry wa s

1 0We th ink the B oa rd in tended
“misc lassified GM E” in th i s f ind ing . Bu t
the re su lt i s the same : The B oa rd found
o r ig inally c la imed g radua te med ica l
educa t ion cos ts cou ld b e incre a s ed by
add ing mis clas sifie d co sts.

9

no t requ ired to rev i se the hosp ital-spec ific
rate o r ta rge t amoun t becau se M e r cy
Cath olic Med ica l Cen te r had no t p rov ided
the requ i red documen ta t ion d i rec tly to the
In termed iary w i th in 180 days o f the No t ice
of A verag e Per Res ident A mo unt.
D . D i s tr ic t Cour t Dec i s ion
The Distric t Cou rt affirm ed th e
Boa rd . Me rcy Ca tho l ic Med . C t r. v .
Thomp son , No . 02 -419 , 2003 U .S. D ist.
LEX IS 4688 (E .D . Pa . M ar . 5 , 2003) .
Rev iew ing the f irst iss ue, t h e D i s t ric t
Cou r t de te rm ined the l im i ted excep tion to
the requ i rem en t fo r con tempo raneou s
do cumen ta t ion
re s tr ic ted
the u se o f
subs titute documen ta t ion f rom la ter years
to ve r i fy co s t s o rig ina lly c la imed a s
grad uate med ica l educa t ion co s t s in the
grad uate med ica l educa t ion base yea r, and
did no t se rve to add o r inc rea se co s t s to the
o r ig ina l g ra du ate m edica l educ ation c osts
c l a im e d . Id . a t *22 -23 . Fo r suppo r t, the
Cou r t c i ted the Sec reta ry’ s rep re sen ta tion s
tha t la ter ye a r recor ds “w ere inh erently
less re l iab le ,” and tha t p rov ide r s had
“ s ign if ican t incen tive s to in f late their
GM E costs in the base yea r unde r the new
Id . at *24 (quo t ing
me tho dol ogy.”
Pres byte r ia n Med . C tr . , No . 95 -1939 ,
1998 U .S . D i s t. LEX IS 6254 , a t 12 -13
(D .D .C . Ap ril 21 , 199 8), aff ’d , 170 F .3d
1146 (D .C . C ir . 1999 )) .
The D i s t r ic t Cou r t a lso a f f i rmed on
the bas is of lack of d ocume ntati on. T he
Cou r t found Me rcy Ca tho lic Med ica l
Cen ter’s c la im s su spect becau se
the
a d m i n i s t r a t i v e
r e c o r d
l a c k e d
con tempo raneou s ev idence o f 339 ‘s in the

th ree m iss ing depa r tmen ts . The C our t
w ro te : “ [ t ]he reco rd ind ica te s tha t Me rcy
no longe r had any o f the 339 s and tha t
Me rcy d id no t subm i t any o the r ev idence
[to suppo r t a rec lassi f ica t ion of cos ts] ,
o the r than the tim e study co ndu cted in
Id . a t *24 -25 .
199 0.”

A l though
recogn izing Me rcy Ca tho lic Med ica l
Cen te r wa s no t no tified o f a rea udit un til
a f te r the reco rd re ten tion pe r iod had
exp ir ed , the D is t r ic t Cou r t none the less
conc luded Me rcy Ca tho lic Med ica l Cen te r
could be pena l ized fo r fa il ing to ma intain
its 339 fo rm s becau se it had rece ived
“con s t ruc t ive notice ” that t ho se co sts
“w ould l ike ly be the sub jec t o f ongo ing
rev iew .” Id . at *2 7.
O n the second is sue , the D i s tr ic t
Cou r t a f f i rmed the Boa rd ’ s ru l ing th a t
Me rcy C ath olic Med ica l Cen te r wa s no t
en t i tled to incre ases in its hosp ital-spec ific
rate and ta rget amoun t beca use it failed to
p re sen t documen ta t ion compa r ing M e rcy
Cath olic M ed i c al Cen te r’ s FY 1983 and
1985 g radua te med ical educa t ion programs
directly to the in te rmedia ry, noting that it
w as th e ho sp i ta l ’ s “bu rden . . . to p re sen t
su f f ic ien t ev idence .” Id . a t *33 .
II .
W e have jur isd ic t ion u nder 28
U .S.C . § 12 91. W e review th e g ran t o f
summ ary j ud gm en t de n ovo . Fe r t i li ze r
Inst. v . B rowne r , 163 F .3d 774 , 777 (3d
C ir . 1998 ) . L ike th e D is tr ic t C o ur t, we
rev iew a f ina l dec is ion o f the Secre tary1 1

1 1 In th is ca se , the Boa rd ’ s dec i s ion wa s
the f inal d ecis ion of th e Se creta ry.

10

unde r 42 U . S.C . § 1395oo ( f ) (1 ) , wh ich
incorpora tes the s tandard o f rev iew o f the
Ad min istrati ve P roc edu re A ct, 5 U.S .C. §
706 . U nder the A PA , we w i l l aff irm
un l e s s
is
th e Se c r e t a ry ’ s d e c i s io n
“ar bi tra ry, capr ic iou s , an abu s e of
d i sc re t ion , o r o the rw i se no t in acco rdance
with law; [ or] un supp orted by sub stan t ia l
evid enc e.” 5 U .S .C . § 7 06(2)(A ) ,(E) ;
Rober t Wood John son Ho sp . v . Thomp son ,
29 7 F.3 d 27 3, 28 0 (3 d C ir. 20 02) . B u t
when app lying th is sta nda rd, a rev iew ing
cour t may no t me re ly rubbe r -s tamp the
Secre tary’s ac t ion s , bu t mu s t en su re tha t
the agency’ s ru ling is n either c learly
e r roneou s no r incon si s ten t with applic able
Thoma s Je f fe rson Un iv .
regu la t ions .
Ho sp . v. Sha lala , 512 U .S . 504 , 512
(19 9 4) . Fu r the r, we may a f f irm the
agency’s dec i s ion on ly on g round s on
wh ich the agency ac tua lly re l ied , and no t
on the bas is o f a lte rna tive ra tiona les o r
ju s t if ica tion s put fo rwa rd by co unse l on
appe al. SEC v . Chene ry Co rp ., 318 U .S .
80 , 87 (19 43) .

III .
A . G radu ate M ed ica l E duca t ion Co sts
1 . A s Ap plied to the Fac ts of th is
C a s e ,
t h e S e c r e t a r y ’ s
In terpre tive Ru le i s Arb i trary
and C apr ic ious .
Me rcy Ca tho l ic Med ica l Cen te r
con tend s the Secretary’s fai lu re to con s ide r
its 1990 t ime s tud ie s to the ex ten t they
suppo r ted a pos itive ad justm ent to its
repo r ted FY 1985 g radua te med ica l
ed u c a t ion co s t s w a s a rb i t r a ry and
cap r ic ious . As a thresh old ma t te r , we mus t

de te rm ine the leve l o f de fe rence , if any, to
afford the Sec re tary’ s in te rp re ta t ion o f the
g radua te med ica l educa t ion reaud i t ru le .1 2
A s no ted , when i t became c lea r
p r o v i d e r s d i d n o t a lw a y s
r e t a in
con tempo raneou s t ime reco rd s to facilitate
the reaud i t, the Sec re tary i s sued a spec ia l
g r a d u a t e m e d i c a l e d u c a t i o n
c o s t
documen ta t ion ru le fo r reaud i ts a s an
o f f ic ia l instruc tion to f isca l in te rmed ia r ies ,
“ G r a d u a t e M e d i c a l E d u c a t i o n :
Documen ta t ion to Suppo r t the Phy s ic ian
Co s t /T im e A l loca tion” (1990 ) , JA 211 –
215 . The Secr etary’s w ritten in terp re ta tion
p rov ide s tha t la te r -yea r t ime s tud ie s , o f the
sor t re l ied on by Me rcy Ca tho l ic Med ica l
Cen ter , cou ld on ly se rve to ve r i fy costs
tha t we re orig inally claim ed as grad uate
med ica l educa t ion co s t s in the base year ,
and cou ld no t suppo r t the additio n of costs
no t origina lly c la imed a s g radua te med ica l
educa t ion co s t s . The l im i ted exce ption to
the reco rd -keep ing po l icy p rov ides :
A s an equ i tab le so lu tion to
t h e p r o b l e m o f
t h e
nonex i s tence o f phy sic ian
allo ca t ion a g re em en ts , t im e
a n d o t h e r
r e c o r d s ,
i n f o r m a t i o n , w e
a r e
a l l o w i n g p r o v i d e r s
t o
fu rn ish the documen ta tion
f rom co s t repo r t ing pe r iod s
sub sequen t
the base
to
pe r iod in suppo r t o f the

1 2Th e Distric t Cou rt did no t explic itly
add ress the leve l o f de fe rence i t wa r ran ted
the S ecre tary’s in terp retiv e ru le.

11

a l loca t ion
o f
phy s ic ian
compen sa t ion co s t s in the
GM E b ase per iod . . . . It is
only in the absence o f base
pe r iod documen ta t ion tha t
sub sequen t documen ta t ion
shou ld be cons ide red as a
p r o x y
fo r b a s e p e r iod
documen ta t ion fo r pu rpo ses
the per
o f de te rm in ing
In no
re s iden t am oun t.
e v e n t w i l l
r e su l t s
th e
ob ta ined f rom the use o f the
r e c o r d s
f r o m a
c o s t
repo r t ing pe r iod la te r than
the base perio d serv e to
increase o r add phy s ician
compen sa t ion co s t s to the
costs used to dete rm ine the
per res iden t amoun ts .
55 Fed . Reg . at 36,0 63-6 4 (em phas is
added ) .1 3

1 3Th e A ge nc y supp leme nted its ru le
w i th the fo l low ing q ues t ion and answ er :

Fo l low ing it s in te rp re ta tion , the
S ecretary now a rgue s the l im ited excep tion
to the ru le requ ir ing c on temp oran eou s
d o cum en ta t ion on ly a l low s the u se o f
reco rd s f rom sub sequen t co s t repo r t ing
pe r iod s to ve r ify cos ts and a l loca t ion s
c la imed a s g radua te med ica l educa t ion
th e g r adu a te m ed i c a l
costs du r ing
educa tion base year— no t
to supp or t
increases to those cos ts in the base year .
W e owe no de fe rence to an agency
in te rp re ta tion plainly incon s is ten t w i th the
re levan t s tatute . See Pub . Emp loyee s
Re t i remen t Sys. v. B etts , 492 U .S . 158 , 171
(1989 ) (“ [N ]o de ference i s due to agency
in te rp re ta tion s at odd s with th e plain
language o f th e s ta tu te i t se l f .” ) . In the
s am e vein, a n age ncy’s interp retation of its
ow n
regu lations
is n ot en titled
to
sub s tan tia l deferen ce by a rev iew ing cour t
wh e r e “ ‘ an a l t e rn a t i v e
is
r e a d i n g
compe l led by
the
regu la t ion’s p lain
mean ing or by o the r ind ica tion s o f the
Secre tary ’ s in ten t a t the t ime o f the
Thoma s
regu la t ion’s p romu lga tion . ’”

Que s t ion : If a pr ovid er did
n o t
c h a r g e p h y s i c i a n
compen sa t ion to GME in
the ba se pe r iod , can
i t
reque st tha t documen ta t ion
f rom a sub sequen t pe r iod be
u sed , at thi s tim e, to rev ise
its ba se pe r iod co s t s fo r the
pu rpose o f ca lcu la t ing its
a v e r a g e p e r
r e s i d e n t
amo unt?

Answ er : No . As e xpla in ed

12

in HCFA ’ s in st ruc tion s , the
use of su bseq uent p e r iod
documen ta t ion to suppo r t
the allo c a t ion o f phy s ic ian
costs may no t be us ed to
inc rease
the amoun t o f
p h y s ic i a n c om p e n s a t i o n
origin a lly c la imed by the
p rov ide r in i ts GME base
pe r iod . G radua te Med ica l
Educa t ion : Que s t ion s and
Answers (Nov . 8 , 1990 ) , JA
872 .

Je f fe r son U n i v . Ho sp ., 512 U .S . at 512
(quo t ing Ga rdeb r ing v . Jenk in s, 485 U .S .
415 , 430 (1988 ) ) . Me rcy Ca tho l ic Med ica l
Cen te r con tend s the g radua te m ed ica l
educa t ion ru le
in neu tra l
is w r i t ten
language that comp els interm ediarie s to
accu rately calcu late gra duate med ica l
educa t ion cos ts , and
to co rrec t all
miscla s s i f ied co s t s , ope ra t ing co s t s and
grad uate med ica l educ ation c osts, to a r r ive
a t th e m os t a cc ura te AP RA po ss ib le . W e
a g r e e
t h e S e c r e t a r y ’ s
f i n d
a n d
in te rp re ta tion directly contra dicts the pla in
l a ng u a g e o f
th e g r adu a t e m e d i c al
educa t ion regu la tion and canno t be uphe ld .

The plain langu age o f the g radu ate
med ica l educa t ion ru le does no t suppor t
l im it ing corre c t ions u pon
to
reaud it
m i sc la ss i f ied oper ating co s t s , bu t ra the r
an t ic ipa te s co r rec tion s o f m i sc la s si f ied
g rad u ate med ica l educa t ion co s t s and
ope ratin g co sts.
42 C .F.R. § 413 .86(e) a nd (l)
p rov ide :
(e ) De te rm in ing pe r re s iden t
amoun t s fo r the ba se pe r iod
– (1 ) Fo r the ba se pe r iod .
( i) . . . the interm edia ry
de term ines a base -pe riod pe r
re s iden t amoun t fo r each
hos pital as f ollows . . .
(ii) In dete rm in ing the base
p e r i o d
a m o u n t u n d e r
paragra ph (e)(1)(i) o f this
sec t ion , the in termed iary – .
. .

13

(A ) Ver i f ies the hosp i ta l’s
b a s e – p e r i o d g r a d u a t e
med ica l educ ation c osts and
t h e h o s p i t a l ’ s a v e r a g e
numbe r o f FT E res iden ts ;
(B ) Exc lude s f rom the ba se –
pe riod g radua te med ica l
a n y
e d u c a t i o n
c o s t s
n o n a l l o w a b l e
o r
m i s c l a s s i f i e d
c o s t s ,
inc lud ing those prev iously
u n d e r
a l l o w e d
§
4 1 2 . 1 1 3 ( b ) ( 3 ) o f
t h i s
chap te r; and
(C ) Upo n a hosp i ta l’s
reque st, includ es gra dua te
med ica l educa t ion co s t s tha t
w e r e m i s c l a s s i f i e d a s
ope ra t ing co s t s du ring the
h o s p i t a l ’ s p r o s p e c t i v e
paymen t base year and w ere
no t allowab l e under §
4 1 2 . 1 1 3 ( b ) ( 3 ) o f
t h i s
chap te r durin g the g radu ate
m ed i ca l edu ca tion ba se
pe r iod . These co s t s may be
inc luded only if the ho sp ita l
requ ests an ad ju s tmen t of its
p r o s p e c t i v e p a y m e n t
ho sp i ta l – s pecif ic
r a t e or
ta rge t amoun t a s de sc ribed
in parag raph [(l)(2)] o f this
sec tion .
( l ) A d j u s tm e n t
a
o f
hosp i ta l’s ta rge t amoun t o r
p r o s p e c t i v e p a y m e n t
ho sp i ta l – spec i f ic ra te – (1 )

o p e r a t i n g

M i s c l a s s i f ie d
cos ts . . .
(2 ) M i sc la s s if ica tion o f
grad uate med ica l educa t ion
co sts – ( i) Gene ra l ru le . If
costs that shou ld have been
c l a s s if i e d a s g r a d u a t e
med ica l educa t ion cos ts
were t rea ted a s ope ra ting
c o s t s d u r i n g b o th
th e
grad uate med ica l educa t ion
base per iod and the ra t e -o f –
inc rease ce i l ing base yea r o r
p ro spec tive paymen t base
yea r and the ho sp i ta l w i she s
to rece ive bene f i t fo r the
appr opriate c la s si f ica t ion o f
these costs a s grad uate
med ica l educa t ion costs in
t h e g r a d u a t e m e d i c a l
educa t ion ba se pe r iod , the
ho sp i ta l mu s t reque s t tha t
the in te rmed ia ry rev iew the
c la s si f ica t ion o f the a f fec ted
costs in th e ra te -o f – inc rease
c e i l i n g o r p r o s p e c t i v e
p a ymen t ba se yea r
fo r
pu rpo se s o f ad ju s ting th e
hosp i ta l’s ta rge t amoun t o r
ho sp i ta l – spec i f ic ra te.
42 C.F .R. § 4 13.86 (e), (l) (em phas is
add ed) .
The regu la tion ’ s p la in language
r equ i re s the Inte rmed iary to corre ct a l l
m isc la ss i f ied co s t s , no t ju st m i sc la s s i fied
grad uate med ica l educa t ion co s t s . The
Secre tary’s re strictive a ppro ach c onf licts
w i th the regu la to ry language .

A dd itio na lly, the intent o f the ru le
s u p p o r t s o u r
I n

i n t e r p r e t a t i o n .
p romu lga t ing § 413 .86 , the Secre tary
de te rm ined a reaud i t o f FY 1985 co s t
repo rts w a s w a r ranted beca use h ospitals
may not h av e accu ra te ly d i s tingu i shed
b e tw e e n t ea c hi ng tim e and adm in i s tra t ive
and o ther
teach ing
spen t by
t ime
phy s ic ian s in FY 1985 , s ince a t tha t po in t
in t ime the re we re no real re imbu r s em en t
c o n s e q u e n c e s
e i t h e r w a y ,
a n d
In te rmed ia r ie s had app l ied the aud it ru le s
in co ns ist en tly. 54 F ed . Reg . 40 ,286 ,
40 ,288 -89 , 40 ,301 -02 . In th is ve in , the
Secre tary no ted : “In e s tab l i sh ing the ba se –
pe r iod pe r re siden t amoun t fo r a sp e c ific
ho sp i ta l . . . it is impo r tan t tha t the amoun t
de te rm ined be an accu ra te de te rm ina t ion
o f prov iders ’ 1984 GM E co s t s .” 54 Fed .
Reg . 40 ,286 , 40 ,288 . The go a l o f an
accu rate determ ination of co sts sup ports
both in c rea se s and dec rea se s to 1984
grad uate med ical edu ca t ion co s t s . The
Secr eta ry’s intent is p articular ly relevan t to
this ca se whe re Me rcy Ca tho l ic Med ica l
Cen te r i s no t seek ing to add add i tiona l
costs not au dited in 1985 , bu t ra the r , seek s
to rea l loca te ope ra t ing costs a s grad uate
med ica l educ ation c osts b a se d on th e sam e
t im e s tud ie s the In te rmed iary relied o n to
rec las s i fy co s t s in the oppo s ite d i rec t ion .
Ou r po s i tion is con s i s ten t w i th the
S u p rem e Cou r t ’ s in te rp re ta tion o f the
grad uate med ical ed ucatio n reau dit rule in
Reg ion s Ho sp. v. Sh alala , 522 U .S . 448
(1998) . In upho ld ing the reaud i t s, the
C our t w ro te , the aud i ts we re requ ired “ to
ca tch errors th at, if perp etual, co uld
gross ly d is tor t fu ture re imbu r semen t .” 522

14

U .S . a t 457 -58 . T o m a k e t he APRA
accu rate and avo id pe rpe t ra t ing e r ro rs , the
reaud it requ i re s co r rec t ing a l l re levan t
c la s si f ica t ion e r ro rs , no t me re ly tho se tha t
result in a reduct ion o f g radua te med ica l
educa t ion cos ts .
A s no ted , we f ind the reaud i t rule
env i s ion s a
The
st ree t.
two -way
S ecre tary’s in te rp re ta t ion is a t odds w i t h
this p r incip le . S ign i f ican t ly , the P rov ide r
Re imbu r semen t Rev iew Boa rd ag reed ,
ho ld ing the g raduate med ica l educa t ion
r u l e
r e q u i r e d
r e c l a s s i f i c a t i o n o f
m i sc la ss i f ied g radua te med ica l educa t ion
co s ts and ope ratin g co sts. P RR B D ec. a t
202 ,480 . In do ing so, the B oard explic itly
d i sc red i ted the inte rpretatio n of the rule
adop ted by the Secr etary in this l i tiga t ion .
E v e n
i f
t h e
S e c r e t a r y ’ s
in te rp re ta tion we re no t a t odd s w i th the
r u l e , h i s
l a n g u a g e o f
p l a i n
t h e
in te rp re ta tion
is still no t entitled
to
Chev ron – leve l de fe rence .1 4 A n Agency

1 4 In P re sby te rian Med ica l Cen te r , 1998
U .S . Dis t. LE XI S 6 254 , a f f’d , 170 F .3d
1146 , the D is tr ic t Cou r t fo r the D i s tr ic t o f
Co lumb ia he ld the Sec re tary’ s in st ruc tion
on the u s e o f la te r t ime – reco rd s wa s an
“ in terp re tive ru le ,” and a f fo rd ed the ru le
Chev ron def eren ce. Id . a t *9. We note
P r e s b y t e r i a n w a s d e c i d e d b e f o r e
Chr is ten sen v . Ha r r is Coun ty , 529 U .S .
576 (2000 ), wh e re th e Sup reme C our t
c la r if ied the de fe rence due agency op in ion
letter s. See id . a t 587 (decl in ing to afford
Chev ron de fe rence to Depa r tment o f
Labo r’s opi nio n lett er). W e b e l ieve the

15

in te rp re ta tion “ ‘qual i f ies fo r Chev ron
de fe rence when i t app ea rs tha t Cong ress
de lega ted autho rity to the agen cy gene rally
to m a ke ru le s c ar ryi ng th e f or ce of law ,
and tha t the agency in te rp re ta tion c la im ing
de fe rence wa s p romu lga ted in the exe rc ise
o f tha t au tho r ity. ’” Geo rge Harm s Cons tr .
Co . v. C hao , 371 F .3d 156 , 161 (3d C ir .
2004 ) (quo t ing U n ite d S ta te s v . M ead
Co rp., 533 U .S . 218 , 2 26-27 (2 001)) .
Agency s ta temen t s con ta ined in op in ion
le t te rs , po l icy sta temen ts , agency manua ls ,
and en fo rcemen t gu ide l ines lack the fo rce
o f law and “do no t wa rrant Chev ron -style
def eren ce.” Ch r i s ten sen v . Ha rris C oun ty ,
529 U.S . at 587 ; Mad i son v . R es . fo r
Human Dev . , Inc ., 233 F .3d 175 , 185 (3d
C ir . 2000 ) . “To gran t Chev ron de fe rence
to in fo rma l agency in te rp re ta tions w ould
und uly va l idate the re su lt s o f an in fo rm a l
pro ces s.” Mad i son , 2 33 F.3 d a t 1 86 . W e
have made c lea r tha t agency in te rp re t ive
gu ide l ine s “do no t r ise to th e leve l o f a
regu la tion and do no t have th e e f fec t o f
law .” Id . (quo t ing Bro oks v . Village o f
Ridg efield Park , 185 F .3d 130 , 135 (3d
Cir . 199 9)).
A s fo r the per sua s ivene s s o f agency
in te rp re t ive gu ide l ines , we contin ue to re ly
on the f ramewo rk la id ou t in Sk idmo re v .
Sw ift, 323 U.S . 134
See
(19 44) .
Ch r i s ten sen , 529 U .S . a t 587 ; Mad i son ,

in s truc t ion a t i ssue i s an in terp re tive ru le .
See 5 U .S.C . § 553 (b ) (A ) (d i scu s sing
in fo rma l ru le -mak ing w i thou t no t ice and
comm en t) . Bu t we d i sag ree w i th the leve l
o f d e fe rence g ran ted in P re sby te rian
Med ica l Cen te r.

233 F .3d a t 186 . The Sk idmore Cou r t
exp la ined :
W e cons ide r tha t the ru l ings ,
in te rp re ta tion s and op in ion s
o f the Adm in i s tra to r unde r
t h i s A c t , w h i l e n o t
con t ro ll ing upo n the c ourts
by rea son o f th eir au th or ity,
do con s t itu te a body o f
expe r ience and
in fo rmed
judgmen t to wh ich courts
and lit igants m ay prop erly
reso r t fo r gu idance . The
we igh t o f such a judgmen t
in a partic ular ca se w ill
d e p e n d
u p o n
t h e
tho roughness evide nt in its
considera t ion , the va lid i ty o f
its rea son ing , i ts con s i stency
w i t h e a r l i e r a n d
l a t e r
p ronounceme n ts , and a ll
those fa c tors w hich g ive it
p ow e r
t o p e r s uad e ,
i f
lack ing pow er to con trol.
323 U .S . a t 140 .
Unde r Sk idmore ana lys is , we f ind
the Ag ency ha s inco nsiste n t ly app l ied the
Secre tary’s in s truc t ion s conce rn ing wha t
costs can b e reco gnize d in the reaud it
p rocess . In Abbo t t v. NW Mem ’ l Ho sp . ,
PRRB Dec . No . 95 -D10 , Med ica re &
M edica id G u id e (CCH ) ¶ 42 , 970 (Dec . 7 ,
1994 ) a f f’d , HC FA Ad m’r De c., Me d icare
& M e d ic a id G u id e (CCH ) ¶ 43 ,136 (Feb .
2 , 1995 ) , the p rov ide r p resen ted base yea r
phy s ic ian allo c ation a greem ents, bu t did
no t p roduce suppo r t ing t ime reco rd s f rom

the base year .1 5 The HCFA Adm in i s t ra to r
de t e rm ined t ha t s u bs eq u en t ye a r t im e
s tud ie s m ay be u sed to increa se phys ic ian
compen sa t ion
in excess of amo unts
origina lly c la imed in the g radu ate med ica l
educa t ion co s t cen te r i f the t ime s tud ie s
were con s i s ten t w i th con tempo raneou s
da ta . T h e A dm inistrator s ubse quen tly
se e
repud ia ted his e arlie r po sition ,
P re sby te rian Med . C tr . , 1998 U.S . Dist .
LEX IS 625 4, and adop ted his cu r ren t
po s i tion , tha t the amoun t c la imed in the
grad uate med ica l educa t ion co s t cen te r
could only b e
inc rea sed ba sed on
con tem po ra neou s documen ta tion , not
sub sequen t pe r iod time s tud ie s . “The
Secre tary i s no t e s topped f rom chang ing a
v iew . . . be lieve [d ] to have been g rounded
upon a m istak en le gal in terp retat ion ,”
G ood Sam aritan Ho sp. v. Sh alala , 508
U . S . 4 0 2 , 4 1 7
t h is
(19 93 ) , b u t
incon s is tency can a f fec t the leve l o f
d e f e r e n c e
a f f o r d e d
a n
a g e n c y ’ s
in te rp re ta tion . See Sk idmore , 323 U .S . at
140 . The Sec re ta ry ’s in te rna l ly con f lic t ing
po s i tion s on th is issue m i l ita te aga ins t
a f fo rd ing defe rence to the in te rp re tive
ru le .1 6

1 5As not ed, M er cy C a tho l ic Med ica l
Cen te r d id re ta in some o f it s 339 a l loca t ion
ag reemen ts , and the se we re inc luded in the
adm inistr ative reco rd.

1 6Me rcy Ca tho l ic Med ica l Cen te r a lso
a rgue s the Sec reta ry endo r sed a po si t ion
incon s is ten t w i th tha t taken in the cu r ren t
c ase when de fend ing the va lid i ty o f the
grad uate med ica l educa t ion ru le be fo re the
S u p rem e Cou r t in Reg ion s , 522 U .S . 448 .

16

In Reg ion s, the Suprem e Cou r t con s ide red
the b roader
i s su e o f whe the r
the
S e c r e ta ry ’ s enac tm e n t o f
r u le
th e
p rov id ing fo r a re tro spec tive reaud i t o f
grad uate med ica l educa t ion cos ts was a
reaso nable in terpre ta t ion of the g raduate
med ica l educa t ion ame ndm ent, 4 2 U .S .C .
§ 1395 ww (h) , under Chev ron . The C our t
cond i t ioned i t s a f f i rmance o f the grad uate
m e d i c a l
e d u c a t i o n
r u l e o n
t h e
unde r s tand ing that ho spitals w ould no t be
pena l ized fo r lack o f documen ta t ion wh ich
they we re no longe r requ i red to ma in ta in .
Id . a t 465 . The Sec re ta ry ove rcame this
p ro b lem th rough the “equ i tab le so lu t ion”
d is cu s sed above . Acco rd ing to Me rcy
Cath olic M edica l C en te r , Gove rnmen t
coun se l sugge sted the Secr etary wo uld
a l low p rov ide rs to add to , a s we l l a s
dec rea se, b a se -yea r g raduate med ica l
educa t ion co s t s based on the fo l low ing
discu ssion a t oral arg um ent:

I
[B reyer, J .]:
Que s t ion
wo uld just like to be cle ar in
m y own min d.
W ha t
p e t i tione r sa id . . . [i s ] tha t
they have changed
the
c l a s si f i ca t ion o f ce r t a in
f i x e d
c o s t s ,
t h e
adm in i s tra t ive co s t s , f rom
educa t ion co s t s to ope ra t ing
cos ts , no t becau se o f new
e v i d e n c e b u t b e c a u s e
pe t i tione r no
longe r had
audit doc um enta tion . . . .
Am I right in th ink ing tha t
isn’ t the p ro b lem , beca use if

there a re some p iece s o f
pape r and o the r ev idence
tha t a re no longer a round ,
the Secr etary will pe rm i t the
ho sp i ta l to in t roduce –

Ms . B l a tt
coun se l ]: Ye s

[gove rnmen t

Que s t ion : – o the r ev idence ,
la ter ev idence , o r anyth ing
that –

Ms . Blatt: T hat’s c orrect,
a n d
i r o n i c a l l y ,
J u s t i c e
Breyer , the pe titioner d id
p re sen t subsequen t year data
. . . becau se the [ old] tim e
reco rd s d id no t b reak . . .
d own th e c os ts [ su ff ici en tly]
. . . they were a l lowed to use
a new tim e s tu dy, and tha t’s
why the re was a se t tlemen t
in th i s case , the pe t it ione r
actua lly go t an inc rease in
the p er-re side nt av erag e . . .
.

O ra l Ar gum ent T ran scrip t at 16 , Reg ion s
Ho sp i ta l v. Sha lala , No . 96 -1375 , 1997
W L 751915 (U .S .S .C t . Dec . 1 , 1997) .
Ba sed on th is in te rchange , M ercy Ca tholic
Med ica l Cen te r a rgue s tha t the p r inc ip le o f
jud ic ia l e s toppe l shou ld p reven t
the
Secr etary from switc hing positio ns in th is
l i tiga t ion . Becau se we f ind the Sec re tary’s
in te rp re t ive rule co ntrary to the plain
langu age of the regu lation, inc onsiste ntly

17

None the less , the Sec reta ry a rgue s
its in te rp re ta tive ru le i s rea sonab le and
en t i tled to de fe rence . Con tend ing la te r
yea r re co rd s a re inhe ren t ly le s s re liab le,
the Se cr eta ry a rg ues it is re ason able to
limit the we igh t affo rded to these reco rds .
Acco rd ing to the Secre ta ry , ho sp i ta l s may
a t temp t to man ipu la te g radua te med ica l
educa t ion cos ts w i th documen ta t ion
deve loped a f te r the ba se yea r , fo r pu rpo se s
o f i nc re as in g th ei r A PRA .
In P re sby te rian Med ica l Cen te r v .
Sha lala , 170 F .3d 1146 (D .C . C ir . 1999) ,
the Co urt of A ppea ls for th e D .C. C ircu i t
no ted the Secre tary’s in te rp re t ive ru le wa s
rea sonab le becau se :
GM E co s t s cla imed in th e
base yea r have a l ready gone
t h r o u g h a v e r i f i c a t i o n
p r o c e s s
r e q u i r i n g
c o n t e m p o r a n e o u s
documen ta t ion . Add i t iona l
GM E cos ts c la imed du ring
reaud it hav e no t. B e c ause
l a t e r y e a r
r e co r d a r e
inhere ntly le s s re l iab le , and
b e c a u s e h o s p i t a ls h av e
s ign if ican t
in c entives
to
inflate the ir GM E co sts in
the ba se yea r . . . we th ink
in te rp re t ive ru le , by
the
p r o h i b i
t
i n g
n o n c o n t e m p o r a n e o u s
reco rd s
f rom
suppo r ting

GM E cos ts . . . reason ably
f u r t h e r s — n o t
f r u s t r a t e s — a c c u r a t e
d e t e rm i n a t io n o f G M E
co s t s .”
Id . a t 1150-51 ( in te rna l quo ta t ion s and
c i tat ion s om itted ).
W e
respe ctfully
disa gre e.
W e see no valid re ason to gen erally
a sc r ibe to teach ing ho sp i ta l s w rong fu l
ove r – repo r t ing of te ach ing cos ts. Because
o f the Con s i stency Ru le , ho sp ita l s had no
opp ortun ity to cha nge c lassifica tion o f
costs in FY 1985 from tha t repo r ted in FY
1983 , th e p ro sp ec tiv e p aym en t sys tem base
year . 42 C .F.R . § 41 2.113 (b)(3). N or did
teach ing hosp i ta l s have a
financ ia l
incen tive to m i sa lloca te e i ther grad uate
med ica l educa t ion co s t s o r ope ra t ing costs
in the p rospec t ive paymen t sys tem base
year , 1983, as M edica re reim burse d bo th
educa t ion co s t s and ope ra t ing co s t s on a
reaso nable co s t ba si s du r ing that pe r iod .
C on se qu en tly, the re is no rea son to expec t
errors in cos t repor ting in 1 984 -85 w ould
have favo red repo r ting co s ts
in one
ca tegory o r the o the r . Add i tiona l ly , s ince
§ 1395ww (h ) wa s enac ted in 1986 and
manda ted th e u se o f FY 1985 a s the
grad uate med ica l educa t ion b ase year— a
ye a r wh ich p reda ted th i s change in th e
law— to se t the AP RA , prov id e r s had no
no t ice o r o p po rt un it y t o “ g am e t he sys tem ”
by ove r – repo r ting teach ing cos ts .1 7

app l ied , and l ac ki ng v al id re as on in g , w e
do not rea ch M ercy Ca tho l ic Med ica l
Ce nter ’s jud icial e stop pel a rgume nt.

1 7The Sec re ta ry ’s In terp re tive Ru le doe s
no t c la r ify the d i f fe rence be tween add ing
grad uate med ica l educa t ion co s ts no t

18

prev iously c la imed , and rec la s s i fy ing
m i sc la ss i f ied g radu a te med ical educa tion
costs p rev iou sly c la s si f ied a s ope ra ting
cos ts . The d i s t ric t cou r t in P re sby te rian
no ted the spec if ic ques t ion b efore the co ur t
wa s “whe th er la te r yea r reco rd s can be
u sed to suppo r t an increa se in GM E co sts
ove r wh at w a s o r ig ina l ly c la imed in the
base yea r.” 1998 U .S . D i s t . LEX IS 6254 ,
a t *9 . In d iscuss ing the Secre tary’s
in te rp re t ive rule, the cour t noted : “In [ the
Sec re ta ry ’s ] judgmen t, how ever, sh e did
not thin k it app ropria te for h ospitals to be
able to use la ter yea r reco rd s to suppo r t an
inc rease in GM E co sts ove r wh at hos pitals
had orig inall y claim ed.” Id . at *12 -13; see
a lso Clev eland Clin ic Fo und . v. Sha lala ,
No . 1 :9 4 CV 2414 , 1996 WL 636135 , a t
*2 (N .D . Oh io , Aug . 28 , 1996 ) ( reje c ting
prov ider’s “a t temp t s to c la im add i tiona l
costs no[ t] p re v ious ly c la imed in the base
year p erio d”) .
Un l ike the s itua t ion in Presby ter ian
and Clev eland Clin ic , Me rcy Cath olic
Med ica l Center’s reques ted reclass ification
o f m i s c l a s s i f i e d g r a d u a t e m e d i c a l
educ a tion costs w ould serve only to
partially o f f se t
the g radua te med ic a l
educa t ion co s t s tha t we re found by the
In termed iary to have been m i sc la s s i fied on
reaud it , an d wou ld no t ra ise Me rcy
C a tho l ic M ed i c a l C en ter’s gra duate
med ica l educa t ion co s t s above the amoun t
contemp oran eous ly c la ime d in FY 198 5.
In Abb o t t a s w e l l , th e g r adu a te

med ica l edu c a t ion co st add i tion s d id no t
result in to ta l g raduate med ica l educa t ion
cos ts in exce s s o f the amoun t the ho sp i ta l

19

h ad pre vio usly cla ime d.
th e
T her e,
P rov ide r Re imbu r sement Rev iew Board
noted :
T h e
n o t
is
p ro v i d e r
a t temp t ing to inc rease o r
a d d
p h y s i c i a n
t h e
compen sa t ion co s t to the
cos ts c la imed on i t s 1984
cos t r ep o rt w hich wa s u sed
to d e term ine the P rov ider’s
pe r r es id en t am ou n t. All o f
the costs th at th e P rov ide r
ha s claim ed w ere cla imed in
the ba se yea r , al though they
m ay no t have been c la imed
spec ifically in the In te rn and
Res iden t cos t cen ter .
Abb ott , Med i c a re & Med ica id Gu ide
(CCH ) ¶ 42 , 970 , a t 42 ,898 .
The Agency supplem ented
its
in terp re t ive
fo llow ing
ru le w i th
the
ques t ion an d answ er :
Que s t ion : I f a p rovid er did
n o t
c h a r g e p h y s i c i a n
compen sa t ion to GME in
the ba se per iod, can
it
reque st tha t documen ta t ion
f rom a sub sequen t pe r iod be
u sed , a t th is t ime , to rev ise
its ba se pe r iod co s t s fo r the
pu rpose o f ca lcu la t ing its
a v e r a g e p e r
r e s i d e n t
amo unt?
Answ er : N o . A s exp la ined
in HCFA ’ s in st ruc tion s , the
use of su bseq uent p e r iod
documen ta t ion to suppo r t
the a lloca tion o f phys ic ian

The Sec re tary’ s
in te rp re ta t ion
requ i re s the In te rmed ia ry to app ly the
grad uate med ical ed ucatio n reau dit rule in
a one – s ided fa sh ion . An agency a c ts
arbitrarily and c apricio usly wh en
it
con s t rue s o r app l ie s a regu la t ion in an
incon s is ten t ma nne r. See W alte r B osw ell
Me m’ l Ho sp. v . H e c k le r, 749 F .2d 788 ,
799 (D .C . C ir . 1984 ) (“ It wou ld be
arb i trary and c apricio us fo r HH S to b r ing
va rying interpre tations o f the sta tute to
bea r [ in a lloca ting cos ts to M ed icare] ,
depend ing on whe the r the re su lt he lp s o r
hurts the Med ica re ’s ba lance shee ts . . . .”) .

t h e S e c r e t a r y ’ s
F u r t h e rm o r e ,
in te rp re ta tion e schew s the fundamen ta l
goa l of n eutral a ccura cy in a rea udit. See ,
e.g., Bos well , 749 F.2 d at 79 9; Coun ty o f
Lo s Ang e le s v. Sh alala , 192 F .3d 1005
(D .C . Cir . 199 9). In C oun ty o f Lo s
Ange le s, the Cou r t o f Appea l s fo r the D .C .
C i rcu it re jected the Secretary’s exp lana tion
fo r s e lectively ign oring data w here it
wo uld inc rease Med ica re paymen t s ba sed

costs may no t be us ed to
increase
the amoun t o f
p h y s i c ia n c o m p e n s a t i o n
origin ally c la imed by the
p rov ide r in i ts GME ba se
pe r iod.
Gra dua te Med ica l Educa t ion : Que s t ion s
and A nswers (Nov . 8 , 1990 ), JA 872
(emp hasis adde d). A s this c a se conce rn s
m i sc la s si f ied g radua te med ica l educ a t ion
cos ts , we f ind the Sec re ta ry’ s po si t ion
conce rn ing co s t s no t o r ig ina l ly c la imed ,
d o e s no t
su pp o r t
th e S ec re ta r y ’ s
in te rp re ta tion a s app lied to th i s ca se .

20

o n “ [ a ]
lo n g
l i n e o f p r ec e d e n t
[e s tab li sh ing ] . . . th at an a genc y action is
a rb i t r a ry w h e n
t h e a g e n cy o f f e rs
in su f f ic ien t re a son s fo r trea t ing s im i la r
Id . a t 1022
s i tua t ion s d i f fe ren t ly.”
(quo t ing T ran sac t ive Co rp . v . Un i ted
S ta te s, 91 F .3d 232 , 237 (D .C . C ir . 1996 )) .
The cour t held the Sec reta ry’ s d i sc re t ion ,
a l though bro ad, “ is no t a lice nse to . . .
t rea t l ike ca se s d if feren t l y .” Id . a t 1023
(quo t ing A i rma r k Corp . v . FAA , 758 F .2d
685 , 691 (D .C. C ir. 19 85) ).
B y a l low ing non -con tempo raneou s
reco rd s
to ve r ify g radua te medica l
educ ation costs or deduc t g radua te med ica l
educa t ion costs c laime d in the ba se -yea r
cos t repo rt, bu t no t a llow ing such reco rd s
to suppo r t the inc lu s ion of grad uate
med ica l edu ca t ion co s t s m isc la ss i f ied a s
o p e r a t in g
c o s t s ,
t h e S e c r e t a r y ’ s
in terp re t ive ru le frus tra tes the regu la tory
goa l o f en su r ing an accu ra te de te rm ina t ion
o f a prov ider’s grad uate med ica l educa t ion
cos ts . The Sec re ta ry e ithe r c red i t s o r
igno re s la ter year t ime s tud ie s depend ing
on whe the r the co r rec tion o f e rrors w ill
result in a reduc t ion o r increa s e in a
ho sp i ta l’s g radua te med ica l educa t ion
reimb ursem ent. The Secretary’s res trictive
in te rp re t ive ru le is arb i trary and cap r ic iou s
because i t con trad ic ts the p la in language o f
the ru le , ha s no t be en ap pl ied co ns ist en tly,
and i s un rea sonab le.1 8

1 8The S ecre tary’s ru le may a l so e f fec t
an i l lega l co s t- sh i ft ing o f Med ica re co sts
to non -Med ica re pa tien t s, a s it w i l l sh i f t
costs p rope r ly bo rne by Med ica re to o ther
S e e
4 2 U . S . C .
p a t i e n t s .

2 . Ev iden t iary I s sue s Suppor t
R emand .
Me rcy Ca tho l ic Med ica l Cen te r
con tend s the D is tr ic t Co ur t and the B oard
e r red in re jec t ing i t s appea l on the added
g round
tha t Me rcy Ca tho l ic Med i c a l
Cen te r
fa i led
to p ro duce
fo rm 339
phy s ic ian a l loca t ion agreem en ts for the
th ree missin g dep artme nts . W e recogn ize
the able D istrict Co urt w as pre sented with
a c o n f u s i n g a dm i n i s tr a t iv e
r e c o r d .
None the less , w e reve r se and remand ba sed
o n
t h e
a l t e r n a t i v e g r o u n d
t h a t
con tempo raneou s ev idence o f teach ing
p rog rams ,
i nc lu d in g 33 9 fo rm s , wa s
p re sen ted to the P rov ide r Re imbu r semen t
Re view Bo ard .
There i s no d ispu te tha t Me rcy
Cath olic M ed i c a l C en t e r condu c ted
acc red ited med ical resid ency pro gram s in
its Lab orator y, OB/G YN , and R adio logy
De partm ents in 1 984 -85 . B e fo re the
B o a rd , Me rcy Ca tho lic Med ica l Cen te r
c o n t e m p o r a n e o u s
i n t r o d u c e d
documen ta t ion verifying
its grad uate
med ica l edu catio n ac tivitie s. The B oard
found : “ In f i sca l yea r 1985 , the p rov ide r
conduc ted GM E teach ing prog rams in its
OB /GYN , Labo ra to ry , and Rad io logy
De par tme nts.” PRRB Dec . a t 202 ,480 .
Ye t, the Boa rd no ted , “ [ t ]he re i s no
c red i t able evide nce
in
the rec ord
to
rec las s i fy the m i sc la s s if ie d O C to GM E
costs bec aus e of the la ck o f fo rm 3 39 ‘s . .
. .” Id . at 20 2,48 1. The D is t r ic t Cou r t a lso
conc luded , “ [ t ]he reco rd ind ica te s tha t

§ 13 95( x)(v )(1)(A) .

21

Me rcy no long er had any o f the 339 s and
tha t M er cy d id no t su bm it a ny o the r
ev idence , other
th an
the
t ime s tudy
conduc ted in 1990 .” Me rcy Ca tho l ic Med .
C tr ., 2003 U .S . D i s t. LEX IS 4688 , a t *24 –
25.

A t o ra l a rgumen t , and
in a
sub sequen t le t te r to th i s Cou rt , Me rcy
Cath olic Med ica l Cen te r p ro v ed th a t s ome
o r i g i n a l 3 3 9 s
f r o m
t h e m i s s i n g
depa rtmen ts had been inc luded in the
adm in i s tra t ive reco rd , though , ap pa re nt ly,
no t a s fo rma l exh ib i ts .1 9 To the ex ten t the
P rov ide r R e im b u rs em en t Rev iew Board
and the D istrict Co urt gro und ed the ir
dec i s ion s on Me rcy Ca tho lic Med i c al
Cen ter’s inab i li ty to p roduce cop ie s o f the
3 3 9
th ree m iss in g
the
f o r
f o rms
depa r tmen ts , it is c lea r tha t a t leas t some o f
these
form s w e re p roduced
in
the
adm inistrativ e reco rd .2 0 T h er ef or e, we w ill

1 9Acco rd ing to Me rcy Ca tho l ic Med ica l
C en te r ’ s le t te r to th i s Cou r t da ted May 4 ,
2004 , a “de partm ental 339 a l loca t ion”
fo rm fo r the Rad io logy Depa r tmen t wa s
intro duc ed a s PR RB Ex hib it 32 .

2 0A l though no 339 fo rm s fo r ind iv idua l
doc tors we re inclu ded in the ap pend ix to
this Co urt, a “d epartm enta l 339 a l loca t ion”
form fo r a l l teach ing phys ic ian s in the
Rad io logy Depa r tmen t
in 1985 wa s
inc luded . JA 381 . Hea l th Ca re F inanc ing
A d m i n i s t r a t i o n ’ s
i n s t r u c t i o n s
t o
i n t e r m e d i a r i e s
s u c h
th a t
s p e c i f y
“depa r tmen ta l t ime a l loca t ion s may be
accep ted” on r eau dits. In s t ruc t ion s fo r
fo r
Imp lemen t ing P rog ram Paymen t s

reve rse and remand on the a lte rna tive
g round that suf ficien t con tempo raneou s
documen ta t ion o f teach ing p rog ram s in the
“m i s s ing depa rtmen ts” w as pro duce d to
suppor t the rec las s i f ica t ion o f co s t s and
shou ld have been con s ide red by the Boa rd .
In sum , the Sec re ta ry’s pos i tion tha t
la ter yea r t ime s tud ie s may on ly be used to
co r rec t m isc lass i f ied ope ra t ing cos ts , and
no t m i s c l a ss i f ie d g r a d u a te m e d i c al
educa t ion co s t s , i s a rb i t ra ry and capr ic ious.
rev erse an d
W e will
rem and w ith
i n s t r u c t i o n s
t o
t h e P r o v i d e r
Re imbu r semen t Rev iew Boa rd to o rde r the
In te rmed iary to recalc ula te M ercy Ca tholic
M ed i c a l C en t e r ’ s g ra d u a t e m e d ic a l
educa t ion co s t s af te r aud it in g th e tim e
s tud ie s and o the r availa ble documen ta t ion
from th e thr ee m issin g de par tme nts.
B . Ho spital-S pecific Ra te and Targe t
Amoun t
Mercy Cath olic Med ica l Cen ter a lso
con tend s the D istrict Co urt faile d to o rde r
the In termed iary to incre a se its ho spital-
spec ific rate an d TE FRA tar get am oun t.
A s no ted , the Board dec l ined to o rde r the
In termed iary to inc reas e M ercy Ca tholic
M ed ica l Center’s hosp i ta l- spec if ic rate and
ta rge t amoun t in an amoun t co rre spond ing
to the In te rmed ia ry’ s reduct ion o f th e sam e
costs f rom th e APRA b ecau se Me rcy
Cath olic Med ica l Cen te r had no t p rov ided
t h e
t o
d o c u m e n t a t i o n d i r e c t l y
I n t e rm e d i a r y , b u t
r a t h e r
t o
t h e
S ubcon trac tor . PR RB De c. at 2 02,4 81 .

Gra dua te Med ica l Educa t ion Co sts , JA
341 .

22

The D i s t r ic t Cou r t a f f i rmed , no t ing , “ [ t ]he
fac t that th e Subcon t rac to r may have the
docu men ts in i ts possess io n doe s no t
sa t is fy the requ i remen t s se t fo r th by the
reg ulati ons .” Mercy C a tho l ic Med . C tr .,
2003 U .S . D is t . LEX IS 4688 , a t *33 -34 .
We canno t ag ree .
the
in
inc rea se
A s no ted , an
hosp ital-spec ific ra te and ta rge t amoun t is
an t icipa ted b y
t he S ec re ta ry’ s ow n
r e g u l a t i o n s
t o a c h i e v e c o n s i s t e n t
classific a t ion o f costs w here c osts
o r iginally c la s si f ied a s g radua te med ica l
educa t ion costs sh ould have been repo rted
a s ope ratin g co sts. See 42 C .F.R . §
413 .86( l)(1) . Add i t iona l ly, because o f the
Con s i s tency Ru le , a llowab le ope ra t ing
costs invo lved in se t ting th e hosp ital-
spec ific rate an d targe t amo unt m ust b e
t r e a te d c o n s i s t en tly
th rough ou t
th e
p ro spec tive paymen t t ran si t ion pe r iod (i .e.
M e rcy C a tho li c M ed ic a l C en t e r’ s FY
1985-1 989) . 42 C .F .R . § 4 12 .113(b )(3) .2 1
Once it is d e te rm ined tha t m i sc la s s i fied

2 1M ercy Ca tho l ic Med ica l Cen te r a lso
con tend s tha t becau se i ts Ta rge t Amoun t
app l ied only to a p sychiatr i c un it not in
ope ra t ion unt il FY 198 5, th ere wa s no
ra t iona l basis to requ ire M ercy Ca tholic
M e d i c a l C e n t e r
t o
i n t r o d u c e
d o c u m e n t a t i o n
e v i d e n c i n g
t h e
com parab ility o f i t s FY 1983 and FY 1985
costs a s a p recond it ion to inc reas ing the
t a r g e t
a m o u n t .
T h e r e f o r e , n o
“com parab ility da ta” wa s nece ssa ry to
ad jus t the targe t amoun t, and th e B oard’s
f ind ing on in su f f ic ien t documen ta t ion wa s
i r re levan t to the targ et am oun t adjustm ent.

grad uate med ical educa tion co sts sho uld
have been reimb ursab le as ope ra t ing cos ts ,
an increa se to the hosp ital-spec i f ic ra te and
ta rge t am oun t i s requ i red no t me re ly fo r
cons isten c y pu rpo se s , bu t a l so in l igh t o f
Me d icare’s cos t- sh i f t ing p roh ib it ion . 42
U.S .C . § 1395x (v ) (1 ) (A ) .
Fo r these
reasons , the ho sp i ta l- spec if ic rate / ta rge t
amoun t adju stm ent is critic al. M e rcy
Cath olic Med ica l Cen te r’ s reques t for a
rev i sion of b oth its h ospital-s pecif ic rate
and ta rget amoun t wa s app rop ria te and
time ly.
P rov id er
t h e
d isc uss ed ,
A s
Re imbu r semen t Rev iew Boa rd d id no t
deny
the ad ju s tmen t s fo r sub s tan tive
reasons . See PRRB Dec . a t 202 ,481 .
Me rcy Ca tho l ic Med ica l Cen te r had
p rovid ed the app rop ria te and su f f ic ien t
documen ta t ion
to
th e
In termed iary’s
Subcon trac tor .2 2 JA 161 . The Boa rd ,
how ever , refus ed to o rder th e hos pital-
s p e c i f i c
r a t e a n d
t a r g e t a m o u n t

2 2The reco rd demon s tra te s the ev idence
p rov ided by Me rcy Ca tho l ic Med ica l
Cen te r wa s su f f ic ien t
to make
the
adjus tmen ts to the h ospital-s pecif ic rate
and ta rge t amoun t . The Board found “ the
Subcon t rac to r . . . had receiv ed ade quate
in fo rma tion fo r . . . rev is ion s to the
HSR /TEFRA ta rge t amoun t .” PRRB Dec .
a t 202 ,481 . In fac t, the “be s t ev idence” o f
compa rabi lity be tween the p ro spec t ive
paymen t sy stem and g radua te med ica l
educa t ion ba se yea r s wa s the cost repo rt ing
data and sup por t ing aud i t records tha t we re
a l ready in the In te rm ed ia ry’ s po s ses s ion
un t i l a t lea s t 1992 . JA 156 .

23

adjus tmen ts on the techn ica l ity tha t Me rcy
Cath olic Med ica l Cen te r p rov ided the data
suppo r t ing compa rab i li ty w i th in the 180
d a y p e r i o d
to
th e
I n t e r m ed ia r y ’ s
S u b c o n t r a c t o r
t h a n d i r e c t l y
r a t h e r
p rov id ing i t to the In te rm e d ia ry. PRRB
Dec . a t 202 ,481 . We do no t f ind th is
distin ction lega lly sign ifica nt.
P rov id ing data
to
the on -site
Subcon t rac to r is th e lega l equ iva len t o f
p rov id ing the da ta to the In te rmed i a ry
unde r Cen ters fo r M edica re and M edica id
Serv ice s Manua l s and p r incip le s o f
ag en cy. In co l lec t ing data fo r an aud i t , the
Subcon t racto r s tep s in to the shoe s o f the
In term ed iar y. See Med icare In termed iary
Manua l , JA 9 19. A subc ontrac ted au dit
f irm is autho rized to receiv e cos t repor ts
and make its wo rking pape rs ava ilable to
the In te rmed ia ry fo r rev iew and to ob tain
necessary info rma tion . See id . pt. F (“The
independen t aud i t f irm ’s [Subcon tracto r ’s ]
wo rk ing pape rs , inc lud ing pe rmanen t f ile s
and rev iew s o f in te rna l con t ro l, a re to be
made ava i lab le to rep re sen ta t ives o f the
Secre tary and th e interm ediary, at all
reaso nable t imes , fo r rev iew and ob ta in ing
any nece s sa ry in fo rma t ion .” ) . Unde r the
Med icare
In termed iary M anua l,
the
In termed iary and the S ubcon trac tor are
the
in t e rch ang e ab le
f unctio n o f
in
rece iv ing docum en ts .
The B oard’s
dec is ion a lso descr ibed the In termed iary
p e r f o r m i n g
i t s
“ t h r o u g h
a u d i t s
Su bco ntra ctor .” PR RB De c. at 2 02,4 66.
Unde r these c i rcums tances , we f ind
the documen t s we re p la in ly w i th in th e
con t ro l of the “prim e con tractor” (in this
ca se , the In te rmed ia ry ). In the con tex t o f

Fed . R . C iv . P . 3 4 (a), so lo ng as the pa rty
ha s the lega l r igh t o r ab i l i ty to ob ta in the
docu men ts from a no ther sou rce upon
demand , tha t par ty i s deemed to have
See F e d R . C iv . P . 34 (a )
contro l.
(a l low ing “[a]n y party [ to ] se rve on any
o the r pa rty a r equ es t . . . any de signa ted
docu men ts . . . which are in the po s se s s ion ,
cu s tody o r con t ro l of the party upon whom
the requ est is serv ed); s e e a l so Poo l e v .
Tex t ron, 192 F.R .D. 4 94, 5 01 (D . Md .
2000 )
is cha rged with
(“[A ] party
know ledge o f wha t i ts agen ts kn ow o r
wha t i s in the reco rd s ava ilab le to i t.” )
( in te rna l quo ta t ion om i t ted ). In the R ule
34 conte xt , con trol is def ined a s the le g a l
r igh t to ob ta in requi red documen t s on
demand . See Ge r l ing In t ’ l In s . Co . v .
Com m’r , 839 F .2d 131 , 14 0 (3d C ir .
1988) ; 8A C ha r le s A lan W r igh t & A r thu r
R . M i l ler , Fede ra l Prac t ice and P rocedure
§ 22 10 (2d ed . 1994 ). The Med icare
In termed iary Manua l spec ifically requ i re s
the Subcon t rac to r ’ s wo rk ing p ape r s and
f i les be made ava i lab le to the In term ed iary
and Sec retar y at all “ reas ona ble time s.”
Med icare In te rmed ia ry Manua l p t . F .
Because the reco rd demon s t ra te s Me rcy
Cath olic Med ica l Cen te r p rov ided the
necessary docu men ts to the Subco n trac tor ,
and
the
In te rmed ia ry emp loyed
the
Subcon t rac to r to con duct t h e aud i t and
rece ive documen ts , the documen ts w ere
acce ssible to the In terme diary and with in
its contro l.
Wh ile the re is no que s t ion th e
In termed iary d et erm in es th e A PRA and
co r re spond ing adjus tmen ts to the ho spital-
spec ific ra te and the Ta rge t Amoun t unde r

§ 413 .86, it do es no t follow that th e
p rov ide r may no t supp ly the da ta to the
I n t e rm e d i a r y
t h r o u g h
t h e o n – s i t e
Sub contra cto r . The Subcon t rac to r wa s
en t i tled to receive co s t documen ta t ion
f rom Me rcy C a tho l ic Med ica l Cen te r a s
the In te rmed ia ry’ s agen t. An agency
relation ship may be e s tab l i shed by : (1 )
exp ress au th or ity; (2) im plied a utho rity , to
do a l l tha t is prop e r , usua l and n ecessary
fo r the au tho r i ty ac tua l ly g ran ted ; (3 )
appa ren t au tho r ity, a s wh e re the p rinc ipal
ho ld s one ou t a s agen t by wo rd s o r
cond uct; and (4 ) agency by e stop pel. See
SE I Co rp . v . N o r ton & Co ., 631 F . Supp .
497 , 501 (E.D . Pa. 1 986 ).
Ba sed on the re la t ion sh ip be tween
the Sub contra ctor an d Inte rmed ia ry, the
subc ontr ac tor l ike ly had exp re s s o r imp l ied
autho rity
to receive documen t s f rom
Me rcy C atho lic M edic al C ente r. See
Med icare In te rmed ia ry Manua l p t s. D -F .
The Subcon t rac to r undoub tab ly po s se s sed
the au tho r i ty to conduc t the reaud it o f the
grad uate med ica l educa t ion cos ts . JA 153 .
A s no ted , adjus tmen t of the hosp ital-
spec ific rate an d targe t amo unt is t ied to
the c la s si f ica t ion of h osp itals’ c osts . See
42 C .F .R . § 413 .86 ( l ). Ra t iona l ly , the
Subcon t rac to r shou ld be a utho rized to
r e c e iv e d o c um e n t s
f o r b o t h c o s t
rec las s i f ica t ion s and ad ju s tmen t s to a
hosp i ta l’s spec ific rate and target amo unt.
Alte rna tiv ely, i f the subcon t rac to r lacked
express a u th o ri ty t o r ec e iv e do c um ents, the
fac t that it had cond ucted the g ra duate
med ica l educa t ion
reaud i t, and had
conduc ted a ll o f Me rcy Ca tho lic Med ica l
Cen ter’s aud i t s s ince th e “mid 70s ,” JA

24

153 , demon s t ra te s the Subcon trac to r had
a p p a r e n t a u t h o r i t y
th e
r e c e i v e
t o
documen ts . “It is we ll se t tled that appa ren t
autho rity (1 ) ‘ re su lt s f rom a man i fe s ta t ion
by a pe rson tha t ano the r is h i s agen t ’ and
(2 ) ‘ex i st s on ly to the ex tent tha t it is
reason able fo r the th i rd pe rson dea l ing
with t h e agent to b elieve that the agen t is
au thor ized .’” Tay lo r v . Peop le ’ s Na tu ra l
Ga s Co . , 49 F .3d 982 , 989 (3d C i r . 1995 )
(quo t ing Re s ta temen t (Second ) o f Agency
§ 8 cm ts . a & c (1958 )) . Merc y C a tholic
Med ica l C en ter re as on ab ly b e l ieved the
Subcon t rac to r had the au thority to receive
t h e
T h e
r e l e v an t docu men ta t io n .
In termed iary and the Subcon trac tor we re
jo in t ly o b l ig a ted
to
s a f e gu a r d
th e
hosp ita l’s documen t s . The re fo re , Me rcy
Cath olic M edica l Cen ter fulf illed
its
bu rden by prov iding a ppro pria t e data to
the I nterme diar y’s ag ent.
Mercy C a tholic Med ica l Cen ter also
con tend s
i t was en t i t led
to p re sen t
ev idence no t subm i tted to the In termed iary
to the P rov ide r Re imbu r semen t Rev iew
Board fo r d e novo rev iew , and tha t the
Board v io la ted 42 U .S .C . § 1395oo (d ) by
no t cons idering this evid en ce .2 3 In this
ve in , Me rcy Ca tho lic Med ica l Cen te r
a rgue s i t shou ld be a llowed to p re sen t
the p ro spec tive
evid ence compa r ing

2 342 U .S.C . § 139 5oo(d ) prov ides in
re levan t pa rt : “A d ec is ion by the Bo ard
shall be ba sed upon th e reco rd made a t
such h e a r ing , wh ich sha l l inc lude the
ev idenc e cons idered by the in termed iary
and such o the r ev idence th a t may be
obt aine d or rece ived by the Bo ard . . . .”

25

paymen t sy stem and the g radua te med ica l
educa t ion base years— to eff ect a n
a d j u s tm e n t o f
th e h o s p i ta l – sp e c i f ic
ra te— un t i l the Boa rd ha s dete rm ined
whe the r to app rove a reaud it c la s si f ica t ion
o f ope ra t ing co s ts to g radua te med ical
edu catio n co sts.
The Sec re tary ma in ta in s Me rcy
Cath olic M ed ica l Cen te r ’ s re l iance on 42
U .S.C . § 13 95o o(d) is u nava iling . W e
ag ree . This statute d oes n ot requ ire the
Board to receive add it iona l ev idenc e no t
con s ide red by the Inte rmed iary, but on ly
confers discre tion on the B oard as to wha t
will be allowe d into th e adm inis tra t ive
reco rd . Tak ing Me rcy Ca tho lic Med ica l
C e n t e r ’ s a r g u m e n t
t o
it s
lo g i c a l
conc lu s ion , all sta tu to ry o r regu la tory
dead l ine s
impo sed on p rov ide r s
fo r
pu rpo se s o f Med i c a re re imbu r semen t
wo uld be incon sequ ential, s ince prov iders
cou ld p ro f fe r a l l requ i red repo r ts and
doc um ents by the time of th e he arin g.
Ne verth e less , becau se we f ind
Me rcy Ca tho l ic Med ica l Cen te r to have
fu l f il led i t s bu rden by p re sen t ing su f f ic ien t
data for ad justing its hosp ital-spec ific rate
and ta rge t amoun t to the S u bc on tr ac to r, we
will reve r se the Boa rd and the D i s t ric t
Cou r t on t his is sue . We will remand to the
D i s t r ic t C ou r t to remand to the P rov ide r
R e im bu r semen t Rev iew Boa rd w i t h
in s truc t ion s to ord er the In terme diary to
ad jus t Me rcy Ca tho l ic M ed ica l Cen ter’s
hosp ital-spec ific ra te and ta rge t amo unt to
co r re spond to rec la s s i fied oper a ting co sts
and g radua te med ica l educa t ion cos ts .

IV .
Fo r the rea sons stated, w e w ill
reve rse and remand the judgmen t o f the
D i s t r ic t Cou r t fo r p roceed ing s con s i sten t
w i th th is op in ion .

26

Mercy Health Sys. of N.W. Ark., Inc. v. Bicak (Summary)

RESTRICTIVE COVENANTS

Mercy Health Sys. of N.W. Ark., Inc. v. Bicak, No. CA 10-1057 (Ark. Ct. App. May 11, 2011)

The Court of Appeals of Arkansas affirmed summary judgment in favor of a physician who had been sued by his former employer (a hospital) for tortious interference with business expectancy and breach of contract as a result of his decision to terminate his employment contract, take information from the hospital about its patients, and then open a competing practice that violated the terms of his restrictive covenant.

In affirming summary judgment for the physician, the court noted that the restrictive covenant was unenforceable because it did nothing besides eliminate competition. The court found that the hospital did not counter the evidence brought by the physician showing the hospital had no interest to protect through the covenant and that the covenant would unreasonably interfere with patients’ access to the physicians of their choice.

The appeals court also found no error in the trial court finding that the physician had not breached the employment agreement, noting that there was no direct evidence that the physician had compiled a patient list from the hospital’s data, nor that he actively solicited the two employees who chose to leave the hospital to go work for the physician.

 

 

Mendez-Arriola v. White Wilson Med. Ctr. (Full Text)

Case 3:09-cv-00495-MCR-EMT Document 90 Filed 08/25/10 Page 1 of 16

IN THE UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF FLORIDA
PENSACOLA DIVISION

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DANAE MENDEZ-ARRIOLA, M.D.

Plaintiff,

v.

WHITE WILSON MEDICAL CENTER PA,
et al.

Defendants
_______________________________/

Case No. 3:09cv495/MCR/EMT

O R D E R
Plaintiff, Danae Mendez-Arriola, M.D., has sued White W ilson Medical Center, P.A.
1
(“Clinic”); White W ilson Properties Partnership (“WWP”); WW Real Estate, LLC (“WWRE”);
Douglas W . Rigby, M.D.; and Alan L. Gieseman for disability discrimination, sex
discrimination and retaliation under federal and state law; and breach of contract, breach
of implied covenant of good faith and fair dealing, and breach of fiduciary duty under state
law in connection with her removal as a shareholder/employee of the Clinic and as a
partner/investor in WWP. Mendez also seeks declaratory relief. Presently before the court
are defendants’ motion for a more definite statement or, in the alternative, motion to
dismiss (doc. 52); and Mendez’s motion for reconsideration of the court’s order granting
defendants’ leave to reply (docs. 72, 77). For the reasons given below, defendants’ motion
will be granted in part and denied in part; Mendez’s motion for reconsideration will be
denied.
Background
The allegations are as follows. In 1997, the Clinic, a Florida corporation located in
Fort Walton Beach, Florida, employed Mendez as a radiologist. Rigby was president and
director of the Clinic and Gieseman was its chief executive officer. In 1999, Mendez

1

In h e r c om p la in t , M e n d e z -A r r io la a b b re v ia te s he r n am e to M e n de z ; the c o u r t w ill d o th e s am e .

Case 3:09-cv-00495-MCR-EMT Document 90 Filed 08/25/10 Page 2 of 16

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became a shareholder of the Clinic. On August 1, 2000, Mendez and the Clinic entered
into a Shareholder Employment Agreement (“Clinic agreement”) which incorporated the
Clinic’s bylaws.
WWP was a Florida partnership that owned the real property on which the Clinic
operated its business. On February 28, 2002, Mendez signed a promissory note, payable
to WWP, for one hundred twenty consecutive monthly installments of $606.64, and agreed
to assume her pro rata share of WWP’s obligations. In consideration for the note, Mendez
acquired full partnership rights and interests in WWP, subject to certain vesting provisions. 2
Specifically, the promissory note provided that Mendez would vest in equity upon
completion of ten years of service and full payment of the note. Furthermore, the note
provided that termination from the Clinic, for any reason or no reason at all, would
constitute withdrawal from WWP; and, in such event, only Mendez’s principal would be
refunded to her.
Some time later, the common leadership of the Clinic and WWP, including Rigby
and Gieseman, reorganized the entities. They formed WWRE, a Florida limited liability
3
company, to take title to the real property held by WWP; and White W ilson Association,
PA (“WWA”), to act as a holding company for both the Clinic and WWRE. Rigby became
president of both WWRE and WWA. In 2007, WWRE purchased the real property from
WWP for $24,290,000. WWP wrote to Mendez that her proportionate interest in the
partnership was $661,000; she could cash out in 2006 and receive a payment of
approximately $402,000, or wait until 2012 and receive approximately $1,165,000. WWP
also provided Mendez with tax documentation related to capital gains on her individual
equity interest in WWP, and paid her approximately $40,000 to cover her expected capital
gains tax.

2
A lth o u g h M e n d e z d o e s n o t d is c u s s th e ve s t in g p ro v is io n s in h e r c om p la in t , the p rom is s o ry n o te
a t ta c h e d to h e r c om p la in t de f in e s “ve s t in g ” a s h a v in g th e s am e m e a n in g a s in th e W W P p a r tn e rs h ip
a g reem e n t . S e e F ed . R . C iv . P . 1 0 (c ) ; N o v o n e u ro n In c . v . A d d ic t io n R e s e a rch In s t . , In c . , 3 2 6 F e d . A p p x . 5 0 5 ,
5 0 8 (1 1 th C ir . 2 0 0 9 ) . T h is m e a n in g is u n c le a r , h ow e ve r , b e c au s e M e n d e z d id n o t a t ta c h th e W W P
p a r tn e rsh ip a g re em e n t to h e r c om p la in t .

3

T h e c om p la in t is u n c le a r a s to w h e n th e re o rga n iza t io n o c c u r re d .

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P a g e 3 o f 16

Some time prior to 2008, Mendez’s work conditions at the Clinic deteriorated. A
number of radiologists left the Clinic, leaving Mendez with an increased workload.
Notwithstanding, Mendez was required to meet a newly-imposed 24-hour turnaround on
her work. According to the complaint, the Clinic ignored Mendez’s repeated requests for
assistance and lowered her compensation by changing compensation formulas, double-
charging her for transcription costs, and outsourcing more lucrative radiology work off-site.
When Mendez complained, the Clinic leadership subjected her to continued abuse and
unfair criticism, including blaming her for errors caused by problems with transcription
services. Mendez alleges that this abuse and unfair criticism was based on, at least in
4
part, her female gender and the Clinic’s perception that she was mentally or
psychologically disabled. According to Mendez, although she was the senior member of
the Clinic’s radiology department, the Clinic denied her request to become director of the
department and instead brought in an outside, male, radiologist to fill the position. In
addition, when Mendez ran for election to the Clinic’s board of directors, hoping to become
its first female member, the all-male board rejected her.
On May 29, 2008, the Clinic’s board of directors gave Mendez a letter advising her
that its members had voted to summarily suspend her based on the May 27, 2008
recommendation of the Clinic’s risk management committee. The same day, the Clinic
informed Mendez that the suspension was for ninety days, and was based on errors in
twenty-five of her patient files. According to Mendez, none of the identified errors affected
the quality of medical care delivered to the patients or brought disrepute to the Clinic. On
June 4, 2008, Mendez wrote to the Clinic that the suspension was an improper attempt to
replace her with a younger male doctor and prevent her from vesting in WWP. Mendez
requested a hearing pursuant to the Clinic’s bylaws, which the Clinic failed to provide.
Instead, on June 5, 2008, the board affirmed her suspension with a memorandum stating
that Mendez would be suspended for at least ninety days; her return to work would be
conditioned on parameters outlined by the Clinic; and she’d be required to seek additional

4

T h e c om p la in t p ro v id e s n o fu r th e r d e ta ils a b o u t th e a lle g e d a b u s e a n d u n fa ir c r it ic ism .

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P a g e 4 o f 16

education and a psychological evaluation, both approved by the Clinic. On June 6, 2008,
the Clinic’s medical director and Karl Metz, M.D., met with Mendez, telling her she was a
“bad citizen” of the Clinic and a “liability;” she should return to work once she had “healed;”
and she was required to undergo a psychological evaluation by a doctor of the Clinic’s
choosing before returning to work. (Doc. 37, at ¶ 47.) In addition, they gave Mendez a
5
document entitled “Citizenship Issues” which criticized her work style. On June 27, 2008,
the Clinic responded to Mendez’s June 4, 2008 letter, informing her of the board’s vote to
affirm her suspension. The letter notified Mendez that her return to work would be
conditioned on parameters outlined by the Clinic, and required her to seek additional
education and a psychological evaluation, both approved by the Clinic. Furthermore, the
Clinic denied Mendez’s July 4, 2008 written request for a hearing, stating that her letter had
raised no material factual disputes and that her suspension was in accord with the Clinic’s
bylaws.
Mendez, through her counsel, informed the Clinic in writing of her belief that the
Clinic was violating the Americans with Disabilities Act (ADA), Title VII of the 1964 Civil
Rights Act, and the Florida Civil Rights Act, by requiring her to undergo a psychological
evaluation, without any basis, before allowing her to return to work. On October 16, 2008,
6
according to Mendez was shortly after she complained that the Clinic’s actions were
discriminatory, the Clinic fired her. Prior to her termination, the Clinic hired a male
radiologist as a shareholder of the Clinic. According to Mendez, unlike her, the male
7
radiologist was not required to work as an associate for two years prior to becoming a
shareholder. Mendez alleges that most of the harms outlined above, including her
termination, took place after the male radiologist was hired, and stemmed from the Clinic’s
intent to replace Mendez with a male. At the time, Mendez was the only female radiologist

5
T h e com p la in t d o e s n o t id en t ify th e C lin ic ’s m ed ic a l d ire c to r b y n am e , o r e x p la in K a r l M e tz ’s p o s it ion
w ith th e C lin ic .

6

7

T h e c om p la in t is u n c le a r a s to th e d a te M e n de z in fo rm ed th e C lin ic o f h e r b e lie f .

T h e c om p la in t is u n c le a r a s to th e id e n t ity o r q u a lif ic a t io n s o f th e m a le ra d io lo g is t .

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P a g e 5 o f 16

working for the Clinic. Mendez alleges that after she was terminated the male radiologist
assumed her workload. On December 8, 2008, WWP sent Mendez a check for
$28,300.45, which WWP described as a refund of the principal of Mendez’s payments into
the partnership. On October 27, 2009, the Clinic sent Mendez a check for $40,000, which
the Clinic described as payment for the redemption of her shareholder interest in the Clinic;
the Clinic provided no explanation as to how it derived the figure, or why it took over a year
after Mendez’s termination for the Clinic to send the payment to her. Mendez alleges that
she lost the value of her equity interest in the Clinic, WWP, and WWRE.8
On or about November 24, 2008, Mendez filed an administrative charge of
discrimination, based on disability, sex and retaliation, with the EEOC. On or about August
9, 2009, Mendez received notice from the EEOC of her right to sue under the Americans
with Disabilities Act and Title VII of the Civil Rights Act of 1964. On November 3, 2009,
Mendez filed this suit.
Discussion
A complaint must contain a “short and plain statement of the claim showing that the
pleader is entitled to relief.” See Fed. R. Civ. P. 8(a)(2). If the claim “is so vague or
ambiguous that a party cannot reasonably be required to frame a responsive pleading,” a
party may move for a more definite statement. Fed. R. Civ. P. 12(e). The court will grant
a motion for more definite statement where it is “virtually impossible” to determine which
of a complaint’s factual allegations support its claims. See Anderson v. Dist. Bd. of Tr., 77
F.3d 364, 366-67 (11th Cir. 1996). The more definite statement should present the claims
with clarity and precision, allowing the defendant to discern, and respond to, the claims.
See id.

To survive a motion to dismiss, a complaint must contain enough facts, accepted
as true, to state a plausible claim to relief; merely reciting the elements of a cause of action
will not suffice. See Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009); Sinaltrainal v. Coca-
Cola Co., 578 F.3d 1252, 1260 (11th Cir. 2009). A claim is plausible when the plaintiff

8

T h e c om p la in t is un c le a r a s to w h a t e x te n t M e nd e z ha d an eq u ity in te re s t in W W R E to b e g in w ith .

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P a g e 6 o f 16

pleads facts which allow the court to draw the reasonable inference that the defendant is
liable for the misconduct alleged. See id. Although the court must accept well-pled facts
as true, the court is not required to accept the plaintiff’s legal conclusions. See id.; Waters
Edge Living, LLC v. RSUI Indemnity Co., 355 Fed. Appx. 318, 320 (11th Cir. 2009). The
moving party bears the burden to show that the complaint should be dismissed. See
Superior Energy Servs., LLC v. Boconco, Inc., 2010 WL 1267173, at *5 (S.D. Ala. Mar. 29,
2010); Vitola v. Paramount Automated Food Servs., Inc., 2009 WL 5214962, at *1 n.1
(S.D. Fla. Dec. 28, 2009).
Motion for More Definite Statement
Defendants argue that many counts in the amended complaint incorporate
numerous allegations that are inapplicable to that count, rendering the complaint as a
whole vague and confusing. For example, defendants argue Mendez’s breach of implied
9
covenant claim against WWP and Rigby, which relates to the WWP partnership
agreement, incorporates allegations regarding Mendez’s termination from the Clinic.

10
In response, Mendez argues the allegations are applicable to her claim against WWP and
Rigby because WWP and the Clinic shared common leadership, including Rigby, and her
removal from WWP was justified by her wrongful termination from the Clinic. The court
agrees. To the extent that defendants understand, but disagree with, Mendez’s claims,
their arguments are better suited to a motion to dismiss, not a motion for more definite
statement.
In addition, defendants argue that some paragraphs in the complaint contain
subparagraphs, in violation of the requirement that allegations be “simple, concise, and
direct.” Fed. R. Civ. P. 8(d)(1). The court notes, however, that Rule 8(d)(1) further states
that “[n]o technical form is required.” Notwithstanding the subparagraphs, the court
considers defendants’ detailed motion to dismiss as a good indication that they are fully

9
D e fe n d a n ts p re v io u s ly m o ve d fo r a m o re d e f in ite s ta tem e n t (d o c . 2 5 ) , w h ich th e c o u r t g ra n te d (d o c .
3 2 ) . M e nd e z s u b s e qu en t ly f ile d an am en d e d c om p la in t (d o c . 3 7 ) .

10

C o un t X V o f th e c om p la in t .

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capable of discerning, and responding to, Mendez’s claims.
See Anderson, 77 F.3d 366-
11
367. Accordingly, the motion for more definite statement will be denied.
Motion to Dismiss – “Many” Claims
Defendants begin their motion to dismiss with a recitation of the Iqbal standard,
arguing that the court should dismiss “many of the Counts” because “many of [Mendez’s]
claims” are not plausible. (Doc. 52.) Defendants’ sparse argument fails to identify which
claims defendants are seeking the dismissal of. See Fed. R. Civ. P. 7(b)(1); Superior
Energy Servs., LLC, 2010 WL 1267173, at *5; Vitola, 2009 WL 5214962, at *1 n.1.
Motion to Dismiss – Medical Examination Claims
In Counts III and IV, Mendez alleges that the Clinic required Mendez to submit to
a medical examination, which was neither job-related nor consistent with business
necessity, in violation of federal and Florida law. See 42 U.S.C. § 12112(d)(4); Florida Civil
Rights Act of 1992 (FCRA), FLA. STAT . § 760.10 et seq.
Defendants claim that Counts
12
III and IV merely duplicate Mendez disability discrimination claims in Counts I and II.
Defendants rely on 42 U.S.C. § 12112(d)(1), which provides: “The prohibition against
discrimination as referred to in subsection (a) of this section shall include medical
examinations and inquiries.” Subsection (a) states the general rule prohibiting
discrimination on the basis of disability. See 42 U.S.C. § 12112(a). Thus, according to
defendants, violation of the prohibition against medical examination is merely evidence of
disability discrimination, rather than a separate and distinct injury. The Eleventh Circuit,
however, has recognized an employee’s private right to sue to enforce the prohibition
against medical examinations under §12112(d)(4). See Harrison v. Benchmark Electronics

11
T h e c ou r t d o e s n o t e n d o rs e M e n d e z ’s u s e o f s u bp a ra g rap h s . H ow e ve r , th e c o u r t h a s a lre a d y
g ra n ted o n e m o tio n fo r m o re d e f in ite s ta tem e n t , a n d f in d s th a t g ran t in g an o th e r w ou ld c au s e u n n e c e s s a ry
d e la y.

12
4 2 U .S .C . § 1 2 1 1 2 (d ) (4 ) (A ) p ro v id e s : “A c o ve re d e n t ity s h a ll n o t req u ire a m ed ic a l e x am in a t io n a nd
s h a ll n o t m a k e inq u ir ie s o f a n em p lo ye e a s to w h e the r s u c h em p lo ye e is a n in d iv id u a l w ith a d isa b ility o r a s
to th e n a tu re o r s e ve r i ty o f th e d isa b ility, u n le s s s u ch e x am in a t io n o r in qu iry is s h ow n to be jo b – re la te d a nd
c o n s is te n t w ith b u s in e s s n e c e s s ity.”

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Huntsville, Inc., 593 F.3d 1206 (11th Cir. 2010).
Accordingly, as to Count III, the court
13
finds that Mendez’s medical examination claim is separate from her disability discrimination
claim. As to Count IV, however, Mendez provides no authority for a separate claim of
medical examination under the FCRA.
Instead, Mendez cites to statutes prohibiting
14
discrimination and retaliation, which do not mention medical examination at all. See FLA .
STAT . §§ 760.10(1) (discrimination), 760.10(7) (retaliation). Thus, Count IV, Mendez’s
medical examination claim under the FCRA must be dismissed.15
Defendants also argue that Mendez waived her medical examination claim by
signing the Clinic agreement, which incorporated the Clinic’s bylaws. Specifically, Section
21.2 of the bylaws provides: “The Board may require a physical or psychological
examination if it, in its sole discretion, considers such to be helpful in determining the
suitability of a physician to remain in practice in this corporation.” (Doc. 37-4.) Defendants
rely on Bledsoe v. Palm Beach County Soil and Water Conservation Dist, 133 F.3d 816
(11th Cir. 1998) for the proposition that ADA rights may be waived. Defendants reliance
on Bledsoe is misplaced, however; as Mendez notes, Bledsoe dealt with the waiver of
rights, after the fact, as part of a voluntary settlement agreement. Id. at 819. An
employee’s rights under ADA may not be prospectively waived. See Alexander v. Gardner-

13
T h e H a r r iso n c o u r t ’s a n a lys is fo c u s e d o n § 1 21 1 2 (d ) (2 ) , p ro h ib it in g m ed ic a l e xam ina t io n s o f job
app lic a n ts , b u t the re a s on in g a p p lie s e q u a lly to § 1 2 1 12 (d ) (4 ) , p ro h ib it in g m ed ic a l e x am in a t ions o f em p loyees .
S e e H a r r is o n , 5 9 3 F .3 d a t 1 2 1 2 -1 2 1 4 ; C o n ro y v . N ew Y o rk S ta te D e p t . o f C o r r . S e rv s . , 3 33 F .3 d 8 8 , 9 4 (2d
C ir . 2 0 03 ) (h o ld in g th a t em p lo ye e s m a y b r in g a n a c t io n un d e r § 1 2 1 1 2 (d ) (4 ) re ga rd le s s o f w he th e r th e y a re
d is a b led ) ; F re d e n b u rg v . C o n tra C o s ta C o u n ty D e p t. o f H e a lth S e rv s ., 1 7 2 F .3d 1 1 7 6 , 1 1 82 (9 th C ir . 1 9 9 9 )
(s am e ) ; C o s s e t te v . M in n . P ow e r an d L ig h t , 1 8 8 F .3 d 9 6 4 , 9 6 9 (8 th C ir . 1 9 9 9 ) (s am e ) ; R o e v . C he y e n n e M tn .
C o n f . R e s o r t , In c . , 1 2 4 F .3 d 1 2 2 1 , 1 2 2 8 (1 0 th C ir . 19 9 7 ) (sam e ) .

14
T h e c o u r t n o te s th a t “F lo r id a c o u r ts c o n s tru e th e FCR A in c o n fo rm ity w ith th e AD A .” Iz iza r ry v . M id
F la . C om m . S e rv s , In c . , 2 0 0 9 W L 21 3 51 1 3 , a t *2 (M .D . F la . J u ly 1 4 , 2 0 0 9 ) ; L e n a rd v . A .L .P .H .A . “A B e g in n in g ”
In c . , 945 S o . 2 d 6 1 8 , 6 2 1 (F la . 2d D C A 2 0 0 6 ) ; W im b e r ly v . S e c . T e ch . G rou p , In c . , 8 6 6 S o . 2 d 1 4 6 , 1 4 7 (F la .
4 th D C A 2 0 04 ) . A c c o rd in g ly, th e c o u r t ’s in te rp re ta t ion o f h a n d ic a p d is c r im in a t io n , a s p roh ib ite d in F L A . S T A T .
§ § 7 6 0 .1 0 , co n fo rm s to th e AD A . M en d e z h a s p ro v id e d n o a u th o r ity, h ow e ve r , s u gg e s t in g th a t th e FC R A
p ro v id e s a s e p a ra te r ig h t o f a c t io n fo r m e d ic a l e x am in a t io n s .

15
D e fe n d a n ts h a ve n o t m o v e d to d ism is s M e nd e z ’s F lo r id a law c la im s fo r d is a b ility d is c r im in a t ion
(C o u n t I I) o r re ta lia t io n fo r opp o s in g d is a b ility d is c r im in a t io n (C o un t X ) . T o th e e x te n t M e n d e z ’s a lle g a t io n s
re g a rd in g m e d ic a l e x am in a t ion s up p o r t a c la im u n d e r F lo r id a law fo r d is c r im in a t ion o r re ta lia t io n , th a t c la im
is p re s e rve d in C o u n ts I I a n d X , w h ic h in c o rp o ra te th e s am e fa c tu a l a lle g a tio n s a s C o u n t IV .

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Denver Co., 415 U.S. 36, 51-52, 94 S.Ct. 1011, 1021 (1974) (“[A]n employee’s rights under
Title VII are not susceptible of prospective waiver.”); Bledsoe, 133 F.3d at 819 (applying
the Gardner-Denver analysis of Title VII rights to the ADA); Sullivan v. River Valley School
Dist., 20 F. Supp. 2d 1120, 1126 (W .D. Mich. 1998).
Accordingly, defendants’ motion to
16
dismiss Count III, Mendez’s medical examination claim under federal law, will be denied.
Motion to Dismiss – Sex Discrimination and Retaliation Claims
In Counts V and VI, Mendez alleges that the Clinic discriminated against her
because of her sex in violation of federal and Florida law.
See Title VII of the Civil Rights
17
Act of 1964, as amended (Title VII), 42 U.S.C. §§ 2000e-2, et seq.; FLA . STAT . § 760.10 et
seq. Similarly, in Counts VIII and IX, Mendez alleges that the Clinic unlawfully retaliated
against her for opposing sex discrimination. See 42 U.S.C. § 2000e-3; FLA . STAT .
§ 760.10(7). Defendants argue Mendez has failed to exhaust her administrative remedies
as to these claims. See Green v. Elixir Industries, Inc., 152 Fed. Appx. 838, 840 (11th Cir.
2005). Defendants do not dispute that Mendez timely filed a charge of discrimination with
the EEOC; rather, they argue that the charge failed to allege any facts that would put the
Clinic on notice of her sex discrimination and retaliation claims. According to defendants,
the charge discusses only facts relevant to a claim of disability discrimination and
retaliation. In response, Mendez argues the Clinic had sufficient notice of her Title VII
claim, because her sex-based claims were within “the scope of the EEOC investigation that
could reasonably be expected to grow out of the initial charges.” See Chanda v.
Engelhardt/ICC, 234 F.3d 1219, 1225 (11th Cir. 2000). The court agrees. Whereas, in
Chanda, the court found that an investigation could not reasonably be expected to
encompass retaliation based on national origin, as nothing in the plaintiff’s charge
mentioned such discrimination or a claim under Title VII, see id., in this case, Mendez’s

16
N o tw ith s ta n d in g , e ve n i f th e law re c o g n ize d a p ro s p e c tive w a ive r , th e c o u r t w o u ld n o t f in d the
la n g u a g e in th is c a s e s u f f ic ien t to c o n s t itu te a k n ow in g w a ive r o f M e n d e z ’s r igh ts u n d e r th e A D A . S ee
B led s o e , 13 3 F .3 d a t 8 19 .

17
T it le V I I an d th e FC R A a re c o n s tru e d s im ila r ly. S ee A lb ra v . A d v an , In c . , 4 9 0 F .3 d 8 26 , 8 3 4 (1 1 th
C ir . 2 0 0 7 ) .

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charge of discrimination gave notice of her claim under Title VII by stating: “The Clinic’s
actions were done in violation of Dr. Mendez’s rights under the Americans with Disabilities
Act; the Florida Civil Rights Act, Title VII and in retaliation for her complaint that she
believed her federally protected rights were being violated.” (Doc. 37-1.) Thus, the court
finds that the EEOC investigation of Mendez’s discrimination charge reasonably could be
expected to encompass claims of sex discrimination and retaliation for opposing sex
discrimination. See Chanda, 234 F.3d at 1225. Accordingly, defendants’ motion to
dismiss Counts V, VI, VIII and IX, containing Mendez’s sex-based discrimination and
retaliation claims, will be denied.
Motion to Dismiss – Breach of Clinic Agreement Claim
In Count XI, Mendez alleges that the Clinic breached the Clinic agreement by
suspending and terminating her without cause, and failing to grant her the procedural
protections provided by the Clinic agreement.
The interpretation of an unambiguous
18
contract is a matter of law. See Lawyer Title Ins. Corp. v. JDC (Am.) Corp., 52 F.3d 1575,
1580 (11th Cir. 1995). The court accords a realistic, plain-language meaning to the words
of the contract, and construes the contract as a whole, giving effect to all its provisions, in
a manner consistent with reason and probability. See Taylor v. Taylor, 1 So. 3d 348, 350
(Fla. 1st DCA 2009); Ospina-Baraya v. Heiligers, 909 So. 2d 465, 472 (Fla. 4th DCA 2005).
As to Section 25.1.d of the agreement, Mendez alleges that the Clinic failed to have
the medical director inform her “of the general nature of the charges against [] her, and
[invite her] to discuss, explain or refute them.” (Doc. 37-4.) Defendants argue that,
according to Mendez’s own allegations, the medical director met with Mendez on June 6,
2008 and Mendez refuted the charges in her June 4, 2008 letter to the Clinic. These
allegations, however, do not refute Mendez’s allegation that the medical director failed to
invite her to discuss, explain or refute the charges after he advised her of the charges;
thus, Mendez’s factual allegations, accepted as true, state a plausible claim for breach of
the Clinic agreement. See Iqbal, 129 S. Ct. at 1949. Defendants’ motion to dismiss Count

18
S p e c if ic a lly, th e d is p u te d p ro v is io n s a re in th e C lin ic ’s b ylaw s , w h ic h a re in c o rp o ra te d b y re fe re n ce
in to th e C lin ic a g re em en t.

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XI, Mendez’s breach of Clinic agreement claim, will be denied. Defendants may raise their
arguments as to the other provisions on motion for summary judgment.
Motion to Dismiss – Breach of Partnership Agreement Claim
In Count XIV, Mendez alleges that WWP and Rigby breached the WWP partnership
agreement by expelling her. Defendants rely on the promissory note Mendez made in
exchange for her interest in WWP, arguing that, by the note’s plain language,“termination
for any reason whatsoever or for no reason at all, from [the Clinic,] will constitute
withdrawal from [WWP].” The note also provided that Mendez would vest in equity upon
completion of ten years with the partnership and payment of full of the note; and, if Mendez
terminated from WWP prior to vesting, she would receive only the refund of her principal.
Mendez argues that these provisions were unenforceable; or, alternatively, that if the
provisions were enforceable, her removal from WWP was still a breach of the partnership
agreement because her removal from the Clinic was wrongful. Mendez offers the court no
support for either proposition. Next, Mendez claims that WWP had treated her as if she
were fully vested at the time of the sale of real property from WWP to WWRE. In support
of her argument, Mendez alleges that WWP provided her with a written statement
confirming the value of her proportionate interest; offered her the option to cash out as
early as 2006, and paid her $40,000 to cover her expected capital gains tax. As with her
previous arguments, it is unclear to the court how these allegations lead Mendez to
conclude that Rigby or WWP breached the partnership agreement.
As defendants note,
19
at no point does Mendez even identify the provision in the partnership agreement which
WWP and Rigby allegedly breached. Accordingly, Count XIV, Mendez’s claim of breach
of the WWP partnership agreement, will be dismissed with leave to amend.
Motion to Dismiss – Breach of Implied Covenant of Good Faith and Fair Dealing Claims
In Counts XII and XV, Mendez alleges breach of implied covenant of good faith and
fair dealing by, respectively, the Clinic as to the Clinic agreement, and Rigby and WWP as

19
F o r th a t m a tte r , it’s u n c le a r w h y th e s e a lle g a t io n s le a d M e n de z to b e lie ve s h e w a s tre a te d a s if s he
w e re fu lly ve s te d . T he c o u r t re ite ra te s th a t th e p rom is s o ry no te s ta te s th a t th e te rm “ve s tin g ” is d e f in e d in the
s am e m a nn e r a s th a t p ro v id e d in th e W W P p a r tn e rs h ip a g re em e n t , w h ic h M e n d e z h a s fa ile d to p ro v id e .

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to the WWP partnership agreement. Under Florida law, every contract contains an implied
covenant of good faith and fair dealing designed to protect the parties’ reasonable
expectations. See Centurion Air Cargo, Inc. v. United Parcel Service, Co., 420 F.3d 1146,
1151 (11th Cir. 2005). “A breach of the implied covenant of good faith and fair dealing is
not an independent cause of action, but attaches to the performance of a specif ic
contractual obligation.” Id. A breach of the implied covenant claim may be dismissed as
redundant if the conduct violating the implied covenant is duplicative of the breach of
contract claim. See Merill Lynch Bus. Fin. Servs., Inc. v. Performance Mach. Sys. U.S.A.,
Inc., 2005 WL 975773, at *11 (S.D. Fla. Mar. 4, 2005). Indeed, this court has determined
that, “in order to state a claim for breach of the implied covenant of good faith and fair
dealing, [p]laintiffs must identify the specific contract term(s) giving rise to the implied duty
of good faith and also allege how [d]efendants breached their implied duty, alleging facts
different from those giving rise to the breach of contract claim.” See Stallworth v. Hartford
Ins. Co., 2006 WL 2711597, at *6 (N.D. Fla. Sept. 19, 2006).
Defendants argue that Mendez has failed to allege facts on this claim different from
those in her breach of contract claims. The court agrees. Mendez’s claim for breach of
implied duty against the Clinic is based on her allegation that she was “illegally harassed,
summarily suspended, wrongfully terminated as an employee and improperly removed as
a shareholder,” the same allegation giving rise to her breach of Clinic agreement claim.
Similarly, Mendez’s claim for breach of implied duty against Rigby and WWP is based on
her allegation that she was “illegally, wrongfully and/or unfairly expelled from [WWP],” the
same allegation giving rise to her breach of the WWP partnership agreement claim. In
addition, Mendez fails to identify the specific terms in either contract giving rise to the
implied duty of good faith and fair dealing. See Stallworth, 2006 WL 2711597, at *6. In
response, Mendez argues that, in Stallworth, the court denied a motion to dismiss a breach
of implied duty claim, despite the plaintiffs’ failure to specify a contract term giving rise to
the duty or to allege a different factual basis. See id. However, as defendants note, the
Stallworth court denied the motion to dismiss only because it could not “conclude beyond
all doubt that Plaintiffs can prove no set of facts that would entitle them to relief.” Id. After

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Stallworth was decided, the Supreme Court retired the no-set-of-facts test. See Bell
Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007). In
light of the more stringent pleading requirements of Iqbal and Twombly, Counts XII and XV,
containing Mendez’s claims of breach of implied duty of good faith and fair dealing, will be
dismissed without prejudice to amend.
Motion to Dismiss – Breach of Fiduciary Duty Claim as to the Clinic
In Count XIII, Mendez alleges that Rigby and Gieseman, in their capacities as
officers of the Clinic, owed fiduciary duties to her and breached those duties. Defendants
argue that Rigby and Gieseman owed fiduciary duties to Mendez only in her capacity as
a shareholder of the Clinic, not as an employee; thus, Mendez’s claim should be dismissed
because it focuses on Mendez’s termination as an employee of the Clinic. See Orlinsky
v. Patraka, 971 So. 2d 796, 802 (Fla. 3d DCA 2007) (“Fiduciary duties are not implicated
when the issue involves the right of the minority stockholder qua employee under an
employment contract”) (citations omitted). In response, Mendez offers only generic
authority for the proposition that corporate officers owe a fiduciary duty to the corporation
and its shareholders. The court agrees with defendants. Accordingly, Count XIII,
Mendez’s claim of breach of fiduciary duty as to the Clinic, will be dismissed without
prejudice to amend.
Motion to Dismiss – Breach of Fiduciary Duty Claim as to WWP
In Count XVI, Mendez alleges that Rigby, in his capacity as a partner in WWP, owed
fiduciary duties to her and breached those duties. Defendants argue that the claim fails
to meet the Iqbal standard. As defendants note, Florida law limits a partner’s fiduciary
duties to other partners, and Mendez has failed to identify which of the specified duties
provided under Florida law defendants allegedly breached. See FLA. STAT . § 620.8404(2)
and (3). In response, Mendez argues that her allegation that Rigby owed her unspecified
fiduciary duties and “was directly involved in the illegal and wrongful termination of
[Mendez] as an employee, her termination as a Clinic shareholder, and, consequently her
wrongful expulsion from [WWP]” suffices to state a claim. (Doc. 37, at ¶ 258.) The court
disagrees; Mendez’s allegations consist of mere conclusory statements. See Iqbal, 129

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S. Ct. at 1949. Accordingly, Count XVI, Mendez’s claim of breach of fiduciary duty as to
WWP, will be dismissed with leave to amend.
Motion to Dismiss – Declaratory Judgment Claims
In Counts XVII and XVIII, Mendez seeks declaratory judgments against the Clinic
and against WWP and WWRE regarding the parties rights and obligations under the Clinic
agreement and the WWP partnership agreement. “The Declaratory Judgment Act
provides that a court may declare the rights and other legal relations of any interested
party, not that it must do so.” MedImmune, Inc. v. Genentech, Inc., 594 U.S. 118, 136, 127
S. Ct. 764, 766 (2007) (internal marks omitted). The Act is “an enabling Act, which confers
discretion on the courts rather than an absolute right on the litigant.” Wilton v. Seven Falls
Co., 515 U.S. 277, 287, 115 S. Ct. 2137, 2143 (1995); see also Ameritas Variable Life Ins.
Co. v. Roach, 411 F.3d 1328, 1330 (11th Cir. 2005). The purpose of the act is to provide
relief from uncertainty with respect to rights and other legal relations. See Eisenberg v.
Std. Ins. Co., 2009 WL 3667086, at *2 (M.D. Fla. Oct. 26, 2009). A determination of
“whether a contract was adequately performed is unrelated to the purpose behind the
Declaratory Judgment Act.” Id.; see also Amerisure Mut. Ins. Co. v. Maschmeyer
Landscapers, Inc., 2007 WL 2811080, *2 (E.D. Mo. 2007).
It appears that Mendez’s declaratory judgment claims are, to some extent,
redundant with her breach of contract claims. For example, Mendez alleges in Count XVII:
“Dr. Mendez maintains that she has the right to remain an employee and shareholder of
the Clinic. The Clinic maintains that it had the right to term inate and remove her as an
employee and shareholder, respectively.” (Doc. 37-4, at ¶ 265.) Similarly, in Count XVIII,
Mendez alleges: “Dr. Mendez maintains that she has the right to remain a general partner
of [WWP], which maintains it had the right to expel her as a general partner.” (Doc. 37-4,
at ¶ 272.) Although Mendez describes her request as for a declaration of the parties’ rights
under the contracts, she effectively seeks a declaration of breach and her damages. See
Eisenberg, 2009 WL 3667086, at *2. To that extent, the court concludes that declaratory
relief is inappropriate; instead, the court will consider the disputed provisions, and
Mendez’s damages, if any, when it considers her breach of contract claims.

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Mendez, however, also argues that, even if the court found no breach of either the
Clinic or WWP agreements, she would be entitled to a determination of her equitable
interest in each entity, entitlement to profits, and valuation of amounts returned to her. To
that extent, Mendez’s declaratory judgment claims are not subsumed into her contract
claims. Accordingly, Count XVII and XVIII, containing Mendez’s declaratory judgment
claims, will be dismissed without prejudice to an amendment.
In amending her complaint,
20
Mendez should specify, as to the Clinic, WWP and WWRE, the factual basis for her claim
that she is entitled to this determination.
Mendez’s Motion for Reconsideration
Mendez also moves for reconsideration of the court’s order granting defendants’
request for leave to reply. Mendez claims that defendants’ reply allowed them to unfairly
get the “last word,” and to “insert[] their own facts.” (Doc. 75.) As to Mendez’s first
argument, the court notes that its local rules provide for a reply memorandum on good
cause shown. N.D. Fla. Loc. R. 7.1(C). Also, on any motion, one party is always going to
have the last word, and on a motion to dismiss, defendants have the burden so it makes
sense they would be permitted to file a brief reply to plaintiff’s response. See Superior
Energy Servs., LLC, 2010 WL 1267173, at *5; Vitola, 2009 WL 5214962, at *1 n.1.
Regarding Mendez’s second argument, that defendants inserted their own facts, the court
disagrees. As the court discussed in considering defendants’ motion to dismiss Mendez’s
breach of contract claim against the Clinic, the court interpreted the defendants statement
regarding a typographical error to refer to an error in their motion to dismiss, not in the
Clinic agreement. Accordingly, Mendez’s motion for reconsideration will be denied.
In conclusion, defendants’ motion for a more definite statement or, in the alternative,
motion to dismiss (doc. 52) is GRANTED in part and DENIED in part. To the extent
defendants’ motion is for a more definite statement, it is DENIED; to the extent the motion
requests a dismissal, it is GRANTED as to Counts IV, XII, XIII, XIV, XV, XVI, XVII and XVIII

20
D e fe n d a n ts a ls o s e e k a n aw a rd o f c o s ts a s so c ia te d w ith d e fe n d in g a g a in s t the d e c la ra to ry
ju d gm e n t a c t io n s . S e e F L A . S T A T . § 8 6 .0 1 ( “T h e c ou r t m a y aw a rd c o s ts a s a re e q u ita b le .” ) . D e fe n d a n ts ’
re q ue s t fo r c o s ts is d e n ie d .

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Case 3:09-cv-00495-MCR-EMT Document 90 Filed 08/25/10 Page 16 of 16

with leave to amend as outlined in the order, within 14 days,
and DENIED as to Counts
21
Defendants’ response to plaintiff’s amended complaint is due
III, V, VI, VIII, IX, and XI.
22
14 days after the complaint is filed. Mendez’s motion for reconsideration (doc. 77) is
DENIED.
DONE and ORDERED this 25th day of August, 2010.

P a g e 1 6 o f 16

s/ M. Casey Rodgers
M. CASEY RODGERS
UNITED STATES DISTRICT JUDGE

21
P la in tif f is no t in v ite d to am e nd th e c om p la in t, o the r th an a s s p e c if ic a lly o u t lin e d in th is o rd e r . N o
o th e r a d d it io n s o r c o r re c t io n s a re e n v is io n e d o r p e rm it te d .

22

D e fe n d an ts d id n o t m o ve fo r th e d ism is s a l o f C o u n ts I , I I , V I I a n d X .

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Mercy Catholic Med. Ctr. v. Thompson

Medicare

Mercy Catholic Med. Ctr. v. Thompson,
No. 03-2292 (3d Cir. Aug. 18, 2004)

The United States Court of Appeals for the Third Circuit held that the Secretary
of the Department of Health and Human Services erred in failing to permit a hospital
to use time studies conducted in 1990 as evidence to correct graduate medical
education (GME) costs that were allegedly misclassified in 1985. The court found
that the Secretary’s decision to limit the use of such time studies to
correct only misclassified operating costs rather than GME costs was inconsistent
with the Department’s own regulations.

Memphis Health Ctr., Inc. v. Grant (Summary)

BOARD OF DIRECTORS – VIOLATION OF FIDUCIARY DUTIES

Memphis Health Ctr., Inc. v. Grant, No. W2004-02898-COA-R3-CV (Tenn. Ct. App. July 28, 2006)

The CEO and two ex-board members of a nonprofit hospital brought a derivative action on behalf of the corporation against the hospital’s board chairman and the other board members. The suit accused the board members of violating their fiduciary duties to the corporation by not taking action, pursuant to corporate bylaws, against the chairman after he was found guilty of submitting false claims in federal court. The trial court issued a temporary restraining order enjoining the hospital board from violating its bylaws or taking any action to amend its bylaws. When the board subsequently failed to investigate the federal claims against its chairman, the CEO and ex-board members filed a motion to hold the remaining board members in contempt for ignoring the provisions of the restraining order. Specifically, the CEO argued that the hospital board had an affirmative duty to take action against the chairman with respect to his involvement in the federal false claims judgment, as this was “conduct unbecoming” of a board member. The trial court agreed, holding the chairman and remaining board members in contempt and ordering their permanent removal from the hospital board. On appeal, the chairman and board members argued that the CEO and two ex-board members lacked standing to file a derivative action, as they were not “directors” of the corporation, as required by state law. They also sought immunity under the federal Volunteer Protection Act (“VPA”). Notably, they did not dispute that they had violated the hospital’s bylaws. The Court of Appeals of Tennessee dismissed the appellants’ arguments. The court ruled that the CEO was an ex officio, albeit non-voting, member of the board in accordance with the hospital’s bylaws and found this sufficient to confer her “director” status. The court further held that VPA immunity is unavailable where a nonprofit organization brings suit against its volunteer board members, as was the case here. As such, the contempt order was sustained and the remedy of permanent removal upheld.