Merritt Personal Lines Manual: Medicare Supplement Deductibles
One of the biggest issues facing people who have to make claims under Medicare is the deductibles that they have to pay as part of the system. Depending on a person's health and geographic location, these deductibles can tally to tens of thousands of dollars a year.
Medigap policies can, themselves, be quite complex. The March 1999 federal appeals court decision Vencor Hospitals v. Blue Cross/Blue Shield of Rhode Island examined the interpretation of certain terms in a standard Medigap insurance contract.
Blue Cross/Blue Shield of Rhode Island (BCBS) issued Medigap policies to Martha Butler and Aniello Esposito. Butler and Esposito were both admitted to Vencor Hospital in Ft. Lauderdale, Florida and required care for a period exceeding their Medicare coverage. During the period of Medicare coverage, Vencor charged Butler and Esposito only the co-payment or deductible required under Medicare (which, in turn, was paid for by BCBS under the Medigap policy). At first, Vencor's costs were reimbursed by Medicare. But, when the Medicare coverage expired, Vencor began charging Butler and Esposito its ordinary rates, which included a substantial amount of profit greatly in excess of the amount Vencor had received as cost reimbursement from Medicare.
After their hospital stays, Butler and Esposito sought payment from BCBS. Their Medigap policy provided for coverage as follows:
Upon exhaustion of all Medicare hospital inpatient coverage ... we will cover up to ninety percent (90%) of all Medicare Part A Eligible Expenses for hospitalization not covered by Medicare....
According to BCBS, the policy covered 90 percent -- $240,582.13 -- of what Medicare would have paid (i.e., cost reimbursement) for any necessary treatment; thus, Vencor was entitled only to that amount and not to 90 percent of its ordinary charges. However, Vencor interpreted the policy somewhat differently and filed suit in the United States District Court to recover the remaining money -- some $570,000 -- it believed was due.
The district court granted summary judgment for BCBS on the ground that the policy unambiguously limited payment to 90 percent of what Medicare would have paid.
Vencor appealed.
First, BCBS argued that its contracts were with Butler and Esposito -- not Vencor -- and therefore only Butler and Esposito had standing to sue for any breach.
However, the court noted that Vencor was a third-party beneficiary of the contracts between BCBS and Butler and Esposito and therefore had the right to sue for breach of the insurance contract.
The policy held by Butler and Esposito stated:
Benefit payments may be paid to the doctor, hospital or to you directly at our discretion.
By providing for payment directly to the hospital, the contracting parties showed a clear intent to provide a direct benefit to Vencor (or any other service-providing hospital), so Vencor had standing to bring suit.
The court further ruled that a genuine issue of material fact existed regarding whether Vencor was entitled to payment based on its ordinary charges and remanded the case to the district court for further proceedings.
Under the BCBS policy, Vencor was entitled to 90 percent of "all Medicare Part A Eligible Expenses for hospitalization not covered by Medicare." Eligible expenses were defined as "the health care expenses covered under Medicare which Medicare has determined are reasonable and medically necessary."
The debate between Vencor and BCBS turned on whether the phrase "health care expenses" referred exclusively to types of expenses -- in other words, forms of treatment -- or also included amounts of expenses.
The record also contained an "Outline of Coverage" that was highly ambiguous in is reading of the policy's coverage, said the court. And, if this outline is considered part of the contract, then the contract is ambiguous regarding the contested issue and that ambiguity must be resolved in favor of Vencor.
One reason for this was that under state law, BCBS was required to provide such an outline to Butler and Esposito to provide more clarity than the ordinary insurance policy. But if the outline is not part of the contract, then the regulatory scheme would do nothing more than create additional evidence of the fraud that the legislature intended to prevent.
BCBS claimed it owed Vencor the amount Medicare would have paid for Butler's and Esposito's treatment. However, the court noted:
that amount varies according to the stage of the reimbursement process. During the year, Medicare advances payment to Vencor based on an approximation of Vencor's costs. At the end of the year, Vencor submits a cost report to Medicare and either receives more payment or returns some of the previous payments depending on how the actual year-end costs compare with the estimated amounts previously advanced. Medicare also sets a target amount for annual costs, forcing Vencor to absorb costs that exceed this amount. However, Vencor receives a bonus if its costs are below the target amount.
Therefore, Vencor argued that BCBS's claim that it owed Vencor only the amount that Medicare would have paid, is unclear about whether the amount is based on the preliminary advance, the final accounting or the final accounting plus or minus some amount related to Vencor's deviance from its annual target.
BCBS argued that, even if Vencor would otherwise be entitled to payment of its ordinary charges, each of Vencor's claims was barred by the affirmative defense of accord and satisfaction.
BCBS sent a check directly to Butler in the amount BCBS felt it was obligated to pay and a letter stating that it represented full payment of the claim. Butler gave the check minus the cover letter to Vencor, which endorsed and deposited it. According to the court, this showed that BCBS reached an accord and satisfaction with Butler. This type of agreement had no effect on Vencor's rights under the policy. Thus, BCBS's accord and satisfaction defense failed in regard to Butler's claim.
On the other hand, the Esposito claim payment was made directly to Vencor. According to BCBS's Director of Provider Reimbursement, BCBS negotiated an agreement with Vencor under which BCBS would pay $37,535.45 as full payment of the claim. Therefore, genuine issues of material fact exist regarding whether there was an accord and satisfaction on this claim. If BCBS and Vencor had reached a settlement agreement, then such an agreement would constitute an accord and satisfaction.
As a result, the judgment of the district court was vacated and the case was sent back for trial.
