Court Rejects Claim that Abolition of the DRG System Voided "Stop Loss" Clause
- In 1991, Meadowlands Hospital entered into a contract with U.S. Healthcare. Under the contract, the hospital agreed to provide inpatient services to U.S. Healthcare's employees at fixed per diem rates and, in the case of maternity care, fixed case rates. The hospital, however, wished to limit any financial loss that may result from the contract. Hence, the contract contained a "stop loss" clause that provided, "If the overall discount for all inpatients exceeds 40% during a calendar year, U.S. Healthcare will reimburse Meadowlands Hospital and Medical Center monies beyond the 40% discount."
- The parties negotiated and entered the contract when New Jersey's Diagnostic Related Group, or "DRG", rate system was in effect. The DRG System was a comprehensive regulatory system that required hospitals to bill for inpatient services at prices set by the New Jersey Department of Health. The DRG System, which was implemented in 1979, was abolished by the New Jersey Legislature as of January 1, 1993, during the term of the contract.
- The hospital continued to provide services to U.S. Healthcare's enrollees throughout 1993. However, when the hospital demanded reimbursement under the stop loss clause, U.S. Healthcare refused to perform the necessary reconciliation. U.S. Healthcare asserted that the stop loss clause's guarantee of a maximum discount of 40% applied only to charges under the DRG System. Thus, argued U.S. Healthcare, the stop loss clause became invalid with the abolition of the DRG System.
- The claim for reimbursement was pursued by UniHealth, the parent of the hospital. UniHealth brought an action against U.S. Healthcare in federal court.
- After a trial on the issues, the United States District Court rejected U.S. Healthcare's claims that it had no obligation to honor the stop loss clause. Kevin R. Jespersen, Esq., of Slattery & Jespersen, P.C. was the trial lawyer for the successful plaintiff, UniHealth. The Court's opinion is reported at UniHealth v. U.S. Healthcare, Inc., 14 F. Supp. 623 (D.N.J. 1998).
- The Court opined that the interpretation of the contract would depend upon the relations of the parties at the time of the agreement, the attendant circumstances and the objects they were trying to attain. The Court further stated that the agreement could include "implied terms," depending upon the parties' intent and the circumstances surrounding the creation of the contract.
- The Court concluded that the existence of the DRG System was an underlying assumption, or implied condition, of the contract. The Court therefore concluded that the abolition of the DRG System frustrated the purpose and goals of the parties to the contract.
- The Court, however, also determined that the principal purpose of the contract was to achieve a "mutually satisfactory, long term pricing compromise which limited both parties' exposure to risk." Part of that purpose was to assure that UniHealth received at least 60% of its "normal revenues" for the services provided to U.S. Healthcare's enrollees.
- UniHealth had performed its contractual duties by rendering hospital services in 1993 to U.S. Healthcare's enrollees. The Court, accordingly, concluded that it would be "inequitable" for U.S. Healthcare to obtain those services without protecting UniHealth's "normal revenues" as required by the stop loss clause.
- The Court concluded that the stop loss clause would remain effective. The abolition of the DRG System, however, made it difficult to ascertain the type of "normal revenues" to which the stop loss clause would be applied.
- The Court appointed a Special Master to determine a pricing scheme "that is comparable to the former DRG scheme." The Court further directed the Special Master to apply the stop loss clause to the prices thus determined.
- After proceedings before the Special Master, a judgment was entered against U.S. Healthcare and in favor of UniHealth for the amount of reimbursement due under the stop loss clause.