Baptist Physician Hospital Organization, Inc.; Baptist Hospital of East Tennessee v. Humana Military Healthcare Services, Inc.

*The Honorable Joseph M. Hood, United States District Judge for the
Eastern District of Kentucky, sitting by designation.
1
RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
ELECTRONIC CITATION: 2004 FED App. 0152P (6th Cir.)
File Name: 04a0152p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________
BAPTIST PHYSICIAN HOSPITAL
ORGANIZATION, INC.;
BAPTIST HOSPITAL OF EAST
TENNESSEE,
Plaintiffs-Appellants,
v.
HUMANA MILITARY
HEALTHCARE SERVICES, INC.,
Defendant-Appellee.
X
-
-
-
->
,
-
-
-
-
-
-
-
N
No. 03-5084
Appeal from the United States District Court
for the Eastern District of Tennessee at Knoxville.
No. 01-00588—Thomas W. Phillips, District Judge.
Argued: March 11, 2004
Decided and Filed: May 25, 2004
Before: MERRITT and DAUGHTREY, Circuit Judges;
HOOD, District Judge.*
2 Baptist Physician, et al.
v. Humana Military
No. 03-5084
_________________
COUNSEL
ARGUED: Reuben N. Pelot IV, EGERTON, McAFEE,
ARMISTEAD & DAVIS, Knoxville, Tennessee, for
Appellants. J. Bruce Miller, J. BRUCE MILLER LAW
GROUP, Louisville, Kentucky, for Appellee. ON BRIEF:
Reuben N. Pelot IV, Cheryl G. Rice, EGERTON, McAFEE,
ARMISTEAD & DAVIS, Knoxville, Tennessee, for
Appellants. J. Bruce Miller, Michael J. Kitchen, J. BRUCE
MILLER LAW GROUP, Louisville, Kentucky, for Appellee.
_________________
OPINION
_________________
MERRITT, Circuit Judge. In this diversity contract action
governed by the substantive law of Tennessee, Baptist alleges
that Humana, a private government contractor administering
the managed healthcare program in Regions 3 and 4 for the
Department of Defense, underpaid Baptist for eighty-five
separate claims for a total underpayment of over $1.3 million.
The Humana Baptist contract defines a reimbursement
scheme that is the center of the controversy. Humana has
raised a defense to payment based on federal regulations
limiting amounts that the government itself will pay to
Humana as reimbursement on individual medical claims, and
the question is whether these regulations place a limit on the
amount Humana must pay Baptist. On cross-motions for
summary judgment, the district court granted summary
judgment in favor of Humana. We conclude that the federal
regulations incorporated by reference into the agreement
between Baptist and Humana regulate only the amount the
government can contract to pay Humana and not the amount
Humana as an independent contractor can promise to pay
Baptist. Because these regulations do not prohibit the

-- 1 of 8 --

No. 03-5084 Baptist Physician, et al.
v. Humana Military
3
reimbursement provisions in the Baptist-Humana network
provider agreement, we REVERSE.
BACKGROUND
Pursuant to authority delegated to it by Congress, the
Department of Defense established the Civilian Health and
Medical Program of the Uniformed Services, called
CHAMPUS, in 1967. CHAMPUS beneficiaries include
retired armed forces personnel and dependents of both active
and retired military personnel. In 1995, the Department of
Defense established TRICARE, a managed health care
program operating as a supplement to CHAMPUS and
involving the competitive selection of private contractors to
financially underwrite the delivery of health care services
under CHAMPUS. The overall goal of the TRICARE
program is to improve the quality, cost, and accessibility of
healthcare to the nation’s military through the mechanism of
a managed care program, and one aspect of the new
TRICARE program was the establishment of “Civilian
Preferred Provider Networks.” See 32 C.F.R. § 199.17(p).
TRICARE Management Activity, which was previously
known as Office of CHAMPUS, is the government office
charged with the responsibility of administering
TRICARE/CHAMPUS.
In January 1996, Humana Military Healthcare Services,
Inc. was awarded the TRICARE contract for Regions 3 and
4, which covers seven states and includes the State of
Tennessee. Under the contract, Humana became the managed
care support contractor charged with the responsibility of
establishing and managing a Civilian Preferred Provider
Network throughout the seven state area. Humana established
the preferred provider network by entering into contractual
arrangements with individual CHAMPUS participating
providers of medical services, one of which was Baptist.
Broadly speaking, TRICARE preferred network providers
agreed to accept from a managed care support contractor
4 Baptist Physician, et al.
v. Humana Military
No. 03-5084
1Diagnostic related groups (DRG s) are “a method of dividing
hospital patients into clinically coherent groups based on the consumption
of resources.” 32 C.F.R. § 199.2. “Patients are assigned to the groups
based on their principle diagnosis (the reason for admission, determined
after study), secondary diagnoses, procedures performed, and the patient’s
age, sex, and discharge status.” Id.
lower reimbursement rates than those authorized under the
CHAMPUS reimbursement system, with the understanding
that in exchange they would see an increase in directed
volume. These discounted rates might be expressed as
discounts from the maximum allowable rate under the
CHAMPUS diagnostic grouping system (DRG),1 or as a fixed
per diem rate, or as some other agreed-upon rate of
reimbursement.
In the early spring of 1996, Baptist Physician Hospital
Organization, Inc. and Baptist Hospital of East Tennessee, or
more simply “Baptist,” entered into negotiations with
Humana to become a TRICARE preferred network provider.
In the course of negotiations, Baptist offered a three-tiered
system of discounted reimbursement from the CHAMPUS
rates depending on the number of other TRICARE providers
in the area. On August 6, 1996, the parties entered into a
letter-of-agreement by which Humana agreed to the three-
tiered system, the “Hospital Payment Arrangement,” which
was expressed as a percentage discount off the CHAMPUS
DRG reimbursement rate with a “stop loss” provision (in the
italicized language below) consisting of an increased rate of
payment for certain high-dollar inpatient claims as an
alternative to a percentage discount from standard
government rates. The purpose of the stop-loss provision is
to reduce the risk of losses to Baptist in large individual cases
that Baptist believed the percentage discount off CHAMPUS
DRG rates would create. The contractual provision was
expressed as follows:

-- 2 of 8 --

No. 03-5084 Baptist Physician, et al.
v. Humana Military
5
Baptist Health System as Exclusive Provider
Inpatient
20% Discount from CHAMPUS DRG rates;
Any case with provider charges greater than
$30,000 reverting to a 45% discount from
provider charges.
Outpatient
30% Discount from CHAMPUS allowables.
Baptist Health System + 1 Additional Provider
Inpatient
20% Discount from CHAMPUS DRG rates;
Any case with provider charges greater than
$25,000 reverting to a 35% discount from
provider charges.
Outpatient
25% Discount from CHAMPUS allowables.
Baptist Health System + 2 Additional Providers
Inpatient
15% Discount from CHAMPUS DRG rates;
Any case with provider charges greater than
$25,000 reverting to a 30% discount from
provider charges.
Outpatient
25% Discount from CHAMPUS allowables.
(Emphasis added.) Under each tier, Baptist and Humana
agreed to the “stop loss” language which increased
reimbursement to Baptist when a particular inpatient hospital
stay exceeded a certain dollar amount. In such cases, the
reimbursement rate would not be a percentage discount off
the CHAMPUS DRG rate, but rather would “revert” to a
percentage discount off the provider charges, which are the
6 Baptist Physician, et al.
v. Humana Military
No. 03-5084
charges the hospital would otherwise charge for the services
rendered.
An example illustrates how the “stop loss” provision would
work. Suppose a certain hospital stay resulted in provider
charges of $77,098, but the maximum CHAMPUS DRG
reimbursement rate for this particular stay is only $27,755.00.
Without the stop loss provision, Baptist as the exclusive
TRICARE provider under the above agreement would receive
$22,204, which represents a 20% discount from the
CHAMPUS DRG rate and an effective 71% discount from
provider charges. Under the stop loss provision, however,
Baptist would receive $42,404, or a 45% discount from the
provider charges. In effect, the stop loss provision operates
to increase the net overall discount for the business associated
with the TRICARE program.
As illustrated above, for certain claims the reimbursement
amount calculated as a percentage of provider charges was
greater than 100% of the CHAMPUS DRG rate. For each of
these claims, Humana unilaterally capped the reimbursement
amount at 100% of the CHAMPUS DRG rate. After
discovering in 1998 that Humana was not paying these claims
in full according to the terms of the stop loss provision,
Baptist demanded payment of the difference. According to
Baptist, Humana refused to honor the provision, insisting
instead on renegotiating the contract. Attempts to renegotiate
were unsuccessful, and Humana exercised its right to
terminate the agreement. On December 7, 2001, Baptist filed
a one-count complaint alleging breach of contract and seeking
just over $1 million in damages. On May 1, 2002, Humana
filed a motion for summary judgment. On that same day,
Baptist filed a motion to amend its complaint to add claims
for promissory fraud, promissory estoppel and violations of
the Tennessee Consumer Protection Act. Baptist moved for
partial summary judgment on its breach of contract claim.
The district court granted Humana’s motion for summary
judgment on the breach of contract claim, and in a separate

-- 3 of 8 --

No. 03-5084 Baptist Physician, et al.
v. Humana Military
7
opinion and order, dismissed the remaining claims as having
been filed out of time under the applicable limitations periods.
Baptist appeals the grant of summary judgment in favor of
Humana on the breach of contract claim and the dismissal of
the promissory estoppel claim for failure to file within three
years of accrual. We review de novo the district court’s order
granting summary judgment de novo, see Peters v. Lincoln
Elec. Co., 285 F.3d 456, 464 (6th Cir. 2002), as well as the
the district court’s order dismissing Baptist’s claim based on
promissory estoppel, see Valassis Communications v. Aetna
Cas. & Sur. Co., 97 F.3d 870, 873 (6th Cir. 1996).
DISCUSSION
Under Tennessee law, in reviewing a contract for
ambiguities, the court considers the contract as a whole.
Williamson County Broad. Co. v. Intermedia Partners, 987
S.W.2d 550, 552 (Tenn. Ct. App. 1998); Gredig v. Tennessee
Farmers Mut. Ins. Co., 891 S.W.2d 909, 912 (Tenn. Ct. App.
1994). “A contract is ambiguous only when it is of uncertain
meaning and may fairly be understood in more ways than one.
A strained construction may not be placed on the language
used to find ambiguity where none exists.” Farmers-Peoples
Bank v. Clemmer, 519 S.W.2d 801, 805 (Tenn. 1975).
However, “[a] contract is not rendered ambiguous simply
because the parties disagree as to the interpretation of one or
more of its provisions.” International Flight Ctr. v. City of
Murfreesboro, 45 S.W.3d 565, 570 n.5 (Tenn. Ct. App. 2000).
Interpretation of an unambiguous contract is a question of law
for the court to decide. Hamblen County v. City of
Morristown, 656 S.W.2d 331, 335-36 (Tenn. 1983). “Where
a contract is clear and unambiguous, parties’ intentions are to
be determined from the four corners of the contract.” Bokor
v. Holder, 722 S.W.2d 676, 679 (Tenn. Ct. App. 1986). Even
when the agreement is unambiguous, however, the court may
“‘consider the situation of the parties and the accompanying
circumstances at the time it was entered into – not for the
8 Baptist Physician, et al.
v. Humana Military
No. 03-5084
purpose of modifying or enlarging or curtailing its terms, but
to aid in determining’” the contract’s meaning. Hamblen, 656
S.W.2d at 334 (internal quotation marks omitted).
Humana does not dispute that, on its face, the stop loss
clause provides that in the event a particular claim exceeds a
certain dollar amount, the reimbursement rate reverts to a
discounted amount off billed charges rather than a discount
off the CHAMPUS DRG rates. Likewise, Humana does not
dispute that there is no other provision in the agreement on its
face that would indicate that Humana could cap the payments
at 100% of CHAMPUS DRG rates despite the express
language of the reimbursement provision. Humana argues
that Baptist understood and agreed that payments under the
stop loss provision would be capped pursuant to
CHAMPUS/TRICARE policies and regulations incorporated
by reference into the agreement. Humana asserts that these
policies and regulations make clear the parties’ agreement
that payments made in accordance with the stop loss
provision would nevertheless be capped at 100% of
CHAMPUS DRG allowables.
The district court ruled that “the regulations and federal law
incorporated by reference into the Agreement by the Provider
Handbook prohibit payments in excess of the maximum
DRG,” and that as a CHAMPUS provider bound by the
regulations, Baptist “agreed to accept the CHAMPUS-
determined allowable as payment in full for its services
provided to CHAMPUS beneficiaries when the ‘Stop Loss’
provision proved inapplicable.”
Paragraph C of the provider agreement between Baptist and
Humana states:
[Provider] agrees to abide by all quality assurance,
utilization review, credentialing, grievance, and other
policies and procedures as are established and revised by
Humana, and as applicable to CHAMPUS. Such

-- 4 of 8 --

No. 03-5084 Baptist Physician, et al.
v. Humana Military
9
CHAMPUS policies and procedures are set forth in the
Provider Handbook which is hereby incorporated by
reference and made part of this Interim Agreement.
We agree with the district court that, through the operation of
Paragraph C, the entire Provider Handbook is incorporated by
reference into the agreement.
Section 5.4.3 of the Handbook, entitled “TRICARE
Payment,” states:
PROVIDERS WILL ACCEPT THE TRICARE payment
as payment in full for services rendered, not counting the
applicable deductible, co-payment or cost share to be
collected from the beneficiary. This payment will be the
lower of the TRICARE discounted fee or your normal
charge. Providers accepting the TRICARE payment
cannot use balance billing to beneficiaries for any
amount that exceeds the TRICARE payment.
The term “TRICARE discounted fee” is not defined in the
Handbook. According to Baptist, it could reasonably
interpret “TRICARE discounted fee” to mean a payment
made pursuant to the stop loss provision because such
payment is in fact based on a discounted fee pursuant to a
TRICARE provider agreement. In response, Humana sets out
a lengthy recitation of parol evidence relating to the parties’
disputed “understandings” during negotiations, concluding
with an apparent reference to section 1.0 of the Handbook.
That section specifies that in the event of a conflict between
the agreement, the handbook and the regulations, the
regulations control. Setting aside the parol evidence for the
moment, we turn to the regulations to determine whether the
terms of the agreement itself evidence the parties’ agreement
that payments made under the stop loss provision would be
capped at the maximum government CHAMPUS DRG rate.
10 Baptist Physician, et al.
v. Humana Military
No. 03-5084
The regulations governing the CHAMPUS program in
general are set forth in 32 C.F.R. part 199. Reimbursement
methods and rates for the CHAMPUS program are set forth
at 32 C.F.R. § 199.14. The CHAMPUS DRG-based system
is based on maximum allowable rates and lists diagnoses for
which a fixed fee rate is set by the government for inpatient
care. See 32 C.F.R. § 199.14(a)(1). The groupings used are
the same as those used in the Medicare Prospective Payment
System. See id. § 199.14(a)(1)(i)(A). In order to participate
in the CHAMPUS program, a CHAMPUS provider must
agree “to accept the CHAMPUS-determined allowable
amount as payment in full for medical services and supplies
provided to the CHAMPUS beneficiary.” Id. § 199.6(a)(8).
According to special rules and procedures adopted for
TRICARE, the reimbursement system for the TRICARE
managed care system can deviate from the CHAMPUS
reimbursement system. See 32 C.F.R. § 199.17(p)(6). In the
event of conflict between the special TRICARE rules set forth
in § 199.17 and those rules generally applicable to
CHAMPUS, the specific TRICARE rules take precedence.
Id. § 199.17(a)(4). The special rule relating to reimbursement
to TRICARE network providers states:
Special reimbursement methods for network providers.
The Director, [Office of CHAMPUS], may establish, for
preferred provider networks, reimbursement rates and
methods different from those established pursuant to
§ 199.14. Such provisions may be expressed in terms of
percentage discounts off CHAMPUS allowable amounts,
or in other terms. In circumstances in which payments
are based on hospital-specific rates (or other rates
specific to particular institutional providers), special
reimbursement methods may permit payments based on
discounts off national or regional prevailing payment
levels, even if higher than particular institution-specific
payment rates.

-- 5 of 8 --

No. 03-5084 Baptist Physician, et al.
v. Humana Military
11
Id. § 199.17(p)(6). Administrative rulemaking history
indicates that the intent of subsection (p)(6) is to provide
regional managed care contractors the flexibility to negotiate
reimbursement methods that vary from the payment
provisions established by regulation:
Regarding the suggestion that we provide additional
specificity concerning the special reimbursement
methods for network providers, we do not agree that
additional specifics should be provided. The rule
provides added flexibility to vary payment provisions
from those established by regulation, to accommodate
local market conditions. To attempt to specify in advance
the possible reimbursement approaches would defeat our
purpose of providing a flexible mechanism. We also
disagree that network rate setting should be the same as
under standard CHAMPUS rules; a key aim of managed
care programs is to negotiate lower rates of
reimbursement with networks of preferred providers.
TRICARE Program, 60 Fed. Reg. 52, 086, 52,094 (Oct. 5,
1995).
In Chapter 13, section 1.1 of the 1999
TRICARE/CHAMPUS Policy manual, the Director cites 32
C.F.R. § 199.17(p)(6) and answers the question “How are
network providers reimbursed under TRICARE?”:
Network provider reimbursement is neither subject to,
nor restricted by, amounts that would have otherwise
been paid under the standard TRICARE reimbursement
methodologies outlined in this chapter (i.e. those
reimbursement methodologies applicable only to non-
network providers). Managed Care Support (MCS)
contractors are free to establish alternative
reimbursement systems that will ensure adequate
beneficiary access to quality network providers. These
alternative reimbursement systems may include, but are
12 Baptist Physician, et al.
v. Humana Military
No. 03-5084
not restricted to: negotiated or discounted fee schedules;
usual and customary fees; salary; flat fee; global or
profit/risk sharing arrangements for noninstitutional
providers; and per diems and capitation payments for
institutional providers.
(J.A. at 323.) On September 19, 2000 the Office of the
Assistant Secretary of Defense, Health Affairs issued a
“Memorandum for Regions 3/4 Contract Administrator” in
response to Humana’s letter requesting clarification that all
claims payments for individual services are subject to
maximum payment methodology:
Humana is correct in stating Chapter 13, Section 1.1,
Paragraph IIB of the TRICARE/CHAMPUS Policy
Manual can be misleading when read in the absence of
associated TMA policy. The intent of the statement
“reimbursement is neither, subject to, nor restricted by”
is as Humana states, to allow contractors to pay network
providers sums in addition to individual claims payments
if it is deemed necessary to entice providers into the
network. Health care dollars may not be used to pay
amounts in excess of the maximum payment
methodology set forth by federal law, e.g. DRG,
allowable charge, etc., unless approved by the Director
OCHAMPUS.
(J.A. at 514.) According to this same memorandum, the
policy prohibiting a managed care support contractor from
using health care dollars to pay sums in excess of government
allowables would be “clarified” in an “upcoming consolidated
manual change.” (Id.)
We conclude that federal regulations and associated
TRICARE policies incorporated into the parties’ agreement
by reference do not categorically bar an independent managed
care support contractor, such as Humana, from paying sums
in excess of government allowables on certain claims. As

-- 6 of 8 --

No. 03-5084 Baptist Physician, et al.
v. Humana Military
13
provided by Chapter 13, Section 1.1 of the Policy Manual, the
Director has promulgated a general policy that managed care
support contractors are “free to establish alternative
reimbursement systems that will ensure adequate beneficiary
access to quality network providers.” The “clarifying” Health
Affairs memorandum limits that freedom only to the extent
that, absent approval by the Director of the Office of
CHAMPUS, “health care dollars” may not be used to pay
sums in excess of government allowables. As a result, we
need not look beyond the four corners of the agreement to
determine that, by its terms, the parties agreed that Humana
would pay certain high-dollar claims as a percentage discount
off provider charges, and that federal law and regulations do
not prohibit such payments so long as the payments are not
made with government “health care dollars.”
Our job of interpretation is aided, and our conclusion
reinforced, by a reimbursement provision in the contract
between Humana and the Department of Defense, as well as
by a recent district court decision examining the relationship
between TRICARE managed care support contractors, such
as Humana, and the Department of Defense. Section C-5,
j.(2) of the DoD-Humana contract, which was made part of
the appellate record through a supplemental filing pursuant to
Fed. R. App. P. 28(j), specifies: “All claims payments for
individual services (whether in-system or out-of-system) are
subject to the maximum payment methodology set forth by
federal law . . . . The contractor may pay network providers
(on an annual basis or other arrangement) sums in addition to
individual claims payments if it is deemed necessary to entice
providers into the network.” (Appellee’s Response to Supp.
Filing, Ex. 2.) This provision, which aids in the interpretation
of the Humana-Baptist contract, was not disclosed by
Humana in the trial court.
In a case filed in a Florida district court, the plaintiffs, a
group of institutional providers of outpatient non-surgical
services, allege that Humana breached its agreement to pay
14 Baptist Physician, et al.
v. Humana Military
No. 03-5084
agreed-upon reimbursement amounts by capping those
amounts at maximum government allowables. In addressing
various motions to dismiss, including a motion by Humana to
dismiss on the ground that the United States is 100% liable
for any breach of the network provider contracts entered into
by Humana, the court interpreted Humana’s contract with the
government and concluded in relevant part:
The [Managed Care Support] contracts created an
arrangement whereby the contractor (Humana) received
control over a monthly allotment of governmental funds
that the federal government electronically transferred to
the contractor’s bank account. The [Managed Care
Support] contractor has ownership over the funds and
can distribute those funds to network providers as it sees
fit. The contractor cannot pay any claim beyond what
federal law allows from the healthcare portion of the
allotment; however, the contractor is permitted to pay
network providers beyond the Government’s allowed
amounts. If the contractor chooses to do so, then any
overage is paid for out of the contractor’s administrative
portion of the allotment, which results in less profit to the
contractor.
Bay Med. Ctr v. Humana Military Health Care Servs., No.
5:03-cv-144/MCR (N.D. Fla. Mar. 16, 2004) (denying, inter
alia, Humana’s motion to dismiss for lack of subject matter
jurisdiction on the ground that Humana is the real party in
interest for the breach of contract claim) (emphasis added).
The reimbursement provision cited above, along with the
Florida district court’s rejection of Humana’s argument that
any liability for its breach of a provider contract is directly
chargeable to the Treasury, serve to refute Humana’s
assertion in this case that payments made in excess of
CHAMPUS allowables would ultimately come out of the
pockets of taxpayers.

-- 7 of 8 --

No. 03-5084 Baptist Physician, et al.
v. Humana Military
15
Humana proposes that, in the event the Court concludes
that the stop loss provision is not subject to a regulatory cap
based on government allowables, the Court should
nevertheless affirm the grant of summary judgment in its
favor on the ground that Baptist waived its claims. This issue
was pretermitted below by the district court’s decision and is
more appropriately decided by the district court in the first
instance.
Finally, we need not reach the question whether the district
court erred in dismissing Baptist’s promissory estoppel claim
as untimely filed. As Baptist explains, its promissory
estoppel claim is brought as an alternative to its breach of
contract claim should this Court conclude that the terms of the
agreement pertaining to the stop loss provision are
unenforceable or invalid. (See Reply Br. of Appellant at 26.)
CONCLUSION
For the foregoing reasons, the order of the district court
granting Humana’s motion for summary judgment to Humana
is REVERSED. This matter is REMANDED to the district
court for proceedings not inconsistent with this opinion.

-- 8 of 8 --