Medicaid Managed Care: News from Kentucky Litigation

Medicaid managed care organization (MCO) Kentucky Spirit, Inc., a subsidiary of Centene, sustained two major setbacks during the last week of May, 2013. Both were rulings in litigation between the MCO and the state of Kentucky over the extent of its contractual obligations. On Tuesday, May 28th, Judge Philip Shepherd of the circuit court in Franklin County, held Kentucky Spirit liable for $7.9 million owed to county health departments for school-based services. Then, on Friday, May 31st, Judge Thomas Wingate ruled that the MCO had no right to terminate its contract with the Kentucky Medicaid agency, as it announced in October, 2012.

A Rocky Start to Managed Care

Governor Steve Beshear moved the state Medicaid program to a managed care model in 2011. Contracts were signed in July and performance began in November. By February 2012, providers complained bitterly about slow payment and unfair denials by all three MCOs:  WellCare, Coventry, and Kentucky Spirit. The state’s Auditor General began an investigation. As we reported in June 2012, providers sued both Kentucky Spirit and Coventry. Kentucky Spirit tightened coverage requirements for emergency department and neonatal intensive care services. Coventry tried to renegotiate its contracts with providers and announced termination of some hospital contracts.

Challenging the Contract

In October 2012, Kentucky Spirit announced that it was terminating its contract with Medicaid effective July 5, 2013, one year before the end set in the contract. The MCO quickly filed a lawsuit asking for a declaratory judgment that its contract was not binding because its bid was based on inaccurate information from the state. The complaint alleged losses of $120 million, according to the Louisville Courier Journal. The company claimed that the information state officials provided about costs, particularly the use of emergency department and neonatal intensive care services, was inaccurate and incomplete. The state responded by countersuing for breach of contract.

Payment for School-Based Services

Meanwhile, Kentucky Spirit instituted other policies to bring costs down. For example, it reduced payment rates for nonparticipating providers and tightened requirements for coverage of elective induced deliveries before 39 weeks gestation. In the summer of 2012, Kentucky Spirit determined that certain preventive services provided by county health department nurses to children in public schools were not covered under its contract with the state because the nurses were not directly or personally supervised by a physician and did not perform the services in a properly equipped facility.

The refusal to pay for health department services hurt health departments all over the state. At least one health department terminated its participation in Kentucky Spirit’s network. Some school nurses were laid off, and more layoffs were threatened. The Louisville Courier Journal reported that the state sent Kentucky Spirit checks payable to both the MCO and the providers, but the MCO would not pass them on.

Kentucky Spirit presented its interpretation to Medicaid officials, but they disagreed. The Finance and Administration Cabinet heard an administrative appeal and upheld the agency’s decision. On Tuesday, May 28, Judge Philip Shepherd upheld the decision of the Finance and Administration Cabinet. Judge Shepherd found that for many years, the Medicaid agency had interpreted its regulations to permit health department nurses to provide services at schools without a physician present. The health departments had relied on that long-standing policy. The agency did not have the power to change its policy unilaterally; it would have to use the rulemaking process.  Kentucky Spirit had no power to change state policy based on its “highly technical” interpretation of the regulations. The MCO was held liable for $7.9 million.

The Contract Action

Judge Wingate rejected Kentucky Spirit’s interpretation of its contract with the Medicaid agency. The MCO argued that the contract permitted it to terminate on six months’ notice. Although the heading of the relevant paragraph was “Termination by Contractor,” the paragraph actually required it to notify the state six months before the end of the term if it intended not to continue the contract when the term expired. There were multiple provisions concerning the state’s right to terminate the contract, and they described in detail the responsibilities of the MCO as it wound down the operation. The contract also referred to state procurement regulations, which did not provide for termination by a contractor. However, it did not describe any such obligations with respect to termination by the contractor.  Therefore, the MCO’s notice of termination was ineffective.

The court also ruled that Kentucky Spirit had not breached the contract because it had continued to perform as required. So it owed no damages—yet. But that would change if the MCO acted on its notice and began to wind down.