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Sixth Circuit Holds Medigap Insurer Only Required To Pay Medicare Per Diem Rate After Exhaustion Of Part A Benefits


HLD, v. 31, n. 3 (March 2003)

Sixth Circuit Holds Medigap Insurer Only Required To Pay Medicare Per Diem Rate After Exhaustion Of Part A Benefits

Mac Weaks and Mildred Hollow had supplemental Medicare coverage (Medigap) insurance policies issued by Standard Life and Accident Insurance Company (Standard Life). Both policies defined "Medicare eligible expenses" as "healthcare expense of the kind covered by Medicare to the extent recognized as reasonable by Medicare." Weaks was hospitalized at a Vencor, Inc. hospital in Louisville, Kentucky for over four months until his death on August 6, 1996. Initially, Standard Life and Medicare each paid a portion of the Vencor hospital's $800 allowable per diem, but after Weaks exhausted his Part A benefits, Standard Life, as his Medigap insurer, paid the entire amount. Hollow was hospitalized at a Vencor hospital in Chattanooga, Tennessee for roughly eight months until her death on September 18, 1996. As with Weaks, Standard Life provided supplemental coverage of the hospital's $900 allowable per diem rate until Hollow's Medicare Part A benefits ran out; thereafter, the Medigap insurer paid the entire per diem rate. Post-exhaustion, Vencor billed Standard Life $122,929 for Weaks' hospitalization costs, but the insurer paid only $48,213, the amount calculated based on the Medicare $800 per diem rate. Likewise, Vencor billed Standard Life $381,093.99 for Hollow's care, but Standard Life paid only $179,084, based on the $900 Medicare per diem rate.

Vencor sued Standard Life in federal district court, alleging Standard Life breached its insurance contracts with Weaks and Hollow by failing to pay Vencor its standard rates, rather than the Medicare per diem rates, for their post-exhaustion hospital stays. According to Vencor, it suffered direct damages as a result of the alleged breach and should be subrogated to Weaks' and Hollow's breach of contract claims. Vencor also lodged a promissory estoppel claim, saying it relied on Standard Life's promise to cover Weaks' and Hollow's medical expenses. The district court granted summary judgment in Standard Life's favor, finding the insurance policies at issue unambiguously limited the insurer's post-exhaustion payment obligations to the Medicare per diem rate. Vencor appealed.

The Sixth Circuit affirmed. Applying state law applicable to contract interpretation, the appeals court agreed with the lower court that the insurance policies' definition of "Medicare eligible expenses" unambiguously provided coverage only at the rate set by Medicare after Part A benefits had been exhausted. The appeals court rejected Vencor's contention that the definition of Medicare eligible expenses should be construed to encompass all reasonable and necessary care. This reading of the policy, the appeals court found, would be inconsistent with how "Medicare eligible expenses" is used in the other parts of the contract. The appeals court went on to cite case law, some of which involved suits by Vencor against Standard Life, in the Fifth, Ninth, and Eleventh Circuits that "uniformly ruled that a Medigap insurer's liability post-exhaustion is limited to the Medicare rate or a percentage of the Medicare rate, whichever is specified in the contract." Thus, the appeals court held that Standard Life was required to pay Vencor only the Medicare per diem rate for Weaks' and Hollow's hospitalization after the exhaustion of their Part A benefits.

The appeals court also rejected Vencor's promissory estoppel claim. According to the appeals court, the Outline of Coverage, which Vencor alleged promised to cover all but "non-covered charges," could not form the basis of Vencor's promissory estoppel claim as that document specifically cautioned that the policy provisions controlled. Accordingly, the appeals court affirmed the grant of summary judgment in Standard Life's favor.

Vencor, Inc. v. Standard Life & Accident Ins. Co., No. 01-5435, 2003 WL 138320 (6th Cir. Jan. 21, 2003) (17 pages).

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