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Coventry Health Care of Nebraska, Inc. v. Nebraska Department of Administrative Services

United States District Court, D. Nebraska

August 19, 2016

COVENTRY HEALTH CARE OF NEBRASKA, INC., a Nebraska domestic corporation; Plaintiff,
v.
NEBRASKA DEPARTMENT OF ADMINISTRATIVE SERVICES; NEBRASKA DEPARTMENT OF HEALTH & HUMAN SERVICES; DOUG PETERSON, in his official capacity as Attorney General of the State of Nebraska; BYRON DIAMOND, in his official capacity as Director, Nebraska Department of Administrative Services; COURTNEY PHILLIPS, CEO of the Nebraska Department of Health and Human Services; CALDER LYNCH, in his official capacity as Director of the Nebraska Department of Health and Human Services Division of Medicaid and Long Term Care; and BO BOTELHO, in his official capacity as Acting Material Division Administrator; Defendants, and NEBRASKA TOTAL CARE, INC.; WELLCARE OF NEBRASKA, INC.; and UNITEDHEALTHCARE OF THE MIDLANDS, INC.; Intervenors. AMERIHEALTH NEBRASKA, INC., a Nebraska corporation; Plaintiff,
v.
NEBRASKA DEPARTMENT OF ADMINISTRATIVE SERVICES, a political subdivision of the State of Nebraska; NEBRASKA DEPARTMENT OF HEALTH & HUMAN SERVICES, a political subdivision of the State of Nebraska; BYRON DIAMOND, Director of the Nebraska Department of Administrative Services; FRANCIS BOTELHO, Administrator of the Nebraska Department of Administrative Services Materiel Division Administrator; COURTNEY N. PHILLIPS, Chief Executive Officer of the Nebraska Department of Health and Human Services; and CALDER A. LYNCH, Director of the Nebraska Department of Health and Human Services Division of Medicaid and Long- Term Care; Defendants, and WELLCARE OF NEBRASKA, INC.; NEBRASKA TOTAL CARE, INC.; and UNITEDHEALTHCARE OF THE MIDLANDS, INC.; Intervenors.

          MEMORANDUM AND ORDER

          Robert F. Rossiter, Jr. United States District Judge

         Coventry Health Care of Nebraska, Inc., d/b/a Aetna Better Health of Nebraska (“Aetna”) and AmeriHealth Nebraska, Inc., d/b/a Arbor Health Plan (“Arbor Health”) (collectively, “plaintiffs”) unsuccessfully bid to provide managed-care services under Heritage Health, Nebraska’s forthcoming comprehensive Medicaid managed-care program for physical health, behavioral health, and pharmacy services. In these consolidated cases, the plaintiffs each allege the Nebraska Department of Administrative Services (“DAS”), Nebraska Department of Health and Human Services (“DHHS”), and various state officials (collectively, the “State”) exceeded their authority and violated state and federal law in awarding three multi-million dollar service contracts. The three successful bidders, United Healthcare of the Midlands, Inc. (“United”), WellCare of Nebraska, Inc. (“WellCare”), and Nebraska Total Care, Inc. (“NTC”) have intervened (collectively, “intervenors” and with the State, “defendants”).

         Now before the Court are Aetna’s Motion for Preliminary Injunction (Filing No. 21 in Case No. 4:16CV3094) and Arbor Health’s Motion for Preliminary Injunction (Filing No. 21 in Case No. 4:16CV3100). The plaintiffs each move, pursuant to Federal Rule of Civil Procedure 65, to enjoin performance under the service contracts and further implementation of the Heritage Health program. After careful review of the many and complex issues presented by way of extensive exhibits, briefs, and oral argument, the motions for preliminary injunction are denied.

         I. BACKGROUND

         DHHS administers the Nebraska Medicaid program, which provides health-care coverage for approximately 233, 000 low-income, elderly, and disabled Nebraska citizens. DHHS currently provides physical-health, behavioral-health, and pharmacy benefits through three different programs. Aetna is currently one of three managed-care organizations (“MCOs”) that provide managed-care services under the physical-health program. Aetna has successfully provided those services for more than five years; its contract expires June 30, 2017. Another contractor manages the behavioral-health program under a contract set to expire August 31, 2016. The State provides pharmacy services.

         On October 21, 2015, DAS issued Request for Proposal Number 5151 Z1 (“RFP”) to solicit proposals from vendors from which DAS would select two or three qualified contractors to serve as MCOs for the consolidated Heritage Health program. Six different contractors submitted proposals, including Aetna, Arbor Health, the three intervenors, and another bidder not involved in these cases. State evaluators scored the bid proposals in two general scoring categories using a point system. The Corporate Overview section was worth up to 130 points and the Technical Approach section was worth up to 2, 120 points for a total of 2, 250 possible points. Five teams of five evaluators were assigned different sections and subsections to evaluate. Team 1 evaluated the Corporate Overview section and several Technical Approach sections. All evaluators were to review their assigned sections independently and confidentially.

         After each evaluator had completed reviewing their assigned sections, the scores were averaged and totaled to determine each bidder’s score. The RFP indicated “[t]he award may be granted to the highest scoring and responsible bidder” or that the State could ask such bidders “to submit best and final offers.” The State expressly “reserve[d] the right to reject any or all proposals, wholly or in part” and “to waive any deviations or errors that [we]re not material, d[id] not invalidate the legitimacy of the proposal and d[id] not improve the bidder’s competitive position.” The RFP further provided, “All awards w[ould] be made in a manner deemed in the best interest of the State.” On February 5, 2016, DAS posted a Notice of Intent to Award (“First Notice of Intent”) the Heritage Health contracts to the three highest-scoring bidders: United (1, 680.4), NTC (1, 669.6), and Aetna (1, 605.6). WellCare (1, 603.6) finished fourth, two points behind Aetna, and Arbor Health (1, 509.2) finished a distant fifth. DAS also posted a final evaluation document that summarized the scores received by each proposal.

         On February 19, 2016, WellCare and Arbor Health each protested the First Notice of Intent pursuant to the State’s protest and review process. Among other things, they pointed out the failure of one evaluator on Team 1 to score the proposals in accordance with the instructions. Arbor Health also complained the RFP did not allow the evaluators sufficient discretion and did not allow them to consider factors required by Nebraska law.

         On February 29, 2016, DAS issued a Notice of Withdrawal of Intent to Award, acknowledging some flaws in the scoring of the Corporate Overview section.[1] To address those errors, DAS slightly changed the scoring for that section and announced a team of new and impartial evaluators would perform a limited re-evaluation of only that section. Two of the evaluators had no prior experience reviewing Medicaid proposals. DAS notified the bidders that upon completion of the re-evaluation, DAS would recalculate each bidder’s total score and post a new intent to award. None of the bidders objected to the proposed re-evaluation process. The limited re-evaluation took place between March 2 and March 4, 2016.

         On March 8, 2016, DAS issued a second Notice of Intent to Award (“Second Notice of Intent”) the contracts to the three highest-scoring bidders after re-evaluation. United (1, 658.2) and NTC (1, 652.6) finished first and second again, but WellCare (1, 592.4) replaced Aetna (1, 581.2) at third. Aetna fell to fourth and Arbor Health (1, 493.6) stayed a distant fifth. DAS also released a final re-evaluation document that included the new scores received by each proposal.

         On March 21 and March 22, 2106, respectively, Aetna and Arbor Health each protested the Second Notice of Intent. By letters dated April 7, 2016, DAS denied the protests. As allowed by the protest procedures, Aetna and Arbor Health each asked for further review of their protests and sought a meeting with Materiel Administrator, Francis “Bo” Botelho, and the Director of Administrative Services, Byron Diamond (“Director Diamond”).

         On April 14, 2016, before Aetna and Arbor Health met with Director Diamond, DAS and DHHS entered into contracts with United, NTC, and WellCare in accordance with the second award. Arbor Health met with Director Diamond and other DAS officials on May 17, 2016; Aetna did the same on May 19, 2016. Both received written confirmation of the denial of their protests by letter dated May 31, 2016.

         The Heritage Health program is scheduled to begin January 1, 2017. Since entering the contracts, the State and intervenors have been taking steps to implement the program, including forming committees, attending planning meetings, disseminating Heritage Health information to providers and the public, and entering provider contracts. Open enrollment is scheduled to begin in September 2016.

         Asserting state and federal claims, the plaintiffs each filed a complaint seeking declaratory and injunctive relief in Nebraska state court. The plaintiffs seek to enjoin further implementation of the Heritage Health program and additional expenditures of public funds because, as they see it, the award process was not open and fair as required by Nebraska law. They further allege the State exceeded its statutory authority and disregarded mandatory agency rules by re-evaluating the proposals. In particular, the plaintiffs contend the State did not comply with the Agency Procurement Manual for Services (“manual”) in awarding the contracts.

         The State removed both cases to federal court, [2] and United, NTC, and WellCare intervened. The plaintiffs each moved for a preliminary injunction. The Court consolidated the cases and conducted a lengthy joint motion hearing August 11, 2016, at which the parties jointly stipulated to allow the Court to consider the evidence in the record without objections.

         II. DISCUSSION

         “A preliminary injunction is an extraordinary remedy and the burden of establishing the propriety of an injunction is on the movant.” Roudachevski v. All-Am. Care Centers, Inc., 648 F.3d 701, 705 (8th Cir. 2011). In deciding whether to issue a preliminary injunction, the Court must consider “(1) the threat of irreparable harm to the movant; (2) the state of the balance between this harm and the injury that granting the injunction will inflict on other parties litigant; (3) the probability that movant will succeed on the merits; and (4) the public interest.” Dataphase Systems, Inc. v. C L Systems, Inc., 640 F.2d 109, 113 (8th Cir. 1981) (en banc).

         A. Irreparable Harm

         “To demonstrate irreparable harm, a party must show that the harm is certain and great and of such imminence that there is a clear and present need for equitable relief.” Iowa Utils. Bd. v. FCC, 109 F.3d 418, 425 (8th Cir. 1996). “Failure to show irreparable harm is an independently sufficient ground upon which to deny a preliminary injunction.” Watkins Inc. v. Lewis, 346 F.3d 841, 844 (8th Cir. 2003).

         The parties agree Nebraska substantive law governs the plaintiffs’ state-law claims. See Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78 (1938). “[E]nacted for the benefit of taxpayers, ” Nebraska’s competitive-bidding statutes “assure[] the prudent expenditure of public money, ” Anderson v. Peterson, 375 N.W.2d 901, 904 (Neb. 1985).

         The plaintiffs first argue they have established irreparable harm as a matter of Nebraska law as taxpayers trying to prevent the illegal expenditure of public funds. In support, the plaintiffs rely on Rath v. City of Sutton, 673 N.W.2d 869, 883-84 (Neb. 2004), in which the Nebraska Supreme Court concluded “the injury that flows from an illegal expenditure of public funds is inherently irreparable.” According to the plaintiffs, the Erie Doctrine requires this Court to apply the Rath rule and find irreparable harm as a matter of law. The plaintiffs’ reliance on Erie and Rath are misplaced.

         The plaintiffs each moved for a preliminary injunction pursuant to Federal Rule of Civil Procedure 65 and sought relief based on federal equity principles. Federal courts ordinarily apply federal rules of civil procedure in such circumstances. See, e.g., Hanna v. Plumer, 380 U.S. 460, 467, 470-71 (1965). And although the United States Supreme Court declined to consider whether the availability of an injunction in a diversity case should be determined by state or federal law, Grupo Mexicano de Desarrollo S.A. v. All. Bond Fund, Inc., 527 U.S. 308, 318 n.3 (1999), and the Eighth Circuit apparently has yet to consider the precise question raised in these cases, at least six other circuits have long held that federal law provides the standard for determining whether a federal court should issue a preliminary injunction, even when “the right upon which th[e] cause of action is based is state-created.” Sys. Operations, Inc. v. Sci. Games Dev. Corp., 555 F.2d 1131, 1141 (3d Cir. 1977); accord Certified Restoration Dry Cleaning Network, L.L.C. v. Tenke Corp., 511 F.3d 535, 541 (6th Cir. 2007) (“[W]e apply our own procedural jurisprudence regarding the factors to consider in granting a preliminary injunction.”); Mitsubishi Int’l Corp. v. Cardinal Textile Sales, Inc., 14 F.3d 1507, 1525 (11th Cir. 1994) (same); Direx Israel, Ltd. v. Breakthrough Med. Corp., 952 F.2d 802, 811 (4th Cir. ...


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