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BEVERLY ENTERPRISES v. MATHEWS

December 16, 1976

BEVERLY ENTERPRISES, Plaintiff,
v.
HONORABLE DAVID MATHEWS, Secretary of the Department of Health, Education and Welfare, ET AL., Defendants



The opinion of the court was delivered by: GASCH

 Plaintiff brought this action on June 30, 1976, seeking to temporarily restrain the defendants from undertaking the suspension of the Medicare disbursements regularly made to plaintiff, a measure which the defendants had scheduled for implementation on that date as a means of "recouping" certain alleged Medicare overpayments made during 1967, 1968, and 1969. Plaintiff claimed that such recoupment would, inter alia, constitute an abuse of the Secretary's discretion and violate due process of law. At oral argument that day, the defendants agreed to reconsider their proposed course of action and to afford plaintiff 30 days' written notice if they once again decided to suspend plaintiff's Medicare disbursements. By letter dated November 10, 1976, the defendants indicated their intention to institute such a suspension as of December 10. *fn1"

 On December 6, the Court heard oral argument on plaintiff's motion for preliminary and permanent injunctive relief. *fn2" At that hearing, defendants' counsel advised the Court of the Secretary's willingness voluntarily to afford plaintiff certain administrative remedies *fn3" to which plaintiff would not otherwise be entitled. *fn4" The Court finds, for the reasons set forth briefly below, that plaintiff's motion for a preliminary injunction should be granted and that defendants should be enjoined from suspending Medicare disbursements to plaintiff pending this Court's final determination of the merits of plaintiff's claim.

 FACTUAL BACKGROUND

 In 1965, Congress enacted Title XVIII of the Social Security Act, 42 U.S.C. § 1395 et seq. This legislation, popularly known as the "Medicare Act" ("the Act") and administered by the Secretary, provides federal funds for medical care received by aged or disabled persons. Under Part A of the Medicare program, the providers of appropriate medical services to proper Medicare beneficiaries are reimbursed by the federal government for the "reasonable cost" of such services as determined pursuant to pertinent implementing regulations. 42 U.S.C. §§ 1395f(b) and 1395x(v); see 20 C.F.R. §§ 401 et seq. To obtain reimbursement as a "provider" of such services, an institution or corporation must enter into a "provider agreement" with the Secretary as directed by the Act. 42 U.S.C. §§ 1395cc and 1395(f)(a). Such reimbursements are made directly to certified providers from the Federal Hospital Insurance Trust Fund established specifically for that purpose. 42 U.S.C. §§ 1395i and 1395x(v).

 The day-to-day administration of this portion of the Medicare program has been delegated by the Secretary to "fiscal intermediaries," usually private health insurance companies such as defendant Mutual of Omaha. The fiscal intermediary of the program at the time of the alleged overpayments was Blue Cross of Southern California. These intermediaries have responsibility for a wide variety of functions, including determination of the proper amount of program disbursement and the actual disbursement of funds. 42 U.S.C. § 1395h. In recognition of the cash flow needs of health care providers, Congress has required that periodic interim disbursements be made to providers by the fiscal intermediaries not less often than monthly. 42 U.S.C. § 1395g; see 20 C.F.R. § 405.402(b)(1). These payments are of necessity only approximations; they are made subject to subsequent exact determination of proper reimbursement amounts made by the fiscal intermediaries at the conclusion of each semi-annual accounting period. 42 U.S.C. § 1395g; 20 C.F.R. § 405.454(a), (f). If after auditing a provider's records according to "reasonable cost" criteria a fiscal intermediary determines that the provider has received an overpayment during an accounting period, the intermediary may suspend future reimbursements sufficient to recover the amount of the determined overpayment. 20 C.F.R. § 405.370.

 In the instant case, the defendants plan to recoup from plaintiff certain determined overpayments which, for the most part, *fn5" antedated plaintiff's ownership of the nursing home facilities to which they were made. When a provider agreement covering these two facilities was first executed, they were owned and operated by, respectively, two limited partnerships. One facility, then known as Whitmar Nursing Complex East, was owned and operated by Estate Investments, Ltd., whose general partner was a California corporation (Vector Corp.) and whose limited partners were a group of individuals. The second facility, known as Whitmar Nursing Complex West was owned and operated by Intercommunity Investors, Ltd., a limited partnership composed of California corporation (D.B.N. & W.) as its general partner and a number of individuals as limited partners.

 On April 30, 1969, the group of limited partners associated with the Whitmar West facility incorporated as Intercommunity Investors Ltd., Inc. On May 12, the group of limited partners associated with the Whitmar East facility incorporated as Whitmar Nursing Complex, Inc. On August 2, plaintiff executed respective stock transfer agreements with the shareholders of Intercommunity Investors Ltd., Inc. and D.B.N. & W. and with shareholders of Whitmar Nursing Complex, Inc. and Vector Corp., wherein it contracted to acquire all issued and outstanding stock in these corporations. *fn6" As one of the provisions of these virtually identical agreements, the shareholders (referred to by the parties to this litigation as the "former owners") expressly retained all liability for any Medicare overpayments made in connection with the two nursing homes prior to the date of stock transfer. *fn7" That acquisition took place on October 24, 1969, and plaintiff commenced to operate the two facilities.

 On July 12, 1971, plaintiff received notification from Blue Cross of Southern California ("Blue Cross"), the fiscal intermediary then serving plaintiff's nursing home facilities, that its review and audit of the accounting periods ending November 30, 1967, November 30, 1968, and December 31, 1969 revealed overpayments totaling $59,483 in connection with the Whitmar West facility. *fn8" The next day, notification of similar alleged overpayments totaling $203,509 during comparable accounting periods in connection with Whitmar East was mailed to plaintiff. *fn9" Plaintiff then undertook to appeal these overpayment determinations, while at the same time insisting that the former owners would be liable for any overpayments which took place prior to plaintiff's acquisition of the facilities in October, 1969. *fn10"

 During the ensuing months of 1971 and the early part of 1972, there occurred a series of meetings and communications between representatives of plaintiff, the former owners, Blue Cross, and ultimately the Secretary. Additionally, plaintiff submitted the agreements by which it had acquired the corporate interests of the former owners. *fn11" As a result of this process, and based in large part upon these submitted transfer documents, Blue Cross' legal counsel concluded that the former owners, not plaintiff, were liable for the overpayments. *fn12" On March 29, 1972, this conclusion was fully concurred with by the Secretary's Assistant Regional Attorney, whose only reservation concerned plaintiff's possible liability for those overpayments allocable to the approximately ten-week period between the date of acquisition and the end of the last controversial accounting period, in late 1969. *fn13" The record before the Court reflects no sustained attempt by either the Secretary or his intermediary to pursue this matter against plaintiff for more than three years after these conclusions were reached by the Secretary's agents. There is similarly no indication in the record that the former owners disputed their status as the properly liable parties at any time prior to or during this three-year period extending into mid-1975.

 At some time during this period, after Blue Cross was apparently unsuccessful in its attempts to recover the overpayment amounts from the former owners, the matter was referred to the Bureau of Health Insurance ("BHI") of the Social Security Administration, the agency primarily responsible for administering the Medicare program for the Secretary. By letter dated August 1, 1975, BHI informed plaintiff for the first time that the former owners were contesting their liability. It requested that plaintiff once again submit any documents which might support the conclusion that the former owners were the properly liable parties. *fn14" By letter dated January 28, 1976, the Government Accounting Office ("GAO") informed plaintiff that the Secretary had reported for collection plaintiff's alleged indebtedness of $83,530.76 in connection with Whitmar West. *fn15" On February 2, GAO similarly informed plaintiff of its alleged outstanding indebtedness of $204,523.68 in connection with Whitmar East. *fn16" After defendant Mutual of Omaha notified plaintiff of its intention to suspend Medicare disbursements as of June 30, 1976, *fn17" plaintiff filed this action.

 MERITS OF THE MOTION

 Plaintiff has advanced a number of arguments in support of its motion for preliminary injunctive relief. *fn18" First, it points to the twin stock acquisition agreements in which it attempted carefully to contract away the very liability here at issue. Although the Secretary was not a party to those agreements and despite the fact that no new provider agreement was immediately thereafter executed as required for any purported "change of ownership" under 20 C.F.R. § 405.626(c), the former owners' express retention of Medicare overpayment liability was apparently deemed determinative of this question by the Secretary's agents. *fn19" However, plaintiff does not ask this Court to enjoin the defendants' planned recoupment solely on the strength of these documents. Neither does it rely exclusively upon the fact that the Secretary's agents had initially concluded that plaintiff was not liable for the overpayments in question. Rather, ...


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