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BEVERLY ENTERPRISES v. CALIFANO

February 17, 1978

BEVERLY ENTERPRISES, Plaintiff,
v.
JOSEPH A. CALIFANO, JR., Secretary, Health, Education, and Welfare, and MUTUAL OF OMAHA, Defendants



The opinion of the court was delivered by: RICHEY

 OF UNITED STATES DISTRICT JUDGE CHARLES R. RICHEY

 This case is before the Court on cross-motions for summary judgment. Upon consideration of the memoranda filed, the affidavits, and the administrative record, the Court finds that there are no genuine issues as to any material facts remaining in this case and that plaintiff's motion for summary judgment be granted in part and denied in part.

 I. BACKGROUND

 1. Plaintiff, Beverly Enterprises ("Beverly") owns and operates four facilities involved in this case, and has since the time this dispute arose. Each of these facilities participates in the Medicare program as a "provider" of skilled nursing care. These providers are:

 
Beverly Manor Convalescent Hospital Capistrano Beach, California
 
Beverly Manor Convalescent Hospital Seal Beach, California
 
Beverly Manor of Laguna Laguna Hills, California
 
Beverly Manor of Petosky Petosky, Michigan

 2. Each facility further is properly described as a "distinct-part provider," rendering care as a "skilled nursing facility" ("SNF") to Medicare patients in a distinct part of its physical plant. This distinct part must be physically separated from the rest of the institution.

 3. The distinct part in which Medicare-eligible patients are cared for is termed the "certified" part. The other part of the facility is termed the "noncertified" part. A patient in a room located in the noncertified part of a distinct part provider cannot qualify for reimbursement under the Medicare program.

 4. Most "providers" under the program do not receive their Medicare reimbursements directly from the Department of Health, Education and Welfare (HEW), but rather from a fiscal intermediary, usually an insurance company. The intermediary then is reimbursed by HEW. The fiscal intermediary pays the hospital on a monthly estimated basis for services rendered to certified Medicare patients, audits on a yearly basis the hospital's cost records in order to make the final determination of "reasonable costs," and notifies the provider if, in its opinion, any "overpayments" have been made to the provider in monthly estimated payments made during that year. If the intermediary considers overpayments to have been made, it furnishes the provider with a Notice of Program Reimbursement (NPR), which itemizes adjustments to the provider's Medicare cost reports for that year. The provider then is deemed to owe the intermediary and HEW the amount stated in the NPR. If the provider disagrees with the intermediary's decision, it may appeal to the Provider Reimbursement Review Board ("PRRB"). The fiscal intermediary for the four Beverly facilities was and is Mutual of Omaha.

 5. In August 1973, the Social Security Administration published Section 2342 of the Provider Reimbursement Manual (HIM-15) ("PRM"). The PRM is a guide for fiscal intermediaries in their decision-making processes concerning reimbursement claims submitted by providers each fiscal year.

 6. Section 2342 and Subsection 1 of the PRM read as follows:

 
Where the unoccupied beds in a partially certified institution are concentrated in the certified portion, the standby costs attributable to the unoccupied beds ( e.g., depreciation, operation of plant, etc.) would not be allocated equitable under existing cost find methods. This section indicates the manner in which costs attributable to a provider's unoccupied beds are allocated under such circumstances so that the burden of these costs is proportionally shared by all patients in the institution. This section is applicable to all cost reporting periods beginning after September 30, 1973.
 
2342.1 General Rule -- Where the average occupancy rate of a certified portion of an institution is substantially less than the average occupancy rate in the noncertified portion, the routine costs attributable to the unoccupied beds of the institution allocated on the basis of space (see subparagraph B) are reallocated using the following basis:
 
Total Patient Days in the Certified Portion / Total Patient Days in the Entire Institution X Costs of Unoccupied Beds = Cost of Unoccupied Beds Allocable to Certified Portion
 
Only costs allocated to the inpatient areas on the basis of space are adjusted since other costs are allocated in a manner related to the actual usage of services in the institution -- e.g., hours of services, meals served, etc.
 
A. Substantial Difference in Occupancy Rates -- For this purpose, a difference of 25 percentage points or more in the occupancy rates in any Medicare cost reporting period is considered substantial. Thus, if the occupancy rate in the certified portion of an institution is 50 per cent and the occupancy rate is 75 per cent or more in the noncertified portion, the procedure described in this section is applicable.
 
B. Costs Allocated on Basis of Space -- All costs actually allocated or required to be allocated to the inpatient areas on the basis of space under the cost-finding ...

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