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LODI MEM. HOSP. v. CALIFANO

May 22, 1978

LODI MEMORIAL HOSPITAL, Plaintiff,
v.
JOSEPH A. CALIFANO, Secretary Department of Health, Education and Welfare, Defendant



The opinion of the court was delivered by: FLANNERY

This matter is before the court on cross-motions for summary judgment. Because this case is somewhat complex, involving as it does a dispute over the meaning of certain Medicare regulations, a somewhat lengthy factual background is necessary. Plaintiff is an acute care health facility which is an authorized provider of services to Medicare patients. 42 U.S.C. § 1395cc. The Medicare Program involves basically two types of payments. Under Part A of the program, an authorized hospital such as plaintiff, receives direct payments from the government, 42 U.S.C. § 1395c, for the reasonable and necessary costs, 42 U.S.C. § 1395y(a)(1), of certain defined health care and diagnostic services, 42 U.S.C. § 1395d. Such reimbursements for actual costs which are reasonably and necessarily incurred in the care of a Medicare patient may be paid directly from the government or through an elected financial intermediary, such as Blue Cross. 42 U.S.C. § 1395h. In this case, the payments in issue were made through Blue Cross of Northern California, which makes certain estimated payments during the course of the year and then adjusts the payments at the end of the year when cost reports are filed and the government repays the intermediary in a lump sum. Part B of the program is a voluntary health insurance program available to persons eligible for Medicare upon payment of a small premium. This is a separate though related program to Part A, and each program is administered out of its own, discrete funds. Part B allows payments for services rendered by other than hospital sources, as, for example, a private physician who bills his patients separately from the hospital. A similar system of private intermediaries is available under this plan. 42 U.S.C. § 1395. These two programs complement each other, and the dispute in this case involves the interplay of these two programs and the payments made thereunder.

 Proceeding to the particular facts of this case, plaintiff had been filing its cost reports and receiving its payments as a provider of Medicare services from the Blue Cross of Northern California. Also, since 1957, plaintiff has not run its own radiology department. Rather, plaintiff has leased space on the hospital premises to a private group of radiologists. According to the record of the administrative proceedings in this case, rental payments from the radiologists were, until September 30, 1973, computed as a flat percentage of the gross billings of the radiologists. Thereafter, under the terms of a new ten-year lease, the rental was computed on a cost per square foot of space leased basis. In all other respects, the new and old lease were the same. Plaintiff supplied and paid for all utilities except outside telephone lines. Plaintiff also provided janitorial services, laundry and linen service, and various standard supplies such as needles and gloves at no additional cost. In return, the radiologists paid their rent, provided the necessary radiology equipment and bore all other costs of running the department. The radiologists billed the hospital patients who used their services separately, but the radiologists were treated in all other respects as if they were members of the hospital staff. It appears that for the years in question, 1970-1974, the rental payments made by the radiologists exceeded the actual costs incurred by the hospital in maintaining the radiology facility. Defendants have deemed this excess to be a profit accruing to the hospital. It is also clear that for the years in question plaintiff treated the radiology center as a "non-reimbursable cost center." In other words, plaintiff never sought any payments from Medicare for any of the costs incurred in connection with the radiology center, even though many Medicare patients used the facility. The record is devoid of any evidence of the extent to which the radiologists included the rental costs for hospital space in their requests for Part B payments when they dealt with Medicare patients in the hospital.

 In 1975, Blue Cross of Northern California, the financial intermediary handling payments to plaintiff for the providing of Medicare services, conducted an audit of plaintiff's 1974 and 1973 cost reports. Blue Cross informed plaintiff that it intended to declare an adjustment for those years in consideration of plaintiff's profit from the rent on the radiology center. Blue Cross stated that it intended to deduct an amount equal to the profit times the hospital's percentage of Medicare utilization, resulting in a request that plaintiff repay the government $14,056 for 1973 and $13,760 for 1974. Defendant states that Blue Cross took this action in compliance with H.E.W.'s Provider Reimbursement Manual, HIM-15 § 2108.5A, which requires the set-off of excess lease revenues against allowable costs of other hospital departments. Blue Cross then proceeded to make similar adjustments for 1970, 1971 and 1972.

 Plaintiff naturally took exception to these deductions, and, as provided by 42 U.S.C. § 1395oo(a) (Supp. III, 1973), plaintiff filed for a review of these determinations by the Provider Reimbursement Review Board. The Board found that it did not have jurisdiction to review the determinations regarding the 1970, 1971 and 1972 assessments since the review provisions were applicable only to cost reports filed after June 30, 1973. Pub. L. No. 92-603, Title II, § 243(a), 86 Stat. 1420. Plaintiff asserts that this was error, and now makes this its first claim for summary judgment.

 As for the 1973 and 1974 adjustments, the Board found in favor of the plaintiff. Upon request of Blue Cross, and pursuant to his discretionary review power, 42 U.S.C. § 1395oo(f)(1) (Supp. IV, 1974), the Secretary granted review of the Board's determination. Before making a final decision, the Secretary consulted with the Bureau of Health Insurance, an office within H.E.W. which has great expertise in these matters but which was not a party to the original proceedings and which submitted no comments during the original proceedings. Although BHI's comments were in writing and were subsequently made a part of the record, plaintiff had no opportunity to rebut or otherwise respond to BHI's comments. Plaintiff, therefore, alleges that it was deprived of due process of law, and this is plaintiff's second ground for summary judgment.

 After consultation with BHI, the Secretary issued his final administrative order reversing the Board's decision and reinstating the action taken originally by Blue Cross. Pursuant to 42 U.S.C. § 1395oo(f) plaintiff has exercised its right to judicial review of the Secretary's ruling. Plaintiff contends that the Secretary's judgment is contrary to the Medicare laws, and especially involves an erroneous interpretation of 20 C.F.R. § 405.486 (1977). *fn1" Plaintiff contends that this interpretation, as embodied in H.E.W.'s Provider Reimbursement Manual, HIM-15 § 2108.5A, is arbitrary and capricious, and that, therefore, plaintiff is entitled to summary judgment. Each of plaintiff's contentions will be discussed separately, and the court shall analyze the procedural questions first.

 II. Review of the 1970, 1971 and 1972 Adjustments

 The Medicare program was created by amending the Social Security Act, which contains its own provisions governing judicial review. Section 205(h) of the Act, codified at 42 U.S.C. § 405(h), is particularly pertinent, and states:

 
The findings and decisions of the Secretary after a hearing shall be binding upon all individuals who were parties to such hearing. No findings of fact or decision of the Secretary shall be reviewed by any person, tribunal, or governmental agency except as herein provided. No action against the United States, the Secretary, or any officer or employee thereof shall be brought under section 41 of Title 28 to recover on any claim arising under this subchapter.

 This provision is applicable to the Medicare Act to the same extent that it is applicable to the act creating old-age, disability and survivor benefits, of which act section 405(h) was an original part. See 42 U.S.C. § 1395ii (Supp. III, 1973). Since section 405(h) indicates that judicial review is allowed only as provided within the act itself, reviewability of provider benefit decisions under the Medicare Act is totally governed by 42 U.S.C. § 1935oo. Association of American Medical Colleges v. Califano, 186 U.S. App. D.C. 270, 569 F.2d 101, 106-108 (D.C. Cir. 1977). Plaintiff may not ask this court to assume jurisdiction of this case under 5 U.S.C. §§ 701-706, which are the general judicial review provisions of the Administrative Procedure Act, Califano v. Sanders, 430 U.S. 99, 97 S. Ct. 980, 983-85, 51 L. Ed. 2d 192 (1977), nor under general federal question jurisdiction. Association of American Medical Colleges v. Califano, supra, 569 F.2d at 107. Therefore, this court will have jurisdiction of the 1970-72 claims only to the extent that 42 U.S.C. § 1935oo provides for such jurisdiction.

 Section 1935oo provides judicial review of any action taken by the Secretary which affirms, modifies or reverses a ruling of the Provider Reimbursement Review Board. The Board was created by Public Law No. 92-603, and originally judicial review could be had only if the Secretary modified or reversed a finding of the Board. Pub. L. No. 92-603, Title II § 243(a), 86 Stat. 1420. However, section 243(c) of the act creating the Board and providing review therefrom stated:

 
The amendments made by this section shall apply with respect to cost reports of providers of services . . . for accounting periods ending on or after June 30, 1973.

 When this Act was amended to its present form to allow review even when the Secretary affirmed the Board's decision, the June 30, 1973 date was retained as the cut-off. Pub. L. No. 93-484, § 3, 88 Stat. 1459. Plaintiff argues that a great number of cases, including Humana of South Carolina, Inc. v. Mathews, 419 F. Supp. 253 (D.D.C. 1976), have held that jurisdiction to hear claims under the Medicare Act may be found despite this limitation. However, examination of those cases reveals that they all relied on 28 U.S.C. § 1331, on the Administrative Procedure Act, or on both. In light of the recent decision in Association of American Medical Colleges v. Califano, ...


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