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July 30, 1978

Joseph A. CALIFANO et al., Defendants

The opinion of the court was delivered by: GASCH


Plaintiff Beverly Enterprises (Beverly), in challenging the decision of an HEW hearing panel to hold it liable for alleged Medicare overpayments, seeks to enjoin the Secretary of HEW from suspending Medicare overpayments. Defendants request this Court to affirm the agency decision that plaintiff is liable, thereby permitting them to recover the alleged overpayments by suspending Medicare disbursements. Plaintiff is a California corporation that owns and operates two nursing home facilities, Beverly Manor Convalescent Hospital East and West, and is a provider of health care services under the Medicare program. See 42 U.S.C. § 1395g. Defendants are the Secretary of HEW and Mutual of Omaha, a "fiscal intermediary" which presently serves as the Secretary's agent in connection with the disbursement of Medicare funds to plaintiff. Presently before the Court are the parties' cross-motions for summary judgment and defendants' alternative motion to dismiss.


 On August 2, 1969, plaintiff Beverly Enterprises entered into a contract to acquire all the stock in Intercommunity Investors Ltd., Inc. and D.B.N. & W., corporations associated with the Whitmar Nursing Complex West facility, and Whitmar Nursing Complex, Inc. and Vector Corp., corporations associated with the Whitmar Nursing Complex East facility. One of the provisions in these virtually identical agreements provided:

Shareholder agrees to save, indemnify and hold harmless Beverly from any liabilities not reflected in said (balance sheet) statements or incurred in the ordinary course of business through closing date. Such liabilities against which Beverly shall be held harmless shall include, but not be limited to, any liabilities to Medicare, Medi-Cal, Blue-Cross or any other health insurance plan, whether governmental or private, and whether presently known or unknown.

 The acquisition pursuant to this contract took place on October 24, 1969, and plaintiff commenced to operate the two facilities.

 On December 15, 1971, representatives of Blue Cross, Beverly Enterprises, and the former owners of the nursing homes attended a meeting to discuss the issue of liability for the alleged overpayments. At the meeting, Beverly agreed to submit documents relating to the issue of liability. On January 20, 1972, Blue Cross notified Beverly that it was affirming the decision that had been appealed. The letter stated:

Since the question of who should be held responsible for the balance due Medicare Program is still unanswered pending receipt and determination of the terms of the reorganization agreement, we are holding both former and current owners responsible

 Administrative Record at 468-69. Beverly was informed that the appeal procedure at the intermediary level had been concluded. However, plaintiff did not appeal this decision. On February 10, 1972, the former owners of the Whitmar facilities received a similar notification from Blue Cross.

 On February 29, 1972, Christopher Carr, counsel for Blue Cross, sent a letter to Albert Lin, an employee of Blue Cross, stating that it appeared that the former owners, rather than plaintiff, were liable for the overpayments. Administrative Record at 479-80. Plaintiff, at some later point, was sent a copy of this letter. On March 29, 1972, Howard T. Chang, assistant regional attorney for HEW, wrote Christopher Carr that he concurred that the former owners were the proper parties against whom HEW should proceed. Id. at 481.

 In 1975, after Blue Cross was apparently unsuccessful in its attempt to recover the overpayments from the former owners, the matter was referred to the Bureau of Health Insurance (BHI) of the Social Security Administration. BHI informed plaintiff in a letter dated August 1, 1971, that the former owners were contesting liability and requested Beverly to submit additional documents concerning this issue. At the end of January 1976, the Government Accounting Office (GAO) informed Beverly that HEW had reported for collection plaintiff's alleged indebtedness to the United States in connection with the Whitmar East and West facilities.

 On June 30, 1976, the day Mutual of Omaha planned to institute suspension of reimbursement payments, plaintiff brought suit in this Court for declaratory and injunctive relief on the ground that defendants' proposed suspension of current Medicare payments was arbitrary and capricious and violated due process. On June 30, 1976, defendants agreed to reconsider their proposed course of action and afford plaintiff 30 days notice if they again decided to suspend plaintiff's Medicare disbursements. On November 10, 1976, defendants afforded plaintiff notice of their intention to institute such a suspension.

 Plaintiff renewed its motion for declaratory and preliminary injunctive relief. On December 16, 1976, the Court granted plaintiff's motion for preliminary injunction. The Court held that it was "an abuse of the Secretary's discretion and a violation of due process for the Secretary to suddenly recoup the alleged overpayments after the passage of over three years and without any accommodation to whatever equities might have accrued to plaintiff's position during that span of time." 432 F. Supp. 1073, 1077-78 (D.D.C. 1976). Defendants were prevented from suspending Medicare disbursement until after defendants "voluntarily afforded ...

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