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February 2, 1979


The opinion of the court was delivered by: RICHEY


This case is before the Court on cross-motions for summary judgment. Plaintiffs are American Medical International (hereinafter, "AMI"), thirty-seven of its wholly owned subsidiary hospital corporations, and one hospital organization which AMI manages. The defendant is the Secretary of Health, Education and Welfare, who is responsible for the administration of Title XVIII of the Medicare Act, 42 U.S.C. §§ 1395 Et seq. In this action, plaintiffs challenge a decision by the defendant concerning plaintiff hospitals' allowable Medicare reimbursement for reporting periods ending from June 30, 1973, through November 30, 1975. Plaintiffs seek resolution of four separate controversies which involve four different types of costs. The Medicare Act requires the defendant to reimburse provider hospitals for the reasonable costs of treating Medicare patients. These costs, which the defendant disallowed, are:

(1) stock maintenance costs costs relating to annual reports, stockholders' meetings, mandatory filings with the Securities and Exchange Commission, proxies, and transfer of stock shares;
(2) costs relating to payment by certain plaintiff hospitals to Inhalation Therapy Service, Inc., for its contractual charges to them for respiratory therapy services;
(3) costs of certain plaintiff hospitals relating to interest expense, increased asset valuation, and increased goodwill arising from the purchase of 100 percent of the capital stock of corporations formerly owning and/or operating said plaintiffs; and
(4) costs relating to the payment of California and Florida franchise taxes.

 According to the defendant, the amount in controversy in this case is roughly 1.9 million dollars, and because the costs are of a recurring nature, the allowance of these costs will have a substantial impact on the federal health care program.


 This lawsuit arises under Title XVIII of the Social Security Act, commonly known as the "Medicare" program. 42 U.S.C. §§ 1395 Et seq. This legislation provides for federal reimbursement of medical care for the aged and certain disabled persons. It consists of two basic components: Part A, under which the instant case arises, provides hospital insurance benefits to the elderly, 42 U.S.C. §§ 1395-1395i-2, while Part B, 42 U.S.C. §§ 1395j-1395w, involves a voluntary supplemental medical insurance program. Part C of Title XVIII, 42 U.S.C. §§ 1395x-1395pp contains definitions and general provisions applicable to Parts A and B. These three components of Title XVIII establish a reimbursement scheme for funding a beneficiary's covered health costs.

 The hospital insurance benefits established under Part A are funded out of Social Security taxes. 42 U.S.C. § 1395i. Coverage under Part A extends to services rendered by providers as defined in 42 U.S.C. § 1395x(u), which included hospitals such as plaintiff hospitals. However, for a hospital, or any other qualified provider, to participate in the Medicare program it must file an agreement with the Secretary of Health, Education and Welfare in which it agrees, among other things, not to bill patients eligible under the Medicare program for covered services. 42 U.S.C. § 1395cc. In turn, the Act provides that the provider is to be reimbursed by the government for its reasonable cost of providing such services, or, if lower, the customary charges for such services. 42 U.S.C. § 1395f(b).

 A provider may be reimbursed for services rendered to Medicare beneficiaries directly by the Secretary, or it may appoint as a "fiscal intermediary" any qualified public or private agency to act as the Secretary's agent for the purpose of reviewing its claims and administering payments due it from the government. If a provider is dissatisfied with the fiscal intermediary's determination with respect to its claim for cost, it may request a hearing on this matter before the Provider Reimbursement Review Board. 42 U.S.C. § 1395Oo. The Board's determination is the final agency action unless the Secretary, on his own motion and within 60 days after the provider of services is notified of the Board's decision, reverses or modifies the Board's decision. 42 U.S.C. § 1395Oo (f)(1). The Secretary has delegated his authority to review the Board's decisions to the Administrator of the Health Care Financing Administration.

 The Medicare program is structured around the concept of reasonable cost. Under that concept, a provider is to be reimbursed only for the reasonable cost of providing medical services to Medicare beneficiaries. The Medicare statute sets forth only the broadest definitional parameters, requiring reasonable cost to be

. . . the cost actually incurred, excluding therefrom any part of incurred cost found to be unnecessary in the efficient delivery of needed health services . . . .

 42 U.S.C. § 1395x(v)(1)(A). Beyond this threshold requirement, reasonable cost is to be determined under regulations promulgated by the Secretary

 Id. These regulations must, however, take into account the direct and indirect costs necessary in the efficient delivery of covered services to Medicare beneficiaries so that such costs will not be borne by non-covered individuals. Conversely, the cost of rendering services to non-covered individuals is not to be borne by the Medicare Insurance Program.

 Pursuant to his statutory authority, the Secretary has promulgated regulations to reimburse providers for their reasonable costs incurred in rendering medical services to Medicare beneficiaries. 42 C.F.R. §§ 405.401-488. At issue in this case is whether certain costs claimed by plaintiff hospitals are allowable as reasonable costs under those regulations or the Medicare statute itself.

 After plaintiff hospitals initially submitted the costs at issue to their respective fiscal intermediaries, the intermediaries determined that these costs were not reimbursable under Medicare principles. They therefore disallowed these costs and adjusted plaintiff hospitals' cost reports to reflect this disallowance. Pursuant to 42 U.S.C. § 1395Oo (b), plaintiff hospitals, together with their parent corporation, American Medical International, took a group appeal to the Provider Reimbursement Review Board. In a written decision issued September 8, 1977, the Board affirmed certain of the cost determinations of the fiscal intermediaries and reversed others. On September 15, 1977, the Administrator sent written notification to the parties of his intent to review the Board's decision. On November 4, the Administrator rendered his decision reversing those points on which the Board had disagreed with the fiscal intermediaries and reinstating the fiscal intermediaries determinations in full. Plaintiffs pursue this court action pursuant to 42 U.S.C. § 1395Oo (f)(1), challenging the Administrator's disallowance of four distinct costs:

(1) stock maintenance costs
(2) related organization costs,
(3) 100% Stock purchase of fifteen of the plaintiff hospitals, and
(4) franchise taxes.


 Jurisdiction of this case lies in this Court pursuant to 42 U.S.C. § 1395Oo (f). That provision also provides that the administrative decision "shall be tried pursuant to the applicable provisions under Chapter 7 of Title 5 (the Administrative Procedure Act)." The Administrative Procedure Act (APA) sets forth the scope of judicial review:

To the extent necessary to decision and when presented, the reviewing court shall decide all relevant questions of law, interpret constitutional and statutory provisions, and determine the meaning or applicability of the terms of any agency action. The reviewing court shall
(1) compel agency action unlawfully withheld or unreasonably delayed; and
(2) hold unlawful and set aside agency action, findings, and conclusions found to be
(a) arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law;
(b) contrary to constitutional right, power, privilege, or immunity;
(c) in excess of statutory jurisdiction, authority, or limitations, or short of statutory right;
(d) without observance of procedure required by law;
(e) unsupported by substantial evidence in a case subject to sections 556 and 557 of this title or otherwise reviewed on the record of an agency hearing provided by statute; or
(f) unwarranted by the facts to the extent that the facts are subject to trial de novo by the reviewing court.
In making the foregoing determinations, the court shall review the whole record or those parts of it cited by a party, and due account shall be taken of the rule of prejudicial error.

 5 U.S.C. § 706. Thus, the Court will review the decision of the Administrator which deals with a basic question of law i. e., whether certain costs are "reasonable costs" within the meaning of 42 U.S.C. § 1395x(v)(1)(A) to determine whether it is "not in accordance with law." See Securities and Exchange Commission v. Chenery Corp., 318 U.S. 80, 63 S. Ct. 454, 87 L. Ed. 626 (1943); International Harvester v. Ruckelshaus, 155 U.S.App.D.C. 411, 478 F.2d 615 (1973); Environmental Defense Fund v. Corps of Engineers, 470 F.2d 289 (8th Cir. 1972), Cert. denied, 412 U.S. 931, 93 S. Ct. 2749, 37 L. Ed. 2d 160 (1973).

 In the course of its review, the Court must recognize that because of the expertise of the agency, administrative decisions should be given deference. See Red Lion Broadcasting Co. v. FCC, 395 U.S. 367, 381, 89 S. Ct. 1794, 23 L. Ed. 2d 371 (1969); Udall v. Tallman, 380 U.S. 1, 16, 85 S. Ct. 792, 13 L. Ed. 2d 616 (1965). This is especially appropriate when Congress explicitly vests broad discretion in the agency to interpret a statute. See Mourning v. Family Publications Service, Inc., 411 U.S. 356, 369, 93 S. Ct. 1652, 36 L. Ed. 2d 318 (1973). The Medicare Act provides that reasonable costs "shall be determined in accordance with regulations (promulgated by the Secretary) establishing the method or methods to be used, and the items to be included, in determining such costs for various types or classes of institutions." 42 U.S.C. § 1395x(v)(1) (A). Apparently, Congress recognized the difficulty in defining the imprecise concept of reasonable costs and, therefore, Congress consciously chose to establish general statutory guidelines and authorize the agency to prescribe regulations to carry out the Act. Springdale Convalescent Center v. Mathews, 545 F.2d 943, 951 (5th Cir. 1977). See Diplomat Lakewood, Inc. v. Califano, 453 F. Supp. 442 at 445 (D.D.C.1978).

 Plaintiffs, however, suggest that this Court deviate from the normal rule of deference in this case because the decision of the Provider Reimbursement Review Board differed in substantial part from the Secretary's final decision. As noted, review by this Court shall be "pursuant to the applicable provisions (of the Administrative Procedure Act)." 42 U.S.C. § 1395Oo (f). *fn1" It is well settled that, under the APA, final responsibility for rendering the decision lies in the agency itself, not in any subordinate hearing officers. This is because it is the agency, not any subordinate officers such as the Provider Reimbursement Review Board, that is charged with the responsibility for implementing and administering the agency's program. See Environmental Defense Fund, Inc. v. EPA, 160 U.S.App.D.C. 123, 489 F.2d 1247, 1253 (1973); Hamlin Testing Laboratories, Inc. v. United States Atomic Energy Commission, 357 F.2d 632, 637-38 (6th Cir. 1966); McClatchy Broadcasting Co. v. FCC, 99 U.S.App.D.C. 195, 239 F.2d 15, 18 (1956), Cert. denied, 353 U.S. 918, 77 S. Ct. 662, 1 L. Ed. 2d 665, 77 S. Ct. 664 (1957). As pointed out recently by the Court of Appeals for this Circuit,

When final decision making authority is vested in an administrative tribunal, the determinations of that body, and not the mere recommendations of its examiner, are the principal concern of a reviewing court. . . . And when the agency's final determination is adequately substantiated, that ...

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