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ST. FRANCIS HOSP., INC. v. CALIFANO

October 31, 1979

ST. FRANCIS HOSPITAL, INC., Plaintiff,
v.
Joseph A. CALIFANO, Jr., Secretary of Health, Education and Welfare, Defendant.



The opinion of the court was delivered by: GREEN

MEMORANDUM OPINION

Introduction

 This matter is before the Court on defendant's motion to dismiss, or in the alternative, for summary judgment, and plaintiff's cross-motion for summary judgment. Upon consideration of these motions, the oppositions filed thereto, the oral arguments of counsel, and the entire record herein, the Court concludes that plaintiff has stated a claim upon which relief can be granted, that there are no genuine issues of material fact and that both motions for summary judgment should be denied in part and granted in part.

 The plaintiff, a non-profit corporation, is a 248-bed general, short-term hospital. In accordance with an agreement entered into with the Secretary of Health, Education and Welfare (Secretary) under the provisions of 1866 of the Social Security Act, 42 U.S.C. § 1395 Et seq., plaintiff hospital was certified as a participating provider under Title XVIII of the Social Security Act, popularly referred to as "the Medicare program".

 At all times material hereto, Joseph Califano, sued in his official capacity, was the Secretary of Health, Education and Welfare. He is consequently the named defendant but has been succeeded by Patricia Harris.

 Payment to providers of services under Medicare is commonly carried out by fiscal intermediaries pursuant to contract with the Secretary. At the end of each fiscal year, a provider of services submits a Medicare cost report to its Intermediary showing the costs incurred by it during the fiscal year. As a participating provider of services under the Medicare program, plaintiff submitted bills for the cost reporting period ending December 31, 1975 and was denied reimbursement by its Intermediary, Blue Cross of Wisconsin, for charges stemming from four specific areas. The dispute concerned the following:

 
b. The Intermediary determined that patient telephones were provided for patient convenience since a nurse signalling system is in operation at the hospital and that telephones, therefore, were not an allowable expense.
 
c. The Intermediary determined that the refinancing of certain loans created excess funds, since the loan proceeds exceeded the amount of the existing debt. The Intermediary found that the interest expense on these excess funds was unnecessary and disallowed it. Further, the Intermediary determined that the excess loan proceeds also created excess funds that were used to fund depreciation. Therefore, interest expense derived from these funds was disallowed.
 
d. The Intermediary determined that an arbitrary amount of overhead was allocated to nonpaid workers' meals. Therefore, it calculated the overhead based on the percentage of direct cost of these meals divided by total cafeteria costs times the cost centers allocated to the cafeteria.

 On February 25, 1977, the Intermediary issued a Notice of Program Reimbursement to the plaintiff for the cost reporting period ending December 31, 1975. Thereafter, pursuant to 42 U.S.C.A. § 1395Oo and 42 CFR § 405.1841, plaintiff appealed the denial of reimbursement to the Provider Reimbursement Review Board (PRRB). The PRRB has been established by Congress to adjudicate disputes between the Secretary and providers over reimbursement under the Medicare Act.

 On June 14, 1978, a hearing was held before the PRRB. At the hearing, the Intermediary proposed to revise its adjustment and treat one-third of the cost of the meals as an allowable cost. The Intermediary based this formula on the assumption that lay employees eat one meal per day in the plaintiff's cafeteria, and that nonpaid workers eat three meals per day in the cafeteria. Since the cost of meals to lay employees is subsidized as a fringe benefit, and since the nonpaid workers are required to be treated on an equal basis with the regular employees, it was found that the nonpaid workers would receive the proper amount if one-third of their meal costs are treated as allowable for Medicare reimbursement.

 On August 29, 1978, the PRRB rendered a decision holding that pursuant to the Medicare Act and regulations: (1) the plaintiff's cost of operating a health information service is a public relations expense directly or indirectly related to patient care; (2) a portion of the cost of telephones in patient rooms in excess of the per call charge is not an allowable cost; (3) the amount of a loan in excess of the amount needed to refinance existing debt was not necessary; (4) the cost of sisters' meals as a component of sisters' maintenance is more than the cost of equivalent fringe benefits of other employees.

 On October 27, 1978, the Secretary, through the Health Care Financing Administration, reviewed the decision of the PRRB and affirmed the PRRB on all issues except that pertaining to the cost of the plaintiff's health information service, which it reversed. The plaintiff received notice of the PRRB decision on November 6, ...


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