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NATIONAL ASSN. OF PATIENTS ON HEMODIALYSIS & TRANS

June 11, 1984

National Association of Patients on Hemodialysis and Transplantation, Inc., Renal Physicians Association and Bio-Medical Applications of Vero Beach, Inc.
v.
Margaret M. Heckler, Secretary of Health and Human Services and Carolyne K. Davis, Administrator, Health Care Financing Administration



The opinion of the court was delivered by: GREEN

 In Count I of the complaint, plaintiffs seek to prevent implementation of the End-Stage Renal Disease program's "Prospective Reimbursement" regulations, 48 Fed. Reg. 21254 et seq. (May 11, 1983). In Count II plaintiffs seek to prevent implementation of the End-Stage Renal Disease program's "Secondary Payment" regulations, 48 Fed. Reg. 14802 et seq. (April 5, 1983). The matter is now before the Court on the parties' cross-motions for summary judgment as to each of the counts of the complaint. *fn1"

 I. BACKGROUND

 A. End-Stage Renal Disease2

 End-stage renal disease, also called chronic renal failure or chronic uremia, is the permanent and irreversible breakdown of the capacity of the kidneys to carry on their function of the disposal of toxic wastes. Approximately 70,000 Americans suffer from this disease, which is fatal unless the patient receives a kidney transplant or commences regular dialysis.

 The two basic types of dialysis treatment are hemodialysis and peritoneal dialysis. Hemodialysis is a treatment process in which the patient's blood is circulated through an artificial kidney machine that filters out toxic wastes before returning the blood to the body. Standard treatment requires the patient to be dialyzed for about four hours, three times a week. Peritoneal dialysis is a treatment process in which the patient's blood is filtered through the peritoneal membrane in the patient's abdominal cavity. Hemodialysis is the more common of the two methods; peritoneal dialysis is marked by a higher rate of infection, complications and resulting hospitalization.

 Most patients begin dialysis on an inpatient basis while hospitalized for acute kidney failure. Once the patient's condition stabilizes, he or she may be treated as an outpatient. Outpatient dialysis may take place either at a hospital-based or independent outpatient dialysis facility, or at home. Approximately 83 percent of all dialysis patients receive maintenance dialysis in a facility. Of that 83 percent, 47 percent of in-facility dialysis takes place in hospitals and 53 percent in independent facilities which serve renal patients exclusively. The remaining 17 percent of all dialysis patients dialyze at home. Home dialysis is generally agreed to be substantially less expensive than in-facility dialysis.

 B. Statutory and Regulatory Scheme

 In 1965, Congress established the Medicare Program, Title XVII of the Social Security Act (Act), 42 U.S.C. §§ 1395-1395pp (1976), to provide funds for medical care for the aged and disabled. The program consists of two parts. Part A, 42 U.S.C. §§ 1395c-1395i, the hospital insurance program, pays for inpatient hospital services and related post-hospital services. Institutional "providers of services" *fn3" under Part A have generally been reimbursed on the basis of "reasonable cost." 42 U.S.C. §§ 1395f(b), 1395x(v)(1). Part A covers all individuals eligible for monthly Social Security benefits and is funded by Social Security taxes. 42 U.S.C. §§ 1395c, 1395i. Part B, 42 U.S.C. §§ 1395j-1395w, is a voluntary supplemental insurance program in which beneficiaries enroll to establish entitlement to benefits. Part B generally pays for "reasonable charges" of physicians' services and other health services, such as x-rays and laboratory tests, subject to deductible and coinsurance requirements. 42 U.S.C. §§ 1395k, 1395l, 1395x(s). *fn4" Part B is funded by monthly premiums paid by beneficiaries and matching federal contributions. 42 U.S.C. §§ 1395j, 1395r, 1395s. Part B benefits are administered by insurance carriers pursuant to contracts with HHS. 42 U.S.C. § 1395u. The carriers set reasonable charges for Part B services. Under the coinsurance feature, Medicare pays 80 percent of reasonable charges for covered services and the beneficiary pays the remaining 20 percent. 42 U.S.C. § 1395l(a)(1).

 The End-Stage Renal Disease (ESRD) program was established by Section 299I of the Social Security Amendments of 1972, 42 U.S.C. §§ 426(f), (g). That law extended Medicare coverage to individuals who suffer from permanent kidney failure, require dialysis or kidney transplantation, and meet certain other eligibility requirements. HHS established special reimbursement rules for the ESRD program within the general Medicare framework of reasonable cost reimbursement for providers and reasonable charge reimbursement for physicians and suppliers. 42 C.F.R. §§ 402(g), 405.502(e), 405.541-405.544. Under these rules, which were in effect until August 1, 1983, hospital dialysis facilities were paid 80 percent of the "reasonable cost" of providing dialysis treatment up to 80 percent of $138, the maximum amount available per treatment. Independent dialysis facilities were reimbursed 80 percent of the "reasonable charge" up to a maximum 80 percent of $138 per treatment. *fn5" This system provided an economic incentive to independent facilities to minimize the costs of dialysis treatment. See Proposed Regulations Governing Reimbursement Under the End-Stage Renal Disease Program, Hearings before the Subcommittee on Oversight of the Committee on Ways and Means, House of Representatives, 97th Cong., 2d Sess. at 180-81 15, (Apr. 22, 1982) (Statement of Carolyne K. Davis). However, dialysis facilities could request reimbursement in excess of the maximum amount if they submitted documentation showing that their actual costs exceeded $138 per treatment. *fn6"

 In response to the rising costs of the ESRD program, Congress enacted the End-Stage Renal Disease Program Amendments of 1978, Pub. L. No. 95-292, 42 U.S.C. § 1395rr(b)(2)(B). This legislation directed the Secretary to develop new methods and procedures to determine the costs incurred by dialysis facilities and to determine "on a cost related or other economical and equitable basis" the amount of payments to be made for services furnished by dialysis facilities. Congress also directed the Secretary to develop a system for classifying comparable providers and facilities and for the setting of prospective reimbursement rates. These amendments specifically authorized the Alternative Method of physician reimbursement and added a number of other provisions designed to encourage less expensive home dialysis treatments, and transplantation. See S. Rep. No. 714, 95th Cong., 2d Sess. 1-5 (1978), reprinted in [1978] U.S. Code Cong. & Ad. News 848-852.

 In the Omnibus Budget Reconciliation Act of 1981, Pub. L. No. 97-35, 42 U.S.C. § 1395rr(b)(3)(7), Congress again amended the law to direct the Secretary to develop a method of prospective reimbursement that would encourage the use of home dialysis. Specifically, Congress provided that such a system must either reimburse home dialysis and in-facility dialysis under composite rates that combined payment for home and in-facility dialysis, or use some other method that would be determined to be more efficient and would promote home dialysis more effectively. *fn7" Congress assumed that under such a composite rate system facilities would have a greater economic incentive to treat patients at home. The provisions governing reimbursement for physicians' services were also amended to promote efficient delivery of dialysis services and to provide incentives for the increased use of home dialysis. 42 U.S.C. § 1395rr(b)(3).

 Another section of the Omnibus Budget Reconciliation Act of 1981 amended portions of the Social Security Act to provide that Medicare benefits based solely on the ESRD program are secondary to benefits payable under employer group health plans. The law provides that the Secretary may not pay benefits on behalf of ESRD beneficiaries who are covered under employer group health plans, if payment under such a plan has been made or "the Secretary determines will be made . . . as promptly as would otherwise be the case if payment were made by the Secretary under this title." 42 U.S.C. § 1395y(b)(2)(A).

 C. The Challenged Regulations

 1. Reimbursement of Facilities and Physicians (Reimbursement Regulations)

 On May 11, 1983, defendants issued new regulations for reimbursement of facilities and physicians under the ESRD program. 48 Fed. Reg. 21254 et seq. (May 11, 1983), amending 42 C.F.R. Part 405. The regulations, effective August 1, 1983, establish prospective reimbursement rates for dialysis services whether furnished at home or in a hospital-based or independent dialysis facility. They also establish a monthly capitation method of payment for physicians' services to ESRD patients, under which each participating physician will receive a flat monthly payment, based upon a presumed 12.4 dialysis sessions per patient per month and a monthly examination.

 HCFA determined that the rational median cost of all in-facility dialysis, including independent facilities and hospital-based facilities, was $125, and that the national median cost of home dialysis for all patients was $97. HCFA used these cost figures to develop composite reimbursement rates. Under the new system, each facility will receive the same payment for in-facility dialysis and for home dialysis performed by patients under its direction. The level of reimbursement, $127 per treatment for independent facilities and $131 for hospital-based facilities, is deliberately set below the prior rate of $138 per session, but because the facility receives more than the actual cost of home dialysis for each treatment, it should be adequately compensated. This cross-subsidy is intended to promote efficiency in the provision of services and increased use of home dialysis. 48 Fed. Reg. at 21260-21268.

 The new regulations also limit the circumstances under which facilities may obtain "exceptions" to the composite rates, and abolish the target rate reimbursement system and the program under which equipment costs were reimbursable at 100 percent.

 With respect to reimbursement for physicians' services, the new regulations eliminate the Initial Method. In addition, they change the level of reimbursement under the remaining Alternative Method by applying a single base multiplier to physicians' services rendered to in-facility patients and for services rendered to home patients, instead of the previously used "conversion factors".

 Plaintiffs contend that the reimbursement regulations and payment methodology are based on incorrect data concerning the costs of dialysis services and incorrect assumptions concerning the capacity of dialysis facilities to alter their costs for dialysis services. They contend, further, that the new system for reimbursing physicians is inconsistent with Congressional intent and founded upon incorrect assumptions concerning the nature of physicians' services provided to dialysis patients. These defects allegedly render the new reimbursement regulations "arbitrary and capricious" under the Administrative Procedure Act (APA), 5 U.S.C. § 706(2)(A), and not in accordance with the Congressional directive to defendants to promulgate regulations producing efficient, economical and equitable delivery of dialysis services.

 2. Secondary Payment Regulations

 Plaintiffs allege that Section 2146 of the Omnibus Budget Reconciliation Act of 1981 requires that conditional primary payments be made except when there has been payment by an employer group health plan or a prior determination by the Secretary that payment under an employer group health plan will be as prompt as if payment were made by the Secretary under Medicare. The Secondary Payer Regulations do not provide for such determinations by the Secretary, and thus, plaintiffs maintain, contravene the statute and, violate the APA.

 II. JURISDICTION

 Defendants maintain that this Court lacks jurisdiction over plaintiffs' claims, which arise under Part B of the Medicare Act, for two separate reasons. First, they argue that jurisdiction is squarely precluded by United States v. Erika, 456 U.S. 201, 72 L. Ed. 2d 12, 102 S. Ct. 1650 (1982). Second, they argue that jurisdiction is additionally precluded by the Social Security Act, 42 U.S.C. § 405(h) as incorporated into the Medicare Act by 42 U.S.C. § 1395ii.

 Erika8 held that both the language and legislative history of 42 U.S.C. § 1395ff *fn9" evince a clear Congressional intent to foreclose judicial review of adverse determinations of benefit amounts made by private insurance carriers under Part B. 456 U.S. at 208-09.

 Part B carrier determinations are subject to review by a hearing officer designated by the carrier where the amount in controversy is $100 or more. 42 U.S.C. § 1395u(b)(3)(C). The hearing officer's decision is final and binding on all parties. 42 C.F.R. § 405.835. Congress explicitly provided for review by the Secretary of whether an individual is entitled to benefits under Part A or Part B and of the determination of the amount of benefits under Part A. 42 U.S.C. § 1395ff(a). Judicial review of the Secretary's decision is available only where the dispute relates to eligibility to participate in either Part A or Part B, or when the dispute concerns the amount of benefits to which they are entitled under Part A. 42 U.S.C. § 1395ff(b). Thought to be generally smaller than those under Part A, Part B amount determinations were made unreviewable "in order to avoid overloading the courts with quite minor matters." 118 Cong. Rec. 33992 (1972) (statement of Senator Bennett).

 However, plaintiffs' claims involve the Secretary's administration of the Part B program rather than the validity of any particular benefit determinations, defendants' characterization notwithstanding. Indeed, defendants' argument has been expressly rejected recently by the United States Court of Appeals for this Circuit in College of American Pathologists v. Heckler, 734 F.2d 859 (D.C. Cir. 1984); by the Sixth Circuit in Michigan Academy of Family Physicians v. Blue Cross and Blue Shield of Michigan, 728 F.2d 326 (6th Cir. 1984); and by the Fourth Circuit in Starnes v. Schweiker, 715 F.2d 134 (4th Cir. 1983), cert. granted, 467 U.S. 1223, 104 S. Ct. 2673, 81 L. Ed. 2d 870 (1984). In College of American Pathologists, plaintiffs challenged HHS regulations that established qualifications for Medicare reimbursement for services rendered by clinical pathologists in hospital laboratories. The Court upheld the jurisdiction of the District Court, finding no legislative intent to preclude judicial review "of a challenge to the broad regulatory framework adopted by the Secretary. The legislative history cited in Erika only reveals an intent to preclude review of Part B amount determinations." Id. at 863 (emphasis in original).

 In Michigan Academy, plaintiffs challenged HHS' classification for reimbursement purposes of certain family physicians separately from other physicians with comparable qualifications. Although defendants had alleged that the suit involved simply a reimbursement dispute, the Court determined that plaintiffs were "challenging the overall mechanism for determining the amounts of reimbursements, not the actual value of any particular reimbursement . . . Section 1395ff, by its terms as interpreted by the Supreme Court [in Erika ], precludes judicial review of decisions by the carrier concerning amounts of reimbursements, but is silent on the question of reviewing decisions of the Secretary made in implementing the overall Medicare part B program." 728 F.2d at 330. The Court refused to construe that silence as an affirmative restriction on judicial review. Id. at 330-331.

 And, in Starnes, plaintiffs brought procedural, substantive and constitutional challenges to the establishment and implementation by the Secretary of nationwide regional ceilings or caps on Part B reimbursements for computerized tomography head scans. The Court held that the language of section 1395ff indicates that Congress sought to preserve judicial review of actions performed by the Secretary, as distinguished from actions delegated to private carriers under the Medicare Act. 715 F.2d at 138. See also Colonial Penn Ins. Co. v. Heckler, 721 F.2d 431 (3rd Cir. 1983) (permitting review to challenge regulations implementing legislation making Medicare benefits secondary to insurance coverage).

 In the instant case, while the eventual result of litigation could be an increase in amounts of reimbursement, plaintiffs seek to enforce lawful conduct on the part of the Secretary in her administration of the ESRD program, and not to overturn any adverse determination of a particular claim for reimbursement. Preclusion of jurisdiction over this considerable case would not further the legislative policy cited in Erika of relieving the courts from the burden imposed by relatively insignificant lawsuits. Rather, Congress could not have intended to imbue the Secretary with "unbridled discretion to promulgate any regulation she chose." Michigan Academy v. Blue Cross, 728 F.2d at 331. The complete absence of judicial oversight over an entire regulatory program would raise a serious constitutional issue concerning an improper delegation of legislative power to the Executive. *fn10"

 Defendants cite Schweiker v. McClure, 456 U.S. 188, 72 L. Ed. 2d 1, 102 S. Ct. 1665 (1982), decided the same day as Erika, which upheld the carrier administrative appeals mechanism against constitutional attack, for the proposition that the absence of judicial review does not render the Medicare statute constitutionally infirm. However, the action by the Court in Schweiker v. McClure, is evidence of the reviewability of the constitutional challenge to the benefit determination procedures at issue in that case. See Michigan Academy v. Blue ...


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