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AMERICAN MED. NURSING CENTERS-GREENBROOK v. HECKLE

September 26, 1984

AMERICAN MEDICAL NURSING CENTERS-GREENBROOK, Plaintiff,
v.
MARGARET M. HECKLER, Secretary, Department of Health and Human Services, Defendant



The opinion of the court was delivered by: GREEN

 This action arises under Title XVIII of the Social Security Act, 42 U.S.C. § 1395 et seq. (the Medicare program). Plaintiff American Medical Nursing Centers-Greenbrook ("Greenbrook") seeks judicial review of a final decision of the Secretary of Health and Human Services ("HHS") denying a Medicare reimbursement of punitive damages awarded, and related costs incurred, in a medical malpractice suit brought by the estate of a Medicare beneficiary. Under the applicable standard of review, that decision may be set aside if arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law. 42 U.S.C. § 1395oo(f)(1); 5 U.S.C. § 706(2)(A) (1977). Jurisdiction over plaintiff's appeal is vested in this Court pursuant to 42 U.S.C. § 1395oo.

 Before the Court are the parties' cross motions for summary judgment. The parties agree that no material facts are in dispute and direct the Court to a stipulation in the administrative record setting forth the relevant background facts. The contents of that stipulation are summarized below.

 Plaintiff Greenbrook is a skilled nursing facility located in St. Petersburg, Florida. At all times relevant to this action, Greenbrook was owned and operated by American Medical Affiliates, Inc. ("American") and was certified as a provider of skilled nursing facility services under the Medicare program. On March 18, 1980, a malpractice judgment comprised of $25,000 in compensatory damages and $750,000 in punitive damages was entered against American in a Florida state court. The judgment was based on actions and omissions by Greenbrook and its employees which resulted in the death of Charlotte Cohen, a Greenbrook patient. Mrs. Cohen was a Medicare patient at Greenbrook at the time of her death.

 
The Company will pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as damages because of:
 
. . . .
 
Injury to any person arising out of the rendering of or failure to render professional services by the Insured or any other person for whose act the Insured is legally liable. . . .

 The maximum liability under the excess liability policy was $6 million.

 American submitted a claim for the $750,000 punitive damage award under its policy with St. Paul, but St. Paul denied coverage, citing Florida public policy which prohibits coverage of punitive damage awards. American appealed both the Florida state court judgment and St. Paul's refusal to cover the punitive damages. The Florida appellate court affirmed the judgment and refusal to pay on July 31, 1981. On January 5, 1982, American paid to the estate of Charlotte Cohen the sum of $858,164, which represented punitive damages in the amount of $750,000 plus interest. American then sought reimbursement of that amount plus related costs totaling $329,633 from Medicare. American's Medicare fiscal intermediary, Aetna Life & Casualty ("Aetna"), disallowed the entire claim on the grounds that it involved an award of punitive damages. Greenbrook appealed the matter to the Provider Reimbursement Review Board ("PRRB"), which upheld Aetna's determination, ruling that punitive damages and related costs incurred in connection with a malpractice judgment are not reimbursable Medicare costs. Defendant, through the Deputy Administrator of the Health Care Financing Administration, reviewed and affirmed the PRRB's ruling. The Deputy Administrator's decision, dated July 14, 1983, is the final decision of defendant.

 In the proceedings below, the parties stipulated that the sole issue in this case is whether an award of punitive damages and related costs incurred by a provider of skilled nursing facility services in malpractice litigation are reimbursable under the Medicare program. The regulation here at issue is 42 C.F.R. § 405.452(a)(1)(ii) (1983) ("the Malpractice Rule") which provides for direct assignment to the Medicare program of malpractice losses and related direct costs involving Medicare beneficiaries:

 
If a provider pays allowable uninsured malpractice losses incurred by Medicare beneficiaries . . . as a result of an award in excess of reasonable coverage limits . . . such losses and related direct costs must be directly assigned to Medicare for reimbursement.

 The Medicare instructions implementing the Malpractice Rule define "malpractice loss" as

 
the liability arising from an injury to any person caused by a 'medical incident.' Medical incident means any act or omission in the furnishing of ...

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