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SAMARITAN HEALTH SERV. v. HECKLER

October 2, 1985

SAMARITAN HEALTH SERVICE, Plaintiff,
v.
MARGARET HECKLER, Defendant



The opinion of the court was delivered by: OBERDORFER

 This Medicare reimbursement dispute comes before the Court on plaintiff's appeal from a decision by the Provider Reimbursement Review Board ("the Board"). The parties have filed cross motions for summary judgment, and the issues have been fully briefed and argued. This memorandum addresses those motions.

 Plaintiff Samaritan Health Service ("Samaritan") owns and operates Good Samaritan Hospital and Desert Samaritan Hospital, short term, acute care hospitals located respectively in Phoenix, Arizona and Mesa, Arizona. Defendant Margaret Heckler is sued in her official capacity as Secretary of Health and Human Services. Plaintiff here claims that certain decisions made by the Board *fn1" in administrative proceedings pertaining to Good Samaritan and Desert Samaritan were not supported by substantial evidence; were arbitrary, capricious, and an abuse of discretion; and were violative of Samaritan's due process rights as guaranteed by the Fifth Amendment of the United States Constitution.

 Introduction

 Under the Health Insurance for the Aged and Disabled Act ("the Medicare Act"), 42 U.S.C. § 1395 et seq. and implementing regulations, providers of health care services to Medicare beneficiaries are reimbursed by the government, generally through private organizations which act as "fiscal intermediaries." The Medicare Act authorizes the Secretary to contract with such fiscal intermediaries to reimburse providers. 42 U.S.C. § 1395h.

 During the period in question, *fn2" providers such as Good Samaritan and Desert Samaritan were required by statute and regulation to submit "cost reports;" *fn3" the fiscal intermediaries would review, analyze, and, if necessary, audit the cost report to determine the amount of a provider's reimbursement. See 42 C.F.R. § 405.406 (1979). The fiscal intermediary would then issue a "notice of program reimbursement" setting forth the provider's Medicare reimbursement entitlements. 42 C.F.R. § 405.1803(a) (1979).

 A provider who is dissatisfied with the fiscal intermediary's determination has a right to a hearing before the Board if the amount in controversy is $10,000 or more. See 42 U.S.C. § 1395 oo (a); 42 C.F.R. § 405.1835 (1979). The Secretary is authorized to reverse, modify or affirm Board decisions; the Secretary's final decision (or the decision of the Board if the Secretary declines to review its holding) may in turn be appealed to the United States District Court. Under 42 U.S.C. § 1395oo(f), the agency's final action is reviewed under the judicial review provisions of the Administrative Procedure Act ("APA"), 5 U.S.C. § 701 et seq.

 This matter is before the Court on plaintiff's appeal from the Board's decision, left intact by the Secretary, in two administrative proceedings relating to Good Samaritan and Desert Samaritan. The Board decisions which plaintiff challenges followed hearings conducted before the Board on October 12, 13 and 14, 1983. In the first proceeding, pertaining to Good Samaritan Hospital, the Board considered Samaritan's appeal from reimbursement decisions by its fiscal intermediary, Blue Cross and Blue Shield Association of Arizona ("Blue Cross"), and resolved each of three issues in favor of Blue Cross and against Samaritan. In the second proceeding, pertaining to Desert Samaritan Hospital, the Board considered Samaritan's challenge to Blue Cross' reimbursement decision and resolved each of two issues in favor of Blue Cross and against Samaritan. *fn4" Samaritan claims here generally that the decisions reached by the Board were not supported by substantial evidence; were arbitrary, capricious and an abuse of discretion; and were violative of Samaritan's due process rights as guaranteed by the Fifth Amendment of the United States Constitution. Samaritan's more specific contentions and defendant's responses are examined below, addressing in turn each of the five issues raised in the Board proceedings.

 I.

 The first issue is Good Samaritan's reclassification in its 1977, 1978 and 1979 cost reports of certain costs related to care of newborns. The fiscal intermediary, Blue Cross, on September 30, 1981 issued a notice of program reimbursement which rejected Good Samaritan's attempt to reclassify costs in the manner described below. *fn5" The Board upheld Blue Cross' treatment of these costs, and Samaritan here appeals the Board's decision.

 A.

 Good Samaritan in 1977, 1978 and 1979 maintained three separate facilities for the care of newborn babies. Well babies -- those who had normal deliveries and no post-natal complications -- received care in the "Transitional Nursery." The "A-3 Nursery," a rooming-in arrangement that permitted mothers to be with their newborns, also was used for care of healthy newborns. Babies in the A-3 and Transitional nurseries received only custodial care, e.g., feeding, diapering and bathing. G.S.Ad.R. at 1041-45.

 The second facility was the "Border Area," *fn6" which housed infants who had developed problems in the A-3 or Transitional nurseries, or who no longer required the high level of care afforded in the Intensive Care Unit. The infants in the Border Area were monitored with sophisticated diagnostic equipment and attended by a specialized staff. Id. at 1047-49.

 The third facility was the Intensive Care Unit ("ICU"), which treated critically ill infants. The ICU featured advanced equipment and a highly specialized staff. Id. at 1049-53.

 Good Samaritan also operated a Pediatric Unit to care for ill infants and children. Newborns were occasionally admitted to the Pediatric Wing if they developed problems after being sent home. The care provided infants in the Pediatric Ward was essentially the same as the care received by infants in the Border and ICU areas. Id. at 1055-58.

 In 1975, Good Samaritan filed a cost report reclassifying the ICU and Border area days and costs as pediatric days and costs. See id. at 1776-77. It included these pediatric days and costs in its average cost per diem for purposes of Medicare reimbursement. *fn7" Good Samaritan also reclassified the A-3 nursery costs to the Transitional Nursery cost center in order to consolidate "routine nursery" costs. Good Samaritan determined these costs on the basis of revenues. Although Blue Cross did not question this methodology during cost reporting years 1975-78, Blue Cross on September 30, 1981 issued a notice of program reimbursement which rejected Good Samaritan's reclassification of these costs and its inclusion of them in calculating its average cost per diem. Id. at 0010.

 B.

 The Secretary has promulgated regulations detailing the calculation of reimbursable costs. During the cost years at issue, the regulation that set forth the method for calculation of "average cost per diem for routine services" provided in pertinent part that that figure was "computed by dividing the total allowable inpatient cost for routine services (excluding . . . nursery costs) by the total number of inpatient days of care (excluding . . . newborn days)." 42 C.F.R. § 405.452(b)(7) (1979) (emphasis added).

 Samaritan contends that Blue Cross and the Board err in relying on this provision to reject Samaritan's reclassification of its ICU and Border Area infant care costs and days as pediatric days and costs properly included in its average cost per diem and reimbursable as such. According to Samaritan, section 405.452(b)(7) excluded nursery costs from average per diem routine cost because "newborns do not receive any routine care and therefore do not generate any routine costs. It would be unfair to have routine costs apportioned to them when they create none." St. Mary of Nazareth Hospital Center v. Schweiker, 231 U.S. App. D.C. 47, 718 F.2d 459, 468 (D.C. Cir. 1983). Thus, according to ...


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