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SAMARITAN HEALTH SERV. v. HECKLER

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA


October 2, 1985

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

The opinion of the court was delivered by: OBERDORFER

MEMORANDUM

 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 Samaritan, nursery costs are ordinarily not "routine" (and reimbursable as such) because they are associated with a lower level of services than is the norm for a hospital.

 Samaritan contends, however, that the regulations create an implied exception to section 405.452(b)(7)'s exclusion of nursery costs. Section 405.452(d)(2) (1979) defines "routine services" to mean "the regular room, dietary and nursing services, minor medical and surgical supplies, and the use of equipment and facilities for which a separate charge is not customarily made." Samaritan reasons that the services provided to the newborns in the Border and ICU areas, involving a higher level of care than services provided to newborns in the A-3 and Transitional Nurseries, *fn8" met this definition and, therefore, were "routine services" rather than usual nursery services. Samaritan argues that those costs thus were properly included in computing Good Samaritan's average per diem costs.

 In support of this proposition, Samaritan refers to the Secretary's Provider Reimbursement Manual, which gives instructions for completing cost reporting forms. The statistics that are used to compute the average cost per diem for the routine cost component of the Provider cost are requested on lines 4, 5 and 6 of the cost reporting forms. The Secretary advises:

 

An infant remaining in the hospital after the mother is discharged and not occupying a newborn bed in the nursery, or an infant delivered outside the hospital and later admitted to the hospital but not occupying a newborn bed in the nursery, or an infant admitted or transferred out of the nursery for an illness should be included in the total inpatient days reported on lines 4 and 6.

 Provider Reimbursement Manual II, § 304.3, Medicare and Medicaid Guide (CCH) P 9304C.

 The Secretary responds that the "regulations make no distinction between the levels of care [provided] in a nursery." G.S.Ad.R. at 0012 (emphasis added). The Secretary notes that 42 C.F.R. § 405.452(b)(7) flatly excluded "nursery" care from the per diem calculations and further notes that the areas in question were identified by plaintiff as "nursery" units. *fn9" See G.S.Ad.R. at 0728-0735. Moreover, the Secretary argues, the State of Arizona treats the facilities at issue as nurseries for state licensing purposes. *fn10"

 C.

 Samaritan, as the provider, bears the burden of proof in actions brought under 42 U.S.C. § 1395 oo (f), Diplomat Lakewood Inc. v. Harris, 198 U.S. App. D.C. 276, 613 F.2d 1009, 1018 (D.C. Cir. 1979). Samaritan must, in order to prevail, demonstrate that the agency action challenged was arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law or unsupported by substantial evidence in the record as a whole. Home Health Services of the U.S., Inc. v. Schweiker, 683 F.2d 353, 356 (11th Cir. 1982). If the agency action is not appropriately characterized in that fashion, "the reviewing court cannot reverse the findings of the agency on the basis that it would have decided the case differently." Id. at 357. Similarly, "[a] reviewing court may not set aside the agency's interpretation merely because another interpretation . . . seems better, so long as the agency's interpretation is within the range of reasonable meanings that the words of the regulation admit." Psychiatric Institute of Washington, D.C., Inc. v. Schweiker, 216 U.S. App. D.C. 14, 669 F.2d 812, 814 (D.C. Cir. 1981). See also Diplomat Lakewood, supra, 613 F.2d at 1018 ("We would be obliged to affirm the decision below if we could find a rational basis in the record for the Secretary's action").

 On the issue of the reclassification of costs, Samaritan has not sustained its burden of showing that the Secretary's action was arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law, or unsupported by substantial evidence. 42 C.F.R. § 405.452(b)(7) by its plain terms excluded "nursery costs" from the per diem calculation and it is uncontroverted that plaintiff itself identified the areas in question as "nursery" units. See G.S.Ad.R. at 0722-0735. Although plaintiff might prefer to introduce a multi-level definition of the term "nursery," the Secretary has not done so, *fn11" and "the agency's interpretation is within the range of reasonable meanings that the words of the regulation admit." Psychiatric Institute, supra, 669 F.2d at 814. *fn12"

 D.

 Plaintiff argues, however, that the Secretary is estopped from disallowing Good Samaritan's pediatric reclassification. Plaintiff claims that Blue Cross allowed such reclassification in earlier years, that Good Samaritan relied on Blue Cross' determination to its detriment, and that the Secretary improperly changed her position. Plaintiff's argument on this issue is unpersuasive. As the Supreme Court noted in Heckler v. Community Health Services of Crawford County, 467 U.S. 51, 104 S. Ct. 2218, 81 L. Ed. 2d 42 (1984):

 

As a recipient of public funds well acquainted with the role of a fiscal intermediary, respondent knew [that its intermediary] only acted as a conduit; . . . The relevant statute, regulations, and reimbursement manual, with which respondent should have been and was acquainted, made that perfectly clear. Yet respondent made no attempt to have the question resolved by [the Secretary]. It was satisfied with the policy judgment of a mere conduit.

 Id. at 2226 (note omitted). Community Services clarifies that plaintiff cannot rely on the determinations of its intermediary as grounds for an estoppel argument against the Secretary.

 There being no issue of material fact, an accompanying order will grant defendant's motion for summary judgment on this issue and deny plaintiff's motion. In view of the grounds on which this decision is based, it is unnecessary to reach the question whether plaintiff's documentation of its nursing costs was adequate to support reimbursement if its reclassification was legal.

 II.

 The second issue to be addressed is Good Samaritan's treatment of fees paid to "on call" anesthesiologists and surgeons in its cost report for 1979. Good Samaritan in 1979 paid certain anesthesiologists $200 per 12-hour shift and paid certain surgeons $400 per 24-hour shift to "stand by" to render emergency trauma services. *fn13" In its cost report for 1979, Good Samaritan claimed these "on-call" expenses as "allowable costs." *fn14" Blue Cross, after auditing Good Samaritan's 1979 cost report, rejected Good Samaritan's treatment of the fees paid to the on-call physicians, resulting in a reimbursement reduction of approximately $28,000. The Board affirmed Blue Cross' decision on this issue and Samaritan here appeals the Board's decision.

 A.

 The Secretary's Provider Reimbursement Manual, HIM-15, Medicare and Medicaid Guide (CCH) P 5889, sets at section 2109 the standard for reimbursement of emergency room standby costs. The version of section 2109.1 in force during the cost years in question expressly provided that:

 

the unmet guarantee, *fn15" as described in this section, is the only type of financial arrangement in which the Medicare program will recognize provider standby costs for payments made to emergency room physicians. Since the purpose of this section is to extend program reimbursement to those financial arrangements which meet all the conditions established in § 2109.2, the program does not recognize other types of contractual arrangements which fail to consider these requirements in determining the provider's allowable costs. The program does not recognize, as a reimbursable cost, any amount relating to unmet guarantee payments for physicians' services in provider settings other than as described in this section.

 Id. at § 2109.1 (emphasis in original). *fn16"

 Notwithstanding the plain language of section 2109, Samaritan contends that section 2108 *fn17" should instead govern allowability of its "on call" trauma physician fees. *fn18" In so contending, Samaritan relies on certain previous Board decisions and the statement by an HCFA administrator in a memorandum *fn19" relating to what Samaritan describes as an analogous case:

 

The provisions of Section 2109 would not be applicable to the Scottsdale Memorial Hospital arrangement [which Samaritan characterizes as "almost identical" to its own arrangement] you described. Section 2109 applies only to minimum guarantee agreements. . . . The Scottsdale arrangement cannot be considered to be a minimum guarantee agreement because the hospital's liability is not affected by the amount of the physician charges. It is a fixed compensation component and should be assessed against the hospital-based physician guidelines in section 2108ff.

 G.S.Ad.R. at 1981. *fn20"

 The Secretary, in response, cites the text of section 2109 and excerpts from several other memoranda present in the administrative record. Generally, the Secretary contends that section 2109 properly applies to standby costs and that section 2108 would not in any event justify Medicare reimbursement for fixed fees unrelated to billing charges unless some identifiable provider-component services were included in the fixed fee (which, she contends, is not true here).

  B.

 Once again, plaintiff has not sustained its burden of demonstrating that the Secretary's action was arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law, or unsupported by substantial evidence.

 The Secretary has broad authority under the Medicare Act to promulgate regulations defining the reasonable cost of providing services to Medicare beneficiaries. 42 U.S.C. § 1395x(v)(1)(A). Although that section provides that the Secretary shall "take into account both direct and indirect costs of providers of services," it further directs that the regulations should "exclude therefrom any costs, including standby costs, which are determined in accordance with regulations to be unnecessary in the efficient delivery of services." Id. (emphasis added). Pertinent regulatory provisions mandate that:

 

The determination of reasonable cost of services must be based on cost related to the care of beneficiaries of title XVIII of the Act. Reasonable cost includes all necessary and proper expenses incurred in rendering services. . . . It includes . . . normal standby costs. However, where the provider's operating costs include amounts not related to patient care . . . or . . . items or services substantially in excess of or more expensive than those generally considered necessary for the provision of needed health services. . . . Such amounts will not be allowable.

 42 C.F.R. § 405.451(c)(3)(1979) (emphasis added).

 According to the Secretary, Section 2109's unmet guarantee system is designed to insure that only necessary and proper standby costs will be incurred while simultaneously protecting against double payment for services rendered by physicians. The controlling version of section 2109 stated in plain terms that "the unmet guarantee . . . is the only type of financial arrangement in which the Medicare program will recognize provider standby costs for payments made to emergency room physicians," and Samaritan has not attempted to argue that it satisfied section 2109's requirements. As "[a] reviewing court may not set aside the agency's interpretation merely because another interpretation . . . seems better, so long as the agency's interpretation is within the range of reasonable meanings that the words of the regulation admit," *fn21" the Secretary's decision on this issue must be upheld.

 Although Samaritan's citation to the statement by an HFCA administrator does suggest the possible application of section 2108 analysis to emergency room fixed fee arrangements, see supra at 14, that suggestion is contradicted by the explicit language of section 2109. As discussed above, the controlling version of section 2109 stated that "the unmet guarantee . . . is the only type of financial arrangement in which the Medicare program will recognize provider standby costs for payments to emergency room physicians." The Secretary points to other memoranda present in the administrative record which support her interpretation. In one such memorandum, it is unequivocally stated that "the only type of physician standby costs which are allowable are those which meet the limited situations described in section 2109ff of the Provider Reimbursement Manual (PRM)." *fn22"

  Finally, the cases cited by Samaritan in support of its claim that section 2108 should instead govern the costs at issue are not persuasive. *fn23" The Secretary notes that the decisions of the Board are not by regulation made binding except between the parties to the hearing before the Board, see 42 C.F.R. § 405.1871(b) (1984), and further points out that these cases were not part of the record before the Board. In any event, the two cases cited by plaintiff, *fn24" like the excerpts from HCFA memorandum cited by plaintiff, support a result contradicted by the plain language of the controlling version of § 2109. In light of that plain language, the Secretary's decision to apply § 2109 must be upheld.

 As it is concluded that the Secretary properly applied section 2109 in analyzing Samaritan's claim for reimbursement of the on call costs, it is unnecessary to resolve the question of whether Samaritan's documentation of those costs was sufficient to permit reimbursement under section 2108. *fn25" As section 2109 properly applies and Samaritan does not claim that it has satisfied the requirements of that section, an accompanying order will grant the Secretary's motion for summary judgment on this issue.

 III.

 The third issue to be addressed is Samaritan's claims for reimbursement of costs from the "Definitive Observation Units" operated by both Good Samaritan and Desert Samaritan. *fn26" Blue Cross, after auditing the 1977, 1978, and 1979 cost reports, issued notices of program reimbursement that rejected Good Samaritan's and Desert Samaritan's treatment of these costs. The result was a reimbursement reduction for Good Samaritan of $58,000 in 1977, $87,000 in 1978, and $105,000 in 1977. G.S. Ad. R. at 0008. The reimbursement reduction for Desert Samaritan was $48,000 in 1977, $73,000 in 1978, and $82,000 in 1979. Desert Samaritan Administrative Record ("D.S.Ad.R.") at 0009. The Board affirmed Blue Cross' decision on this issue and Samaritan here appeals the Board's decision.

 A.

 Good Samaritan and Desert Samaritan in 1977, 1978 and 1979 operated "Definitive Observation Units" ("DOU's"). A DOU is a sub-intensive care unit designed to provide sophisticated treatment for critically ill patients without subjecting them to negative environmental factors commonly found in the Intensive Care Unit ("ICU") and the Coronary Care Unit ("CCU"). The DOU's consisted of semi-private rooms intended to facilitate rehabilitation of cardiac patients; they also featured high levels of monitoring intervention care, although the nurse-to-patient ratios fell in between the ratios for ICU and routine care.

 Before the Board hearings began, Blue Cross entered into stipulations with Good Samaritan and Desert Samaritan in which it was agreed that (1) the DOU's were in a hospital; (2) both hospitals had specific written policies for their DOU's; (3) the DOU's in both hospitals were physically identifiable as separate from general patient care areas; and (4) care required in each DOU was extraordinary. *fn27" Based on 42 C.F.R. § 405.452(d)(10), the stipulation left for the Board the question of whether care was provided in the DOU's "on a concentrated and continuous basis." The Board affirmed Blue Cross' conclusion that care was not provided on a concentrated and continuous basis *fn28" and Samaritan here appeals the Board's decision.

 B.

 Samaritan argues that, contrary to the Board's decision, the care provided in its DOU's was "on a concentrated and continuous basis" that met the requirements of 42 C.F.R. § 405.452(d)(10). Samaritan contends that (1) the stipulation entered into by the fiscal intermediary and the hospitals stated that the care was "extraordinary;" (2) the Medicare regulations do not define the phrase "on a concentrated and continuous basis" in a manner that would preclude Samaritan's claims; (3) the Board's analysis and reliance on nursing statistics was incomplete and erroneous; and (4) Blue Cross and the Board erred by "retroactively" applying Section 2202.7 of the Provider Reimbursement Manual ("HIM-15"). *fn29"

  The Secretary contends that the applicable Medicare regulation affords "special care unit" status only to those units which provide care equivalent to a hospital's highest level of care. The Secretary further contends that § 2202.7's definition of "special care unit," based in part on nursing services, has been upheld in this Circuit. *fn30" According to the Secretary, that definition precludes classification of Samaritan's DOU's as "special care unit" once Samaritan's nurse-patient ratios are examined.

 C.

 On this issue, as on the issues discussed above, Samaritan has not sustained its burden of demonstrating that the Secretary's decision was arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law, or unsupported by substantial evidence. Substantial evidence in the record supports the Secretary's conclusion that the level of care provided in the DOU's did not rise to the level provided in the hospitals' ICU's or CCU's and, accordingly, the DOU units were not appropriately designated as "special care units" for purposes of cost reimbursement.

 Although Blue Cross and Samaritan did, prior to the Board proceedings, stipulate that the care required in the DOU's was "extraordinary," 42 C.F.R. § 405.452(d)(10) (1979) (as worded during the cost years at issue) further required that such care be provided " on a concentrated and continuous basis." (Emphasis added). Substantial evidence in the record supports the Board's conclusion that the levels of care in the DOU's did not satisfy that requirement as interpreted by the Secretary and this Circuit.

 The Secretary's Provider Reimbursement Manual, HIM-15, at section 2202.7 clearly indicates that nurse-patient ratios are appropriately examined to determine whether units such as Samaritan's DOU's should be accorded "special care unit" status for reimbursement purposes. *fn31" That section further suggests that if patients are generally transferred to the unit in question from an established special care unit (as appears to have been the case at least with respect to Desert Samaritan), the unit in question would generally not qualify as an SCU.

 The record clarifies that the level of care in the DOU's exceeded that in routine care units; it is undisputed, however, that the levels of care did not rise to the levels found in the ICU's and CCU's. n32 Furthermore, Desert Samaritan had a written policy which provided that: "admissions to Intermediate Care Unit (DOU) shall be from ICU or CCU for patients requiring a lesser degree of intensive care than is available in the units, but shall require more care than is available on the general services." D.S.Ad.R. at 0012 (emphasis added). In short, the record substantially supports the Secretary's conclusions that, based on nurse-patient ratios and patient transfer policies, the DOU's were not providing the "concentrated and continuous care" required for designation as a special care unit. n32 Samaritan in its Statement of Points and Authorities in Support of its Motion for Summary Judgment summarized the nurse-patient ratios in Good Samaritan Hospital and Desert Samaritan Hospital in 1979: Desert Samaritan Good Samaritan Routine 1:4.4 1:3.7 DOU 1:2.2 1:2.4 CCU 1:1.6 1:1.2 ICU 1:1.4 1:1.1

19851002

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