their actual, reasonable costs. 42 U.S.C. §§ 1395f(b), 1395x(v)(1)(A).
There is no dispute that malpractice costs as a generic category of expenses are allowable under the statute and regulations. The allowability of various methods for covering malpractice losses is discussed in the Manual. PRM § 2162. In one of the decisions here under appeal, PRRB noted that "costs for malpractice insurance is a common and accepted occurrence in the hospital industry." Rec. II at 14. Indeed, reimbursement for the membership fees and regular assessments paid by plaintiffs to FPCF have been allowed, Rec. I at 1094, 1103, which could only have occurred if the intermediary agreed that participation in the Fund was a prudent management decision.
The crux of defendant's argument against reimbursing plaintiffs for these IBNR expenses is that they do not constitute reasonable costs under the statute or regulations. Three reasons are proffered as to why these costs are not reasonable. The most significant of these is that the IBNR expenses are not actual costs but, instead, are speculative liabilities. Second, defendant contends that these expenses are not necessary costs related to patient care. Third, defendant argues that these expenses fail to satisfy the prudent buyer requirement and are thus not reimbursable. These will be addressed seriatim.
A. Actual Costs Versus Speculative Liabilities
As stated above, under Medicare's former cost-based reimbursement system, costs that are reasonable, necessary, and related to patient care shall be allowed. 42 C.F.R. § 413.9. Implicit in this notion is the idea that the cost be an actual expense. Purely speculative liabilities may not be reimbursed. Gosman v. United States, 215 Ct. Cl. 617, 573 F.2d 31, 38 (Ct. Cl. 1978) (advertising expenses only tangentially or speculatively related to patient care not reimbursable); Medical Rehabilitation Services v. Bowen, [1990 Transfer Binder] Medicare & Medicaid Guide (CCH) P38201, at 21,113-14 (E.D. Mich. Sept. 6, 1989) (speculative expenses which may never come due not reimbursable).
Defendant argues that plaintiffs' IBNR payments are speculative because they merely represent an estimate of costs of possible future claims. IBNR costs are obviously always speculative to the extent that they cover claims which have yet to be reported. However, it cannot be true that the inability to quantify the amount of IBNR liability with exactitude renders the costs speculative. Defendant admits as much in his Statement of Facts:
Since the FPCF fee for membership was relatively nominal, the initial fund for each year was not actuarially sound. As a result, deficiencies for some years inevitably would have to be covered through later assessments. . . .
Defendant's Motion at 7 (emphasis added and citation omitted). The Secretary has thus conceded the certainty of the need for additional payments relating to FPCF years 1976-1982.
We find that plaintiffs' costs here were actual and not speculative. Plaintiffs actually paid FPCF millions of dollars to cover, inter alia, the "special assessments," or IBNR costs. Plaintiffs' Statement of Material Facts Not in Dispute ("Plaintiffs' Statement of Facts") at PP11-14. This case is distinguishable from those listed above where reimbursement was not permitted because the costs were deemed speculative. In Gosman, the expenditures in question were for advertising, which can hardly be considered as being related to patient care as integrally as malpractice insurance is. 573 F.2d at 38. In Medical Rehabilitation Services, the disallowed expenses had not actually been paid by the provider; they were merely evidenced by a promissory note and thus truly were speculative. P38,201 at 21,113. Here, of course, plaintiffs actually paid the special assessments.
The instant case is more analogous to Medical Society of South Carolina d/b/a Roper Hospital v. Heckler, [1984-1 Transfer Binder] Medicare & Medicaid Guide (CCH) P33,651 at 10,088-90 (D.S.C. Feb. 27, 1984), which involved reimbursement of sick leave benefits, accrued annually by plaintiff's employees but rarely paid out within one year of accrual. That court found that reimbursement of accrued sick leave was not speculative since there was an extremely high probability that all accrued sick leave benefits would ultimately be paid out. Id. Here, the case for reimbursement is even stronger because the expenditure for IBNR costs was actually made by these hospitals. Thus the payments were not speculative to plaintiffs; they paid actual money to cover actuarily determined future liability.
Defendant's decision was therefore arbitrary and capricious because it distinguished between different types of malpractice costs (IBNR versus non-IBNR) without any basis. In addition, the Medicare statute was violated because defendant refused to reimburse plaintiffs for their reasonable costs associated with the program.
B. Necessary Costs Related to Patient Care
Only costs that are reasonably related to patient care, 42 C.F.R. § 413.9, and necessary in the efficient delivery of needed health services, 42 U.S.C. § 1395x(v)(1)(A), are reimbursable by Medicare.
Defendant argues that these IBNR expenses were not necessary because they were not malpractice insurance costs but "voluntarily-assumed expenses." Defendant's Motion at 23. As discussed supra, the IBNR costs were paid pursuant to settlement agreements between plaintiffs and FPCF. Also included in these agreements were terms allowing past assessments to be paid without interest and ending the hospitals' participation in on-going litigation. Plaintiffs' Statement of Facts at P12.
The distinction defendant attempts to make here between a necessary cost and a voluntary cost is of no consequence. Initially, it must be recalled that reimbursement was allowed for the non-IBNR retrospective assessments, which means that these were necessary costs. All that distinguishes these assessments from the IBNR costs is exactly when the hospitals had a legal obligation to pay them. Because, as defendant has conceded, the IBNR costs were "inevitable," plaintiffs would ultimately have had to pay their share of the FPCF deficits through what would have presumably been numerous additional retrospective assessments.
Thus, the only way these costs could be considered voluntary is to ignore the fact that a legal obligation would eventually arise whereby plaintiffs would owe FPCF these insurance costs. We find that the disallowed IBNR costs were just as necessary as the retrospective assessment costs for which reimbursement was permitted.
Defendants also contend that these costs were unrelated to patient care. We disagree, finding that the IBNR costs were related to patient care for the same reasons that the reimbursed assessment costs were.
C. Prudent Buyer Requirement
The Manual requires Medicare providers to act as "prudent and cost-conscious buyer[s]" who should, among other responsibilities, "refuse to pay more than the going price for an item. . . ." PRM § 2103. The intermediary agreed that it was prudent for plaintiffs to participate in FPCF and pay the non-IBNR costs. Rec. I at 1094, 1103; Memorandum of Points and Authorities in Support of Plaintiffs' Motion for Summary Judgment ("Plaintiffs' Motion") at 18. Only the prudence of the IBNR payments is questioned.
This argument is odd. In most circles, setting aside reserves for predictable losses is viewed as prudent, not the opposite. Indeed, HHS and PRRB elsewhere criticize FPCF for not previously having set aside funds for IBNR expenses. Rec. II at 19; Defendant's Motion at 22 n.15. How can it be imprudent to fund IBNR expenses in 1983 and 1984 when setting aside reserves for such claims would have been prudent and allowable in the years 1976-1982?
Defendant's only evidence of the imprudence of plaintiffs' actions is the fact that plaintiffs lost out on the opportunity to earn a commercial return on the investment of the money. Defendant's Motion at 24. This argument, however, misses the point of the prudent buyer requirement. This Medicare rule does not require providers to maximize their profits at every conceivable juncture in order to be reimbursed for their reasonable costs. Instead, it requires those monies which are to be reimbursed to have been spent prudently. It would not have saved HHS and the United States Government one penny if plaintiffs had earned interest on its money before ultimately being retrospectively assessed for the money it instead paid as part of the settlement agreement. Plaintiffs' decisions to pay the IBNR costs when they did cannot, therefore, be considered imprudent for the purposes of PRM § 2103.
For the reasons stated above, we hold that it was arbitrary and capricious, and not in accordance with the Medicare statute, for the Secretary to deny plaintiffs reimbursement for the IBNR costs paid to the Fund. Therefore, plaintiffs' motion for summary judgment will be granted and defendant's motion will be denied. This case will be remanded to the Secretary with instructions that Medicare reimburse plaintiffs for the disputed IBNR costs plus interest in a manner not inconsistent with this opinion.
EDITOR'S NOTE: The following court-provided text does not appear at this cite in 780 F. Supp. 1047.
JOHN H. PRATT
United States District Judge
Date: 13 March 92
ORDER - March 16, 1992, Filed
Upon consideration of plaintiffs' and defendant's motions for summary judgment, the oppositions, replies, and supplemental memoranda thereto, and the entire record herein, and for the reasons stated in the accompanying Memorandum Opinion, it is by the Court this 13th day of March, 1992
ORDERED that plaintiffs' motion is hereby granted; and it is
ORDERED that defendant's motion is hereby denied; and it is
ORDERED that judgment will be entered in plaintiffs' favor; and it is
ORDERED that this case be remanded to the Secretary with instructions that Medicare reimburse plaintiffs for the disputed IBNR costs (and interest thereupon, pursuant to 42 U.S.C. § 1395oo(f)(2)) in a manner not inconsistent with the accompanying Memorandum Opinion; and it is
FURTHER ORDERED that this cause of action is dismissed with prejudice.
JOHN H. PRATT
United States District Judge