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NATIONAL MED. ENTERPRISES v. SHALALA

July 16, 1993

NATIONAL MEDICAL ENTERPRISES, INC., d/b/a CENTURY CITY HOSPITAL, Plaintiff,
v.
DONNA SHALALA, SECRETARY OF HEALTH AND HUMAN SERVICES, 1 Defendant.



The opinion of the court was delivered by: JOHN H. PRATT

 In this action, plaintiff National Medical Enterprises, Inc., has challenged a decision by the Secretary of Health and Human Services ("the Secretary") regarding reimbursement for certain hospital costs for Medicare beneficiaries. Before the Court are plaintiff's and defendant's cross motions for summary judgment. For the reasons which follow, we deny plaintiff's Motion for Summary Judgment and grant defendant's.

 I. Background

 Plaintiff, National Medical Enterprises, Inc., is a corporation which owns acute care hospitals, including Century City Hospital ("the Hospital") located in Los Angeles, California. Century City Hospital has an agreement with defendant, the Secretary of HHS, to provide hospital services to persons eligible for Medicare pursuant to the Medicare Act, 42 U.S.C. § 1395 et seq.2 As a designated "provider of services" under the Medicare Act, see 42 U.S.C. § 1395x(u), the Hospital is entitled to reimbursement for the "reasonable cost" of rendering those services. See 42 U.S.C. § 1395f(b). *fn3"

 In the present case, plaintiff alleges that defendant failed to properly reimburse it for its costs of administering intravenous ("IV") therapy to Medicare beneficiaries. The costs in question cover the salaries and benefits of a team of nurses responsible for preparing, administering, and monitoring IV therapy at the Hospital. Defendant reimbursed these IV therapy administration costs as routine services rather than ancillary services. The amount in controversy is $ 215,000 and $ 191,000 for fiscal years 1982 and 1983, respectively.

 The central issue is whether these IV therapy costs should have been allocated to a "routine cost center" or an "ancillary cost center." It is not disputed that when a provider of services elects to use the "departmental method" of cost apportionment, as it did in the instant case, it must assign its costs in its annual cost report to one of these two categories. See 42 C.F.R. § 405.452(a)(1983). *fn4" Routine services include "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." 42 C.F.R. § 405.452(b). Ancillary services are defined as "the services for which charges are customarily made in addition to routine services." Id.5

 The distinction between these cost centers is important for reimbursement purposes. Routine services are reimbursed on a per diem basis. Thus, if 10% of the patients using IV services on a given day are Medicare beneficiaries, the Hospital will be reimbursed by HHS for 10% of its routine service costs on that day. See Memorandum of Points and Authorities in Support of Plaintiff's Motion for Summary Judgment ("Pl's Mem.") at 7-8. Ancillary services, by contrast, are reimbursed on a utilization basis. Thus, if the Medicare beneficiaries account for 20% of the charges for the services (even if they represent only 10% of the patients), then the Hospital will be reimbursed for 20% of its costs. See Pl's Mem. at 7.

 Plaintiff claims that the Secretary has improperly categorized the nursing costs affiliated with administering IV therapy as routine services rather than as ancillary services. In its cost report for fiscal years ending May 31, 1982 and 1983, plaintiff allocated its costs for its IV therapy services to an ancillary service center. Pursuant to 42 C.F.R. § 413.20, the Hospital's cost reports were reviewed by its fiscal intermediary, the Mutual of Omaha Insurance Company. The intermediary reclassified the costs for administering the IV services, namely the nurses' salaries and benefits, in a routine cost center. The other costs associated with IV therapy, such as equipment and supplies, were not moved from the ancillary cost center where they remained.

 Plaintiff proceeded to appeal the intermediary's adjustments to the Provider Reimbursement Review Board ("PRRB"), pursuant to 42 C.F.R. § 1395oo(a). On August 19, 1991, the PRRB reversed the intermediary's decision by a three-to-two majority, declaring that

 
apportioning the costs of the IV therapy personnel salaries and benefits on the basis of the relative charges for IV therapy services is the most accurate method of determining the relative costs for IV therapy services used by Medicare and non-program beneficiaries. The majority finds, therefore, that the IV therapy nurses' salaries and benefits should be included in the IV therapy cost center for cost apportionment purposes.

 Administrative Record ("AR") at 32-33. In reaching this decision, the PRRB noted that two other intermediaries, Blue Cross of California and Aetna Life Ins. Co., had approved the classification of salaries and benefits in an IV therapy cost center for two other acute care hospitals located a few miles away from plaintiff's. See AR at 32.

 The decision of the PRRB was reversed on October 18, 1991 by the Deputy Administrator of the Health Care Financing Administration ("Deputy Administrator"), acting on behalf of the Secretary. The Deputy Administrator relied on section 2203 of the Provider Reimbursement Manual, HIM-15 ("PRM"), which prohibits classification of costs in an ancillary cost center when the "common or established practice of providers of the same class . . . in the same State is to include the item or service in the routine service charge." See AR at 5. Relying on Loma Linda Univ. v. Schweiker, Medicare & Medicaid Guide (CCH) P 31,650 at 10,148 (C.D. Cal. Dec. 14, 1981), in which the district court held that the "customary and prevailing practice among hospitals in California is to include intravenous therapy services within the routine nursing service and not to separately bill for such services," the Administrator concluded that Century City Hospital's IV therapy services must also be categorized as routine services. AR at 6.

 Plaintiff's Complaint, challenging the Deputy Administrator's decision, was timely filed with this Court pursuant to 42 U.S.C. § 1395oo(f)(1).

 II. Discussion

 In reviewing plaintiff's appeal from the Deputy Administrator's determination, we are bound by the Administrative Procedure Act ("APA"), 5 U.S.C. § 701 et seq. See 42 U.S.C. § 1395oo(f)(1). The APA standard of review provides, in relevant part, that agency actions, findings, or conclusions may be set aside if they are "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law," "contrary to constitutional right," or "unsupported by substantial evidence in a case . . . reviewed on the record of an agency hearing provided by statute." 5 U.S.C. § 706(2)(A), (B), and (E); see also Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402, 413-14, 28 L. Ed. 2d 136, 91 S. Ct. 814 (1971).

 Plaintiff, for several distinct reasons, challenges both the Deputy Administrator's findings and the rule upon which it is based. First, plaintiff alleges that defendant's decision is arbitrary and capricious because it is contrary to provisions in the Medicare Act and Medicare regulations. Second, plaintiff maintains that the decision was not based on substantial evidence in the record. Third, plaintiff contends that the ruling denies plaintiff's equal protection in treating the Hospital differently from other similarly situated hospitals. Defendant has filed a Motion for Summary Judgment to affirm the decision of the Deputy Administrator. Because there is no dispute as to any material fact, summary judgment is appropriate. See Fed. R. Civ. P. 56(c).

 A. Arbitrary and Capricious

 Plaintiff alleges that both the Deputy Administrator's decision, as well as the rule upon which it was based, are arbitrary and capricious because they contravene ...


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