The opinion of the court was delivered by: Walton, District Judge
I. Factual & Legislative Background
The plaintiff is a provider-based ESRD facility located in Bethlehem,
Pennsylvania that offers ESRD outpatient dialysis treatment.*fn2 Compl.
at 1-2. As a participator in the Medicare Program, the plaintiff is
reimbursed for outpatient maintenance dialysis services*fn3 by means of
a prospectively determined composite rate, which "is a comprehensive
payment for all modes of in-facility dialysis and home dialysis . . .
[and] is computed on a per treatment basis by adding labor and nonlabor
portions, which are adjusted periodically."*fn4 Def.'s Mot. for Summ. J.
("Def.'s Mot.") at 4-5 (citing Medicare Provider Reimbursement Manual
(PRM) § 2702). While Congress sought to regulate the reimbursement
of ESRD dialysis services by means of a composite rate, it was careful to
include a provision for exceptions of "unusual circumstances", and
directed the Secretary to formulate both a method for determining the
composite rate and to provide such exceptions as may be warranted.
42 U.S.C. § 1395rr(b)(7). Subsequently, the Secretary promulgated
42 C.F.R. § 413.170 (1993),*fn5 which provided that the Health Care
Financing Administration ("HCFA")*fn6 may grant an exception to the
composite rate if the dialysis provider
demonstrates with convincing objective evidence that
its total per treatment costs are reasonable and
allowable under [the relevant cost reimbursement
principles of § 413.174], and that its per
treatment costs in excess of its payment rate are
directly attributable to [one or more specific
On April 28, 1994, the plaintiff submitted a request*fn7 to its fiscal
intermediary,*fn8 Blue Cross and Blue Shield Association of Western
Pennsylvania, seeking an exception from its established ESRD outpatient
dialysis composite rate of $127.98, based on an atypical service
intensity/patient mix.*fn9 Compl. at 6; Admin. R. ("A.R.") at 89-90.
St. Luke's sought an exception in the amount of $174.41 per dialysis
treatment. Def.'s Mot. at 11 (citing A.R. at 89-90). The fiscal
intermediary reviewed the plaintiff's request and subsequently submitted
it to HCFA with a recommendation that the exception be granted. Compl.
at 6; A.R. at 96.
Upon reviewing the plaintiff's request, the HCFA denied the exception
because "[w]hile the patient characteristics may indicate an atypical
patient mix, [the request contained] inconsistent cost report
data . . ."*fn10 A.R. at 1013. Specifically, the HCFA denied the
request because plaintiff failed to explain "(1) a 19% increase in its
cost per treatment (CPT) from FY 1992 to FY 1993, and (2) an inconsistency
in St. Luke's documentation supporting its salary costs, which made it
impossible to compare FY 1993 actual costs with FY 1994 projected
costs."*fn11 Def.'s Mot. at 11 (citing A.R. at 1012-13). The
HCFA explained that
The plaintiff timely appealed the HCFA's denial to the Provider
Reimbursement Review Board ("PRRB"), which provides for an administrative
review of exception denials by the HCFA pursuant to 42 C.F.R. § 413.194
(1993); PRM § 2726. Upon review of the HCFA's findings, the PRRB
reversed the exception denial on the basis that the HCFA inappropriately
relied upon PRM § 2725.3E and that while the FY 1993 numbers
contained an obvious error, the HCFA's "review identified the error but
did no further review of the obvious error." A.R. at 68. The PRRB found
that the HCFA's "lack of appropriate review [was] in violation of 
Pub. 15-1 § 2724 which requires [the HCFA] to properly review all
information submitted." Id.
The HCFA Administrator chose to review and subsequently reversed the
decision of the PRRB, finding that the HCFA was unable to properly
evaluate St. Luke's exception request because "the Provider failed to
document the basis for the significant variance between the projected and
prior costs as required by the regulations . . ." A.R. at 2-13.
Specifically, the Administrator found that the HCFA "did not fail its
obligation to review the Provider's application when it questioned the
incorrect number of hours reported." Id. at 11. The Administrator
reiterated that the plaintiff bears the burden of demonstrating that the
exception is warranted, "[t]hat is, the Provider must show that its total
costs per treatment are reasonable, and that its costs in excess of its
payment rate are directly attributable to its atypical patient mix . . .
[;] the Administrator finds that [the HCFA] does not have an obligation
to perfect a Provider's ESRD exception request." Id. at 12. Moreover,
the Administrator noted
that the Provider failed to relate its higher costs to
its claimed atypical patient mix . . . [as] the
Provider does not explain how the increase in the
volume of the treatments results in a higher cost per
treatment. While the Provider's salary cost may
increase to service the higher volume, the higher
salary costs does not mean that there are higher cost
per treatment. . . The Provider must show that its
increased costs are due to its atypical patient mix as
opposed to other excess costs.
Id. at 11. Finally, the Administrator commented that the plaintiff
submitted its request on the last day of the 180-day filing period for
exception requests, making "it impossible for the Intermediary to request
additional information which could be submitted timely." Id. at 12. The
plaintiff subsequently filed this ...