The opinion of the court was delivered by: Gladys Kessler United States District Judge
Plaintiff Dialysis Clinic, Inc. ("DCI") brings this action against Defendant Michael O. Leavitt, Secretary of the U.S. Department of Health and Human Services ("HHS"),*fn1 pursuant to Title XVII of the Social Security Act, 42 U.S.C. §§ 1395 et seq. ("the Medicare Act"). DCI is a Tennessee non-profit corporation that owns and operates Medicare-certified end stage renal disease ("ESRD") facilities throughout the United States. Pursuant to Medicare's cost reimbursement program, DCI filed Medicare cost reports on behalf of a number of those ESRD facilities for periods ending September 30, 1994, September 30, 1995, and September 30, 1996 ("Relevant Periods"). DCI included in those cost reports bad debts that it was unable to collect from Medicare recipients for whom the facilities had provided ESRD treatment. The cost reports included $1,033,628 in bad debts relating to the provision of "separately billed items" to Medicare patients. AR 19.
DCI seeks judicial review of a final agency decision to deny reimbursement to those ESRD facilities for a portion of the deductible and coinsurance payments that they were unable to collect from Medicare patients. Specifically, DCI challenges the decision of the Administrator of the Centers for Medicare and Medicaid Services ("CMS") to deny reimbursement pursuant to 42 C.F.R. § 413.170(e) ("§413.170(e)") for bad debts relating to the "separately billed items" category of services.
This matter is now before the Court on the parties' cross-motions for summary judgment. Upon consideration of the Motions, Oppositions, Replies, and the entire record herein, and for the reasons stated below, DCI's Motion for Summary Judgment [Dkt. No. 15] is granted, and Defendant's Cross-Motion for Summary Judgment [Dkt. No. 18] is denied.
I. BACKGROUND AND PROCEDURAL HISTORY
A. Statutory and Regulatory Framework
Congress created the Medicare program in 1965 to pay for certain specified, or "covered," medical services provided to eligible elderly and disabled persons. See 42 U.S.C. §§ 1395 et seq. Under the program, health care providers are reimbursed for a portion of the costs that they incur treating Medicare beneficiaries pursuant to an extremely "complex statutory and regulatory regime." Good Samaritan Hosp. v. Shalala, 508 U.S. 402, 404 (1993). That regime is administered by the Centers for Medicare & Medicaid Services ("CMS" or "the agency") under the supervision of the Secretary of HHS ("the Secretary") and through a network of fiscal intermediaries, private entities with which the Secretary contracts to review and process Medicare claims in the first instance.
The Medicare Act provides for reimbursement of the "reasonable cost" of services furnished to Medicare beneficiaries. 42 U.S.C. § 1395x(v)(1)(A). "Congress authorized the Secretary of Health and Human Services (Secretary) to issue regulations defining reimbursable costs and otherwise giving content to the broad outlines of the Medicare statute. That authority encompasses the discretion to determine both the 'reasonable cost' of services and the 'items to be included' in the category of reimbursable services." Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 506-07 (1994) (citing 42 U.S.C. § 1395x(v)(1)(A)).
The Medicare program reimburses Medicare-certified ESRD facilities for two categories of items and services provided to program beneficiaries: (1) those items and services contained within the Medicare "composite rate," which is a pre-determined payment for dialysis treatment based on past reasonable costs for such treatment; and (2) separately billed items, which are "add-on" items and services outside of the composite rate. 42 U.S.C. § 1395rr(b)(7), (b)(11). The separately billed items, such as provision of the drug Epoietin, are paid on a charge or flat fee schedule, rather than a reasonable cost or reasonable cost-based prospective payment methodology. A deductible and coinsurance applies to both the composite rate services and the separately billed items.
If, after making reasonable collection efforts, a facility is unable to collect the deductible or coinsurance from the patient, that outstanding amount is treated as a Medicare bad debt. 42 C.F.R. § 413.80(b). Medicare bad debts are "amounts considered to be uncollectible from accounts and notes receivable that were created or acquired in providing services [to Medicare beneficiaries]." Id.
Pursuant to the authority granted by the Medicare statute, the Secretary, by regulation applicable during the Relevant Periods, permitted reimbursement for "allowable Medicare bad debts." 42 C.F.R. § 413.170(e) (1996). Specifically, the ESRD regulation in effect during the Relevant Periods provided, in pertinent part:
(1) HCFA [Health Care Financing Administration] will reimburse each facility its allowable Medicare bad debts, up to the facility's costs as determined under Medicare principles, in a single lump sum at the end of the facility's cost reporting period. . . .
(3) A facility must request reimbursement for uncollectible deductible and coinsurance amounts owed by beneficiaries by submitting an itemized list of all specific noncollections related to covered services.
42 C.F.R. § 413.170(e) (1996).*fn2 Defendant concedes that "covered services" includes both composite rate and separately billed items. Def.'s Cross-Mot. at 7.
The regulations also define "allowable bad debt." In a section titled "Criteria for allowable bad debt," the regulations provided that for a Medicare bad debt to be ...