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Triad at Jeffersonville I, LLC v. Leavitt

April 21, 2008


The opinion of the court was delivered by: Colleen Kollar-kotelly United States District Judge


Plaintiffs Triad at Jeffersonville I, LLC; Triad at LaGrange I, LLC; Triad at Lumber City I, LLC; Triad at Powder Springs I, LLC; and Triad at Thomasville I, LLC (collectively "Triad") bring this suit for declaratory and injunctive relief against Michael O. Leavitt, in his official capacity as Secretary of the United States Department of Health and Human Services, Kerry N. Weems, in his official capacity as Administrator of the Centers for Medicare and Medicaid Services, the United States Department of Health and Human Services, and the Centers for Medicare and Medicaid Services (collectively "CMS"). The Parties' dispute arises in the context of a transition between the operators of five nursing care facilities in Georgia. Triad (the current operator) and Brian Center Nursing Care/Austell, Inc., a wholly-owned subsidiary of Mariner Health Care, Inc. ("Mariner") (the former operator), both received Medicare reimbursements for the same services provided at the nursing care facilities from approximately December 2006 to April 2007. CMS determined that Triad was responsible for repaying the overpayment from this period, and Triad contends that CMS must recoup the funds from Mariner.

Triad filed the present Complaint on February 26, 2008, along with a Motion for a Temporary Restraining Order and/or Preliminary Injunction barring CMS from recouping the funds from Triad. The Parties and the Court thereafter agreed to convert Triad's Motion into a decision on the merits through cross-motions, and CMS agreed to hold in abeyance its efforts to recoup the overpayment from Triad until the Court rendered its decision, or May 2, 2008, whichever occurred first. After a thorough review of the Parties' submissions, including the attachments thereto, applicable case law, statutory authority and regulations, the Court shall deny Plaintiffs' [9] Motion for Summary Judgment, grant Defendants' [10] Motion to Dismiss, or in the alternative, Motion for Summary Judgment, and deny Plaintiffs' [12] Motion for Leave to File an Amended Complaint, for the reasons that follow.


The Court shall first describe the Medicare statutes, regulations, and procedures providing the necessary context for the factual and procedural backgrounds that follow.

A. Medicare Statutes, Regulations, and Procedures

1. Medicare Reimbursement

Established under Title XVIII of the Social Security Act, 42 U.S.C. § 1395, et seq., the Medicare Program is a federal medical insurance program for the aged and disabled. Part A of the Medicare Program provides payments to, inter alia, operators of skilled nursing facilities ("providers"). Id. § 1395i-3. To participate in the Medicare program and receive reimbursement for the services they render to Medicare beneficiaries, providers must enter into Provider Agreements with the Secretary of the Department of Health and Human Services. Id. § 1395cc(a). Reimbursements are handled through "Fiscal Intermediaries," which are public or a private entities that make initial determinations as to the appropriate reimbursement amounts. Id. §§ 1395g, 1395h.

Providers must submit regular billings to their Fiscal Intermediaries.*fn1 42 C.F.R. 413.350(b)(2). At the end of each annual period, a provider must submit an annual cost report to its Fiscal Intermediary which reconciles its payments against the actual reasonable costs incurred by the provider. Id. §§ 413.20, 413.60, 413.64. If the Fiscal Intermediary believes an overpayment has occurred, it must notify the provider of its intent to offset or recoup the funds and give the provider an opportunity to respond. Id. § 405.373(a). If the provider submits a response, CMS or the Fiscal Intermediary "must within 15 days . . . consider the statement (including any pertinent evidence submitted), together with any other material bearing upon the case, and determine whether the facts justify" the offset or recoupment. Id. § 405.375(a). A determination that an offset or recoupment is justified is not immediately appealable, id. § 405.375(c), and the Fiscal Intermediary may begin offsetting or recouping an overpayment notwithstanding a provider's intention to administratively challenge the overpayment determination, id. §§ 405.373(d), 405.375(a). See also id. § 405.1803(c). After the Fiscal Intermediary completes its audit of the provider's annual cost report, it must issue a Notice of Program Reimbursement ("NPR") that identifies and explains any adjustments, overpayments, or reimbursements. Id. § 405.1803(a), (b). A provider who is dissatisfied with its NPR may appeal to the Provider Reimbursement Review Board ("PRRB"). 42 U.S.C. § 1395oo; 42 C.F.R. § 405.1835. The PRRB's decisions are final unless the Secretary reverses, affirms, or modifies the PRRB's decision within sixty days. 42 U.S.C. § 1395oo(f)(1); 42 C.F.R. §§ 405.1875, 405.1877(a).

Medicare procedures recognize that providers may be financially incapable of paying the full amount of the overpayment immediately or continuing to operate without Medicare payments while awaiting administrative review of a Fiscal Intermediary's recoupment decision. Accordingly, a provider facing financial hardship may negotiate an Extended Repayment Plan ("ERP") with its Fiscal Intermediary that takes into account the provider's particular financial circumstances. See Defs.' Reply, Ex. H, Ch. 4, §§ 50.2, 50.3 (Medicare Financial Management Manual) (describing the process for obtaining an ERP, including the Fiscal Intermediary's examination of a provider's financial records, to create an ERP appropriate for the particular provider). Such plans may extend beyond 12 months if the provider sends its Fiscal Intermediary "at least one letter from a financial institution denying the [provider's] loan request for the amount of the overpayment."*fn2 Id. § 50.1.

2. Changes of Ownership

When a nursing care facility undergoes a Change of Ownership ("CHOW"),*fn3 the former and the new owners must each submit a CMS-855A application ("855A application") to their respective Fiscal Intermediaries. See Medicare Program Integrity Manual, Ch. 10, § 5.5.C.3. The new owner must indicate in its respective 855A application whether it wants to apply for a new Provider Agreement or accept assignment of the former owner's Provider Agreement. See Medicare Financial Management Manual, Ch. 3, § 130. That decision has significant consequences. By accepting assignment of an existing Provider Agreement, the new owner must assume responsibility for all outstanding or future overpayments associated with the agreement:

With assignment, the new owner assumes all penalties and sanctions under the Medicare program, including the repayment of any accrued overpayments, regardless of who had ownership of the Medicare agreement at the time the overpayment was discovered, unless fraud was involved . . . When a provider undergoes a CHOW where the new provider accepts assignment of the previous owner's Medicare agreement, the responsibility for repaying any outstanding and future overpayments resides with the new owner.

Ex. A, FMM, Ch. 3, § 130. A new provider is responsible for all overpayments even when its contract with a former owner provides otherwise. Id. ("A sales agreement stipulating that the new owner is not liable for the overpayments made to the previous owner is not evidence enough for recovery from the new owner to not occur . . . If the new owner assumes assignment of the Medicare agreement, Medicare will attempt to recover from the new/current owner regardless of the sales agreement"). By accepting assignment, however, the new owner "receives the benefits of assuming the Medicare provider agreement, such as receiving underpayments discovered after the CHOW," and will automatically receive the agreement "subject to all the terms and conditions under which the existing agreement was issued." Id.

After receiving an 855A application, the new Fiscal Intermediary must review it for consistency with the sales agreement associated with the CHOW, as well as confirm that the transaction qualifies as a CHOW under applicable Medicare regulations. Medicare Program Integrity Manual, Ch. 10, 5.5.C.3. The Fiscal Intermediary then forwards its recommendation for approval to CMS, which verifies and validates the information, and confirms that the new owner is not on the Medicare Exclusion Database and the General Services Administration Debarment list. See Defs.' Mot., Ex. G, ¶ 13 (Decl. of Ronald L. Smith). If CMS approves the CHOW, it issues a "tie-in notice" to the former and new owners and their respective Fiscal Intermediaries, notifying them of the approval.*fn4 Id.; Medicare Program Integrity Manual, Ch. 10, §§ 11.1.A, 11.1.B. Until the CMS Regional Office issues a tie-in notice, a Fiscal Intermediary must continue paying claims for a facility to its former owner, and must deny any request "to change the bank account to that of the new owner" during the CHOW period. Id. §§ 5.5.C.3, § 11.1.B ("In a CHOW, the intermediary shall continue to pay the old owner until it receives the tie-in notice from the [CMS Regional Office]"). The Medicare Program Integrity Manual advises the former and new owners to reach an agreement related to payments received during the CHOW period:

It is ultimately the responsibility of the old and new owners to work out any payment arrangements between them while the CHOW is being processed by the intermediary and the [CMS Regional Office].

Id. § 11.1.B.

Finally, a provider may choose to reject assignment of an existing Provider Agreement in its 855A application. See Medicare Financial Management Manual, Ch. 3, § 130. In such an instance, the new owner avoids responsibility for any overpayments made to the former owner because "there would be no CHOW of the Medicare agreement [so] the previous owner would still be responsible for any outstanding overpayments." Id. Because the new owner would have to apply for a new Provider Agreement, there would also be a break in Medicare coverage. See Pls.' Opp'n, Ex. 6, ¶¶ 7 (Affidavit of Ronald M. Herbert, Jr.); Raintree Healthcare Corp. v. Omega Healthcare Investors, Inc., 431 F.3d 685, 687 (9th Cir. 2005) (explaining that a new owner could not participate in Medicare program while its application was pending if it refused assignment of an existing Provider Agreement).

B. Factual Background

The material facts underlying this action are undisputed.*fn5 Triad consists of five separate, but affiliated, entities that lease and operate five nursing homes in Georgia that provide care to Medicare beneficiaries. Pls.' Stmt. ¶¶ 1-2. Although Triad expected to begin its operations at these facilities in January 2004, the previous operator of the nursing homes, Mariner, refused to timely cease its operations. Pls.' Stmt. ¶¶ 3-4. After several years of litigation, Mariner vacated the facilities on December 1, 2006, and Triad began operating the facilities. Id. See also Mariner Health Care, Inc. v. Foster, 634 S.W. 2d. 162 (Ga. App. 2006). The transition was contentious and Mariner was uncooperative. Pls.' Opp'n, Ex. 6, ¶¶ 3-6 (Affidavit of Ronald M. Herbert, Jr.). For example, Mariner failed to file a terminating cost report for the nursing homes and refused "to release resident trust accounts to Triad's custody and it refused to pay to its former employees the vacation and leave time they accrued while employed by Mariner at the facilities." Id. ¶ 6. Triad and Mariner also failed to reach an agreement as to how funds paid during the CHOW would be handled. Id. ("There was no agreement between the parties concerning the transition of the nursing homes from Mariner to Triad").

Despite this contentiousness, Triad accepted assignment of Mariner's existing Provider Agreements. On November 30, 2006, the day before Triad began operating the five nursing homes, Triad sent its Fiscal Intermediary, Blue Cross Blue Shield of Georgia ("Georgia BCBS"), five 855A applications asking to have Mariner's Provider Agreements assigned to Triad effective December 1, 2006. Pls.' Stmt. ¶¶ 5-6. The Parties do not dispute that Triad submitted its 855A applications using outdated forms, and that Georgia BCBS took no immediate action with respect the applications.*fn6 Pls.' Stmt. ¶ 9; Defs.' Stmt. ¶ 3. After learning that it had submitted improper applications, Triad re-sent its 855A applications to Georgia BCBS (using the correct forms) on January 31, 2007, although CMS contends that one of the applications was not received until February 5, 2008. Pls.' Stmt. ¶ 9; Defs.' Resp. Stmt. ¶ 9. These applications included, among other information, Mariner's name, the name of Mariner's Fiscal Intermediary ("Mutual of Omaha"), Mariner's Medicare Information Number, and a representation that Triad was choosing to accept assignment of Mariner's Medicare Provider Agreements effective December 1, 2006. Pls.' Stmt.¶ 10. The applications also contained a clause wherein Triad "agree[d] that any existing or future overpayment made to [Triad] by the Medicare program may be recouped by Medicare through the withholding of future payments." Pls.' Mot., Ex. 6 at 37 (855A application). In four letters dated April 12, 2007, and a fifth dated April 26, 2007, CMS acknowledged the change of ownership for each of the five nursing homes, respectively, and indicated that the Medicare Provider Agreement for each facility had been "automatically assigned" to Triad, effective December 1, 2006. Pls.' Stmt. ¶ 11.

Mutual of Omaha continued to receive and pay claims to Mariner for these five facilities between December 2006 and April 2007. Defs.' Stmt. ¶¶ 6-7. Mutual of Omaha first became aware of the change in ownership of the facilities after receiving a tie-in notice sent by the CMS Regional Office in April 2007. Id. ¶ 9. Pursuant to that notice, Mutual of Omaha made its last payment on April 18, 2007 to four of Triad's facilities, and its last payment to the fifth facility on May 2, 2007. Id. ¶ 10. After receiving notice of the change in ownership, Mutual of Omaha redirected its April 18, 2007 and May 2, 2007 payments to the facilities' physical addresses rather than to Mariner's account. Id.

From December 1, 2006 through May 1, 2007, Triad operated the five facilities but received no Medicare payments. Id. ¶ 11. On May 1, 2007, after CMS issued its tie-in notices, Triad began submitting claims to Georgia BCBS for services rendered beginning December 1, 2006. Id. Georgia BCBS thereafter paid those claims. Id. In May, June, July, and October 2007, Mutual of Omaha sent letters to Georgia BCBS explaining that it had made payments to Mariner for services rendered between December 2006 and April 2007. Id. ¶ 12. Because Mutual of Omaha and Georgia BCBS maintain separate financial and claims systems, Georgia BCBS was unaware that Mutual of Omaha had already made payments for the same service period for which it had paid Triad. Id.

On November 29, 2007, Georgia BCBS received annual cost reports from Triad for the fiscal year ending June 30, 2007. Id. ¶ 14; Pls.' Resp. Stmt. ¶ 14. A comparison of the actual amounts paid for the services rendered at the facilities revealed an overpayment of approximately $2.0 Million because both Triad and Mariner had received reimbursements for the services rendered during the CHOW. Id. Georgia BCBS sent Overpayment First Demand letters to the five Triad facilities on February 11, 2008. Defs.' Stmt. ¶ 15. The letters advised Triad that "unless receivable amounts due the Medicare program were paid in full by February 26, 2008, withholding of interim payments would begin on that day." Id. The letters also advised Triad that it had the right to seek an ERP if it could not afford to pay the full sum. Id. Triad and Georgia BCBS thereafter exchanged ...

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