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Genesis Healthventures of Naugatuck, Inc. v. Leavitt

June 30, 2008

GENESIS HEALTHVENTURES OF NAUGATUCK, INC., ET AL., PLAINTIFFS,
v.
MICHAEL O. LEAVITT, DEFENDANT



The opinion of the court was delivered by: Louis F. Oberdorfer United States District Judge

MEMORANDUM & OPINION

Plaintiff Genesis Health Ventures of Naugatuck, Inc. owns 219 skilled nursing facilities that provide services to Medicare patients; each of these facilities is also a plaintiff.*fn1 Plaintiffs brought this action against the Secretary of Health and Human Services seeking reversal of a final decision of the Provider Reimbursement Review Board ("Board") requiring Plaintiffs to allocate employer contributions of Federal Insurance Contributions Act (FICA) taxes to the Employee Health and Welfare cost center ("Employee Health and Welfare") for fiscal years 1996, 1997, and 1998. Plaintiffs had sought to allocate FICA contributions to the Administrative and General cost center ("Administrative and General"), which would have increased their Medicare reimbursement for those cost years by approximately eight million dollars. For the reasons stated herein, an accompanying order grants the Secretary's motion for summary judgment and denies Plaintiffs' motion for summary judgment.

I. Background

Plaintiffs have entered into a "provider agreement" with the Secretary to provide Part A Medicare services. See 42 U.S.C. §§ 1395x(u), 1395cc. A private insurance company, BlueCross BlueShield Association/Veritus Medicare Services (the "Intermediary"), acts as the Secretary's agent to review Plaintiffs' claims for reimbursement and to administer payment. See 42 U.S.C. §§ 1395h, 1395x(u). Plaintiffs receive interim payments throughout the fiscal year. See 42 U.S.C. § 1395g. Within five months after the close of each fiscal year, Plaintiffs must file Medicare cost reports with the Intermediary. See 42 C.F.R. §§ 413.20(a), 413.24(a), (f) (2001). The Intermediary reviews the cost report and determines the amount of Medicare reimbursement due Plaintiffs for that fiscal year, offset by interim payments. See 42 C.F.R. § 405.1803 (2001).

During the period at issue, Medicare reimbursed Plaintiffs for reasonable costs "determined in accordance with regulations establishing the method or methods to be used, and the items to be included, in determining such costs." 42 U.S.C. § 1395f(b)(1). The regulations establishing the guidelines for determining "reasonable cost" are published in 42 C.F.R. Part 413 (2001). The Provider Reimbursement Manual ("the Manual" or "PRM") contains the Secretary's interpretations of the governing statute and regulations to assist agency decision makers and facilities in understanding how to apply the reasonable cost rules.

The first step in determining a facility's reimbursement is to identify the "allowable" costs of furnishing covered services. 42 C.F.R. § 413.24(d) (2001); see also 42 C.F.R. 413.50(a) (2001). Allowable costs are "necessary and proper expenses of an institution in the production of services," 42 C.F.R. § 413.5(a) (2001), "which are appropriate and helpful in developing and maintaining the operation of patient care facilities and activities." 42 C.F.R. § 413.9(b) (2001). After allocating each allowable cost to an appropriate cost center, PRM § 2302.7, the provider apportions them between Medicare and non-Medicare patients so that the program reimburses the provider for only those costs incurred treating Medicare beneficiaries. See 42 C.F.R. Pt 413, Subpt. D. (2001)

Cost centers can generally be classified as either (1) revenue producing cost centers, which produce patient care revenue, and (2) non-revenue producing cost centers, which do not directly generate patient care revenue but contribute to patient care revenue by serving the revenue producing cost centers. PRM § 2306. In order to properly match revenue and expenses, the regulations provide that the costs of revenue-producing cost centers should include both their direct expenses as well as their proportional share of each non-revenue producing cost center based on the amount of services received. 42 C.F.R. § 413.24 (2001). The regulations characterize this as "cost finding" and define it as "the determination of [the costs of the various types of services furnished] by the allocation of direct costs and proration of indirect costs."

42 C.F.R. § 413.24(b) (2001).

Plaintiffs used the "step-down" method to allocate allowable costs to the appropriate cost centers:

Step-down Method. This method recognizes that services furnished by certain non-revenue-producing departments or centers are utilized by certain other non-revenue-producing centers as well as by the revenue-producing centers. All costs of non-revenue-producing centers are allocated to all centers that they serve, regardless of whether or not these centers produce revenue. The cost of the non-revenue-producing center serving the greatest number of other centers, while receiving benefits from the least number of centers, is apportioned first. Following the apportionment of the cost of the non-revenue-producing center, that center will be considered "closed" and no further costs are apportioned to that center. This applies even though it may have received some service from a center whose cost is apportioned later. Generally, if two centers furnish services to an equal number of centers while receiving benefits from an equal number, that center which has the greatest amount of expense should be allocated first.

42 C.F.R. § 413.24(d)(1) (2001). Similarly, the Manual defines "general service cost centers" as "organizational units which are operated for the benefit of the institution as a whole," PRM § 2302.9, and directs providers to allocate general service costs to other cost centers using the step-down process:

The costs of a general service cost center need to be allocated to the cost centers receiving service from that cost center. This allocation process is usually made, for Medicare cost reporting purposes, through cost finding using a statistical basis that measures the benefit received by each cost center.

PRM § 2307.

A. Letters Discussing FICA Allocation

A series of letters from the Health Care Financing Administration (the "Administration")*fn2 in 1998 and early 1999 (the "1998 Letters") addresses the allocation of FICA costs. On April 14, 1998, one of the Administration's intermediaries wrote to the Administration's Division of Cost Reporting and "requested clarification concerning the proper classification of workers' compensation and employment related taxes as employee benefits or administrative costs on the Medicare cost report." AR 547. On May 5, 1998, the Administration responded in writing:

Workers' compensation and other employment related taxes (employer's share of FICA, unemployment compensation) are not fringe (employee) benefits; rather, they are administrative business costs of the provider. Accordingly, these costs are generally included in the provider's administrative and general cost center.

Id. The letter went on to note that these costs "may, dependent upon the individual provider's accounting sophistication and subject to intermediary approval, be allocated directly to the various cost centers to which related employee compensation costs have been allocated." Id.

In July 1998, in response to a request for further clarification, the Administration sent another letter (the "July 1998 Letter") that stated:

Payroll-related taxes such as workers compensation, unemployment compensation and F.I.C.A. (employer's share) are not considered fringe benefits because they are not amounts paid to, or on behalf of, an employee in addition to direct salary or wages (see PRM section 2144.1). Rather, these costs are considered payroll-related tax costs.

AR 551-52. The letter stated that allocating payroll-related taxes to cost centers that have incurred payroll costs is "preferred over a method that would allocate these costs through the A&G cost center" Id. The letter went on to state that providers that lack a level of accounting sophistication sufficient to break out payroll-related taxes and place them in the cost centers that have incurred payroll costs "may include these costs in the A&G cost center for allocation purposes" and that the Administration has "no plans to limit the flexibility that providers have in reporting these costs." Id.

In a letter dated April 8, 1999 to a Medicare appeals consultant, the Administration stated that "Payroll related tax costs for workers compensation, FICA (Employer's portion), FUTA and SUTA should be recorded as administrative and general (A&G) costs" but that "the provider may, subject to intermediary review and approval, directly allocate the costs to the various cost centers to which related salary costs had been allocated." Letter from Ward C. Pleines to Paul R. Gulbrandson dated April 8, 1999 (AR 554).

B. Plaintiffs' Cost Reports

Plaintiffs completed cost reports for fiscal years 1996 and 1997 and filed them with the Intermediary, assigning the FICA costs to Employee Health and Welfare, before they learned of the 1998 Letters. At the hearing before the Board, Plaintiffs' Vice President of Reimbursement testified that he assigned these costs to Employee Health and Welfare because, "It was the way, when I first started doing cost reports many years prior, I had always been told to do it, and I did it that way as a matter of course." Board Hearing Tr. (Sept. 12, 2003) at 64-65, AR 80.

Plaintiffs learned of the 1998 Letters in May 1999, just before the June 1 due date for the 1998 cost reports. Id. Plaintiffs requested a two-week extension to allow them to adjust the 1998 cost report to allocate FICA to Administrative and General. Id. The Intermediary responded that, should Plaintiffs not file their cost reports by their due date, it was "extremely likely" that the Intermediary would suspend Medicare payments to Plaintiffs. AR Supp. 18. In light of this response, Plaintiffs indicated that they would submit their 1998 cost reports by June 1, 1999 and "employ the traditional methodology [they have] used for allocating [their] cost for cost report filing purposes." Id. Plaintiffs' original 1998 cost report allocated FICA to Employee Health and Welfare. Plaintiffs filed amended 1998 cost reports allocating FICA to Administrative and General, but the Intermediary refused to accept them. See AR Supp. 20. The Intermediary also denied Plaintiffs' request to reopen its 1996 and 1997 cost reports to allow it to reclassify payroll-related costs. AR Supp. 22.

The Intermediary computed the reimbursement amounts due Plaintiffs by allocating all payroll-related tax costs, including employer FICA contributions, to Employee Health and Welfare. As a result, Plaintiffs received approximately eight million dollars less in reimbursement payments than they would have received if their employer FICA contributions had instead been allocated to Administrative and General. AR 4-5. On August 6, 1999, Genesis noticed a ...


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