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John L. Doyne Hospital v. Johnson

March 30, 2009


The opinion of the court was delivered by: John D. Bates United States District Judge


The Secretary of the Department of Health and Human Services, through the Centers for Medicare and Medicaid Services ("CMS"), is responsible for determining whether, and to what extent, Medicare providers are entitled to reimbursement of the costs of providing services to Medicare beneficiaries. This case involves a dispute over the final cost report submitted to CMS by the John L. Doyne Hospital ("the Doyne Hospital" or "Hospital") following its closure in December 1995. As part of its final cost report, the Hospital sought reimbursement for the postretirement health insurance benefit costs of qualifying employees for the period 1996 through 2044, which it considered a reasonable cost of having provided Medicare services through the date of its closure. The Secretary disallowed the claim, and the Hospital now seeks judicial review of that final agency action. The parties have filed cross-motions for summary judgment, and the case is now ready for decision.*fn1 For the reasons explained below, the Court will deny the Hospital's motion for summary judgment, grant in part and deny in part the Secretary's motion for summary judgment, and remand the case to the Secretary for further proceedings.


I. Statutory and Regulatory Background

A. The Medicare Program Generally

This action arises under Title XVIII of the Social Security Act, 42 U.S.C. § 1395 et seq., commonly referred to as the Medicare Act, which establishes a federally funded health insurance program for the elderly and disabled. See generally County of Los Angeles v. Shalala, 192 F.3d 1005, 1008 (D.C. Cir. 1999). Part A of the Medicare Act typically covers "inpatient hospital services" furnished by participating providers. 42 U.S.C. § 1395d. Part A services are furnished by a "provider of services," such as a hospital, which must enter into an agreement with the Secretary in order to participate in and obtain payment from the Medicare program. Id. §§ 1395g, 1395cc, 1395x(u). The Secretary has delegated authority to administer the Medicare program to the Centers for Medicare & Medicaid Services. See 42 U.S.C. §§ 1395h, 1395u.

Private insurance companies, known as "fiscal intermediaries," acting as agents of the Secretary, process reimbursements to providers. 42 U.S.C. § 1395h. At the close of each fiscal year, a provider is required to file a Medicare cost report with its intermediary. 42 C.F.R. §§ 405.1801(b), 413.24(f). The intermediary then audits the cost report and makes a final determination of the total amount of reimbursement owed by Medicare. That final determination is set forth in a "notice of program reimbursement" or "NPR." 42 C.F.R. § 405.1803.

A provider dissatisfied with the amount of the award is entitled to request a hearing before the Provider Reimbursement Review Board ("PRRB" or "Board"), an administrative body composed of five members appointed by the Secretary who must be "knowledgeable in the field of payment of providers of services." 42 U.S.C. § 1395oo(a), (h). The Board has the authority to affirm, modify, or reverse the final determination of the intermediary. Id. § 1395oo(d). By request, or on its own motion, a decision by the Board is subject to review by the Secretary's delegate, the Administrator of CMS. 42 U.S.C. § 1395oo(f)(1); 42 C.F.R. § 405.1875. Once a final decision is rendered, the provider may seek judicial review of the final agency decision in federal district court within 60 days. 42 U.S.C. § 1395oo(f)(1).

B. The "Reasonable Cost" Standard

The principles of reimbursement for the costs at issue here are set out in the reasonable cost provision codified at 42 U.S.C. § 1395x(v)(1)(A) and its implementing regulations at 42 C.F.R. § 413.100 (1995).*fn2 Congress defined "reasonable cost" as "the cost actually incurred, excluding therefrom any part of incurred cost found to be unnecessary in the efficient delivery of needed health services" and authorized the Secretary to issue regulations establishing the methods to be used in determining reasonable costs. 42 U.S.C. § 1395x(v)(1)(A). Congress further provided that "[s]uch regulations . . . may provide for using different methods in different circumstances, may provide for the use of estimates of costs of particular items or services, may provide for the establishment of limits on the direct or indirect overall incurred costs or incurred costs of specific items or services . . . , and may provide for the use of charges or a percentage of charges where this method reasonably reflects the costs." Id. Reasonable cost includes items such as "administrative costs, maintenance costs, and premium payments for employee health and pension plans." 42 C.F.R. § 413.9(c)(3).

Pursuant to § 1395x(v)(1)(A), the Secretary has adopted the "accrual" method of accounting to calculate reimbursement of "reasonable costs." See 42 C.F.R. § 413.24(b)(2), (e). Under the accrual method, "revenue is reported in the period in which it is earned, regardless of when it is collected; and an expense is reported in the period in which it is incurred, regardless of when it is paid." Id. § 413.24(b)(2). The Secretary has determined, however, that some liabilities associated with accrued costs may never be fully liquidated through an actual expenditure of funds, which may result in the Medicare program paying for costs that a provider never pays. 60 Fed. Reg. 33126, 33126 (June 27, 1995). He cited as an example employee sick leave days that are subject to forfeiture if the employee is discharged for cause, noting that some providers have sought Medicare payment for employee sick leave days for which the provider never became liable. Id. To minimize the unwarranted payment of federal funds in such cases, the Secretary issued regulations requiring the timely liquidation of liabilities associated with certain types of accrued cost, including vacation pay, sick leave, and most importantly for this case, deferred compensation. Id. 33134-135. These regulations are codified, in relevant part, at § 413.100.

Section 413.100 memorializes these principles as follows:

(a) Principle. . . . In the case of accrued costs described in this section, for Medicare payment purposes the costs are allowable in the year in which the costs are accrued and claimed for Medicare payment only under the conditions set forth in paragraph (c) of this section.

(c) Recognition of accrued costs. (1) General. Although Medicare recognizes in the year of accrual, the accrual of costs for which a provider has not actually expended funds during the current cost reporting period, for purposes of payment Medicare does not recognize the ...

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