457 F.Supp. 848 (N.D.Cal. 1978), C-77-1854, John Muir Memorial Hospital, Inc. v. Califano

Docket Nº:C-77-1854-CBR.
Citation:457 F.Supp. 848
Party Name:JOHN MUIR MEMORIAL HOSPITAL, Inc., a nonprofit corporation, doing business as John Muir Memorial Hospital, Plaintiff, v. Joseph A. CALIFANO, Jr., Secretary of Health, Education and Welfare, Arthur P. Owens, William E. Arnstein, Philip D. Bonnett, M. D., Harold Hinderer, Stanley P. Wilcox, Members of the Provider Reimbursement Review Board, Blue Cro
Case Date:September 22, 1978
Court:United States District Courts, 9th Circuit, Northern District of California

Page 848

457 F.Supp. 848 (N.D.Cal. 1978)

JOHN MUIR MEMORIAL HOSPITAL, Inc., a nonprofit corporation, doing business as John Muir Memorial Hospital, Plaintiff,


Joseph A. CALIFANO, Jr., Secretary of Health, Education and Welfare, Arthur P. Owens, William E. Arnstein, Philip D. Bonnett, M. D., Harold Hinderer, Stanley P. Wilcox, Members of the Provider Reimbursement Review Board, Blue Cross Association, and Blue Cross of Northern California, Defendants.

No. C-77-1854-CBR.

United States District Court, N. D. California.

Sept. 22, 1978

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Weissburg & Aronson, Inc., Robert A. Klein, Patric Hooper, Los Angeles, Cal., for plaintiff.

G. William Hunter, U. S. Atty., George Christopher Stroll, Asst. U. S. Atty., San Francisco, Cal., Sanford Teplitzky, Dept. of Health, Education and Welfare, Baltimore, Md., for defendant Califano


RENFREW, District Judge.

This is a suit for mandamus and declaratory relief brought by plaintiff John Muir

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Memorial Hospital, Inc. ("Muir"), under Title XVIII of the Social Security Act (42 U.S.C. ss 1395 Et seq.), the Declaratory Relief Act (28 U.S.C. s 2201), and the Fifth Amendment. The action is based on defendants' refusal to allow plaintiff to reopen its 1973 and 1974 "cost reports" to reflect certain interest payments as expenses rather than as capital items.

In 1965, Congress enacted Title XVIII of the Social Security Act, known as Medicare, to provide federal reimbursement for medical care to the aged and disabled. 1 The program provides hospital insurance benefits to eligible individuals who receive hospital services from specially designated "providers." Plaintiff Muir operates a hospital as defined by 42 U.S.C. s 1395x(e) and is a "provider" by virtue of having filed an agreement with the Secretary of Health, Education, and Welfare ("HEW") pursuant to 42 U.S.C. s 1395cc(a)(1).

As a provider, plaintiff is entitled to receive reimbursement from the Secretary for the "reasonable cost" of its hospital services. See 42 U.S.C. ss 1395f(b)(1), 1395x(v)(1)(A). Plaintiff receives this reimbursement from a private organization that acts as the government's fiscal intermediary. See 42 U.S.C. s 1395h. 2 The fiscal intermediary between Muir and the Secretary is defendant Blue Cross Association, which has delegated its intermediary duties to defendant Blue Cross of Northern California ("BCNC"), one of its local plan organizations.

BCNC, as fiscal intermediary, has no vested interest in the expenditure of the government funds. Its function is merely to determine that the amount of payment accurately reflects the reasonable costs of services rendered to program beneficiaries. Under statute, and because a hospital's liquidity needs would be impaired if reimbursements were made only once a year, the reimbursement scheme proceeds in two parts. First, the intermediary makes not less than monthly lump sum payments to the provider, based on estimates that are subject to subsequent retroactive adjustment. See 42 U.S.C. ss 1395g, 1395x(v)(1)(A)(ii); 20 C.F.R. ss 405.402(b)(1), 405.402(b)(2), 405.454. Second, the intermediary makes a final determination as to how much reimbursement is due after the close of the provider's fiscal year; this determination is based on a cost report filed by the provider. 20 C.F.R. s 405.405(b). Among the costs for which a provider is entitled to reimbursement is the interest cost on current and capital indebtedness. 20 C.F.R. s 405.419. It is the formula used to calculate these costs in the 1973 and 1974 cost reports that plaintiff ultimately seeks to challenge by bringing this lawsuit.

In 1973, plaintiff began construction of a nine million dollar addition to its existing hospital. This addition increased the number of beds; provided services for intensive care, coronary care, and intermediate care patients; and created substantial space for support services. The project was financed with bank loans and with a long-term mortgage on the hospital's land and buildings. Plaintiff paid $166,000 in interest on this indebtedness in 1973 and $366,000 in 1974.

Prior to 1973, plaintiff had always expensed its interest costs as they were incurred. However, on its 1973 and 1974 Medicare cost reports, plaintiff treated the interest payments on the construction financing as a capital item. It did so to conform to the accounting procedures set out in the Provider Reimbursement Manual, HIM-15, s 206, a manual that provides guidance for the implementation of Medicare regulations regarding the reasonable cost of provider services. 3 As a result of

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using the capitalization method of accounting rather than the expensing method, plaintiff's net reimbursed costs were $60,179 less in 1973 and $134,694 less in 1974. Defendant BCNC accepted and approved plaintiff's cost report for 1973 on January 31, 1975 and for 1974 on December 23, 1975. Plaintiff did not seek administrative review of these decisions. 4

On March 11, 1976, plaintiff requested that BCNC reopen its 1973 and 1974 cost reports to allow recomputation of the interest costs according to the expensing method. 5 BCNC denied this request on March 18, 1976, because plaintiff had not supplied sufficient information. Plaintiff then filed a more complete Amended Request for Reopening the Cost Reports on September 23, 1976. This request was similarly denied by BCNC on November 23, 1976. 6

Having been unable to secure relief from BCNC, plaintiff filed a Request for a Hearing with defendant Provider Reimbursement Review Board ("PRRB") on February 22, 1977. 7 On April 4, 1977, after BCNC had filed an opposition to plaintiff's request for a hearing and plaintiff had filed a rebuttal to that opposition, the PRRB determined that it was without jurisdiction to hear plaintiff's claim. It based this decision on three factors: first, plaintiff did not file its request for a hearing in timely fashion (20 C.F.R. s 405.1841(a)); second, plaintiff did not meet the minimum monetary jurisdictional requirement (20 C.F.R. s 405.1839(a)); and third, the decision whether to reopen a determination could only be made by the fiscal intermediary that made that determination (20 C.F.R. s 405.1885(c)). Four and one half months after receiving the PRRB's letter, on August 22, 1977, plaintiff filed this lawsuit.

Plaintiff seeks two types of relief from this Court. First, plaintiff seeks a declaration and order that defendant BCNC is required to reopen the cost reports for 1973 and 1974 to reflect the expensing, rather than the capitalizing, of the interest costs. In this regard, it contends that Manual Section 206, the regulation requiring capitalizing of interest costs, is invalid, and that 42 U.S.C. s 1395x(v)(1)(A) requires the Secretary to enact regulations that "provide for the making of suitable retroactive corrective adjustments" to a reimbursement when the methods of determining costs prove to be inadequate. Second, plaintiff seeks a declaration and order that it is entitled to a full and complete hearing before defendant PRRB on the issues of the

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validity of Section 206 of the Manual and of the right to amend the cost reports. It claims that this is a due process right, guaranteed by the Fifth Amendment, which is based on its property interest in adequate and proper reimbursement.

On December 14, 1977, defendants filed a motion to dismiss on the grounds that this Court lacks subject matter jurisdiction over the action and that plaintiff has failed to state a claim upon which relief can be granted. The case was thereafter reassigned to the undersigned judge and the motion to dismiss was heard on June 8, 1978. For the reasons stated below, the Court will grant defendant's motion.

A. 28 U.S.C. s 1331

Section 1331(a) of Title 28, providing for federal question jurisdiction, gives district courts original jurisdiction of all civil actions brought against the United States which arise under the Constitution, laws, or treaties of the United States, regardless of the amount in controversy. Plaintiff contends that this statute confers jurisdiction in this action. This Court does not agree.

Federal jurisdiction to review administrative decisions under the Social Security Act is sharply limited by statute. Section 405(h) of the Act states:

"The findings and decisions of the Secretary after a hearing shall be binding upon all individuals who were parties to such hearing. No findings of fact or decision of the Secretary shall be reviewed by any person, tribunal or governmental agency except as herein provided. No action against the United States, the Secretary, or any officer or employee thereof shall be brought under section 41 of Title 28 (28 U.S.C. s 1331) To recover on any claim arising under this subchapter." 42 U.S.C. s 405(h) (emphasis added).

Although this section by its terms eliminates s 1331 jurisdiction only from claims "arising under this subchapter" (Title II of the Social Security Act), Congress has extended its prohibition to claims arising under the Medicare Act as well. 42 U.S.C. s 1395ii. 8 Therefore, because s 405(h) clearly provides that "no action" shall be brought under s 1331, this Court is precluded from asserting federal question jurisdiction if plaintiff's suit is construed as a claim arising under the Medicare Act. 9 See Weinberger v. Salfi, 422 U.S. 749, 757, 95 S.Ct. 2457, 45 L.Ed.2d 522 (1975); Assoc. of Amer. Medical Colleges v. Califano, 186 U.S.App.D.C. 270, 275, 569 F.2d 101, 107 (1977); South Windsor Convalescent Home, Inc. v. Mathews, 541 F.2d 910, 912 (2 Cir. 1976).

Plaintiff's first claim is based on its allegation that BCNC improperly failed to reopen the 1973 and 1974 cost reports. In bringing this claim, plaintiff is seeking greater reimbursement under the Medicare Act for...

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