Battle Creek Health System v. Leavitt

• Decision Date: 14 August 2007
• Docket Number: No. 06-1775.,06-1775.
• Citation: 498 F.3d 401
• Parties: BATTLE CREEK HEALTH SYSTEM; Trinity Health-Michigan, Plaintiffs-Appellants, v. Michael LEAVITT, Secretary of the United States Department of Health and Human Services, Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

498 F.3d 401

BATTLE CREEK HEALTH SYSTEM; Trinity Health-Michigan, Plaintiffs-Appellants, v. Michael LEAVITT, Secretary of the United States Department of Health and Human Services, Defendant-Appellee.

No. 06-1775.

United States Court of Appeals, Sixth Circuit.

Argued: March 9, 2007.

Decided and Filed: August 14, 2007.

ARGUED: John R. Trentacosta, Foley & Lardner, Detroit, Michigan, for Appellants. Jacqueline M. Zydeck, Office of the General Counsel, Chicago, Illinois, for Appellee. ON BRIEF: John R. Trentacosta, H. William Burdett, Jr., Foley & Lardner, Detroit, Michigan, for Appellants. Jacqueline M. Zydeck, Office of the General Counsel, Chicago, Illinois, J. Joseph Rossi, Assistant United States Attorney, Grand Rapids, Michigan, for Appellee. Michael J. Philbrick, Joan L. Lowes, Hall, Render, Killian, Health, & Lyman, Troy, Michigan, for Amicus Curiae.

Before: BOGGS, Chief Judge; BATCHELDER and GRIFFIN, Circuit Judges.

OPINION

GRIFFIN, Circuit Judge.

Plaintiffs-appellants Battle Creek Health System ("Battle Creek") and Trinity Health-Michigan ("Trinity Health"), doing business as Mercy General Health Partners, are acute-care hospitals and participating Medicare providers located in southwestern Michigan. Plaintiffs brought the present action against defendant-appellee Michael Leavitt, Secretary of the United States Department of Health and Human Services ("defendant" or "the Secretary"), pursuant to Title XVIII of the Social Security Act, 42 U.S.C. §§ 1395-1395ggg (the "Medicare Act") and the Administrative Procedure Act, 5 U.S.C. § 551 et seq. (the "APA"), challenging the final administrative decision of defendant denying Medicare reimbursement for certain bad debts incurred by plaintiffs during the fiscal year 1999. The district court affirmed the Secretary's decision, granting summary judgment in favor of defendant and denying plaintiffs' similar motion. See Battle Creek Health Sys. v. Thompson, 423 F.Supp.2d 755 (W.D.Mich.2006). Plaintiffs now appeal. For the reasons set forth below, we affirm.

I.

A.

Plaintiffs are non-profit, tax-exempt, acute-care hospitals located in southwestern Michigan that provide services to persons covered by Medicare ("Medicare beneficiaries"). The Medicare Act provides a system for payment of health services to eligible elderly and disabled persons. Medicare providers participate in Medicare by entering into an agreement with the Secretary and the Department of Health and Human Services Center for Medicare and Medicaid Services ("CMS"), formerly the Health Care Financing Administration ("HCFA"), which administers the program for the Secretary. Both plaintiffs are parties to a Medicare participation agreement with defendant.

The present case implicates only Medicare Part A reimbursement for hospital services. Part A authorizes payments primarily for institutional care, including hospital inpatient services and skilled nursing facility services. See 42 U.S.C. §§ 1395c-1395i-4. Medicare beneficiaries are responsible for paying a portion of the cost of hospital services in the form of deductibles and coinsurance. 42 C.F.R. §§ 409.80-409.83.

Before 1983, the Medicare Act based hospital reimbursement upon a retrospective determination of "reasonable cost" as defined in the Secretary's regulations and identified in a provider's annual cost report. 42 U.S.C. § 1395x(v); 42 C.F.R. § 413.1 et seq. In 1983, Congress established a Prospective Payment System ("PPS"), whereby hospital operating costs are reimbursed on a per discharge basis through prospectively fixed rates that are based upon the "diagnostic related group" assigned to the discharge. 42 U.S.C. § 1395ww(d); 42 C.F.R. § 412.1 et seq. Certain Medicare payments to hospitals, however, continue to be determined retrospectively and reimbursed on a reasonable cost basis.¹ Included in this latter category are the unpaid deductible and coinsurance obligations of Medicare beneficiaries (Medicare "bad debts") at issue herein. 42 C.F.R. § 412.115(a).

The regulations pertaining to Medicare declare that amounts due to providers from other parties that providers cannot recover are generally not reimbursable under the Medicare program because these bad debts are deemed "deductions from revenue and are not to be included in allowable cost." 42 C.F.R. § 413.89(a).² The Secretary will nonetheless reimburse a provider for certain bad debts attributable to deductible and coinsurance amounts related to covered services received from beneficiaries. 42 C.F.R. § 412.115(a). Such reimbursable bad debts are defined at 42 C.F.R. § 413.89(b):

Bad debts are amounts considered to be uncollectible from accounts and notes receivable that were created or acquired in providing services. "Accounts receivable" and "notes receivable" are designations for claims arising from the furnishing of services, and are collectible in money in the relatively near future.

Bad debts are reimbursed in order to prevent the costs of Medicare-covered services from being shifted to non-Medicare patients or their payors. 42 C.F.R. § 413.89(d). Consequently, a provider may receive reimbursement for Medicare bad debt if it meets all of the criteria set forth in 42 C.F.R. § 413.89(e):

(e) Criteria for allowable bad debt. A bad debt must meet the following criteria to be allowable:

(1) The debt must be related to covered services and derived from deductible and coinsurance amounts.

(2) The provider must be able to establish that reasonable collection efforts were made.

(3) The debt was actually uncollectible when claimed as worthless.

(4) Sound business judgment established that there was no likelihood of recovery at any time in the future.

42 C.F.R. § 413.89(e).³ See also Provider Reimbursement Manual § 308 (reiterating these four criteria).

The Secretary's Provider Reimbursement Manual ("PRM") contains non-binding guidelines and interpretative rules to assist providers and intermediaries in the implementation of the Medicare regulations.⁴ Relevant to the present case, PRM § 310 addresses the "reasonable collection effort[s]" that must be undertaken by providers when seeking to recoup bad debts:

To be considered a reasonable collection effort, a provider's effort to collect Medicare deductible and coinsurance amounts must be similar to the effort the provider puts forth to collect comparable amounts from non-Medicare patients. It must involve the issuance of a bill on or shortly after discharge or death of the beneficiary to the party responsible for the patient's personal financial obligations. It also includes other actions such as subsequent billings, collection letters and telephone calls or personal contacts with this party which constitute a genuine, rather than a token, collection effort. The provider's collection effort may include using or threatening to use court action to obtain payment. (See § 312 for indigent or medically indigent patients.)

PRM § 310.A further explains:

A provider's collection effort may include the use of a collection agency in addition to or in lieu of subsequent billings, follow-up letters, telephone and personal contacts. Where a collection agency is used, Medicare expects the provider to refer all uncollected patient charges of like amount to the agency without regard to class of patient. The "like amount" requirement may include uncollected charges above a specified minimum amount. Therefore, if a provider refers to a collection agency its uncollected non-Medicare patient charges which in amount are comparable to the individual Medicare deductible and coinsurance amounts due the provider from its Medicare patient, Medicare requires the provider to also refer its uncollected Medicare deductible and coinsurance amounts to the collection agency. Where a collection agency is used, the agency's practices may include using or threatening to use court action to obtain payment.

In addition, PRM § 310.2 provides for a "Presumption of Noncollectibility":

If after reasonable and customary attempts to collect a bill, the debt remains unpaid more than 120 days from the date the first bill is mailed to the beneficiary, the debt may be deemed uncollectible.

"The amounts uncollectible from specific beneficiaries are to be charged off as bad debts in the accounting period in which the accounts are deemed to be worthless." 42 C.F.R. § 413.89(f). Consistent with this regulation, PRM § 314 provides that uncollectible debts and coinsurance amounts "are recognized as allowable bad debts in the reporting period in which the debts are determined to be worthless." PRM § 314 also requires the provider to document its claimed bad debts ("the provider should have the usual accounts receivable records — ledger cards and source documents — to support its claim for a bad debt for each account included."). See also PRM § 310.B ("[t]he provider's collection effort should be documented in the patient's file by copies of the bill(s), follow-up letters, reports of telephone and personal contact, etc."). These guidelines are in keeping with regulations that require documentation. See 42 C.F.R. §§ 413.9, 413.24, and 413.20(a) ("[t]he principles of cost reimbursement require that providers maintain sufficient financial records and statistical data for proper determination of costs payable under the program.").

PRM § 316 further addresses the recovery of bad debts and provides in pertinent part:

Amounts included in allowable bad debts in a prior period might be recovered in a later reporting period. Treatment of such recoveries under the program is designed to achieve the same effect upon reimbursement as in the case where the amount was uncollectible.

Where the provider was reimbursed by the program for bad debts for the reporting period in which the amount recovered was included in allowable bad debts, reimbursable costs in the period of recovery are reduced by the amounts recovered. However, such reductions in reimbursable costs should not exceed...