Advanced Health Systems, Inc. v. Schweiker, Civ. A. No. 79-Z-863.

• Decision Date: 31 March 1981
• Docket Number: Civ. A. No. 79-Z-863.
• Citation: 510 F. Supp. 965
• Parties: ADVANCED HEALTH SYSTEMS, INC., Plaintiff, v. Richard S. SCHWEIKER, Secretary of Health and Human Services, Defendant.
• Court: U.S. District Court — District of Colorado

510 F. Supp. 965

ADVANCED HEALTH SYSTEMS, INC., Plaintiff, v. Richard S. SCHWEIKER, Secretary of Health and Human Services, Defendant.

Civ. A. No. 79-Z-863.

United States District Court, D. Colorado.

March 31, 1981.

Lewis J. Hock, Saunders, Snyder, Ross & Dickson, P. C., Denver, Colo., Weissburg & Aronson, Inc., Los Angeles, Cal., for plaintiff.

Roland J. Brumbaugh, Asst. U. S. Atty., Denver, Colo., for defendant.

ORDER RULING ON MOTIONS FOR SUMMARY JUDGMENT

WEINSHIENK, District Judge.

This matter is before the Court on cross Motions for Summary Judgment. Advanced Health Systems, Inc., brought this action pursuant to 42 U.S.C. § 1395oo(f) to obtain judicial review of an affirmance by the Secretary of the Department of Health and Human Services (Secretary) of an administrative decision of the Provider Reimbursement Review Board (Board). The challenged decision denied Medicare reimbursement to plaintiff for radio and television advertising expenses in the amount of $53,187.00, incurred on behalf of one of plaintiff's hospitals,¹ Raleigh Hills Hospital, Denver, Colorado (Hospital), during the fiscal year ending September 30, 1976. Having considered the arguments advanced by the parties in their briefs and memoranda, and having reviewed the certified record² of the administrative proceedings as well as the relevant case law, the Court has concluded that plaintiff's motion must be granted and the Secretary's decision reversed.

Plaintiff is the owner and operator of several hospitals which are exclusively engaged in the diagnosis and treatment of alcohol abuse. Pursuant to contract with defendant, it is also a "provider of services" within the meaning of 42 U.S.C. § 1395x(u), and thus entitled to reimbursement for the reasonable cost of services it provides to Medicare patients. During the fiscal year which ended in September 1976, plaintiff incurred radio and television advertising expenses in connection with its operation of the Hospital in Denver. After its annual audit, Blue Cross of Colorado, plaintiff's fiscal intermediary under the Medicare program, disallowed reimbursement for these expenses; plaintiff appealed this decision to the Board. Relying upon §§ 2136 and 2136.2 of the Provider Reimbursement Manual (Manual), the Board affirmed the disallowance. When the Secretary refused to reverse or modify the Board's decision, plaintiff filed this action for judicial review of the Secretary's decision.

I.

Under 42 U.S.C. § 1395f(b), a provider of services to Medicare beneficiaries may obtain payment for the "reasonable cost of such services," as defined in the statute and regulations. The statute indicates that "reasonable cost" shall be the "cost actually incurred, excluding therefrom any part of incurred cost found to be unnecessary in the efficient delivery of needed health services." 42 U.S.C. § 1395x(v)(1)(A). That subsection also furnishes a guideline for the implementing regulations:

Such regulations shall ... take into account both direct and indirect costs of providers of services ... in order that, under the methods of determining costs, the necessary costs of efficiently delivering covered services to individuals covered by the insurance programs ... will not be borne by individuals not so covered, and the costs with respect to individuals not so covered will not be borne by such insurance programs ....

The regulation, in turn, explains that reasonable cost "includes all necessary and proper costs incurred in rendering the services," 42 C.F.R. 405.451(a) (1978), and defines necessary and proper costs as "costs which are appropriate and helpful in developing and maintaining the operation of patient care facilities and activities," 42 C.F.R. § 405.451(b)(2) (1978). This provision further indicates that necessary and proper costs "are usually costs which are common and accepted occurrences in the field of the provider's activity."

While neither the statute nor the regulation specifically addresses advertising costs, the Department of Health and Human Services has compiled the Manual to publicize its interpretations of the Medicare cost reimbursement regulations. Sections 2136, 2136.1 and 2136.2 of the Manual, which relate to advertising costs, permit reimbursement for those costs which are "common and accepted" in the provider's field and are "directly or indirectly related to patient care" and deny it for those which seek "to increase patient utilization of the provider's facilities."³ Thus the statutory scheme contemplates that providers will be reimbursed for direct and indirect costs actually incurred, upon a finding that such costs are common and accepted in the provider's field and are appropriate and helpful in the provision of covered services. The Manual adds the agency's interpretation⁴ that costs incurred in soliciting patients are not reimbursable.

II.

At the hearing before the Board, plaintiff relied on the extensive expert testimony presented by its Newport Beach, California, hospital at the earlier hearing of October 29, 1976, to demonstrate the relationship between general advertising and the care and treatment of alcoholics. The experts testified that, unlike persons afflicted with other diseases, alcoholics must be persuaded that they have a disease and that they can be helped. Advertising, to be effective, must provide information concerning an immediate source of help rather than a referral service. In the latter case, the alcoholic often is frustrated by the necessity of making numerous phone calls in order to obtain help. Thus, in the experts' opinions, public outreach programs are essential in the effective care of alcoholics, and the advertising at issue in this case is directly related to the diagnosis and treatment of alcoholism. Evidence also showed that plaintiff's advertising costs are common and accepted in the field of alcoholism treatment because the National Institute on Alcohol Abuse and Alcoholism (NIAAA) sponsors an intensive television and radio advertising campaign, and the standards for accreditation of alcoholism treatment facilities established by the Joint Commission on Accreditation of Hospitals require such facilities to sponsor public advertising programs. The intermediary presented no evidence in support of its position. Rather it relied upon the plain meaning of § 2136.2 of the Manual and the text of the advertising at issue. It contended that the effect of the advertising was to attract patients to the Raleigh Hills facility and, hence, that the costs were properly disallowed.

Although the Board recognized that the television and radio advertising was an "important component" of the hospital's program, it upheld the intermediary's position, finding that "the TV advertisements utilized by the Provider (`short spots') as opposed to educational types of programs have the effect of promoting patient utilization of the Provider's facilities." Record, Vol. 1, at 26. In its opinion on remand in the Newport Beach facility appeal, the Board acknowledged the validity of the facility's argument that, in order to be effective, advertising must directly identify a treatment source. However, it concluded that this type of advertising prevents the intermediary from determining whether the actual purpose of the advertising is patient care or patient solicitation, and so, re-affirmed the disallowance. Record, Vol. 3, at 548.

In its Motion for Summary Judgment, plaintiff urges (1) that the decision in Advanced Health Systems, Inc. v. Califano, (N.D.Cal. No. C-77-2765 SW, September 26, 1979, appeal dismissed, April 26, 1980) in favor of Advanced Health Systems collaterally estops the Secretary from seeking affirmance of the Board's decision; and (2) that the decision of the Board must be reversed because (a) it is not supported by substantial evidence, (b) it is arbitrary and capricious and contrary to law, and (c) it is based upon Manual provisions which were not adopted in accordance with the Administrative Procedure Act, 5 U.S.C. § 553.

In opposition to plaintiff's Motion and in support of his Motion for Summary Judgment, defendant argues (1) that collateral estoppel does not apply in this case; (2) that the Manual provisions are consistent with the statute and the regulation; (3) that the advertising at issue was lacking in educational content and was principally directed to patient solicitation; and (4) that the Manual provisions are interpretative rules exempt from the requirements of the APA, 5 U.S.C. § 553.

III.

"Collateral estoppel, like the related doctrine of res judicata, has the dual purpose of protecting litigants from the burden of relitigating an identical issue with the same party or his privy and of promoting judicial economy by preventing needless litigation." Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326, 99 S.Ct. 645, 649, 58 L.Ed.2d 552 (1979). However, collateral estoppel applies only to questions of fact, not to questions of law. United States v. Casper, 541 F.2d 1275 (8th Cir. 1976), cert. denied, 430 U.S. 970, 97 S.Ct. 1654, 52 L.Ed.2d 362 (1977). As the 8th Circuit, adopting the reasoning of the trial court, explained in Casper,

Where a trial judge ... establishes a rule or standard of law, application of the doctrine of collateral estoppel would extend that ruling, which is the law of the first case, to become the law of the second case.

The primary risk is not one of eroding the power of the second court. A more serious risk is that after the doctrine is applied in a matter of first instance, when it gets to the appellate court, that court is foreclosed from considering other, equally useful reasoning as to the question of law, which would normally generate in the second trial court.

541 F.2d at 1278-79.

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