698 F.2d 615 (3rd Cir. 1983), 82-5098, Community Health Services of Crawford County, Inc. v. Califano

Docket Nº:82-5098.
Citation:698 F.2d 615
Party Name:COMMUNITY HEALTH SERVICES OF CRAWFORD COUNTY, INC., a non-profit corporation, Ada Werner, an individual, Frank E. Werner, an individual, and Shirley Sorger, an individual, Plaintiffs-Appellants, v. Joseph A. CALIFANO, Jr., Secretary of the Department of Health, Education and Welfare, and the Travelers Insurance Companies, a corporation, Defendants-
Case Date:January 19, 1983
Court:United States Courts of Appeals, Court of Appeals for the Third Circuit

Page 615

698 F.2d 615 (3rd Cir. 1983)


non-profit corporation, Ada Werner, an individual,

Frank E. Werner, an individual, and

Shirley Sorger, an individual,



Joseph A. CALIFANO, Jr., Secretary of the Department of

Health, Education and Welfare, and the Travelers

Insurance Companies, a corporation,



non-profit corporation, Plaintiff-Appellant,


Patricia Roberts HARRIS, Secretary of the Department of

Health, Education and Welfare, and the Travelers

Insurance Companies, a corporation,


No. 82-5098.

United States Court of Appeals, Third Circuit

January 19, 1983

Argued Sept. 29, 1982.

Rehearing Denied Feb. 14, 1983.

Page 616

Raymond G. Hasley, Brian W. Ashbaugh (argued), Rose, Schmidt, Dixon & Hasley, Pittsburgh, Pa., for plaintiffs-appellants.

David R. Culp, Acting Regional Atty., James S. Feight, Jr., Asst. Regional Atty., James C. Newman (argued), Dept. of Health and Human Services, Philadelphia, Pa., for defendants-appellees.

Before ALDISERT and HIGGINBOTHAM, Circuit Judges, and MEANOR, District Judge. [*]


A. LEON HIGGINBOTHAM, Jr., Circuit Judge.

Since time immemorial it has been argued that "The King can do no wrong;" therefore, his subjects can neither complain of, nor be indemnified for, the "wrongs" of the King nor for the wrongs of the King's agents. In a different context, we are now asked to affirm a somewhat similarly archaic concept in favor of the United States government, regardless of its effect on innocent persons. Even though the agent of the Secretary of Health and Human Services 1 on five different occasions over a two

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and one-half year period wrongly advised a charitable health care provider that certain costs were reimbursable, and even though the health care provider in good faith made expenditures and incurred obligations in excess of $70,000 in reliance on the explicit advice of the agent of the Secretary, and even though the repayment of those "costs" may cause a significant diminution of home health care availability to ill and poor people in a rural medically underserved area, the Secretary now seeks to hold the health care provider liable for recoupment of the reimbursed costs. In effect, the government seems to argue that: "We, just like the King and his agents, can do no wrong, regardless of the grievous consequences we cause innocent people." 2 The issue we must decide is whether, on the facts of this case, the Secretary can be estopped from recouping monies from the very party that was induced, by the government agent's totally erroneous advice, into incurring the expenses for which the reimbursements were made.

Appellants, Community Health Services of Crawford County, Inc. (CHS), a non-profit corporation and Ada Werner, Frank E. Werner, and Shirley Sorger, individuals within the county who utilize CHS' services, ask this court to set aside the summary judgment order of the United States District Court for the Western District of Pennsylvania. Plaintiffs/Appellants have filed two separate suits against the Secretary and its agent, the Travelers Insurance Companies (Travelers). Appellants claim that the decisions of the Provider Reimbursement Review Board (PRRB) and the Secretary, which allowed recoupment of overpayments to CHS under Medicare cost reimbursement procedures, were erroneous. Though appellants assert several grounds for reversal, we agree only that the District Court erred in finding that the United States cannot be estopped from recouping the alleged overpayment. Under the egregious facts of this case and in view of the affirmative misconduct of the government's agent--Travelers--we will reverse the judgment of the district court.


CHS is a charitable health care provider incorporated under the laws of Pennsylvania. In 1966 it entered into an agreement with the Secretary whereby CHS agreed to provide home health care services to eligible individuals under the Medicare provisions of the Social Security Act. 3 The Secretary agreed to reimburse CHS for reasonable costs of such services. In April, 1975, CHS entered into contracts with the Mercer County Consortium Services, Inc. by which CHS was to employ participants in a program established under the Comprehensive Employment and Training Act of 1973 4 (CETA) which is designed to provide job training and experience for unemployed individuals to enhance their future employability. Under the terms of the CETA grants, "CHS was to employ program participants furnished by the regional CETA administration, and it was to be reimbursed for the salaries and fringe benefits paid to those employees." 5

John C. Wallach, CHS' administrator, testified that CETA workers enabled the agency to expand the range of services it provided and to meet the mushrooming demand for health services in the economically depressed and impoverished rural area in which it functioned. 6 CHS had designated the county that CHS serves as a medically

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underserved area. 7 It is understandable that from 1975 to 1978 CHS' units of service burgeoned from just under 4,000 to 81,000 per year. In 1979 they increased to over 100,000 units of service. 8 CETA funds became a critical source for financing this expansion because CHS was otherwise dependent upon Medicare reimbursements and charitable contributions. 9 In 1975-1976, CETA grants of $53,402 represented 25% of CHS' budget; in 1976-1977 CETA grants of $81,141 represented 24% of its budget; in 1977-1978, CETA grants of $104,524 represented 18%. 10

Medicare regulations provide that revenue received by providers in the form of donor-restricted grants, or gifts that must be used to pay designated operating expenses, must be set off against the expenses submitted to Medicare for reimbursement in the provider's cost report. 11 However, the Provider Reimbursement Manual at Sec. 612 provides an exception to required offsets known as "Seed Money Grants." 12 "Seed Money" is defined in Sec. 612.2 as "[g]rants designated for the development of new health care agencies or for expansion of services of established agencies...." 13 Thus, the critical question arose as to whether the CETA grants had to be offset against expenses CHS submitted to Medicare for reimbursement.

The administrative structure established under Medicare made it quite difficult for CHS to get an answer to the above question. The administrative process precluded CHS from presenting an inquiry directly to the Secretary. Rather, it was required to consult a fiscal intermediary appointed by the Secretary to serve as his agent. The intermediary's primary duty involved processing claims and payments to providers such as CHS. The intermediary was required statutorily to relay information and instructions from the Secretary to providers and to serve as a channel of communication from providers to the Secretary. 14 Consequently, Wallach presented the question of the appropriate treatment of CETA funds to the intermediary, appellee Travelers Insurance Companies. From 1975 to August 1977, Wallach discussed this issue with Michael Reeves, Travelers' Medicare Manager, on five separate occasions. 15 On each occasion, Reeves advised Wallach that Medicare would not offset the CETA grants against reimbursable costs because they qualified as a "seed money" exception to reimbursement offsets as provided in Sec. 612.2 of the Provider Reimbursement Manual. 16 CHS prepared its cost reports without offsetting its CETA grants from its reimbursable costs, and Travelers approved CHS' reports for the years 1975, 1976 and 1977. CHS used this additional money to finance the expansion of the health care services it provided to Medicare beneficiaries. 17

During the years that CHS inquired into the treatment of CETA grants, the Secretary had neither formulated nor promulgated an official policy on the treatment of CETA funds. Administrative procedures applicable to this situation obliged Reeves to refer CHS' inquiries to the Health Care Financing Administrator. Consequently, Reeves was making a policy judgment in his own discretion in advising CHS that CETA funds were seed money and did not have to be offset. It was not until August 4, 1977 that he finally requested instructions about the treatment of CETA grants from the Philadelphia office of the Department's Bureau of Health Insurance as Reeves testified

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he was required to do under administrative procedures. 18

The instructions Reeves received from Robert C. Griffith, the Program Officer of the Health Care Financing Administration, contradicted the advice Reeves had given to CHS. Griffith declared that CETA funds did not qualify as seed money and were therefore to be offset against the provider's reimbursable costs. 19 CHS was advised of this instruction by letter dated October 7, 1977 and personally by Reeves on November 9, 1977. 20

Statutory procedures 21 authorize the Secretary to periodically review providers' cost reports. Thus, a determination made by an intermediary may be reopened and revised if, within three years after notice of the intermediary's determination, the Secretary notifies the intermediary that its determination is inconsistent with applicable law, regulations or general instructions of the Secretary.

Claiming authority under 42 C.F.R. Sec. 405.1885, the Secretary reopened CHS' cost reports for 1975, 1976 and 1977 to recoup the CETA funds he claimed should have been offset against the costs Medicare reimbursed for those years. Beginning in May 1978, Travelers issued Notices of Program Reimbursements to recapture from CHS the following...

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