National Medical Enterprises, Inc. v. Sullivan

• Citation: 916 F.2d 542
• Decision Date: 10 October 1990
• Docket Number: No. 89-55859,89-55859
• Parties: , 31 Soc.Sec.Rep.Ser. 306, Medicare&Medicaid Gu 38,893 NATIONAL MEDICAL ENTERPRISES, INC., Doing Business Through Various Wholly-Owned Hospital Subsidiaries, Plaintiff-Appellee, v. Louis W. SULLIVAN, M.D., Secretary of Health and Human Services, Defendant-Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

Page 542

916 F.2d 542

59 USLW 2312, 31 Soc.Sec.Rep.Ser. 306,

Medicare&Medicaid Gu 38,893

NATIONAL MEDICAL ENTERPRISES, INC., Doing Business Through

Various Wholly-Owned Hospital Subsidiaries, Plaintiff-Appellee, v. Louis W. SULLIVAN, M.D., Secretary of Health and Human

Services, Defendant-Appellant.

No. 89-55859.

United States Court of Appeals,

Ninth Circuit.

Argued and Submitted April 10, 1990.

Decided Oct. 10, 1990.

Anthony J. Steinmeyer, Dept. of Justice, Civ. Div., Washington, D.C., for defendant-appellant.

Patric Hooper, Hooper, Lundy & Bookman, Inc., Los Angeles, Cal., for plaintiff-appellee.

Appeal from the United States District Court for the Central District of California.

Before NELSON, NORRIS and O'SCANNLAIN, Circuit Judges.

WILLIAM A. NORRIS, Circuit Judge:

This case involves the claims of eighteen hospitals ("Providers") seeking Medicare reimbursement for stock maintenance costs incurred by their corporate owner, National Medical Enterprises ("NME"), during the fiscal years 1974 to 1979. The costs in dispute include stock transfer agent fees, stock and exchange registration fees and costs attributable to SEC filings, stockholder meetings, annual reports to stockholders, and institutional public relations related to stock and financial matters. The Secretary of Health and Human Services ("Secretary") ruled that, pursuant to Title XVIII of the Social Security Act, 42 U.S.C. Sec. 1395 et seq., known as the "Medicare Act", and internal agency regulations, stock maintenance costs were not reimbursable expenses. NME sought judicial review of the Secretary's decision in the United States District Court for the Central District of California on behalf of its eighteen wholly-owned subsidiaries. After considering cross motions for summary judgment, the court ruled that the Secretary had no rational basis for denying the subsidiaries reimbursement and granted summary judgment for plaintiff-appellee. The Secretary timely appeals the district court's decision. We reverse.

I

Under the Medicare Act, providers are entitled to reimbursement for reasonable costs "necessary in the efficient delivery of needed health services" to Medicare patients. 42 U.S.C. Sec. 1395x(v)(1)(A) (1988). Agency regulations established to implement the statutory mandate stipulate that the costs must be "necessary and proper," 42 C.F.R. Sec. 405.451(b) (1985) (redesignated as 42 C.F.R. Sec. 413.9(b) and "directly or indirectly related to patient care." 42 C.F.R. Sec. 405.451(c) (1985) (redesignated as 42 C.F.R. Sec. 413.9(c)).

In a previous action, NME and three of its subsidiary hospitals sought reimbursement for NME's stock maintenance costs during fiscal 1973. The Claims Court held that the Secretary had improperly denied reimbursement because, it said, stock maintenance costs were reasonable expenses related to patient care. See National Medical Enterprises, Inc. v. United States ("NME"), 11 Cl.Ct. 329 (1986). The Secretary did not appeal.

In the present action, NME, on behalf of the three subsidiaries involved in the Claims Court judgment and fifteen additional subsidiaries, claimed reimbursement for stock maintenance costs incurred by NME from fiscal 1974 to 1979. After an agency review process, the Secretary held that stock maintenance costs were incurred primarily for the benefit of present and future stockholders, not Medicare patients, and thus were not "reasonable costs" related to patient care under the Medicare Act. The Secretary also found that denial of reimbursement was consistent with the agency's Provider Reimbursement Manual ("PRM") Secs. 2150.2B, 2134.9 ¹ interpreting the Act. According to the manual:

The following types of costs relevant to the proprietary and equity interest of the stock holders, but not related to patient care, are excluded from allowable costs: Costs incurred primarily for the benefit of stockholders or other investors, including but not limited to, the costs of stockholders' annual reports and newsletters, annual meetings, mailing of proxies, stock transfer agent fees, stock exchange registration fees, stock broker and investment analysis, and accounting and legal fees for consolidating statements for SEC purposes.

PRM Sec. 2134.9.

The district court granted summary judgment for NME on the ground that the Secretary's decision lacked a rational basis. Stock maintenance costs, the court concluded, were necessarily incurred in securing equity financing for the provision of patient services. Moreover, the court found that stock maintenance costs were indistinguishable from other costs, such as debt financing, that were reimbursed. Accordingly, the district court ruled that the Secretary's disallowance of stock maintenance costs had no rational basis. Because we conclude, on the contrary, that the Secretary's decision does rest on a rational basis, we reverse the district court's judgment.

II

Before addressing the merits of this action, we consider NME's claim that the Secretary is collaterally estopped from relitigating the stock maintenance cost issue because NME or its privies already successfully litigated the issue in the previous Claims Court action. See NME, 11 Cl.Ct. at 329. Neither party disputes the well-established rule that nonmutual offensive collateral estoppel ² cannot be asserted against the government. See United States v. Mendoza, 464 U.S. 154, 159-60, 104 S.Ct. 568, 571-72, 78 L.Ed.2d 379 (1984). At issue, only, is whether mutuality exists, allowing NME the use of collateral estoppel. We hold that it does not.

The Secretary claims that mutuality is lacking because, although NME was the primary plaintiff in the Claims Court action, it is not the proper plaintiff in the case at bar. See Appellant's Reply Brief at 3-12. The Secretary points to 42 U.S.C. Sec. 1395oo (f)(1), which stipulates that only "providers" of patient services may seek judicial review of agency decisions. ³ Drawing on a statutory definition of "provider" in 42 U.S.C. Sec. 1395x(u) ⁴, the Secretary argues that NME, as the parent corporation, lacks standing to sue. See Appellant's Reply Brief at 3-12. NME counters that as the owner and home office of the subsidiaries, it is the appropriate party and contends that hospital owners "routinely" are named as plaintiffs in Medicare reimbursement suits. See Appellee's Brief at 15 n. 3; Appellee's Reply Brief at 1-5.

We need not decide whether, and under what circumstances, a parent corporation may seek judicial review under the Medicare Act. Because this lawsuit is grounded on the claims of eighteen wholly-owned subsidiaries--fifteen of which were not involved in the prior action--we conclude that mutuality is lacking, whether or not NME is considered a proper plaintiff. The facts of this case are that the eighteen providers, not NME, are the primary plaintiffs in this dispute. As wholly-owned subsidiaries, these providers contract with the Secretary to provide patient services, receive regular payment and submit annual cost reports showing the expenses incurred during the fiscal year and the appropriate portion of those costs to be allocated to the Medicare program. Allowing a home office to establish mutuality merely by holding itself out as the "representative" of multiple subsidiaries would open the door for home offices with providers in multiple states to secure a favorable judgment in one circuit, then bind the government to that judgment in other circuits. Such a result would effectively freeze the law among circuits--a result explicitly disfavored by the Supreme Court in Mendoza, 464 U.S. at 160, 104 S.Ct. at 572 (noting that nonmutual collateral estoppel against the government "would substantially thwart the development of important questions of law by freezing the first final decision rendered on a particular legal issue."). See also American Medical Int'l, Inc. v. Secretary of HEW ("AMI"), 677 F.2d 118, 124 (D.C.Cir.1981) (holding that subsidiary providers that were not parties to a previous Medicare reimbursement suit could not use collateral estoppel against the government).

We also reject NME's contention that even if the parties in the disputed actions were different, collateral estoppel is still appropriate because NME and the fifteen subsidiaries that were not involved in the Claims Court action were in privity with each other. Whatever relationship exists between NME and its offspring is not sufficient to override the important values limiting the use of collateral estoppel. As courts have long recognized, collateral estoppel is inappropriate where, as here, it would be "unfair" to the defendant, Parklane Hosiery Co., Inc. v. Shore, 439 U.S. 322, 331, 99 S.Ct. 645, 651, 58 L.Ed.2d 552 (1979), or where "applying preclusion [would] give one person a favored position in current administration of the law," AMI, 677 F.2d at 124 (quoting Restatement (Second) of Judgments Sec. 68.1 at 33 (Tent.Draft No. 4, 1977)). Courts of appeals consistently have denied providers Medicare reimbursement for stock maintenance costs. See AMI, 677 F.2d at 124; Humana, Inc. v. Heckler, 758 F.2d 696, 700 (D.C.Cir.1985), cert. denied, 474 U.S. 1055, 106 S.Ct. 791, 88 L.Ed.2d 769 (1986); Sun Towers, Inc. v. Heckler, 725 F.2d 315, 327 (5th Cir.), cert. denied, 469 U.S. 823, 105 S.Ct. 100, 83 L.Ed.2d 45 (1984). In addition to creating inconsistency among the circuits, allowing the subsidiaries in the present case to be reimbursed would unduly privilege them vis-a-vis providers in similar circumstances. We see no reason to countenance such disparity. We therefore deny NME the benefit of collateral estoppel.

III

Turning to the merits of the case, we hold that the Secretary's decision to deny reimbursement for stock maintenance costs rested on a rational basis. Pursuant to Congressional directives, the Secretary is entitled to deny the subsidiaries reimbursement where such costs are not "reasonably related to patient care" or are "unnecessary in the efficient...