Battle Creek Health Systems v. Thompson

Decision Date30 March 2006
Docket NumberNo. 5:05CV-14.,5:05CV-14.
Citation423 F.Supp.2d 755
PartiesBATTLE CREEK HEALTH SYSTEMS, and Trinity Health-Michigan, Plaintiffs, v. Tommy G. THOMPSON, Defendant.
CourtU.S. District Court — Western District of Michigan

Howard William Burdett, Jr., Foley & Lardner LLP, Detroit, MI, for Plaintiffs.

J. Joseph Rossi, U.S. Attorney, Grand Rapids, MI, for Defendant.

OPINION AND ORDER

MILES, Senior District Judge.

Plaintiffs, Battle Creek Health System and Trinity Health-Michigan, filed this action against Tommy G. Thompson, Secretary of the Department of Health and Human Services ("Secretary"), under Title XVIII of the Social Security Act, 42 U.S.C. § 1395 (the "Medicare Act"), and the Administrative Procedure Act, 5 U.S.C. § 551 (the "APA"). This matter is presently before the court on Plaintiffs' Motion for Summary Judgment (dkt.# 23), and Defendant's Counter-Motion for Summary Judgment (dkt.# 27). For the reasons that follow, the Court denies the Plaintiffs' motion and grants the Defendant's counter-motion.

Background

The Medicare Act establishes a system for payment of health services provided to the elderly and disabled. 42 U.S.C. § 1395 et seq. The Department of Health and Human Services Center for Medicare and Medicaid Services ("CMS"), administers the program for the Secretary. Plaintiff Battle Creek Health Systems ("Battle Creek") operates an acute-care hospital that is a participating Medicare provider. Plaintiff Trinity Health-Michigan, doing business as Mercy General Health Partners ("Mercy-Muskegon"), operates an acute-care hospital that is also a participating Medicare provider. Provider hospitals participate in Medicare by entering into an agreement with the Secretary. Both Plaintiffs are parties to a Medicare participation agreement with the Secretary.

Pursuant to 42 U.S.C. § 1395h, fiscal intermediaries under contract to the Secretary serve as claims managers for the Medicare program, making the initial determination of the amount of payment to be made to a health care provider. At the close of the fiscal year (the cost reporting period), a provider submits a cost report to its fiscal intermediary showing the costs it incurred during the fiscal year and the proportion of the costs to be allocated to Medicare. 42 CFR § 413.20. The fiscal intermediary audits the report and determines the final amount of Medicare reimbursement due to the provider, 42 U.S.C. § 1395g, and then issues a Notice of Program Reimbursement ("NPR"). 42 CFR § 405.1803.

Among other costs, Medicare reimburses providers for bad debts that are attributable to amounts unpaid by beneficiaries of the Medicare program for Medicare deductibles and coinsurance. In this case, the fiscal intermediary1 audited Plaintiffs' cost reports for the period ending June 30, 1999, and denied $155,822 and $327,829 in bad debts ("Bad Debts") claimed respectively by Battle Creek and Mercy-Muskegon. Both Plaintiffs appealed to the Provider Reimbursement Review Board (PRRB), which found that Plaintiffs were entitled to reimbursement for the Bad Debts disallowed by the fiscal intermediary. Subsequently, the Deputy Administrator of CMS reversed the PRRB's decision regarding the Bad Debts. The Deputy Administrator's decision, issued November 12, 2004, was the final decision of the Secretary. Plaintiffs now are challenging the final decision of the Secretary denying Medicare reimbursement for the Bad Debts claimed by each Plaintiff.2

Standard of Review

Judicial review of the Secretary's final decision in a Medicare reimbursement dispute is conducted in accordance with the standards set forth in the Administrative Procedure Act, 5 U.S.C. § 701 et seq. 42 U.S.C. § 1395oo(f)(1). Under this standard; the Court may set aside a final decision only if it is "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law," or is "unsupported by substantial evidence." 5 U.S.C. § 706(2)(A), (E); Maximum Home Health Care, Inc. v. Shalala, 272 F.3d 318, 320 (6th Cir.2001). The Supreme Court defined the "arbitrary and capricious" standard under section 706 by stating:

The scope of review is a narrow one. A reviewing court must consider whether the decision was based on a consideration of the relevant factors and whether there has been a clear error of judgment . . . although this inquiry into the facts is to be searching and careful, the ultimate standard of review is a narrow one. The court is not empowered to substitute its judgment for that of the agency . . . The agency must articulate a rational connection between the facts found and the choice made . . . While we may not supply a reasoned basis for the agency's action that the agency itself has not given . . . we will uphold a decision of less than ideal clarity if the agency's path may be reasonably discerned.

Bowman Transportation v. Arkansas-Best, Freight System, 419 U.S. 281, 285-86, 95 S.Ct. 438, 42 L.Ed.2d 447 (1974) (citations omitted). The Supreme Court further clarified the term "arbitrary and capricious," explaining:

Normally, an agency rule would be arbitrary and capricious if the agency relied on factors which Congress had not intended it to consider, entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise.

Motor Vehicle Mfr. Ass'n v. State Farm, 463 U.S. 29, 43, 103 S.Ct. 2856, 77 L.Ed.2d 443 (1983). Agency interpretations contained in policy statements, agency manuals and enforcement guidelines, which do not have the force of law, are entitled to less deference than an interpretation arrived at after a formal adjudication or notice-and-comment rulemaking. Christensen v. Harris County, 529 U.S. 576, 587, 120 S.Ct. 1655, 146 L.Ed.2d 621 (2000); Reno v. Koray, 515 U.S. 50, 61, 115 S.Ct. 2021, 132 L.Ed.2d 46 (1995). However, the Court must defer to the Health and Human Services' reading of its own regulations, unless the reading is "plainly erroneous or inconsistent with the regulation[s]." Auer v. Robbins, 519 U.S. 452, 461, 117 S.Ct. 905, 137 L.Ed.2d 79 (1997); Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 512, 114 S.Ct. 2381, 129 L.Ed.2d 405 (1994); and see K Mart Corp. v. Cartier, Inc., 486 U.S. 281, 292, 108 S.Ct. 1811, 100 L.Ed.2d 313 (1988) ("If the agency regulation is not in conflict with the plain language of the statute, a reviewing court must give deference to the agency's interpretation of the statute."); Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 844, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984) ("[A] court may not substitute its own construction of a statutory provision for a reasonable interpretation made by the administrator of an agency."). If the Secretary defines a regulation in a reasonable way, the Court must give that reading controlling weight, even if it is not the answer "the court would have reached if the question had initially arisen in a judicial proceeding.'" Regions Hosp. v. Shalala, 522 U.S. 448, 457, 118 S.Ct. 909, 139 L.Ed.2d 895 (1998) (quoting Chevron USA, 467 U.S. at 843 n. 11, 104 S.Ct. 2778 (1984)).

Discussion

Under the Medicare Act, the Secretary reimburses provider hospitals for services provided to Medicare patients. Bad Debts are considered reductions in revenue rather than costs incurred delivering medical services and are not allowable costs under Medicare. However, Service providers receive reimbursement for "bad debts," as defined at 42 C.F.R. § 412.115(a):

[A]mounts 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.

A debt must meet the following criteria before a provider is entitled to reimbursement:

(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); Provider Reimbursement Manual (PRM), § 308.3 Here, with regard to the Bad Debts disallowed, the fiscal intermediary determined that Plaintiffs had met the requirements of subsections 1 and 2, but failed to satisfy subsections 3 and 4.

CSM publishes the PRM, which contains interpretive guidelines and policies to implement the Medicare regulations. Relative to this case, the PRM provides:

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.

PRM, § 310.2.

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.

PRM, § 310. "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." PRM, § 310.A. Further,

Uncollectible deductibles and coinsurance amounts are recognized as allowable bad debts in the reporting period in which the debts are determined to be worthless. Allowable bad debts must be related to specific amounts which have been determined to be uncollectible. Since bail debts are uncollectible accounts receivable and notes receivable and notes receivable, 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...

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3 cases
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    ...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 Plaintiffs are non-profit, tax-exempt, acute-care hospita......
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    ...at any time in the future." 42 C.F.R. § 413.89(e). To support this contention, defendant relies on Battle Creek Health Sys. v. Thompson, 423 F.Supp.2d 755, 760 (W.D.Mich.2006), which upheld a fiscal intermediary's ruling that § 413.89(e) prohibits reimbursement for bad debts held by a colle......

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