Bedford Medical Center v. Heckler

• Decision Date: 01 July 1985
• Docket Number: No. 84-2453,84-2453
• Citation: 766 F.2d 321
• Parties: , Medicare&Medicaid Gu 34,694 BEDFORD MEDICAL CENTER, Plaintiff-Appellant, v. Margaret M. HECKLER, Secretary of Health & Human Services, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 321

766 F.2d 321

10 Soc.Sec.Rep.Ser. 187, Medicare&Medicaid Gu 34,694

BEDFORD MEDICAL CENTER, Plaintiff-Appellant, v. Margaret M. HECKLER, Secretary of Health & Human Services,

Defendant-Appellee.

No. 84-2453.

United States Court of Appeals, Seventh Circuit.

Argued April 24, 1985.

Decided July 1, 1985.

Carson P. Porter, Rice, Porter & Seiller, Louisville, Ky., for plaintiff-appellant.

Alan S. Dorn, Asst. Reg. Atty., Dept. of Health & Human Services, Chicago, Ill., for defendant-appellee.

Before COFFEY and FLAUM, Circuit Judges, and GIBSON, Senior Circuit Judge. ^*

FLOYD R. GIBSON, Senior Circuit Judge.

The plaintiff, Bedford Medical Center, appeals from a district court's decision which affirmed the defendant's, Margaret Heckler, Secretary of Health and Human Services, decision denying the plaintiff reimbursement under the Medicare Act for certain expenses. We affirm.

I.

The plaintiff is a 117-bed, general, short-term hospital located in Bedford, Indiana. During the relevant time periods, the plaintiff was a Medicare certified "provider of services." 42 C.F.R. Secs. 489.1-489.11 (1982). In accordance with Medicare requirements, the plaintiff submitted to the fiscal Intermediary ¹ cost reports for fiscal years ending June 30, 1977, June 30, 1978, and September 30, 1979. 42 C.F.R. Sec. 405.406 (1982). Upon its review of these reports the Intermediary made certain adjustments. For fiscal years 1977 and 1978, the Intermediary disallowed costs for physical therapists which were in excess of published limits. For all three years, the Intermediary made reductions in allowable interest expenses, and for fiscal year 1979, the Intermediary disallowed costs incurred in recruiting doctors for an independent clinic.

The plaintiff appealed these adjustments to the Provider Reimbursement Review Board (PRRB). 42 U.S.C. Sec. 1395oo(a)(1)(A) (1982); 42 C.F.R. Sec. 405.1835(a) (1982). The PRRB affirmed the Intermediary's adjustments in part, and modified them in part. Because the Deputy Administrator of the Health Care Financing Administration declined to reverse, affirm, or modify the PRRB's decision, it became the Secretary's final decision. See 42 U.S.C. Sec. 1395oo(f)(1) (1982); 42 C.F.R. Sec. 405.1871(b) (1982). The plaintiff appealed this decision to the district court. 42 U.S.C. Sec. 1395oo(f)(1) (1982); 42 C.F.R. Sec. 405.1877 (1982).

II.

Our standard of review of this reimbursement decision has been established by the Administrative Procedure Act. 5 U.S.C. Sec. 706 (1982). When reviewing administrative decisions, federal courts are authorized to set aside agency decisions only when they: are arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with the law; are contrary to constitutional right, power, privilege, or immunity; exceed statutory jurisdiction or fall short of statutory right; are reached in violation of established procedure; or are unsupported by substantial evidence. Id.; St. Francis Hosp. Center v. Heckler, 714 F.2d 872, 873 (7th Cir.1983), cert. denied, --- U.S. ----, 104 S.Ct. 1274, 79 L.Ed.2d 679 (1984); Pleasantview Convalescent & Nursing Center, Inc. v. Weinberger, 565 F.2d 99, 102 (7th Cir.1976). We note also that the interpretations of regulations issued pursuant to a statute, especially a statute as complex as the Medicare Act, are entitled to considerable deference. St. Francis Hosp. Center, 714 F.2d at 873; St. Mary of Nazareth Hosp. Center v. Department of Health & Human Servs., 698 F.2d 1337, 1346 (7th Cir.), cert. denied, --- U.S. ----, 104 S.Ct. 107, 78 L.Ed.2d 110 (1983); see Udall v. Tallman, 380 U.S. 1, 16, 85 S.Ct. 792, 801, 13 L.Ed.2d 616 (1965).

a. The disallowance of excess physical therapy costs.

In the 1977 and 1978 cost years, the plaintiff contracted with independent physical therapists to provide physical therapy services to its patients. For both of those fiscal years, the Intermediary disallowed those costs to the extent that they exceeded the "salary equivalency guidelines" published by the Secretary. On appeal, the plaintiff's argument is twofold: first, that the salary equivalency guidelines are "arbitrary, capricious, and an abuse of discretion" because they are based on invalid statistics; and, second, that the Secretary's denial of the plaintiff's request for an exception to the application of the guidelines was "clearly erroneous and not in accordance with the law."

When a provider of Medicare services enters into an independent contractor arrangement with a physical therapy service, both the Act and the regulations issued pursuant to it provide that the independent contractor shall not be paid more than the prevailing salary (plus any additional costs incurred by the provider for the benefit of the therapist) which a physical therapist who is an employee of a provider receives. 42 U.S.C. Sec. 1395x(v)(5)(A) (1982); 42 C.F.R. Sec. 405.432(a) (1982). The prevailing salary is "the hourly salary rate based on the 75th percentile of salary ranges paid by providers in the geographical area...." 42 C.F.R. Sec. 405.432(b)(1) (1982). The Secretary relied on data gathered during a Bureau of Labor Statistics survey to determine the 75th percentile of salary ranges paid to physical therapists. PRRB Decision No. 79-D8. [1979-1 Transfer Binder] Medicare & Medicaid Guide (CCH) p 29,628 at 9956, rev'd, HCFA Administrator Decision [1979-1 Transfer Binder] Medicare & Medicaid Guide (CCH) p 29,703, aff'd, Mercy Hosp. of Laredo v. Harris, No. H-79-884 (S.D.Tx.1984) (appeal pending before the Fifth Circuit). This survey, conducted originally in 1972 but updated to reflect economic changes, gathered data from twenty-one standard metropolitan statistical areas (SMSAs). Nineteen SMSAs generated statistically significant data. Id. It is the application of the guidelines based on this data to which the plaintiff objects.

The plaintiff argues that guidelines based on data gathered from urban areas cannot be applied to rural areas. However, the Secretary's regulations do not require that the guidelines be applied in all situations or under all circumstances. The regulations provide for certain exceptions to the application of the guidelines, one of which applies to the plaintiff and is as follows:

An exception may be granted ... by the intermediary when a provider demonstrates that the cost for therapy services established by the guideline amounts are inappropriate to a particular provider because of some unique circumstances or special labor market conditions in the area.

42 C.F.R. Sec. 405.432(f)(2) (1982). Thus, it seems as if the guidelines were not intended to be an ironclad set of standards for making reimbursement decisions, but rather were intended to provide an approximate rule of thumb by which intermediaries could make those decisions. As is clear from the regulation setting forth the exception, the burden is on the provider to prove that, in its particular situation, the guidelines are not an appropriate rule of thumb. Id.; see also Provider Reimbursement Man., Part 1, Sec. 1414.2, reprinted in Medicare & Medicaid Guide (CCH) p 5849D-58. The Provider Reimbursement Manual elaborates on the exception procedure. ² Once a provider establishes a prima facie case that the going rate for physical therapy or other services in the area is higher than the guidelines, the intermediary is to survey the other providers in the area to determine what the going rate is for the particular specialist. This survey should include similarly situated providers. Thus, the intermediary's ultimate decision as to the extent of the reasonable costs is made by assessing the applicant's costs vis-a-vis other providers in the relevant area, not on the guidelines. Provider Reimbursement Man., Part 1, Sec. 1414.2 reprinted in Medicare & Medicaid Guide (CCH) p 5849D-58 at 1931-48, 1931-49.

In this case, the district court found specifically that Bedford failed to present any evidence that other hospitals in the area were unable to obtain physical therapy services at rates within the guidelines for the cost years in question. On the other hand, the intermediary surveyed all of the hospitals within a thirty-five mile radius of the plaintiff--including a hospital of similar size in Bedford. Four of the five hospitals had hired therapists within the guidelines for the cost years in question. In addition, for the cost year following the years in question here, the plaintiff was able to hire a therapist at a rate well within the guidelines. The plaintiff argues, however, that it did present evidence that it and other providers were unable to obtain therapy services within the guidelines. This argument is disingenuous. The evidence which the plaintiff presented concerned cost years not in question here and, accordingly, is irrelevant.

The plaintiff urges us to find that the guidelines themselves, as well as the application of them, are arbitrary and capricious. The plaintiff has not shown the guidelines to be arbitrary and capricious. Pursuant to the exception procedure provided for in the guidelines, the intermediary determined the reasonableness of the plaintiff's physical therapy costs by determining what the going rate was for physical therapists in the plaintiff's area for the cost years in question. The guidelines were used only as a point of reference and not as an absolute limit on the plaintiff's reimbursable costs. Thus, the Secretary's decision was based on costs actually paid in the geographic area by other providers, and her decision to deny the plaintiff reimbursement for physical therapy costs in excess of the costs incurred by other providers in the area, and in excess of the guidelines, was not erroneous.

b. The modification of the plaintiff's reimbursable interest expense.

In 1976, the plaintiff executed a First Mortgage Note to the Hospital Authority of Lawrence County, Indiana, to finance a construction project. The Authority assigned the note to a...