Biloxi Regional Medical Center v. Bowen

• Decision Date: 18 December 1987
• Docket Number: No. 86-5615,86-5615
• Citation: 835 F.2d 345
• Parties: , 20 Soc.Sec.Rep.Ser. 96, Medicare&Medicaid Gu 36,759 BILOXI REGIONAL MEDICAL CENTER, Appellant, v. Otis R. BOWEN, Secretary, Dept. of H.H.S.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 345

835 F.2d 345

266 U.S.App.D.C. 281, 20 Soc.Sec.Rep.Ser. 96,

Medicare&Medicaid Gu 36,759

BILOXI REGIONAL MEDICAL CENTER, Appellant, v. Otis R. BOWEN, Secretary, Dept. of H.H.S.

No. 86-5615.

United States Court of Appeals District of Columbia Circuit.

Argued Oct. 2, 1987.

Decided Dec. 18, 1987.

Appeal from the United States District Court for the District of Columbia (Civil Action No. 86-00043).

Ronald N. Sutter, Washington, D.C., for appellant.

Thomas K. Stuber, Atty., Dept. of Health and Human Services, with whom Richard K. Willard, Asst. Atty. Gen., Dept. of Justice and Joseph E. diGenova, U.S. Atty., Washington, D.C., were on the brief, for appellee.

Before EDWARDS, STARR and D.H. GINSBURG, Circuit Judges.

Opinion for the Court filed by Circuit Judge D.H. GINSBURG.

D.H. GINSBURG, Circuit Judge:

This case arises under the Medicare reimbursement provisions of Title XVIII of the Social Security Act ("the Act"), 42 U.S.C. Sec. 1395 et seq. (1982), and implementing regulations promulgated by the Secretary of Health and Human Services ("the Secretary"). Under the Act and regulations, hospitals and other health care facilities that provide covered health care services to Medicare beneficiaries are ordinarily reimbursed for the actual reasonable costs they incur in delivering those services. 42 U.S.C. Sec. 1395f(b) (1982). ¹ The appellant, Biloxi Regional Medical Center ("the Center"), rents hospital facilities owned and originally equipped by the City of Biloxi, Mississippi. During its 1982 cost reporting year, the Center's rental payments to the City totaled $800,000. When the Center claimed a portion of these payments as a reasonable cost attributable to its care of Medicare beneficiaries, however, the Center's fiscal intermediary ² denied reimbursement for the payments.

The Center appealed to the Provider Reimbursement Review Board ("PRRB"), ³ which affirmed the decision of the intermediary. ⁴ The PRRB, like the intermediary, determined that the Center and the City of Biloxi were "organizations related ... by common ownership or control," i.e., that the City controlled the Center. Under regulations promulgated by the Secretary, a provider of covered health services that is furnished services, facilities, or supplies by such a "related organization" is reimbursed for the costs incurred by the related, supplying organization, but only to the extent that such "cost[§ do] not exceed the price of comparable services, facilities, or supplies that could be purchased elsewhere." 42 C.F.R. Sec. 405.427(a) (1982). ⁵ Maintaining that the PRRB improperly applied the related organizations regulation, the Center filed a civil action against the Secretary in the District Court, ⁶ which granted summary judgment in favor of the defendant. ⁷ The Center appealed and, for the reasons set forth below, we reverse.

I

The Center is a not-for-profit corporation chartered in the State of Mississippi in 1981. By the terms of an agreement dated May 29, 1981, the Center assumed the operation of a hospital formerly known as Howard Memorial Hospital. Signatories to this agreement included the Center, the City, and three other parties: New Biloxi Hospital ("NBH"), which had operated Howard Memorial Hospital since 1963 under a lease from the City; Methodist Hospitals of Memphis, Tennessee ("Methodist"), a corporation that operates health care facilities; and American Medical Management Hospital Group, Inc. ("AMM"), a subsidiary of Methodist. The 1963 lease had provided NBH with a rent-free term of twenty-five years, with an option to renew the lease for an additional twenty-five years. ⁸ Under the 1981 agreement, NBH assigned the lease, with certain revisions, to the Center. Methodist agreed to affiliate with the Center and to lend its cooperation and expertise in establishing the facility as a regional medical center. The agreement recognized AMM as the Center's intended management group and guarantor of the Center's financial responsibilities under the agreement. ⁹

In assuming NBH's obligations, the Center agreed to operate Howard Memorial Hospital under the name Biloxi Regional Medical Center, but also promised "to begin as soon as practical and possible plans for the construction of new facilities." J.E. at 275. If the Center did not substantially complete the new facilities by July 1, 1985, the City reserved the right to cancel the agreement and take over operation of the hospital.

For purposes of this case, the most significant revision of the 1963 lease between the City and NBH concerns the Center's agreement to make monthly rental payments to the City in "an amount determined after an independent rental appraisal has been completed by a qualified appraisal firm." Id. at 279. After the agreement was signed, an appraisal firm determined that the annual fair market rental value of the facility was $800,000. The Center paid this amount to the City during its 1982 cost reporting year; in its 1982 cost report to its fiscal intermediary, Blue Cross and Blue Shield of Mississippi ("Blue Cross"), the Center claimed slightly more than $450,000 of these payments as a reasonable and reimbursable cost allocable to Medicare.

Blue Cross denied the Center's claim on the ground that the Center and the City were related organizations within the meaning of the Secretary's regulations. In reaching this conclusion, Blue Cross relied upon an opinion issued from the Secretary's Regional Office concluding that although "the City [was] not involved in the day to day operations of the Center," the City and the Center were related by common control. Id. at 264. ¹⁰ As a result of this finding, the Center was reimbursed only about $93,000, representing the City's allocable costs of owning the hospital. ¹¹

The PRRB affirmed, but it relied principally on the clause in the 1981 agreement providing that upon the expiration of the lease, "the proceeds of the [Center's] operations would revert to the City." Id. at 35. Reading its decision generously, the PRRB appears also to have relied upon five other factors (only one of which had been mentioned by the intermediary) indicative, in its view, of the City's control over the Center: (1) the power given in the agreement to the mayor of the City to approve or reject non-physician candidates selected by AMM to fill four of the nine seats on the Center's Board of Directors; (2) the City's assistance to the Center in financing the construction of the new facility by issuing bonds; (3) a provision in the agreement for the City to take title to all furniture, equipment, and so on, at the expiration of the lease; (4) a clause in the 1963 lease stating that it would be in the City's best interest to lease the hospital to NBH; and (5) the City's extension of the Center's deadline for substantially completing the new facility without requiring additional consideration from the Center. Id. at 35-36. ¹²

In granting summary judgment in favor of the Secretary, the District Court held that the PRRB's decision was supported by substantial evidence. The court thought it unnecessary to analyze all the factors on which the PRRB had relied, however; in that court's view, the mayor's power to approve or reject four members of the Center's Board of Directors was sufficient in itself to sustain the finding of relatedness on the ground that the City controlled the Center.

II

Our review in this case, like that of the District Court, is limited to determining whether, on the record as a whole, the PRRB's decision is supported by substantial evidence. ¹³ Our review proceeds as if this case were an immediate appeal from a decision reached after an administrative hearing on the record. The District Court's decision is not entitled to any particular deference. Walter O. Boswell Memorial Hosp. v. Heckler, 749 F.2d 788, 790 n. 2 (D.C.Cir.1984); see Regents of the Univ. of California v. Heckler, 771 F.2d 1182, 1187 (9th Cir.1985) ("[W]e review the Secretary's action under the same standard as did the district court."). Before discussing the record evidence, however, we pause briefly to describe the concept of "related organizations" and its significance in the labyrinth of Medicare reimbursement regulations.

A

The Medicare program established by Title XVIII of the Social Security Act provides federally funded health insurance for the aged and disabled. Under the Act, payments on behalf of eligible individuals are made to health care providers with whom the Secretary has entered into "provider agreements." 42 U.S.C. Sec. 1395cc (1982). For cost reporting years prior to October 1, 1983, these providers are reimbursed for their "reasonable costs"--costs "actually incurred, excluding therefrom any part of the incurred cost found to be unnecessary in the efficient delivery of needed health services" as "determined in accordance with regulations" promulgated by the Secretary. Id. at Secs. 1395f(b), 1395x(v)(1)(A) (1982); see 42 C.F.R. Sec. 413.9(b) (1986).

The Secretary's regulations set forth with particularity the methods to be used in determining the reasonable costs for which providers will be reimbursed. The overall objective of these regulations is to ensure that the Medicare program pays only for the cost of the services that providers render to beneficiaries--no more and no less. ¹⁴ In accordance with this objective, reimbursement is allowed for both direct and indirect costs incurred by providers, including an allocable portion of the rent a provider pays to occupy and operate facilities owned by others. 42 C.F.R. Sec. 413.130(b) (1986).

The Secretary has decided, however, that when services, facilities, or supplies are furnished to a provider by a "related organization," there is "a significant likelihood that charges incurred by providers ... will be artificially inflated because of the absence of bona fide arms-length bargaining." American Hosp. Management Corp. v. Harris, 638 F.2d 1208, 1212 (9th Cir.1981). To...