Charter Peachford Hosp., Inc. v. Bowen, 86-8008

• Decision Date: 12 November 1986
• Docket Number: No. 86-8008,86-8008
• Citation: 803 F.2d 1541
• Parties: , Medicare&Medicaid Gu 35,921 CHARTER PEACHFORD HOSPITAL, INC., A Georgia Corporation, Plaintiff-Appellant, v. Otis BOWEN, Secretary of Health and Human Services, and Carolyne K. Davis, Administrator of Health Care Financing, Defendants-Appellees.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1541

803 F.2d 1541

15 Soc.Sec.Rep.Ser. 291, Medicare&Medicaid Gu 35,921

CHARTER PEACHFORD HOSPITAL, INC., A Georgia Corporation Plaintiff-Appellant, v. Otis BOWEN, Secretary of Health and Human Services, and Carolyne K. Davis, Administrator of Health Care Financing, Defendants-Appellees.

No. 86-8008.

United States Court of Appeals Eleventh Circuit.

Nov. 12, 1986.

Richard L. Shackelford, Atlanta, Ga., for plaintiff-appellant.

Nina L. Hunt, Asst. U.S. Atty., Edgar M. Swindell, Asst. Reg. Atty., Atlanta, Ga., for defendants-appellees.

Appeal from the United States District Court for the Northern District of Georgia.

Before GODBOLD and HILL, Circuit Judges, and LYNNE ^*, Senior District Judge.

HILL, Circuit Judge.

The Medicare program is primarily intended to provide benefits for individuals of relatively advanced age. In this case, however, we reach what would appear to be the unlikely conclusion that a provider of services may recover from the Medicare program a portion of the costs of educational services for children. This holding merits some explanation.

I. FACTS

Charter Peachford Hospital, Inc. ("Charter Peachford"), is a psychiatric hospital which is certified to be a "provider" of services under the Medicare Program. Further, it provides its services to the general community. As part of its treatment plan, Charter Peachford provides an educational program for patients who are eighteen years old or younger. Charter Peachford employs teacher-therapists to teach academic subjects and, as to members of the hospital's multi-disciplinary treatment team, provide various direct therapeutic services to its minor patients.

Charter Peachford sought reimbursement under the Medicare Act, 42 U.S.C. Sec. 1395 et seq. (1982 and Supp. II 1984), for part of the teacher-therapists' salaries for the 1980 fiscal year. ¹ The "fiscal intermediary," authorized by the Secretary of Health and Human Services (the "Secretary") to make such reimbursement pursuant to 42 U.S.C. Sec. 1395h (1982 and Supp. II 1984), denied reimbursement for any part of the educational costs. Although Charter Peachford did not originally claim reimbursement for the salaries in its 1980 cost report, it later appealed the intermediary's disallowance of these costs to the Provider Reimbursement Review Board ("PRRB"). After conducting an evidentiary hearing, the PRRB affirmed the decision of the fiscal intermediary, holding that educational costs were specifically disallowed by section 2104.5 of the Provider Reimbursement Manual (HIM-15). Alternatively, the PRRB held that even if the educational costs were allowable, they were "ancillary costs" rather than "routine costs." Because no Medicare beneficiaries received services under the educational program, none of the costs could be reimbursed. The Deputy Administrator of the Health Care Financing Administration, acting on behalf of the Secretary, affirmed the PRRB's decision on both grounds.

Charter Peachford subsequently brought this action in district court contending that the Secretary's decision should be reversed because it was not supported by substantial evidence. The case was referred to a magistrate who recommended that the Secretary's decision be affirmed in part, reversed in part and remanded for calculation of the percent of salary costs attributable to therapeutic activities. The magistrate's recommendation was based on three findings: (1) the cost of Charter Peachford's purely educational program was not eligible for reimbursement because the program could not be used by Medicare beneficiaries; (2) the Secretary's conclusion that the teacher-therapists' time was spent entirely on education-related activities was not supported by substantial evidence and, in fact, the evidence showed that approximately 70 percent of their time was spent in therapy-related activities; and (3) the Secretary's conclusion that the cost of any time attributable to therapy would be ancillary was not supported by substantial evidence. The district court rejected the magistrate's recommendation and affirmed the Secretary's decision, holding that the Secretary's decision was supported by substantial evidence.

II. STANDARD OF REVIEW

Judicial review of a decision of the Deputy Administrator is governed by 42 U.S.C. Sec. 1395oo(f) (1982 and Supp. II 1984) which incorporates the standards of Section 706 of the Administrative Procedure Act, 5 U.S.C. Sec. 706 (1982). Carraway Methodist Medical Center v. Heckler, 753 F.2d 1006, 1009 (11th Cir.1985). An agency's decision must not be overturned unless it is arbitrary, capricious, an abuse of discretion, not in accordance with law, or unsupported by substantial evidence in the record taken as a whole. Id.

In exercising its review of legal questions, the court is required to accord substantial deference to the interpretation of an agency charged with the administration of a statute. See, e.g., Connecticut Department of Income Maintenance v. Heckler, 471 U.S. 524, 105 S.Ct. 2210, 2215, 85 L.Ed.2d 577 (1985). An agency's interpretation of a regulation it has been authorized to promulgate is also entitled to great deference and must be upheld unless it is unreasonable, arbitrary and capricious or inconsistent with the statute. Carraway Methodist Medical Center, 753 F.2d at 1009.

III. THE MEDICARE REIMBURSEMENT PROGRAM

This appeal involves Part A of the Medicare Program, Title XVIII of the Social Security Act, 42 U.S.C. Sec. 1395 et seq. Part A provides hospital insurance benefits for services rendered by a "provider of services," as defined in 42 U.S.C. Sec. 1395x(u) (Supp. II 1984), including hospitals. Providers are entitled to be reimbursed for the reasonable cost of furnishing covered services to Medicare patients or, if lower, the customary charges for such services. 42 U.S.C. Sec. 1395f(b) (1982 and Supp. II 1984). ² The statute defines "reasonable cost" as "the cost actually incurred, excluding therefrom any part of incurred cost found to be unnecessary in the efficient delivery of needed health services" as determined under the Secretary's regulations. 42 U.S.C. Sec. 1395x(v)(1)(A) (Supp. II 1984). The Secretary is directed to establish methods for determining reasonable cost that will account for both direct and indirect costs and prevent cross-subsidization--that is, not shift the cost of furnishing care to Medicare beneficiaries onto other patients or vice versa. Id.

Under the Secretary's regulations, Medicare reimbursement involves a two-step determination of: (1) the provider's "allowable costs" for supplying services and (2) the proportion of those costs that is to be borne by Medicare. 42 C.F.R. Sec. 405.403(a) (1985). Separate principles, set out in the regulations, govern each of the two steps. Id.

In determining the total amount of a provider's "allowable costs," the regulations recognize "[a]ll necessary and proper expenses of an institution in the production of services," 42 C.F.R. Sec. 405.402(a) (1985), subject to specific limitations. 42 C.F.R. Sec. 405.451(a) (1985). "Necessary and proper costs are costs which are appropriate and helpful in developing and maintaining the operation of patient care facilities and activities. They are usually costs which are common and accepted occurrences in the field of the provider's activity." 42 C.F.R. Sec. 405.451(b)(2) (1985). The following types of costs are deemed unallowable: "amounts not related to patient care, specifically not reimbursable under the program, or flowing from the provision of luxury items or services...." 42 C.F.R. Sec. 405.451(c)(3) (1985). The regulations repeat the statutory admonition that any determination of the reasonable cost of services must be based on costs related to the care of Medicare beneficiaries, 42 C.F.R. Sec. 405.451(c)(3) (1985) and that costs should not be shifted between Medicare and non-Medicare patients. 42 C.F.R. Sec. 405.402(a) (1985). Nonetheless, the definition of allowable costs, the first step toward determining reasonable cost, is not limited to services related to Medicare patient care. In effect, the determination of allowable costs results in a large pool of costs related to patient care. The second step of the formula, apportionment, then narrows that amount to approximate the cost of supplying services to Medicare beneficiaries.

The share of total allowable costs to be borne by the Medicare program is "determined in accordance with principles relating to apportionment of cost." 42 C.F.R. Sec. 405.403(a) (1985). In furtherance of the statutory mandate against cross-subsidization, the regulations endeavor to use methods of apportioning costs that "to the extent reasonably possible, result in the program's share of a provider's total allowable costs being the same as the program's share of the provider's total services." 42 C.F.R. Sec. 405.403(b) (1985).

In this case, the "departmental method" was used to apportion allowable costs. The departmental method requires two separate calculations depending upon whether the particular allowable costs are characterized as "routine services" or "ancillary services." 42 C.F.R. Sec. 405.452(a)(1)(i) (1985). "Routine services" are the "regular room, dietary, and nursing services, minor medical and surgical supplies, and the use of equipment and facilities for which a separate charge is not customarily made." 42 C.F.R. Sec. 405.452(b) (1985). "Ancillary services" are "services for which charges are customarily made in addition to routine services." Id.

The amount of reimbursement for routine services is calculated by multiplying the average cost of a day of general routine care (the "average per diem" cost) by the number of Medicare beneficiary inpatient days. 42 C.F.R. Sec. 405.452(a)(1)(i), (b), (e)(1) (1985). ³ The average per diem cost is determined by dividing the total inpatient general routine service costs (net of the private room cost differential) by the total number of inpatient general...