Danvers Pathology Associates, Inc. v. Atkins, 84-1675

• Decision Date: 03 December 1984
• Docket Number: No. 84-1675,84-1675
• Citation: 757 F.2d 427
• Court: U.S. Court of Appeals — First Circuit
• Parties: , Medicare&Medicaid Gu 34,550 DANVERS PATHOLOGY ASSOCIATES, INC., et al., Plaintiffs, Appellees, v. Charles ATKINS, Commissioner, etc., et al., Defendants, Appellants. . Heard

Page 427

757 F.2d 427

9 Soc.Sec.Rep.Ser. 122, Medicare&Medicaid Gu 34,550

DANVERS PATHOLOGY ASSOCIATES, INC., et al., Plaintiffs, Appellees, v. Charles ATKINS, Commissioner, etc., et al., Defendants, Appellants.

No. 84-1675.

United States Court of Appeals First Circuit.

Heard Dec. 3, 1984.

Decided March 19, 1985.

Ellen J. Janos, Asst. Atty. Gen., Boston, Mass., with whom Francis X. Bellotti, Atty. Gen., Boston, Mass., was on brief for defendants, appellants.

Barbara L. Moore, Boston, Mass., with whom Cooley, Manion, Moore & Jones, P.C., Boston, Mass., was on brief for plaintiffs, appellees.

Before COFFIN and BREYER, Circuit Judges, and MALETZ, ^* Senior Judge.

BREYER, Circuit Judge.

The issue in this case is whether a provision of the federal Medicaid statute, 42 U.S.C. Sec. 1396a(a)(32), requires a state to furnish Medicaid payments directly to a financially independent pathology laboratory, instead of paying the hospital in which the laboratory is physically located. The statute says that the state cannot pay "anyone other than ... [the] individual or the person or institution providing ... [the medical] care or service...." Id. The district court said that this statute means the state must pay the laboratory directly, for the laboratory provides the service. We see nothing in the statute's language or purpose, however, that prevents the state from viewingboth the hospital and the laboratory as "institution[s] providing ... [the] service"--in which case the statute does not require payment to the laboratory instead of the hospital. We therefore reverse the district court.

I

a. A little statutory background will help place the legal issue in perspective. Medicaid is a joint federal-state program that provides federal money for medical assistance to those "whose income and resources are insufficient to meet the costs of necessary medical services." 42 U.S.C. Sec. 1396. A participating state must have a "State plan" that meets the requirements of the federal medicaid statute, see 42 U.S.C. Sec. 1396a, and the relevant federal regulations promulgated by the Secretary of Health and Human Services, see 42 C.F.R. Secs. 430.0 et seq. (1984). Within the confines of the statute, rules, and regulations, the states enjoy considerable flexibility in fashioning their own reimbursement systems. See Michael Reese Physicians & Surgeons, S.C. v. Quern, 606 F.2d 732, 735 (7th Cir.1979) ("Medicaid is an experiment in cooperative federalism, which literally abounds with options") (citations omitted), reheard in banc, 625 F.2d 764 (1980), cert. denied, 449 U.S. 1079, 101 S.Ct. 860, 66 L.Ed.2d 802 (1981); Arkansas Pharmacists Association v. Harris, 627 F.2d 867, 869 (8th Cir.1980); Massachusetts Hospital Association, Inc. v. Harris, 500 F.Supp. 1270, 1274 (D.Mass.1980).

To obtain Medicaid reimbursement in Massachusetts, a person or entity providing service must enter into a "provider agreement" with the state and obtain a "provider number." See 42 U.S.C. Sec. 1396a(a)(27); 106 C.M.R. Sec. 433.403. Under relevant state regulations, the state will not issue a "provider number" to a laboratory unless it is "independent." 106 C.M.R. Sec. 401.403; 114.3 C.M.R. Sec. 20.02(2). And, by the word "independent" the regulations do not simply mean "financially independent." Rather, they specify that, even if separately owned, a laboratory "which: (1) Is located in a hospital ... and (2) serves the hospital's patients, is not an independent laboratory." 42 C.F.R. Sec. 405.1310(a); see 114.3 C.M.R. 20.02(4). Hence, state regulations mean that such a laboratory cannot be reimbursed directly.

State regulations nonetheless provide reimbursement for a "nonindependent" laboratory located in a hospital. The Massachusetts Commissioner of Public Welfare (who administers Medicaid) typically issues a provider number to the hospital. The hospital can submit the laboratory's costs, along with other costs, to the Massachusetts Rate Setting Commission. The Commission uses these costs in establishing an all-inclusive per diem rate for hospital reimbursement, an appropriate portion of which the hospital can pass on to the laboratory.

The Commissioner prefers this indirect reimbursement system to a direct reimbursement system because it saves money. It avoids the costs of processing thousands of additional, separate reimbursement claims, and it provides greater incentives for the hospital to monitor laboratory efficiency and to hold down laboratory costs. Cf. College of American Pathologists v. Heckler, 734 F.2d 859, 865-66 (D.C.Cir.1984) ("spin off" of laboratory services may significantly increase Medicare costs). The Commissioner also notes that the Medicaid statute strongly encourages states to design innovative reimbursement systems to hold down hospital costs. See, e.g., H.R.Rep. No. 158, 97th Cong., 1st Sess. 293.

In sum, the Commonwealth has designed a cost-saving reimbursement system that in its view, falls within the scope of "flexibility" that federal law allows the states. That system does not authorize direct reimbursement to laboratories located within a hospital and serving the hospital's patients.

b. Danvers Pathology Associates, Inc. owns and operates a laboratory located in Hunt Memorial Hospital. It is financially independent of Hunt. But, because of its location and the fact that it serves Hunt patients, it is not "independent" under the terms of the relevant regulations. The Commissioner refused to give Danvers a provider number and insisted that it seek indirect reimbursement through Hunt.

Danvers sued the Commissioner seeking an injunction requiring him to give Danvers a provider number. Danvers advanced several statutory and constitutional arguments, but the district court ruled on only one issue. The court found that a particular federal statutory provision, Sec. 1396a(a)(32) of the federal Medicaid statute, required the Commissioner to reimburse Danvers directly. Hence it issued an injunction in Danvers' favor. The Commissioner appeals.

II

The relevant statutory provision, in pertinent part, says that a state Medicaid reimbursement plan must:

(32) provide that no payment under the plan for any care or service provided to an individual shall be made to anyone other than such individual or the person or institution providing such care or service, under an assignment or power of attorney or otherwise; except that--

(A) in the case of any care or service provided by a physician, dentist, or other individual practitioner, such payment may be made (i) to the employer of such physician, dentist, or other practitioner if such physician, dentist, or practitioner is required as a condition of his employment to turn over his fee for such care or service to his employer, or (ii) (where the care or service was provided in a hospital, clinic, or other facility) to the facility in which the care or service was provided if there is a contractual arrangement between such physician, dentist, or practitioner and such facility under which such facility submits the bill for such care or service; ...

42 U.S.C. Sec. 1396a(a)(32) (emphasis added). We believe that this provision--subsection 32--does not require direct reimbursement to Danvers for the following reasons.

First, the language of subsection 32 does not say that the Commissioner must pay directly every person who provides a medical service. The provision is deliberately phrased in the negative. It says that the Commissioner cannot pay one who does not "provid[e] ... such care or service" absent special circumstances. The negative phrasing is important, for, from the perspective of ordinary English, many different persons or institutions might reasonably be considered as a "provider" of a given service. Suppose, for example, a nurse gives a pill ordered by a doctor to a patient located in the intensive care unit of a hospital. Who is the "provider"? The nurse? The doctor? The intensive care unit? The hospital? Depending upon the context in which one asks the question, one might consider any or all of them to "provide" the service. As far as ordinary English goes, the statute says, "Don't pay anyone who is not a provider"; it does not say, "When X, Y, and Z have all had a hand in supplying a service, choose (and pay directly) X as the provider."

Since a hospital in which a laboratory is located might be considered, along with the laboratory itself, to have provided a laboratory service, much of Danvers' argument--that it provided the service--is beside the point. The question here, in terms of the statute's language, is not what Danvers did but what the hospital did: Can the hospital be considered a provider? Here, where the hospital is required by state law to provide the services that Danvers (also) provides, see 105 C.M.R. Sec. 130.200; 42 C.F.R. Sec. 405.1028, where the laboratory is physically inside the hospital, where the laboratory treats hospital patients, and where the state recognizes the hospital as a provider of medical services by giving it a provider number, we see no reason not to consider the hospital an "institution ... providing ... service" within the terms of ...