Doctors Hospital, Inc. v. Califano, Civ. A. No. 77-1908.

• Decision Date: 06 October 1978
• Docket Number: Civ. A. No. 77-1908.
• Citation: 459 F. Supp. 201
• Parties: DOCTORS HOSPITAL, INC., Plaintiff, v. Joseph A. CALIFANO, Jr., Defendant.
• Court: U.S. District Court — District of Columbia

459 F. Supp. 201

DOCTORS HOSPITAL, INC., Plaintiff, v. Joseph A. CALIFANO, Jr., Defendant.

Civ. A. No. 77-1908.

United States District Court, District of Columbia.

October 6, 1978.

COPYRIGHT MATERIAL OMITTED

George H. Clark, Gordon H. Glenn, Washington, D. C., for plaintiff.

Nathan Dodell, Asst. U. S. Atty., David B. Palmer, HEW, Washington, D. C., for defendant.

MEMORANDUM OPINION

GESELL, District Judge.

This case involves several issues relating to the reimbursement of a provider of Medicare services. Plaintiff is Doctors Hospital, Inc., which owns and operates Doctors Hospital located in the District of Columbia. Plaintiff is a wholly-owned subsidiary of Washington Medical Center, Inc. ("WMC") and is an authorized "provider of services" for Medicare purposes. Defendant is Joseph A. Califano, Jr., Secretary of the United States Department of Health, Education, and Welfare.

The cost items in dispute here involve the two fiscal years ending December 31, 1973, and December 31, 1974. All but one of the items were found to be non-reimbursable by Group Hospitalization, Inc. ("GHI"), plaintiff's "fiscal intermediary." An appeal was taken to the Provider Reimbursement Review Board (the "Board") and hearings were held on the cost items now in contention and on other issues. The Board issued its decision on July 8, 1977, affirming GHI in some respects and reversing it on others. On September 9, 1977, the Administrator of the Health Care Financing Administration (the "administrator") affirmed the Board's decision in all respects. Plaintiff then brought this action to review the agency's determinations. The Court is presented with cross-motions for summary judgment, there being no material issues in dispute. The facts relating to each cost item are discussed in the course of the following opinion.

I.

The Health Insurance for the Aged Act ("Medicare Act"), 42 U.S.C. § 1395-1395pp (1976), establishes two regimes of federal medical care support for the aged and certain disabled persons. Part A of the Act provides for the reimbursement of inpatient hospital services and certain services rendered following inpatient hospital care. 42 U.S.C. §§ 1395c-1395i-2 (1976). Part A Medicare beneficiaries generally receive hospital and related care services at no charge; the providers of the services then receive direct reimbursement from the Government (through so-called "fiscal intermediaries"). Part B of the Act establishes a voluntary medical insurance program which pays for various health services not covered by Part A of the Act, such as physician services and certain laboratory fees. 42 U.S.C. §§ 1395j-1395w (1976). Part B is partially financed by premiums paid by its enrollees. 42 U.S.C. § 1395s (1976). This suit involves Part A reimbursement.

Reimbursement of providers differs as between Part A and Part B. Under Part B, reimbursement is premised on the "reasonable charges" of the individual or entity providing the services, although in some instances a provider may receive Part B reimbursement based on 80% of its reasonable costs. 42 U.S.C. § 1395l (1976). Part A reimbursement, on the other hand, is based upon the lesser of the provider's "reasonable cost" in rendering such services or its "customary charges" with respect to such services. 42 U.S.C. § 1395f(b) (1976). "Reasonable cost" for purposes of the Act is defined in 42 U.S.C. § 1395x(v)(1)(A) (1976):

The reasonable cost of any services shall be the cost actually incurred, excluding therefrom any part of incurred cost found to be unnecessary in the efficient delivery of needed health services, and shall be determined in accordance with regulations . . .. Such regulations shall (i) take into account both direct and indirect costs of providers of services . . . in order that, under the methods of determining costs, the necessary costs of efficiently delivering covered services to individuals covered by the insurance programs established by this subchapter will not be borne by individuals not so covered, and the costs with respect to individuals not so covered will not be borne by such insurance programs, and (ii) provide for the making of suitable retroactive corrective adjustments where, for a provider of services for any fiscal period, the aggregate reimbursement produced by the methods of determining costs proves to be either inadequate or excessive.

Pursuant to this authorization, the Secretary of Health, Education, and Welfare has promulgated regulations governing the reimbursement of providers under the Act. See 42 C.F.R. §§ 405.401-405.488 (1977).

Medicare reimbursement is commonly accomplished through the use of so-called "intermediaries." See 42 U.S.C. §§ 1395h, 1395u. The "intermediary" in this case is the Blue Cross Association which has delegated its duties to Group Hospitalization, Inc. ("GHI"), a District of Columbia corporation.

At the close of each fiscal year, providers of services submit "cost reports" to their respective "intermediaries." 42 C.F.R. § 405.406(b). After an audit of a provider's report, the intermediary determines the "reasonable cost" of the reimbursable services which have been provided, and hence the reimbursement due. See 42 C.F.R. § 405.454(f).

When a provider such as plaintiff disagrees with the intermediary's "reasonable cost" determination, it may obtain a hearing before the Provider Reimbursement Review Board (the "Board"). 42 U.S.C. § 1395 oo (1976); 42 C.F.R. § 405.1835. The Board, basing its decision "upon the record made at such hearing," is authorized to "affirm, modify, or reverse a final determination of the fiscal intermediary with respect to a cost report and to make any other revisions on matters covered by such cost report (including revisions adverse to the provider of services) even though such matters were not considered by the intermediary in making such final determination." 42 U.S.C. § 1395oo(d) (1976). Decisions of the Board constitute the Secretary of HEW's final decision, unless within 60 days of the provider receiving notice of the Board's decision, the Secretary reverses, affirms or modifies the Board's decision on his own motion. 42 U.S.C. § 1395oo(f)(1) (1976). The Secretary has delegated his powers in this regard to the Administrator of the Health Care Financing Administration (the "Administrator").

Judicial review may be obtained of the Board's decision or of the Secretary's decision, whichever is final. 42 U.S.C. § 1395oo(f)(1). Both parties agree that the Board's action in this case, as affirmed by the Administrator, may be overturned by the Court if it was "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law;" 5 U.S.C. § 706(2)(A) (1976); or was "unsupported by substantial evidence." 5 U.S.C. § 706(2)(E) (1976). The Court may not affirm the Board's decision based on any post hoc rationalizations advanced by government counsel. The Court must look solely at the decision of the Board which itself has to "be supported by substantial evidence when the record is viewed as a whole." 42 U.S.C. § 1395oo(d) (1976). Balanced against this, however, is the fact that both Medicare regulations and judicial authority place the burden of proof of "reasonable cost" on the provider. 42 C.F.R. § 405.453. See e. g., Overlook Nursing Home, Inc. v. United States, 556 F.2d 500, 506 (Ct. Cl. 1977).

For purposes of judicial review, "substantial evidence" means something less than the weight of the evidence. Consolo v. Federal Maritime Commission, 383 U.S. 607, 619-20, 86 S.Ct. 1018, 16 L.Ed.2d 131 (1966). It amounts to such relevant evidence as a reasonable mind might accept as adequate to support the conclusion reached. Id., at 620, 86 S.Ct. 1018, 1027. The possibility of drawing two inconsistent conclusions from the evidence does not prevent an administrative agency's decision from being supported by substantial evidence. Id. This standard is intended to free "the reviewing courts of the time-consuming and difficult task of weighing the evidence," to give "proper respect to the expertise of the administrative tribunal" and to help "promote the uniform application of the statute." Id.

II.

A. Accrued, but unpaid, compensation

For the 1973 and 1974 fiscal years, plaintiff's cost reports sought reimbursement for two accrued, but unpaid, liabilities. One was compensation plaintiff owed Dr. John Andrina for services he had performed in supervising plaintiff's oxygen inhalation therapy department. The other was a debt plaintiff owed Oscar B. Hunter Memorial Laboratories ("Hunter Lab") for physical examinations it had performed on plaintiff's and WMC's employees. These obligations were accrued on plaintiff's books, but were still unpaid as of more than a year following the close of the the relevant fiscal periods (and remained unpaid until at least early 1976).

The fiscal intermediary disallowed the costs on the basis that they represented either contingent liabilities or costs involving related party considerations, but did indicate that they might be recognized upon their actual payment. The Board affirmed, ruling that:

Since these amounts had not been actually paid within a reasonable time (more than a year) after the end of the relevant fiscal periods, the Intermediary's disallowances of those amounts are affirmed. . . .

However, if these amounts are paid in a subsequent fiscal period, consideration as to allowability would need to be made at the time of audit of the cost reports for that period and consideration given to whether the amounts represent the costs to a related person or organization.

With respect to the question whether the Pathology Laboratory and the Provider are related organizations, the Board points out that if the evidence indicates that they are related, the burden of proof rests on the Provider to show that it meets all four of the criteria for exception stated in Regulation § 405.427(d), if charges instead of costs are to be allowed. The

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