Faith Hospital Ass'n v. United States, 532-78.

• Decision Date: 10 September 1980
• Docket Number: No. 532-78.,532-78.
• Citation: 634 F.2d 526
• Parties: FAITH HOSPITAL ASSOCIATION v. The UNITED STATES.
• Court: U.S. Claims Court

634 F.2d 526

FAITH HOSPITAL ASSOCIATION v. The UNITED STATES.

No. 532-78.

United States Court of Claims.

September 10, 1980.

Alan C. Kohn, St. Louis, Mo., attorney of record for plaintiff. Kohn, Shands, Elbert, Gianoulakis & Giljum, Terry Lueckenhoff, St. Louis, Mo., of counsel.

Alexander Younger, Washington, D. C., with whom was Asst. Atty. Gen. Alice Daniel, Washington, D. C., for defendant. David B. Palmer, Dept. of Health, Education, and Welfare, Washington, D. C., of counsel.

Before FRIEDMAN, Chief Judge, and DAVIS, NICHOLS, KASHIWA, KUNZIG, BENNETT and SMITH, Judges, en banc.

ON CROSS-MOTIONS FOR SUMMARY JUDGMENT

KUNZIG, Judge:

This difficult and complex Medicare case deals with the appropriate allocation of costs for Faith Hospital's ancillary services departments-anesthesiology, cardiology, pathology and radiology-concerning hospital-based physicians. Once more, it involves this court in the application and interpretation of the Secretary of Health, Education, and Welfare's (HEW)¹ troubled regulation² 20 C.F.R. § 405.486 (1973).³ Upon review of plaintiff's fiscal year end reports, defendant, acting through the fiscal intermediary, Blue Cross Association, determined that plaintiff made a profit from treating Medicare patients and defendant withheld sufficient funds from current reimbursement to recapture that profit. Plaintiff claims a refund of that money. For the reasons stated below, we hold for plaintiff.

I BACKGROUND

A. Medicare Provisions

Plaintiff is a qualified provider of services under the Medicare Act. 42 U.S.C. § 1395x(u) (1976). To qualify, Faith Hospital is required by HEW to provide pathology and radiology departments. 20 C.F.R. §§ 405.1028-29. Anesthesiology departments are not required, but their operation is also governed by regulation if present. Id. at § 405.1031. As a qualified provider, HEW is obligated to reimburse Faith for the reasonable cost of covered services provided to Medicare beneficiaries.⁴ 42 U.S.C. § 1395x(v), 1395cc. This entire statutory scheme is detailed in Part A of the Medicare Act. Id. at §§ 1395c-1395i.

Part A "provides basic protection against the costs of hospital and related post-hospital services." Id. at § 1395c. As mentioned, qualified providers of services are entitled to reimbursement based on the reasonable cost of providing services. Id. at § 1395f(b)(1). Rather then seek reimbursement directly from HEW, most providers elect a fiscal intermediary such as Blue Cross Association to provide interim payments and make final year end adjustments to conform payments to the requirements of the Medicare Act.⁵See Pasadena Hospital Ass'n Ltd. v. United States, 223 Ct.Cl. ___, 618 F.2d 728 (1980). All Part A reimbursements are made from the Federal Hospital Insurance Trust Fund, 42 U.S.C. § 1395i (1976), which is funded from self-employment and employee wage taxes. Id. at § 1395(a)(1)-(2).

As we have explained before, the Medicare Act has a second program complimenting Part A. See Faith Hospital Ass'n v. United States, 218 Ct.Cl. 255, 585 F.2d 474 (1978). The complimentary program, Part B, 42 U.S.C. §§ 1395j-1395w (1976), is a supplementary insurance program covering physician and related health services. Generally, those covered by Part A are eligible to enroll under Part B.⁶ Eligible individuals are required to enroll and make periodic premium payments. Id. at §§ 1395p, 1395s.

Physicians treating Part B beneficiaries are entitled to payment based on their reasonable charges, id. at § 1395l, rather than costs. Obviously, this is to allow doctors a professional fee generating personal income. Rather than pay the physicians directly, the Secretary is empowered to contract with carriers⁷ to administer the Part B benefits. Id. at § 1395u. Thus, a physician is paid, audited and reviewed by the carrier acting on behalf of HEW. Ultimately, Part B benefits are paid from the Federal Supplementary Medical Insurance Trust Fund. Id. at § 1395t. This Part B trust is funded by the patient premiums and matching general federal revenue funds. Id. at §§ 1395s, 1395t.

Normally, no significant problem is encountered in determining whether costs of medical services to Medicare patients fall under Part A or B. For instance, a doctor operating out of his private office incorporates into his reasonable charge an amount to pay overhead, employees and provide the doctor's "profit" or income element. Since reasonable charges are a function of the locality's customary charges, a physician paying less rent than another may get more income from his Medicare reimbursement. Thus, some play exists in the Part B reimbursement due to the allowance of profit that does not exist under Part A which only reimburses for reasonable cost.

A problem exists, however, when dealing with hospital-based physicians. When a physician performs professional services under an agreement with a hospital, some degree of intermingling of costs exists and a method is needed to allocate costs between Part A and Part B. A set of examples may best illustrate the difficulties extant in such relationships.

Assume a radiologist has an agreement to perform professional services for a qualified provider-hospital as required by the Secretary. 20 C.F.R. § 405.1029. In the first case, also assume that all the radiologist does is walk into the hospital, operate the X-ray machine and read the developed negative. The hospital owns all the equipment, provides the supplies, equipment and personnel. Seemingly, the doctor's medical services consist entirely of a professional fee allocable to Part B. In turn, all the operating costs are borne by the hospital and should be allocated to Part A on a pro rata basis.⁸

Next, suppose the radiologist performed the services in his own office, the professional fee and all operating costs would be allocated to Part B.

Finally, suppose the radiologist brings a laboratory technician and some film but the hospital supplies all else. The doctor's charge is once more covered by Part B. But two problems exist. First, if reasonable charges are community based and uniform, the hospital-based doctor receives a windfall from Medicare vis-a-vis the private practitioner. In other words, since the hospital-based doctor theoretically, had all his costs paid for by the hospital, he nets more money than a private doctor charging the same amount but paying his own costs. Thus, a means of separating out and adjusting the professional fee component of a hospital-based physician is needed. Second, where the physician works through a hospital, a means of allocating the costs each bears to the correct program must be devised. In the case at bar, we are concerned only with the latter cost allocation problem, but it is confused by interrelationship with the charges problem.

The Secretary's answer to the hospital-based physician cost allocation and charge adjustment problems is contained in 20 C.F.R. § 405.486. Generally, the regulation makes its decision on the basis of whether the physician or hospital bills the patient and whether the physician bears any operating costs. One overall goal of the regulation is to bring about as little change as possible in the net income the doctor receives for his professional services rendered in the hospital. Basically, the regulation, re-printed in full below,⁹ provides that where a physician 1) bills his patients directly and 2) bears some of the operating expenses, then his reasonable charges are to reflect the operating costs he bears.¹⁰ Part A will pay any operating costs incurred by the hospital. The regulation goes on, however, to make an exception to this rule for those operating expenses which the hospital "initially" incurs. Reimbursement for operating expenses initially incurred by the hospital are to be reimbursed by Part A and not included in the doctor's reasonable charge. Furthermore, if the physician subsequently "repays" the hospital for such costs, the hospital must offset the amount received against Part A costs generally. Because the transfer of costs to the physician can alter the total medical cost to the patient, an arrangement shifting the profitability to the physician (who can insulate these operating costs in his reasonable charge) is not permitted. Thus, under this complicated, confused regulation there may be a constant necessity for adjustment of both charges and costs.

B. Faith Hospital's Attempted Compliance

1. Pre-Medicare Arrangement

Prior to Congress' adoption of Medicare, Faith Hospital had ancillary services departments utilizing hospital-based physicians. In essence, the hospital operated the departments. It paid the employees, purchased equipment and supplies, and billed the patients. The physicians received a percentage of the gross billings and the hospital thus absorbed the bad debts. Throughout this period, however, the physicians negotiated for the right to bill their patients directly.

2. 1966-1969 Arrangement — Faith I

During the period 1966 to 1969, plaintiff and its hospital-based physicians rearranged their relationship, unfortunately, even more confusedly. During that period, examined fully by this court in Faith Hospital Ass'n v. United States, 218 Ct.Cl. 255, 585 F.2d 474 (1978), in plaintiff's terminology, the hospital "leased" the departments to the doctors. The hospital, however, still hired and paid the employees, purchased supplies and owned the equipment. The billing arrangement was also modified. Seemingly to come within the proscription of 20 C.F.R. § 405.486 that a doctor "bill his patients directly," bills for physicians' services were sent to patients on the physician's letterhead. Nevertheless, patients were to pay the doctor's group or Faith as collection agent. As apparently intended, most payments were made to Faith which deducted a substantial portion to cover operating costs. A fixed percentage of the billing was then paid the physicians for the value of their services. From the...