French Hosp. Medical Center v. Shalala, 94-15366

• Decision Date: 09 July 1996
• Docket Number: No. 94-15366,94-15366
• Citation: 89 F.3d 1411
• Parties: , Medicare & Medicaid Guide P 44,486, 97 Cal. Daily Op. Serv. 5104, 96 Daily Journal D.A.R. 8231 FRENCH HOSPITAL MEDICAL CENTER, a California nonprofit corporation, Plaintiff-Appellant, v. Donna E. SHALALA, in her official capacity as Secretary of the United States Department of Health and Human Services, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1411

89 F.3d 1411

51 Soc.Sec.Rep.Ser. 278, Medicare & Medicaid Guide

P 44,486,

97 Cal. Daily Op. Serv. 5104,

96 Daily Journal D.A.R. 8231

FRENCH HOSPITAL MEDICAL CENTER, a California nonprofit corporation, Plaintiff-Appellant, v. Donna E. SHALALA, in her official capacity as Secretary of the United States Department of Health and Human Services, Defendant-Appellee.

No. 94-15366.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Sept. 11, 1995.

Decided July 9, 1996.

James M. Gaynor, Jr., McDermott Will & Emery, Chicago, Illinois; Kathleen Houston Drummy, McDermott Will & Emery, Los Angeles, California, for plaintiff-appellant.

Gerard Keating and Charles Bailey, Office of the General Counsel, United States Department of Health and Human Services, Washington, D.C., for defendant-appellee.

Appeal from the United States District Court for the Northern District of California, Eugene F. Lynch, District Judge, Presiding. D.C. No. CV-92-03527-EFL.

Before: HALL, KOZINSKI and HAWKINS, Circuit Judges.

Opinion by Judge HAWKINS; Concurrence by Judge KOZINSKI.

OPINION

MICHAEL DALY HAWKINS, Circuit Judge:

This appeal requires us to decide whether a health care provider may seek administrative review of a Medicare cost limit formula, where the provider first challenged that formula in its revised notice of Medicare reimbursement, but had not challenged that same formula in its original notice of reimbursement. We hold that the cost limit formula is not within the scope of administrative review because that formula was not at issue in the revised notice of Medicare reimbursement.

I. BACKGROUND

A. Statutory and Regulatory Framework

Under the Medicare statute, Title XVIII of the Social Security Act, Pub.L. No. 89-97, 79 Stat. 291 (1965)(codified as amended at 42 U.S.C. §§ 1395 to 1395ccc (1988)), the Secretary of Health and Human Services ("Secretary") reimburses health care providers for services provided Medicare patients. Medicare reimbursement is typically handled by "fiscal intermediaries," such as insurance companies, who make interim payments to health care providers, then determine the proper amount of reimbursement for the entire fiscal year. 42 U.S.C. § 1395h(a). A health care provider seeking reimbursement must submit an annual cost report to its fiscal intermediary. 42 C.F.R. §§ 413.20(a)-(b) & 413.24(f) (1994). The fiscal intermediary then audits the cost report, determines the reimbursement amount to which the provider is entitled under the statute and regulations, and issues a Notice of Amount of Medicare Program Reimbursement ("NPR"). 42 C.F.R. § 405.1803.

During the period at issue in this appeal, health care providers were entitled under the statute to reimbursement for the lesser of the "reasonable cost" of providing services to Medicare patients or the provider's "customary charges" for such services. ¹ 42 U.S.C. §§ 1395f(b)(1) & 1395x(v)(1)(A). In addition, the Medicare statute defining "reasonable cost" expressly authorizes the Secretary to establish cost limits. 42 U.S.C. § 1395x(v)(1)(A); 42 C.F.R. § 413.30. Pursuant to this statutory authorization, the Secretary, acting through the Health Care Financing Administration ("HCFA"), promulgated cost ceilings called "routine cost limits" ("RCL") for the period at issue in this appeal. 46 Fed.Reg. 33,637 (June 30, 1981). Providers generally were not reimbursed for routine costs that exceeded the routine cost limits. Of the factors HCFA included in formulating the RCL, two have significance for this appeal: (1) a wage index allowing HCFA to adjust the RCL to reflect regional variations in labor costs; and (2) a formula permitting upward adjustments in the RCL for regions where the number of covered days of care per 1,000 Medicare beneficiaries is below the national average. 46 Fed.Reg. 33,641 & 33,643. During the period at issue in this case, fiscal intermediaries calculating providers' reimbursements used routine cost limits that reflected both factors.

B. Facts

French Hospital Medical Center is a California-based health care provider certified under the Medicare statute, 42 U.S.C. §§ 1395 to 1395ccc. Pursuant to the statute, the hospital filed a Medicare cost report for the fiscal year ending December 31, 1982 ("FY 1982") with Blue Cross of California, the hospital's fiscal intermediary. Blue Cross audited the hospital's cost report, and on May 15, 1984, issued a Notice of Amount of Medicare Program Reimbursement ("the original NPR").

The Medicare statute permits a health care provider meeting certain jurisdictional prerequisites to appeal an NPR, within 180 days of its issuance, by requesting a hearing before the Provider Reimbursement Review Board ("PRRB") established by the Secretary. 42 U.S.C. § 1395oo(a). In addition, Medicare regulations allow a fiscal intermediary to reopen a provider's cost report and issue a revised NPR within three years of issuing the original NPR. 42 C.F.R. § 405.1885.

The hospital did not appeal the original NPR of May 15, 1984. However, on March 31, 1989, pursuant to HCFA Ruling 89-1, a ruling requiring fiscal intermediaries to treat malpractice insurance costs as an administrative and general cost, Blue Cross reopened the hospital's cost report for FY 1982. The sole purpose of reopening the cost report was to treat the hospital's malpractice insurance costs as an administrative and general cost. The change increased the hospital's total reimbursement by $24,644, but, under the RCL, an additional $39,823 of actual insurance costs was disallowed. On November 9, 1990, Blue Cross issued a revised NPR for FY 1982 ("the first revised NPR").

In response to Blue Cross's downward revision of its reimbursement, the hospital appealed, first to the PRRB and eventually to the federal courts.

On December 20, 1990, the hospital asked Blue Cross for an exception to the RCL claiming the RCL formula was flawed in three respects: (1) the RCL database omitted malpractice insurance costs so that the limits on certain accounts to which these expenses were retroactively applied were improperly low; (2) the wage index used in the RCL was incorrect; and (3) the adjustment for covered days of care was inaccurate for California hospitals. See 42 C.F.R. §§ 413.30(c) & (f). ² Blue Cross denied the hospital's request on January 10, 1991. Because the RCL were identical for the original and revised NPRs, and the hospital had not challenged the RCL in the 180 days following the original NPR, Blue Cross concluded that the hospital could no longer seek an exception to the RCL.

Nevertheless, Blue Cross did offer the hospital relief as to its first complaint: HCFA, it noted, had given malpractice insurance payments "special consideration" following its Ruling 89-1, and had instructed intermediaries to reimburse providers for "the additional amount due ... as a result of the [m]alpractice reopening without regard to its impact on the RCL." To make the malpractice reimbursement HCFA required, Blue Cross issued yet another revised NPR on February 18, 1991 ("the second revised NPR"). The second revised NPR increased the hospital's reimbursement by $39,823 over the first revised NPR. With this allowance, French Hospital was reimbursed in full for its malpractice costs--the issue Blue Cross had reopened the NPR to address.

Despite Blue Cross's reimbursement of its malpractice insurance costs, the hospital continued to pursue two other avenues of appeal before the PRRB. On December 5, 1990, the hospital sought a PRRB hearing to raise the same three challenges to the RCL it had presented to Blue Cross. See 42 C.F.R §§ 405.1835 & 405.1889. ³ Moreover, on July 26, 1991, it asked the PRRB for expedited judicial review ("EJR") of its challenge to the RCL. See 42 C.F.R. § 405.1842. ⁴ In seeking EJR, however, the hospital challenged only the wage index and the covered days of care components, and explicitly declared that it was not challenging the exclusion of malpractice insurance costs from the RCL database.

In response to the PRRB's request that it clarify the issues it sought to appeal, the hospital informed the PRRB on October 3, 1991 that it no longer challenged the exclusion of malpractice insurance costs because Blue Cross had resolved that issue in the second revised NPR. Its appeal was therefore limited to the wage index and covered days of care components of the RCL.

In a letter of April 22, 1992, the PRRB denied the hospital's appeals on jurisdictional grounds. The PRRB's decision rested chiefly on its interpretation of 42 C.F.R. § 405.1889, the regulation defining revised NPRs. Quoting § 405.1889, the PRRB stated that a revised NPR was, for purposes of appeal, "a separate and distinct determination" from an original NPR. Based on this distinction, the PRRB concluded that § 405.1889 limited the scope of review of a revised NPR:

"A revised NPR does not reopen the entire cost report to appeal nor does it extend the 180 day appeal period for any earlier NPR. It merely reopens those parts of the cost report (issues) adjusted by the revised NPR and only those adjustments may be appealed."

In this case, the PRRB concluded that it lacked jurisdiction over the revised NPR because "[t]here are no audit adjustments from the revised NPR under dispute." (emphasis added). The PRRB declined to hear the hospital's challenges to the wage index and covered days of care components of the RCL because Blue Cross had not adjusted the RCL.

The hospital next appealed the PRRB decision to the Acting Deputy Administrator of HCFA, who acted on behalf of the Secretary. The hospital argued that Blue Cross's first revised NPR had addressed the RCL "because malpractice costs are a vital component in the computation of the RCL."

The Acting Deputy Administrator affirmed the PRRB's decision in a final administrative decision of June 18, 1992. His reasoning adhered closely to that of the PRRB. Noting that 42 C.F.R. § 405.1889 defines revised...