Grancare, Inc. v. Shalala, 98-1971 (TFH).

• Decision Date: 28 March 2000
• Docket Number: No. 98-1971 (TFH).,98-1971 (TFH).
• Citation: 93 F.Supp.2d 24
• Parties: GRANCARE, INC. and Regency Health Services, Inc. Plaintiffs, v. Donna SHALALA, Secretary, Department of Health and Human Services Defendant.
• Court: U.S. District Court — District of Columbia

93 F.Supp.2d 24

GRANCARE, INC. and Regency Health Services, Inc. Plaintiffs, v. Donna SHALALA, Secretary, Department of Health and Human Services Defendant.

No. 98-1971 (TFH).

United States District Court, District of Columbia.

March 28, 2000.

Ronald Sutter, Christopher L. Keough, Powers, Pyles, Sutter & Verville, P.C., Washington, DC, for Plaintiff Grancare.

Sonia Orfield, Dept of Health & Human Serv., Washington, DC, for Defendant Shalala.

MEMORANDUM OPINION

THOMAS F. HOGAN, District Judge.

This case involves plaintiffs' challenge to the Secretary's disallowance of Medicare reimbursements for costs incurred by thirteen Skilled Nursing Facilities to provide occupational therapy and speech therapy services to patients under arrangements with outside contractors in 1994. Currently pending before the Court are the parties' cross-motions for summary judgment. Summary judgment is appropriate when there is "no genuine issue as to any material fact and ... the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). This case is proper for summary judgment as it does not present any disputed issues of material fact. After holding a hearing on these motions and carefully considering the parties' briefs, the court grants plaintiffs' motion for summary judgment and denies defendant's motion for summary judgment.

I. BACKGROUND

A. Statutory and Regulatory Background

Title XVIII of the Social Security Act ("the Medicare program"), 42 U.S.C. §§ 1395 et seq., establishes a program of medical insurance for the aged and disabled. The Medicare program consists of two parts: Part A and Part B. Part A provides for inpatient care, including speech therapy ("ST") and occupational therapy ("OT"), by a Skilled Nursing Facility ("SNF") if it is prescribed by a physician. See 42 U.S.C. §§ 1395c, 1395d (a) (2), 1395i-3(b)(2), 1395x (h). Part B provides supplemental medical insurance to cover OT and ST therapy on an outpatient basis also pursuant to a prescription by a physician. See 42 U.S.C. §§ 1395j, 1395k (a)(2)(c), 1395x (g) & (p). After the close of each fiscal year, each provider files a cost report with its Medicare fiscal intermediary ("intermediary"), which audits the cost report and issues a final determination of the provider's reasonable costs of services furnished to medicare beneficiaries in a notice of program reimbursement. See 42 U.S.C. §§ 1395h, 1395oo(a)(1)(A)(i); 42 C.F.R. §§ 413.20, 405.1803(a)(1) (1997). Providers are then reimbursed for the reasonable cost of their services, provided they are medically necessary. See 42 U.S.C. §§ 1395d, 1395i, 1395x. There is no allegation that the services in this case were not medically necessary.

The reasonable cost of a service is defined by statute as "the cost actually incurred, excluding therefrom any part of incurred cost found to be unnecessary in the efficient delivery of needed health services...." 42 U.S.C. § 1395x(v)(1)(A). The statute further provides that reasonable cost "shall be determined in accordance with regulations establishing the method or methods to be used, and the items to be included, in determining such costs...." Id.

The Secretary has issued several regulations, pursuant to the Medicare statutes that are at issue in this case. They read, in pertinent part, as follows:

The costs of providers' services vary from one provider to another and the variations generally reflect differences in scope of services and intensity of care. The provision in Medicare for payment of reasonable cost of services is intended to meet the actual costs, however widely they may vary from one institution to another. This is subject to a limitation if a particular institution's costs are found to be substantially out of line with other institutions in the same area that are similar in size, scope of services, utilization, and other relevant factors.

42 C.F.R. § 413.9(c)(2) (1993) (emphasis added). See also 42 C.F.R. § 413.9 (1992) (same text).

Limitations on reimbursable costs [Cost Limits] (a) Introduction.(1) Scope. This section implements 1861(v)(1)(A) of the Act, by setting forth the general rules under which HCFA [the Health Care Financing Administration, an entity with authority to act on behalf of the Secretary of Health and Human Services] may establish limits on provider costs recognized as reasonable in determining Medicare program payments ... (2) General principle. Reimbursable provider costs may not exceed the costs estimated by HCFA to be necessary for the efficient delivery of needed health services.

42 C.F.R. § 413.30 (1993) (emphasis added). See also 42 C.F.R. § 413.30 (1992) (same text).

Reasonable cost of physical and other therapy services furnished under arrangements. (a) Principle. The reasonable cost of the services of physical, occupational, speech and other therapists ... furnished under arrangements ... with a provider ... may not exceed an amount equivalent to the prevailing salary and additional costs that would reasonably have been incurred by the provider or other organization had such services been performed by such person in an employment relationship, plus the cost of other reasonable expenses incurred by such person in furnishing services under such an arrangement ... (c)(5) These provisions are applicable to individual therapy services or disciplines by means of separate guidelines by geographical area and apply to costs incurred after issuance of the guidelines but no earlier than the beginning of the provider's cost reporting period described in paragraph (a) of this section. Until a guideline is issued for a specific therapy or discipline, costs are evaluated so that such costs do not exceed what a prudent and cost-conscious buyer would pay for the given service,....

42 C.F.R. § 413.106 (1993) (emphasis added). See also 42 C.F.R. § 413.106 (1992) (same text).

This case also involves two sections of the Secretary's Medicare Provider Reimbursement Manual ("PRM"). These provisions read, in pertinent part, as follows:

Reasonable Costs — Reasonable costs of services are determined in accordance with regulations establishing the method or methods to be used, and the items to be included.... Costs may vary from one institution to another because of the scope of services, level of care, geographic location, and utilization. It is the intent of the program that providers are reimbursed the actual costs of providing health quality care, regardless of how widely they may vary from provider to provider, except where a particular institution's costs are found to be substantially out of line with other institutions in the same area which are similar in size, scope of services, utilization, and other relevant factors.... Implicit in the intention that actual costs be paid to the extent they are reasonable is the expectation that the provider seeks to minimize its costs and that its actual costs do not exceed what a prudent and cost conscious buyer pays for a given service. (See § 2103). If costs are determined to exceed the level that such buyers incur, in the absence of clear evidence that the higher costs were unavoidable, the excess costs are not reimbursable under the program.

PRM § 2102.1 (emphasis added).

The prudent and cost conscious buyer not only refuses to pay more than the going price for an item or service, he/she seeks to economize by minimizing cost.

PRM § 2103 (emphasis added).

B. Factual Background

Plaintiffs operate a group of thirteen SNF's in the State of California that provide OT and ST services to Medicare patients by contracting with outside service providers. The reimbursements at issue in this case are for costs incurred in 1994.

In 1996, in response to rising costs of OT and ST services, the intermediary conducted a survey and used the results to establish prevailing salary rates specific to geographic regions for OT and ST services. This national survey asked providers to report the salaries of full-time therapists they employed or the costs (by unit of service or hour) they incurred of contracting these services to outside therapy providers. Of the 1,146 responses received, 1,092 were deemed usable and these were separated into five geographic regions. Relevant to this case, the intermediary estimated the annual salary rates in the pertinent region of California and Utah based on the 75th percentile of the reported salaries or per hour costs paid by respondents in that region. The figure was then adjusted by the 61.8 percent fringe benefit and expense factor that the Secretary had adopted in 1983 in connection with the establishment of salary equivalency limits for physical therapy services.¹ The Secretary maintains that the intermediary used these cost estimates as "benchmarks" to apply in its prudent buyer analysis.

As was customary, at the end of fiscal year 1994, the SNF's submitted cost reports to the intermediary, a body that performs fiscal auditing for the Secretary. Noting that plaintiffs had not attempted to minimize costs by hiring full-time, salaried therapists, the intermediary requested documentation that the SNF's had otherwise acted as a "prudent buyer." When no documentation was submitted, the intermediary found that the SNF's had exceeded the costs that they would have incurred had they hired a full-time therapist and reduced the reimbursable amount to the 75th percentile of the benchmark costs determined by the 1996 survey, plus a fringe benefit and expense factor of 61.8 percent. Notably, the intermediary acknowledged that the SNF's costs (of $100 per hour) were not out of line with those incurred by similar providers.

The plaintiffs appealed the decision of the intermediary to the Provider Reimbursement Review Board ("PRRB"), which reversed the intermediary's disallowances. The Board found that the intermediary did not show that the employment of salaried therapists was less expensive than contracting out for the therapy services and that it...