Group Health Inc. v. US

• Decision Date: 10 June 1987
• Docket Number: No. 84 CIV. 2917 (PKL).,84 CIV. 2917 (PKL).
• Parties: GROUP HEALTH INCORPORATED, Plaintiff, v. UNITED STATES of America, and Otis R. Bowen, Secretary of Health and Human Services, Defendants.
• Court: U.S. District Court — Southern District of New York

662 F. Supp. 753

GROUP HEALTH INCORPORATED, Plaintiff, v. UNITED STATES of America, and Otis R. Bowen, Secretary of Health and Human Services, Defendants.

No. 84 CIV. 2917 (PKL).

United States District Court, S.D. New York.

June 10, 1987.

COPYRIGHT MATERIAL OMITTED

De Forest & Duer, New York City, John M. O'Connor, of counsel, for plaintiff.

Rudolph Giuliani, U.S. Atty., for S.D. N.Y., New York City, Susan E. Harkins, of counsel, for defendants.

OPINION & ORDER

LEISURE, District Judge:

Plaintiff in this action, Group Health Incorporated ("GHI"), seeks to recover $3.3 million in damages from the United States under the Federal Tort Claims Act ("FTCA"). GHI also seeks judicial review under 42 U.S.C. § 1395oo of a decision of the Secretary ("Secretary") of the United States Department of Health and Human Services ("HHS"), which denied Medicare reimbursement to Hillcrest General Hospital ("Hillcrest") for certain interest expense allegedly incurred during the 1977 cost year. Defendants have moved: (1) to dismiss the FTCA claims for lack of subject matter jurisdiction; (2) alternatively, for summary judgment on the FTCA claims; and (3) for summary judgment on the remaining causes of action set forth in the amended complaint.

Factual Background

The following recitation is limited to the facts pertinent to the instant motions. The sequence of events giving rise to this litigation has been described previously by the Court of Appeals for the Second Circuit and by three judges of this Court. See Group Health Inc. v. Blue Cross Association, 793 F.2d 491 (2d Cir.1986); Group Health Inc. v. Schweiker, No. 80 Civ. 6163 (S.D.N.Y. docketed Mar. 23, 1982) (Carter, J.), aff'd, 742 F.2d 1434 (2d Cir.1983), cert. denied, 467 U.S. 1225, 104 S.Ct. 2677, 81 L.Ed.2d 873 (1984); Group Health Inc. v. Blue Cross Association, 587 F.Supp. 887 (S.D.N.Y.1984) (Sweet, J.); Group Health Inc. v. Blue Cross Association, 625 F.Supp. 69 (S.D.N.Y.1985) (Leisure, J.), appeal dismissed, 793 F.2d 491 (2d Cir.1986).

GHI is a nonprofit health services corporation organized under Article IX-C of the New York State Insurance Law. Its activities are regulated by the New York State Insurance Department ("Insurance Department"). See Statement of Defendants Pursuant to Local Rule 3(g) ("Defendants' 3(g) Statement") at ¶ 1. At all times relevant to this action, GHI acted as a carrier under Part B of the Medicare program. Id. at ¶ 2. At all relevant times, Hillcrest was a provider of Medicare services. Id. at ¶ 3. Blue Cross Association ("Association") and Blue Cross/Blue Shield of Greater New York ("Blue Cross") served as fiscal intermediaries under Part A of the Medicare program. Id. at ¶ 4. With HHS' approval, the Association entered into a subcontract with Blue Cross in which the Association delegated some of its assignments to Blue Cross. Pursuant to this subcontract, Blue Cross acted as Hillcrest's fiscal intermediary. Id. at ¶ 5. Blue Cross also provided hospital and health-related benefits under its own reimbursement program. Id. at ¶ 6.

In 1973, GHI applied to the Insurance Department for permission to purchase Hillcrest for $6.35 million. Affidavit of Susan E. Harkins, Assistant United States Attorney, sworn to on July 29, 1986, ("Harkins Aff."), Exh. B.¹ The Insurance Department approved the purchase, provided GHI invested no more than $2 million of its own funds and financed the balance of the purchase price with a nonrecourse mortgage. Exh. C.

In January 1974, GHI submitted to the Insurance Department an amended application for permission to buy Hillcrest with its own funds at a reduced price of $5.79 million. In its amended application, GHI stated that it was unable to obtain acceptable mortgage financing. GHI noted, however, that under a proposed amendment to the Blue Cross reimbursement formula, GHI would receive a return on its investment in Hillcrest. Exh. D. See also Exh. E.

On February 15, 1974, the Insurance Department approved GHI's amended application to purchase Hillcrest on the condition that the proposed amendment to the Blue Cross reimbursement formula was approved by the New York State Health Department ("Health Department"). The Insurance Department stated that if the amendment to the Blue Cross reimbursement formula was not approved, GHI would have to obtain a nonrecourse mortgage in a minimum amount of $2 million within 90 days after it acquired Hillcrest. Exh. F.

Notwithstanding that the amendment to the Blue Cross reimbursement formula had yet to be approved, GHI bought Hillcrest on February 28, 1974. Exh. G., ¶ 3. By letter dated March 26, 1974, the Health Department informed Blue Cross that the proposed amendment to its reimbursement formula would not be approved. As to GHI's acquisition of Hillcrest, the Health Department stated that it had reached a joint conclusion with the Insurance Department that GHI's purchase of Hillcrest would be construed as a loan from restricted funds. Exh. I.

By letter dated May 21, 1974, GHI informed Blue Cross that it would give a $6 million mortage to Hillcrest, payable over 30 years at the rate of nine percent. Exh. J. On or about June 11, 1974, almost four months after GHI had bought Hillcrest, Blue Cross informed GHI that the terms of the mortgage were acceptable for Medicare reimbursement. Exh. K.

Hillcrest included the interest expense on the mortgage in its annual Medicare costs reports for the 1974 through 1980 fiscal years. Amended Complaint at ¶ 16. In 1977, during its audit of Hillcrest's 1975 costs reports, Blue Cross discovered that Hillcrest had paid no interest to GHI with respect to the 1974 and 1975 interest deductions up to and including the date of the field audit. Blue Cross then referred the matter to HHS. Exh. P at 3.

By letter dated September 29, 1978, HHS notified Blue Cross that the interest expense was not reimbursable under Medicare. HHS determined that GHI's purchase of Hillcrest was an investment, not a loan, and that GHI was not entitled to a return on its investment because it was not a proprietary organization. HHS further stated that even if the transaction were construed as a loan, the interest was not reimbursable because GHI and Hillcrest were related entities. Accordingly, HHS directed Blue Cross to issue a Notice of Program Reimbursement ("NPR") and to disallow the interest expense for all outstanding years. Exh. L.

On or about March 20, 1979, March 30, 1979, and April 19, 1979, Blue Cross issued to Hillcrest NPRs disallowing all of the interest expense it had claimed for the 1976, 1975 and 1974 fiscal years. Exh. M. Hillcrest timely requested hearings on the NPRs before the Provider Reimbursement Review Board ("PRRB"). Exh. N. On June 10, 1980, the PPRB held a hearing to determine whether Blue Cross' disallowance of the interest expense for the 1976, 1975 and 1974 fiscal years was appropriate. In a decision dated September 19, 1980, the PPRB determined that the interest expense was not reimbursable under Medicare. Exh. P.

On October 29, 1980, GHI filed a complaint seeking judicial review of the PRRB decision pursuant to 42 U.S.C. § 1395oo. On cross motions for summary judgment, the Court granted the Secretary's motion. Group Health Inc. v. Schweiker, No. 80 Civ. 6163 (S.D.N.Y. docketed Mar. 23, 1982), aff'd, 742 F.2d 1434 (2d Cir.1983), cert. denied, 467 U.S. 1225, 104 S.Ct. 2677, 81 L.Ed.2d 873 (1984).

On or about November 30, 1979, Blue Cross issued an NPR disallowing Hillcrest's claim for reimbursement of the interest expense for its 1977 fiscal year. By letter dated April 14, 1980, Hillcrest requested a hearing before the PRRB. Defendants' 3(g) Statement at ¶ 26.

On September 20, 1982, GHI filed an administrative tort claim with the Secretary. In the claim, GHI asserted that Blue Cross was negligent in its dealings with GHI and that HHS was negligent in supervising Blue Cross, its agent. GHI claimed property damage in the amount of $3,345,035. Exh. U.

The PRRB hearing on the 1977 fiscal year reimbursement was held on September 15, 1983. Plaintiff's Statement Pursuant to Local Rule 3(g) ("Plaintiff's 3(g) Statement") at 16; Defendants' 3(g) Statement at ¶ 27.

By letter dated October 25, 1983, HHS denied GHI's administrative tort claim. Exh. V.

In a decision dated March 27, 1984, the PRRB affirmed Blue Cross' disallowance of Hillcrest's interest expense. Amended Complaint at ¶ 25; Plaintiff's 3(g) Statement at ¶ 16. The PRRB's decision became the final decision of the Secretary on April 23, 1984, when the Secretary declined to reverse, affirm or modify the determination. Plaintiff's 3(g) Statement at ¶ 16; Defendants' 3(g) Statement ¶ 27.²

GHI commenced the instant action in this Court on April 25, 1984. GHI also filed a tort action against the Association and Blue Cross in the Supreme Court of the State of New York, County of New York. Exh. W. The Association and Blue Cross removed the state action to this Court pursuant to 28 U.S.C. § 1442(a)(1). HHS then intervened as a defendant in the removed action, which was consolidated on September 25, 1984, with GHI's case against the United States and the Secretary. The Association and Blue Cross filed a motion for summary judgment, in which HHS joined. This Court denied the motion. Group Health Inc. v. Blue Cross Association, 587 F.Supp. 887 (S.D.N.Y.1984). The Association, Blue Cross and HHS filed appeals, which were dismissed for lack of appellate jurisdiction. Group Health Inc. v. Blue Cross Association, 793 F.2d 491 (2d Cir. 1986).

The Amended Complaint

The amended complaint in this action against the United States and the Secretary contains eight claims for relief. In the first three claims, which are brought under the FTCA, GHI alleges that Blue Cross was negligent in failing to consult HHS or the Association before deciding that Medicare would reimburse the interest expense, ¶ 36; that Blue Cross' decision was negligent, ¶ 37; that HHS negligently failed to supervise...