Homemakers North Shore, Inc. v. Bowen

• Decision Date: 22 October 1987
• Docket Number: No. 87-1389,87-1389
• Citation: 832 F.2d 408
• Parties: , Medicare&Medicaid Gu 36,721 HOMEMAKERS NORTH SHORE, INC., Plaintiff-Appellant, v. Otis R. BOWEN, Secretary of Health and Human Services, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 408

832 F.2d 408

19 Soc.Sec.Rep.Ser. 549, Medicare&Medicaid Gu 36,721

HOMEMAKERS NORTH SHORE, INC., Plaintiff-Appellant, v. Otis R. BOWEN, Secretary of Health and Human Services,

Defendant-Appellee.

No. 87-1389.

United States Court of Appeals, Seventh Circuit.

Argued Sept. 9, 1987.

Decided Oct. 22, 1987.

Sanford V. Teplitzky, Ober, Kaler, Grimes & Shriver, Baltimore, Md., for plaintiff-appellant.

Richard A. Urbin, Asst. Regional Counsel, Chicago, Ill., for defendant-appellee.

Before CUMMINGS, COFFEY and EASTERBROOK, Circuit Judges.

EASTERBROOK, Circuit Judge.

Providers of medical services under the Medicare program, 42 U.S.C. Sec. 1395, et seq., usually receive reimbursement for the "customary charge" for the services, not to exceed the "reasonable cost" of providing them, as the Secretary of Health and Human Services reckons "cost", 42 U.S.C. Sec. 1395f(b), Sec. 1395x(v)(1)(A). Nursing services usually are reimbursed at a fixed price per service. A provider that can supply care for less makes a profit, and a provider that cannot suffers a loss.

Since 1979 the Secretary also has allowed fledgling providers of home nursing services to recover their actual costs, if reasonable, at a rate higher than the one ordinarily applicable. The regulation adopted in 1979 excepted a "newly established home health agency" from the usual limits on reimbursement, provided (among other things) the agency "has operated as the type of provider for which it was certified for Medicare ... for less than three full years." 42 C.F.R. Sec. 405.460(f)(7) (1979). The Secretary amended this in 1984 to: "has provided ... for a period of less than three full years home health care services equivalent to those that would have been covered if the agency had a Medicare provider agreement in effect." 49 Fed.Reg. 20616, 20628 (May 15, 1984), 49 Fed.Reg. 27272, 27284-85 (July 2, 1984), 42 C.F.R. 405.460(f)(7) (1984), now codified at 42 C.F.R. Sec. 413.30(f)(7). The principal question in this case is whether these two definitions of equivalency are equivalent to each other.

Founded in 1968, Homemakers North Shore, Inc., furnished its clients in Illinois with a variety of services, including home nursing care. Its nurses visited the homes of patients with chronic ailments. Homemakers' executives characterize the nursing as "private duty" or "custodial care" nursing, meaning that nurses served for extended periods (no less than four hours per call, and often more) but did not render care for acute conditions. By 1972 Homemakers, a subsidiary of Upjohn HealthCare Services, a large medical-service firm, had professional supervisory nurses monitoring its home services. Position descriptions for these supervisory positions in 1975 recounted that the supervisors were responsible for coordinating with physicians the health care plans to be carried out by Homemakers' nurses, most of whom were licensed practical nurses.

Until 1977 neither Illinois nor the federal government regulated Homemakers' business. This absence of regulation prevented Homemakers from receiving reimbursement for its services as a "home health agency" (the appropriate category under the Medicare statute). Until 1981 the Medicare statute excluded unlicensed, proprietary firms from participation. 42 U.S.C. Sec. 1395x(o) (1976). When Illinois adopted a licensing statute in 1977, Ill.Rev.Stat. ch. 111 1/2 p 2801 et seq., Homemakers became eligible for federal reimbursement if it could first qualify under state law. It did so, taking advantage of a "grandfather" clause in Illinois law. Its application papers represented to Illinois that it had been providing high quality home nursing care for a decade. Illinois granted Homemakers a license, and the Medicare program promptly certified Homemakers as a "home health agency", waiving the inspection and audit that are required for start-up firms.

Since joining the Medicare program Homemakers has sought exception from the usual cost ceilings, relying on Sec. 405.460(f). Homemakers maintained that it had not formerly furnished nursing services as the "type of provider" qualified for the Medicare program because, until it was licensed under Illinois law, it could not be a "provider" at all. In other words, Homemakers read Sec. 405.460(f) as a term of art, under which each "home health agency" is entitled to an exception during its first three years as a qualified provider--or at least the first three years it was legally entitled to be a certified "home health agency", whether or not it choose to participate in the program for all three. Homemakers also contended that when it joined the Medicare program it altered its business, substituting registered nurses for licensed practical nurses and furnishing services at a higher level of skill; this change, it believed, entitled it to treatment as a new provider.

Employees of the Department have not been of one mind about Homemakers' position. Homemakers was certified as a Medicare provider in August 1979, three days after it received its final state license. (It had been operating under a provisional license.) On September 10, 1979, the Director of the Division of Provider Reimbursement in the Health Care Financing Administration within the Department wrote Homemakers that "your facility is deemed to be a newly established home health agency". The Director did not give reasons. When Homemakers submitted its first requests for reimbursement, the Office of Direct Reimbursement (a component of the Administration then serving as Homemakers' "financial intermediary") rejected the claims as exceeding the per-visit limits on "reasonable cost". The Office of Direct Reimbursement continued to reject Homemakers' claims for the reporting periods through November 1981.

Homemakers appealed the denials for 1979 and 1980 to the Provider Reimbursement Review Board, still another part of the Department, see 42 U.S.C. Sec. 1395. While the case was pending, the Health Care Financing Administration decided that Homemakers had been a "newly established" health agency since October 1, 1977, and planned to reopen the 1979 fiscal year. It chose October 1, 1977, because Illinois' licensing statute took effect that date and Homemakers became eligible for participation in the Medicare program. But Homemakers by then had appealed the denial of an exception for 1981. The Board consolidated the cases and concluded that Homemakers became a new agency on July 31, 1979, close to the time it received a final license from Illinois. This led to a grant of Homemakers' claim for all three years.

The Administration's Bureau of Eligibility, Reimbursement and Coverage, contending that Homemakers furnished home nursing--the "type" of service in question--for three years before it joined the Medicare program, and therefore is not eligible for an exception under Sec. 405.460(f), appealed to the Secretary. The Deputy Administrator of the Health Care Financing Administration, acting as the Secretary's delegate, rendered the Department's final decision.

The Deputy Administrator adopted the Bureau's construction of the 1979 regulation. His opinion emphasized that Homemakers long had been providing home nursing services. Under the 1984 version of the regulation, the Deputy Administrator reasoned, Homemakers' application would be denied out of hand; he thought the two versions functionally identical, because in either case the Department wanted to limit exceptional compensation to new providers that were building up their referral systems and caseloads. These new firms would experience higher costs per patient for a brief period. Homemakers, the Deputy Administrator reasoned, was an established firm with a network of contacts in the medical profession. Although Homemakers expanded and altered the nature of its services in 1979, and as a result experienced higher costs per patient, the Deputy Administrator thought the change insufficient to call Homemakers "newly established" for purposes of the Medicare program. His opinion distinguished between a newly established service (such as entering the nursing business) and a change in an established service (such as substituting registered nurses for licensed practical nurses and providing more specialized care).

The fifth and next step was the district court, which granted summary judgment to the Secretary. The court held that the Department's construction of its own regulation is entitled to deference because, although perhaps not the best reading, it is plausible enough to be respected. Once the Department prevailed on the legal question, the court thought, it followed that substantial evidence supported the decision. Homemakers has been in the home nursing business since 1968, represented to Illinois in 1978 that it was a thriving firm supplying home health care of all sorts, and could not turn around and tell the Department that it was not really in the "home health agency" business until 1979. The sixth step is the appeal to us.

Homemakers concedes that the 1984 regulation, making eligibility turn on whether for more than three years the firm provided "health care services equivalent to" those it could have provided under the Medicare program, is within the Secretary's statutory power. Although there is a dispute about substantial evidence, to which we return, Homemakers recognizes that if the equivalency test applies, it is likely to lose that fight. It therefore vigorously disputes the Secretary's conclusion that the 1979 regulation and the 1984 regulation mean the same thing. The change in language, which the Secretary describes as a clarification, Homemakers finds to be a revolution, which under the Administrative Procedure Act, 5 U.S.C. Sec. 551, may not be applied retroactively. See Georgetown University Hospital v. Bowen, 821 F.2d 750, 756-58 (D.C.Cir.1987). Homemakers thinks that any fool can see that "type of provider" (the 1979 language) is different from ...