Isaacs v. Bowen, 87 Civ. 6979 (WK).

• Citation: 683 F. Supp. 930
• Decision Date: 17 March 1988
• Docket Number: No. 87 Civ. 6979 (WK).,87 Civ. 6979 (WK).
• Parties: George H. ISAACS, Frank Pavano, James Agalloco and Abraham Frosch, on Behalf of Themselves and all Others Similarly Situated, Plaintiffs, v. Otis R. BOWEN, as Secretary of the Department of Health and Human Services, and William L. Roper, as Administrator of Health Care Financing Administration, Defendants.
• Court: U.S. District Court — Southern District of New York

683 F. Supp. 930

George H. ISAACS, Frank Pavano, James Agalloco and Abraham Frosch, on Behalf of Themselves and all Others Similarly Situated, Plaintiffs, v. Otis R. BOWEN, as Secretary of the Department of Health and Human Services, and William L. Roper, as Administrator of Health Care Financing Administration, Defendants.

No. 87 Civ. 6979 (WK).

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

January 28, 1988.

On Motion for Reargument March 17, 1988.

Whitney North Seymour, Jr., Brown & Seymour, New York City, for plaintiffs.

Rudolph W. Giuliani, U.S. Atty., S.D.N.Y. by Chad A. Vignola, Sp. Asst. U.S. Atty., Civ. Div., for defendants.

MEMORANDUM AND ORDER

WHITMAN KNAPP, District Judge.

This action challenges policies adopted by the defendants in the wake of Congress' recent amendment of the appeal procedures available to dissatisfied Medicare claimants. See Omnibus Budget Reconciliation Act of 1986, Pub.L. 99-509, § 9341, 100 Stat. 2037 (1986), amending Title XVIII of the Social Security Act, 42 U.S.C. § 1395 et seq. (the "Medicare Act"). Specifically at issue in this lawsuit are the procedural steps required of claimants under Part B of the Medicare Act who wish to appeal determinations made with respect to their claims.

Plaintiffs Isaacs and Pavano originally asserted their claims individually, but recently amended their complaint to assert a class action and to name two additional representative plaintiffs. The case is currently before us on plaintiffs' motion for a preliminary injunction and on defendants' cross-motion to dismiss. At oral argument on these motions, we indicated our inclination to deny a preliminary injunction, and obtained the consent of both parties to treat plaintiffs' motion as one for summary judgement and permanent injunctive relief. We indicated that, should we rule in plaintiffs' favor, we would grant a stay of any injunctive relief pending review by the Court of Appeals. The parties agreed that a final judgement could be entered on the submissions made thus far, and were of the view that they would be able to dispose of the issue of class certification by stipulation. For the reasons stated below, we grant in part each of the motions before us.

FACTUAL BACKGROUND

The Medicare Act is divided into two separate benefits programs. Part A, 42 U.S.C. §§ 1395c-1395i, the primary benefits component, provides major medical coverage for hospital care and related post-hospitalization services, and is funded out of Social Security taxes. Part B, 42 U.S.C. §§ 1395j-1395w, is a voluntary program of supplemental medical insurance which partially covers outpatient care, laboratory testing and ancillary medical services. Under Part B of the Medicare Act, the defendant Secretary is authorized to contract with private insurance carriers to administer the claims process. 42 U.S.C. § 1395u. The insurance carriers review claims to determine whether the services are "medically necessary," whether the charges are "reasonable," and whether the claims are otherwise payable under Part B, using standards set out in the Medicare Act and in regulations and guidelines promulgated by the Health Care Financing Administration ("HCFA"), the agency within the Department of Health and Human Services which administers Medicare. See 42 U.S.C. §§ 1395u(b)(3) and 1395y(a); 42 C.F.R. §§ 421.200 and 405.501 et seq.

Any claimant dissatisfied with the carrier's initial determination may request review by the carrier, 42 C.F.R. § 405.807 et seq. If, after such internal review, the claimant still disputes the determination, and if the amount in controversy exceeds $100, the claimant may seek further review. If the amount in controversy is between $100 and $500, such review is limited to a hearing, statutorily entitled a "fair hearing," conducted by a hearing officer designated by the private insurance carrier. 42 U.S.C. § 1395u(b)(3)(C) (as amended). It is the nature of the review afforded to Part B benefit disputes in excess of $500 that is at the core of the dispute in this lawsuit.

Until 1986, the law required that claims administration contracts with private carriers provide for the conduct of a "fair hearing" by the carrier "in any case where the amount in controversy is $100 or more." 42 U.S.C. § 1395u(b)(3)(C) (amended 1986). Under the pre-1986 scheme, such a "fair hearing" was the only type of review available to Part B claimants who disputed the amount of benefits determined by the carrier, no matter what may have been the magnitude of the dispute. The "fair hearing" officer's determination as to the amount of benefits payable was final and unreviewable; only a determination as to eligibility for benefits was reviewable by the defendant Secretary. 42 U.S.C. § 1395ff(a) (amended 1986); United States v. Erika, Inc. (1982) 456 U.S. 201, 102 S.Ct. 1650, 72 L.Ed.2d 12.

By contrast, with respect to claims under Part A of the Medicare Act, both pre- and post-1986 law has entitled claimants with benefits disputes in excess of $100 to proceed directly to a hearing before an independent Administrative Law Judge ("ALJ") designated by the defendant Secretary, and has entitled those with disputes in excess of $1000 to seek judicial review of an adverse ALJ decision. 42 U.S.C. 1395ff(b)(2)(A) (as amended).

During 1985, both houses of Congress held hearings on the Medicare appeals process, some of which focused on the Part B "fair hearing" scheme. The testimony at these hearings revealed considerable dissatisfaction with this scheme, particularly with regard to the built-in conflict of interest held by the carrier hearing officers, the frequency of unexplained discrepancies and arbitrariness in their determinations, and the constraints on their power to correct inequities in claim adjustment arising earlier in the carrier claim review process. Frequent criticism was also directed at the apparent unfairness of having "fair hearings" be the arbitral forum of last resort for Part B claims. See, e.g., Medicare Appeals Provisions: Hearings on S.1158 Before the Subcomm. on Health of the Senate Comm. on Finance, 99th Cong., 1st Sess. 188-194, 229-233, 385-391 (1985) (statements of American Bar Association, National Senior Citizens Law Center and National Association of Medical Equipment Suppliers, respectively); Health Financing: Hearings on H.R. 2864 Before the Subcomm. on Health and the Environment of the House Comm. on Energy and Commerce, 99th Cong., 1st Sess. 458 (1985) (statement of American Association of Retired Persons). These concerns were summarized in the House report that accompanied the resulting legislation:

Numerous concerns have been expressed by beneficiaries about the fairness and adequacy of the Part B appeals process. Some have expressed the concern that the hearing officers are not properly qualified or are not objective, because many of them are former employees of the carrier or because their continued service as hearing officers may depend on the carriers' being satisfied with the decisions they render. Other concerns deal with the way hearings are conducted, including the beneficiaries' inability to produce evidence or to challenge the hearing officers' decision rules or his reliance on unidentified experts and consultants.

H.R.Rep. No. 99-727 at 95, reprinted in 1986 U.S.Code Cong. & Admin.News at 3607, 3685. Congress sought "to resolve these concerns by establishing an appeals procedure under Part B that is modeled after that available under Part A." Id. (emphasis added).

In the ensuing legislation, Congress amended the Part B hearing procedures in two ways. See Pub.L. 99-509, § 9341, supra. First, although Congress continued to require that contracts with carriers provide for "fair hearings," it altered the amount-in-controversy language to include a maximum as well as a minimum dollar amount. The pertinent section now reads:

Each such contract shall provide that the carrier ... will establish and maintain procedures pursuant to which an individual enrolled under this part will be granted an opportunity for a fair hearing by the carrier, in any case where the amount in controversy is at least $100, but not more than $500 ...

42 U.S.C. § 1395u(b)(3)(C) (as amended) (emphasis added). Second, Congress amended the section of the Medicare Act (applicable to both Part A and Part B) which sets the parameters for the availability of hearings before independent ALJs and for the availability of judicial review. 42 U.S.C. § 1395ff(b)(2)(B) (as amended). As noted above, neither ALJ hearings nor judicial review were previously available to Part B claimants who disputed the amount of benefits granted. The statute now provides for hearings before ALJs on Part B benefits disputes where the amount in controversy is $500 or more, and — as is the case with Part A claims — for judicial review of such disputes where such amount exceeds $1000. Id.

In April 1987, the defendants promulgated an amendment to the Medicare Carrier Manual, HCFA's principal policy guide for claims adjustment by carriers, making the carrier "fair hearing" a "prerequisite for an ALJ hearing" on all Part B claims, no matter how great the amount. Medicare Carrier Manual ¶ 12105(B) (emphasis added). In other words, regardless of the amount in controversy, HCFA regulations now require all Part B claimants to undergo a "fair hearing" before pursuing further appeals. In addition, Medicare Carrier Manual ¶ 12015(B) provides that "if less than $500 is in controversy following the carrier hearing officer's decision, no further appeals are available." Id. Defendants assert that authority to institute such limitations is found in the general power delegated to them to implement the Medicare Act, and, more specifically, in 42 U.S.C. § 1395ff(a), which, inter alia, allows the Secretary to make determinations of Part B benefits "in accordance with regulations prescribed by him."

The instant plaintiffs, dissatisfied Part B claimants who have amounts in...