Loyola University of Chicago v. Bowen

• Decision Date: 21 June 1990
• Docket Number: Nos. 88-3041,88-3057,s. 88-3041
• Citation: 905 F.2d 1061
• Parties: 61 Ed. Law Rep. 19, 30 Soc.Sec.Rep.Ser. 209, Medicare&Medicaid Gu 38,583 LOYOLA UNIVERSITY OF CHICAGO, Plaintiff-Appellee, Cross-Appellant, v. Otis R. BOWEN, M.D., Secretary of the Department of Health and Human Services, Defendant-Appellant, Cross-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1061

905 F.2d 1061

61 Ed. Law Rep. 19, 30 Soc.Sec.Rep.Ser. 209,

Medicare&Medicaid Gu 38,583

LOYOLA UNIVERSITY OF CHICAGO, Plaintiff-Appellee, Cross-Appellant, v. Otis R. BOWEN, M.D., Secretary of the Department of Health and Human Services, Defendant-Appellant, Cross-Appellee.

Nos. 88-3041, 88-3057.

United States Court of Appeals, Seventh Circuit.

Argued Sept. 14, 1989.

Decided June 21, 1990.

James M. Gaynor, Jr., Stephen L. Tyma, McDermott, Will & Emery, Chicago, Ill., H. Guy Collier, McDermott, Will & Emery, Washington, D.C., for plaintiff-appellee, cross-appellant.

Linda A. Wawzenski, Asst. U.S. Atty., Chicago, Ill., Joel Tornari, Washington, D.C., for defendant-appellant, cross-appellee.

Before POSNER, COFFEY, and KANNE, Circuit Judges.

COFFEY, Circuit Judge.

The Secretary of the United States Department of Health and Human Services ("Secretary," "HHS") appeals the district court's order granting summary judgment for the plaintiff-appellee, Loyola University of Chicago ("University"), on the issue of whether the Secretary improperly disallowed a portion of the University's claim for reimbursement of clinical medical education costs under the Medicare statute. See 42 U.S.C. Sec. 1395 et seq. The University cross-appeals the district court's grant of summary judgment affirming the Secretary's denial of its claim for reimbursement of the costs of University-employed medical residents and interns working in the University's outpatient clinic. We affirm summary judgment for the University on the issue of reimbursement for clinical medical education costs and reverse summary judgment for the Secretary on the issue of reimbursement for residents' and interns' costs.

I.

Loyola University owns and operates the Foster G. McGaw Hospital ("Hospital"), the Burke Ambulatory Care Center ("BACC") ¹ and the Stritch School of Medicine ("Medical School") as separate entities within the Loyola University Medical Center ("LUMC"), located in Maywood, Illinois. ² The Hospital provides inpatient and emergency medical services whereas BACC is LUMC's outpatient clinic. LUMC's students, interns and resident physicians rotate through the various departments within the Hospital, as well as the BACC, in order to obtain the experience and training in patient care necessary for the Medical School's medical programs to receive accreditation from the American Medical Association. While working in either the Hospital or the BACC, students, interns and residents are supervised and trained by physicians on the Medical School faculty ("faculty-physicians"). Only Medical School faculty-physicians are allowed to practice medicine and treat patients in the Hospital and in the BACC. Similarly, faculty-physicians, in addition to their teaching and research duties at the Medical School, are required as a condition of their employment with LUMC to practice medicine primarily at the Loyola University Medical Center facilities and in other facilities only after having received approval in writing from the chairman of the department in which the faculty-physician practices and the dean of the Medical School.

Because LUMC's faculty-physicians engage in two distinct types of activities in the course of their employment--namely, providing teaching and research services to the Medical School and practicing medicine in the Hospital and in the BACC--they are compensated in two different ways. First, faculty-physicians receive a fixed salary from the Medical School for their teaching, research and administrative activities. Second, they receive a percentage of the revenue resulting from their own patient care activities in the LUMC facilities, determined pursuant to the terms of the Loyola Medical Practice Plan ("LMPP"), a faculty practice plan that all faculty-physicians are required to join as a condition of employment.

The University uses the LMPP as the vehicle for billing and collecting the fees for those receiving medical care and treatment in the LUMC facilities. Once a bill for medical services is generated, the LMPP apportions the revenue received between the University and the respective faculty-physicians on an agreed-upon contractual percentage basis. Specifically, after deducting the various administrative costs incurred from the patient's billing, LMPP reimburses the University twenty-one percent of the remainder "for use of practice-related facilities" and four percent for the "Dean's Development Fund." Faculty-physicians performing the services receive the remaining seventy-five percent of the fee until such time as they have reached their annual maximum patient care "earnings ceiling" ³ set forth in the LMPP. Thereafter, the faculty-physician receives only twenty-five percent of his patient care fees for the remainder of the fiscal year, with the remaining fifty percent being allocated to the "Research and Education" ("R & E") account of the particular Medical School department in which the faculty-physician is a faculty member.

The permissible uses for funds paid to R & E accounts is also set forth in the LMPP agreement. Paragraph 10.0 of the LMPP states that such funds may be used for medical education and research operating and capital costs, including faculty member base salaries, education or research personnel salaries, research and educational supplies or equipment, scientific exhibits, publications expenses, travel to professional meetings (within the constraints of the University's general travel policy and budget), fees and expenses of guest speakers, visiting professors and consultants, and renovation of space needed for education or research.

Under the Medicare statute, ⁴ the University is entitled to reimbursement for the reasonable costs ⁵ of medical services the Hospital provides to Medicare beneficiaries. 42 U.S.C. Sec. 1395x(v)(1)(A). Under Medicare regulations, one of the costs which may be reimbursed is the cost of approved medical educational activities, including that portion of faculty salaries attributable to clinical education in the Hospital and stipends paid to medical residents and interns in accredited training programs. 42 C.F.R. Sec. 405.421 (1982). Although the provider may include these expenses within its claim for reimbursement, reimbursement is available only for those costs net of "revenues it receives from tuition, and from grants and donations that the donor has designated for the activities." 42 C.F.R. Sec. 405.421(g)(1) (1982).

In order for a provider of health care services to obtain reimbursement under Medicare, it must enter into a contract with the Secretary wherein the provider agrees to furnish medical services to Medicare beneficiaries and the Secretary agrees to reimburse the provider for the reasonable costs thereof. 42 U.S.C. Sec. 1395cc. The provider nominates a fiscal intermediary, a private organization also under contract with the Secretary, and files an annual cost report with the intermediary setting forth all the reimbursable costs incurred during the fiscal year. 42 U.S.C. Sec. 1395h; 42 C.F.R. Sec. 413.60 (1982). As the agent of the Secretary, the intermediary reviews the provider's cost report and approves or disapproves payment for services rendered in compliance with the program's fee schedule, regulations and guidelines set forth in the manuals published by the Health Care Financing Administration ("HCFA"), the agency within HHS charged with administering the Medicare program. 42 U.S.C. Secs. 1395g and 1395x(v)(1)(A).

Pursuant to its contract with the Secretary, the University filed cost reports with its designated intermediary, Blue Cross Association/Health Care Service Corporation (the "Intermediary"), for fiscal years 1979, 1980, 1981, 1982 and 1983. The University claimed reimbursement for its overall costs of clinical medical education, including salaries paid to medical residents and interns working in the LUMC facilities. The Intermediary disallowed reimbursement for fifty percent of the costs attributable to the time the residents and interns spent in BACC. The Intermediary also reduced the University's claimed overall clinical education costs by the amounts set aside under the LMPP for various R & E accounts in the Medical School. The Intermediary reasoned that these funds were restricted gifts and grants designated for payment of specific costs included within the University's reimbursement claim.

The University appealed the Intermediary's decision, referred to above, to the Provider Reimbursement Review Board ("PRRB"), a panel of five individuals appointed by the Secretary of HHS whose responsibilities include the mediating of "disputes between providers and intermediaries acting for [HHS]." St. John's Hickey Memorial Hospital v. Califano, 599 F.2d 803, 813 n. 18 (7th Cir.1979). The PRRB sustained the Intermediary on the issue of costs attributable to the time the LUMC resident physicians and interns spent in BACC, finding that the clinic "was a separate revenue producing cost center similar to private physicians' offices and was not a Medicare certified facility," and ruled that no portion of the BACC resident and intern costs was reimbursable. On the issue of offset, a majority of the PRRB reversed the Intermediary's adjustment to the University's claim for clinical education costs, finding that the adjustment contravened Congress' intent that "teaching hospitals and medical schools be able to derive a surplus from the patient care activities of faculty members." The PRRB chairman dissented, finding that the faculty-physicians granted a portion of their professional fee earnings to the University to be used for purposes specified in the LMMP document, and thus, the provider (the Hospital) was essentially claiming Medicare reimbursement for the same costs. The chairman also asserted that the provider had failed to support its claim that Congress intended that teaching hospitals be allowed to derive a profit from patient care services, thus...