Maximum Home Health Care, Inc. v. Shalala, 3:99-0299.

CourtUnited States District Courts. 6th Circuit. United States District Court of Middle District of Tennessee
Citation136 F.Supp.2d 814
Docket NumberNo. 3:99-0299.,3:99-0299.
PartiesMAXIMUM HOME HEALTH CARE, INC., Plaintiff, v. Donna E. SHALALA, as Secretary of the United States Department of Health and Human Services, Defendant.
Decision Date27 July 2000
136 F.Supp.2d 814
Donna E. SHALALA, as Secretary of the United States Department of Health and Human Services, Defendant.
No. 3:99-0299.
United States District Court, M.D. Tennessee, Nashville Division.
July 27, 2000.

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John P. Konvalinka, James Scott McDearman, Grant, Konvalinka & Grubbs, P.C., Chattanooga, TN, for plaintiff.

Michael L. Roden, Office of the United States Attorney, Nashville, TN, for defendant.


HAYNES, District Judge.

Plaintiff, Maximum Health Care, Inc, (Maximum) filed this action under 42 U.S.C. § 1395oo(f)(1), Title XVIII of the Social Security Act (the "Act"), 42 U.S.C. § 1395 et seq. that establishes Medicare,

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the federally funded health insurance program. Maximum seeks judicial review of the decision of the Administrator of the Health Care Financing Administration (HFCA) rendered on behalf of the defendant, Donna Shalala, in her official capacity as the Secretary of the United States Department of Health and Human Services (Secretary). The gravamen of Maximum's claim is that the Administrators improperly reversed the decision of the Provider Reimbursement Review Board (PRRB), that Maximum was entitled to reimbursements for the management consultant fees Maximum paid to Diversified Health Management Company ("Diversified") for the fiscal years of 1990 and 1991.

Pending before the Court are the parties' cross motions for judgment on the administrative record and responses thereto, (Docket Entry No. 13, Plaintiff's Motion for Judgment on the Administrative Record); (Docket Entry No. 19, Defendant's Motion for Judgment on the Administrative Record and Response to the Plaintiff's Motion for Judgment on the Administrative Record); the Plaintiff's Reply (Docket Entry No.23); and the Defendant's Reply. (Docket Entry No.27).

Maximum contends, in sum: (1) that the Administrator relied upon an erroneous method to determine a reasonable management services fee; (2) that Administrator's auditor's componentized analysis under Medicare regulations reflects that the management fees paid by Maximum are reasonable and are not substantially out of line and thereby are required by the Medicare Act and regulations to be reimbursed; and (3) that the study conducted by an independent accounting firm also supports the PRRB's ruling that Plaintiff's management fees are reasonable and entitled to reimbursement.

The Secretary contends, in sum, that her decision must be upheld unless it is arbitrary, capricious, unsupported by substantial evidence, or otherwise not in accordance with the Medicare Act, regulations and guides. The Secretary contends that the Administrator's decision that the Plaintiff did not act as a prudent buyer, as reflected by Maximum's failure to solicit bids for these services, is supported by substantial evidence that includes an auditor's survey that shows the availability of these management services at lower prices in Maximum's geographic market. Further, Maximum's consultant's survey of management fees is flawed for its failures to define the market surveyed; to include the comparable management contracts and to exclude an aberration in prices that was used to justify its conclusion.

For reasons set forth below, the Court concludes that the prudent buyer standard utilized by the Administrator is a longstanding and acceptable method to determine the amount of reimbursement under the Medicare statutes, regulations and policies. The Administrator properly applied the prudent buyer principle in this action and that decision is supported by substantial evidence. The Administrator was not required to utilize the "substantially out of line" standard for the reimbursement decision. In any event, the Court concludes that the Administrator could properly decline to accept Maximum's evidence of a reasonable cost as based upon a flawed survey. Finally, the Court does not find any inconsistency that would constitute an arbitrary or capricious decision by the Administrator.

A. Review of the Record1

Maximum is a certified home health agency that provides services in

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Watertown, Tennessee, the location of its principal office and at its offices in Gallatin, Murfreesboro, Nashville and Sparta, Tennessee. (Docket Entry No. 9 Attachment thereto Administrative Record at p. 74.) On January 26, 1988, Maximum entered into a management agreement with Diversified to provide a full range of management services effective March 1, 1988 at the rate of $11.50 per patient visit. Id. at 350. On April 17, 1989, Diversified's fee increased to $13.00 per patient visit effective March 1, 1989. Id. at pp. 365, 376. On May 17, 1990, Maximum and Diversified entered into another agreement to increase fees to $13.60 per patient visit. Id. at p. 392. The fee increase between 1988 and 1989 was 13.6%, and the increase between 1989 and 1990 was 4.6%. Id. at p. 350. Even though the fees increased, the services performed by Diversified did not change. Id. at p. 347.

Under the Medicare program, a Fiscal Intermediary (FI) contracts with the Secretary to process and audit payments to providers.2 The fiscal intermediary reviews the cost report, undertakes any necessary audits, and informs the provider of the amount of Medicare reimbursement which the FI deems the provider is entitled through a written Notice of Program Reimbursement ("NPR"). 42 C.F.R. § 405.1803. Blue Cross and Blue Shields Association, and its subcontracting Plan, Blue Cross and Blue Shield of South Carolina, doing business as Palmetto Government Benefits Administrator is the regional home health FI for Medicare certified home health agencies located in Kentucky, North Carolina, South Carolina, and Tennessee. Blue Cross was the FI that performed a study to determine the reasonableness of Maximum's management fees paid to Diversified for reimbursement. Id. By October, 1993 the FI determined that with some adjustments, Maximum's management services costs for 1990 and 1991 should be reduced for reimbursement by $137,626. Id. at p. 351, 545 and 547.

The FI found the contract to be fairly specific as to the services to be performed by Diversified, but because a progress report was not provided to document the quantity of services rendered, the FI's auditors performed a limited review to determine if the services were actually performed. Id. at p. 359. The FI found that Maximum did not obtain competitive bids for the outside management contract, as required by HCFA regulations. Id. at p. 351. In addition, the FI found that there was not any proof that the parties were related through ownership, and could not state whether the parties were related through control. Id. at p. 359.

The FI concluded that Diversified's fees were considerably higher than comparable fees in Maximum's market for similar contract services that ranged between $8.25 and $11.00 per visit. Diversified's fees were $13.00 for the fiscal year 1990 and $13.60 for the fiscal year 1991. Id. at p. 356. Accordingly, the FI proposed a fee adjustment to $9.74 for both 1990 and 1991. This figure was calculated by averaging the fees of the five management

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contract firms' charges per home visit. Consequently, the FI's audit adjusted the reimbursement for Diversified's fee reducing it to $58,272.00 for 1990 and $74,750 for 1991. Id. at 547, 553.

In sum, the FI found that

[s]ince the reasonableness of the Provider's (plaintiff) management fees was not supported by adequate documentation, as addressed in the regulations noted above, (42 CFR §§ 413.9, 413.20, and 413.24), the intermediary had to resort to other analyses. Competitive bids were not obtained for the management services. Documentation was not submitted on the management group's expertise on health care management. Therefore the intermediary resorted to a comparison with other full service management contract's in the geographical area. The intermediary believes that this is an appropriate mean[s] of determining the fair market value of the management fees in the marketplace. The fee paid by the Provider was out-of-line with fees charged by other management groups in the vicinity.

Id. at pp. 360, 361.

Copies of the management contracts of the firms selected by the FI are included in this record. Id. at 363-472. These firms were: (1) Health Care Resources of Somerset, Kentucky that does business in Southern Kentucky; (2) Innovative Management Services, a Tennessee based company; (3) KyMO Company in Dresden, Tennessee; (4) Alpha Medical Management, a corporation in Chattanooga, Tennessee and (5) Health Financial Services, a Tennessee corporation. Id. at pp. 353-55.

Maximum appealed the FI's decision to the Provider Reimbursement Review Board (PRRB.)3. The PRRB found that the FI's fee survey, upon which it based its adjustments, was flawed for several reasons. First, "[t]here was little or no information in evidence regarding the manner in which the sample of five management companies was selected, ... [and therefore] the selection ... appeared to be arbitrary." Id. at p. 36 (PRRB Hearing Decision). The PRRB also stated that testimony of "Intermediary's witness indicated that Intermediary used only base costs per visit from the contracts of the companies surveyed and did not consider additional charges for duration of the contracts." Id. at p. 37. Finally, the PRRB found the FI did not compare Diversified's services to the services of the management companies in the survey. Id.

The PRRB also found the fee survey performed by the Peat Marwick firm, KPMG, for Maximum was more detailed because that survey considered a greater number of variables and companies. The PRRB also found the KPMG survey established a mean and standard deviation for management company rates. Id. Thus, the PRRB concluded that the fees paid to Diversified were well within the mean of $11.38 per visit with a standard deviation of $2.93...

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