Medical Center of Independence v. Califano, 76CV525-W-4.

• Decision Date: 28 July 1977
• Docket Number: No. 76CV525-W-4.,76CV525-W-4.
• Citation: 433 F. Supp. 837
• Parties: MEDICAL CENTER OF INDEPENDENCE, Plaintiff, v. Joseph A. CALIFANO, Jr., et al., Defendants.
• Court: U.S. District Court — Western District of Missouri

433 F. Supp. 837

MEDICAL CENTER OF INDEPENDENCE, Plaintiff, v. Joseph A. CALIFANO, Jr., et al., Defendants.

No. 76CV525-W-4.

United States District Court, W. D. Missouri, W. D.

July 13, 1977.

As Amended July 28, 1977.

F. Philip Kirwan, Gordon R. Gaebler, Margolin & Kirwan, Kansas City, Mo., J. D. Epstein, Wood, Lucksinger & Epstein, Houston, Tex., for plaintiff.

Robert B. Schneider, Asst. U.S. Atty., Kansas City, Mo., for defendants.

MEMORANDUM AND ORDER DISMISSING WITHOUT PREJUDICE CLAIMS FOR COST REPORTING YEARS 1970, 1971, AND 1972

ELMO B. HUNTER, District Judge.

In this action, commenced August 20, 1976, plaintiff seeks reimbursement for certain expenses claimed to be due under the Medicare program for the Medicare cost reporting periods ending December 31, 1970, 1971, 1972, and 1973. The complaint alleges jurisdiction in this Court under 42 U.S.C. § 1395oo (f), 5 U.S.C. § 702, 28 U.S.C. § 1331, and 28 U.S.C. § 1361. Defendants do not contest jurisdiction over plaintiff's claim concerning the 1973 cost reporting year, but assert that jurisdiction is lacking over the claims which involve cost reporting periods ending on December 31, 1970, 1971 and 1972.

Background

In 1965, Congress enacted Title XVIII of the Social Security Act, known as the Medicare program, 42 U.S.C. § 1395 et seq., to provide federal reimbursement for medical care to the aged. Part A of the program, which is involved in this action, provides "hospital insurance" benefits by establishing a reimbursement scheme for funding a beneficiary's covered health care costs. Coverage extends to services rendered by "providers" such as hospitals, skilled nursing facilities, and home health agencies. Beneficiaries entitled to such coverage, which is funded out of social security taxes, are required to pay only an annual deductible charge and a coinsurance amount. Part A insurance benefits are paid by the Government through a fiscal intermediary directly to the provider of services rather than to the beneficiary.

A provider may participate in the Medicare program by filing an agreement with the Secretary of Health, Education and Welfare. 42 U.S.C. § 1395cc. Reimbursement to providers for services rendered to Medicare beneficiaries is carried out by the Secretary or, more often, by certain private organizations acting as fiscal intermediaries pursuant to agreement with the Secretary. 42 U.S.C. § 1395h. The fiscal intermediary between the Medical Center of Independence and the Secretary is the Blue Cross Association, through its local plan, Blue Cross of Kansas City.

In payment of funds to the provider, the fiscal intermediary acts as a conduit of trust funds and has no vested interest in the expenditure of the funds. This payment function necessarily involves ascertaining that the amount of payment is correct and accurately reflects the reasonable costs of services rendered to program beneficiaries. Since lump sum payments are made at least monthly, on the basis of estimates, subsequent adjustments for overpayments or underpayments are required. 42 U.S.C. § 1395g and § 1395x(v)(1)(A)(ii); 20 C.F.R. § 405.402(b)(1) & (2) and 405.454. The final determination as to reimbursable costs is made after the close of the provider's fiscal year, based upon the cost report filed by the provider. 20 C.F.R. § 405.405(b).

The specific background of the present case is as follows. In 1970, Hospital Affiliates of Independence (HAI) purchased the assets of the plaintiff hospital from the prior owner, Americare Corporation, which had itself purchased the facility in 1967 pursuant to a Court-approved reorganization plan under Chapter X of the Bankruptcy Act. As owner of the facility, HAI then entered into a 15-year lease with the Medical Center of Independence (MCI) to be effective August 1, 1970, and a management agreement to run concurrently with the lease. HAI further agreed to make necessary working capital loans to the provider up to $200,000.

The original bylaws of the provider established that there should be 11 directors; the original directors were appointed by the Court which had approved the Chapter X reorganization in 1967. In August 1970, however, after the sale of the facility to HAI and the execution of the lease and management agreement between HAI and MCI, the bylaws were amended to increase the number of directors to 14, to allow non-local directors to vote by proxy, and to increase the number of officers' positions. In October 1970, six HAI employees were elected as directors of the provider; two of these were elected officers of the provider as well.

When the intermediary, Blue Cross of Kansas City, audited the provider's cost reports pursuant to the statutory scheme, it determined that the provider and HAI were related through common control and thus that the regulatory provisions requiring reduction of certain costs claimed by the provider which were acquired from a related organization, were applicable. Accordingly, disallowances were made for interest expenses, management fees, and rental payments claimed by MCI, thereby reducing plaintiff's Medicare reimbursement by approximately $600,000.00. See 20 C.F.R. § 405.427.

Plaintiff filed appeals for all fiscal years involved in this action, 1970 through 1973. The appeal for 1973 was made to the Provider Reimbursement Review Board (PRRB), an independent administrative tribunal which has jurisdiction only over cost reporting periods ending June 30, 1973, or after. See 42 U.S.C. § 1395oo. Although the PRRB rendered its decision in plaintiff's favor, the Commissioner of Social Security, allegedly on the recommendation of the Bureau of Health Insurance and pursuant to authority delegated by the Secretary of Health, Education and Welfare, reversed the PRRB decision.

The determination concerning cost reporting years 1970, 1971, and 1972, made by Blue Cross of Kansas City, was appealed to the Blue Cross Association. When plaintiff filed this action, that appeal had neither been heard nor decided, and to date, it has not been prosecuted to a determination. Plaintiff's suggestions in opposition to defendant's Motion to Dismiss state that plaintiff "has not vigorously pursued the administrative appeal pending before BCA for fiscal years 1970 through 1972 because Plaintiff does not believe that there is any reasonable possibility of obtaining a favorable decision for those years." (Plaintiff states that all BCA decisions are reviewed by BHI, the same entity which recommended reversal of the PRRB decision, and a BCA decision may be reversed at the direction of the Social Security Administration, the Commissioner of which overruled the PRRB decision in this case.)

Defendant does not dispute this Court's jurisdiction over plaintiff's claim covering the cost reporting year 1973. As for the three preceding years, however, defendant contends that the Court lacks jurisdiction due to plaintiff's failure to exhaust administrative remedies with respect to those claims, and further asserts that on the basis of 42 U.S.C. § 405(h) and case authority interpreting those provisions, jurisdiction is lacking to review on the merits the disallowances for fiscal years prior to 1973. Thus, as plaintiff's brief properly has pointed out, the issues presented to this Court by defendant's Motion to Dismiss are:

(1) Does 42 U.S.C. § 405(h) preclude the Court from reviewing on the merits the disallowances of cost for fiscal years 1970 through 1972?

(2) Is it necessary for plaintiff to exhaust administrative remedies as a precondition to this Court's jurisdiction to review the merits of plaintiff's claims?

Exhaustion of Administrative Remedies

First, defendants contend that the Court should dismiss plaintiff's claims for the years 1970, 1971, and 1972, for the reason that plaintiff has failed to exhaust its administrative remedies for those years. Plaintiff responds that the Court should entertain jurisdiction and not require exhaustion of remedies because those administrative remedies are inadequate and it would be futile for plaintiff to pursue them.

As defendants point out, it is a basic legal precept that available administrative remedies must be exhausted prior to seeking relief in a court of law. McKart v. United States, 395 U.S. 185, 89 S.Ct. 1657, 23 L.Ed.2d 194 (1969); Allen v. Grand Central Aircraft Co., 347 U.S. 535, 74 S.Ct. 745, 98 L.Ed. 933 (1954); Myers v. Bethlehem Shipbuilding Corp., 303 U.S. 41, 58 S.Ct. 459, 82 L.Ed. 638 (1938); Aircraft and Diesel Corp. v. Hirsch, 331 U.S. 752, 67 S.Ct. 1493, 91 L.Ed. 1796 (1947). The exhaustion requirement affords the agency an opportunity to assemble a record, to correct any error, and "ascertain . . . that the particular claims involved are neither invalid for other reasons nor allowable under other provisions of the Social Security Act." Weinberger v. Salfi, 422 U.S. 749, 762, 95 S.Ct. 2457, 2465, 45 L.Ed.2d 522 (1975). See Gallo v. Mathews, 534 F.2d 1137 (5th Cir. 1976); Aristocrat South, Inc. v. Mathews, 420 F.Supp. 23 (D.D.C.1976).

Plaintiff argues, however, that in reality a final agency decision has been made that plaintiff and HAI are subject to the related party principle for the cost reporting year 1973, and that in effect, because the facts and evidence for the periods 1970-1972 are the same, a decision has been made with respect to those three preceding years. According to plaintiff, "further prosecution before BCA of the appeal for the cost period ending 1970-1972 would be a needless waste of time and expense when the outcome is entirely predictable."

Persuasive though plaintiff's argument may be, the Court does not find it convincing. This Court may not "entertain jurisdiction" where jurisdiction is lacking, and the Court cannot agree that "it is clear beyond doubt that the relevant administrative agency will not grant the relief in question." American Federation of Government Employees v. Acree, 155 U.S. App.D.C. 20, 475 F.2d 1289 (1973); see...