Mercy Home Health v. Leavitt

• Decision Date: 03 February 2006
• Docket Number: No. 05-2082.,05-2082.
• Citation: 436 F.3d 370
• Court: U.S. Court of Appeals — Third Circuit
• Parties: MERCY HOME HEALTH, Appellant v. <SMALL><SUP>*</SUP></SMALL>Michael O. LEAVITT, Secretary of Health and Human Services.

436 F.3d 370

MERCY HOME HEALTH, Appellant v. ^*Michael O. LEAVITT, Secretary of Health and Human Services.

No. 05-2082.

United States Court of Appeals, Third Circuit.

Argued December 7, 2005.

Filed: February 3, 2006.

Mark H. Gallant (argued), Kimberly A. Hynes, Cozen & O'Connor, Philadelphia, PA, for Appellant.

Patrick L. Meehan, United States Attorney, Virginia A. Gibson, Assistant United States Attorney, Chief, Civil Division, Annetta F. Givhan, Office of the United States Attorney, Philadelphia, PA, Jan M. Lundelius (argued), Department of Health & Human Services, Office of the General Counsel, Philadelphia, PA, for Appellee.

Before RENDELL, FISHER, and GREENBERG, Circuit Judges.

OPINION OF THE COURT

GREENBERG, Circuit Judge.

I. INTRODUCTION

This matter comes on before this Court on an appeal by Mercy Home Health ("MHH") from an order of the district court entered March 18, 2005, granting summary judgment in favor of the Secretary of Health and Human Services (the "Secretary"). MHH sought review in the district court of the Secretary's final decision denying certain Medicare reimbursements for home office costs that MHH claimed pursuant to an alternative cost allocation method previously approved by the Medicare fiscal intermediary. For the reasons set forth below, we will affirm.

II. FACTUAL AND PROCEDURAL HISTORY

A. Medicare Reimbursement

Under Title XVII of the Social Security Act (the "Medicare Act"), 42 U.S.C. § 1395 et seq., the Secretary administers the Medicare program through the Centers for Medicare and Medicaid Services ("CMS").¹ Most Medicare providers receive reimbursement through fiscal intermediaries ("intermediaries") for services provided to Medicare beneficiaries. Intermediaries contract with the Secretary to determine the amounts due and are bound by the Secretary's regulations and interpretive rules. See 42 U.S.C. §§ 1395h, 1395kk-1; 42 C.F.R. § 421.100.

Congress authorized the Secretary "to promulgate regulations `establishing the method or methods to be used' for determining reasonable costs." Shalala v. Guernsey Mem'l Hosp., 514 U.S. 87, 91-92, 115 S.Ct. 1232, 1235, 131 L.Ed.2d 106 (1995) (citing 42 U.S.C. § 1395x(v)(1)(A)). The Secretary's implementing regulations define "reasonable cost" as including reimbursement of only "necessary and proper" costs for furnishing covered services related to beneficiary care. 42 C.F.R. § 413.9(a). During the time period at issue, Medicare reimbursed home health agencies based on their "cost actually incurred," less any costs "unnecessary in the efficient delivery of needed health services." 42 U.S.C. § 1395x(v)(1)(A).

1. Prohibition on Cross-Subsidization

The Medicare Act requires the Secretary's regulations to "take into account both direct and indirect costs of providers of services," and to ensure that Medicare does not pay costs of non-Medicare patients, and that other insurance programs do not pay the costs of Medicare patients. Id. To prevent cross-subsidization, the act further directs the Secretary to "provide for the making of suitable retroactive corrective adjustments where ... the aggregate reimbursement produced by the methods of determining costs proves to be either inadequate or excessive." Id.

2. Record Keeping Requirements

Because the Secretary must verify the provider's actual costs to ensure proper payment, "[i]t is hardly surprising that the reimbursement process begins with certain record keeping requirements." Guernsey Mem'l Hosp., 514 U.S. at 94, 115 S.Ct. at 1236. To this end, the Medicare Act provides that "no such payments shall be made to any provider unless it has furnished such information as the Secretary may request in order to determine the amounts due such provider" for the cost period at issue. 42 U.S.C. § 1395g(a). The implementing regulations further state that "[p]roviders receiving payment on the basis of reimbursable cost must provide adequate cost data." 42 C.F.R. § 413.24(a). According to the regulations, the data must be "accurate and in sufficient detail to accomplish the purposes for which it was intended," and the data must be auditable. Id. at § 413.24(c).

3. Cost Allocation

The home office of a chain of commonly-owned health care providers is not a Medicare provider and cannot directly receive Medicare reimbursement. See 42 U.S.C. § 1395cc. Nevertheless, inasmuch as home offices may perform certain centralized services for a provider subsidiary, Medicare treats those support services as though "obtained from [the provider] itself." 42 C.F.R. § 413.17(c)(2). The Secretary's interpretive rules, found in the Provider Reimbursement Manual, CMS Pub. 15-1 ("PRM"), address how a provider may obtain reimbursement for home office support functions.

To obtain reimbursement for home office support functions related to the care of Medicare patients, the provider's home office files a cost statement, which identifies the allowable home office costs and how they are allocated among each of its subsidiary companies (also called "components"). See PRM § 2150.3. First, the home office totals all of its own costs, including those that it incurred on behalf of its subsidiary companies, and deletes from that total all unallowable costs. See id. at § 2150.3(A). Second, the home office uses "direct allocation" to allocate as many of its costs as possible. Direct allocation accounts for home office costs that are for the benefit of, or directly attributable to, its Medicare subsidiary or its other subsidiaries. See id. at § 2150.3(B). Third, the home office must allocate as many of the remaining costs as possible on a "functional basis." See id. at § 2150.3(C).

After the home office allocates as many home office costs as possible to its subsidiaries by direct and functional allocation, a "pool" of allowable costs for general management or administrative services remains ("pooled costs"). See id. at § 2150.3(D). If the chain consists of companies providing health care services and other types of companies, all the companies "share in the pooled home office costs in the same proportion that the total costs of each component (excluding home office costs) bear to the total costs of all components in the chain." Id. at § 2150.3(D)(2)(b). Thus, the CMS-prescribed default methodology for allocating pooled costs is a cost-to-total cost allocation methodology.

If a home office has higher costs for one of its non-Medicare providers, but performs few services for that company, the home office may use a more sophisticated alternative allocation method to allocate the pooled costs more precisely. See id. at § 2150.3(D)(2)(b). The PRM specifies the procedure the home office should follow if it wants to use an alternative allocation method:

If evidence indicates that the use of a more sophisticated allocation basis would provide a more precise allocation of pooled home office costs to the chain components, such basis can be used in lieu of allocating on the basis of either inpatient days or total costs. However, intermediary approval must be obtained before any substitute basis can be used. The home office must make a written request with its justification to the intermediary responsible for auditing the home office cost for approval of the change....

Where the intermediary approves the home office request, the change must be applied to the accounting period for which the request was made, and to all subsequent home office accounting periods, unless the intermediary approves a subsequent change for the home office.

Id.

4. Cost Reconciliation and Review

The Medicare Act requires payments to providers, at least monthly, based on estimated costs. See 42 U.S.C. § 1395g(a). The act also requires the Secretary to establish a process to reconcile estimated payments made with the actual amount due and requires that regulations create a reconciliation process. See id. at § 1395x(v)(1)(A).

The provider initiates the cost reconciliation process by filing an annual cost report with the intermediary. See 42 C.F.R. § 413.20(b). The intermediary audits the cost report, see id. at § 421.100(c), and issues a notice of program reimbursement ("NPR"), which informs the provider of the amount of reimbursement due for Medicare services during that fiscal year, id. at § 405.1803. The intermediary then adjusts ongoing payments to account for overpayments or underpayments. See 42 U.S.C. § 1395g(a). To further ensure that intermediaries correctly reimburse Medicare providers, the Secretary's regulations allow intermediaries to reopen cost determinations within three years of the date of the NPR. See 42 C.F.R. § 405.1885(a). Intermediaries must reopen a determination if CMS notifies them that an NPR is inconsistent with applicable law, regulations, or CMS general instructions. See id. at § 405.1885(b)(1)(i); see also PRM § 2931.2.

If the provider is dissatisfied with the intermediary's determination and meets the amount in controversy requirement, the provider may appeal to the Secretary's Provider Reimbursement Review Board ("PRRB"). See 42 U.S.C. § 1395oo(a); 42 C.F.R. § 405.1835; see also 42 C.F.R. § 405.1889 (providing that intermediary determinations after reopening are subject to appeal). The PRRB may hold a hearing and issue a decision that is subject to further review by the Secretary's delegate, the CMS Administrator. See 42 U.S.C. § 1395oo(f)(1); 42 C.F.R. § 405.1875. The CMS Administrator may decline to review or may, affirm, reverse, modify or remand a PRRB decision. See 42 C.F.R. § 405.1875(d)(2), (g)(1). The final decision of the Secretary (issued by the PRRB or the CMS Administrator), is subject to judicial review. See 42 U.S.C. § 1395oo(f)(1).

B. Factual Background

MHH is Mercy Home Health Services' (the "Home Office") only Medicare provider subsidiary.² On July 12, 1993, the Home Office sent a letter to its fiscal intermediary, Independence Blue Cross, requesting permission to use an alternative allocation method...