Metropolitan Medical Center v. Harris, Civ. No. 4-78-512.

• Decision Date: 20 October 1981
• Docket Number: Civ. No. 4-78-512.
• Citation: 524 F. Supp. 630
• Parties: METROPOLITAN MEDICAL CENTER and Extended Care Facility, Plaintiff, v. Patricia HARRIS, Secretary of the Department of Health and Human Services; the United States of America; and Blue Cross and Blue Shield of Minnesota, Defendants.
• Court: U.S. District Court — District of Minnesota

524 F. Supp. 630

METROPOLITAN MEDICAL CENTER and Extended Care Facility, Plaintiff, v. Patricia HARRIS, Secretary of the Department of Health and Human Services; the United States of America; and Blue Cross and Blue Shield of Minnesota, Defendants.

Civ. No. 4-78-512.

United States District Court, D. Minnesota, Fourth Division.

October 20, 1981.

Richard I. Diamond, and John R. Beattie, of Larkin, Hoffman, Daly & Lindgren, Ltd., and Mark G. Mishek, Minneapolis, Minn., for plaintiff.

John M. Lee, Deborah S. Kleinman, Asst. U. S. Attys., Minneapolis, Minn., and Stephen B. Weiss, Dept. of Health and Human Services, Baltimore, Md., for defendants.

MEMORANDUM and ORDER

RENNER, District Judge.

This matter comes before the Court on the parties' cross-motions for summary judgment. Richard I. Diamond, Esq., John R. Beattie, Esq., and Mark G. Mishek, Esq., appeared for plaintiff. Debbie S. Kleinman, Esq., and Stephen B. Weiss, Esq., appeared for defendants.

Plaintiff, Metropolitan Medical Center, seeks an order declaring that the cost of providing free care and community services as required by the Hill-Burton Act, 42 U.S.C. § 291 et seq., in its fiscal year ended September 30, 1977, is reimbursable under the Medicare Act, 42 U.S.C. § 1395 et seq. Additionally, plaintiff seeks a prospective application of such a holding to costs incurred in future years.

This action is brought as a judicial review of the decision by the Secretary of Health and Human Services to affirm the final decision of the Provider Reimbursement Review Board, which disallowed reimbursement of Hill-Burton Act costs incurred by plaintiff. In fiscal 1977 this amount equaled $286,233.23.

I. FACTUAL BACKGROUND

Plaintiff is a participating provider of services under the Medicare program. Between 1968 and 1973, plaintiff applied for and received grants under the Hill-Burton Act totaling $2,800,532. In 1973, plaintiff received under the Hill-Burton Act a loan guaranty and interest subsidy on a loan of $16,765,294. As a condition of receiving the grant, the loan guaranty, and the interest subsidy, plaintiff was required to render free care to persons unable to pay. 42 U.S.C. § 291c(e)(2). For the cost-reporting period at issue here, fiscal year ending September 30, 1977, plaintiff was obligated to provide $450,000 worth of free care. In fact, it exceeded its free care obligation by providing $530,521 worth of free care.

As a further condition of receiving the grant, the loan guaranty, and the interest subsidy, plaintiff was required to make its services available to all persons residing in its territorial area. 42 U.S.C. § 291c(e)(1). Plaintiff has claimed that it incurred in fiscal 1977 expenses of $141,388 in meeting its "community services" obligation, and that this amount is appropriately includable on its Medicare costs report for the period in question.

The Secretary's fiscal intermediary, Blue Cross of Minnesota, disallowed the expenses claimed for free care and community services. Plaintiff appealed to the Provider Reimbursement Review Board. That board upheld the disallowances, by a 2-2 vote in the case of free care, and by a 4-0 vote in the case of community services. The Deputy Administrator of the Health Care Financing Administration, acting as the delegate of the Secretary of Health and Human Services, affirmed both disallowances. This decision constituted final administrative action.

II. DISCUSSION

A. The Secretary's decision may be overturned only if "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law" or "unsupported by substantial evidence." 5 U.S.C. § 706(2)(A), (E). Plaintiff contends that the Secretary's action was arbitrary, capricious, and not in accordance with the applicable statutes and regulations.

B. The first issue raised by plaintiff is whether costs by a hospital in rendering free care under the Hill-Burton Act are necessary and proper indirect costs for which reimbursement is required under the Medicare Act. Plaintiff contends that a careful reading of the applicable statutes and regulations clearly shows them to be reimbursable. Defendants' primary response is that there is no clear showing of Congressional intent for such reimbursement, and that the Secretary acted with appropriate discretion in determining that these expenses were not reimbursable.

The controlling principle of Medicare reimbursement is that a hospital is entitled to reimbursement only for the reasonable cost of services provided to Medicare patients. 42 U.S.C. § 1395f(b). The term "reasonable cost" is defined to encompass both direct and indirect costs of providers of services, with the objective that the costs with respect to individuals covered by the Medicare Program will not be borne by individuals not so covered and the costs with respect to individuals not so covered will not be borne by the Program. 42 U.S.C. § 1395x(v)(1)(A); 42 C.F.R. § 405.451(c)(3). "Necessary and proper costs," are defined in the regulations as follows:

Necessary and proper costs are costs which are appropriate and helpful in developing and maintaining the operation of patient care facilities and activities. They are usually costs which are common and accepted occurrences in the field of provider's activity.

42 C.F.R. § 405.451(b)(2).

Plaintiff contends that although the provision of free care pursuant to the Hill-Burton Act obligation inures to the direct benefit of indigents rather than to Medicare patients, it indirectly benefits Medicare patients by qualifying the hospital for interest subsidies on construction and modernization projects that are ultimately used by Medicare patients. By maintaining the facility in compliance with Medicare standards, the hospital retains its eligibility to service Medicare patients, and the Medicare Program and Medicare patients assertedly benefit from the continuing availability of the improved facilities for their care.

Support for plaintiff's position is found in Presbyterian Hospital of Dallas v. Harris, 638 F.2d 1381 (5th Cir. 1981), petition for cert. filed on other grounds, 50 U.S.L.W. 3131 (U.S. Aug. 10, 1981) (81-264). There, the Fifth Circuit held that the free care expenses incurred by the hospital in connection with its obligations under the Hill-Burton Act were reasonable costs of providing care to all of its patients, including Medicare patients, and are consequently reimbursable to the extent that this indirect cost benefited Medicare patients. Id. at 1387. Noting that both the statute and the regulations provide for reimbursement for indirect as well as direct costs, 42 U.S.C. § 1395x(v)(1)(A); 42 C.F.R. § 405.451(c)(3), the court was unable to distinguish free care expenses from those indirect costs, including depreciation, interest, research costs, and some types of bad debts, which the regulations specify as reimbursable indirect costs. See 42 C.F.R. § 405.401 et seq. The fact that such expenses also benefited indigent persons who were not Medicare beneficiaries was considered irrelevant to the determinative issue: Whether the expenses were a reasonable cost incurred in the provision of services to Medicare patients. In so holding, the court also found that two factual issues remained for resolution: whether or to what extent the hospital has already been reimbursed for those expenses in the fiscal year at issue, and, to the extent that the hospital's free care expenses have not been reimbursed, precisely what those expenses are.

Defendants raise a number of arguments in response to plaintiff's motion and the Presbyterian Hospital case. Initially, they assert that there is an absence of Congressional intent for such reimbursement of Hill-Burton Act free care costs. The Act requires that hospitals receiving benefits under the program "furnish needed services for persons unable to pay therefore." 42 U.S.C. § 291c(e). Thus, to hold that hospitals need not satisfy their free care obligation out of their resources, but may finance their obligation in substantial part through federal Medicare moneys arguably robs the Hill-Burton free care obligation of all meaning. Defendants point out that in enacting the Medicare legislation, Congress nowhere evidenced any intent to eliminate or reduce hospitals' Hill-Burton free care obligations.

Defendants cite Harper-Grace Hospitals v. Schweiker, No. 80-72082 (E.D.Mich. April 1, 1981), as providing the correct analysis of this question. In that court's view, Hill-Burton free care expenses differed from other reimbursable expenses such as depreciation and research costs. To hold otherwise would, in effect, assertedly confer upon a hospital a double benefit. The first benefit arises from the construction subsidy provided by the Hill-Burton Act, thus resulting in lower construction costs. The second benefit was viewed to be the reimbursement of the free care obligation, a cost that would seem to have been covered by the construction subsidy. Moreover, the court held that the free care obligation is not satisfied if the federal government pays for it. Hence, in those circumstances where Congress allegedly established in the Hill-Burton Act a clear policy requiring free care commitments in exchange for Hill-Burton benefits, that court considered itself obligated to construe subsequent legislation such as the Medicare Act consistent with that Hill-Burton policy and deny reimbursement.

Defendants' argument is premised on the assumption that Congress intended for the health care provider receiving Hill-Burton benefits to undertake the financial burden of this obligation. The legislative history of the Hill-Burton Act, however, does not provide support for defendants' argument. The general tenor of the Senate hearings on the Hill-Burton Act reflects a desire to assure availability of the facilities for all people, regardless of their financial position. Hospital Construction Act: Hearings on S. 191, Before the Senate Comm. on Education and...