Mid Atlantic Nephrology Ctr., Ltd. v. Califano, Civ. No. T-76-1687.

• Citation: 433 F. Supp. 23
• Decision Date: 31 March 1977
• Docket Number: Civ. No. T-76-1687.
• Parties: MID ATLANTIC NEPHROLOGY CENTER, LTD., Plaintiff, and Maryland Comprehensive Health Planning Agency, Department of Health and Mental Hygiene for the State of Maryland, Realigned as Plaintiff, v. Joseph A. CALIFANO, Secretary, Department of Health, Education and Welfare, et al., Defendants.
• Court: U.S. District Court — District of Maryland

433 F. Supp. 23

MID ATLANTIC NEPHROLOGY CENTER, LTD., Plaintiff and Maryland Comprehensive Health Planning Agency, Department of Health and Mental Hygiene for the State of Maryland, Realigned as Plaintiff, v. Joseph A. CALIFANO, Secretary, Department of Health, Education and Welfare, et al., Defendants.

Civ. No. T-76-1687.

United States District Court, D. Maryland.

March 31, 1977.

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Joseph D. Tydings, Baltimore, Md., Aaron L. Handleman, Washington, D. C., and Gerald C. Baker, Lanham, Md., for plaintiff.

Francis B. Burch, Atty. Gen. of Maryland, and Stephen J. Sfekas, Asst. Atty. Gen., Baltimore, Md., for realigned plaintiff.

Jervis S. Finney, U. S. Atty., and Daniel M. Clements, Asst. U. S. Atty., Baltimore, Md. (Randolph W. Gaines, Chief of Litigation, James C. Pyles, John W. Wojciechowski, and Leila H. Carp, Attys., Social Security Div., Dept. of Health, Ed. and Welfare, Washington, D. C. on brief), for Secretary, HEW.

James P. Parker, James K. Stewart and Arent, Fox, Kintner, Plotkin & Kahn, Washington, D. C., and Howard Goldberg and Smith, Somerville & Case, Baltimore, Md., for Long, Medical Administrative Services, Inc., and Laurel Dialysis Clinic.

THOMSEN, Senior District Judge.

Plaintiff, Mid Atlantic Nephrology Center (MANC),^* filed this action on November 5, 1976, against (1) the Secretary of HEW, (2) Joseph C. Long, Jr. (Long), Medical Administrative Services, Inc. (MAS) and Laurel Dialysis Clinic (LDC),¹ and (3) Maryland Comprehensive Health Planning Agency (MdCHPA), a division of the Maryland Department of Health and Mental Hygiene. MANC, which has operated a dialysis treatment facility in Camp Springs, Maryland, since 1971, seeks primarily injunctive relief (A) to prevent Long and MAS from opening a dialysis clinic (LDC) in the Laurel, Maryland, area, some 25 miles away, and (B) to prevent HEW from disbursing any federal reimbursement funds to LDC under the End Stage Renal Disease (ESRD) program. MANC also seeks damages from Long, a former employee of MANC, for unfair competition. In its complaint MANC claims that HEW's approval of LDC's application to be qualified for federal reimbursement under the ESRD program was arbitrary and capricious, an abuse of discretion, and violated (1) the applicable federal statute and the regulations promulgated thereunder, and (2) MANC's equal protection and due process rights under the Fifth Amendment. Jurisdiction is asserted (a) under § 10 of the APA,² (b) under 28 U.S.C. 1331, and (c) under 28 U.S.C. 1361. MdCHPA, originally named as a defendant, has supported plaintiff's claims against HEW throughout the proceedings, and has now sought and been permitted to realign itself as a plaintiff herein, so far as the complaint seeks injunctive relief against HEW. MdCHPA makes no claim against Long, MAS or LDC.

A temporary restraining order granting the injunctive relief set out above was issued by another judge of this court and was extended by the undersigned judge so that a full hearing on both a preliminary and a permanent injunction could be held. At the close of that hearing, at which testimony was taken on five days, and many exhibits and a stipulation of 124 facts were filed, the court issued a preliminary injunction prohibiting HEW from making Medicare reimbursements to LDC, but not preventing Long and MAS from opening LDC.³

After the preliminary injunction was issued and the testimony had been written up, all parties filed briefs; Long and HEW filed 80 proposed findings of fact, MANC 168.⁴ The court has ruled on each proposed finding, indicating that it is either found, not found, or found as modified. It would unduly prolong this opinion to include those findings, but the decision and ultimate findings and conclusions herein are based upon those detailed findings.

I. Applicable Statutes and Regulations

On July 1, 1973, pursuant to amendments to the Social Security Act which established what is now known as the End Stage Renal Disease (ESRD) Program,⁵ virtually all persons suffering from chronic renal disease became eligible for hemodialysis (dialysis) treatment and kidney transplantation under Medicare.⁶ Under the ESRD program the federal government, through Medicare, pays 80% of the reasonable cost of dialysis treatment beginning three months after a course of dialysis treatment has begun. As usual under Medicare, such payments are made to the supplier of services, not to the patient, and § 226(g) of the Act gives the Secretary of HEW broad discretion to prescribe by regulation the requirements which must be met by ESRD treatment facilities before they become entitled to federal reimbursement for dialysis treatment of eligible patients.⁷

Because coverage under the ESRD program was to become effective on July 1, 1973, eight months after the amendments were signed into law, HEW issued interim regulations to govern the operation of the program while additional information was collected and experience gained upon which the long-term regulations would be based. On June 29, 1973, two days before the effective date of the amendments, the interim regulations were published. They set out the circumstances under which suppliers of ESRD services could qualify for Medicare reimbursements during the interim period, namely: (a) existing facilities providing dialysis services became entitled to receive federal reimbursement for treatment of eligible patients during the period the interim regulations were in effect (the "grandfather" clause); (b) a freeze was placed on the approval of new ESRD treatment facilities — a new facility could become entitled to reimbursement during the freeze only if it met the requirements set out in the regulations for an "exception" to the freeze and was approved by HEW.

The interim regulations remained in effect until September 1, 1976, when long-term regulations went into effect.⁸ Facilities receiving reimbursement under the interim regulations (whether under the grandfather clause or as an approved exception to the freeze) may continue to receive reimbursement until September 1, 1977; after that date reimbursement can continue only if the facility receives approval under the long-term regulations. No application received after September 1, 1976, is eligible for approval as an exception under the interim regulations; any such application must be filed in accordance with the long-term regulations.

MdCHPA, designated by the Governor of Maryland in 1968⁹ as the state agency to receive federal health planning grants, has responsibilities with respect to the approval of facilities to receive both state and federal health care reimbursements.¹⁰ Various local agencies were established, including those now known as the Central Maryland Health Systems Agency (CMdHSA) and the Southern Maryland Health Systems Agency (SMdHSA), which are federally funded (see note 10), and aid MdCHPA in the performance of its state and federal responsibilities.¹¹ In addition to those planning agencies, Maryland established, effective July 1, 1971, a Kidney Disease Program,¹² the first of its kind in the country, to gather and disseminate information concerning the treatment of renal disease, and to make such treatment more widely available to Maryland citizens by providing for state payment of part or all of the cost of such treatment.¹³ A Commission on Kidney Disease (MdCKD) was set up to develop and promulgate standards for the operation of dialysis facilities in Maryland and for the acceptance of patients for treatment in those facilities.¹⁴

Under the State Kidney Disease Program the appropriate local planning agency investigates each facility which wishes to receive state reimbursement to determine whether it meets the standards set by the MdCKD and conforms to the areawide comprehensive health plans;¹⁵ on the basis of its investigation a recommendation with respect to whether that facility should be "certified" is made to MdCHPA. A facility meeting the standards set by MdCKD and approved by the MdCHPA as being in conformance with the state comprehensive health plan, is certified by the Maryland Department of Health and Mental Hygiene.¹⁶ A patient eligible for and wishing to receive state payment can be treated only at a certified treatment facility.¹⁷

In addition to the functions performed by the various state agencies with respect to the state program, MdCHPA and through it the local agencies assist HEW in determining whether a facility applying for federal approval meets certain requirements for participation in the federal ESRD reimbursement program. Specifically, HEW has regularly consulted MdCHPA regarding the need for a proposed ESRD facility and its conformance with the state comprehensive health plan. Also, pursuant to statutory authorization and under an agreement between HEW and the state, MdCHPA makes recommendations to HEW under § 1122 of the Social Security Act¹⁸ with respect to the need for proposed capital expenditures on health care facilities.

Before the implementation of the federal ESRD program, the state was authorized by Md.Ann.Code, Art. 43, § 788, to pay 100% of the certified cost of dialysis treatment of eligible Maryland citizens not covered by other insurance. Since July 1, 1973, the federal ESRD program and the state Kidney Disease Program have generally worked together to cover the total cost of dialysis treatment of individuals who qualify for both federal and state coverage. An individual who is eligible under both programs, and who is treated at a facility which has been approved under both programs, may have 100% of the cost of treatment during the first three months, and 20% of all treatment thereafter, paid for by the state to the extent that such treatments are not covered by other insurance. The federal ESRD program pays 80% of such cost after the initial three month period has passed. Although the cost of a dialysis treatment has risen dramatically...