NJ SPEECH-LANGUAGE-HEARING ASSOCIATION v. PRUDENTIAL INS. COMPANY OF AMERICA

• Decision Date: 03 December 1982
• Docket Number: Civ. A. No. 81-1663.
• Parties: NEW JERSEY SPEECH-LANGUAGE-HEARING ASSOCIATION, a New Jersey Corporation; New Jersey Association of Speech Pathologists and Audiologists in Private Practice, a New Jersey Corporation; Jules Kronengold, M.A., Irwin Blake, Ph.D., and Harriet Schwartz, M.A., on behalf of themselves as speech-language pathologists and all other entities and persons similarly situated, Plaintiffs, v. PRUDENTIAL INSURANCE COMPANY OF AMERICA, a New Jersey Corporation; United States Department of Health and Human Services; Richard Schweiker, Secretary of Health and Human Services; Health Care Financing Administration; and Carolyn K. Davis, Administrator, Health Care Financing Administration, Defendants.
• Court: U.S. District Court — District of New Jersey

551 F. Supp. 1024

NEW JERSEY SPEECH-LANGUAGE-HEARING ASSOCIATION, a New Jersey Corporation; New Jersey Association of Speech Pathologists and Audiologists in Private Practice, a New Jersey Corporation; Jules Kronengold, M.A., Irwin Blake, Ph.D., and Harriet Schwartz, M.A., on behalf of themselves as speech-language pathologists and all other entities and persons similarly situated, Plaintiffs, v. PRUDENTIAL INSURANCE COMPANY OF AMERICA, a New Jersey Corporation; United States Department of Health and Human Services; Richard Schweiker, Secretary of Health and Human Services; Health Care Financing Administration; and Carolyn K. Davis, Administrator, Health Care Financing Administration, Defendants.

Civ. A. No. 81-1663.

United States District Court, D. New Jersey.

December 3, 1982.

Brach, Eichler, Rosenberg, Silver, Bernstein & Hammer by H. Neil Broder, and Dean A. Kant, Roseland, N.J., for plaintiffs.

W. Hunt Dumont, U.S. Atty. by Judy Sello, Asst. U.S. Atty., Newark, N.J., for defendants.

STERN, District Judge.

The question presented here is whether a group of medical professionals who have contracted to furnish services to nursing homes receiving money under Title XVIII of the Social Security Act, 42 U.S.C. §§ 1395 et seq. (the "Medicare" Act), may challenge the method by which those nursing homes are reimbursed for the cost of providing services to Medicare beneficiaries. Since the Court finds that plaintiffs do not have standing to make this challenge, and since we find, alternatively, that the Court lacks federal question or mandamus jurisdiction to entertain the claim, this action will be dismissed.

FACTS

The Medicare Program as it Applies to this Action.

The Medicare program is administered by defendant Health Care Financing Administration ("HCFA"),¹ a principal operating component of defendant United States Department of Health and Human Services ("HHS").² Part A of the Medicare program provides insurance coverage to the aged and disabled for the costs of hospital, related post-hospital and home health services. 42 U.S.C. § 1395c. This coverage is effected by directly reimbursing those providing services to beneficiaries of the program for the cost of furnishing such services. 42 U.S.C. § 1395f. To be eligible to participate in Part A of the Medicare program, an institution must be a "provider of services" — defined by statute as "a hospital, skilled nursing facility, comprehensive outpatient rehabilitation facility or home health agency," 42 U.S.C. § 1395x(u) — which has entered into an agreement with HHS governing the amount the institution may charge beneficiaries, 42 U.S.C. § 1395cc, and which meets certain criteria regarding the extent and quality of care it provides. Skilled nursing facilities, commonly known as nursing homes, must provide a variety of services to their patients in order to participate in the program, including specialized rehabilitative services such as physical therapy, speech pathology and audiology and occupational therapy. 42 U.S.C. § 1395x(j); 42 C.F.R. § 405.1126. The skilled nursing facility may either provide a particular rehabilitative service directly through its own employees, or it may provide these services under "arrangement" with a third party; that is, it may contract with a supplier of a service for the provision of the service, pay the supplier pursuant to the contract, and then receive reimbursement from the Medicare program for its expenses under the contract. 42 U.S.C. § 1395x(w)(1); Complaint, ¶ 21(d). Where a provider chooses to provide services under "arrangement" with a supplier, it must retain professional and administrative responsibility for the services rendered. 42 C.F.R. § 405.1121(i).

Reimbursement of providers under the Medicare Program is most commonly handled by private insurance companies acting as fiscal intermediaries pursuant to a contract with HHS. 42 U.S.C. § 1395h. Providers are paid the lesser of the "reasonable cost" of the services furnished or the "customary charge" for the services, 42 U.S.C. § 1395f(b). Reasonable cost is defined as

the cost actually incurred, excluding therefrom any part of incurred cost found to be unnecessary in the efficient delivery of needed health services, and shall be determined in accordance with regulations establishing the method or methods to be used, and the items to be included, in determining such costs for various types or classes of institutions, agencies and services; ...

42 U.S.C. § 1395x(v)(1)(A). Determination of the reasonable cost of providing health services is the responsibility of the fiscal intermediary. 42 U.S.C. § 1395h(a); 42 C.F.R. § 405.401(c).

Thus, where rehabilitative services are provided under arrangement, the services are actually furnished by therapists who are unable to receive compensation directly from the Medicare program, since such reimbursement may be received only by institutions which are qualified "providers". The therapists instead receive payment pursuant to contracts with providers and the providers in turn are reimbursed their reasonable costs under these contracts by intermediaries charged with the payment of Medicare funds.

The reasonable cost of physical, occupational and speech therapy services provided under arrangement with a skilled nursing facility may not exceed

an amount equal to the salary which would reasonably have been paid for such services (together with any additional costs that would have been incurred by the provider or other organization) to the person performing them if they had been performed in an employment relationship with such provider or other organization (rather than under such arrangement) plus the cost of such other expenses (including a reasonable allowance for travel time and other reasonable types of expense related to any differences in acceptable methods of organization for the provision of such therapy) incurred by such person, as the Secretary may in regulations determine to be appropriate.

42 U.S.C. § 1395x(v)(5)(A). The regulations which implement this provision state that HCFA "will establish criteria for use in determining the reasonable cost of physical, occupational, speech and other therapy services," 42 C.F.R. § 405.432(c)(1), and that the reasonable cost may not exceed the amount obtained by multiplying the hours worked by a therapist by "the adjusted hourly salary equivalency amount appropriate for the particular therapy in the geographical area in which the services are rendered" and adding a travel allowance. 42 C.F.R. § 405.432(c)(2).³ The appropriate amounts for the "adjusted hourly salary equivalency amount" and for the travel allowance are to be set by guidelines developed by HCFA. 42 C.F.R. § 405.432(b)(6). Until these guidelines are available for a particular area and service, however, "costs will be evaluated so that such costs do not exceed what a prudent and cost-conscious buyer would pay for the given service." 42 C.F.R. § 405.432(c)(5). HHS's Health Insurance Manual, Chapter 15, also known as the Provider Reimbursement Manual, Part 1 ("PRM-1"), which gives instructions and guidance to intermediaries in their assessment of reasonable costs, states that an intermediary "may employ various means" to determine whether the amount paid by a provider for speech therapy services exceeds the amount which a prudent buyer would pay for the service. PRM-1, § 2103; Complaint, ¶ 62.

HCFA has issued guidelines for physical therapy services, but has not yet issued guidelines for occupational therapy and speech therapy services. Complaint, ¶¶ 37-38. Intermediaries are therefore required to use the "prudent buyer principle" to determine the reasonableness of expenditures for speech therapy services provided under arrangement. If an intermediary determines that a provider has paid more for the service than a "prudent buyer" would, it must deny reimbursement for any excess. A provider who is dissatisfied with such a denial may request a hearing before the intermediary, if the amount disputed is over $1000, 42 C.F.R. § 405.1811, or before the Provider Reimbursement Review Board, if the disputed amount exceeds $10,000 and involves a cost report submitted after 1973. 42 U.S.C. § 1395oo(a). A provider may appeal any decision of the PRRB to the Secretary of HHS, and may seek judicial review of a final decision of the Secretary. Id. There is no specific provision pursuant to which those other than providers may challenge a denial of reimbursement to providers.

The Nature of this Action.

Plaintiffs New Jersey Speech-Language-Hearing Association and New Jersey Association of Speech Pathologists and Audiologists in Private Practice are professional organizations representing over 1000 speech-language pathologists and audiologists who practice in New Jersey. Plaintiffs Jules Kronengold, Irwin Blake, and Harriet Schwartz are speech-language pathologists practicing in New Jersey who assert claims both individually and as class representatives. The individual plaintiffs and those that plaintiffs represent furnish speech-language pathology services to Medicare beneficiaries under arrangement with a number of skilled nursing facilities in New Jersey. Plaintiffs allege that the contracts between plaintiffs and these skilled nursing facilities provide that the payment that a speech-language pathologist will receive from a facility for the provision of speech therapy services shall be equal to the maximum amount that the Medicare program will reimburse the facility for the provision of those services.⁴ Defendant Prudential Insurance Company of America ("Prudential"), is the fiscal intermediary which reimburses the facilities with which the plaintiffs have contracted to provide services.⁵

Plaintiffs allege that Prudential, in discharging its obligation to determine what a "prudent buyer" would pay for speech pathology services, has developed a formula for calculating the "adjusted hourly salary equivalency amount"...