Ohio State University v. Sullivan

• Decision Date: 13 November 1991
• Docket Number: No. C2-90-905.,C2-90-905.
• Citation: 777 F. Supp. 582
• Parties: The OHIO STATE UNIVERSITY d/b/a Ohio State University Hospitals, Plaintiff, v. Louis W. SULLIVAN, M.D., Secretary of Health and Human Services, Defendant.
• Court: U.S. District Court — Southern District of Ohio

777 F. Supp. 582

The OHIO STATE UNIVERSITY d/b/a Ohio State University Hospitals, Plaintiff, v. Louis W. SULLIVAN, M.D., Secretary of Health and Human Services, Defendant.

No. C2-90-905.

United States District Court, S.D. Ohio, E.D.

November 13, 1991.

Diane Marie Signoracci, Bricker & Eckler, Columbus, Ohio, for plaintiff.

Joseph E. Kane, U.S. Attorney's Office, Columbus, Ohio, for defendant.

MEMORANDUM OPINION AND ORDER

GRAHAM, District Judge.

This is an appeal from a decision of the Administrator of the Health Care Financing Administration ("Administrator") acting on behalf of the Secretary of Health and Human Services ("Secretary") denying plaintiff's claim for provider cost reimbursement under the Medicare Program, 42 U.S.C. § 1395 et seq.

Plaintiff The Ohio State University, d/b/a Ohio State University Hospitals (the "Provider") is a state-owned, 905-bed acute care teaching hospital located in Columbus, Ohio. The Provider is a separate administrative division of the University and operates a Medicare-approved graduate medical education program ("GME program") for interns and residents. The University's College of Medicine ("COM") administers the GME program.

While the Medicare Act itself does not specifically address reimbursement for medical education costs, its legislative history indicates that Congress recognized that many hospitals engage in educational activities which enhance the quality of patient care and that the cost of such activities should be considered an element in the cost of patient care to be borne to an appropriate extent by the Medicare Program. S.Rep. No. 404, 89th Cong., 1st Sess., reprinted in 1965 U.S.Code Cong. & Ad.News 1943, 1977. The Secretary has adopted regulations authorizing the reimbursement of certain medical education costs. 42 C.F.R. § 413.85.

In administering the Medicare Program the Secretary contracts with fiscal agents known as intermediaries. 42 U.S.C. § 1395h. Intermediaries review cost reports submitted by providers at the end of each fiscal year in order to make a final determination of the reimbursable costs which may be allowed to the providers. 42 U.S.C. § 1395g; 42 C.F.R. §§ 413.20(b), 413.24(f), 413.60.

Since the inception of the Medicare Program, the Provider has claimed and received reimbursement for certain direct costs relating to the GME program. In 1985 the Provider employed a Medicare reimbursement expert to review its cost reports to insure that it was recouping all costs permitted by law. As a result of this individual's advice, the Provider included indirect costs, variously referred to as overhead or general and administrative (G & A) costs related to the GME program for fiscal year 1985. The intermediary disallowed these costs, resulting in a reduction in the Provider's Medicare reimbursement in the approximate amount of $765,000. The Provider requested a hearing before the Provider Reimbursement Review Board ("PRRB"). The PRRB is a panel of five individuals appointed by the Secretary whose responsibilities include the mediation of disputes between providers and intermediaries. The members of the PRRB are required by statute to be knowledgeable in the field of medicare cost reimbursement and at least one of them must be a certified public accountant. 42 U.S.C. § 1395oo (h). On August 17, 1990 the PRRB reversed the intermediary, holding that:

The amounts of graduate medical education and physician administrative costs claimed by the Provider are allowable related-party costs subject to audit by the intermediary.

PRRB decision, p. 18. The Administrator then notified the parties of his intention to review the PRRB's decision, and on October 16, 1990, the Administrator reversed the PRRB, holding that the claimed costs were not allowable graduate medical education costs. The Provider appealed the Administrator's decision to this Court and the case is now before the Court on the parties' cross motions for summary judgment.

The Administrator denied Provider's claim for overhead and administrative expenses related to its GME program on two grounds: first, that reimbursement would violate the Secretary's regulation against redistribution of the costs of an educational institution, 42 C.F.R. § 413.85(c), and second, that the overhead and administrative costs are not allowable costs for Medicare purposes under Medicare law and regulations.

STANDARD OF REVIEW

Judicial review of the Administrator's decision is governed by 42 U.S.C. § 1395oo (f) which incorporates the judicial review provisions of the Administrative Procedure Act, 5 U.S.C. § 706. This standard requires a court to set aside agency action "which is arbitrary, capricious, an abuse of discretion or otherwise not in accordance with law; contrary to a Constitutional right, power, privilege or immunity; or unsupported by substantial evidence where an agency hearing is being reviewed on the record." Bedford County General Hospital v. Heckler, 757 F.2d 87, 89 (6th Cir. 1985). Substantial evidence is "such relevant evidence as a reasonable mind might accept as adequate to support a conclusion." Richardson v. Perales, 402 U.S. 389, 401, 91 S.Ct. 1420, 1427, 28 L.Ed.2d 842 (1971).

An administrative agency's interpretation of its own regulations is accorded considerable deference unless it is inconsistent with the plain language of the regulations. University of Cincinnati v. Heckler, 733 F.2d 1171, 1173-74 (6th Cir.1984); University of Cincinnati v. Bowen, 875 F.2d 1207, 1208 (6th Cir.1989). Although an agency's decision is entitled to a presumption of regularity, a reviewing court is required to engage in a thorough, probing, in-depth review. Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402, 415, 91 S.Ct. 814, 823, 28 L.Ed.2d 136 (1971).

THE ISSUE OF DISTRIBUTION

Medicare regulations specifically authorize the reimbursement of the cost of certain educational activities. The following principles govern the reimbursement of such costs:

1. The education program must be approved.

2. The program must contribute to the quality of patient care within an institution.

3. Until communities undertake to bear these costs, the program will participate appropriately in the support of these activities.

4. It is not intended that the program should participate in increased costs resulting from redistribution of costs from educational institutions to patient care institutions.

42 C.F.R. § 413.85(c). University of Cincinnati v. Bowen, 875 F.2d at 1210; St. John's Hickey Memorial Hospital, Inc. v. Califano, 599 F.2d 803, 809-810 (7th Cir. 1979). It is uncontroverted that the Provider's GME program is approved and does contribute to the quality of patient care within the hospital.

The intermediary based its disallowance of the Provider's GME overhead costs in part on a finding that reimbursement would violate both the community support and redistribution principles set forth in 42 C.F.R. § 413.85(c). The PRRB disagreed, finding that reimbursement would violate neither principle. In reversing the PRRB and finally denying reimbursement, the Administrator relied only on the principle of redistribution. In this respect, the Administrator's decision differs from his decisions in Thomas Jefferson University Hospital v. Aetna Life Insurance Co., CCH Medicare & Medicaid Guide, § 38,353 (Jan. 18, 1990) and University of Minnesota Hospitals v. Blue Cross & Blue Shield Assoc., CCH Medicare and Medicaid Guide § 39,420 (May 29, 1991) in which he invoked the community support principle of the rule and found that reimbursement of G & A costs should be disallowed because they had historically been borne by the community. This also distinguishes the present case from Board of Trustees of State Institutions of Higher Learning v. Sullivan, 763 F.Supp. 178 (S.D.Miss.1991).

The Court concludes that the Secretary did not rely on the community support principle because the evidence in this case would not support a finding that the community had undertaken to bear the overhead expenses of the Provider's GME program. The record here discloses that the Provider has historically transferred substantial funds to the COM in general support of its services to the GME program (seven million dollars in fiscal year 1985) and that from fiscal year 1983 through fiscal year 1988, the Provider incurred operating losses of approximately fifteen million dollars. In any event, since the Secretary did not rely on the principle of community support, that issue is not before the Court. An agency's decision must be upheld, if at all, on the same basis articulated by the agency itself. Federal Power Commission v. Texaco, Inc., 417 U.S. 380, 397, 94 S.Ct. 2315, 2326, 41 L.Ed.2d 141 (1974).

The redistribution principle of the rule is stated in the following language:

... Although the intent of the program is to share in the support of educational activities customarily or traditionally carried on by providers in conjunction with their operations, it is not intended that this program should participate in increased costs resulting from redistribution of costs from educational institutions or units to patient care institutions or units.

42 C.F.R. § 413.85(c). A threshold question in interpreting the rule is the meaning of "costs" in the context of Medicare reimbursement regulations. Are they limited to expenses actually incurred and paid by the provider? Are they limited to direct costs? Clearly, the answer to both of these questions is no.

The provisions of 42 C.F.R. § 413.17(a) expressly authorize reimbursement of costs applicable to services, facilities and supplies furnished to a provider by organizations related to the provider by common ownership or control:

(a) Principle. Except as provided in paragraph (d) of this section, costs applicable to services, facilities, and supplies furnished to the provider by organizations related to the provider by common ownership or control are includable in the allowable cost of the

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