Regents of University of California on Behalf of University of California, Davis Medical Center v. Heckler

• Decision Date: 13 September 1985
• Docket Number: No. 83-2517,83-2517
• Citation: 771 F.2d 1182
• Parties: , Medicare&Medicaid Gu 34,905 REGENTS OF the UNIVERSITY OF CALIFORNIA, on Behalf of UNIVERSITY OF CALIFORNIA, DAVIS MEDICAL CENTER, Plaintiff-Appellee, v. Margaret M. HECKLER, Secretary of Health and Human Services, Defendant- Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1182

771 F.2d 1182

11 Soc.Sec.Rep.Ser. 48, Medicare&Medicaid Gu 34,905

REGENTS OF the UNIVERSITY OF CALIFORNIA, on Behalf of UNIVERSITY OF CALIFORNIA, DAVIS MEDICAL CENTER Plaintiff-Appellee, v. Margaret M. HECKLER, Secretary of Health and Human Services Defendant- Appellant.

No. 83-2517.

United States Court of Appeals Ninth Circuit.

Argued and Submitted July 13, 1984.

Decided April 2, 1985.

As Amended on Denial of Rehearing

Sept. 13, 1985.

Michael A. Duncheon, Hanson, Bridgett, Marcus, Vlahos & Stromberg, San Francisco, Cal., for plaintiff-appellee.

Jerry J. Bassett, San Francisco, Cal., for defendant-appellant.

Appeal from the United States District Court for the Eastern District of California.

Before PHILLIPS ^*, FLETCHER, and REINHARDT, Circuit Judges.

REINHARDT, Circuit Judge:

The Secretary of Health and Human Services (Secretary), the agency responsible for managing the Medicare program, and the University of California, Davis Medical Center (UCDMC), a health care provider participating in the program, are in dispute over the amount of reimbursement due UCDMC for Medicare services rendered in fiscal year 1975-76. The Secretary appeals from the district court's decision that UCDMC was improperly denied reimbursement for certain costs it had incurred. The district court found the regulation under which these costs were excluded, 20 (now 42) C.F.R. Sec. 405.460 (1975), as construed by the Secretary, to be inconsistent with the statutory directive that all "reasonable costs" be reimbursed. See 42 U.S.C. Secs. 1395f(b)(1); 1395x(v)(1)(A) (1982). The Secretary contends that the regulation in question, as she construes it, represents a reasonable interpretation of the statute's language and is consistent with its underlying purpose. ¹ For the reasons stated below, we affirm the judgment of the district court.

I. BACKGROUND

A. Reimbursement to Providers Under the Medicare Act

This case arises under Title XVIII of the Social Security Act which established the federally funded health insurance program commonly known as "Medicare." 42 U.S.C. Secs. 1395-1395xx (1982). Under the Medicare program, the federal government reimburses eligible hospitals, nursing facilities, and home health agencies for the "reasonable cost" of covered services provided to Medicare beneficiaries. ² See 42 U.S.C. Secs. 1395f(b)(1); 1395x(v)(1)(A) (1982).

The statute defines "reasonable cost" as the "cost actually incurred, excluding therefrom any part of incurred cost found to be unnecessary in the efficient delivery of needed health services." 42 U.S.C. Sec. 1395x(v)(1)(A) (1982). ³ The Secretary may employ various methods in computing a provider's "reasonable costs" in accordance with this statutory definition. One such method, authorized by a 1972 amendment to the statute, involves the use of a schedule of limits that sets forth the amount of costs to be recognized as "reasonable." Id. The statute further directs the Secretary to provide for "suitable retroactive corrective adjustments" where the amount of reimbursement produced by the chosen methods of determining costs "proves either inadequate or excessive." Id.

Pursuant to her statutory authorization, the Secretary has from time to time promulgated regulations setting forth procedures for determining the amount of provider costs to be recognized as "reasonable" and therefore reimbursable under the Medicare program. This litigation concerns the legality of the regulation in effect during fiscal year 1975-76. See 20 (now 42) C.F.R. Sec. 405.460 (1975). ⁴ The challenged regulation provided that schedules of limits, based on general cost estimates, would be promulgated and that reimbursements would be limited to the amount set forth in those schedules. ⁵ The regulation provided for exceptions, exemptions, and adjustments from such pre-established limits only in certain narrowly defined circumstances. See 20 (now 42) C.F.R. Sec. 405.460(f) (1975). Excepted from the cost limits were expenses attributable to the provision of "atypical services" or to "extraordinary circumstances beyond the provider's control." Id. All expenses which exceeded the "reasonable cost" limit and did not fall within either category of recognized exceptions were deemed unreimbursable, without regard to whether the costs incurred were in fact reasonable.

B. UCDMC's Claim for Reimbursement

The Davis Medical Center is one of five teaching hospitals operated by the University of California and is the major teaching facility for the University of California, Davis, School of Medicine. It serves a metropolitan area of nearly 880,000 people, and is a center for patient referral for a large region of Northern California and parts of Nevada and Oregon. The hospital is licensed for approximately 500 beds and offers a full range of in-patient services, diagnostic services, an ambulatory care program with over 80 clinics, a comprehensive mental health program, and a 24 hour emergency medical service. Specialized programs include a burn center, kidney transplant service, eye bank, regional mental health program, model family practice unit, neonatal intensive care unit, comprehensive rehabilitation center, and six specialized intensive care units.

Blue Cross of Northern California (Blue Cross) is the fiscal intermediary utilized by the Secretary in this case. It notified UCDMC in October, 1978, of its final determination of the amount of Medicare reimbursement due UCDMC for fiscal year 1975-76. Dissatisfied with Blue Cross' assessment of its "reasonable costs," UCDMC requested a hearing before the Provider Reimbursement Review Board (PRRB) pursuant to 42 U.S.C. Sec. 1395oo(a) (1982). The PRRB modified the intermediary's determination of UCDMC's reasonable costs, finding the hospital entitled to additional reimbursement for certain expenses it incurred in providing "atypical nursing services." The PRRB denied the hospital's request for reimbursement for other costs which it claimed were "reasonable." The Secretary, through the Deputy Administrator of the Health Care Financing Administration (HCFA), elected to review the PRRB decision and reversed the Board's determination that UCDMC was entitled to reimbursement for its costs associated with the atypical nursing services. The decision of the HCFA constituted the final decision of the Secretary. 42 U.S.C. Sec. 1395oo(f)(1) (1982).

UCDMC then brought suit in district court, claiming that the Secretary's decision violated the express mandate of the Medicare Act that all "reasonable costs" be reimbursed. At issue was approximately $525,000 in expenses for which UCDMC claimed it was unjustifiably denied reimbursement. ⁶ The district court, while upholding the Secretary's authority to establish a schedule of limits which presumptively defines "reasonable costs," further held that the Secretary is under a statutory duty to provide exceptions and exemptions to such limits that will ensure that reasonable costs actually incurred are reimbursed. The district court's conclusion was based, in large part, on the statutory provision which directs the Secretary to provide for "suitable retroactive corrective adjustments" whenever the amount of reimbursement determined by the chosen method of cost calculation proves to be "inadequate or excessive." See 42 U.S.C. Sec. 1395x(v)(1)(A)(ii) (1982). The district court remanded the case to the Secretary to allow her to review each claimed expense in order to determine whether it was in fact "reasonable" as defined by section 1395x(v)(1)(A). The Secretary was ordered to reimburse UCDMC for all costs which were found to be reasonably incurred.

On appeal, the Secretary vigorously challenges the district court's reading of the Medicare Act. She contends that the statute authorizes her to establish limits on the amount of reimbursement to be recognized as "reasonable," and that any costs which exceed such limits, whether reasonable in fact or not, need not be reimbursed. She claims that the district court erred by reading the corrective adjustment clause as demanding a case-by-case review of the adequacy of the amount of reimbursement deemed "reasonable". She concludes that because the expenses in question exceed the reimbursement limit applicable to UCDMC in fiscal year 1975-76, ⁷ and because they do not fall within any of the then existing exceptions to such limit, the hospital is not entitled to reimbursement, regardless of whether those expenses were in fact reasonable. We reject the Secretary's interpretation of the statute.

II. JURISDICTION

UCDMC reasserts its argument that we are without jurisdiction to hear this appeal because the district court's remand order is not an appealable "final decision." ⁸ See 28 U.S.C. Sec. 1291 (1982). We disagree.

In Stone v. Heckler, 722 F.2d 464 (9th Cir.1983), we recently considered the finality of a remand order quite similar to that involved here. In Stone, we recognized that section 1291 must be given a "practical rather than a technical construction," id. at 467 (quoting Cohen v. Beneficial Industrial Loans Corp., 337 U.S. 541, 546, 69 S.Ct. 1221, 1226, 93 L.Ed. 1528 (1949)), and that the "finality" determination necessitates an evaluation of competing policy considerations--"the inconvenience and costs of piecemeal review on the one hand and the danger of denying justice by delay on the other." Stone, 722 F.2d at 467 (quoting Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 171, 94 S.Ct. 2140, 2149, 40 L.Ed.2d 732 (1974)). We concluded that the district court's remand order, which instructed the Secretary to apply a legal standard significantly different from that which she had been using in determining disability, constituted an appealable final judgment. Stone, 722 F.2d at 467. We explained that refusing appellate jurisdiction might result in the agency's application of an incorrect legal standard. Id. Moreover, we pointed out that if the legal standard formulated by the...