St. James Hospital v. Harris

Decision Date04 December 1981
Docket NumberNo. 80 C 735.,80 C 735.
PartiesST. JAMES HOSPITAL, Plaintiff, v. Patricia Roberts HARRIS, Secretary, Department of Health and Human Services, Defendant.
CourtU.S. District Court — Northern District of Illinois


Leonard C. Homer, Ober, Grimes & Shriver, Baltimore, Md., K. Bruce Stickler, Wood, Lucksinger & Epstein, Chicago, Ill., for plaintiff.

Robert. D. Nesler, Washington, D. C., Mary S. Rigdon, Asst. U. S. Atty., Chicago, Ill., for defendant.


LEIGHTON, District Judge.

This civil action arises from a dispute between a hospital and the Secretary of Health and Human Services concerning reimbursement under the Medicare Act of two classes of costs: (1) those the hospital incurred in providing medical care to indigent patients, a requirement imposed by statute and rules on hospitals which have received Hill-Burton construction grants; and (2) those incurred by the hospital in providing bedside telephones to Medicare beneficiaries. The hospital, proceeding under regulations adopted by the Secretary, made a self-disallowance as to the telephone costs and submitted a report for reimbursement of the costs incurred in furnishing medical care to indigent patients; they were denied. It appealed to the Provider Reimbursement Review Board in accordance with 42 U.S.C. § 1395oo; the Intermediary's decision was upheld. The Secretary's responsible subordinate, the Administrator of the Health Care Financing Administration, declined to affirm, reverse, or modify the Board's decisions, thereby allowing them to stand.

This suit, invoking jurisdiction pursuant to 42 U.S.C. § 1395oo(d) and procedurally governed by 5 U.S.C. §§ 701 et seq., requires review of the Secretary's decisions which may be overturned only if they were arbitrary, capricious, an abuse of discretion, otherwise not in accordance with law, or unsupported by substantial evidence. The cause is before the court on cross-motions for summary judgment. There are no material issues of fact to be resolved. This being so, and from applicable law, the court concludes that on the issue whether, for the year in question, Medicare should reimburse the hospital a percentage of the costs it incurred in connection with its obligations under the Hill-Burton Act to provide free medical care to indigents; and on the issue whether for the same year the hospital should be reimbursed the costs it incurred in furnishing Medicare patients with bedside telephones, St. James is entitled to judgment as a matter of law. Therefore, its motion for summary judgment is granted; the Secretary's is denied.


St. James Hospital is a short-term, acute care general hospital located in Chicago Heights, Illinois. It is a qualified provider of medical services under Part A of the Medicare program, Title XVIII of the Social Security Act, 42 U.S.C. §§ 1395c et seq., which Congress enacted in 1965. These provisions of the Act furnish federal funding of medical care for the aged and disabled. Under these provisions, participating providers of health services like St. James Hospital, are reimbursed from trust funds for the "reasonable cost" of covered services. As defined in 42 U.S.C. § 1395x(v)(1)(A), "reasonable cost" means the actual cost of providing in-patient hospital care; it is an all-inclusive term, unless specifically identified and excluded by 42 U.S.C. § 1395y. Therefore, the Medicare program reimburses hospitals providing services to Medicare beneficiaries the lesser of their charges or the reasonable cost of furnishing such services.

The Secretary of Health and Human Services administers the program through fiscal intermediaries who review cost reports submitted by providers, and who determine the amount of costs that will be reimbursed. Fiscal intermediaries and other agents of the Secretary are guided by rules and regulations which must be consistent with the statute and necessary to the efficient discharge of the statutory functions. 42 C.F.R. § 405.420(g) is the regulation controlling the Hill-Burton issue, reimbursement of the claimed percentage of uncompensated care costs. It provides, in relevant part, that "charity allowances have no relationship to beneficiaries of the health insurance program and are not allowable costs." The statutory provision authorizing publication of this regulation is 42 U.S.C. § 1395x(v)(1)(A) which states that "the reasonable costs of any services shall be the cost actually incurred, ... and shall be determined in accordance with regulations establishing the method or methods to be used, and the items to be included...."

Between the years 1959 and 1967, St. James, as part of construction financing transactions, received Hill-Burton grants totaling $1,593,000. A condition of these grants, as provided in 42 U.S.C. § 291e(e)(2), was the obligation of the hospital to furnish indigents access to a reasonable volume of free or reduced-cost medical care. Accordingly, St. James provided free or reduced-cost care to those unable to pay, persons who were emergency cases or were in urgent need of hospital services. However, in 1972, as a result of litigation concerning obligations of Hill-Burton grantees, the Secretary promulgated 42 C.F.R. § 53.111 which, in Subparagraph (d), established a presumptive compliance guideline and furnished three methods of proving that a hospital has complied with the terms of a grant. St. James chose one of these and proceeded to budget for and pay the cost of uncompensated care for those unable to pay. In 1977, the year at issue in this case, and based on the adopted formula, the hospital provided such care in the amount of $159,300. This was a substantial monetary increase over the value of uncompensated care which St. James had provided prior to promulgation of the regulation. Then, spreading the total cost of uncompensated medical care for 1977 throughout its hospital operations, St. James calculated the percentage of its hospital services represented by Medicare patients and concluded that the same percentage of uncompensated care costs was a "reasonable cost" it had incurred in furnishing medical care to Medicare beneficiaries. It treated this amount as a cost arising out of a financial transaction; that is, the Hill-Burton construction grants. St. James included this sum in its 1977 cost report and asked for reimbursement of this amount. The Intermediary disallowed reimbursement on the ground that uncompensated care represented charity within the meaning of the Secretary's regulation, 42 C.F.R. § 405.420. With one of its three members dissenting, the Provider Reimbursement Review Board upheld the Intermediary; the disallowance ultimately became the Secretary's decision.

In the same cost year, St. James furnished bedside telephones used by staff and physician personnel for hospital purposes and by patients for personal use. Use of the telephones by hospital personnel included alerting the cardiac resuscitation team, calling for inhalation therapy, physical therapy, patient transport, and administrative personnel in the normal course of their duties. Patient usage of the telephones included not only communication with friends and family members, but also contacts with hospital staff persons such as the ombudsman, admitting and discharging personnel and social workers. In completing the cost report, St. James followed Section 2601.1 of the Provider Reimbursement Manual, but particularly, the Secretary's regulation published in 42 C.F.R. § 405.310(j) and providing that

Notwithstanding any other provisions of this Part 405, no payment may be made for any expenses incurred for the following items or services:
* * * * * *
(j) Personal comfort items and services (for example a television set, or telephone service, etc.).

A provision of the Medicare Act, 42 U.S.C. § 1395y(a)(6) excludes certain costs from coverage by stating that

Notwithstanding any other provision of this subchapter, no payment may be made under part A or part B of this subchapter for any expenses incurred for items or services —
* * * * * *
(6) which constitute personal comfort items;

Prompted by what these sources instructed, all of them emanating from either the Secretary or her subordinates, the hospital made cost entries on Worksheet A-8 of its 1977 cost report. This operated to effect a self-disallowance of the patient telephone costs and thus obviated any need for an adjustment by the Intermediary.

The Intermediary denied all the reimbursements claimed in the cost report, and thereafter, St. James joined a number of Florida hospitals in a group appeal challenging refusal of the Medicare program to reimburse the costs of patient bedside telephones and, in the alternative, Medicare's requirement that average costing be used to determine the amount of non-allowable patient telephone costs rather than incremental or direct costing. The hospitals supported their claim for reimbursement of bedside telephone costs with clinical studies and expert medical testimony which they claimed demonstrated that for a hospital patient a bedside telephone was a part of therapy rather than an item of personal comfort. The Intermediary countered this evidence with the testimony of a college professor whose opinion was that the studies conducted by the hospitals were not statistically valid; he expressed the objection that they had been conducted by using an opportunity sample in which all consenting patients over the age of 18 were tested, rather than a sample that not only chose randomly among a hospital's patients, but included nonhospitalized members of the community.

After hearing the case, the Board found "that the Providers involved in this appeal St. James and the Florida hospitals, have conducted in-depth studies and offered expert testimony which demonstrated that patient telephones have therapeutic value. The Board is very impressed with the Providers' arguments and, in fact, agrees that the patient...

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