St. John's Hickey Memorial Hospital, Inc. v. Califano, s. 78-1825

• Decision Date: 01 June 1979
• Docket Number: 78-2203,Nos. 78-1825,s. 78-1825
• Citation: 599 F.2d 803
• Parties: ST. JOHN'S HICKEY MEMORIAL HOSPITAL, INC., Plaintiff-Appellee, v. Joseph A. CALIFANO, Jr., Secretary of HEW, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 803

599 F.2d 803

ST. JOHN'S HICKEY MEMORIAL HOSPITAL, INC., Plaintiff-Appellee, v. Joseph A. CALIFANO, Jr., Secretary of HEW, Defendant-Appellant.

Nos. 78-1825, 78-2203.

United States Court of Appeals, Seventh Circuit.

Argued Feb. 16, 1979.

Decided June 1, 1979.

Robert C. Farrell, Health Care Financing and Human Development Services Division, Dept. of HEW, Washington, D. C., for defendant-appellant.

Stephen L. Gibson, Washington, D. C., for plaintiff-appellee.

Before CUMMINGS and TONE, Circuit Judges, and LEIGHTON, District Judge. ^*

CUMMINGS, Circuit Judge.

Plaintiff is a not-for-profit corporation located in Anderson, Indiana, where it operates a 333-bed acute care, general short-term hospital. It is both a provider of services and a hospital within the definitions of the Social Security Act. ¹ In Count I of its complaint, ² plaintiff has sued the Secretary of Health, Education and Welfare (Secretary) to recover amounts allegedly due because of the Secretary's refusal to permit plaintiff to include its joint nursing education costs of $86,760 in 1974 as allowable costs "for Medicare reimbursement purposes" (par. 27a of Count I).

Since July 1966, plaintiff has participated in the Medicare Program as a provider of services. During that period, Blue Cross of Indiana (formally known as Mutual Hospital Insurance, Inc.) has acted as the Secretary's agent with respect to Medicare reimbursement of Indiana hospitals. In its Medicare cost report for its fiscal year ended May 31, 1974, plaintiff included costs in the amount of $86,760 which it incurred as its portion of the costs of a joint nursing education program engaged in by plaintiff with Anderson College, also located in Anderson, Indiana.

In its audit of plaintiff's fiscal year 1974 cost report, under constraint of a policy statement of defendant's Bureau of Health Insurance issued in November 1975, Blue Cross treated these nursing education costs as nonallowable costs under the Medicare Program and therefore refused the amount of Medicare reimbursement payable to plaintiff. Defendant admits that since 32 per cent of the hospital services provided by plaintiff in that period were provided to Medicare beneficiaries, the Blue Cross disallowance of nursing education costs has denied plaintiff approximately $27,760 in Medicare reimbursement (par. 11 of Count I admitted in par. 1 of defendant's answer).

Medicare regulations provide that the cost of "approved educational activities" is an allowable cost under the Medicare Program. Such activities are defined in the Medicare regulations in part as follows:

"(b) Definitions (1) Approved educational activities. Approved educational activities means formally organized or planned programs of study usually engaged in by providers in order to enhance the quality of patient care in an institution.

"(c) Educational activities. Many providers engage in educational activities including training programs for nurses, medical students, interns and residents, and various paramedical specialties. These programs contribute to the quality of patient care within an institution and are necessary to meet the community's needs for medical and paramedical personnel. It is recognized that the costs of such educational activities should be borne by the community. However, many communities have not assumed responsibility for financing these programs and it is necessary that support be provided by those purchasing health care. Until communities undertake to bear these costs, the program will participate appropriately in the support of these activities. 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. § 405.421(b) and (c); emphasis supplied.)

In 1950, plaintiff was affiliated with other hospitals and together they established the Holy Cross School of Nursing. From 1966 through 1973, plaintiff received reimbursement for the Medicare share of the cost of its participation in the Holy Cross program. However, allegedly "prompted by cost effectiveness considerations," in 1973 plaintiff initiated a joint nursing education program with Anderson College to replace its affiliation with the Holy Cross School of Nursing (par. 13 of Count I).

To avoid a proposed increase in its share of the $130,000 per year cost of the Holy Cross School of Nursing program and to increase the number of local resident nurses, plaintiff decided upon the joint program with Anderson College which required plaintiff to pay "the differential in the cost of educating nursing students represented by the cost of the clinical portion of the program (at the College) that was determined to be over and above the costs (for instructors) incurred by the College in providing education to non-nursing students" (par. 17 of Count I). ³ To cover such clinical program costs, plaintiff agreed to provide "$36,000 toward start-up costs of the nursing education program, $70,000 to cover extra costs of the clinical program in the first academic year, ⁴ and $1,500 per student in each of the following four years, up to a maximum of $75,000 per year * * * " (par. 18 of Count I). Blue Cross advised plaintiff that the foregoing proposed payments to Anderson College would be allowable as reimbursable costs under the Medicare regulations. Therefore, plaintiff agreed to provide a clinical setting for the joint nursing education program and to bear the above-stated portion of the cost of the joint nursing education program. This resulted in plaintiff's paying Anderson College $86,760 as its agreed portion of the cost of the joint program in plaintiff's fiscal year 1974. Plaintiff claims that the joint nursing education program enhances the quality of patient care at the hospital "by providing direct patient services through the clinical portion of the program on Plaintiff's premises and by assuring continued availability of well trained nurses for employment by Plaintiff to meet its nursing needs" (par. 21 of Count I).

When Blue Cross audited plaintiff's fiscal year 1974 cost report, as noted, it reluctantly refused to allow the foregoing payment to Anderson College as allowable costs under the Social Security Act and Medicare regulations in view of a November 1975 general policy statement issued by the Secretary's Bureau of Health Insurance (Tr. 15). According to that policy statement, a provider's contributions to a nursing education program of which it is not the legal operator are not allowable costs.

Plaintiff appealed this disallowance to the Secretary's Provider Reimbursement Review Board pursuant to 42 U.S.C. § 1395Oo. On January 17, 1977, the Board reversed Blue Cross' disallowance and held that these costs incurred by plaintiff for its participation in the joint nursing education program with Anderson College are allowable costs for Medicare reimbursement. The Board reasoned that the sentence of the above-quoted regulation recognizing that educational costs should be borne by the community did not require disallowance of these costs because Anderson, Indiana, had never assumed responsibility for financing the program. The Board considered the program did not result in a redistribution of costs from educational institutions to hospitals in violation of the last sentence of the regulation for the following reason:

"Since the College did not operate a nursing program prior to being affiliated with the (plaintiff) Provider, the College did not have any costs to redistribute to the program. If costs were redistributed, it appears that the College absorbed costs which were previously incurred by the Provider." (Tr. 165.)

Therefore, the Board concluded that the preceding language of the regulation permitted plaintiff to recover the claimed amount.

On March 14, 1977, the Secretary's Acting Administrator for Health Care Financing Administration and the Commissioner of Social Security reversed the Board's decision on the ultimate ground that the amount in question constituted "cash payments by providers to nonprovider-operators of such training programs" and that such "costs are unnecessary in the efficient delivery of health services" (Tr. 25, 30). The signatories of this decision for the Secretary reasoned as follows:

"Once the community assumes the cost of an approved education activity, the Medicare program will not participate in support of this activity. Therefore, in this case, the money advanced by the (plaintiff) Provider to the College in support of the nursing education program cannot be considered a reimbursable cost." (Tr. 28.) ⁵

In his answer to the complaint, the Secretary admitted that there were no other nursing schools in Anderson, Indiana, and that by letter Blue Cross of Indiana had informed another participant in the joint program that nursing education expenditures paid by it and by plaintiff to Anderson College would be reimbursable by Medicare. ⁶ The Secretary also admitted that in fiscal 1974, plaintiff had paid Anderson College $86,760 as its agreed portion of the joint program cost. Nevertheless the Secretary sought judicial affirmance of the March 14, 1977, decision made on his behalf by the Acting Administrator for Health Care Financing Administration and the Commissioner of Social Security.

Subsequently both parties filed cross-motions for summary judgment, and on April 26, 1978, the district court granted plaintiff's motion. In its accompanying "Memorandum Entry" the court ruled that the Secretary's final decision denying plaintiff's request for reimbursement of its nursing education costs for fiscal year 1974 was erroneous and not supported by substantial evidence. The court held as follows:

"The clear weight of the...