St. John's McNamara Hosp. v. ASSOC. HOSP. SERV., INC.

• Decision Date: 09 February 1976
• Docket Number: Civ. No. 73-5029.
• Citation: 410 F. Supp. 67
• Parties: ST. JOHN'S McNAMARA HOSPITAL ORGANIZATION OF the SISTERS OF SAINT BENEDICT OF the BENEDICTINE CONVENT OF ST. MARTIN v. The ASSOCIATED HOSPITAL SERVICE, INC., et al.
• Court: U.S. District Court — District of South Dakota

410 F. Supp. 67

ST. JOHN'S McNAMARA HOSPITAL ORGANIZATION OF the SISTERS OF SAINT BENEDICT OF the BENEDICTINE CONVENT OF ST. MARTIN v. The ASSOCIATED HOSPITAL SERVICE, INC., et al.

Civ. No. 73-5029.

United States District Court D. South Dakota.

February 9, 1976.

COPYRIGHT MATERIAL OMITTED

Ronald E. Clabaugh, Joseph M. Butler, Rapid City, S. D., for plaintiff.

Charles H. Whiting, Rapid City, S. D., William F. Clayton, U. S. Atty., Sioux Falls, S. D., for defendants.

MEMORANDUM OPINION

BOGUE, District Judge.

Plaintiff St. John's McNamara Hospital, hereinafter St. John's, is a 148 bed nonprofit general short-term hospital located in Rapid City, South Dakota. St. John's brought this action seeking review of a final determination by the Secretary of Health, Education and Welfare, hereinafter Secretary, and its agents Blue Cross Association, hereinafter B.C.A., and the Associated Hospital Service, Inc., hereinafter Associated. St. John's contests the 1971 decision of the Secretary and his agents to recover a significant amount of the medicare costs reimbursed to St. John's from 1966 to 1971 by set-offs from future reimbursable costs due for 1972 and 1973. The decisions made on the important questions presented in this controversy concern the scope of governmental authority and the power of the courts to control its exercise. Such decisions will have a significant impact on the Medicare program, St. John's Hospital, and the local community which the hospital serves.

Plaintiff St. John's, the Secretary, and Associated moved for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure. Defendant B.C.A. has now joined in Associated's motion. At the hearing before this Court on August 22, 1975, all parties presented arguments and authorities, certain factual stipulations were approved and received, and additional briefs were requested. Since additional interrogatories have now been submitted and answered and additional briefing completed, this Court now proceeds to determine the pending cross motions for summary judgment.

The following factual framework is necessary to an understanding of this controversy. Since 1966, St. John's has been an authorized provider of "medicare" services pursuant to 42 U.S.C. §§ 1395 and 1395x(u). Title XVIII of the Social Security Act, 42 U.S.C. § 1395 et seq. establishes the Health Insurance for the Aged and Disabled Program, popularly referred to as Medicare. Under the provisions of 42 U.S.C. § 1395cc(a)(1)(A), provider St. John's agreed not to charge Medicare beneficiaries directly but instead agreed to receive payment for services provided from the Federal Hospital Insurance Trust Fund. Payments due a provider of services are based upon the "reasonable cost of services rendered" as defined in 42 U.S.C. § 1395f(b). Only those costs involved in the services rendered by the provider that are deemed reasonable are reimbursable under the Medicare Program. While the term "reasonable cost" is defined generally in the Act, Congress nevertheless directed the Secretary to establish regulations for determining reasonable cost of services provided. 42 U.S.C. § 1395x(v)(1). Such regulations have been established by the Secretary and properly promulgated. See 20 C.F.R. § 405.401, et seq. Allowances for depreciation of assets is one factor in the formula used to compute reasonable cost. See C.F.R. §§ 405.416, 405.427.

For purposes of administrating the Medicare program, the Secretary contracted with B.C.A., a private insurance corporation, to act as its fiscal intermediary. B.C.A. was authorized by the Secretary to determine the reasonable cost of services and, thus, the amount reimbursable to providers. See 42 U.S.C. §§ 1395h, 1395f(b), 1395x(v). B.C.A. in turn contracted with Associated, a B.C.A. plan organization, to assume B.C. A.'s obligation in certain geographical areas including Rapid City, South Dakota. It was the obligation of B.C.A. and Associated to receive periodic cost reports from the provider St. John's, make interim payments to St. John's on an estimated cost basis at least monthly, and make a final adjustment to the provider's account annually at the close of the accounting period based upon actual cost. See C.F.R. §§ 405.454(b), 405.454(f). From 1966 through 1971, B.C.A. and Associated apparently reviewed and approved, with few exceptions, the bills they received from St. John's for Medicare services rendered during that period.

The present dispute began on January 11, 1971, when St. John's was notified by Associated that the depreciation basis used since 1966 would no longer be acceptable. The building which comprises the majority of St. John's corporate assets was built by the Benedictine Convent of St. Martin, Inc. in 1920 and was operated by St. Martin's as a hospital until 1959. In 1959, some six years before the inception of Medicare, St. Martin's transferred the entire hospital business, including the building and equipment, to St. John's Hospital. In 1958, the American Appraisal Company established the fair market value of the transferred assets at $2,183,887.66. Seven years later in 1966 when St. John's was initially authorized as a provider, it submitted and B.C.A. apparently approved, the 1958 established value as a proper depreciation basis. See C.F.R. § 405.417. Each final audit for the years 1966, 1967, 1968, 1969 and 1970 used the 1958 value for depreciation and B.C.A. approved each final audit. In 1971, Associated determined that St. Martin's and St. John's were related within the meaning of C.F.R. § 405.427 and, therefore, determined that historical cost of St. John's assets must be used in lieu of the established 1958 value to determine reasonable cost of services. Although no original cost value was available, Associated arrived at its historical cost basis of $1,372,953.00 by figuring, with an accounting formula, back to 1920 from the 1958 American Appraisal Report. The decreased depreciation value imposed by Associated caused a significant decrease in future reimbursable costs payable to St. John's. In addition, Associated announced that it has recomputed actual cost for the years 1966 through 1971, using its historical basis in lieu of 1958 established value, and determined that overpayments had been made to St. John's for each of those years.

Associated then recouped by setoff from actual cost due for 1971 and 1972 the amount that it had determined was overpaid for 1966 and 1967. B.C.A. and Associated plan to recoup by setoff from payments due for 1973 the amount of claimed overpayment for 1968, 1969 and 1970.

In July, 1971, St. John's filed an appeal with Associated's four-member appeal committee. At the hearing, two members of the committee voted for and two members of the committee voted against Associated's position on depreciation basis. In January, 1972, St. John's filed an appeal with the B.C.A. Appeals Committee which was established in 1970 by B.C.A. pursuant to a contract with the Secretary and then composed of five members. After the hearing held on August 30, 1972, three members of the committee voted for and two members voted against the decision that St. John's was related to St. Martin's and therefore the lower historical depreciation basis must be used in determining reasonable cost.

On March 5, 1973, St. John's filed this action. The Secretary has stipulated that the January, 1972, B.C.A. appeals decision is final under the Medicare Act as it existed then, and that St. John's has completely exhausted its administrative remedies. On July 1, 1973, Mutual of Omaha replaced B.C.A. and became the fiscal intermediary for St. John's Hospital. Mutual has so far agreed with St. John's that the 1958 value as established by American Appraisal is the proper depreciation basis to apply in determining reasonable reimbursable cost, and that historical cost as determined by B.C.A. is not the proper depreciation basis. Thus, the dispute between B.C.A. and St. John's involves fiscal periods beginning May 30, 1966, through and including the fiscal period ending June 30, 1973.

In this action, St. John's presents essentially six claims. (1) St. John's claims that the Secretary's delegation of the right to review an intermediary's decision and determine the issues is unconstitutional. Plaintiff charges that such delegation of quasi-judicial authority to adjudicate disputes between a provider and an intermediary to private insurance corporations such as B.C.A. and Associated denies plaintiff its due process right to an impartial administrative review. (2) Plaintiff contends that as a result of such delegation to intermediaries that do not publish decisions, provider claims similar to plaintiff's have been quietly allowed by other intermediaries while plaintiff's claim was not allowed by B.C.A., thus, plaintiff contends that equal protection of the law has been denied. (3) Plaintiff claims that the composition of B.C.A.'s Appeals Board is inherently biased and unfair and does not comport with the due process requirements of the Fifth Amendment. Plaintiff alleges that the board was composed of five members, three being appointed by the president of B.C.A., and all three employees of B.C.A. with one of the three a B.C.A. vice president who acted as hearing chairman. Plaintiff charges that the mandatory presence of a B.C.A. vice president imposed command influence over the board's decision, and since a simple majority of three votes constituted a decision, such decision was therefore controlled by B.C.A. and clearly violative of the due process requirements of a fair and impartial hearing. Plaintiff further argues that in fact the three B.C.A. employees voted for Associated's position and the two non-B.C.A. employees voted for plaintiff's position. Plaintiff contends that such control of reimbursable costs by B.C.A. serves B.C.A. in their role as a private insurer of the general public and therefore constitutes a clear conflict of...