St. Luke's Hosp. v. SECRETARY OF HEALTH AND HUMAN, Civ. No. 84-1506-Y.

• Citation: 632 F. Supp. 1387
• Decision Date: 15 April 1986
• Docket Number: Civ. No. 84-1506-Y.
• Parties: ST. LUKE'S HOSPITAL, Plaintiff, v. SECRETARY OF HEALTH AND HUMAN SERVICES, Defendant.
• Court: U.S. District Court — District of Massachusetts

632 F. Supp. 1387

ST. LUKE'S HOSPITAL, Plaintiff, v. SECRETARY OF HEALTH AND HUMAN SERVICES, Defendant.

Civ. No. 84-1506-Y.

United States District Court, D. Massachusetts.

April 15, 1986.

COPYRIGHT MATERIAL OMITTED

Mitchell H. Kaplan, Choate, Hall & Stewart, Boston, Mass., for plaintiff.

Ralph A. Child, Asst. U.S. Atty., for defendant.

MEMORANDUM AND ORDER

YOUNG, District Judge.

This action was brought by St. Luke's Hospital ("St. Luke's") to obtain judicial review of a final decision of the Deputy Administrator of the Health Care Financing Administration (the "Deputy Administrator") acting pursuant to a delegation of authority from the Secretary of Health and Human Services (the "Secretary"). The Deputy Administrator denied St. Luke's request for reimbursement of certain costs incurred in fiscal years 1978 and 1979.¹ St. Luke's contends that this action was arbitrary and capricious, and based on certain erroneous conclusions of law. Now before the Court are the parties' cross motions for summary judgment. The parties agree that there exist no disputed issues of material fact and that one of them is entitled to judgment as matter of law. See Rule 56, Fed.R.Civ.P.

I. Background

The Medicare program subsidizes the medical care of eligible disabled and elderly citizens. Among other things, Medicare provides payments to qualified hospitals to reimburse them for medical care provided to Medicare beneficiaries. A hospital may participate in the Medicare program as a "provider of services" by entering into a "provider agreement" with the Secretary. 42 U.S.C. §§ 1395x(e) and (u). The hospital then becomes entitled to payment of the lesser of the "reasonable cost" or the "customary charge" of hospital services provided to Medicare beneficiaries. 42 U.S.C. § 1395f(b). A provider of services receives its Medicare payments from the Secretary, or through a "fiscal intermediary" which acts as an agent of the Secretary for the purpose of reviewing the provider's claim for reimbursement.

The process by which the final amount of reimbursement is determined is quite complex and, as this case aptly demonstrates, it can take years to resolve a dispute between the Secretary and a provider. The payment process begins when the provider files a cost report with its fiscal intermediary. This report sets forth the costs of all services provided to Medicare patients during the year. After the fiscal intermediary analyzes and audits the cost report, it issues the provider a Notice of Program Reimbursement, which sets forth the final amount of reimbursement to which the intermediary believes the provider is entitled. If the provider is dissatisfied with the fiscal intermediary's determination, it may appeal and request an hearing before the Provider Review Board (the "Board"). Within 60 days after a final decision of the Board, the Secretary, on his own motion or at the request of the provider, may review the Board's decision. The Secretary is empowered to affirm, reverse, or modify the Board's decision. The Secretary has delegated his authority in this regard to the Deputy Administrator. A provider dissatisfied with a final decision of the Board or the Deputy Administrator may seek review in the appropriate United States District Court. 42 U.S.C. § 1395oo(f). The District Court's review is made in accordance with the Administrative Procedure Act, and is on the basis of the administrative record. 5 U.S.C. § 706.

St. Luke's is a 434 bed non-profit acute care community hospital located in New Bedford, Massachusetts. St. Luke's, which is an approved provider under the Medicare program, submitted cost reports for 1978 and 1979 to its fiscal intermediary, Aetna Life and Casualty Company ("Aetna"). After receiving its Notice of Program Reimbursement from Aetna, St. Luke's appealed certain of Aetna's rulings to the Board. Specifically, St. Luke's appealed (1) denial of reimbursement for its accrued sick leave benefits costs, and (2) separate application of the lower of cost or charges principle to its Home Health Aide/Visiting Nurse Service. The Board agreed with St. Luke's that the hospital was entitled to reimbursement for its 1978 sick leave benefits costs, but held that it did not have jurisdiction to review the 1979 costs. The Board also adopted St. Luke's position on the lower of cost or charges principle. The Deputy Administrator reversed the Board, except to the extent that the Board held it was without jurisdiction to hear the 1979 sick leave costs appeal. St. Luke's then sought review in this Court.

The careful and competent efforts of counsel on both sides of this case make clear that three issues are now properly before this Court: (1) Is St. Luke's entitled to reimbursement for the accrued costs of vested sick leave benefits? (2) Did the Board have jurisdiction to consider St. Luke's claims as to 1979 sick leave benefits costs? (3) Did the Secretary properly apply the lower of cost or charges principle to the Home Health Aide/Visiting Nurse Service. The Court will address these issues in order.

II. Sick Leave Benefits Costs

A. 1978 Costs

Among the benefits offered by St. Luke's to its employees is a structured sick pay/sick leave plan. Under the plan, full time employees earn one day of sick leave per month, and are allowed to accumulate sick days from year to year up to a maximum of 60 days. Any sick days accumulated in excess of the 60 day maximum are converted into a pay equivalent which the employee receives as bonus compensation in that year.

Employees who do not use their accumulated days of sick leave prior to terminating their employment can acquire a vested right to a cash payment for their unused sick days upon termination. During the fiscal years in question here St. Luke's changed the method by which payment rights were calculated. The specifics of the two plans are complex and not essential to this discussion. It is enough to note that, in general, the percentage of unused sick days that could be converted to cash depended on the length of employment of the particular employee. Under both plans, St. Luke's did not accrue a cost until an employee's right to the sick leave benefits vested.

Pursuant to the Secretary's regulations, St. Luke's accounts for its costs on an accrual basis. 42 C.F.R. § 405.453(a). Unlike cash basis accounting, which treats a cost as incurred only when it actually is paid, accrual basis accounting costs are reported "in the period in which they are incurred, regardless of when they are paid." Id. at § 405.453(b)(2). As regards sick leave benefits, St. Luke's reported these costs at the time the benefit became vested; that is, the time at which the employee had an absolute right to claim that sick day upon severance. In 1978, St. Luke's accrued $173,902 in vested sick leave benefits costs. Aetna and the Deputy administrator disallowed this cost.

The governing principle of the Medicare program, as reflected in the statute and the regulations, is that payments will be made on the basis of the "reasonable costs of services." 42 U.S.C. § 1395f(b); 42 C.F.R. § 405.451. Reasonable costs are "determined in accordance with regulations establishing the method or methods to be used, and the items to be included." 42 C.F.R. § 405.451(b)(1). The Secretary's regulations provide that the cost data submitted by a provider seeking reimbursement must be reported on the accrual basis. Id. at § 405.453(b)(2).

Notwithstanding these regulations, the Secretary challenges St. Luke's accrual of sick leave benefits costs on two grounds. First, the Secretary argues that the Provider Reimbursement Manual dictates the proper treatment of sick leave benefits costs. Second, the Secretary argues that sick leave benefits are actually deferred compensation. In either case, he would allow the cost to be reported only when sick leave benefits actually are paid. The Court thinks neither argument persuasive.

Section 2144.8 of the Medicare Provider Reimbursement Manual (HIM-15) (the "Manual"), as was applicable in 1978, prohibited reimbursement of earned but unused sick leave costs. Instead, the Manual specified that the cost should be reported only when the provider actually made payment for the sick leave. The Secretary correctly points out that the Manual, as the agency's interpretation of its own regulations, is to be given controlling weight unless it is plainly erroneous or inconsistent with the regulations. United States v. Larionoff, 431 U.S. 864, 872, 97 S.Ct. 2150, 2155-56, 53 L.Ed.2d 48 (1977); Braun Corp. v. Doyle, No. 85-4018-Y, slip op. at 5 (D.Mass. December 20, 1985). Here, however, the Manual offends the latter part of that standard because it contradicts the requirement of the regulations that cost data be reported on the accrual basis.

The Manual's requirement that sick leave benefits costs be reported only when paid cuts against the most basic premise of accrual basis accounting; namely, that the actual time of payment is insignificant. See e.g., Statement of Financial Accounting Standards No. 43 (FASB, 1980). St. Luke's reported the costs of sick leave benefits at the time the obligation to pay became certain, i.e. when it vested. This properly was the time at which the cost was "incurred." The Secretary's suggestion that vested sick leave benefits are contingent liabilities misses the mark. While it is true that the obligation is contingent as to when it will be paid, that is true of all accrued costs.

Perhaps recognizing that the sick leave benefits costs properly were accrued, the Secretary goes on to argue that § 405.453 (the accrual regulation) is only a record keeping requirement, which does not address when costs will be reimbursed. The argument is illogical. The Secretary mandates certain record keeping requirements precisely because the provider is entitled to reimbursement of reasonable costs. 42 C.F.R. § 405.453(a). To suggest that the Secretary required providers to seek...