Stephenson v. Shalala

• Citation: 87 F.3d 350
• Decision Date: 25 June 1996
• Docket Number: No. 95-15729,95-15729
• Parties: , Medicare & Medicaid Guide P 44,456, 96 Cal. Daily Op. Serv. 4639, 96 Daily Journal D.A.R. 7469 Harold L. STEPHENSON; Marie Lohse; Joseph Ventimiglia; and Dorothy Petrowicz, Plaintiffs-Appellants, v. Donna E. SHALALA, Secretary, Department of Health and Human Services, Defendant-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

Page 350

87 F.3d 350

51 Soc.Sec.Rep.Ser. 131, Medicare & Medicaid Guide

P 44,456,

96 Cal. Daily Op. Serv. 4639,

96 Daily Journal D.A.R. 7469

Harold L. STEPHENSON; Marie Lohse; Joseph Ventimiglia; and Dorothy Petrowicz, Plaintiffs-Appellants, v. Donna E. SHALALA, Secretary, Department of Health and Human

Services, Defendant-Appellee.

No. 95-15729.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted March 12, 1996.

Decided June 25, 1996.

Carol S. Jimenez, Center for Health Care Rights, Los Angeles, California, for plaintiffs-appellants.

Lois B. Osler, United States Department of Justice, Washington, D.C., for defendant-appellee.

Appeal from the United States District Court for the Eastern District of California, Edward J. Garcia, District Judge, Presiding. D.C. No. CV-93-00963-EJG.

Before HALL and BRUNETTI, Circuit Judges, and WEINER, ^* District Judge.

CYNTHIA HOLCOMB HALL, Circuit Judge:

We must decide whether the Medicare Act, in sections found at 42 U.S.C. §§ 1395cc(a)(2)(A), 1395u(b)(3), 1395x(v)(1)(K), compels the Secretary of Health and Human Services to impose a cap on hospital outpatient charges. We conclude that it does not, and affirm the order of the district court.

I

The appellants are a certified class of Medicare beneficiaries. They brought this action alleging that the Secretary had violated various provisions of the Medicare Act, the Administrative Procedure Act and the Constitution. All of their claims were dismissed, except for those based upon a violation of the Medicare Act. The Medicare Act claims were dismissed separately in an order granting summary judgment for the Secretary. We now consider this order alone. The question presented is whether the Medicare Act requires hospitals to charge no more than a "reasonable" amount for services rendered under Medicare's "Part B." The appellants seek an order compelling the Secretary to ensure that hospitals comply with this command.

Medicare is a vast and complicated federal program. Congress established the Medicare program in 1965 to provide "Federal Health Insurance for the Aged and Disabled." Title XVIII of the Social Security Act of 1965, codified as amended at 42 U.S.C. §§ 1395c et seq. Medicare is administered by the Secretary of Health and Human Services ("HHS"), who delegates administrative responsibility to the Health Care Financing Administration ("HCFA"). To be eligible for Medicare, an individual must normally be at least 65 years old or subject to certain disabilities. See 42 C.F.R. § 407.10.

The program consists mainly of two parts. "Part A" provides an insurance plan to cover inpatient hospital, nursing home, hospice and at-home care. 42 U.S.C. § 1395d(a). Part A is an entitlement for which eligible beneficiaries need not pay premiums; it is financed by payroll taxes. Part A is not at issue in this lawsuit. "Part B," the subject of this lawsuit, provides coverage for certain physician and hospital outpatient services not covered by Part A. 42 U.S.C. §§ 1395j to 1395w-4 ("Supplemental Insurance for the Aged and Disabled"); see also 42 U.S.C. § 1395d (scope of benefits). To deliver Part B services, the HCFA enters into contracts with health care providers, 42 U.S.C. § 1395cc, such as the hospitals whose outpatient bills gave rise to this suit.

The cost of Part B services is shared by beneficiaries and the government. To obtain coverage, Medicare-eligible individuals must first enroll in the program. 42 U.S.C. §§ 1395o (eligibility), 1395p (enrollment). Next, they pay monthly premiums, an annual deductible, and additional fees per-service, called, "coinsurance" or "copayments". 42 U.S.C. §§ 1395r, 1395s (premiums), 1395cc (coinsurance); 42 C.F.R. § 410.160(f) (1995) (deductible). Finally, the HCFA reimburses the balance of the costs of Part B from a "Federal Supplementary Medical Insurance Trust Fund." 42 U.S.C. § 1395l; see also § 1395t (describing trust fund). Patients are considered the "beneficiaries" of this trust. Statutes and HHS regulations determine how much the government and the beneficiaries pay, according to formulas which vary with the type of service covered. ¹

At the center of this case is a fight over cost-sharing and, in particular, how much of the cost beneficiaries should be responsible for. According to the basic formula for Part B services, a beneficiary must pay 20% of the

reasonable charges for such items and services (not in excess of [20%] of the amount customarily charged for such items and services by such provider).

42 U.S.C. § 1395cc(a)(2)(A)(ii) (1995) (emphasis added). The federal government pays

the lesser of (I) the reasonable cost of such services ... or (II) the customary charges ... but in no case may the payment ... exceed 80 percent of such reasonable cost.

42 U.S.C. § 1395l(a)(2)(B)(i) (1995) (emphasis added). The appellants call this cost-sharing arrangement the "80-20 split." It guarantees health services providers payment for 100% of their Medicare-allowed costs. Pennsylvania Medical Soc. v. Snider, 29 F.3d 886, 892 (3d Cir.1994); New York City Health & Hosp. v. Perales, 954 F.2d 854, 858 (2d Cir.1992).

However, the label "80-20 split" is misleading. Of the total amount paid to the provider, the beneficiary's share typically exceeds 20%, while the government's share falls below 80%. This is true for several reasons. First, note that the HCFA reimburses on the basis of the hospital's costs, while the beneficiary owes a percentage of hospital charges. Because providers normally charge above cost--this is how they make money--we should expect the beneficiary's share to represent something more than 20% of the total payment to the hospital. ² Just how much more than 20% depends upon the degree to which charges exceed costs.

In recent years, charges have far exceeded costs and, as a result, copayments have risen. It is the burden of coping with rising copayments that animates this lawsuit. In the early days of Medicare, according to the Secretary, charges approximated costs. Since the early 1980s, however, hospitals have raised charges for outpatient services well above their costs, allegedly in an attempt to compensate for revenues lost in other areas of their business, where Congress and the insurance industry have imposed cost controls. Outpatient charges (and coinsurance) have risen steeply, at a rate faster than the rate for many other medical services.

Costs, meanwhile, have not risen as fast, and this has further reduced the government's burden under Part B. The federal government has, by statute and regulation imposed progressively tighter limits on what "costs" will be deemed "reasonable" for purposes of reimbursement. ³ The combined effect of rapidly rising charges together with deliberate cost controls has been to inflate the percentage of total hospital receipts paid by beneficiaries.

Yet another source of inflationary pressure on coinsurance comes from so-called "formula-driven overpayment." See Donna E. Shalala, Secretary of Health and Human Services, Report to Congress: Medicare Hospital Outpatient Prospective Payment iv (1995) ("Secretary's Report "). Since the passage of the Omnibus Reconciliation Act of 1986, Pub.L. No. 99-509, 100 Stat. 1874 (1986) ("OBRA 1986"), HFCA has applied a complicated formula to pay hospitals for many outpatient diagnostic and surgical procedures. See, e.g., 42 U.S.C. § 1395l(n) (applying new formula to reimbursement for radiology diagnostic). This formula, known as the "blended rate," permits hospitals in certain circumstances to recover more than 100% of their Medicare-allowed costs by overcharging beneficiaries; thus the "blend" gives hospitals an incentive to raise their outpatient charges. Secretary's Report iv; United States General Accounting Office, Medicare: Alternatives for Computing Payments for Hospital Outpatient Surgery 3 (1990). Before the blended rate was adopted, the system discouraged hospitals from overcharging beneficiaries by offsetting overpayment by the beneficiary with a corresponding reduction in the amount paid by the HCFA. ⁴

As a result of these and other influences, beneficiaries now pay some 49% of the total reimbursement to hospitals for Part B services. ⁵ Secretary's Report 29. This condition grows more acute with time. The Secretary estimates that by the next century Medicare beneficiaries will be paying 65% of total Part B hospital receipts. Id. In response to this worrisome trend, and to keep the system solvent, Congress is presently studying new ways to finance Medicare. In particular, Congress is looking into a "prospective payment" ⁶ system for hospital outpatient services. See Secretary's Report; Omnibus Budget Reconciliation Act of 1990, Pub.L. No. 101-508, § 4151(b)(2), 104 Stat. 1388, 1388-72 (1990), codified at 42 U.S.C. § 1320b-5 note ("OBRA 1990") (directing Secretary to study feasibility of prospective payment system for hospital outpatient services).

In the meantime, we are left to decide what controls the present Medicare legislation exerts on coinsurance. We review de novo the district court's order upholding the Secretary's interpretation of the Social Security laws. Regents of the Univ. of Cal. v. Heckler, 771 F.2d 1182, 1187 (9th Cir.1985).

II

The beneficiaries first argue that 42 U.S.C. § 1395cc(a)(2)(A) (Supp.1995) ("section 1395cc") imposes two, independent caps on hospital charges under Part B, and that the Secretary has failed to enforce these limits. The beneficiaries read "reasonable, not to exceed customary" as equivalent to "reasonable and customary." In their view, the Secretary should take steps--by regulation, contract compliance monitoring, or otherwise--to guarantee that all Part B hospital agreements enforce this statutory limit on coinsurance. ⁷

The district court rejected this reading of the statute on the grounds that section 1395cc does not explicitly direct the Secretary to "regulate" hospital charges to Part B patients. However, we...