U.S. v. Aquavella

• Decision Date: 17 March 1980
• Docket Number: 1557,Nos. 1132,D,s. 1132
• Citation: 615 F.2d 12
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. James V. AQUAVELLA and Salmon C. Harvey, Defendants-Appellants. ocket 79-6017.
• Court: U.S. Court of Appeals — Second Circuit

Page 12

615 F.2d 12

UNITED STATES of America, Plaintiff-Appellee, v. James V. AQUAVELLA and Salmon C. Harvey, Defendants-Appellants.

Nos. 1132, 1557, Docket 79-6017.

United States Court of Appeals Second Circuit.

Argued June 18, 1979.

Decided Dec. 6, 1979.

Modified On Rehearing March 17, 1980.

Robert C. Bernius, Rochester, N.Y. (Margaret J. Gillis, and Nixon, Hargrave, Devans & Doyle, Rochester, N.Y., on the brief), for appellant Aquavella.

David L. Fox, New York City (Lane Felcher Kurlander & Fox, New York City, on the brief), for appellant Harvey.

Richard P. Caro, Asst. U. S. Atty., Brooklyn, N.Y. (Edward R. Korman, U. S. Atty., and Harvey M. Stone, Asst. U. S. Atty., Brooklyn, N.Y., on the brief), for appellee.

Before WATERMAN, FEINBERG and TIMBERS, Circuit Judges.

TIMBERS, Circuit Judge:

On this appeal from a judgment entered in a civil action after a bench trial in the Eastern District of New York, Jacob Mishler, Chief Judge, granting judgment in favor of the United States in the amount of $251,567.00 plus interest, representing recovery of excess interim payments and advances paid to appellants under the Medicare Act ¹ for their operation of an extended care facility, the following are the essential questions presented:

(1) Whether the district court erred in holding that it lacked subject matter jurisdiction to review the merits of the government's claims of overpayments and appellants' defense of offset;

(2) Whether the district court erred in holding that the procedures utilized in suspending the payment of interim funds to appellants and in assessing whether there had been overpayments complied with due process;

(3) Whether the district court erred in failing to dismiss the government's claims on the ground that they are compulsory counterclaims under Fed.R.Civ.P. 13 which should have been asserted in the original action brought by appellants. Aquavella v. Finch, 306 F.Supp. 860 (W.D.N.Y.1969), rev'd sub nom. Aquavella v. Richardson, 437 F.2d 397 (2 Cir. 1971).

For the reasons below, we hold that the district court erred in holding that it lacked subject matter jurisdiction. Accordingly, we reverse and remand for consideration of the merits of the government's claims of overpayment. Since the claims asserted by the government constitute compulsory counterclaims under Rule 13, we direct the district court to dismiss the present action and to consider the government's claims in the context of the still pending action in Aquavella v. Richardson, supra.

I.

This litigation has been pending in the district courts of this Circuit for more than a decade. This is the third trip to our Court. We think it is important to make clear where the parties have been, where they stand now and where they are to go in the future. Accordingly, we shall summarize the relevant facts and prior proceedings in that detail believed necessary to an understanding of our rulings on the legal issues raised and our directions to the district court on remand.

The instant action was commenced by the United States to recover certain alleged overpayments made under the Medicare Act to the Glen Oaks Nursing Home during the period from April 3, 1967 to August 7, 1969. Appellants Aquavella and Harvey are physicians. As partners they owned and operated Glen Oaks as a 60 bed "extended care facility" during the relevant period. ² Glen Oaks as an extended care facility was designed to provide post hospitalization care less intensive than that provided by acute care hospitals, but more intensive than that provided by typical nursing homes. In particular, Glen Oaks specialized in rehabilitative medicine. Approximately $150,000 was invested in equipment for the physical and occupational therapy departments alone.

To qualify as a "provider" of extended care services under the Medicare Act, § 1395x(u), Glen Oaks entered into a contract in April 1967 with the Secretary of Health, Education and Welfare. The contract provided, among other things, that Glen Oaks as a provider would not charge Medicare patients for services rendered. Instead, Glen Oaks was entitled to receive reimbursement of the "reasonable cost" ³ of covered services either directly from the Secretary or through a "fiscal intermediary". The latter would be one of certain designated private organizations under contract to the Secretary. Under the Act, the Secretary generally is responsible for determining "reasonable cost". §§ 1395f(b), 1395x(v). Aquavella v. Richardson, supra, 437 F.2d at 399. The regulations then in effect, however, provided that when a fiscal intermediary was appointed, the responsibility for making the initial determination of reasonable cost, based on information submitted by the extended care facility, shifted to the fiscal intermediary. 20 C.F.R. §§ 405.405 and 405.454 (1970). Payments then are made by the fiscal intermediary to the provider at the estimated per diem rate upon an interim basis to provide the facility with a sufficient cash flow. § 1395g. At the end of the cost period, which usually is the end of the provider's fiscal year, a final review is conducted and any adjustments for overpayment or underpayment are made at that time.

In the instant case, Glen Oaks appointed Aetna Life & Casualty Co. in April 1968 to act as its fiscal intermediary. ⁴ Aetna served in this capacity, reimbursing Glen Oaks for routine and ancillary services rendered to Medicare beneficiaries, until July 11, 1969. At that time, the Secretary ordered Aetna to suspend interim payments to Glen Oaks. This order resulted from an on-site validation review of the medical and fiscal records of the facility which had been conducted by the Bureau of Health Insurance of the Social Security Administration in April 1969. ⁵ The auditor concluded that substantial sums of money had been advanced to Glen Oaks on claims which were not covered by Medicare.

On July 17, 1969, Aetna conducted its own on-site review. In addition, it conducted an audit of each of the cost reports submitted by Glen Oaks for its fiscal periods ending March 31, 1968, March 31, 1969 and August 7, 1969.

Referring to the audit by the Bureau of Health Insurance, aside from charges that Glen Oaks had billed for services not covered by the Act, the Secretary asserted that the facility had engaged in an over-utilization of occupational and physical therapy, and had increased the routine service charge without adequate cost justification. Aquavella v. Richardson, supra, 437 F.2d at 400.

Upon learning of the suspension of the interim payments, appellants commenced an action in the Western District of New York to enjoin the government from suspending payments and to obtain money damages. Aquavella v. Finch, 306 F.Supp. 860 (W.D.N.Y.1969). Since 59 out of 60 of the elderly patients receiving care at Glen Oaks were Medicare beneficiaries, appellants alleged that suspension of payments would force the facility to close. Indeed, in August 1969, Glen Oaks ceased operations for lack of funds. Chief Judge Henderson dismissed appellants' original and amended complaints for lack of jurisdiction, ruling that the action of the Secretary in ordering Aetna to terminate interim payments was not a final determination ripe for judicial review. Id. at 863-64.

While the action was pending in the district court, Dr. Aquavella entered into an agreement with Dr. Harvey pursuant to which the partnership was dissolved. Dr. Aquavella assigned his interest in Glen Oaks to Dr. Harvey. In return, Dr. Harvey agreed to indemnify Dr. Aquavella and to assume all liabilities except those that might arise out of Glen Oaks' participation in the Medicare program.

After the judgment of the district court dismissing the action was entered on October 1, 1969, notices of appeal were filed by both doctors. Only Dr. Aquavella, however, pursued his appeal. We reversed and remanded, holding that the district court erred in dismissing the claim for lack of jurisdiction. Aquavella v. Richardson, 437 F.2d 397 (2 Cir. 1971). We stated:

"Where the Medicare Act establishes procedures for review of the Secretary's decision, a court may not review that decision by any other means. However, where the Act does not provide such procedures, section 405(h) does not preclude review . . . . Where, as here, the review procedures of the Medicare Act do not apply, they do not limit 'nonstatutory' review. We conclude, therefore, that it was error to dismiss the original complaint on the ground that the Medicare Act expressly or impliedly precluded the suit here." Id. at 402-03 (footnote omitted).

Although our mandate, including our opinion, was filed in the district court on February 23, 1971, the government did not file its answer or any counterclaims until May 1974 more than three years later.

In the meantime, however, Dr. Harvey commenced an action on February 4, 1972 in the Eastern District of New York, seeking recovery of $301,019.00 in Medicare payments allegedly due and owing and $2,700,000 in tort damages. On April 6, 1976, Chief Judge Mishler dismissed this action with leave to replead in an action to be commenced in the United States Court of Claims. Harvey v. Aetna Life & Casualty Co., No. 72 C 159 (E.D.N.Y. Apr. 6, 1976). Although an appeal was filed, Dr. Harvey stipulated to dismiss the appeal. The stipulation provided that upon dismissal of the appeal Dr. Harvey's action in the Court of Claims would be stayed pending final disposition of the instant action.

Dr. Aquavella, however, refused to enter into or to be bound by the stipulated dismissal. Accordingly, in May 1974, the government filed an answer, including counterclaims, in response to Dr. Aquavella's complaint which was pending in the Western District of New York pursuant to our remand in Aquavella v. Richardson, supra. In response to Dr. Aquavella's motion to strike the answer and counterclaims as untimely, the government filed a cross-motion to transfer the action to the Eastern District...