Unihealth Services Corp. v. Califano

• Citation: 464 F. Supp. 811
• Decision Date: 07 February 1979
• Docket Number: Civ. A. No. 77-3001.
• Parties: UNIHEALTH SERVICES CORPORATION v. Joseph P. CALIFANO, in his official capacity as Secretary of Health, Education and Welfare of the United States, et al.
• Court: U.S. District Court — Eastern District of Louisiana

464 F. Supp. 811

UNIHEALTH SERVICES CORPORATION v. Joseph P. CALIFANO, in his official capacity as Secretary of Health, Education and Welfare of the United States, et al.

Civ. A. No. 77-3001.

United States District Court, E. D. Louisiana.

February 7, 1979.

Donna D. Fraiche, New Orleans, La., for plaintiff.

Edith S. Marchall, Dept. of Health, Education & Welfare, Washington, D. C., Henry R. Goldberg, Dept. of Health, Education & Welfare, Baltimore, Md., for defendants.

MEMORANDUM AND ORDER

JACK M. GORDON, District Judge.

Plaintiff, Unihealth Services Corporation, is a private professional management and consulting firm specializing in the rendering of service to nonprofit home health agencies (as providers) as those entitled are so defined in the Medicare Act. 42 U.S.C. § 1395x(m). Unihealth has serviced 25 provider clients pursuant to a contract with each individual home health agency wherein a unified charge is billed for various services rendered based on the percentage of gross billings of the respective agencies as set out in the agreement. Among the services provided by Unihealth are professional consultation and orientation programs, data processing services, guidance in financial matters, and assistance in audit procedures conducted by fiscal intermediaries as agents of the Department of Health, Education and Welfare. The Department of Health, Education and Welfare has responsibility for administering the Medicare program, and in fulfilling those duties, promulgates regulations and establishes policy relating to the administration of the Medicare program. Unihealth is presently attacking certain administrative practices and policies of the Department of Health, Education and Welfare.

From 1969 through 1976 Medicare officials recognized Unihealth as a management company under policy considerations set out in the Provider Reimbursement Manual. Medicare officials, in making their determination as to the reasonableness of cost regarding Unihealth's services to the providers, scrutinized those costs under guidelines found appropriate to management companies. From 1970 until November, 1976, the fees Unihealth charged its clients were found to be within the principles of reimbursement and thus allowed.

In 1977, Medicare officials made a policy determination that Unihealth should be regarded as a franchisor under the Provider Reimbursement Manual rather than as a management company. Plaintiff has now attacked on constitutional grounds the legality of such a policy determination, of the method of promulgating that determination, and of the manner in which the policy decision was applied.

As alleged by plaintiff, in 1968 officials of Medicare began to review the status of the plaintiff in an effort to make a policy determination as to whether Unihealth should be regarded as a management company or as a franchisor under the Provider Reimbursement Manual. Plaintiff claims that such a review was made without the knowledge of its representatives. Purportedly without giving plaintiff legal notice of any meetings, officials of Medicare met and reached a policy decision that Unihealth should be treated as a franchisor when Medicare officials make a determination on reimbursement. Under § 2133 of the Provider Reimbursement Manual, franchise fees are allowable only to the extent that they are not out of line with costs of similar services provided by nonfranchise organizations. This section requires that providers establish the cost of each of the specific services provided by the franchisor. It requires exclusion of any additional fees relating to the franchisor's trademark or reputation which are purportedly not related to patient care.

As a result of this policy determination recognizing Unihealth as a franchisor, the plaintiff contends that those standards applicable to franchisors in determining reasonable costs, were applied retroactively to those years when plaintiff was operating as a management corporation as designated by the Medicare Act (also referred to as "Act"). Retroactive application of standards relating to franchisors purportedly altered the condition under which plaintiff was operating in the following manner:

(1) That Medicare officials retroactively conducted a more rigorous scrutiny of Unihealth's cost report than was required when Unihealth was accorded management status;

(2) That Unihealth was required to provide itemized cost statements of each individual service rendered to a provider whereas in the past under standards applicable to management corporations, it did not have to itemize costs as to individual services;

(3) That under the franchisor standards, and as referred to above, Unihealth was forced to retroactively utilize more onerous accounting procedures in setting out the costs of the services rendered;

(4) That the presumption that all costs and services stated by a management corporation are reasonable was substituted for the franchisor presumption that all costs and services rendered are not reasonable and must be proven by detailed documentation.

Plaintiff contends that as a result of this retroactively applied policy determination recognizing it as a franchisor, Unihealth's provider clients have withheld almost all payments outstanding to Unihealth in the full amount of $800,000.

In summarizing its contentions, Unihealth alleges, in the main, that the defendant has infringed its due process rights under the Fifth Amendment of the United States Constitution: (1) by singling out the plaintiff in an attempt to regulate it under the Medicare Act without allowing plaintiff any administrative review or judicial review as provided by the Medicare Act; (2) by failing to give plaintiff guidelines further defining "reasonable cost" pursuant to Title 20, Code of Federal Regulations, § 405.501, et seq.; (3) by failing to give the plaintiff proper or legal notice that its charges for services would be disallowed based on retroactively applied policy decisions affecting cost reports for the years 1976, 1975 and 1974; (4) by retroactively applying the policies, practices, actions, and determinations of defendant so as to force plaintiff out of its professional practice thereby proscribing its ability to engage in its profession; (5) by denying plaintiff the right to a hearing relative to the issue of its status as a franchisor, though defendant's precedential policy determination had the adverse effect of depriving Unihealth of its presumption of having submitted reasonable costs on a unified basis.

On a motion to dismiss brought pursuant to FRCP 12(b)(1), the Department of Health, Education and Welfare of the United States sought to dismiss the action on grounds that (1) the plaintiff lacks standing in this action so as to make it a case or controversy subject to a federal court's Article III jurisdiction under the United States Constitution; and (2) that this Court does not have subject matter jurisdiction of the case in that Section 405(h) of the Social Security Act, incorporated into the Medicare provisions at 42 U.S.C. § 1395ii, prevents this Court from exercising any judicial review over the particular claims presented by plaintiff. Section 405(h) reads as follows:

The findings and decisions of the Secretary after a hearing shall be binding upon all individuals who were parties to such hearing. No findings of fact or decision of the Secretary shall be reviewed by any person, tribunal, or governmental agency except as herein provided. No action against the United States, the Secretary, or any officer or employee thereof shall be brought under section 41 of Title 28 to recover on any claim arising under this subchapter.

After oral argument on the issues, and post argument briefing, this Court took the Rule 12 motion under submission, and by written memorandum dated March 31, 1978, 448 F.Supp. 1059, the Court denied the motion to dismiss concluding that plaintiff had standing and that the Court had federal-question jurisdiction to entertain constitutional claims against the Medicare Act and regulations promulgated pursuant to the Act. This Court relied heavily on the decisions in Dr. John T. MacDonald Foundation, Inc. v. Mathews, 554 F.2d 714 (5th Cir. 1977) and St. Louis University v. Blue Cross Hospital Service, 537 F.2d 283 (8th Cir. 1976).

In preparation for trial, the parties formulated a detailed pretrial order. In paragraph 5 of the pretrial order, defendant stated that it would ask the Court to reconsider the motion to dismiss.

The trial of this matter commenced on June 19, 1978. At the completion of the trial, the defendant orally requested that the Court reconsider its earlier ruling on the motion to dismiss, since the Fifth Circuit in an en banc decision had reversed its position in Dr. John T. MacDonald Foundation, Inc. v. Mathews, supra. Dr. John T. MacDonald Foundation, Inc. v. Califano, 571 F.2d 328 (5th Cir. 1978). After allowing additional oral argument on the motion to reconsider and inviting the parties to file post-trial memoranda should they desire, this Court took the motion to reconsider and the issues raised at trial under submission.

Consideration of the Fifth Circuit en banc decision in MacDonald Foundation, Inc., supra, and its more recent decision in The American Association of Councils of Medical Staffs of Private Hospitals, Inc. (CMS) v. Califano, 575 F.2d 1367 (5th Cir. 1978) leads to the inescapable conclusion that this Court has no federal question jurisdiction pursuant to 28 U.S.C. § 1331 over the present action.

In its original memorandum and order, this Court found the reasoning in St. Louis University, supra, highly persuasive, where that Court concluded that the Medicare Act § 405(h) of the Social Security Act could not be read to preclude all judicial review of constitutional claims against the Act. In that case, St. Louis University as a representative of a provider brought an action pursuant to 28 U.S.C. § 1331 challenging the...