US v. Fairlane Memorial Convalescent Homes, Inc., Civ. A. No. 77-71877.

CourtUnited States District Courts. 6th Circuit. United States District Court (Western District Michigan)
Writing for the CourtJULIAN ABELE COOK, Jr.
Citation501 F. Supp. 863
Docket NumberCiv. A. No. 77-71877.
Decision Date22 October 1980


Karl R. Overman, Asst. U. S. Atty., Detroit, Mich., Denise Rodriguez, Health and Human Services, Washington, D. C., for plaintiff.

David Lebenbom, Southfield, Mich., for defendant.


JULIAN ABELE COOK, Jr., District Judge.

A. Facts

The United States filed this action on July 29, 1977 against Fairlane Memorial Convalescent Home, Inc. (hereinafter "Fairlane") to collect alleged overpayments that Fairlane had received while participating in the Medicare program during the period of January 12, 1967 through March 31, 1972.1 Fairlane's participation in the Medicare program, which was commenced with the execution of an agreement with the Secretary of Health, Education and Welfare (hereinafter "Secretary"), was subsequently voluntarily terminated by Fairlane.2

In brief, Fairlane provided services to Medicare program beneficiaries. The Secretary, through an Intermediary who had been previously nominated by Fairlane, paid Fairlane the reasonable cost of those services rendered. Since it would be unrealistic to expect a Provider to absorb the daily costs, with reimbursement only at the end of the fiscal year, a system of interim payments was devised. These interim payments, which are made at least monthly, are contingent upon the Provider furnishing cost records at the end of each year. These records must document the claim by the Provider that the costs were actually incurred and reasonable. The cost records are audited at the request of the Intermediary by a certified public accounting firm to determine whether the interim disbursements represent an overpayment or an underpayment of actual and necessary costs that have been incurred in providing services to Title XVIII beneficiaries.

Upon an audit of the cost reports which had been furnished by Fairlane, it was determined that Fairlane's interim payments exceeded its actual and necessary costs by the sum of $77,465.94 during the six years of its participation. When Fairlane was notified of the adjustment, and of its right to a hearing to contest the adjustment, Fairlane filed for Declaratory Judgment and Injunctive Relief in District Court,3 seeking to enjoin the Secretary from commencing any collection action prior to an Intermediary Hearing. Pursuant to a Stipulation by the parties, Fairlane was (1) renotified of its right to a hearing and (2) requested to identify all issues that it disputed. Fairlane disputed then, as it does now, only two issues: (1) adjustments to owner's compensation costs and (2) the recapture of accelerated depreciation costs, which comprise $54,043.00 of the Secretary's total claim of $75,158.94.4

A three-member Panel, one of whom was chosen by Fairlane, presided over the hearing on May 6, 1976. The Panel upheld the Intermediary's determination as to the compensation issue, but reversed (2-1) on the depreciation issue. Upon a request for reconsideration from the Health Care Financing Administration (hereinafter "HCFA"), the Panel reversed itself six months later as to the depreciation issue, thus sustaining the Intermediary's position on both issues. When Fairlane did not respond to the Intermediary's written demand for payment, dated July 7, 1977, the United States brought this action for a judgment in the sum of $75,158.94, together with interest from November 19, 1976 (the date of the final hearing decision), plus costs.

This matter is now before the Court on Plaintiff's Motion for Summary Judgment.

Briefly, the Secretary's position is that this Court lacks subject matter jurisdiction to review the Agency's determination. Alternatively, the Secretary argues that even if subject matter jurisdiction exists, judicial review is generally limited to the compensation and depreciation issues, and specifically limited to the question of whether the administrative decision was arbitrary, capricious, or contrary to law. In her Reply Brief, the Secretary makes the additional argument that Fairlane has waived its right, if any ever existed, to judicial review by failing to file a compulsory counterclaim, pursuant to Fed.R.Civ.P. 13(a). Further, the Secretary contends that rescission of such a waiver is now barred by the doctrine of laches.

Fairlane alleges that its due process rights and its right to a fair and impartial hearing were violated because (1) the Hearing Panels were not empowered to question the Secretary's methods of arriving at "reasonable compensation" figures or to entertain Constitutional questions, (2) the Secretary failed to supply the Hearing Panel or the Defendant with sufficient facts upon which to make an informed determination, and (3) the decision by the Hearing Panel to reverse itself on the depreciation issue, based on the Secretary's request for reconsideration, was illegal and improper.

In opposition to the Secretary's Motion for Summary Judgment, Fairlane argues that (1) District Courts have jurisdiction to review any Agency decision on Constitutional grounds and (2) after jurisdiction has been assumed, the District Courts may collaterally review other substantive or factual issues that were raised in the "lower tribunal."

As noted by the United States Court of Appeals for the Eighth Circuit in St. Louis University v. Blue Cross Hospital Service, 537 F.2d 283, 289 (8th Cir. 1976), cert. denied, 429 U.S. 977, 97 S.Ct. 484, 50 L.Ed.2d 584 (1977), "the Medicare statute is a complicated one." Therefore, this Court will briefly review the statute before addressing the parties' specific arguments.

B. Summary of Applicable Law

The Medicare/Medicaid Program is a federally funded health insurance plan which provides for cost reimbursement to private service providers through insurance carriers who serve as Intermediaries. 42 U.S.C. § 1395 et seq. (1965). Responsibility for administration of the Program and rule-making authority has been delegated to the Secretary of the Department of Health and Human Services.5

The Program is substantively divided into two parts: Part A, 42 U.S.C. §§ 1395c-1395i-2, provides for hospital insurance benefits through direct payments to hospitals, nursing homes, clinics or home health agencies for inpatient services; Part B, 42 U.S.C. §§ 1395j-1395w, provides for supplementary medical insurance benefits such as physicians' services, drugs and related services. The instant case relates only to Part A and Part C which sets forth miscellaneous provisions, including definitions.

To participate in the Part A Program, service providers enter into an agreement with the Secretary, 42 U.S.C. § 1395cc. As the Provider's option, payment may be made directly by the Secretary, 42 U.S.C. § 1395g (1976), or through a public or private agency or organization as nominated by the Provider, 42 U.S.C. § 1395h(a) (1976), and thereafter referred to as a "fiscal intermediary."6

The amount of payment is determined either by the Provider's customary charges on the basis of reasonable costs, whichever is less.7

Reasonable cost is that "cost actually incurred, excluding therefrom any part of incurred cost found to be unnecessary in the efficient delivery of needed health services, and shall be determined in accordance with regulations establishing the method or methods to be used, and the items to be included, in determining such costs for various types of classes of institutions, agencies and services." 42 U.S.C. §§ 1395x(v)(1)(A) and 1395f(b)(2) (1976).

The statute gives wide discretion to the Secretary in prescribing regulations. Congressional policy is explicitly stated in the statute:

Such regulations shall (i) take into account ... all costs in order that, under the methods of determining costs, the necessary costs of efficiently delivering covered services to individuals covered by ... Medicare will not be borne by individuals not so covered, and the costs with respect to individuals not so covered will not be borne by such insurance programs, and (ii) provide for the making of suitable retroactive corrective adjustments where ... the aggregate reimbursement produced by the methods of determining costs proves to be either inadequate or excessive.


Thus, the overriding policy, which is to be implemented by the Secretary's regulations, is to insure that costs which are attributable to Medicare beneficiaries are not borne by non-beneficiaries and, conversely, that the Medicare program does not reimburse Providers for costs which are properly attributable to non-Medicare patients.8 If it becomes evident that this policy is not advanced by certain cost determination methods, it is the duty of the Secretary to promulgate corrective regulations.

Against this overview of the statute, the Court will now address the specific issues that have been raised by the parties in this Motion for Summary Judgment.


The first issue before this Court is whether District Courts have subject matter jurisdiction to review administrative decisions by the Secretary with respect to the Medicare Act.

42 U.S.C. § 405(h) (1970), incorporated into Title XVIII (Medicare Act) by 42 U.S.C. § 1395ii (1976), provides, in relevant part:

The findings and decision of the Secretary after a hearing shall be binding upon all individuals who were parties to such hearing. No finding of fact or decision of the Secretary shall be reviewed by any person, tribunal, or governmental agency except as herein provided. (Emphasis added)

The United States Court of Appeals for the Sixth Circuit, in Chelsea Community Hospital, et al v. Michigan Blue Cross, et al., 630 F.2d 1131 (6th Cir. 1980) tells us, "How far § 405(h) is applicable to Medicare-provider reimbursement disputes is a tortured question." The answer turns on the meaning of the phrase "except...

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