Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-99-07089/USCOURTS-caDC-99-07089-0/pdf.json

Nature of Suit Code: 151
Nature of Suit: Overpayments under the Medicare Act
Cause of Action: 

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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued April 6, 2000 Decided May 23, 2000

No. 99-7089

Vencor, Inc. d/b/a Vencor Hospitals Texas, LTD.,

d/b/a Vencor Hospital-Houston Northwest,

d/b/a THC of Texas, Inc.,

d/b/a Vencor Hospital-New Orleans,

d/b/a THC of Louisianna, Inc.,

d/b/a Vencor Hospital-Sycamore,

d/b/a Vencor Hospital-Sacramento,

d/b/a Vencor Hospitals California, Inc.,

d/b/a Vencor Hospital-Houston,

d/b/a Vencor Hospital-Dallas,

Appellant

v.

Physicians Mutual Insurance Co.,

Appellee

Appeal from the United States District Court

for the District of Columbia

(No. 98cv00443)

Bradley L. Kelly argued the cause for appellant. With him

on the briefs was Laura J. Oberbroeckling.

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James J. Frost argued the cause for appellee. With him on

the brief were Stephen A. Fennell and Terrence D. O'Hare.

Roger E. Warin entered an appearance.

Before: Silberman, Williams and Sentelle, Circuit

Judges.

Opinion for the Court filed by Circuit Judge Williams.

Williams, Circuit Judge: Vencor, Inc., a provider of longterm hospital care, filed a diversity action1 against Physicians

Mutual Insurance Company, seeking reimbursement for expenses incurred by 10 patients who stayed in six of its

hospitals beyond the period covered by Medicare. Each of

the patients held "Medigap" insurance policies issued by

Physicians Mutual; Vencor sues as third party beneficiary.

Among other defenses, Physicians Mutual claimed that certain provisions of the Medicare Act and associated regulations

barred Vencor from charging patients more than the maximum rate for Medicare-covered hospital days--a rate at

which Physicians Mutual had already reimbursed Vencor.

The district court granted Physicians Mutual's motion for

summary judgment on that limited ground. Vencor, Inc. v.

Physicians Mutual Insurance Co., 39 F. Supp. 2d 1 (D.D.C.

1999). Finding no such limitation in the cited provisions, we

reverse.

* * *

Medicare, like most health insurance plans, provides benefits of limited duration. For instance, it covers the first 90

days of hospital care for every "spell of illness," plus an

additional, non-renewable reserve of 60 days of coverage

(which, until it is exhausted, can be added to any "spell of

illness"). 42 U.S.C. s 1395d(a)-(b), (g). Once Medicare pa-

__________

1 Vencor also claimed the district court had federal question

jurisdiction, which Physicians Mutual disputed. Given the presence

of diversity jurisdiction, we need not reach the issue.

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tients fully exhaust their government-provided hospital benefits, see id. ss 1395c, 1395d, many rely on privatelypurchased "Medigap" policies for extended coverage. These

policies vary in their terms, but (as a result of a federal

regulatory process that we will soon describe) all offer at

least 365 days of post-Medicare hospital benefits. See Medicare Program; HHS' Recognition of NAIC Model Standards

for Regulation of Medigap Policies, 57 Fed. Reg. 37,980,

37,991/1 (1992).

While the Medicare reimbursement rates of most hospitals

are governed by the so-called Prospective Payment System,

see 42 U.S.C. s 1395ww(d)(1)(B)(iv), Vencor, as an operator

of long-term care hospitals, can secure reimbursement for the

"reasonable cost" of providing its services. Id.

ss 1395f(b)(1), 1395x(v). For Medicare-covered services, it

must generally accept this amount as payment in full. See

id. s 1395cc(a)(1)(A).

Vencor and Physicians Mutual filed cross motions for partial summary judgment on the limited question of whether

the Medicare statute or associated federal regulations prohibited it from charging patients for post-Medicare services at

more than the Medicare-approved rates. We emphasize the

word "patients" because much of the legislative and regulatory materials that the parties dispute speak only to insurers'

obligations. Of course for a third-party beneficiary's breach

of contract action, the patient's liability is the bedrock--

without patient responsibility, there is no insurer responsibility. But insurer liability is often less than all of the primary

obligor's; provisions for deductibles and co-insurance are

common, and some items and services may not be covered at

all. Such insurer-specific limitations may affect Physicians

Mutual's liability on these 10 contracts, but no such limitations are before us. The cross-motions for summary judgment frame the issue only in terms of patient liability.

* * *

Physicians Mutual first argues that the Medicare Act itself

prohibits Vencor from charging its patients more than the

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Medicare-approved rate. It relies initially on 42 U.S.C.

s 1395cc(a)(1)(A), under which providers are eligible for

Medicare reimbursement only if they execute a contract with

the Secretary of Health and Human Services agreeing,

among other things,

not to charge ... any individual or any other person for

items or services for which such individual is entitled to

have payment made under this subchapter.

Id.

The most obvious difficulty with this provision as support

for Physicians Mutual is that it appears to have nothing to do

with charges for post-Medicare services. The "subchapter"

(Subchapter XVIII, 42 U.S.C. ss 1395-1395ccc) contains provisions under which providers are "entitled" to be paid by

Medicare when their provision of services meets the many

statutory qualifications. These appear to exhaust its provision of entitlements. Certainly Physicians Mutual points us

to nothing in the subchapter that "entitles" providers to be

paid for services provided after the lapse of Medicare entitlement. For such entitlements, presumably, they must rely on

contract, or perhaps in some cases quasi-contract, under state

law.

Physicians Mutual seeks to get around this impediment by

claiming that because provisions in the subchapter establish

conditions under which the National Association of Insurance

Commissioners ("NAIC") may promulgate standardized Medigap insurance contracts, which under certain conditions

become the exclusive form of lawful Medigap insurance contract, see id. s 1395ss(p), the subchapter "entitles" providers

to be paid for services falling in the Medicare gap. But,

skipping over the distinction between the liabilities of insurers and of patients (recall that it is the latter that the parties'

motions for summary judgment have put in play; insurers'

obligations follow only as a corollary), there is all the difference in the world between the contractual obligations of the

common law, which create the entitlements of providers to be

paid, and federal limitations on those entitlements. Section

1395ss does not entitle anyone to payment.

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In an attempt to sidestep these difficulties, Physicians

Mutual argues that Medicare's general purpose of providing

"basic protection against the costs of hospital ... services,"

id. s 1395c, demonstrates a congressional intent to allow

Medicare recipients to "extend the benefits and protections

under the Medicare Act through the purchase of Medigap

insurance." Appellee's Br. at 15. Even if Physicians Mutual

were correct about the thrust of the statute's purpose, the

Supreme Court has instructed that:

[a]pplication of 'broad purposes' of legislation at the

expense of specific provisions ignores the complexity of

the problems Congress is called upon to address and the

dynamics of legislative action. Congress may be unanimous in its intent to stamp out some vague social or

economic evil; however, because its Members may differ

sharply on the means for effectuating that intent, the

final language of the legislation may reflect hard-fought

compromises. Invocation of the 'plain purpose' of legislation at the expense of the terms of the statute itself

takes no account of the processes of compromise and, in

the end, prevents the effectuation of congressional intent.

Board of Governors of the Fed. Reserve Sys. v. Dimension

Financial Corp., 474 U.S. 361, 373-74 (1986). See also

Rodriguez v. United States, 480 U.S. 522, 525-26 (1987)

(noting that "no legislation pursues its purposes at all costs"

and therefore "it frustrates rather than effectuates legislative

intent simplistically to assume that whatever furthers the

statute's primary objective must be the law"). So radical a

scheme as imposition of price controls on medical services not

covered by Medicare requires explicit language, not mere

brooding purposes (which, we should add, are in any event

not discernible in s 1395ss).

Physicians Mutual also points to a specific provision of the

Medicare statute governing "items or services ... in excess

of or more expensive than" a covered service:

Where a provider of services has furnished, at the request of such individual, items or services which are in

excess of or more expensive than the items or services

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with respect to which payment may be made under this

subchapter, such provider of services may also charge

such individual or other person for such more expensive

items or services to the extent that the amount customarily charged by it for the items or services furnished at

such request exceeds the amount customarily charged by

it for the items or services with respect to which payment may be made under this subchapter.

42 U.S.C. s 1395cc(a)(2)(B).

The parties curiously agree on the idea that this provision

governs post-Medicare hospital days, differing only as to its

effect. We, by contrast, regard it as altogether inapplicable--because confined to superior versions of covered services. (The parties' de facto stipulation of law does not

require us to analyze a statute on a premise we regard as

false. See United States Nat'l Bank of Oregon v. Independent Ins. Agents of Am., 508 U.S. 439, 446 (1993).)

The archetypal example of a service that falls within the

ambit of this provision is a medically-unnecessary private

room requested by the patient instead of the semi-private

room covered by Medicare. In such cases, "the provider may

bill the beneficiary for the difference between the private

room and semi-private room charges." Medicare Program;

Elimination of Medicare Indirect Subsidy for Private Rooms,

47 Fed. Reg. 42,676, 42,676 (1982). More generally, HCFA

has referred to items in services subject to s 1395cc(a)(2)(B),

as "luxury items and services," see Medicare Program; Prospective Payments for Medicare Inpatient Hospital Services;

Interim Final Rule with Comment Period, 48 Fed. Reg.

39,752, 39,786/3 (1983), or as "partially covered" items and

services, see Medicare as Secondary Payer and Medicare

Recovery Against Third Parties, 54 Fed. Reg. 41,716, 41,740,

41,743 (1989). The additional days of hospital coverage at

issue here do not fit these descriptions. Indeed, in search of

its desired result, Physicians Mutual is driven to offer a

thoroughly confusing and improbable view of

s 1395cc(a)(2)(B). Physicians Mutual assumes that hospital

services for pre-and post-exhaustion days are identical and

that the "amount customarily charged" is the Medicare rate

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because that rate is paid by the majority of Vencor's patients.

But after fitting these assumptions into the statutory language, the upshot is that providers would have to offer free

hospital stays to post-exhaustion patients, as the difference

between the two "amounts customarily charged" is zero.

(Insurance would be no help to the provider, as insurers are

obligated to pay only to the extent that the patient is.)

By contrast, applying the statute is simple in the case of a

patient-requested luxury good or service. For example, if a

provider offers a "standard appendectomy" at a customary

charge of $400 (for which Medicare reimbursement is limited

to $300), and a "super appendectomy" at a customary charge

of $600, it would be entitled to charge only $500 (the basic

$300 Medicare rate, plus the $200 premium) for the superior

procedure.

Moreover, the triggering fact, the furnishing of such a

service "at the request" of the recipient, seems to confirm our

reading; the risk that services would be provided long past

the Medicare limit, without a request, seems very limited

(though not zero). The Secretary's implementing regulation

not only requires patient request, see 42 CFR s 489.32(a)(2),

but also requires the provider to inform the beneficiary that

there will be a charge for the service "[t]o avoid misunderstanding," id. s 489.32(a)(3). It is hard to imagine that an

extended hospital stay of several months' duration (which is

the amount that would be "in excess of" Medicare benefits for

most of the patients here) is the type of items or services for

which a patient might fail to understand that "there will be a

specified charge for that service." Id.

The statutes being rather unpromising material for Physicians Mutual, it turns to a "Model Regulation" written by

NAIC. Again Physicians Mutual encounters a statutory difficulty: the authorizing legislation calls for regulation only of

insurance contracts, not providers' services or compensation.

See 42 U.S.C. s 1395ss(p). NAIC was to amend its existing

Model Regulation to include no more than ten standardized

Medigap insurance plans. See id. s 1395ss(p)(1)(A). Each

plan was to include a minimum common core of benefits and

offer benefits widely available in then-existing policies, while

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balancing the objectives of simplifying the market for Medigap insurance, avoiding adverse selection, providing consumer

choice, providing market stability, and promoting competition.

See id. s 1395ss(p)(2)-(3). As a result of the statutory program, no Medigap policy may issue unless either the relevant

state insurance regulator, or in some circumstances the Secretary, has a mechanism for ensuring that the policy meets

the 1991 NAIC Model Regulation.2 See id. s 1395ss(a)(2),

(g)(2)(A), (k)(1)(A), (m), (p)(1). Physicians Mutual identifies

nothing in the authorizing statute governing provider-patient

charges, and we see no such grant of power to NAIC. If the

Model Regulation purported to cover such charges, it would

be ultra vires.

Unsurprisingly then, the text of NAIC's Model Regulation

does not purport to cover such charges. The section relied

on by Physicians Mutual reads as follows:

Section 8. Benefit Standards for Policies or Certificates

...

B. Standards for Basic ("Core") Benefits Common to

All Benefit Plans. Every issuer shall make available a

policy or certificate including only the following basic

"core" package of benefits to each prospective insured....

(3). Upon exhaustion of the Medicare hospital inpatient coverage including the lifetime reserve days, coverage of the Medicare Part A eligible expenses for

hospitalization paid at [rates consistent with the ordinary hospital payment scheme] or other appropriate

standard of payment, subject to a lifetime maximum

benefit of an additional 365 days.

57 Fed. Reg. at 37,990-91.

Someone at NAIC has argued that this precludes provider

charges above the Medicare rate because such charges are

__________

2 Three states, Massachusetts, Minnesota, and Wisconsin, took

advantage of a waiver provision available to states with an alternative simplification program in place as of November 5, 1990, see 42

U.S.C. s 1395ss(p)(6), and therefore need not implement NAIC's

Model Regulation.

not "an appropriate standard of payment," Letter from Guenther Ruch, Chair, NAIC Senior Issues Task Force to NancyAnn Min DeParle, HCFA Administrator at 4, 5 (July 8, 1998)

("1998 NAIC Letter"), reprinted in Joint Appendix ("J.A.")

123, 127. But s 8(B)(3), like s 1395ss(p), makes no mention

of limits on provider charges.

Perhaps recognizing that s 8(B)(3) applies only to insurers'

obligations, Physicians Mutual turns to the Model Regulation's mandatory disclosure provision to support its claim.

Section 16 states, in relevant part:

Section 16. Required Disclosure Provisions

...

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C. Outline of Coverage Requirements for Medicare

Supplemental Policies

(1) Issuers shall provide an outline of coverage to all

applicants at the time application is presented to the

prospective applicant ...

...

(4) The following items shall be included in the outline

of coverage in the order prescribed below.

...

Disclosures

Use this outline to compare benefits and premiums

among policies.

Read Your Policy Very Carefully

This is only an outline describing your policy's most

important features. The policy is your insurance contract. You must read the policy itself to understand all

of the rights and duties of both you and your insurance

company.

...

Notice

This policy may not fully cover all of your medical

costs.

...

_____________________________________________________________________________

SERVICES MEDICARE PLAN PAYS YOU PAY

PAYS

______________________________________________________________________________

Hospitalization

...

--Once lifetime reserve

days are used:

---Additional $0 100% of 

$0

365 days Medicare

eligible

expenses

---Beyond the $0 $0 

All costs

additional

365 days

_____________________________________________________________________________

57 Fed. Reg. at 37,997, 37,998, 38,000, 38,001.

Physicians Mutual points to the "YOU PAY" column of this

table, which seems to say that the beneficiary pays "$0" for

an additional 365 days of post-exhaustion hospitalization. 57

Fed. Reg. at 38,001, 38,003, 38,005, 38,008, 38,011, 38,014,

38,017, 38,020, 38,023, 38,027. The question posed is whether

the table has any legal effect on providers' charges.

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As a matter of federal law, the answer must be No. As we

have seen, the authorization in s 1395ss(p) to NAIC (and to

the Secretary as an alternative reviser of the Model Regulation) is confined to insurance contracts. Authority to create a

class of standardized insurance contracts does not carry some

implicit authority to regulate transactions that give rise to the

potentially covered obligations.

The parties have nonetheless hotly disputed the meaning of

various expressions of opinion by representatives of NAIC

and the Secretary. Physicians Mutual relies heavily on the

1998 NAIC letter in which a NAIC official claimed that

HCFA, "by adopting the NAIC Model Act and Regulation as

the federal standard for Medicare supplement insurance," has

embraced s 16 of the Model Regulation, which "in substance

limits the providers to charging only the Medicare-approved

amount for hospitalization when Medicare benefits have been

exhausted." 1998 NAIC Letter at 4, 5, J.A. at 126, 127. The

1998 NAIC Letter relies in part on a 1992 letter in which

Thomas Hoyer, a HCFA official, interpreted the "day outlier"

language in s 8(B)(3) of the Model Regulation. Letter from

Thomas E. Hoyer, Jr., Director, Division of Provider Services

Coverage Policy, HCFA, to F. David Wythe, Insurance Analyst, Forms and Rates Section, Life, Accident and Health

Division, South Carolina Department of Insurance at 3 (Feb.

12, 1992), J.A. at 136. Vencor, however, notes that just seven

months earlier, NAIC had quite candidly admitted that it

"cannot control what providers charge for their services" and

asked HCFA to take action to ensure that providers accept

the Medicare approved rates as payment in full for postexhaustion hospital expenses. Letter from Glenn Pomeroy,

Chair, NAIC Senior Issues Task Force to Nancy-Ann Min

DeParle, HCFA Administrator at 3 (Dec. 3, 1997), J.A. at 129,

131. Vencor also offers a more recent letter from HCFA in

which the Deputy Administrator stated that neither Mr.

Hoyer nor anyone else at HCFA has taken a position as to

the 1991 NAIC Model Regulation's effects on providers'

charges for post-exhaustion hospital care. See Letter from

Michael Hash, HCFA Deputy Administrator to Bradley L.

Kelly, Mintz, Levin, Cohen, Ferris, Glovsky & Popeo at 2-3

(Sept. 14, 1999).

To the extent that any of these letters attributes to s 16 of

the Model Regulation any limitation on provider charges to

patients, they exceed the unambiguous limits in the statutory

sections relied upon. Thus, even if we were to assume that

NAIC--a private entity--were entitled to deference, or that

the Secretary were owed deference on her interpretation of

regulations drafted not by her but by NAIC, compare Thomas Jefferson University v. Shalala, 512 U.S. 510, 512-13

(1994), the complete absence of statutory authority, even

assuming the full application of deference under Chevron

U.S.A. Inc. v. NRDC, Inc., 467 U.S. 837, 842-843 (1984),

would fatally undercut the interpretation claimed by Physicians Mutual.3

__________

3 Thus we have no occasion to consider the effect of the Supreme Court's recent decision in Christensen v. Harris County, No.

98-1167, slip op. (U.S. May 1, 2000) <http: //www.supremecourtus.

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gov/opinions/99pdf/98-1167.pdf>, stating that when an agency

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In theory the following question remains: If a state adopts

the Model Regulation in order to make the sale of Medigap

policies lawful under federal law within its borders, could the

text of s 16(C) have the effect asserted by Physicians Mutual? Recall that s 16(C) is simply a mandatory disclosure

provision in a contract between patient and insurer. As such,

it would seem a weak basis for a claim of a binding restraint

on contracts between patients and providers.

Further, the language required by s 16(C)(4) itself explains

that its purpose is simply to enable the insured to compare

premiums and benefits (which are plainly independent of

providers' rates), and warns patients (1) that the policy rather

than the outline determines coverage, and (2) that the policy

may not cover all of the patient's medical costs. Compare

Vencor Hosps. South v. Blue Cross and Blue Shield of R.I.,

86 F. Supp. 2d 1155, 1159-60 (S.D. Fla. 2000) (concluding that

under Florida Law the outline is not part of the insurance

policy); Vencor, Inc. v. Standard Life & Accident Ins. Co., 65

F. Supp. 2d 573, 578 (W.D. Ky. 1999) (same for Tennessee

law). As Physicians Mutual has invoked the Model Regulation solely as a matter of federal law, however, disputes as to

its meaning under state law are not before us.

Finally, we note that in denying Vencor's motion under

Fed. R. Civ. P. 59(e) to alter or amend the judgment, the

district court said that Vencor had waived its claim that the

1991 NAIC Model Regulation is inapplicable to the six patients whose policies took effect before August 21, 1992. It is

not clear whether the district court would reach the same

conclusion in light of our decision that the authorities invoked

by Physicians Mutual do not bar Vencor from charging

patients its standard rates for post-exhaustion hospital care.

__________

provides interpretations of an ambiguous statute in documents that

lack the force of law (such as opinion letters and policy statements),

such intepretations "do not warrant Chevron-style deference," id. at

10, but are " 'entitled to respect' under ... Skidmore v. Swift & Co.,

323 U.S. 134, 140 (1944), but only to the extent that those intepretations have the 'power to persuade,' " id. at 11.

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To avoid confusion, we emphasize that the claim remains live.

If the district court on remand is called upon to interpret the

individual insurance contracts, and if it concludes that any

version of NAIC's Model Regulation has any impact on the

outcome, it must determine which version was in effect in

each relevant state at the time that each contract took effect.

* * *

Because we find no statute or regulation that prohibits

Vencor from charging its standard rates to patients who have

exhausted their Medicare hospital benefits, we reverse the

judgment of the district court and remand the case.

So ordered.

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