Source: https://law.justia.com/cases/federal/appellate-courts/F2/714/872/198932/
Timestamp: 2020-08-11 01:30:53
Document Index: 397476247

Matched Legal Cases: ['§ 1395', '§ 1395', '§ 1395', '§ 1395', '§ 1395', '§ 1395', '§ 1395', '§ 1395', '§ 1395', '§ 1395', '§ 1395', '§ 1395', '§ 1395', '§ 1395', '§ 1395', '§ 405', '§ 1395', '§ 1395', '§ 1395', '§ 405', '§ 1395', '§ 1395', 'art 405', '§ 1395', '§ 405', '§ 1395', '§ 405', '§ 1395', '§ 405', '§ 405', '§ 405', '§ 1395', '§ 405', '§ 1395', '§ 1395', '§ 1395', '§ 1395', '§ 405', '§ 1395', '§ 1395', '§ 1395', '§ 1395', '§ 405', '§ 405', '§ 1395', '§ 1395', '§ 1395', '§ 1395', '§ 405', '§ 405', '§ 405', '§ 405', '§ 1395', '§ 1395', '§ 1395', '§ 1395', '§ 1395', '§ 1395', '§ 1395', '§ 1395', '§ 1395', '§ 1395', '§ 1395', '§ 1395', '§ 1395', '§ 405', '§ 405', '§ 1395']

St. Francis Hospital Center, et al., Plaintiffs-appellants, v. Margaret Heckler,* Secretary, Department Ofhealth and Human Services & Provider Reimbursementreview Board, Thomas Tierney, Chairman,defendants- Appellees, 714 F.2d 872 (7th Cir. 1983) :: Justia
Justia › US Law › Case Law › Federal Courts › Courts of Appeals › Seventh Circuit › 1983 › St. Francis Hospital Center, et al., Plaintiffs-appellants, v. Margaret Heckler,* Secretary, Departm...
St. Francis Hospital Center, et al., Plaintiffs-appellants, v. Margaret Heckler,* Secretary, Department Ofhealth and Human Services & Provider Reimbursementreview Board, Thomas Tierney, Chairman,defendants- Appellees, 714 F.2d 872 (7th Cir. 1983)
US Court of Appeals for the Seventh Circuit - 714 F.2d 872 (7th Cir. 1983) Argued Feb. 10, 1983. Decided Aug. 12, 1983
Sixty-eight nonproprietary hospitals ("the Hospitals") appeal from the district court's decision denying them reimbursement under the Medicare Act, 42 U.S.C. §§ 1395 through 1395pp, for a return on equity capital and for certain bad debt and charity expenses. 544 F. Supp. 1167 (S.D. Ind. 1982). We affirm the decision of the district court and adopt those portions of the court's excellent opinion reproduced as an appendix to our opinion. We have deleted certain portions of the opinion, primarily those dealing with a separate suit that was not appealed and those addressing issues not raised on appeal. We add the supplemental sections immediately below to address arguments raised on appeal that are not specifically answered by the district court's opinion.
We note at the outset that to the extent the Hospitals challenge the constitutionality of the statute or the regulatory scheme, their non-deference argument is unnecessary. Deference to administrative expertise does not extend to judging the constitutionality of a statute or regulatory scheme. As far as construing the Medicare statute, a court should give deference to the interpretation of the agency charged with administration of the statute. See Blum v. Bacon, 457 U.S. 132, 141, 102 S. Ct. 2355, 2361, 72 L. Ed. 2d 728 (1982); Griggs v. Duke Power Co., 401 U.S. 424, 433-34, 91 S. Ct. 849, 854-55, 28 L. Ed. 2d 158 (1971). Congress has charged the Secretary of Health and Human Services ("HHS") with administration of the Medicare program. 42 U.S.C. § 1395kk. Nevertheless, deference to the Secretary must yield to the clear meaning of the statute as revealed by its language, purpose and history. See Southeastern Community College v. Davis, 442 U.S. 397, 411, 99 S. Ct. 2361, 2369, 60 L. Ed. 2d 980 (1979).
This does not support the Hospitals' argument that the district court should have deferred to the PRRB's decision. Final responsibility for rendering a decision lies in the agency itself, not with subordinate hearing officers, and it is this decision that the district court reviewed. See American Medical International, Inc. v. Secretary of Health, Education and Welfare, 466 F. Supp. 605, 611 (D.D.C. 1979), aff'd, 677 F.2d 118 (D.C. Cir. 1981). The decision of the PRRB can be considered no more expert than the decision of the Secretary.
Supplement--Is a Return on Equity Capital a Reasonable Cost for Nonproprietary Providers Under 42 U.S.C. § 1395x(v) (1) (A)?
All providers are entitled to reimbursement of the "reasonable cost" of the services provided. 42 U.S.C. § 1395f(b). Reasonable costs are defined generally in 42 U.S.C. § 1395x(v) (1) (A), with authorization for the Secretary to prescribe regulations further defining reasonable costs. 42 U.S.C. § 1395x(v) (1) (B), added in 1966, directs the Secretary to include in the regulations a provision for return on equity capital for extended care services provided by proprietary facilities. The Hospitals contend that the services of proprietary hospitals do not fit the literal language of § 1395x(v) (1) (B), and therefore their return on capital must come under the general provisions for reasonable costs, § 1395x(v) (1) (A). If a return on equity capital is a reasonable cost under this section for proprietary hospitals, the appellants argue that it is also a reasonable cost for nonproprietary hospitals.
The reasons Congress had for singling out proprietary facilities providing extended care service (i.e., skilled nursing facilities) are not clear. The legislative history is scant. There is some indication, however, that Congress intended a return on equity capital to be extended to all proprietary providers. The Managers on the Part of the House submitted a statement to explain the recommended action of the committee of conference considering the proposed 1966 amendment. The committee recommended the amendment, which is now codified at § 1395x(v) (1) (B), the house managers explaining:
The legislative enactments at issue here are not a model of clarity. However, they do not alter our conclusion that Congress did not intend a return on equity capital for nonproprietary providers to be reimbursable as a "reasonable cost" under § 1395x(v) (1) (A). Any ambiguity we find goes to the issue of whether proprietary hospitals are entitled to such a return under either § 1395x(v) (1) (A) or (B), an issue we need not decide at this point. We agree with the Secretary, the district court, and the other courts that have faced the issue presently before us--Congress did not intend nonproprietary facilities to collect a return on equity capital as part of the "reasonable cost" of providing services.
The Hospitals argue that those cases in which the Supreme Court held government-prescribed rates to be confiscatory, e.g. Smyth v. Ames, 169 U.S. 466, 18 S. Ct. 418, 42 L. Ed. 819 (1898), are directly analogous to the instant case. They correctly point out that the government cannot prescribe rates so low that the result is a taking of property without just compensation, see id. at 526, 18 S. Ct. at 426, and that the government cannot defend setting low rates in one market segment by arguing that the regulated enterprise can set higher rates for another segment and thus turn a net profit, see id. at 541, 18 S. Ct. at 431.
UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF INDIANA INDIANAPOLIS DIVISION ------------ ST. FRANCIS HOSPITAL CENTER,) et al.,) ) Plaintiffs,) ) v.) No. IP 80-89-C) No. IP 80-206-C RICHARD S. SCHWEIKER, Secretary) No. IP 80-272-C Department of Health and) No. IP 80-500-C Human Services,) PROVIDER REIMBURSEMENT REVIEW) BOARD,) THOMAS TIERNEY, Chairman,) ) Defendants.)
The hospitals claim that they are entitled to reimbursement of the portion of their return on equity capital and bad debt and charity costs that they claim are attributable to the Medicare patients they treat. The Medicare Act was passed in 1965. 42 U.S.C. §§ 1395, et seq. It provides for the reimbursement of the reasonable cost of providing services to Medicare beneficiaries. 42 U.S.C. § 1395f(b). The statutory definition of "reasonable cost" is found at 42 U.S.C. § 1395x(v) (1) (A). Pursuant to the Medicare Act, the Secretary of Health and Human Services (hereinafter "the Secretary") has promulgated regulations which define the concept of reasonable cost more fully. 42 U.S.C. § 1395hh; and 42 C.F.R. §§ 405.401-405.488.
The return on equity issue has been raised in several other courts. The hospitals' basic contention is that they should be reimbursed by the Medicare program for a reasonable rate of return on their net assets used in the treatment of Medicare patients. The plaintiffs rest their argument on the following grounds: (A) the Deputy Administrator had no power to reverse the PRRB's decision to grant these plaintiffs return on equity costs, therefore the PRRB's decision is final, [not at issue on appeal] (B) great deference should be given to PRRB's decision, (C) a return on equity is a "reasonable cost" of providing services under 42 U.S.C. § 1395x(v) (1) (A), (D) the denial of reimbursement for these costs constitutes a violation of the just compensation clause of the Fifth Amendment, and (E) since proprietary (for-profit) hospitals are given a return on net assets reimbursement, these plaintiffs, nonproprietary hospitals, are being denied their rights to equal protection.
In order to understand the plaintiffs' arguments, it is necessary to review some background and legislative history of the Medicare program. The terms "return on equity," "return on equity capital," "return on net assets," and "imputed interest" are all used to describe the hospitals' claims of entitlement to reimbursement for the opportunity cost of capital used in the treatment of Medicare patients. Under Part A of the Medicare Act, 42 U.S.C. §§ 1395c-1395i-2, which provides hospital insurance benefits to qualified elderly and/or disabled recipients, hospitals are reimbursed for the "reasonable cost" of providing services to these recipients. The thrust of the plaintiffs' position in this case is that a return on equity is a reasonable cost under the Act and should be reimbursed. Title 42 U.S.C. § 1395x(v) (1) (A) initially defines reasonable cost, for provider reimbursement purposes, as:
(v) (1) (A) The reasonable cost of any services shall be the 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 or classes of institutions, agencies, and services; ....
The gist of the "necessary costs" requirement is that hospitals will be reimbursed for costs, either direct or indirect, which are attributable to Medicare patients. The Medicare Program is not to be responsible for costs incurred on behalf of non-Medicare patients. If indirect costs are attributable to both Medicare and non-Medicare patients, the provider will be reimbursed for the proportionate share of such indirect costs as are incurred for the benefits of the Medicare patients. 42 C.F.R. § 405.451(b) (1) and (c) (3)The Secretary of Health and Human Services has the responsibility for administering the Medicare Program. 42 U.S.C. § 1395kk. The Secretary is authorized by Congress to "prescribe such regulations as may be necessary to carry out the administration of the insurance programs under this [subchapter]." 42 U.S.C. § 1395hh. These regulations are found in the Code of Federal Regulations, Subchapter B, Part 405 of 42 C.F.R. Chapter IV.
The regulations further delineate the types of costs which will be allowable under the Program. These regulations flesh out the general principles laid down in 42 U.S.C. § 1395x(v) (1) (A). One regulation which is at issue in this case, at least indirectly, is 42 C.F.R. § 405.429, which specifically authorizes a proportionate reimbursement for return on equity in the case of proprietary (for profit) hospitals.
Presumably for the reasons expressed in subsection (b), above, the Secretary has made no analogous provision for a return on investment costs in the cases of nonproprietary providers. The plaintiffs in this case are challenging the Secretary's disallowance of a proportionate share of their return on equity costs, primarily on the basis of their perception of the general spirit of 42 U.S.C. § 1395x(v) (1) (A) and on some legislative history.
The first Medicare Regulations, issued by the Secretary in 1966, authorized a reimbursement of an additional 2% of total allowable costs for nonproprietary facilities as compensation for otherwise unspecified costs. One of the costs included in the 2% was a return on equity capital. (See Proposed HEW Regulations, §§ 405.402(e) and 405.428(b) (1966); statements of the Commissioner of Social Security, Robert M. Ball in the Hearings on Reimbursement Guidelines for Medicare Before the Senate Committee on Financing, 89th Congress, 2d Sess., at 55-56 (1966), R. 0501-2; and Mr. Ball's comments in the 1966 Hearings at 72 [R. 0508].) Proprietary hospitals were only given a 1-to-1 1/2% additional reimbursement. The regulation expressly recognized that proprietary hospitals had already been given a return on equity capital reimbursement under § 1395x(v) (1) (B) and 42 C.F.R. § 405.429. 42 C.F.R. § 405.428 (formerly 20 C.F.R. § 405.428).
It is clear that the nonproprietary providers' 2% allowance did include a return on equity capital: it is equally clear that Congress heard discussion of the return on equity issue before these regulations were passed. The problems at issue for the nonproprietary hospital plaintiffs began in June, 1969, when the Secretary dropped both the 2% and the 1 1/2% allowances. 34 Fed.Reg. 9927 (June 27, 1969). As a result, the nonproprietary providers are left with only the "reasonable cost" definition found in 42 U.S.C. § 1395x(v) (1) (A). Proprietary providers may still be reimbursed for return on equity capital costs pursuant to 42 C.F.R. § 405.429, the regulatory counterpart of § 1395x(v) (1) (A).
The plaintiffs in this case now contend that a return on equity is a "reasonable cost" and that it is anomalous to grant a return on equity capital reimbursement to proprietary but not to nonproprietary providers. The arguments which shore up their contention that Congress intended that all providers be reimbursed for return on equity expenses are based primarily on post-enactment legislative history and on more generalized arguments that this expense is a "reasonable cost" within the meaning of 42 U.S.C. § 1395x(v) (1) (A).
(c) Is a Return on Equity Capital a Reasonable Cost for Nonproprietary Providers Under 42 U.S.C. § 1395x(v) (1) (A)?
The stance of the Department of Health and Human Services on this issue is that nonproprietary providers may not recoup any Medicare funds for a return on equity. The rationale of the Deputy Administrator is that there is no regulation that authorizes the reimbursement, so if the hospitals are to recover these amounts, it must be done as a reasonable cost under § 1395x(v) (1) (A). The Department's analysis of this statute and its conclusions is set out in the Deputy Administrator's opinion in the group appeal now before the Court:
It would appear that if a return on equity capital were paid to non-profit hospitals, Medicare would be paying a disproportionate share of provider costs. This is because the return is a profit rather than a cost. Under Section 1861(v) (1) (A) of the Act and the supporting regulations, Medicare reimburses all of a provider's reasonable costs in caring for Medicare beneficiaries. This includes a proportionate share of the cost of capital investment related to patient care such as a building or equipment.
In this case, the Board found that non-profit providers need the funds from the return on equity capital for capital investment purposes, and to cover the costs of bad debts and charity allowances. However, under these circumstances, Medicare would be paying an amount in excess of its share of reasonable cost. This excess would be used to satisfy the burden of non-Medicare patients. This is contrary to the mandate in Section 1861(v) (1) (A) of the Act and the Board's finding in this regard is clearly erroneous.
Based on the specific wording of Section 1861(v) (1) (B) of the Act and 42 CFR 405.429, and the Congressional comments, the Deputy Administrator finds that a return on equity capital is not an element of reasonable cost for non-profit providers. It is not an out-of-pocket cost and was not the type of cost contemplated as reasonable, either direct or indirect, when Section 1861(v) (1) (A) was enacted. Section 1861(v) (1) (B) was enacted because under Section 1861(v) (1) (A) alone a return on equity capital could not be paid to proprietary providers. Therefore, the Board's reliance on Section 1861(v) (1) (A) in this regard is erroneous.
The Secretary's position in regard to 42 C.F.R. § 405.429 (quoted above, concerning return on equity for proprietary hospitals) is correct. The terms of this statute are explicit in the distinction between proprietary and nonproprietary providers insofar as the return on equity issue is concerned. (In accord, Valley View Community Hospital v. United States, 679 F.2d 857 (U.S. Ct. Cl. 1982), p 31,978, CCH Medicare and Medicaid Guide.) The rationale for the distinction expressed in the regulation is that proprietary providers must raise capital through funds invested by owners in the expectation of earning a profit. Alternatively, nonproprietary hospitals have other sources of funding, i.e., public contributions and governmental programs. Id. p 31,978 Medicare and Medicaid Guide, at 9748. The plaintiffs have not brought forward any regulations which affirmatively authorize a return on equity for nonprofit hospitals. They are relegated to the very general reasonable cost standard defined in § 1395x(v) (1) (A).
As noted above, the Secretary's position is that the intent of Congress, as set forth in § 1395x(v) (1) (A), in light of its legislative history, is that a return on equity is not a reasonable cost. This is also the position of the courts which have viewed this issue.
The legislative history of the return on equity issue has been quoted exhaustively by both parties to this litigation. It has also been summarized in Hospital Authority of Floyd County, Georgia v. Schweiker, 522 F. Supp. 569 (N.D. Ga. 1981) [, aff'd, 707 F.2d 456 (11th Cir. 1983) ].
The plaintiffs' argument that a return on equity is a reasonable cost under § 1395x(v) (1) (A) is not borne out by the legislative history. The bulk of the plaintiffs' authority is testimony from the transcript of the 1966 Senate Finance Committee hearings on the issue of reimbursement guidelines. These hearings were held nearly a year after the Medicare Act was passed by Congress. "Such post-enactment history is not the surest guide of the legislative intent in initially passing the Act. Cf. Rogers v. Frito-Lay, Inc., 611 F.2d 1074 (5th Cir. 1980) [ cert. den., Moon v. Roadway Express, Inc., 449 U.S. 889, 101 S. Ct. 246, 66 L. Ed. 2d 115 (1980) ]. Nevertheless, the testimony of the witnesses and the remarks of the Senators are quite instructive." Floyd County, supra, 522 F. Supp. at .
The idea that even the proponents of a return on equity capital classified it as a portion of the 2% allowance rather than as an automatic "reasonable cost" is significant. Shortly after the hearings Congress amended the Act to provide explicitly for a return on equity to proprietary facilities. Title 42 U.S.C. § 1395x(v) (1) (B), the statutory counterpart of 42 C.F.R. § 405.429, provides:
Section 1395x(v) (1) (B) and 42 C.F.R. § 405.429 remained after the 1969 decision to discontinue the 1 1/2% and 2% allowances. The following lengthy portion of the Floyd County analysis of the legislative history reveals that the understanding of the Congress was that a return on equity was not provided in the original Act and that it was not within the ambit of a § 1395x(v) (1) (A) reasonable cost:
In addition, when the Act was amended in October, Congressman John W. Byrnes of Wisconsin stated, " [Under existing law] the amount that will be paid to the individual nursing home or facility--shall be, and I quote, 'the reasonable cost' of furnishing such care. In other words, as the law now stands, fundamentally all the Social Security Administration can pay are the costs, with no allowance for profits or a return on the invested capital." 112 Cong.Rec. 28220 (1966). Senator Long made a similar statement to the Senate, "As the proposed Medicare regulations stood [an investor] would only have been reimbursed for the actual costs of providing services with no specific return given on his investment." 112 Cong.Rec. 27608 (1966).
This Court concludes, as did the district court for the Northern District of Georgia, id., at 575, that a payment for a return on equity capital is not within the scope of § 1395x(v) (1) (A). The plaintiffs have brought forward no cases which stand as authority for the proposition that a return on equity is a § 1395x(v) (1) (A) reasonable cost. Rather, they have relied on: (1) the PRRB's decision, (2) general policy statements which assert that a policy of nonreimbursement for nonproprietary providers would violate the mandate of § 1395x(v) (1) (A) in that a heavier share of costs would be borne by non-Medicare patients, and (3) analogies to indirect costs which are reimbursed (i.e., straight line depreciation, 42 C.F.R. § 405.415, the 1966-1969 2% allowance, 20 C.F.R. § 405.428, interest on some loans, 42 C.F.R. § 405., and return on net assets to proprietary hospitals, 42 C.F.R. § 405.429).
None of these arguments addresses the critical question: did the Secretary misconstrue the statute in denying a return on equity? Given the legislative history quoted above, it is clear that not only did Congress not consider a return on equity when it passed the Medicare Act, it specifically viewed this item during the 1966 Hearings as an expense which did not fall within the purview of § 1395x(v) (1) (A). When the 2% allowance, some "bit" of which was a return on equity, was abandoned in 1969, the expense, as to nonproprietary providers, returned to its status as a nonreimbursable expense. In light of its legislative history, 42 U.S.C. § 1395x(v) (1) (A) cannot be stretched to cover this item of cost.
Another district court which has considered the issue of whether a return on equity is a reasonable cost was recently upheld by the Court of Appeals for the District of Columbia Circuit. American Medical International, Inc. v. Secretary of Health, Education and Welfare, 466 F. Supp. 605 (D.D.C. 1979), aff'd, 677 F.2d 118 (D.C.App.1981). In American Medical International the court discussed return on equity capital because the plaintiffs had analogized it to the stock maintenance costs for which they sought reimbursement. The district court stated:
Plaintiffs argue that stock maintenance costs, though related to investment, should be reimbursed because Medicare allows proprietary providers a return on equity capital. 42 U.S.C. § 1395x(v) (1) (B). [Footnote omitted.] By allowing this payment, plaintiffs contend, the Medicare program expressly recognized that costs related to investment may be reimbursed. This argument assumes that the return on equity capital in § 1395x(v) (1) (B) is a reasonable cost within the meaning of § 1395x(v) (1) (A). However, this return on equity provision was added subsequent to the passage of the Medicare Act and it constitutes the sole exception to the basic Medicare principle that reimbursement be limited to those costs actually incurred in providing patient care services. It is clear from the purpose behind the return on equity provision (§ 1395x(v) (1) (B)), its legislative history, and the provision itself that the return on equity capital provision cannot be used by plaintiffs to support the position that reasonable costs under 42 U.S.C. § 1395x(v) (1) (A) was meant to include costs for investment.
Id., 466 F. Supp. at 613. (In accord, Valley View, supra.)
Therefore, the Secretary did not misinterpret § 1395x(v) (1) (A), nor do the regulations conflict with the statutory scheme. Although the plaintiffs' policy arguments might have been convincing during the initial stages of legislative debate on the Medicare legislation, they were not accepted by Congress. It is beyond the province of the Court to do more than discern the will of Congress on this issue. A return on equity was not within the definition of reasonable cost originally. Since Congress has done nothing to change the statute in the 13 years since the demise of the 2% allowance, this Court cannot proclaim a return on equity capital to be a § 1395x(v) (1) (A) reasonable cost.
These opportunity cost arguments go to the compensation element and do not need to be answered since the "taking" element of the just compensation clause has not been violated. The plaintiffs have stated that the hospitals are in positions akin to those of public utilities. (Relying on Smyth v. Ames, 169 U.S. 466, 18 S. Ct. 418, 42 L. Ed. 819 (1898).) The basic principle of Smyth, as stated by the plaintiffs, is that when a business dedicates a portion of its property to activities deemed to be affected with a public interest, the Constitution guarantees that the property will not be used for the public benefit without just compensation being paid for the services rendered.
The Court identified as unconstitutional takings of property in which property is "wrested" from its owner for the benefit of another or for the public. Id., 169 U.S. at 524-25, 18 S. Ct. at 425, 42 L. Ed. at 841. The prohibition was against "a tariff of rates which is so unreasonable as to practically destroy the value of property of companies engaged in the carrying business...." Id., 169 U.S. at 525, 18 S. Ct. at 425, 42 L. Ed. at 841. This "wresting away" and "practically destroying the value of the property" has evolved into a standard which demands at a minimum some loss of use.
A district court for the Eastern District of New York recently dealt with the just compensation clause's "taking" requirement in a similar case involving Medicaid reimbursement provisions. Hempstead General Hospital v. Whalen, 474 F. Supp. 398 (E.D.N.Y. 1979), aff'd without opinion, 622 F.2d 573 (2 Cir. 1980). The plaintiffs in that case challenged federally approved state limitations on capital cost reimbursements to potential purchasers of health care facilities. They contended that these capital reimbursement limitations constituted a taking because they eliminated many potential buyers of health care facilities. The Medicaid regulations at issue limited capital reimbursement of purchasers to the net depreciated value of the property rather than to either the purchase price or the fair market value. After reviewing the recent just compensation cases, the Court held that there was no taking in spite of the fact that there was a greatly lessened market for hospital facilities and the regulations "impose upon plaintiffs a constantly diminishing potential sale price." Id., 474 F. Supp. at 411.
Many kinds of legislative and administrative action affect property values, but, without some diminution in the owner's right of use, do not constitute a taking within the purview of the Fourteenth Amendment. Chacon v. Granata, 515 F.2d 922, 925 (CA5 1975), cert. denied, 423 U.S. 930, 96 S. Ct. 279, 46 L. Ed. 2d 258 (1975).
The plaintiffs claim that the Fifth Amendment is violated if the Medicare statutes and regulations allow or disallow a return on equity solely on the basis of whether a provider is proprietary or nonproprietary. This equal protection argument can only be proved under the Fifth Amendment if the discrimination is "so unjustifiable as to be violative of due process." Shapiro v. Thompson, 394 U.S. 618, 642, 89 S. Ct. 1322, 1335, 22 L. Ed. 2d 600, 619 (1969); Schneider v. Rusk, 377 U.S. 163, 168, 84 S. Ct. 1187, 1190, 12 L. Ed. 2d 218, 222 (1964). Therefore, the due process clause of the Fifth Amendment guarantees equal protection. United States Department of Agriculture v. Moreno, 413 U.S. 528, 533 n. 5, 93 S. Ct. 2821, 2825 n. 5, 37 L. Ed. 2d 782, 787 n. 5 (1973).
The standard to be applied in cases in which the constitutionality of a social welfare program is challenged is the same low level of scrutiny that is applied to legislation regulating business. Weinberger v. Salfi, 422 U.S. 749, 771-72, 95 S. Ct. 2457, 2469-70, 45 L. Ed. 2d 522, 542-43 (1975). Salfi cited with approval social welfare legislation cases ( Richardson v. Belcher, 404 U.S. 78, 92 S. Ct. 254, 30 L. Ed. 2d 231 (1971); Dandridge v. Williams, 397 U.S. 471, 90 S. Ct. 1153, 25 L. Ed. 2d 491 (1970); and Flemming v. Nestor, 363 U.S. 603, 80 S. Ct. 1367, 4 L. Ed. 2d 1435 (1960)) which "establish that a statutory classification violates due process only if it is 'patently arbitrary ..., utterly lacking in rational justification.' 363 U.S. at 611 [80 S. Ct. at 1372]. They establish that a classification violates equal protection only if it lacks a reasonable basis; there is no violation merely because the classification is 'imperfect,' or ' "not made with mathematical nicety or because in practice it results in some inequality." ' 397 U.S. at 485-86 [90 S. Ct. at 1161-62]." Caylor-Nickel Hospital, Inc. v. Califano, Civil No. F 77-83 (N.D. Ind. Sept. 10, 1979) p 30,718, CCH Medicare and Medicaid Guide. In Caylor-Nickel, Judge Eschbach, with specific reference to the return on equity provisions, held that the regulations which "provide for profit institutions but not to nonprofit institutions" are sufficiently rationally based to satisfy Salfi. Id., p 30,718, Medicare and Medicaid Guide at 9098. The reasons for this finding of sufficient rationality to sustain the constitutionality of the statutory and regulatory scheme are that:
It is certainly rational that profit institutions receive this advantage when nonprofit institutions receive numerous other advantages, such as various grants and contributions, and tax-exempt status. The purpose and rationality of this classification is made clear in 42 U.S.C. § 1395x(v) (1) (A) and in the legislative history .... The distinction drawn between profit and nonprofit institutions violates nothing in the fifth amendment. See Am. Med. Int'l, Inc. v. Sec. of H.E.W., 466 F. Supp. 605, 615 (D.C.Dist.Columb.1979).
Other cases which have accepted the rationality of the distinction between proprietary and nonproprietary providers in the context of equal protection challenges are Valley View, supra; Stevens Park Osteopathic Hospital, Inc. v. United States, 633 F.2d 1373 (Ct. Cl. 1980); and Floyd County, supra. Another explanation of the rationality of this distinction, which relies upon the section of Judge Eschbach's opinion quoted above, states:
Floyd County, supra, 522 F. Supp. at 575-76.
The hospitals ask the Court either to declare a regulation with respect to bad debts, charity, and courtesy allowances to be inconsistent with the "reasonable cost" requirement of § 1395x(v) (1) (A), or to rule that it violates the due process clause of the Fifth Amendment. The hospitals claim that because bad debts and charity not attributable to Medicare patients are categorized by accountants as economic costs of running a hospital, the Medicare program should reimburse them for a proportionate share of these costs.
The Secretary has great leeway to formulate standards for the determination of which are "reasonable costs" under 42 U.S.C. § 1395x(v) (1) (A). In 1966, the Secretary promulgated the following regulation, now challenged by the plaintiffs:
From the above it will be noted that plaintiffs are specifically allowed to collect every penny of bad debts attributable to the deductibles and coinsurance amounts which Medicare patients fail to pay. In other words, payments are reduced in the first instance by applicable deductibles and coinsurance amounts, 42 U.S.C. § 1395e; 42 C.F.R. § 405.110(b). Notwithstanding such fact, the amount of these reductions is eventually paid to plaintiffs to the extent that plaintiffs are not otherwise able to collect the same. 42 C.F.R. § 405.420(a). Since the exact amount of the bad debts incurred by Medicare patients in the foregoing areas is reimbursed, it is logical to deny reimbursement, either directly or as an item of overhead, of similar losses of revenue attributable to non-Medicare patients, in keeping with the congressional policy as expressed in 42 U.S.C. § 1395x(v) (1) (A).