Opinion ID: 449269
Heading Depth: 1
Heading Rank: 4

Heading: the secretary has a statutory obligation to reimburse all reasonable costs

Text: 17 A. The Statute Directs The Secretary To Make Corrective Adjustments Whenever Necessary To Ensure That All Reasonable Costs Are Reimbursed 18 In promulgating the Medicare Act of 1965, Congress made clear its intent that providers were to be reimbursed, as nearly as possible, for all costs necessarily incurred in the efficient delivery of health care services to Medicare beneficiaries. The bill was designed to avoid shifting the burden of costs incurred in the treatment of Medicare patients to others not covered by the program while simultaneously ensuring that the costs of services provided to other patients was not borne by the program. 10 19 The statute directs the Secretary to implement these goals by reimbursing providers for the lesser of the reasonable cost of covered services or the customary charges associated with such services. 42 U.S.C. Sec. 1395f(b)(1) (1982). In this case, both parties agree that UCDMC's reimbursement is to be determined under the reasonable cost standard. 20 As mentioned, the statute defines reasonable cost as the actual cost less any portion unnecessary in the efficient delivery of needed health services. 42 U.S.C. Sec. 1395x(v)(1)(A) (1982). Although the statute authorizes the Secretary to employ various methods in determining the reasonableness of a provider's costs, it mandates that the Secretary provide for the making of suitable retroactive corrective adjustments where ... the aggregate reimbursement produced by the methods of determining costs proves either inadequate or excessive. Id. 21 Numerous courts have construed section 1395x(v)(1)(A) as imposing a statutory duty upon the Secretary to make suitable corrective adjustments whenever the amount of reimbursement determined by the chosen method of cost calculation fails to adequately reimburse all reasonable costs. In Kingsbrook Jewish Medical Center v. Richardson, 486 F.2d 663 (2d Cir.1973), the Second Circuit, recognizing that the plain words [of the statute] do not require interpretative gymnastics, read section 1395x(v)(1)(A) as a congressional directive to the Secretary to issue regulations providing for corrective adjustments whenever a method of determining costs ... produces an inadequate reimbursement. Id. at 669. Similarly, the Fifth Circuit has concluded that the statutory language means exactly what it says: Upon determining that one of [her] cost reimbursement regulations produces inadequate or excessive payments to providers, the Secretary has a statutory duty to make suitable retroactive corrective adjustments. Springdale Convalescent Center v. Mathews, 545 F.2d 943, 954 (5th Cir.1977) (emphasis added); see also Humana of South Carolina, Inc. v. Califano, 590 F.2d 1070, 1079 n. 66 (D.C.Cir.1978) (Secretary has statutory duty to make corrective adjustments whenever method of cost reimbursement proves inadequate); Whitecliff, Inc. v. United States, 536 F.2d 347, 351-52, 210 Ct.Cl. 53 (1976) (statutory provision imposes duty upon Secretary to make corrective adjustments when methods of cost-determination lead to inadequate reimbursement), cert. denied, 430 U.S. 969, 97 S.Ct. 1652, 52 L.Ed.2d 361 (1977). 22 We too read section 1395x(v)(1)(A) as imposing a duty upon the Secretary to ensure that the necessary corrective adjustments are made whenever the methods of cost calculation fail to reimburse a provider for its reasonable costs. Such a reading is not only compelled by the plain language of the section but is entirely consistent with the statute's overriding objective to ensure that the Medicare program pay all of its own costs. See, e.g., Professional Medical Care Home, Inc. v. Harris, 644 F.2d 589, 593 (7th Cir.1980). 23 B. The 1972 Amendments Did Not Alter The Secretary's Obligation To Reimburse All Reasonable Costs 24 The Secretary contends that reading the statute as imposing a duty to reimburse all costs that are in fact reasonable is no longer tenable in view of the 1972 amendments to section 1395x(v)(1)(A). See Social Security Amendments of 1972, Pub.L. No. 92-603, Sec. 223, 86 Stat. 1329, 1393-94 (1972). The Secretary bases her argument on the fact that Congress called upon her to experiment with the use of a prospective payment scheme for the reimbursement of Medicare providers. Id. at Sec. 222, 86 Stat. at 1390-93. In developing such a program, she was authorized to promulgate regulations establishing cost limits on the amount of reimbursement that would be recognized as reasonable. Id. at Sec. 223, 86 Stat. at 1393. These cost limits were to be based on estimates of the necessary expenses to be incurred. 25 The Secretary urges that the 1972 amendments authorize her to establish a schedule of limits that is final and binding, with such exceptions and exemptions as she deems appropriate. She contends that all costs which exceed and are not excepted from such limits are per se unreasonable and therefore nonreimbursable. She need not, in her view, engage in a case-by-case examination of the reasonableness of a provider's costs. 26 According to the Secretary's construction of the amended statute, the term inadequate or excessive which appears in section 1395x(v)(1)(A) is not relevant to the question of reasonableness. The corrective adjustment clause, she claims, is merely designed to ensure that the actual amount of reimbursement paid in a given year coincides with the amount the Secretary has determined to be reasonable. In effect, she reads the clause to require no more than a year-end balancing of the books. Numerous Courts have rejected the Secretary's suggestion that the corrective adjustment clause of section 1395x(v)(1)(A) merely contemplates a year-end balancing of the monthly installments received by a provider with the aggregate due it for the year. See, e.g., Springdale Convalescent Center, 545 F.2d at 954; Kingsbrook Jewish Medical Center, 486 F.2d at 669-70. The Medicare Act provides for two different types of adjustments: (1) a year-end adjustment to rectify errors produced by the monthly installment payment procedure, see 42 U.S.C. Sec. 1395g (1982); and (2) retroactive corrective adjustments whenever necessary to correct flaws in the determination of the aggregate reimbursement due a provider as a result of inaccurate methods of determining reasonable costs. 42 U.S.C. Sec. 1395x(v)(1)(A) (1982). That the retroactivity clause of section 1395x(v)(1)(A) was not intended to merely ameliorate auditing errors is evident by Congress' provision for such relief in section 1395g. 27 Moreover, the Secretary's reading of the amended statute is inconsistent with the plain language employed by Congress. On its face, the corrective adjustment clause is applicable regardless of the particular method of determining costs employed by the Secretary. The 1972 amendments, in authorizing the Secretary to adopt cost limits, merely added another method of cost calculation to those already recognized as legitimate by the statute. The utilization of cost limits, like each of the other methods permitted by the statute, remains subject to Congress' clear command that corrective adjustments be made whenever the methods of determining reimbursable costs prove to be inadequate or excessive. The Secretary's interpretation would render the corrective adjustment clause nugatory in the case of one particular method of calculating costs. That Congress did not intend section 1395x(v)(1)(A) to be construed in that manner is readily apparent from the very organization and structure of the section. 28 We construe the 1972 amendments as authorizing the Secretary to develop and apply presumptive cost limits, subject to corrective adjustment when necessary. Our construction is supported by the legislative history behind the amendments. The House and Senate reports accompanying the cost limit legislation clearly evidence Congress' intent that the limits were to operate on a presumptive, rather than conclusive, basis and that providers would have the right to demonstrate their entitlement to reimbursement in excess of those limits: the evaluation of the costs necessary in delivering covered services to beneficiaries would be operated on a class and a presumptive basis ... H.R.Rep. No. 231, 92nd Cong., 2nd Sess., reprinted in 1972 U.S.Code Cong. & Ad.News 4989, 5070 (emphasis added) [hereinafter cited as House Report]; see also S.Rep. No. 1230, 92nd Cong., 2nd Sess. 188 (1972) [hereinafter cited as Senate Report]; [p]roviders would, of course, have the right to obtain reconsideration of their classification for purposes of cost limits applied to them and to obtain relief from the effect of the cost limits on the basis of evidence of the need for such an exception. House Report, supra, at 5071; see also Senate Report, supra, at 189 (emphasis added). 29 The Secretary contends that the 1972 amendment's change to a scheme of payments based on predetermined cost estimates was designed to eliminate the need for individual reviews of the reasonableness of providers' claims. If this were Congress' principal objective in enacting the 1972 amendments, that objective would be substantially realized as a result of the use of presumptive cost limits. Following the 1972 amendments, the Secretary is no longer required to review all claims for reasonableness but only those in which a provider challenges the adequacy of the reimbursement resulting from application of the presumptive cost limits. 30 In any event, we do not agree that one of Congress' principal purposes in adopting the 1972 amendments was to reduce the Secretary's workload. Rather, the cost limit legislation was designed to enable the Secretary more readily to identify and disallow costs resulting from inefficiency or the provision of unneeded or excessive services. See Senate Report, supra, at 187. Prior to the 1972 amendments, reimbursements were calculated individually for each provider on a retrospective basis. That method generally led to reimbursement for all costs which providers had incurred, whether necessary and efficient or not, because it was extremely difficult for the Secretary to establish that a specific cost was unreasonable. See House Report, supra, at 5069-70. 11 The use of prospective payments regulated by a schedule of limits shifted the burden of proving the reasonableness of costs exceeding the presumptive limit to the provider. Id. at 5070. Furthermore, the 1972 amendments were designed to encourage providers to hold down rapidly escalating health care costs. This was accomplished, in part, by putting providers on notice that all costs in excess of the limit established by the Secretary would be considered presumptively unreasonable. Thus, like the objective suggested by the Secretary, Congress' actual objectives in adopting the 1972 amendments are wholly compatible with the use of presumptive limits. 31 Both the structure and organization of the statute as amended and the legislative history of the 1972 amendments lead us to conclude that those amendments did not modify or eliminate the Secretary's statutory obligation to reimburse providers for reasonable costs actually incurred. Nor did they modify or eliminate the Secretary's duty to make corrective adjustments when, notwithstanding her use of a permissible method of cost calculation, the result in a particular case would be inconsistent with that statutory mandate. Rather, the 1972 amendments authorized the Secretary to develop a schedule of limits that was to be applied on a presumptive basis, a schedule that was to be subject to the over-riding requirement that corrective adjustments be made whenever the actual reasonable costs exceed the established limits. 32 C. The Cases Relied Upon By The Secretary Do Not Support Her Authority To Apply The Cost Limits In A Conclusive Manner 33 The Secretary draws upon a number of our decisions, as well as a recent Supreme Court opinion, as support for her argument that she may apply the cost limits in a final and conclusive, rather than a presumptive, manner. We read those cases differently. 34 For example, the Secretary contends that in California Hospital Association v. Obledo, 602 F.2d 1357 (9th Cir.1979), we recognized her authority to employ absolute cost limits in determining the amount due a Medicare provider. In fact we did nothing of the sort. Although we recognized that the 1972 amendments authorized the Secretary to impose ceilings on reimbursable costs, id. at 1359, we expressly cautioned that [s]ome limits might be so arbitrary or restrictive as to preclude the payment of 'reasonable cost' as required by law ... Id. at 1360-61 (emphasis added). Thus, Obledo actually belies the Secretary's suggestion that she has the statutory authority to define conclusively and finally reasonable costs. To the contrary, the Secretary's authority to promulgate limits on reimbursable costs is necessarily subject to her statutory obligation to ensure that all reasonable costs are ultimately reimbursed. 35 Similarly, we find the Secretary's reliance on Heckler v. Campbell, 461 U.S. 458, 103 S.Ct. 1952, 76 L.Ed.2d 66 (1983), to be misplaced. In Campbell, the Supreme Court upheld the Secretary's authority to utilize, in certain cases, a matrix of medical-vocational guidelines as conclusive evidence of a disability claimant's employability in the national economy. However, the Court noted that the guidelines may not be applied if they fail to describe accurately a claimant's particular limitations. Id. at 462 n. 5, 103 S.Ct. at 1955 n. 5; see also Stone v. Heckler, 722 F.2d at 468. Moreover, the Court recognized that the regulations afforded each claimant an ample opportunity to demonstrate that the guidelines ought not be applied to his individual case. Campbell, 461 U.S. at 467, 103 S.Ct. at 1957. Thus, Campbell suggests, consistent with what we hold here, that the Secretary must afford claimants the opportunity to demonstrate that the application of a particular rule to the facts of their case would produce a result that is contrary to the statutory mandate. 36 Finally, the Secretary attempts to justify her interpretation of the statute by referring to a series of cases in which we upheld her use of a prophylactic rule in making reimbursement decisions allegedly similar to those involved here. See, e.g., Goleta Valley Community Hospital v. Schweiker, 647 F.2d 894 (9th Cir.1981); American Hospital Management Corp. v. Harris, 638 F.2d 1208 (9th Cir.1981); Marina Mercy Hospital v. Harris, 633 F.2d 1301 (9th Cir.1980). We find the principles established in those cases of little relevance. 37 The cases invoked by the Secretary deal with a narrow, limited and specific issue. They involve a regulation, 42 C.F.R. Sec. 405.427 (1984), which governs reimbursements for transactions involving related organizations. The regulation limits the amount of the provider's reimbursement to the amount the related organization could have received, i.e., the cost incurred by the related organization. 38 The related organization regulation differs fundamentally from the one before us here; it does not represent a method of determining whether particular costs are reasonable, but rather whether certain expenses may properly be regarded as costs at all. See Pasadena Hospital Association, Ltd. v. United States, 618 F.2d 728, 732-33, 223 Ct.Cl. 72 (1980). The related organization regulation embodies the Secretary's judgment that the only legitimate cost is the outside cost to the business viewed as a whole. Put differently, the cost is that initially incurred by the business rather than that cost plus an additional charge assessed in connection with an intra-organizational transaction. We have upheld this judgment as rationally related to both the language and purpose of the Medicare Act. 39 Moreover, the reimbursement limit embodied in section 405.427 does not operate in a final and conclusive manner; rather, there is a specific exception for any provider who can demonstrate that the presumption of artificially-inflated costs is inapplicable to its particular claim. See 42 C.F.R. Sec. 405.427(d) (1984). Of especial significance is the fact that a provider is excepted from the regulation's reimbursement limit if it can establish, among other things, that the costs in question were comparable to those customarily charged in the open market; i.e., that the costs were, in fact, reasonable. Id. In American Hospital Management Corp., one of the cases invoked by the Secretary, we specifically recognized the import of these exceptions: The regulation ... further narrows the scope of 'related entity' by exempting from its coverage providers who demonstrate that the transaction in question meets the conditions set out in subsection (d). We therefore conclude that the regulation, hedged as it is by a reasonable exception, is a proper exercise of the Secretary's rule making authority ... 638 F.2d at 1213 (emphasis added); see also Northwest Hospital, Inc. v. Hospital Service Corp., 687 F.2d 985, 993-94 (7th Cir.1982) (Section 405.427 does not prohibit reimbursement for the reasonable costs of materials and services obtained from related-party suppliers; it merely establishes a rebuttable limitation on costs which will be deemed reasonable (and hence reimbursable).). 40 In summary, the related organization regulation simply establishes a rule that, in certain limited circumstances, a transfer of assets between related entities does not involve a cost to the organization as a whole; moreover, the regulation permits a provider to rebut the presumption where good reason for deviating from the rule exists. Thus, there is no conflict between the rule established by that regulation and the obligation imposed on the Secretary by the statute. Accordingly, the cases upholding the related organization regulation do not stand as authority for the arguments advanced by the Secretary.