SSR 77-36c: Section 1861(v)(1)(A) (42 U.S.C. 1395x(v)(1)(A)) Health Insurance Benefits—Reasonable Costs—Effect of Assumption of Operating Costs
20 CFR 405.486(b)(1)
Vallejo General Hospital v. Weinberger, CCH Medicare-Medicaid Guide 28373, (N.D. CA., Feb. 9, 1977)
The hospital leased its radiology department but continued to provide certain maintenance services to the department in return for a fixed percentage of the radiologist's gross billings. Over the period of time in question, rent exceeded the hospital's cost of providing maintenance services. Held, that section 405.486(b)(1) of Social Security Regulations No. 5, authorizes the Secretary to reduce the otherwise reimbursable costs of all hospital departments by the Medicare portion of the net lease revenue.
The court recognized that a hospital which leases out its radiology department may receive Medicare reimbursement, channeled through the payments of the radiologist, which includes payments in excess of the hospital's actual costs of serving Medicare beneficiaries. Accordingly, a set-off of the excess revenue against the hospital's otherwise reimbursable Medicare costs insures that only the hospital's reasonable costs of providing services are reimbursed. Further, the court found contrary to the hospital's position that the Secretary must use section 405.486(b)(2) to prevent Medicare payment of a hospital's profit under a lease by restricting the Part B reimbursement to the physician that both section 405.486(b)(1) and section (b)(2) seek the same objective, to limit the reimbursement to its costs of operation.[*]
WEIGEL, District Judge:
Plaintiff Vallejo General Hospital brings this action to challenge a determination of the Secretary of Health, Education and Welfare ("the Secretary") reducing the hospital's reimbursement under the Medicare Act, 42 U.S.C. §1395 et. seq. (1970). Both plaintiff and defendants move for summary judgment. Defendants also move to dismiss for lack of subject matter jurisdiction. The motions have been briefed and argued.
Defendants' motion to dismiss is without merit. This Court has jurisdiction, under the Administrative Procedure Act, 5, USC. §702(1970), to review a decision of the Secretary regarding payments to a hospital under the Medicare Act. Hazlewood Chronic & Convalescent Hospital, Inc. v. Casper Weinberger, 543 F.2d 703 (9th Cir. 1976).
The Medicare Act establishes two separate health insurance programs for the elderly. "Part A" of the Medicare program provides federal payments to hospitals for the reasonable costs of rendering hospital services to eligible individuals. "Part B" is a supplementary, voluntary health insurance program. It pays physicians the reasonable charges of their medical services.
Plaintiff Vallejo General Hospital leased out its radiology department. Plaintiff provided certain maintenance services to the leased department. The radiology department handled its own billing. The lease provided that the hospital receive fifteen percent of the radiologist's gross billings. During the years 1966 through 1972, inclusive, the amount paid as rent exceeded the hospital's costs of providing maintenance services by $204,092.00. Of this amount, $59,770,00 represented the portion equal to the percentage utilization of the hospital's facilities by Medicare patients during the years in question.
In computing plaintiff's Part A Medicare reimbursement for the years 1966 through 1972, inclusive, Blue Cross of North California, the representative of the Secretary, relied on 20 C.F.R. §405.486(b)(1) (1975) to reduce reimbursement of the Medicare costs generated by the hospital's other departments by the portion of the radiology department's net lease revenue attributable to Medicare patients, $59,770.00. The Blue Cross Association Medicare Provider Appeals Committee sustained this determination.
Plaintiff contends that the Secretary's reduction of the hospital's otherwise reimbursable Medicare costs by the Medicare portion of the profit from the radiology lease constituted an abuse of discretion and was contrary to law. Plaintiff also contends that, even assuming that §405.486(b)(1) properly authorizes such a reduction, the reduction constituted a retroactive application of the regulation in violation of Fifth Amendment Due Process.
Finally, plaintiff contends that the administrative hearing before the Blue Cross Association Medicare Provider Appeals Committee denied plaintiff Due Process of Law.
The Secretary reduced plaintiff's reimbursable Medicare costs by $59,770.00 based on 20 C.F.R. §405.486(b)(1) (1975). This regulation provides:
The objective in determining reasonable charges where the physician bills patients directly is the same as that expressed in §405.4859(a); to bring about as little change as possible (in the normal case) in the compensation the physician receives for his services in the hospital. Where the physician bills the patient directly, costs of operating the hospital department which are borne by the physician [sic] will be reflected in his reasonable charges which are compensable under the supplementary medical insurance program; the hospital will receive reimbursement through the hospital insurance program for those costs, if any, which it incurs. Where, however, a hospital initially pays some or all of the operating expenses of a hospital department (c.g., pays the salaries of nonprofessional personnel and purchases supplies and equipment), even though subsequently those items and services for which it pays the operating expenses are furnished for use of the physician in return for an agreed upon payment by the physician to the hospital, such operating costs are reimbursable under the hospital insurance program as hospital costs, and are not to be reflected in the reasonable charges of the physician. Any payments received by the hospital under such an arrangement shall be treated as a reduction of allowable costs of the hospital reimbursable through the hospital insurance program.
The parties agree that the issue in this case is the proper reimbursement procedure under Part A of the Medicare program of plaintiff's profit from the lease of its radiology department. The profit arose because the lease payments made by the radiologist to the hospital exceeded the hospital's costs for the radiology department. The Secretary asserts that §405.486(b)(1) authorizes the set-off applied in this case to insure that plaintiff is reimbursed only for its reasonable costs of providing hospital services to Medicare beneficiaries and not for amounts in excess of these costs. Plaintiff contends that §405.486(b)(1) exists solely to insure that plaintiff is not paid twice for the same operating costs, once by Medicare and again under the radiology lease. In this case, plaintiff did not claim Medicare reimbursement for the costs of the services provided to the radiology department. Hence, plaintiff asserts, double payment is impossible, the regulation inapplicable, and the reduction improper. Plaintiff relies upon Dr. John T. MacDonald Foundation, Inc. v. Mathews, 534 F.2d 633 (5th Cir. 1976).
The Court begins with the principle that judicial deference normally is given to an administrator's interpretation of the statutory scheme the administrator is authorized to carry out. Johnson's Professional Nursing Home v. Weinberger, 490 F.2d 841, 844 (5th Cir. 1974). For reasons below elaborated, this Court holds that §405.486(b)(1) authorizes the reduction in Medicare reimbursement applied by the Secretary in this case.
The Court finds that the last sentence of §405.486(b)(1) authorizes the Secretary to reduce the otherwise reimbursable Medicare costs of other hospital departments by the Medicare portion of the net lease revenue. The Court reads "[a]ny payment received by the hospital under such an arrangement" to refer to the Medicare portion of lease payments to the hospital. Only the Medicare portion of such payments are included, since the regulations are designed to avoid placing the burden of Medicare costs upon individuals not covered by Medicare, 42 U.S.C. §1395x(v)(1)(A) (1970); 20 C.F.R. §405.402(a) (1975). "[A]llowable costs of the hospital reimbursable through the hospital insurance program" denotes the reimbursable costs of all hospital departments. Had its provision been intended to restrict the prescribed reduction to the allowable costs of the particular department for which the payments are made, as plaintiff contends, the provision would provide for a reduction in the allowable costs of the department, and would not direct a reduction in the allowable costs of the hospital.
This reading of §405.486(b)(1) is consistent with the Medicare Act. Only the reasonable costs of providing hospital services are to be reimbursed under Part A of the Medicare program. 42 U.S.C. §1395f(b)(1) (1970). The Secretary is authorized to establish regulations to determine the proper reimbursement for a hospital's costs. 42 U.S.C. §1395x(v)(1)(A) (1970). If a hospital operates its radiology department itself and contracts with a radiologist to provide professional services, only the hospital's actual costs attributing to serving Medicare beneficiaries are reimbursed under Part A. The radiologist is reimbursed under Part B for his reasonable charges. However, if a hospital leases it radiology department, the hospital's Medicare reimbursement, channeled through the payments of the radiologist, can include payments in excess of the hospital's actual costs of serving Medicare beneficiaries. A set-off of its excess revenue against the hospital's otherwise reimbursable Medicare costs may be made to insure that only the hospital's reasonable costs of providing services are reimbursed. This construction of §405.486(b)(1) also gives effect to the purposes of the Medicare Act to insure that adequate medical care is available to the aged throughout the country. S.Rep. No. 404, 89th Cong., 1st Sess., reprinted in  U.S. Code Cong. & Admin. News 1943, 1964. The set-off authorized by this provision conserves Medicare dollars while fully compensating hospitals for their costs of providing services.
The Court rejects plaintiff's contention that the Secretary may prevent Medicare reimbursement of the hospital's profit under §405.486(b)(2) but may not do so under §405.486(b)(1). Cf. Macdonald, supra at 638-39. §405.486Ib)(2) provides:
Where a hospital has been receiving, as its portion of the receipts for such services, significantly more or less than the costs of the hospital has incurred in the provision of the services, this excess or shortage should not be transferred from the hospital to the physician merely because he decides to bill his patients directly. Since payment to the hospital is made on the basis of its reasonable costs for all hospital services, the transfer of such excess or shortage to the physician necessarily would alter the total cost of patient hospital and medical care—a result which the legislation was not intended to bring abut. The reasonable charges of a physician who enters into a lease or similar arrangement with a hospital under which the physician assumes the costs of operating the department and bills the patients directly would be based upon the remuneration he received for his services immediately prior to the leasing arrangement plus his reasonable costs of operation, taking into account the hospital's cost experience in providing such services. Reasonable charges, so determined, would be subject to appropriate future adjustment to take into account changing economic factors. Reference back to the remuneration formerly received by the physician from the hospital as a factor in determining his reasonable charges under the lease or similar arrangement is required to give effect to the provisions of the statute which direct that consideration be given, in determining reasonable charges, to the customary charges generally made by the physician for similar services. Where no pattern of customary charges has been established for the physician's professional services to patients other than the compensation he received from the hospital for is services, such compensation would serve as the basis for establishing the customary charge. (Emphasis supplied.)
Plaintiff asserts the Secretary must use §405.486(b)(2) to prevent Medicare payment of a hospital's profit under a lease by restricting the Part B reimbursement of the physician's lease payments to the physician's "reasonable costs of operation." Even if the Court were to hold that §405.486(b)92) excludes from the physician's Part B reimbursement that portion of the lease payments in excess of the hospital's actual costs for the leased department, an issue this Court does not decide, this interpretation would not conflict with §405.486(b)(1) since both provisions would seek the same objective, limiting the hospital's reimbursement to its costs of operation. Plaintiff cites no evidence to indicate that §405.486(b)(2) was intended to be the exclusive means by which the Secretary can delay with the problem of Medicare reimbursement in excess of a hospital's actual costs.
The Court also rejects plaintiff's contention that the illegality of the Secretary's interpretation of §405.486(b)(1) is demonstrated by the Secretary's failure to set-off the net revenue from other hospital services, care of private, non-Medicare patients, for example, against otherwise reimbursable Medicare costs. The cost of serving Medicare beneficiaries may not be placed upon individuals not covered by Medicare. 42 U.S.C. §1395x(v)(1)(A) (1970); 20 C.F.R. §405.402(a) (1975). Where net revenue is derived from hospital activities not reimbursable under the Medicare program, the Secretary may not set-off this revenue against otherwise reimbursable Medicare costs.
In the final settlement of plaintiff's Medicare reimbursement for the years 1966 through 1970 the Secretary did not reduce plaintiff's otherwise reimbursable Medicare costs by the Medicare portion of the net revenue from the radiology lease. In 1973, the Secretary reopened the cost determinations for the years 1966 through 1970. For each of the years 1966 through 1972, inclusive, the Secretary made the challenged reduction.
Plaintiff asserts that the application of §405.486(b)(1) to the years 1966 through 1972 when plaintiff had no notice of the regulation's requirements and after the time when plaintiff could have taken remedial action to deal with the regulation's consequences constitutes a retroactive application of the regulation in violation of Fifth Amendment Due Process.
Not every law with retroactive effect is unconstitutional under the Due Process Clause "Only when the retroactive effects are so wholly unexpected and disruptive that harsh and oppressive consequences follow, is the constitutional limitation exceeded." Hazelwood Chronic & Convalescent Hospital, Inc., supra at 708.
Section 405.486(b)(1) was adopted in 1966. This Court holds in an earlier part of its opinion that, by its terms, §405.487(b)(1) authorizes the reduction applied by the Secretary in this case. This reduction is consistent with the remedial purpose of the Medicare Act. 20 C.F.R. §405.499g(c) (1973) (removed 3 Fed. Reg. 34515 (1974)) placed plaintiff on notice that prior reimbursement decisions could be reconsidered in order to correct a determination inconsistent with applicable regulations. Given these considerations, the Court finds that the application of §405.486(b)(1) to the period 1966 through 1972, inclusive, was not so unexpected, disruptive, harsh, or oppressive as to violate plaintiff's right to Due Process of Law.
Plaintiff's charge of denial of Due Process in its administrative hearing before the Blue Cross Association Medicare Provider Appeals committee is directed at the alleged biased composition of the Committee and at the Committee's alleged refusal to consider the legality of the challenged regulation. Neither party disputes the underlying facts of its case. The only issue is whether the Secretary's application of §405.486(b)(1) to plaintiff was according to law. Since this Court decides that issue today, plaintiff's Due Process challenge to its administrative hearing is moot.
IT IS ORDERED that plaintiff's motion for summary judgment is denied.
IT IS FURTHER ORDERED that defendants' motion to dismiss for lack of subject matter jurisdiction is denied. IT IS FURTHER ORDERED that defendants' motion for summary judgement is granted and that judgment be entered for defendants.
[*] While we do not acquiesce in that portion of the court's decision finding that the court had jurisdiction under the Administrative Procedure Act, we are publishing the decision as a Ruling because we agree with the court's findings on the merits.
 Offsetting the net revenue from the radiology lease against otherwise reimbursable Medicare costs of other hospital departments, the procedure followed in this case, produces the same result as reducing allowable Medicare costs from all hospital departments by the lease payments of the radiologist.
 20C.F.R. §405.499g(c) (1973) provided:
A determination, as specified in paragraph (a) of this section, and a decision, as specified in paragraph (b) of this section, shall be reopened and corrected by an intermediary if, within 3 years of the date specified in paragraph (a) or (b) of this section, as the case may be, the Social Security Administration notifies the intermediary that such determination or such decision is inconsistent with the applicable law, regulations, or general instructions issued by the Social Security Administration in accordance with the Secretary's agreement with the intermediary.