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Annie M. Warner Hospital v. Harris

decided: January 22, 1981.

ANNIE M. WARNER HOSPITAL, EVANGELICAL COMMUNITY HOSPITAL, THE ALLENTOWN HOSPITAL, MUHLENBERG MEDICAL CENTER, ST. CLAIR MEMORIAL HOSPITAL, MCKEE HOSPITAL, HAMOT MEDICAL CENTER, LATROBE AREA HOSPITAL, DOCTORS OSTEOPATHIC HOSPITAL, BRADFORD HOSPITAL, LEE HOSPITAL, INDIANA HOSPITAL, ALLEGHENY GENERAL HOSPITAL, THE LOWER BUCKS HOSPITAL, EPISCOPAL HOSPITAL, WILKES-BARRE GENERAL HOSPITAL, WYOMING VALLEY HOSPITAL, GNADEN HUETTEN MEMORIAL HOSPITAL, WAYNE COUNTY MEMORIAL HOSPITAL, ALLENTOWN AND SACRED HEART HOSPITAL CENTER, BUTLER COUNTY MEMORIAL HOSPITAL, SUBURBAN GENERAL HOSPITAL, CENTRAL MEDICAL HEALTH SERVICES, SHADYSIDE HOSPITAL, MINERS HOSPITAL OF NORTHERN CAMBRIA, CITIZENS GENERAL HOSPITAL, THE MERCY HOSPITAL OF PITTSBURGH, THE ALTOONA HOSPITAL, CENTER CITY HOSPITAL, TAYLOR HOSPITAL, FRANKFORD HOSPITAL, ST. MARY HOSPITAL, YORK HOSPITAL, THE CHAMBERSBURG HOSPITAL, SUNBURY COMMUNITY HOSPITAL, NORTHEASTERN HOSPITAL, ST. FRANCIS GENERAL HOSPITAL, FRANKLIN HOSPITAL, THE MERCY HOSPITAL OF JOHNSTOWN, MEDICAL CENTER OF BEAVER COUNTY, INC., CONEMAUGH VALLEY MEMORIAL HOSPITAL, SAINT JOSEPH HOSPITAL, SOLDIERS & SAILORS MEMORIAL HOSPITAL, EASTON HOSPITAL, ST. LUKE'S HOSPITAL OF BETHLEHEM, WEST PARK HOSPITAL, DIVINE PROVIDENCE HOSPITAL, LEWISTOWN HOSPITAL, ANDREW KAUL MEMORIAL HOSPITAL, PORT ALLEGANY COMMUNITY HOSPITAL, OHIO VALLEY GENERAL HOSPITAL, THE BERWICK HOSPITAL, WAYNESBORO HOSPITAL, ALLENTOWN OSTEOPATHIC HOSPITAL, CONONSBURG GENERAL HOSPITAL, CARBONDALE GENERAL HOSPITAL, THE MERCY HOSPITAL OF WILKES-BARRE, THE MONTEFIORE HOSPITAL ASSOCIATION OF WESTERN PENNSYLVANIA, SUBURBAN GENERAL HOSPITAL, COMMUNITY GENERAL HOSPITAL (OF READING), NORTH PENN HOSPITAL, NORTH HILLS PASSAVANT HOSPITAL, UNION CITY MEMORIAL HOSPITAL, ALLEGHENY VALLEY HOSPITAL, MUNCY VALLEY HOSPITAL, WINDBER HOSPITAL AND WHEELING CLINIC, HANOVER GENERAL HOSPITAL, HENRY CLAY FRICK COMMUNITY HOSPITAL, EYE AND EAR HOSPITAL OF PITTSBURGH, UNIONTOWN HOSPITAL ASSOCIATION, BROWNSVILLE GENERAL HOSPITAL, MEMORIAL HOSPITAL OF BEDFORD COUNTY, ST. JOHNS' GENERAL HOSPITAL, SOMERSET COMMUNITY HOSPITAL, SEWICKLEY VALLEY HOSPITAL, MAGEEWOMENS HOSPITAL, READING HOSPITAL AND MEDICAL CENTER, JERSEY SHORE HOSPITAL, ST. MARGARET MEMORIAL HOSPITAL, WARMINISTER GENERAL HOSPITAL, ROLLING HILLS HOSPITAL AND DIAGNOSTIC CENTER, LAWNDALE COMMUNITY HOSPITAL, GREENE COUNTY MEMORIAL HOSPITAL, J. C. BLAIR MEMORIAL HOSPITAL, WESTMORELAND HOSPITAL ASSOCIATION, PHOENIXVILLE HOSPITAL, LANKENAU HOSPITAL, MEMORIAL HOSPITAL OF ROXBOROUGH, COATESVILLE HOSPITAL, ROBERT PACKER HOSPITAL, PITTSTON HOSPITAL, LOCK HAVEN HOSPITAL. WILLIAMSPORT HOSPITAL, CROZER-CHESTER MEDICAL CENTER, THE MEDICAL COLLEGE OF PENNSYLVANIA AND HOSPITAL, CLEARFIELD HOSPITAL, OIL CITY HOSPITAL AND SKILLED NURSING FACILITY, SHARON GENERAL HOSPITAL, TITUSVILLE HOSPITAL, FORBES HEALTH SYSTEM PITTSBURGH HEALTH CENTER, FORBES HEALTH SYSTEM COLUMBIA HEALTH CENTER, THE COMMUNITY HOSPITAL OF KANE, CHESTNUT HILL HOSPITAL, MAPLE AVENUE HOSPITAL, SAINT JOSEPH'S HOSPITAL OF CARBONDALE, THE WESTERN PENNSYLVANIA HOSPITAL, ELLWOOD CITY HOSPITAL, NESBITT MEMORIAL HOSPITAL, WEST ALLEGHENY HOSPITAL, THE PODIATRY HOSPITAL OF PITTSBURGH, ST. VINCENT HEALTH CENTER, POTTSTOWN MEMORIAL MEDICAL CENTER, MEYERSDALE COMMUNITY HOSPITAL, DIVINE PROVIDENCE HOSPITAL OF WILLIAMSPORT, MERCY HOSPITAL OF ALTOONA, MEMORIAL HOSPITAL OF TOWANDA, JEANNETTE DISTRICT MEMORIAL HOSPITAL, JEANES HOSPITAL, SACRED HEART HOSPITAL OF NORRISTOWN, LANCASTER GENERAL HOSPITAL, POCONO HOSPITAL, APPELLANTS
v.
PATRICIA ROBERTS HARRIS, SECRETARY OF THE DEPARTMENT OF HEALTH, EDUCATION AND WELFARE



ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE MIDDLE DISTRICT OF PENNSYLVANIA (C.A. No. 78-0546)

Before Adams and Sloviter, Circuit Judges, and Brotman, District Judge.*fn*

Author: Adams

Opinion OF THE COURT

The issue presented by this appeal is whether the federal government, under the Medicare program, must reimburse hospitals for a special dues assessment each paid to the Hospital Association of Pennsylvania (HAP). The purpose of the assessment was to obtain funds for the capitalization of a malpractice insurance company sponsored by the Association. Establishing such a company was necessary to alleviate a crisis in the malpractice insurance market. Appellants, 121 hospitals who are members of HAP, seek to overturn a decision of the Administrator of the Health Care Financing Administration, which was upheld by the district court, denying reimbursement to the hospitals. Because the dues payments were necessary to secure continued insurance coverage, without which the hospitals could not operate, we conclude that the expenditures were a "cost" related to patient care, and therefore reimbursable under Medicare.

I

In the autumn of 1975, Employers of Wausau, the leading malpractice insurance carrier operating in Pennsylvania, announced that it would no longer provide malpractice coverage. This announcement coincided with the enactment by the Pennsylvania legislature of the Health Care Services Malpractice Act, which required hospitals to carry professional liability insurance as a condition for continuing in operation. Act of October 15, 1975, P.L. 390, No. 111, 40 Pa.Stat. § 1301.701.

These actions precipitated a crisis for Pennsylvania hospitals: many faced a loss of coverage or an inability to obtain coverage at the very time such coverage became mandatory under state law. For those institutions fortunate enough to acquire or maintain insurance policies, Wausau's withdrawal from the market meant that there would be huge increases in the cost of malpractice insurance.*fn1

To ameliorate the situation, the Hospital Association proposed to its membership the creation of an insurance company wholly owned by HAP. At that time state law would not permit individual hospitals to insure themselves,*fn2 nor would it allow hospitals to secure insurance with out-of-state companies. 40 Pa.Stat. § 1301.701(a). Consequently, the HAP-owned company was the only mechanism available to meet the emergency. The Insurance Department required the new company to maintain a large underpinning of capital and surplus. In order to raise the requisite amount of capitalization, HAP levied a special dues assessment of $62 per hospital bed. This levy produced.$2.5 million in capital for the newly established Pennsylvania Hospital Insurance Company (PHICO).

HAP chose the device of a dues assessment as the means of raising capital partly because it could require all members to contribute whether or not they ever purchased PHICO insurance. Thus, HAP made payment of the assessment an obligatory condition for maintaining membership. HAP also selected the dues assessment with an eye toward Medicare reimbursement policies. Regulations of the Department of Health, Education, and Welfare (HEW) contained in the Provider Reimbursement Manual authorized reimbursement of the cost of membership in professional associations such as HAP. HIM-15, § 2138.1. This regulation specifically mentioned special assessments as a reimbursable item.

When auditing the cost reports of each of the member hospitals, the fiscal intermediaries monitoring the Medicare program disallowed the dues payments to HAP, concluding that they were not reimbursable costs. The hospitals appealed this decision to the Provider Reimbursement Review Board (PRRB). By a vote of 3-2 the PRRB upheld the disallowance and denied reimbursement.

The majority of the Board acknowledged that the hospitals had "amply demonstrated the need to create a new mechanism" for obtaining malpractice insurance, and, that given the time pressures, they had brought about the least costly, and perhaps the most effective, device for doing so. The PRRB also stated that it "appears obvious that malpractice insurance is related to patient care and is in keeping with" HEW regulations detailing reimbursable costs. Despite these observations, the majority concluded that the assessment represented a future-oriented investment rather than a cost. In support of this decision, two considerations were offered: (1) that the dues payments provided the foundation for an enterprise that would endure into the future and return future services and benefits to the hospitals; and (2) that the initial amount might be returned to the hospitals upon the dissolution of PHICO.

Dissenting members of the PRRB agreed that investments are not reimbursable, but they reasoned that the HAP assessment was an expenditure, or cost, necessary to enable the hospitals to remain in operation. They were persuaded that the dues payment should be reimbursed because the amount of capitalization was required by state law and because there was an undoubted need to create the insurance company in order to guarantee the continued provision of health care services. While acknowledging that a recently promulgated reimbursement regulation, HIM-15, § 2162.2(B) (1978), disallowed payments for capitalizing insurance companies, the dissenters regarded the need to establish the company and the state law mandate as factors warranting an exception in this instance. Finally, the dissenters observed that it would be inequitable if Medicare did not reimburse the hospitals, because so long as Medicare paid for the cost of insurance, the program was obtaining a benefit from PHICO in the form of substantially reduced premiums and administrative costs.

The hospitals appealed the adverse decision of the PRRB to federal district court. The district court affirmed the Board, maintaining that the dues assessment was a capital expenditure that was tangential to the current ability of the hospitals to furnish patient care. This appeal followed. Because we conclude that the PRRB and the district court gave ...


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