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January 22, 1982

Patricia HARRIS, Secretary of Health, Education and Welfare

The opinion of the court was delivered by: BRODERICK


In this matter, the Court reviews pursuant to section 1878(f)(1) of the Social Security Act, 42 U.S.C. § 1395 oo(f)(1), a final decision of the Department of Health, Education and Welfare (HEW) disallowing certain claims of plaintiff, Home Health Services of Greater Philadelphia, Inc. (Home Health) for Medicare reimbursement for the cost year ending June 30, 1975. The decision, rendered by the Administrator of HEW's Health Care Financing Administration (Administrator) on July 1979, affirmed the determination of the intermediary, HEW's Division of Direct Reimbursement (Intermediary) and reversed that of the Department's Provider Reimbursement Review Board (PRRB). Since this action must be decided upon a review of the administrative record, the parties have appropriately filed cross-motions for summary judgment. Based upon our review of the entire record and the administrator's decision, the Court has determined that the decision of the Administrator must be vacated in that it is not supported by substantial evidence.

 I. Background

 Title XVIII of the Social Security Act, 42 U.S.C. § 1395 et seq., establishes a two-part program of federal reimbursement for medical care for the aged and disabled commonly known as "Medicare." Part A of the program provides "hospital insurance" benefits (in-patient hospital and post-hospital extended or home health care) and is financed by Social Security payroll contributions. Sections 1811-1818 of the Social Security Act, 42 U.S.C. §§ 1395c-1395(i)-2. Part B provides "medical insurance" benefits for physician services, and out-patient services and supplies, and is financed by premium payments of enrollees together with contributions from funds appropriated by the federal government. Sections 1831-1844 of the Social Security Act, 42 U.S.C. §§ 1395j-1395w. Both parts of the program are administered by the Medicare Bureau of the Health Care Financing Administration.

 Health care providers (hospital, skilled nursing facilities, and home health agencies) that have filed an agreement with the Secretary pursuant to section 1866 of the Social Security Act, 42 U.S.C. § 1395 cc, may participate in the medicare program. Under Part A of the Social Security Act, the "reasonable cost" of covered services rendered by providers to Medicare beneficiaries is paid directly to the providers in lieu of reimbursing Medicare beneficiaries. 42 U.S.C. § 1395(f)(b). In order not to delay reimbursement payments until a final determination of the reasonable cost of the services, interim estimated payments are made to providers at least monthly, with subsequent adjustments for overpayments and underpayments, 42 U.S.C. § 1395g, § 1395 x(v)(1)(A)(ii); 42 CFR § 405.405. A final determination as to reimbursable costs is made after the close of the provider's fiscal year, based upon a cost report which the provider is required to file. 42 CFR § 405.406(b). The reasonable cost of services rendered by the provider to program beneficiaries is initially determined by a fiscal intermediary, in this case HEW's Division of Direct Reimbursement (Intermediary), who is responsible for the processing of claims and the payment of funds to the provider. A provider who is dissatisfied with the intermediary's reimbursement decision, may request a hearing before the Provider Reimbursement Review Board (PRRB) where the amount in controversy is $ 10,000 or more. 42 U.S.C. § 1395 oo (a). Within sixty days after a PRRB decision, the Secretary of HEW, on his or her own motion, may reverse or modify the decision. 42 U.S.C. § 1395 oo (f)(1). The district court is given jurisdiction to review any final decision of the PRRB or any reversal, affirmance or modification by the Secretary. Id. Such an action "shall be tried pursuant to the applicable provisions under Chapter 7 of Title 5 (the Administrative Procedure Act), notwithstanding any other provisions in section 405 of this title (42)." 42 U.S.C. § 1395 oo(f)(1).

 II. Facts

 On July 7, 1971, plaintiff, Home Health, entered into a contractual agreement with Unihealth Services Corporation (Unihealth) whereby Unihealth would provide certain services to Home Health. Unihealth is a New Orleans, Louisiana-based management company which assists in establishing nonprofit home health agencies and assists them also in the necessary start-up and operation of the agency. The agreement between Unihealth and Home Health provided for start-up services, professional management services, financial and health care consultation, on-call and data processing services. Unihealth charged an initial "start up" fee of $ 12,500 and a fee of 7% of the gross billings of Home Health for its continuing services. In January 1975, the fixed 7% fee was changed to a sliding scale charge whereby the percentage fee for services would decline as Home Health's volume of gross billings increased.

 On August 3, 1973, Home Health was certified as a provider of Medicare services. Home Health submitted its first cost report for the fiscal year ended 1974. It reflected the management fees for Unihealth for that year as well as the amortized start-up fees. After an audit ordered by the Intermediary, the management fees as charged by Unihealth were found reasonable and a Notice of Program Reimbursement was issued which made no adjustment as to the cost figures submitted by Home Health relating to the services supplied by Unihealth.

 The following year, Home Health submitted a cost report for the fiscal year ending June 30, 1975. In the report, Home Health claimed that it incurred $ 32,872 in fees for management services provided by Unihealth. On April 28, 1976, the Intermediary issued a Notice of Program Reimbursement for the fiscal year ending June 30, 1975 in which it disallowed $ 12,720 of the Unihealth management fees and allowed reimbursement in the amount of $ 20,152. The explanation for the adjustment contained in the notice read:

To correct management fee in accordance with "sliding scale" fee schedules as modified in contract per letter dated January 3, 1974. Adjusted amounts include billing adjustments and accruals.

 On or about August 17, 1976, the director of the Intermediary wrote the administrator of Home Health and stated,

As you were advised in my letter of April 28, 1976, your cost report for the period ending June 30, 1975, was settled without audit. A reduction in the amount of $ 12,720.00 was made to the management fee due Unihealth Services Corporation. Subsequent to this cost adjustment, representatives of the Division of Direct Reimbursement visited Unihealth Headquarters to review their organizational activities to explore the relationship between the services rendered by Unihealth and the management fees charged. Although no final determinations have been made, we have decided that the disallowance of $ 12,192 be restored to your costs. The additional adjustment is for $ 528 representing accrual and debit and credit memos per your detail of management fees....
The approval of this payment is not to be construed as a blanket approval for all future management fees. Management fees being paid to all management services organizations are currently under consideration by Bureau of Health Insurance policy groups. Any resultant guidelines or directives could affect all management fees; therefore, the entire amount of management fees is subject to revision during the 3-year period following the date of this Revised Notice of Amount of Medicare Program Reimbursement if such revision is required by Health Insurance policy.


 On April 10, 1978, Home Health appealed these adjustments to the PRRB pursuant to section 1878 of the Social Security Act, 42 U.S.C. 1395 oo. The Board held a hearing on January 18, 19, 25, and 26, 1979 and issued a decision on May 16, 1979 in which it reversed the Intermediary's adjustments and held: "... the management fees paid by the Provider (Home Health) under the service contract with Unihealth Services Corporation are reasonable and necessary Medicare cost." In its opinion, the PRRB stated, "Therefore, the Board does not accept the Intermediary's position that the Provider's management fees are substantially out of line compared with other institutions in the same geographic area which are similar in size, scope of service, utilization and relevant factors as defined in § 405.451(c)(2)."

 Pursuant to 42 U.S.C. § 1395 oo(f)(1), the Secretary, through the Administrator of the Department's Health Care Financing Administration (Administrator), reviewed the Board's decision and on July 15, 1979, the Administrator issued an opinion reversing the Board and holding: "The management and accounting fees paid by the Provider exceeded reasonable and necessary Medicare costs, and are limited to the amounts not in excess of those allowed in the Notice of Program Reimbursement issued by the Intermediary on January 17, 1978." The administrator's decision contained the following findings of fact and conclusions of law:


1. The amount of Medicare reimbursement in dispute for the 1975 cost year under appeal exceeds $ 10,000.
2. Unihealth Services Corporation is a Louisiana based, for-profit corporation formed in 1969, which establishes Medicare home health agencies and then furnishes continuing management services.
3. On July 7, 1971, Unihealth contracted with Bernard Shaper, now the Provider's Executive Director, to assist him in establishing a home health agency, which would qualify for Medicare participation.
5. The contract required the Provider to pay Unihealth $ 12,500 upon execution, for starting up the Provider. It also called for payment of the greater of a flat monthly amount, or 7 percent of its gross monthly billings, for continuing management services.
6. On August 2, 1973, the Provider was certified for participation in the Medicare program as a non-profit, home health agency.
7. The periodic reimbursement for continuing management services, based on the Provider's gross monthly billings, bore no statistical relationship to the actual services rendered or to be rendered by Unihealth.
8. The Provider amortized the $ 12,500 "starting up" fee over a 5 year period, for claiming Medicare reimbursement purposes.
9. For the cost year ending June 30, 1975, the Provider serviced only Medicare beneficiaries.
10. For the cost year ending June 30, 1975, the Provider claimed Medicare reimbursement for $ 37,844 in management fees, consisting of $ 2,500 of amortized start up costs, $ 32,344 of current period management fees, and $ 3,000 for accounting fees.
11. The Provider reported these items on its cost report for the cost year under appeal, as a lump sum, with no breakdown of the services or costs comprising the management fee.
12. On January 5, 1977, the Intermediary requested the Provider to furnish a breakdown of the fees paid to Unihealth with a value placed on each service rendered.
13. On March 25, 1977, Unihealth responded that such a breakdown was not available because it did not bill for specific services rendered.
14. In response to the Intermediary's further requests, Unihealth subsequently submitted a breakdown based on estimates.
15. Based on this information, the Intermediary determined what it considered the reasonable management fee by comparison with the cost of ...

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