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EPISCOPAL HOSP. v. BOWEN

September 25, 1986

EPISCOPAL HOSPITAL, et al.
v.
OTIS R. BOWEN, M.D., Secretary of Health and Human Services



The opinion of the court was delivered by: NEWCOMER

 Newcomer, J.

 Although this case arises in a complex statutory and regulatory framework, it presents a single straightforward legal issue: when may a provider of medical care under the Medicare program obtain administrative review of the decision of the Secretary of Health and Human Services (the "Secretary") which determines the rate of hospital-specific payments under the recently established Prospective Payment System ("PPS"). The Plaintiffs in this case are seven Philadelphia area hospitals, and the defendant is the Secretary of Health and Human Services, Dr. Otis R. Bowen. The Secretary has delegated responsibility for administration of the Medicare Program to the Health Care Financing Administration ("HCFA"). Each of the seven plaintiffs is a Medicare provider. Each sought to appeal to the Provider Reimbursement Review Board ("PRRB" or "the Board") the decision of its fiscal intermediary *fn1" concerning the treatment of certain costs attributable to medical care. See Administrative Record at 7-11. Pursuant to regulations and a ruling of the HCFA, the PRRB declined the plaintiffs' request to hear the appeal, asserting that the Board lacked jurisdiction as the appeal was premature. Administrative Record at 1-6.

 Plaintiffs appeal to this Court the Board's refusal to assert jurisdiction over the administrative appeal. The Secretary has now moved to dismiss plaintiffs' complaint. For the reasons elaborated below, I conclude that the PRRB's refusal to assert jurisdiction over the administrative appeal, and the regulations and rulings upon which that refusal was based, are contrary to the Medicare statute as amended. As a result, I will deny the defendant's motion to dismiss. I note that this Court has jurisdiction over the case and the parties. See 42 U.S.C. § 1395oo(f)(1).

 1. Statutory and Regulatory Framework

 a. The Cost Reimbursement System

 In 1965 Congress enacted the Medicare program as Title XVIII of the Social Security Act, which is codified at 42 U.S.C. § 1395 et seq. Pub. L. No. 89-97, § 102(a). Medicare provides a system of health insurance for the aged and disabled.

 For cost reporting years beginning prior to October 1, 1983, Medicare reimbursed the "reasonable cost" of inpatient hospital services furnished to Medicare patients. 42 U.S.C. § 1395(f)(b). The Medicare Act defines "reasonable cost" as the "cost actually incurred, excluding therefrom any part of incurred cost found to be unnecessary in the efficient delivery of needed health services." The Act requires the Secretary through regulation to reimburse "both direct and indirect costs. . . ." 42 U.S.C. § 1395x(v)(1)(A).

 The Secretary has contracted out many of his audit and payment functions under the Medicare program to fiscal intermediaries. See note 1, supra, at 1. After the close of a fiscal year, a hospital must submit to its intermediary a "cost report" showing both the costs incurred by it during the fiscal year and the appropriate portion of those costs to be apportioned to Medicare. 42 C.F.R. §§ 405.406(b) (1982) and 405.453(f) (1982); Athens Community Hospital, Inc. v. Schweiker, 222 U.S. App. D.C. 363, 686 F.2d 989, 991 (D.C. Cir. 1982). The intermediary is required to analyze and audit the cost report and to issue a notice of amount of program reimbursement ("NPR"). 42 C.F.R. § 405.1803(a) (1982). If a hospital is dissatisfied with the determination of its intermediary, it is entitled to file a request for a Board hearing within 180 days of the issuance of the NPR. 42 U.S.C. § 1395oo(a)(1)(A) (1982).

 b. The Prospective Payment System

 Under the prospective payment system ("PPS"), Medicare will ultimately pay all hospitals for inpatient operating services based on a standard national rate for each of approximately 471 diagnosis related groups ("DRGs"). 42 U.S.C. § 1395ww(d)(1)(A)(iii). However, the Act provides for a four-year transition period *fn2" during which a hospital's payment amount will be a blend of two components: a "target amount" (or, in the terminology of the regulations, a "hospital-specific portion") and a "DRG prospective payment rate" (or, in the terminology of the regulations, a "Federal portion"). *fn3" 42 U.S.C. § 1395ww(d)(1)(A)(i)-(ii); 42 C.F.R. § 412.70 (1985). The "target amount" is the amount of a particular hospital's allowable inpatient operating costs per discharged patient for an historic cost reporting year (known as the "base year"), updated by an inflation factor. 42 U.S.C. § 1395ww(d)(1)(A)(i)(I), incorporating by reference 42 U.S.C. § 1395ww(b)(3)(A). The "DRG prospective payment rate" is a standard amount determined either on a national or a regional basis for each DRG. See generally 42 U.S.C. § 1395ww(d)(2) (applicable to the first PPS year) and 42 U.S.C. § 1395ww(d)(3) (applicable to subsequent PPS years). Both components of the PPS payment amount are determined prior to the beginning of a hospital's PPS year. See (with respect to the "target amount") 42 C.F.R. § 405.474(b)(1)(iv)-(v) (1983), 42 C.F.R. § 412.71(d) (1985) and (with respect to the "DRG prospective payment rate") 42 U.S.C. § 1395ww(d)(6), 42 C.F.R. § 412.8 (1985). 50 Fed.Reg. 3547 (Sept. 3, 1985).

 c. PPS Appeals to the Board

 The 1983 legislation substantially amended 42 U.S.C. § 1395oo(a), which governs the initiation of administrative Medicare appeals, to conform with the major change in Medicare payment effected by PPS. The ...


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