The opinion of the court was delivered by: TROUTMAN
I. The Statutory and Regulatory Framework.
The substantive and procedural framework established by Title XVIII has been described by a number of other courts, and we find it appropriate to draw upon their elucidations. As related by the Seventh Circuit Court of Appeals,
. . . Title XVIII of the Social Security Act (the 'Act'), . . . established the federally funded health insurance program commonly known as 'Medicare.' 42 U.S.C. § 1395 et seq. (1976). Part A of the Medicare program, which is funded out of social security taxes, provides 'hospital insurance' for the aged and certain disabled individuals. Under Part A, the federal government reimburses eligible hospitals, nursing facilities, and home health agencies for the 'reasonable costs' of covered services provided to Medicare beneficiaries in accordance with a Congressionally established scheme.
42 U.S.C. § 1395d (1976).
A hospital may become a Medicare provider, and thus become eligible for federal reimbursement, by filing an agreement with the Secretary of Health and Human Services. 42 U.S C. § 1395cc. Medicare providers are reimbursed for their services either by the Secretary or, more commonly, by certain private organizations acting as fiscal intermediaries pursuant to contract with the Secretary.
42 U.S.C. § 1395h. As part of their fiscal responsibilities, these intermediaries are required to ascertain the amount of reimbursement which accurately reflects the 'reasonable cost' of the Medicare services provided by an eligible health care institution. A final calculation as to reimbursable costs is made annually, at the close of the provider's fiscal year, and is based upon a 'cost report' that each provider is required to file. 42 C.F.R. § 405-406(b).
Upon receipt of a provider's cost report, the fiscal intermediary is required to analyze the reported data, undertake any necessary audits and inform the provider, through a written Notice of Program Reimbursement, of the amount of Medicare reimbursement to which it is entitled. 42 C.F.R. § 405.1803. If the provider is not satisfied with this determination, and the total amount in controversy is at least $10,000, the provider may request a hearing before the Provider Reimbursement Review Board (PRRB). 42 U.S.C. § 1395oo(a); 42 C.F.R. § 405.1835. Within 60 days after a PRRB decision, the Secretary, on her own motion, may reverse, affirm or modify that decision. 42 U.S C. § 1395oo(f)(1).
Pursuant to the applicable provisions of the Administrative Procedure Act, 5 U.S.C § 701 et seq., the provider may then seek review of the agency's final decision in federal district court. 42 U.S C § 1395oo(f)(1).
Northwest Hospital, Inc. v. Hospital Service Corp., 687 F.2d 985, 986 (7th Cir. 1982). See also, Sun Towers, Inc. v. Heckler, 725 F.2d 315, 318 (5th Cir. 1984), American Medical International, Inc. v. Secretary of Health, Education and Welfare, 466 F. Supp. 605, 609 (D. D.C. 1979), aff'd., 219 U.S. App. D.C. 267, 677 F.2d 118 (D.C. Cir 1981); and Doctor's Hospital, Inc. v. Califano, 459 F. Supp. 201, 204 (D.D.C. 1978).
42 U.S.C. § 1395x(v)(1)(A)(West 1983) in its pertinent parts defines "reasonable cost" as follows:
The reasonable cost of any services shall be the costs actually incurred, excluding therefrom any part of incurred cost found to be unnecessary in the efficient delivery of needed health services, and shall be determined in accordance with regulations establishing the method or methods to be used, and the items to be included, in determining such costs for various types or classes of institutions, agencies, and services . . . . Such regulations shall (i) take into account both direct and indirect costs of providers of services (excluding therefrom any such costs . . . which are determined in accordance with regulations to be unnecessary in the efficient delivery of services covered by the insurance program . . .) in order that, under the methods of determining costs, the necessary costs of efficiently delivering covered services to individuals covered by the insurance programs . . . will not be borne by individuals so covered, and the costs with respect to individuals not so covered will not be borne by such insurance programs . . . .
Pursuant to his statutory authority, 42 U.S.C. § 1395hh (West 1983), the Secretary has promulgated a number of regulations further refining the concept of "reasonable cost". In 42 CFR § 405.451(a), the Secretary stated the following:
All payments to providers must be based on the reasonable cost of services covered under Title XVIII of the Act and related to the care of the beneficiaries. Reasonable cost includes all necessary and proper costs incurred in rendering the services . . . .
The regulations define reasonable cost as
. . . both direct and indirect costs of providers of services. The objective is that under the methods of determining costs, the costs with respect to individuals covered by the program will not be borne by individuals not so covered, and the costs with respect to individuals not so covered will not be borne by the program . . . .
They define necessary and proper costs as
. . . costs which are appropriate and helpful in developing and maintaining the operation of patient care facilities and activities. They are usually costs which are common and accepted occurrences in the field of the provider's activity.
42 CFR § 405.451(b)(2). See also, Annie M. Warner Hospital v. Harris, 639 F.2d ...