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FRANKFORD HOSP. v. DAVIS

November 18, 1986

FRANKFORD HOSPITAL
v.
CAROLYNE K. DAVIS, Ph.D., Administrator, and the HEALTH CARE FINANCING ADMINISTRATION, et al.



The opinion of the court was delivered by: BRODERICK

 BRODERICK, J.

 The plaintiff, Frankford Hospital, a nonprofit general community hospital organized under Pennsylvania law and operating in Pennsylvania, brought this action against the Health Care Financing Administration ("HCFA") and its administrator Carolyne K. Davis; the Department of Health and Human Services ("HHS") and its former Secretary Margaret M. Heckler; and Blue Cross of Greater Philadelphia ("Blue Cross") and its President, David S. Markson. The complaint alleges that (1) in determining plaintiff's allowable costs for which the plaintiff will receive Medicare payments, Blue Cross improperly disallowed certain costs for plaintiff's fiscal year ending June 30, 1983; (2) that a regulation covering interest expense, 42 C.F.R. § 405.419, violates the Establishment Clause of the First Amendment and the Equal Protection Clause of the Fourteenth Amendment on its face and as applied; (3) that a regulation prohibiting prospective relief, 42 C.F.R. § 405.474(b)(3)(i)(C), and a ruling issued by Davis, 49 Fed. Reg. 22,414-15 (May 29, 1984) ("HCFAR 84-1"), deprives the plaintiff of due process of law in violation of the Fifth Amendment; (4) that Davis, Heckler, Markson and Blue Cross have deprived the plaintiff of its First, Fifth and Fourteenth Amendment rights; (5) and that Markson and Blue Cross acted negligently in making cost determinations for the plaintiff's fiscal year ending June 30, 1983. The plaintiff asserts that as a result of the aforesaid acts, it has received and will in the future receive less under the Medicare Program than it would have otherwise received. Plaintiff seeks declaratory and injunctive relief, as well as damages equal to the sum of its alleged loss of payments under the Medicare program. Markson has been dismissed as a defendant by stipulation of the parties filed on January 24, 1985.

 The federal defendants, Heckler, HHS, Davis and HCFA, have filed a motion to dismiss or in the alternative a motion for summary judgment, both of which motions Blue Cross has joined. The plaintiff opposes the motions and has filed a motion for partial summary judgment.

 In their motion to dismiss, the federal defendants contend that this Court lacks subject matter jurisdiction for the following reasons: the plaintiff has not satisfied the prerequisites for judicial review set forth at 42 U.S.C. § 1395oo, which provides the exclusive avenue of jurisdiction over the action; and there is no justiciable controversy in connection with the validity of 42 C.F.R. § 405.474(b)(3)(i)(C). Blue Cross further contends that the regulation concerning interest expense that the plaintiff seeks declared unconstitutional, 42 C.F.R. § 405.419(c), is not relevant to this action and in no way affects the plaintiff.

 The plaintiff on the other hand, has moved for summary judgment of the following two bases: 42 C.F.R. § 405.474(b)(3)(i)(C)(2) be declared unlawful and 42 C.F.R. § 405.419(b)(2)(iii) and (c)(1) be declared unlawful as applied. For the reasons that follow, the defendants' motion to dismiss will be granted.

 In a motion to dismiss for lack of subject matter jurisdiction pursuant to Fed.R.Civ.P. 12(b)(1), "the court is not restricted to the face of the pleadings, but may review any evidence, such as affidavits and testimony, to resolve factual disputes concerning the existence of jurisdiction to hear the action." 2A Moore's Federal Practice para. 12.07 [2.-1] at 12-45 - 12-46. There are two types of challenges which may be made pursuant to Rule 12(b)(1):

 
. . . 12(b)(1) motions that attack the complaint on its face and 12(b)(1) motions that attack the subject matter jurisdiction in fact, quite apart from any pleadings. [In t]he facial attack . . . the court must consider the allegations of the complaint as true. [In t]he factual attack, however, . . . there is substantial authority that the trial court is free to weigh the evidence and satisfy itself as to the existence of its power to hear the case. In short, no presumptive truthfulness attaches to plaintiff's allegations, and the existence of disputed material facts will not preclude the trial court from evaluating for itself the merits of jurisdictional claims. Moreover, the plaintiff will have the burden of proof that jurisdiction does in fact exist.

 Mortensen v. First Federal Savings and Loan Association, 549 F.2d 884, 891 (3d Cir. 1977).

 This action involves Part A of Title XVIII of the Social Security Act, 42 U.S.C. § 1395 et seq. (the "Medicare Act") which provides reimbursement for specified hospital, extended care and home health services. Prior to October 1, 1983, the statute mandated that Part A providers were to be reimbursed based on the provider's "reasonable cost" of rendering covered services to eligible beneficiaries or, if lower, the customary charges for such services. 42 U.S.C. § 1395f(b). The term "reasonable cost" is defined at 42 U.S.C. § 1395x(v)(1)(A), and under that provision the Secretary has broad authority to determine what costs will be reimbursable. Generally, reimbursement was handled by private organizations acting as fiscal intermediaries pursuant to contract with the Secretary. 42 U.S.C. § 1395h(a). Blue Cross is the fiscal intermediary for the plaintiff. Under this system the determination of "reasonable cost" was made after the close of the provider's fiscal year, based upon the provider's "cost report." 42 C.F.R. § 405.406(b) (1982). Upon receipt of the cost report, the intermediary analyzed the report, audited it if necessary, and furnished the provider with a written notice of program reimbursement ("NPR") setting forth its final determination of the total amount of reimbursement due under the program. 42 C.F.R. § 405.1803 (1982). The Provider Reimbursement Review Board ("PRRB"), an administrative appellate tribunal established by Congress, did not have jurisdiction under 42 U.S.C. § 1395oo(a) to review a reimbursement determination until the fiscal intermediary had issued an NPR.

 Effective October 1, 1983, Congress mandated a new formula -- the prospective payment system ("PPS") -- for Medicare hospital reimbursement. Pub. L. No. 98-21. Under this new system, hospitals are reimbursed prospectively, on the basis of a predetermined, specific rate for each "discharge," according to the patient's diagnosis (a "diagnostic related group" or "DRG"). See 42 U.S.C. § 1395ww(d). There are 467 such diagnosis related groups. See 49 Fed. Reg. 34,728, 34,780-90 (Aug. 31, 1984) for a list of the DRGs.

 Hospitals begin to receive prospective payments on the first day of their first cost year that begins on or after October 1, 1983. 48 Fed. Reg. 39,824 (Sept. 1, 1983) (codified at 42 C.F.R. § 405.470(d)(1)). The "base year" for determining the portion of the prospective rate reflecting the individual hospital's historical costs is the cost year of the hospital ending on or after September 30, 1982 and before September 30, 1983. 42 C.F.R. § 405.474(b)(1)(i). Reimbursement under the prospective payment system will continue to be handled by private organizations acting as fiscal intermediaries pursuant to contract with the Secretary. 42 U.S.C. § 1395h(a).

 As noted above, the "hospital specific portion" is determined under 42 C.F.R. § 405.474(b)(1)(i) by the fiscal intermediary. This determination does not constitute an NPR, but rather is the fiscal intermediary's pre-NPR estimate of 1982 base year costs. See Doctors General Hospital, Inc. v. Heckler, 613 F. Supp. 1036, 1038 (S.D. Fla. 1985). The determination made for the fiscal year ending in 1983 serves as the basis for determining the hospital specific portion for the entire transition period, i.e., during 1983 through 1987.

 JURISDICTION

 In its complaint, the plaintiff asserts that this Court has federal question jurisdiction pursuant to 28 U.S.C. § 1331; Title XVIII of the Social Security Act, 42 U.S.C. § 1395 et seq., the Medicare Act, particularly § 1395oo; the First, Fifth and Fourteenth Amendments to the United States Constitution; 28 U.S.C. § 1651, the All Writs Act; 28 U.S.C. § 2201 et seq., the Declaratory Judgment Act; and the law of pendent jurisdiction.

 The plaintiffs contend that pursuant to Bowen v. Michigan Academy of Family Physicians, 476 U.S. 667, 106 S. Ct. 2133, 90 L. Ed. 2d 623 (1986), its claims are cognizable in this Court on the basis of 28 U.S.C. § 1331 and it need not exhaust its administrative remedies under the Medicare Act. The Court disagrees. Michigan Academy was an action by a group of physicians challenging the validity of the Secretary's instructions and regulations authorizing payment of Medicare Part B benefits in different amounts for similar services. The unique circumstances in Michigan Academy presented a statutory scheme under Part B of the Medicare Act whereby Congress had neither provided for nor specifically precluded judicial review of challenges to the validity of the Secretary's instructions and regulations. In light of the void left in the statutory framework, the United States Supreme Court, relying on "the strong presumption that Congress intends judicial review of administrative action," 106 S. Ct. at 2135, held that there existed federal question jurisdiction over challenges to the validity of the Secretary's instructions and regulations. The United States Supreme Court in Michigan Academy held that federal question jurisdiction was available because there was no other avenue by which the plaintiff could seek relief and because Congress had not precluded review of such challenges by a federal court. Accord Colonial Penn Insurance Co. v. Heckler, 721 F.2d 431, 437 (3d Cir. 1983). Congress has, however, specifically provided for judicial review in federal district court of any final decision of the PRRB or any reversal, affirmance or modification thereof by the Secretary. 42 U.S.C. § 1395oo(f)(1). As pointed out by the United States Supreme Court in Heckler v. Ringer, 466 U.S. 602, 104 S. Ct. 2013, 80 L. Ed. 2d 622 (1984):

 
The third sentence of 42 U.S.C. § 405(h) made applicable to the Medicare Act by 42 U.S.C. § 1395ii, provides that § 405(g), [which requires administrative exhaustion] to the exclusion of 28 U.S.C. § 1331, is the sole avenue for judicial review for all "claims arising under" the Medicare Act.

 Id. 104 S. Ct. at 2021-22 (footnote omitted). It is clear, therefore, that constitutional challenges to the Secretary's regulations under Part A may be pursued in a federal court, but such challenges must be brought under the jurisdictional grants contained in the Medicare Act and in conformity with the same standards applicable to nonconstitutional claims arising under the Act. Weinberger v. Salfi, 422 U.S. 749, 762, 95 S. Ct. 2457, 2465, 45 L. Ed. 2d 522 (1975). See Heckler v. Ringer, 466 U.S. 602, 104 S. Ct. 2013, 2022, 80 L. Ed. 2d 622 (1984). This Court, therefore, does not have jurisdiction over the plaintiff's complaint pursuant to 28 U.S.C. § 1331, since as heretofore pointed out, challenges to the regulations under Part A must be brought under the jurisdictional grants provided for in the Medicare Act.

 In Salfi, however, the Supreme Court conceded that exhaustion requirements may be satisfied in certain circumstances without "full exhaustion of internal review procedures . . . * * * . . . after a hearing" by the Secretary. The Supreme Court stated:

 
Exhaustion is generally required as a matter of preventing premature interference with agency processes, so that the agency may function efficiently and so that it may have an opportunity to correct its own errors, to afford the parties and the courts the benefit of its experience and expertise, and to compile a record which is adequate for judicial review. . . . Plainly these purposes have been served once the Secretary has satisfied himself that the only issue is the constitutionality of a statutory requirement, a matter which is beyond his jurisdiction to determine, and that the claim is neither otherwise invalid nor cognizable under a different section of the Act. Once a benefit applicant has presented his or her claim at a sufficiently high level of review to satisfy the Secretary's administrative needs, further exhaustion would not merely be futile for the applicant, but would also be a commitment of administrative resources unsupported by any administrative or judicial interest.

 422 U.S. at 765-66, 95 S. Ct. at 2467 (citation omitted). Based on this statement in Salfi, our Third Circuit has held, that

 
if the legal issue is constitutional, since the administrative agency cannot decide that issue, no exhaustion is required . . . Where the legal issue is statutory, however, the agency does have authority to decide it, subject of course to judicial review. The test for exhaustion of a statutory issue in an individual case, we believe, should be whether the Secretary had taken a final position on that issue.

 Liberty Alliance of the Blind v. Califano, 568 F.2d 333, 345-46 (3d Cir. 1977) (citations omitted). See also Kuehner v. Schweiker, 717 F.2d 813, 817 (3d Cir. 1983). This exception to the exhaustion requirement, as hereinafter pointed out, is inapplicable to this action.

 As heretofore pointed out, the plaintiff also asserts jurisdiction under the All Writs Act, 28 U.S.C. § 1651. Although the All Writs Act is not an independent basis of jurisdiction, under very limited and exceptional circumstances, some courts have concluded that the Act empowers a court to preserve the status quo. See Federal Trade Commission v. Dean Foods Co., 384 U.S. 597, 603, 86 S. Ct. 1738, 1742, 16 L. Ed. 2d 802 (1966). For example, in V.N.A. of Greater Tift County, Inc. v. Heckler, 711 F.2d 1020 (11th Cir. 1983), cert. denied, 466 U.S. 936, 80 L. Ed. 2d 457, 104 S. Ct. 1908 (1984), the court explored at length the relationship between 42 U.S.C. § 405(h) and the All Writs Act, and ...


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