Indiana Law Review


Medicare Provider Reimbursement Disputes: Mapping the
Contorted Borders of Administrative and Judicial Review

I. Introduction

This nation spent 458 billion dollars—nearly eleven percent of the
Gross National Product—on health care in 1986.' The federal government
financed twenty-five percent of that amount through the Medicare and

Medicaid programs.^ Most of Medicare's expenditures were paid directly

to health care providers, primarily hospitals, as reimbursement for pro-

viding care and treatment to Medicare beneficiaries.^ The Department

of Health and Human Services [HHS] administers the Medicare program,
and the Secretary of HHS has broad authority to promulgate rules and
regulations affecting Medicare."* Health care providers have an enormous

stake in these rules, particularly those affecting reimbursement amounts.

Recent figures indicate that the average acute-care hospital receives twenty-

eight percent of its revenue directly from Medicare.^ Yet obtaining some
form of review of the regulations and decisions relating to payment

issues has proved to be difficult for Medicare providers. The jurisdictional

grants of the Medicare act which provide for administrative and judicial

review of provider disputes have been extensively litigated, often with

conflicting results.^ If the present state of the availability of review is

best described as being discordant, the future must be characterized as

sharply restricted. Dramatic changes in the substantive law governing

inpatient reimbursement have been specifically put beyond the scope of

administrative and judicial oversight."^

The health care provider dissatisfied with its Medicare reimbursement
must follow the procedures for obtaining review or face a collateral

^Currents, Hospitals, August 5, 1987, at 22.

^Hospitals receive approximately 70% of all Medicare reimbursements. United States
Budget in Brief - Fiscal Year 1987, at 81 (1986).

M2 U.S.C. § 405(a) (1982).
^Kinney, The Medicare Appeals System for Coverage and Payment Disputes: Achiev-

ing Fairness in a Time of Constraint , 1 Adm. L.J. 1, 5 (1987) (citing Office of Management
AND Budget, Budget of the United States, FY 1987, H.R. Doc. No. 143, 99th Cong.,
2d Sess. 5-108 (1986)).

^Informal research indicates that almost every federal case involving a challenge by

a provider to a reimbursement determination has required some discussion as to the

availabihty of jurisdiction. Many cases deal exclusively with jurisdiction. There are ap-
proximately 300 federal decisions interpreting 42 U.S.C. § 1395oo, the United States Code
section governing appeal of reimbursement determinations.

^See infra notes 158-70 and accompanying text.

705



706 INDIANA LAW REVIEW [Vol. 21:705

attack on his right to Htigate. This Note examines the jurisdictional

parameters governing administrative and judicial review of Medicare

provider reimbursement disputes. The Note deals exclusively with the

institutional provider^ receiving reimbursement under Medicare Part A.^

After an introductory overview to the Medicare program in general, the

jurisdictional statutes and decisions will be reviewed, first for availability

of administrative review, and then for access to judicial review. Fact

patterns that have met with consistent jurisdictional results will be de-

scribed, but the principal focus will be on those aspects of the statutes

on which the courts have failed to reach agreement. Those statutory

provisions that have been specifically precluded from administrative and

judicial review will be explained. Building upon this analytical foundation

of statutory interpretation and prior case law, the Note will assess the

likely direction of future jurisdictional issues. The concluding section

explains why a broad interpretation of Medicare jurisdictional statutes
is both needed by Medicare service providers and consistent with recent

Supreme Court holdings.

At issue in this analysis is the authority to challenge how billions
of federal dollars are spent. At a practical level, the jurisdictional

problems discussed herein are of critical importance to the fiscal well-

being of the hospitals seeking review. One study indicated that the average
size of a disputed Medicare payment at the administrative level of

adjudication during 1986 was $400,000.'^ The Secretary has shown he

intends to use the limited availability of review to his advantage against

any claim where there may be a colorable jurisdictional issue. Given the
sweeping nature of recent and proposed changes to Medicare reimburse-

ment regulations, the health care provider must have an understanding

of the jurisdictional roadblocks that may be encountered in litigation,
and how to overcome them.

II. An Overview of Medicare from the Provider's Perspective

Medicare was enacted in 1965 as part of the Social Security Act.^'

It is essentially a federally subsidized health insurance program admin-

istered by the Department of Health and Human Services.*^ Generally,

'See 42 U.S.C. § 1395x(u) (Supp. Ill 1985) for the definition of a qualifying

institutional provider.

^See infra notes 18-20 and accompanying text for an overview of Medicare Part

A.

^°See study reported in Burda, Ganeles Braces the PRRB for Change, Hospitals,
January 5, 1987, at 44.

"42 U.S.C. §§ 1395-1395ZZ (1982 & Supp. Ill 1985).
'^In the interest of maintaining consistency with the nomenclature used in the cases,

this Note will refer to either the HHS or the Secretary when discussing the administrative
responsibility for Medicare.



1988] MEDICARE PROVIDER REIMBURSEMENT 707

enrollment in Medicare is limited to citizens aged sixty-five and older,

and to certain disabled individuals.'^ Medicare is divided into two distinct

programs: Part A and Part B. The Part B program is made available
on a voluntary basis, and is set up similarly to a commercial insurance

company, providing insurance coverage primarily for physician fees.'"^

Although the jurisdictional borders of Part B regulations have been
extensively litigated, that topic will not be addressed here.*^ While some

significant interpretations of the Medicare jurisdictional statutes have

involved beneficiary claims, that category of claim will not be discussed.'^

This Note focuses on Medicare Part A jurisdiction from the institutional
health care provider perspective.'^ Medicare Part A provides insurance
for hospital and certain post-hospital expenses at no cost to the eligible

enrollee.'^ Only a hospital or other qualified provider of services is

eligible to receive payments under the Part A program,'^ and the provider
must agree not to charge the Medicare beneficiary for services received. ^°

Prior to 1983, hospitals were entitled to reimbursement from the

government for the actual, reasonable costs of furnishing care to Medicare

beneficiaries.^' At that time, and still today, each provider submitted a

year-end "cost report" detailing the costs associated with treating Med-
icare patients. 2^ In 1983, Congress enacted provisions creating a pro-

spective, rather than cost based system for reimbursing providers for

inpatient services. ^^ This new payment system^"^ was phased in over a
four year period ending in 1987.^^ For the most part, reimbursement

for inpatient services is no longer based on the hospital's costs incurred

in treating Medicare beneficiaries. However, reimbursement for psychi-

atric hospitals, outpatient services, capital expenses, bad debt and medical

education is still based on the cost reporting system. ^^

'H2 U.S.C. §§ 1395c, 1395o (1982 & Supp. Ill 1985).
''Id. § 1395J, 1395k(a).

'^Numerous decisions bantered around the availability of judicial review regarding

Part B determinations until the recent Supreme Court decision in Bowen v. Michigan
Academy of Family Physicians, 476 U.S. 667 (1986). See infra notes 187-93 and accom-
panying text.

'^Heckler v. Ringer, 466 U.S. 602 (1984); Weinberger v. Salfi, 422 U.S. 749 (1975).

'''See supra note 8.

'«42 U.S.C. § 1395d(a)-(c) (1982).

'H2 U.S.C. § 1395f(a) (1982 & Supp. Ill 1985).
"HI U.S.C. § 1395cc(a)(l) (1982).

^•/cf. § 1395f(b)(l).

2^42 C.F.R. §§ 413.20, 413.24(0 (1986). The cost report itself is a lengthy document

often containing hundreds of pages in the form of schedules and worksheets.

"42 U.S.C. § 1395ww(d) (Supp. Ill 1985).

^See infra notes 158-62 and accompanying text for a brief overview to the prospective

payment system.

^H2 U.S.C. § 1395ww(d)(l)(C) (Supp. Ill 1985).

^'Id. §§ 1395ww(a)(4), 1395ww(d)(l)(B).



708 INDIANA LAW REVIEW [Vol. 21:705

Although the HHS administers the program and, through the Sec-
retary, has the authority to promulgate rules and render decisions, the

daily supervision of the Medicare program is performed at the local

level by large insurance companies acting under contract as '^fiscal

intermediaries."^^ The intermediary is the first line of administrative

authority for the resolution of any type of Medicare dispute.^^

The Medicare provider files the annual cost report with the assigned

intermediary within three months following the end of the provider's

fiscal year.2^ The intermediary audits the report and issues a Notice of

Program Reimbursement, explaining any adjustments made to the pro-
vider's cost report. ^° A provider dissatisfied with the amount of reim-
bursement may request administrative review of his claim. A provider
still dissatisfied following an administrative hearing may bring suit in
federal court. Because all disputes must first begin at the administrative

level, this Note's discussion begins with an analysis of the availability

of administrative review. The inability to gain a jurisdictional foothold

at this level will preclude the possibility of later judicial review.

III. Administrative Review

Provider dissatisfaction with some aspect of its Medicare reimburse-

ment might be caused by a regulation thought to be invaUd, or by a

perceived inaccuracy in the application of a regulation by the inter-

mediary. To obtain and preserve the right to dispute the issue, there
are specific procedures and time-tables that the provider must observe.

In 1972, Congress created the Provider Reimbursement Review Board

[Board] as a forum for administrative review of intermediary determi-

nations.^' The Board adjudicates disputes arising from provider dissat-

isfaction with the amount of Medicare reimbursement due, or the timehness

of an intermediary determination. ^^ Section 1395oo of title 42, United

States Code, estabhshes the Board and delineates its authority." It also

''Id. § 1395h.

2«42 C.F.R. §§ 405.1803(a), 405.1809 (1986).

''See generally 42 U.S.C. § 1395oo(a)(l) (1982 & Supp. Ill 1985).
'""See generally id. § 1395oo(0.

''See S. Rep. No. 1230, 92d Cong., 2d Sess. 249 (1972).

'H2 U.S.C. § 1395oo(a)(l) (1982 & Supp. Ill 1985).
"Id. §§ 1395oo(a) and (d), which establish the Board and delineate its authority are

reproduced below:

(a) Establishment. Any provider of services which has filed a required cost report
within the time specified in regulations may obtain a hearing with respect to
such cost report by a Provider Reimbursement Review Board (hereinafter referred

to as the "Board") which shall be established by the Secretary in accordance

with subsection (h) of this section and (except as provided in subsection (g)(2)



1988] MEDICARE PROVIDER REIMBURSEMENT 709

establishes the criteria for the availabiHty of judicial review of provider

disputes.
^"^

of this section) any hospital which receives payments in amounts computed under

subsection (b) or (d) of section 1395ww of this title and which has submitted

such reports within such time as the Secretary may require in order to make

payment under such section may obtain a hearing with respect to such payment
by the Board, if

—

(1) such provider

—

(A) (i) is dissatisfied with a final determination of the organization

serving as its fiscal intermediary pursuant to section 1395h of

this title as to the amount of total program reimbursement due

the provider for the items and services furnished to individuals

for which payment may be made under this subchapter for the
period covered by such report, or

(ii) is dissatisfied with a final determination of the Secretary as

to the amount of the payment under subsection (b) or (d) of

section 1395ww of this title,

(B) has not received such final determination from such intermediary

on a timely basis after filing such report, where such report

complied with the rules and regulations of the Secretary relating

to such report, or

(C) has not received such final determination on a timely basis after

filing a supplementary cost report, where such cost report did

not so comply and such supplementary cost report did so comply,

(2) the amount in controversy is $10,000 or more, and

(3) such provider files a request for a hearing within 180 days after notice of

the intermediary's final determination under paragraph (l)(A)(i), or, with

respect to appeals under paragraph (l)(A)(ii), 180 days after notice of the

Secretary's final determination, or with respect to appeals pursuant to

paragraph (1)(B) or (C), within 180 days after notice of such determination

would have been received if such determination had been made on a timely

basis. . . .

(d) Decisions of Board. A decision by the Board shall be based upon the record
made at such hearing, which shall include the evidence considered by the in-

termediary and such other evidence as may be obtained or received by the
Board, and shall be supported by substantial evidence when the record is viewed

as a whole. The Board shall have the power to affirm, modify, or reverse a

final determination of the fiscal intermediary with respect to a cost report and

to make any other revisions on matters covered by such cost report (including

revisions adverse to the provider of services) even though such matters were not

considered by the intermediary in making such final determination.

^M2 U.S.C. § 1395oo(f) (1982 & Supp. 1985) estabUshes the criteria for judicial
review and is set out below:

(f) Finality of decision; judicial review; determinations of Board authority;

jurisdiction; venue; interest on amount in controversy.

(1) A decision of the Board shall be final unless the Secretary, on his own
motion, and within 60 days after the provider of services is notified of the

Board's decision, reverses, affirms, or modifies the Board's decision. Pro-

viders shall have the right to obtain judicial review of any final decision



710 INDIANA LAW REVIEW [Vol. 21:705

A. The Jurisdiction of the Board

The Board is authorized to act in an appellate capacity, in that it

may "affirm, modify, or reverse a final determination of the fiscal
intermediary with respect to a cost report. "^^ It also can act as a fact-

of the Board, or of any reversal, affirmance, or modification by the

Secretary, by a civil action commenced within 60 days of the date on which

notice of any final decision by the Board or of any reversal, affirmance,

or modification by the Secretary is received. Providers shall also have the

right to obtain judicial review of any action of the fiscal intermediary which

involves a question of law or regulations relevant to the matters in con-

troversy whenever the Board determines (on its own motion or at the request
of a provider of services as described in the following sentence) that it is

without authority to decide the question, by a civil action commenced within

sixty days of the date on which notification of such determination is received.

If a provider of services may obtain a hearing under subsection (a) of this
section and has filed a request for such a hearing, such provider may file
a request for a determination by the Board of its authority to decide the

question of law or regulations relevant to the matters in controversy (ac-

companied by such documents and materials as the Board shall require for

purposes of rendering such determination). The Board shall render such

determination in writing within thirty days after the Board receives the

request and such accompanying documents and materials, and the deter-

mination shall be considered a final decision and not subject to review by

the Secretary. If the Board fails to render such determination within such

period, the provider may bring a civil action (within sixty days of the end
of such period) with respect to the matter in controversy contained in such

request for a hearing. Such action shall be brought in the district court of

the United States for the judicial district in which the provider is located

(or, in the action brought jointly by several providers, the judicial district

in which the greatest number of such providers are located) or in the District

Court for the District of Columbia and shall be tried pursuant to the

appHcable provisions under chapter 7 of title 5, notwithstanding any other

provisions in section 405 of this title. Any appeal to the Board or action
for judicial review by providers which are under common ownership or
control or which have obtained a hearing under subsection (b) of this section

must be brought by such providers as a group with respect to any matter

involving an issue common to such providers.
(2) Where a provider seeks judicial review pursuant to paragraph (1), the amount

in controversy shall be subject to annual interest beginning on the first day

of the first month beginning after the 180-day period as determined pursuant

to subsection (a)(3) of this section and equal to the rate of return on equity

capital established by regulation pursuant to section 1395x(v)(l)(B) of this

section and in effect at the time the civil action authorized under paragraph

(1) is commenced, to be awarded by the reviewing court in favor of the

prevailing party.

(3) No interest awarded pursuant to paragraph (2) shall be deemed income or
cost for the purposes of determining reimbursement due providers under

this chapter.

'HI U.S.C. § 1395oo(d) (1982).



1988] MEDICARE PROVIDER REIMBURSEMENT 711

finder, by examining witnesses and allowing the presentation of evidence

at the Board hearing. ^^ A determination by the Board is considered final,
unless the Secretary exercises the statutory right to overrule the Board, ^^

or unless the decision is overturned on appeal by a federal district court. ^^

The Board is bound by the rulings of the Secretary in making its
determinations.^^

The Board does not have the authority to consider questions of law

regarding the validity of a rule or regulation promulgated by the Secretary

or Congress. "^^ Although provision has been made to allow for expedited
judicial review when the Board has no authority to decide an issue, all
claims still must be initially submitted to the Board, so that it can

determine in the first instance whether it has authority to resolve the

dispute. "^^ But the Board itself has other jurisdictional limitations, as

well as some procedural requisites that have been interpreted as being

jurisdictional in nature. These limitations are discussed in the following

sections.

B. Amount in Controversy

The first relevant determination applicable to obtaining a hearing

before the Board is the amount in controversy. Generally, the Board is
not authorized to grant a hearing when the amount in controversy is
less than $10,000.^^ However, review would be allowed even where the

amount in controversy is less than $10,000 if the provider can effectuate

a group appeal. If all the providers' claims in the group ''involve a

common question of fact or interpretation of law or regulations," then
a group appeal could be taken before the Board, as long as all the

other jurisdictional requirements have been met and the aggregate amount
in controversy exceeds $50,000. "^^

The courts would probably adopt a liberal interpretation of this

amount in controversy requirement. This would be consistent with general

Ml U.S.C. § 1395oo(c) (Supp. Ill 1985).
'HI U.S.C. § 1395oo(0 (1982 & Supp. Ill 1985). See also note 34.
''Id.

'H2 C.F.R. § 405.1867 (1986).

'•Ml U.S.C. § 1395(f)(1) (Supp. Ill 1985); see also Hospital Ass'n v. Secretary of

HHS, 820 F.2d 533, 539 (1st Cir. 1987).
'*'5ee infra notes 110-16 and accompanying text for a discussion of the 1980 amend-

ments providing for expedited judicial review.

^H2 U.S.C. § 1395oo(a)(2) (Supp. Ill 1985). If the amount in controversy is less

than $10,000 but more than $10(X), the provider may obtain a hearing with the intermediary.
42 C.F.R. § 1809(b) (1986). The details of this type of administrative hearing are explained

in 42 C.F.R. §§ 1809-1833 (1986).

'H2 U.S.C. § 1395oo(b) (Supp. Ill 1985).



712 INDIANA LAW REVIEW [Vol. 21:705

federal law."*^ And in one of the few cases where the Secretary challenged
the Board's jurisdiction on this point, the hospitals involved were per-

mitted to aggregate cost reports for more than one year in order to
meet the $50,000 requirement/^

C. Timeliness of Request

Section 1395oo also requires that the provider file a request for a

hearing within 180 days following notice of the intermediary's final

determination of total program reimbursement/^ This provision has been

generally accepted to be jurisdictional in nature/^ Thus, a provider

wishing to take advantage of a recent favorable court decision or in

any way challenge his reimbursement for a given cost year must act
promptly or lose the right to review.

This restriction seems simple enough, but has been made compHcated
by a federal regulation which gives the Board the authority to extend

the time hmit for accepting appeals for up to three years on a showing

of "good cause. '"^^ This ruling conflicts with the general rule that

administrative bodies do not have the authority to extend the jurisdictional

Umitations imposed by Congress."*^ For this reason, the appellate court

in 5^. Joseph's Hospital v. Heckler^^ found the regulation to be illegal

and without force. Thus, health care providers in the Eighth Circuit

may not request an extension to appeal. But in the Ninth Circuit, the
appellate court relied on the general rule that an agency interpretation

will be given deference if found to be a permissible construction of the

statute being construed,^' and upheld the validity of the rule in Western

•^The leading case on liberally construing federal amount in controversy requirements

is St. Paul Mercury Indem. v. Red Cab Co., 303 U.S. 283 (1938). In this oft-cited case,
the Court stated that it must be apparent to a legal certainty that the claim is really for

less than the jurisdictional amount in order to dismiss the case.

^'Cleveland Mem. Hosp., Inc. v. CaUfano, 594 F.2d 993 (4th Cir. 1979).
M2 U.S.C. § 1395oo(a)(3) (Supp. Ill 1985). Notice, in this context, has been

interpreted to occur when the provider actually receives notice of a determination, and

not when the determination is made. Sun Towers, Inc. v. Heckler, 725 F.2d 315 (5th

Cir.), cert, denied, 466 U.S. 936 (1984).

''See St. Joseph's Hosp. v. Heckler, 786 F.2d 848, 853 (8th Cir. 1986); V.N.A. of

Greater Tift County v. Heckler, 711 F.2d 1020 (11th Cir. 1983); Miami Gen. Hosp. v.

Bowen, 652 F. Supp. 812, 814 (S.D. Fla. 1986).
^«42 C.F.R. § 1841(b) (1986).

'^See generally Citizens State Bank v. FDIC, 751 F.2d 209, 217 (8th Cir. 1984);
Atchison, T.&S.F. R.R. v. Interstate Commerce Comm'n, 607 F.2d 1199, 1203 (7th Cir.
1979).

5°786 F.2d 848, 853 (1986).

^^See, e.g.. Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467

U.S. 837 (1984); Blum v. Bacon, 457 U.S. 132, 141 (1982); Memorial Hosp. v. Heckler,
706 F.2d 1130, 1134 (11th Cir. 1983).



1988] MEDICARE PROVIDER REIMBURSEMENT 713

Medical Enterprises, Inc. v. Heckler. ^^ Noting that the language of section

1395oo states that a provider '*may" obtain a hearing if the jurisdictional

requirements are met, the court found this language ambiguous enough

to permit the Board to waive the 180 day requirement if it so chose."

Although the regulation does not seem unreasonable, the Eighth

Circuit's holding that the 180 day limitation is not subject to discretionary

extension is the better rule of law and makes more practical sense. As

the St. Joseph's court noted, a House report discussing this provision

states that an '^appeal must be filed within 180 days. . . ."^"^ Congress

could have avoided the use of the word ''must" or inserted a clause

indicating that appeal may be taken within such time as the Secretary
may allow. ^^ Further, it is axiomatic in federal courts that the issue of
subject matter jurisdiction may not be waived. ^^ There is no justification
for not applying a similar rule to administrative bodies acting in a

judicial capacity. From a practical standpoint given the extensive backlog
of appeals now pending before the Board, it is unlikely that a provider
could show convincing reasons for missing a filing deadline. ^^

Because the Supreme Court will probably never entertain argument

on this question, the issue will probably be adjudicated on a case by

case basis. Clearly, there is a substantial risk involved in allowing the

180 day fiUng deadline to pass.

D. Matters Covered on a Cost Report

Another issue that has caused dissent among the courts is the question
of what constitutes a matter covered on a cost report. Generally, section

1395oo provides that any health service provider who has filed a timely
cost report may obtain a hearing before the Board "with respect to
such cost report ... [if the provider is] dissatisfied with a final deter-

mination of . . . [the intermediary] as to the amount of total program

reimbursement due ... for the period covered by the report . . . ."^^

"783 F.2d 1376, 1379-80 (9th Cir. 1986).

''Id. at 1380.

^"786 F.2d at 851 (quoting H.R. Rep. No. 231, 92d Cong., 2d Sess., reprinted in

1972 U.S. Code Cong. & Admin. News 4989, 5094).
''Id.

*^Fed. R. Civ. P. 12(h); see also Laffey v. Northwest Airlines, Inc., 567 F.2d 429,

474 (D.C. Cir. 1976), cert, denied, 434 U.S. 1086 (1978).

"In an interview early in 1987, Paul Morton Ganeles, the chairman of the Provider

Reimbursement Review Board, stated that the Board was "set up to handle a caseload

ten percent of what we have." At that time, the Board had 3,259 pending appeals. Burda,

Ganeles Braces the PRRB for Change, Hospitals, January 5, 1987, at 44.
'HI U.S.C. § 139500(a) (1982 & Supp. Ill 1985). The statute also authorizes the

provider to obtain a hearing before the Board with respect to the cost report if the

provider has not received a timely determination by the intermediary. See supra note 33

for a complete text of section 1395oo(a).



714 INDIANA LAW REVIEW [Vol. 21:705

This section further provides that the Board has the authority to *' affirm,

modify, or reverse a final determination of the fiscal intermediary with

respect to a cost report and to make any other revisions on matters
covered by such cost report . . . even though such matters were not

considered by the intermediary in making such final determination. "^^

In the routine Board dispute, then, a provider with a dispute involving

an amount in controversy in excess of $10,000 files for a hearing within
180 days of receiving the Notice of Program Reimbursement. The prov-
ider's complaint will center on some aspect of an expense claimed on
the cost report but denied by the intermediary in its final reimbursement

determination. But an important issue arises when a provider disagrees
with a regulation, but files the cost report in accordance with the disputed

rule. By strictly conforming to cost reporting regulations, many providers
lost their right to administrative and judicial review. The general reasoning
of the Board in these cases was that by not including the disputed cost

on the cost report, there was no '*final determination" of the intermediary
**with respect to" a cost report for the Board to review.^^ In 1979, the

Board began to refuse to accept jurisdiction to hear appeals concerning

costs that had been '* self-disallowed" from the cost report. ^^

Until April 4, 1988, when the Supreme Court decided Bethesda
Hospital V. Bowen,^^ the self-disallowance issue had been frequently

litigated and with divergent results. The leading opinion on this issue
since 1984 had been Athens Community Hospital v. Schweiker.^^ In that
case, the provider group had argued unsuccessfully that section 1395oo(d)

gave the Board the authority to review issues *'even though such matters

were not considered by the intermediary in making such final deter-

'^42 U.S.C. § 1395oo(d) (1982). See supra note 33 for the complete text.
«'42 U.S.C. § 1395oo(a) (1982 & Supp. Ill 1985). See University of Cincinnati v.

Secretary of HHS, 809 F.2d 307, 310 (6th Cir. 1987); Athens Community Hosp. v.
Schweiker, 743 F.2d 1, 8 (D.C. Cir. 1984).

^'Tallahassee Mem. Regional Medical Center v. Bowen, 815 F.2d 1435 (11th Cir.
1987), involved a hospital that had "self-disallowed" costs. An attorney in that case has
criticized the Board for penalizing hospitals that were attempting to comply with Medicare

rules and regulations, especially since the hospitals were never made aware of the impli-
cations of omitting disputed costs from their cost reports. "The PRRB first used the
policy in 1979 and acted like everyone knew about it. Hospitals were innocently led to
slaughter." Burda, "Self-disallowed" Costs: Issue to High Court?, Hospitals, July 20,
1987 at 60.

^^108 S. Ct. 1255 (1988), rev'g 810 F.2d 558 (6th Cir. 1987).

"743 F.2d 1 (D.C. Cir. 1984). This case is important for two reasons. First, the

opinion, written by Judge Robert Bork, is carefully reasoned and well written. Second,

District of Columbia Circuit decisions are highly influential because providers have the

option of litigating either in their home district court or in the District of Columbia court.
42 U.S.C. § 139500(f) (1982 & Supp. Ill 1985).



1988] MEDICARE PROVIDER REIMBURSEMENT 715

mination,"^'^ The District of Columbia Court of Appeals held that in

order for jurisdiction to exist, a claim for reimbursement must be made
either by directly claiming the disputed cost on the report or by appending

a statement to the cost report claiming entitlement to reimbursement for

the disputed cost.^^ This line of reasoning had been followed in decisions

by the Courts of Appeals for the Fourth^^ and Sixth circuits. ^^ But more

recent appellate decisions had shown a willingness to find jurisdiction

in these self-disallowed cost situations.^^ The Supreme Court granted

certiorari in Bethesda Hospital to resolve what had become a conflict

among the Courts of Appeals.^^

In the Bethesda Hospital case, a group of hospitals sought to chal-

lenge a regulation governing reimbursement for medical malpractice in-

surance costs. ^^ But two of the plaintiff hospitals had filed their cost

reports in accordance with the regulation they sought to challenge, and

the Board refused to hear their claims.^* The district court ordered the

Board to accept jurisdiction but that decision was reversed by the Sixth

Circuit Court of Appeals.^^

The Supreme Court reversed, holding that when a provider self-

allows a cost in accordance with a regulation, the right to challenge the

vaHdity of the rule and the reimbursement amount for that cost is not

lost."^^ The decision was predicated on Justice Kennedy's interpretation

of the language of section 1395oo(a)(l)(A)(i), which requires that a

provider must be "dissatisfied with a final determination of . . . its

fiscal intermediary . . . ."^"^ The Court characterized as "strained" the

Secretary's view that a provider cannot be dissatisfied with an inter-

mediary's decision to reimburse the amount indicated in the cost report. ^^

The Court stated:

It is clear, however, that the submission of a cost report in full

compliance with the unambiguous dictates of the Secretary's

rules does not, by itself, bar the provider from claiming dis-

^Athens, 743 F.2d, at 5, (quoting 42 U.S.C. § 1395oo(d) (Supp. Ill 1985)). See

supra note 33 for the complete text of this statute.

^'Athens, 743 F.2d at 10.

^Community Hosp. v. HHS, 770 F.2d 1257 (4th Cir. 1985).
^^Baptist Hosp. East v. Secretary of HHS, 802 F.2d 860 (6th Cir. 1986).
^'See Adams House Health Care v. Heckler, 817 F.2d 587 (9th Cir. 1987); Tallahassee

Mem. Regional Medical Center v. Bowen, 815 F.2d 1435 (11th Cir. 1987).
^Bethesda Hosp. v. Bowen, 108 S. Ct. 1255, 1258 (1988).

™/cf. at 1257.

''Id.

''Id.

''Id. at 1258.

''Id. (quoting 42 U.S.C. § 1395oo(a)(l)(A)(i) (Supp. Ill 1985)).

"Id.



716 INDIANA LAW REVIEW [Vol. 21:705

satisfaction with the amount of reimbursement allowed by those

regulations .... We conclude that petitioners could claim dis-
satisfaction, within the meaning of the statute, without incor-

porating their challenge in the cost reports filed with their fiscal

intermediaries.^^

The Court found further support for its position in section 1395oo(d),
which permits the Board to '*make any other revisions on matters covered

by such cost report . . . even though such matters were not considered

by the intermediary in making such final determinations. ''^"^

While the Bethesda Hospital decision settled the question of self-

disallowed costs when a regulation is being challenged, the Court did
not address whether a provider could obtain Board review of reim-

bursement determinations when providers simply fail to request reim-
bursement to which they are entitled. But the Court did hint that a

provider in that situation would ''stand on different ground" than the

petitioners in Bethesda Hospital.''^ Moreover, the Eleventh Circuit Court

of Appeals had already taken the position that although self-disallowance

in compHance with regulations does not create a jurisdictional bar,^^

failure to include allowable costs does preclude Board jurisdiction. ^°

Following Bethesda Hospital, it seems likely that the other federal courts

will adopt the same position.

E. A Final Determination of the Intermediary

The question of what constitutes a final determination by the in-

termediary has also caused conflict among federal courts. As a general
rule, issuance of a Notice of Program Reimbursement satisfies the re-

quirement of a final determination by the intermediary.^^ However,

instances have arisen in the past, and are likely to occur again, where

an intermediary must make a determination affecting provider payment
prior to the issuance of the reimbursement notice. The question then

arises over whether the Board can hear an appeal on this intermediate

determination, or whether the provider must await the formal issuance

of the reimbursement notice. Although most courts which have addressed

this question have allowed the Board to hear these appeals, some contrary

'^Id. at 1258-59.

-"Id. at 1259 (quoting 42 U.S.C. § 1395oo(d) (1982)).

'^Id.

^^Tallahassee Mem. Regional Medical Center v. Bowen, 815 F.2d 1435 (11th Cir.
1987).

»°North Broward Hosp. Dist. v. Bowen, 808 F.2d 1405 (11th Cir. 1987).

^'See 42 U.S.C. § 1395oo(a)(l)(A) (Supp. Ill 1985); Charter Medical Corp. v. Bowen,

788 F.2d 728, 733 (11th Cir. 1986).



1988] MEDICARE PROVIDER REIMBURSEMENT 111

authority exists. This issue has arisen in the context of amendments to

section 1395oo, adopted in 1983 as part of the shift to prospective

reimbursement.^^

At the same time Congress was overhauUng the substantive law

governing Medicare reimbursement in 1983, conforming amendments were

made to the jurisdictional provisions as well.^^ One of the amendments
permitted a hearing before the Board if the provider was "dissatisfied

with a final determination of the Secretary as to the amount of payment"

under the new prospective reimbursement system. ^"^ Under the prospective

payment system, intermediaries were required to make a preliminary
determination of each hospital's current average cost of treatment of

Medicare patients, so this amount could be blended into the prospective

payment amount.^^ In reliance on the conforming amendments, the Board

began accepting jurisdiction to review provider complaints regarding

intermediary determinations of average cost.^^ The Secretary then issued

a ruling [HCFAR 84-1] stating that an intermediary's estimation of base
year costs is not a final determination of program reimbursement and

accordingly, the Board is without jurisdiction to review the intermediary's

determination until after the issuance of a reimbursement notice for the

first year under the new system. ^^ Pursuant to the Secretary's new rule,
the Board began refusing to accept jurisdiction on this issue until after

the filing of a cost report and issuance of a Notice of Program Re-

imbursement for the year in question. The hospitals that challenged the

vaUdity of HCFAR 84-1 in federal district court were all successful. ^^
In five federal appeals, the providers have obtained affirmation in four

cases. ^^ Only the Eighth Circuit, in Springdale Memorial Hospital v.

Bowen,'^^ has been unwilling to require the Board to accept jurisdiction.

^^See infra notes 158-70 and accompanying text for an overview of the prospective

payment system.

"42 U.S.C. § 1395(a) (1982). See Pub. L. No. 98-21, § 602, 97 Stat. 65, 163-66

(1983).

«M2 U.S.C. § 1395oo(a)(l)(A)(ii) (Supp. Ill 1985). See supra note 33 for the complete

text.

''See 42 C.F.R. §§ 412.70 - 412.74 (1986); 42 U.S.C. § 1395ww(d)(l) (Supp. 1985).

*^In an appendix to one of the cases on this issue, the court indicated that the

Board had accepted jurisdiction over 31 appeals prior to the issuance of HCFAR 84-1.
Washington Hosp. Center v. Bowen, 795 F.2d 139, 142 (D.C. Cir. 1986).

8^9 Fed. Reg. 22,413, 22,415 (1984).

»«See Doctors Hosp., Inc. v. Bowen, 811 F.2d 1448, 1452 n.2 (11th Cir. 1987).

'^See Doctors Hosp., Inc. v. Bowen, 811 F.2d 1448 (11th Cir. 1987); Sunshine Health

Sys., Inc. V. Bowen, 809 F.2d 1390 (9th Cir. 1987); St. Francis Hosp. v. Bowen, 802

F.2d 697 (4th Cir. 1986); Washington Hosp. Center v. Bowen, 795 F.2d 139 (D.C. Cir.

1986). Largely because it came from the District of Columbia court, the Washington case

is considered to be the leading decision.

^818 F.2d 1377 (1987).



718 INDIANA LAW REVIEW [Vol. 21:705

Although the weight of authority favors finding HCFAR 84-1 to be
an unlawful exercise of administrative authority, that finding is incon-

sistent with the plain language of the conforming amendments. In amend-

ing section 1395oo, Congress inserted the provision for review of

prospective payment questions under subpart (a), rather than creating

a separate subpart. Subpart (a) plainly anticipates that Board review is

made *'with respect to [a] cost report.*'^' The Secretary's interpretation
is reasonable, and not arbitrary or capricious, as most courts have

found. ^^ If Congress had expressly intended to exempt prospective pay-

ment determinations from the cost report requirement, the amendments
could have been incorporated into a separate subpart. Further evidence

that Congress did not intend the new review provisions to alter the cost
report requirement can be found in Congress' use of the term "con-

forming amendments." The Supreme Court has implied that when Con-
gress designates an amendment as being "conforming," this is evidence
that it should be treated as a non-substantive reaction to related leg-

islation.^^ Therefore, the Eighth Circuit's reasoning in Springdale offers

the better analysis, based on strict statutory construction.

Yet whatever the merits of the arguments on this issue, HCFAR
84-1 is still a dubious exercise of administrative authority. At best, the
ruling merely delayed the inevitable. By requiring providers to wait until
the end of the year to file appeals, the Secretary created a situation

where the Board was hit by a wave of appeals, rather than a continuous

stream. This has the effect of slowing down an already overburdened
review system. ^"^ If future changes in Medicare law require preliminary

determinations by the fiscal intermediaries, the dissatisfied provider should

look first to the language of any conforming amendments and legislative
history for applicable changes in availability of review. If there are no

accompanying changes in the jurisdictional provisions, current law favors

the availability of administrative review prior to the issuance of the

Notice of Program Reimbursement. Moreover, the Administrative Con-

ference, an independent federal agency responsible for finding ways in

which other agencies can be improved, has recently recommended to the
HHS that the Board's jurisdictional authority be expanded to hear appeals
in a more timely fashion. ^^

^'42 U.S.C. § 1395oo(a) (Supp. Ill 1985). See supra note 33 for the complete text.

'^Arbitrary and capricious is the standard used in determining if the actions of an

administrative agency are in violation of the Administrative Procedure Act. 5 U.S.C. §

706(a)(A) (Supp. Ill 1985).

^^CBS, Inc. V. FCC, 453 U.S. 367, 381-82 (1981).
'"See supra note 57.

'^Burda, Ganeles Braces the PRRB for Change, Hospitals, January 5, 1987, at 44.
This recommendation was based on a report submitted to the Administrative Conference



1988] MEDICARE PROVIDER REIMBURSEMENT 719

Finally, federal regulations permit the reopening and revision of a

decision by the intermediary or the Board any time within three years

of the date of notice of the determination.^^ A motion for reopening
can be made by either the rendering body or the affected provider, and
is permitted if new and material evidence has been submitted, an obvious
error has been made, or the previous determination is inconsistent with

the law.^^ However, only the authority rendering the decision has ju-

risdiction to reopen. Thus, a determination by the intermediary not to

reopen is not reviewable by the Board.^^

After obtaining administrative review and being defeated on the

merits, the provider must now look to the next available avenue of
appeal—the federal courts.

IV. Judicial Review

The Social Security Act prohibits judicial review of any claim arising

under Medicare through the usual jurisdictional channel of section 1331,

title 28, United States Code: claims involving federal questions. ^^ Judicial

review is only available where provided in the Act itself.'^ For the

Medicare provider, judicial review, like administrative review, is available

only through section 1395oo.^^'

Except for certain statutory provisions that have been put beyond

the reach of administrative or judicial scrutiny, judicial review of any

final determination of the Board, or of any subsequent modification of

a Board decision by the Secretary is generally available.'^ Although this

grant of authority seems straightforward, just as with administrative

review, the courts have been called upon many times to discover the
true intent of Congress. Moreover, just as with administrative review,

the courts have not always achieved consistent results. The following

sections examine the various prerequisites to judicial review in detail.

by Eleanor Kinney, Assistant Professor of Law and Director of the Center for Law and
Health, Indiana University School of Law, Indianapohs. An updated version of that report
was recently published: Kinney, The Medicare Appeals System for Coverage and Payment

Disputes: Achieving Fairness in a Time of Constraint, 1 Adm. L.J. 1 (1987).
^^42 C.F.R. § 405.1885(a) (1987).

'^Id. § 405.1885(c).

''42 U.S.C. § 405(h) (1982), made expressly applicable to Medicare by 42 U.S.C.

§ 1395ii (1982).

'o°M § 405(g).
•°'42 U.S.C. § 1395oo(f) (1982 i& Supp. Ill 1985). See supra note 33 for the complete

text.

•°^/cf. § 1395oo(f), (g).



720 INDIANA LAW REVIEW [Vol. 21:705

A. Timeliness of Request

Civil actions against the Secretary must be commenced within 60
days of notice of a final determination. ^^^ Unlike the administrative

timeliness requirement, however, this rule is considered to be a statute

of limitations, rather than a jurisdictional bar.'^'* This distinction is

critical, in that statutory timeliness is a waivable requirement, whereas

subject matter jurisdiction is not.'^^ By way of illustration, in a 1984
suit in which the provider was late in filing, the court refused to dismiss

the case because the Secretary was considered to have waived the time-

liness issue by not raising it as an affirmative defense in his responsive

pleading. ^^^ Courts have uniformly held that the 60 day period commences

upon receipt of notice by the provider and not at the time of issuance

of the final determination.^^

B. Venue

A civil action may be brought either in the district court for the
district in which the provider is located or in the district court for the

District of Columbia. ^°^ This provision is one of the reasons why the
decisions of the District of Columbia Court of Appeals are so influential.

If the District of Columbia court adopts a provider-favorable position,

an incentive is created for providers to commence their actions there,
rather than in their home jurisdiction.

When several providers aggregate their appeals, their "location" for
the purpose of venue is considered to be the judicial district in which

the greatest number of providers are located. ^°^

C. Expedited Judicial Review and the Requirement of Exhaustion of
Administrative Remedies

Prior to 1980, a provider challenging the validity of a statute or

regulation was required to bring an appeal before the Board, despite

the Board's lack of authority to invalidate regulations promulgated by

'°'M § 1395oo(f)(l).

'"^See Lloyd Nolan Hosp. & Clinic v. Heckler, 762 F.2d 1561 (11th Cir. 1985);
Alexandria Hosp. v. Heckler, 586 F. Supp. 581 (E.D. Va. 1984); Bedford County Mem.
Hosp. V. Heckler, 583 F. Supp. 367 (W.D. Va. 1984).

'o^Laffey v. Northwest Airlines, Inc., 567 F.2d 429, 474 (D.C. Cir. 1976), cert, denied,

434 U.S. 1086 (1978). See Fed. R. Civ. P. 12(h)(3).

'"^Alexandria Hosp., 586 F. Supp. 581 (E.D. Va. 1984).

>°'See Lloyd Nolan Hosp. & Clinic v. Heckler, 762 F.2d 1561 (11th Cir. 1985); Sun
Towers, Inc. v. Heckler, 725 F.2d 315 (5th Cir. 1984).

'°H2 U.S.C. § 139500(0(1) (Supp. 1985).



1988] MEDICARE PROVIDER REIMBURSEMENT 721

the HHS.''^ Only after the Board renders a decision could the provider

then bring his action in federal court. This requirement of "exhaustion

of administrative remedy" is a cornerstone of judicial review of ad-

ministrative action, and has been rigidly enforced in the Medicare context.^''

Resourceful providers have sought to circumvent this requirement in a

number of ways: through mandamus jurisdiction, '^^ through the Ad-
ministrative Procedure Act,'^^ and through assertion that no other avenue

of appeal exists.''^ But the courts have consistently stated that resort to

the administrative process, despite its prospective futility, was a prereq-

uisite to federal jurisdiction. In 1980, however. Congress attempted to

help providers avoid "time consuming and irrelevant administrative review

merely to have the right to bring suit" by giving them "the right to

immediate judicial review in instances where the Board determines it

lacks jurisdiction to grant the relief sought."''^ With these commendable

intentions, section 1395oo was amended to provide for expedited judicial
review.''^

Despite the good intentions of Congress, the amendment has done
little to make the appeals process more efficient. The statute still requires
the provider to have met the jurisdictional requirements of subpart (a)

of section 1395oo before the Board renders a determination of whether

expedited judicial review is appropriate.^'^ Thus, the provider must file

a cost report, obtain a determination by the intermediary, file an appeal

for expedited review to the Board, and then obtain a ruling on whether

the jurisdictional requirements of subpart (a) have been met, prior to

the beginning of the 30 day period within which the Board must render

a determination on the availability of expedited judicial review.''^ The

reality of expedited review is in stark contrast to the words of Con-

gressman Heftel, in explaining the amendment:

""Hospital Ass'n v. Secretary of HHS, 820 F.2d 533, 539 (1st Cir. 1987).
'''See, e.g.. Heckler v. Ringer, 466 U.S. 602, 617 (1984); Daniel Freeman Mem.

Hosp. V. Schweiker, 656 F.2d 473 (9th Cir. 1981); Association of Am. Medical Colleges
V. Califano, 569 F.2d 101 (D.C. Cir. 1977).

"^See, e.g., Ohio Hosp. Ass'n v. Heckler, 654 F. Supp. 729 (S.D. Ohio 1986).

Mandamus jurisdiction might be available if the matter in controversy was wholly procedural
in nature, and the Secretary owed a clear, nondiscretionary duty. Ellis v. Blum, 643 F.2d

68 (2d Cir. 1981).

"^See, e.g., Chelsea Community Hosp. v. Michigan Blue Cross, 630 F.2d 1131, 1133
(6th Cir. 1980). See generally Califano v. Sangers, 430 U.S. 99 (1977).

"^Good Samaritan Medical Center v. Secretary of HHS, 776 F.2d 594, 597-98 (6th
Cir. 1985).

"^H.R. Rep. No. 1167, 96th Cong., 2d Sess. 394 (1980).

"H2 U.S.C. § 1395oo(0(l) (Supp. Ill 1985). See supra note 33 for complete text.
"^42 C.F.R. § 405.1842(b)(2) (1987).

"«42 U.S.C. § 139500(f)(1) (Supp. Ill 1985).



722 INDIANA LAW REVIEW [Vol. 21:705

Specifically, under current law providers may not seek judicial
review of regulations of policies of [the HHS] until after the
provider has gone through a long, tortuous process of preparing

and filing cost reports; awaiting a decision by the fiscal inter-

mediary; and appealing that decision to the PRRB, which must
declare what everybody already knows—that the PRRB has no
authority to decide the issues .... Our bill would change this
situation by allowing the provider to obtain immediate judicial

review in such cases—namely, those in which the PRRB has no
authority to decide the case.^^^

If Congress is serious about improving the review process, then the

law should be amended to allow providers to bypass the Board completely
when challenging the validity of a statute or regulation, as long as the
provider can show standing to sue.^^o jj^g ehmination of the Board from
this type of proceeding would have the additional benefit of facihtating

the use by providers of the class action suit. The Supreme Court has
endorsed the use of certification of nation-wide classes to resolve actions

involving administrative challenges. '^^ The class action is particularly
appropriate in the Medicare context, where the fiUng of a multiplicity

of individual suits has resulted in differing results for similarly situated

individuals.'^^

D. The Mootness Problem

One of the more complex and potentially consequential jurisdictional
problems has arisen out of litigation involving a 1979 rule which sub-

stantially reduced Medicare reimbursement for a hospital's medical mal-

practice insurance costs. Every challenge to the legality of the 1979 rule

was successful; '^^ however, the HHS continued to litigate on a piecemeal
basis until 1986, when the HHS finally conceded that the 1979 rule was
invalid. '24 Although a battle was lost, the HHS had not surrendered the
war. The Secretary promulgated a new rule that, from the provider

"^26 Cong. Rec. 22218 (1980) (introductory remarks of Rep. Heftel).
'^"Standing, in this context, means that the amount in controversy requirements have

been met, 42 U.S.C. § 1395oo(a)(2) (Supp. Ill 1985), and the provider is suffering from

a legal wrong caused by agency action. 5 U.S.C. § 702 (1982).

'2'Cahfano v. Yamasaki, 442 U.S. 682, 701-703 (1979).

'^^McClure v. Harris, 503 F. Supp. 409, 413 (N.D. Cal. 1980), rev'd on other grounds

sub nom. Schweiker v. McClure, 456 U.S. 188 (1982).

^^^See Tallahassee Mem. Regional Medical Center v. Bowen, 815 F.2d 1435, 1441 n.7
(11th Cir. 1987).

'"^See 51 Fed. Reg. 11,142, 11,149 (April 1, 1986) (to be codified at 42 C.F.R. §

405).



1988] MEDICARE PROVIDER REIMBURSEMENT 723

viewpoint, was not much better than the old rule.^^^ The new rule, by
its own terms, was to be applied retroactively to all "open" cost reports. •^^

By making the 1986 rule retroactive to all providers with open claims,

the Secretary was now able to make a new jurisdictional challenge in
new federal cases and in those coming up on appeal. The Secretary now
has argued that the retroactive nature of the new rule renders any
litigation on the old rule moot, thus eliminating federal jurisdiction. '^^

The Medicare statutes authorize the Secretary to make retroactive ad-
justments to provider reimbursement under certain circumstances. ^^^ Yet

the practical consequences of permitting retroactive rule-making in this

situation would be that those providers with claims pending in the federal

courts would not be entitled to reimbursement according to pre- 1979

rules. They must either accept reimbursement under the 1986 rule or

challenge the validity of the 1986 rule starting back at the beginning

—

at the administrative level. The long term consequences of the successful

use of this strategy would be to potentially bind providers into a never-

ending series of fruitless legal challenges. In finding that the new rule
did not render the litigation moot, the Eleventh Circuit Court of Appeals

commented:

[I]f this case is dismissed as moot, we would be creating a class

of cases capable of evading judicial review by the very fact that,

after years of litigation challenging an administrative regulation,

an agency would be able to moot a given lawsuit by promulgating

a new regulation. If we were to find this case moot, the hospitals

would have to restart on a long and expensive litigation, only

to be confronted again with the possibility that the Secretary

could moot that litigation. ^^^

The district courts that have addressed this issue have reached con-

flicting results and are likely to continue to do so until the weight of

appellate opinion becomes known. '^° Four appellate courts have rendered

decisions to date. The Sixth and Eleventh Circuits have taken a provider-

favorable position and have either expressly or implicitly assumed a

'2'See Tallahassee Mem. Regional Medical Center v. Bowen, 815 F.2d 1435, 1441
n.l9 (11th Cir. 1987).

'2^51 Fed. Reg. 11,142, 11,149 (April 1, 1986) (to be codified at 42 C.F.R. § 405).

'^^Mootness is jurisdictional. See Tallahassee Mem. Regional Medical Center v. Bowen,
815 F.2d 1435, 1448 n.22 (11th Cir. 1987).

•^H2 U.S.C. § 1395x(v)(l)(A)(ii) (Supp. Ill 1985); see also Tennessee v. Califano,

631 F.2d 89 (6th Cir. 1980).

'^''Tallahassee, 815 F.2d at 1451.

'3°See id. at 1448 n.24.



724 INDIANA LAW REVIEW [Vol. 21:705

limited degree of jurisdiction.'^' Although both courts denied the Sec-

retary's authority to promulgate retroactive regulations that would have

the effect of mooting a present controversy, the courts invalidated only

the retroactive aspect of the new rule, expressly finding themselves without

jurisdiction to review the prospective vaUdity of the rule.'^^ The First

Circuit reached a different conclusion. That court also rejected the

mootness argument, but found that the federal courts have the jurisdiction

to review both the retroactive and the prospective aspects of the new
rule.'" The case was then remanded to the district court for a deter-

mination on both questions. '^^ In the Seventh Circuit, however, the

Secretary was able to gain a victory through an alternative argument. '^^

The court refused to address the retroactivity question, instead finding

that it was without jurisdiction to hear the appeal because the challenge

to the retroactive application of the new rule amounts to an attack on
the regulation itself. '^^ Thus, the court found itself without jurisdiction

until there has been a final determination of the Board with regard to

the new regulation. The court reversed the district court's decision or-
dering reimbursement under the pre- 1979 rule and remanded with in-

structions that the Secretary process the claims using the new regulation. '^'^

This ''final determination" requirement will be examined in more detail

in the following section.

The three appellate courts that rejected the Secretary's claims of

mootness were obviously concerned about the public policy aspects of

allowing an agency the unfettered ability to thwart the purposes of

judicial review. However, the providers had some law to support their

position as well. A supporting case for the providers is a 1984 Supreme
Court ruling in which the Court held that when a party to a dispute
has a monetary interest in the outcome of a litigation, the case cannot

be dismissed as moot because of events subsequent to the action. '^^ In
Tallahassee Memorial Regional Medical Center v. Bowen,^^^ the Eleventh

Circuit, in a detailed and thorough analysis of the mootness question,

applied the two-prong test for mootness adopted by the Supreme Court

'''See Mason General Hosp. v. Secretary of HHS, 809 F.2d 1220 (6th Cir. 1987)
(mootness denied implicitly without discussion); Tallahassee Mem. Regional Medical Center
V. Bowen, 815 F.2d 1435 (mootness expressly denied).

''^Mason, 809 F.2d at 1231; see also Tallahassee, 815 F.2d at 1456-57.

•"Hospital Ass'n v. Secretary of HHS, 820 F.2d 533, 539 (1st Cir. 1987).
'''Id.

•"Appleton Mem. Hosp. v. Bowen, 814 F.2d 408 (7th Cir. 1987).
''"•Id. at 410.

'''Id.

'3«Ellis V. Brotherhood of Ry. Clerks, 466 U.S. 435 (1984), cited in Hospital Ass'n

V. Secretary of HHS, 820 F.2d 533, 537 (1st Cir. 1987).
'"815 F.2d 1435 (11th Cir. 1987).



1988] MEDICARE PROVIDER REIMBURSEMENT 725

in County of Los Angeles v. Davis. ^"^^ Under that standard, a case may
be dismissed as moot only when the parties lack a legally cognizable

interest in the outcome. Jurisdiction, once obtained, can abate only if

two conditions have been met. First, there must be no reasonable ex-

pectation that the alleged violation will recur. Second, subsequent events

must have "completely and irrevocably eradicated the effects of the

alleged violation.
"'"*•

Although the weight of authority, and public policy mitigate against

the success of the mootness argument, the Secretary will continue to

confront providers still litigating the 1979 malpractice rule with this

allegation. All this seemingly endless litigation over one rule could have

been avoided had the HHS corrected the problems with the 1979 rule
when it first became apparent that the rule was hopelessly invalid. The

HHS policy of non-acquiescence in judicial rulings has been recently
criticized in a report presented to the Administrative Conference of the

United States:

Since the inception of the Medicare program, HHS has taken
a very tough stance in provider challenges to payment levels

under Part A. As guardian of the Medicare trust funds, and

especially considering current budget pressures, this position is

clearly appropriate.

At some point, however, a question of fairness is raised.

This point may have been reached with respect to some Medicare
payment issues in view of the fact that federal district and

appellate courts have almost uniformly rejected these policies.

. . . HHS should develop a principled policy on when it will
acquiesce to judicial decisions affecting the Medicare program

and all other programs under the Social Security Act.'"*^

Given the amount of money at stake, the non-acquiescence problem
is likely to remain, unless the statutory provisions can be amended to
facilitate the use of binding class action litigation.

E. Final Determination

Section 1395oo(f)(l) states: "Providers shall have the right to obtain

judicial review of any final decision of the Board, or any reversal,

affirmance, or modification by the Secretary. ""^^ With the statutory

'^°440 U.S. 625 (1979).

'''Id.

'^^Kinney, supra note 5 at 98-99.

'«42 U.S.C. § 139500(f)(1) (Supp. Ill 1985). See supra note 34 for the complete

text.



726 INDIANA LAW REVIEW [Vol. 21:705

exception provided for expedited judicial review, the courts have been

fairly uniform in requiring that all claims first have been submitted to

the Board for a final decision prior to any judicial review.''*^ This section

will explore the various forms that a final determination has taken.

1. The Effect of Retroactive Rule-making.—Retroactive rule-making
in the context of medical malpractice insurance costs discussed in the

preceding section has provided one of the few controversies regarding

the final determination requirement. ^"^^ Along with the allegation of

mootness, the Secretary has also argued in these cases that until the

1986 rule has actually been applied, and administrative review obtained,

there has been no final determination of the Board, and therefore federal

jurisdiction cannot exist. '"^^ This argument has proved problematic for

providers. As mentioned in the preceding section, the Seventh Circuit
Court of Appeals accepted this reasoning, ^^"^ as has at least one district

court. '"^ Two other appellate courts faced with this argument found that
the lack of final decision only precluded judicial review of the prospective,

and not the retroactive application of the new rule.'"^^ The First Circuit
Court of Appeals has been the only court willing to find federal juris-

diction to review both the prospective and retroactive aspects of the

rule.'^^ That court's reasoning—that the new rule simply raises another
question of law

*

'relevant to the matters in controversy" pursuant to

the jurisdictional grant of section 1395oo(f)(l)—is persuasive. ^^^ And the
same policy arguments raised by the mootness problem are applicable

here. Moreover, as the court pointed out, although the prospective futihty

of administrative remand is not a factor to be considered if the juris-
dictional requirements have not been met, "it is a proper consideration

. . . when those jurisdictional requirements have been met."'" In other
words, once a court has properly assumed jurisdiction, subsequent events

should not then demand an administrative remand. This is the proper
interpretation of section 1395oo.

'"^See, e.g., Mercy Hosp. of Laredo v. Heckler, 777 F.2d 1038 (5th Cir. 1985);
Homewood Professional Care Center, Ltd. v. Heckler, 764 F.2d 1242 (7th Cir. 1985);
Association of Am. Medical Colleges v. Califano, 569 F.2d 101 (D.C. Cir. 1977).

'"^See supra notes 123-37 and accompanying text.

'^'•See Tallahassee Mem. Regional Medical Center v. Bowen, 815 F.2d 1435, 1449
n.27 (11th Cir. 1987); Hospital Ass'n v. Secretary of HHS, 820 F.2d 533, 537 (1st Cir.
1987).

"*^Appleton Mem. Hosp. v. Bowen, 814 F.2d 408 (7th Cir. 1987).
>^«St. Louis Univ. Medical Center v. Bowen, 655 F. Supp. 72 (E.D. Mo. 1986).
'^^Mason General Hosp. v. Secretary of HHS, 809 F.2d 1220, 1231 (6th Cir. 1987);

see also Tallahassee, 815 F.2d at 1456-57.

'^"Hospital Ass'n v. Secretary of HHS, 820 F.2d 533 (1st Cir. 1987).
'''Id. at 538 (citing 42 U.S.C. § 1395oo(f)(l) (Supp. Ill 1985); 5 U.S.C. § 706 (1982)).

•"/c?. at 539.



1988] MEDICARE PROVIDER REIMBURSEMENT 111

2. Board Denial of Jurisdiction.—Courts agree that a decision by
the Board not to exercise jurisdiction is a final decision for the purpose

of judicial review. •" If the Board declines jurisdiction for failure to

meet one of the threshold requirements of administrative review, that

decision is subject to judicial review. If it were not, the Board could

preclude any judicial review by simply denying jurisdiction to any claim

viewed as non-meritorious.'^'*

3. Preclusion of Availability to HHS.—Interestingly, section 1395oo
authorizes only a provider to seek judicial review of a Board decision. '^^

However, there seems to be little practical consequence to this omission.

The Secretary has the authority to affirm, modify, or reverse any decision

of the Board, thus obviating the need for the Secretary to seek judicial

review under section 1395oo.'^^ Furthermore, if a district court reverses

a Board decision in favor of the provider, the Secretary may now seek
appellate review, because section 1291, title 28 of the Code governs the
availability of appellate review. '^^

V. Medicare Provisions Not Subject to Review

Congress has made certain aspects of provider reimbursement under
Medicare not available to any form of administrative or judicial review.

An intermediary determination that an expense item is one of those
Usted in section 1395y, title 42, is not subject to review. '^^ This section

of the Code lists certain specific expenses that are excluded from Medicare
coverage. More importantly, the major provisions of inpatient reim-
bursement under the prospective payment system adopted in 1983 and

completely phased in by 1987 are excluded from any form of review. '^^

To understand the significance of this exclusion, some background in-
formation on the prospective payment system is necessary.

In an effort to purchase health care services for the aged more
efficiently. Congress in 1983 adopted provisions which made major
changes in the way hospitals are reimbursed for providing inpatient

'"5ee Saline Community Hosp. Ass'n v. Secretary of HHS, 744 F.2d 517 (6th Cir.
1984); Athens Community Hosp., Inc. v. Schweiker, 686 F.2d 989, 994 (D.C. Cir. 1982),
modified on other grounds, 743 F.2d 1 (D.C. Cir. 1984).

''"Cleveland Mem. Hosp. v. CaHfano, 444 F. Supp. 125, 128 (E.D.N.C. 1978), aff'd,
594 F.2d 993 (4th Cir. 1979).

'"42 U.S.C. § 1395oo(0(l) (Supp. Ill 1985). See supra note 34 for complete text.

'5*M

'"28 U.S.C. § 1291 (1982); see also Daviess County Hosp. v. Bowen, 811 F.2d 338,

342 (7th Cir. 1987).

''«42 U.S.C. § 139500(g)(1) (Supp. Ill 1985).

'^^M § 139500(g)(2).



728 INDIANA LAW REVIEW [Vol. 21:705

care.^^° Prior to 1983, hospitals were reimbursed for their costs incurred

in the treatment of Medicare patients.'^' After 1983, hospitals began

being reimbursed at predetermined fixed rates which vary according to

the type of services rendered. '^^ Approximately 470 categories were cre-

ated, called Diagnosis Related Groups [DRGs].^" Thus, a hospital which

treats a patient that is classified in a DRG that entitles the hospital to
$7,000 reimbursement will receive that amount, regardless of whether

the costs incurred were actually less or substantially greater. Although

a complete discussion of the impact of this system is beyond the scope

of this Note, it is worth noting that prospective reimbursement creates

an enormous change in the financial incentives of inpatient care, and

substantially diminishes the significance of the cost report in determining

provider reimbursement. '^"^

At the same time these major amendments were being adopted.

Congress amended the jurisdictional provisions of section 1395oo.^^^

Neither administrative nor judicial review is available to resolve contro-

versies involving the estabhshment of DRGs,'^^ the methodology used

in classifying patients into DRG groups, *^^ or the weighting factors
attached to each DRG which is used to calculate reimbursement. ^^^ Nor
is review available for disputes involving budget neutral adjustments to

the prospective payment rates. '^^ Thus, the regulations governing the

largest source of hospital Medicare revenue, inpatient services, have been

specifically withheld from the overview of a neutral judiciary. ^^^

VI. Future Jurisdictional Litigation

The significance of the cost report and, by implication, the need

for administrative and judicial review, was greatly diminished by the

advent of prospective reimbursement for inpatients. However, medical

'"^See H.R. Rep. No. 25, 98th Cong., 1st Sess. 132 (1983) (discussing the reasoning

for adopting prospective reimbursement as codified in 42 U.S.C. § 1395ww(d) (Supp. Ill

1985)).

'^'42 U.S.C. § 1395x(v)(l)(A) (1982).

'^M2 U.S.C. § 1395ww(d) (Supp. Ill 1985).

'"M; see also 49 Fed. Reg. 34,728, 34,780-90 (1984).
^^But see supra note 26 and accompanying text.
'"42 U.S.C. § 1395oo(g)(2) (Supp. Ill 1985).

'^42 C.F.R. § 405.1804(b)(1) (1986).

'''Id. at § 405.1804(b)(2).

'''Id. at § 405.1804(b)(3).

'''Id. at § 405.1804(a).

'^Congress created the Prospective Payment Assessment Commission to determine

the various factors used to determine the reimbursement factors for each DRG. These
factors are updated yearly and published in the Federal Register. 42 U.S.C. §§
1395ww(d)(4)(D), (e)(2)-(3) (Supp. Ill 1985).



1988] MEDICARE PROVIDER REIMBURSEMENT 729

education expenses, outpatient service costs, capital expenditures, and

loss attributable to bad debt are all still significant reimbursements

determined by the cost report. '^^ Not coincidentally, reimbursement meth-

ods for all these items have been targeted for change by the HHS or
Congress. '^2

In all likelihood, these changes will be opposed by health care

providers. While the specific case holdings discussed in the preceding

sections will be relied upon extensively, the general doctrines from which

much of the case law has developed will be of value. The following
sections touch briefly on the major themes which emerge from an

assimilation of case law interpreting the jurisdictional parameters of

Medicare provider initiated litigation. The doctrines discussed were se-
lected not only for their recurrence in the case law, but because of their

general appHcability to a variety of jurisdictional issues.

A. Judicial Deference

The most frequently occurring theme in provider reimbursement

disputes is that of "judicial deference." This doctrine requires courts

to defer to the agency's interpretation of a statute the agency is charged

with administering. '^3 In other words, this doctrine creates a presumption

in cases involving statutory interpretation that the Secretary's interpre-

tation is to be given substantial deference by the courts. However, the

"judicial deference" doctrine has limitations in its application. The

Supreme Court has taken the position that deference is only appropriate

where the statute is ambiguous or silent on a particular issue. '^"^ Of
course, the courts do not always agree as to whether a statute is

ambiguous. '^^ Further, courts will not defer to an agency interpretation

when the interpretation cannot be reconciled with congressional intent. '^^

In this respect, the statutory interpretation urged by the Secretary has

'^'See supra note 26.

^''^See 51 Fed. Reg. 6755 (February 26, 1986) (Proposed rule on changes to medical

education payment); 52 Fed. Reg. 20,623 (June 2, 1987) (Proposed rule on changes in

outpatient payment); 52 Fed. Reg. 18,840 (May 19, 1987) (Proposed rule on capital

payments); Currents, Hospitals, August 5, 1987, at 26 (HCFA circulation of a proposal
draft that would halt Medicare payments for bad debt).

'^^Blum V. Bacon, 457 U.S. 132, 141 (1982).

'^^Chevron U.S.A. v. Natural Res. Defense Council, 467 U.S. 837, 842-43 (1984).

'"In their respective interpretations of section 1395oo(f), compare St. Luke's Hosp.

V. Secretary of HHS, 810 F.2d 325, 331 (1st Cir. 1987) ("[W]e interpret the language
literally, and we find no initial ambiguity.") with Athens Community Hosp. v. Schweiker,
743 F.2d 1, 8 (D.C. Cir. 1984) ("[T]he statute is unclear (to put it mildly in the context

of this case) . . . .").

''^Securities Industry Ass'n v. Board of Governors, 468 U.S. 137, 143 (1984).



730 INDIANA LAW REVIEW [Vol. 21:705

often been found to be at odds with the plain language of the statute. '^^

Providers have also argued that the weight to be given the agency

interpretation will depend on the consistency of the agency's position

with prior actions. '^^ Hospitals have thus been able to take advantage

of prior inconsistencies in the Board's actions. '^^

Moreover, the Supreme Court has recently explained that the
*

'ju-

dicial deference" rule is applicable only where the agency is applying

an agreed upon legal standard to a set of facts, and not where there

is a question of interpretation of a contested legal standard. '^° Thus, it

would appear that courts need not show deference when the matter is
one of pure statutory construction.'^' Similarly, providers have success-

fully argued that while HHS may have special expertise in administering
the substantive provisions of Medicare, it has no special expertise in

interpreting jurisdictional statutes, and thus deference is not necessarily

required when the contested issue involves jurisdiction. '^^

B. Congressional Intent

Another critical aspect of provider jurisdictional disputes has been

the relationship of the action to congressional intent, as discerned through

the legislative history of section 1395oo. Congress has been careful to

amend the statute when necessary, and the legislative history, though
brief, has been frequently invoked. Congressional intent has proved to

be dispositive of provider disputes, both for and against the providers. '^^

A review of the legislative history indicates a trend toward broadening
the jurisdictional borders of provider disputes, at least until 1983. The

original statute, which only permitted judicial review where the Secretary

reversed or modified a Board decision, was modified in 1974 to permit

'''See, e.g.. Doctor's Hosp., Inc. v. Bowen, 811 F.2cl 1448, 1452 (11th Cir. 1987);

Hospital Ass'n v. Secretary of HHS, 820 F.2d 533, 537-38 (1st Cir. 1987).
'^»INS V. Cardoza-Fonseca, 107 S. Ct. 1207, 1221 n.30 (1987). Accord Bowen v.

American Hosp. Ass'n, 106 S. Ct. 2101, 2122 n.34 (1986).

'^^St. Luke's Hosp. v. Secretary of HHS, 810 F.2d 325 (1st Cir. 1987).
'«°107 S. Ct. at 1221.

•«2Adams House Health Care v. Heckler, 817 F.2d 587, 594 (9th Cir. 1987); St.

Luke's Hosp. v. Secretary of HHS, 810 F.2d 325 (1st Cir. 1987).
'"See Tallahassee Mem. Regional Medical Center v. Bowen, 815 F.2d 1435, 1463

(11th Cir. 1987) (In ruling for the provider, the court noted, "The clear language of the

statute and the legislative history of the PRRB lead us to conclude. . ."); Springdale
Mem. Hosp. Ass'n v. Bowen, 818 F.2d 1377, 1386 (8th Cir. 1987) (In ruhng for the
HHS, the court noted, "Nothing in the legislative history indicates that Congress intended
this conforming amendment to [eliminate the NPR] .... This, coupled with our reading
of section 1395oo(a) leads us to conclude. . . .").



1988] MEDICARE PROVIDER REIMBURSEMENT 731

review of a decision of the Board. ^^"^ Then, in 1980, the statute was

again amended to provide for expedited judicial review J^^ Sharp limi-

tations on review were then adopted as part of prospective reimbursement

in 1983.'^^ How subsequent legislative history will affect provider claims
will largely depend on the nature of the dispute. While Congress seems

willing to provide for more access to review of minor matters, the new
trend with regard to the major provisions of payment methodologies is

toward precluding review.

C. The Michigan Academy Case

Congress and courts have spoken often of a strong presumption of

the availability of judicial review. ^^^ The Supreme Court has underscored

this presumption in the Medicare context in the recent case of Bowen
V. Michigan Academy of Family PhysiciansJ^^ In this case, a group of
physicians challenged the method by which certain payments were made
under Medicare Part B.'^^ Although prior case law tended to indicate

that judicial review was not available for Part B payment determinations,
the Court held that review is only foreclosed from determinations of

benefit amounts, and not from the method by which the determinations

are made.^^° Providers have been quick to incorporate this theme into

their arguments. Some courts have found the Michigan Academy holding
supportive of the provider viewpoint, ^^' but others have not.^^^ The

implication of Michigan Academy—that the methods by which Medicare
payments are made should be available to judicial review—does not
square with the 1983 amendments foreclosing review of payment meth-

odologies affecting health care providers. As yet, no challenge has been

made to the jurisdictional limitations of the 1983 amendments. It has
been argued that the lack of challenge to the statute may be attributable
to the fact that hospitals have been doing reasonably well financially

under prospective payment, and that it would be difficult to show that

the methodology is arbitrary or capricious. '^^ At some point, however.

'«M2 U.S.C. § 1395oo(f)(l) (Supp. 1985). Pub. L. No. 93-484, 88 Stat. 1459 (1974).

^^^See supra text accompanying note 115.

'**5ee supra text accompanying notes 165-70.

'''See, e.g., Abbott Laboratories v. Gardner, 387 U.S. 136, 140 (1987) (citing cases);

S. Rep. No. 752, 79th Cong., 1st Sess. 26 (1945).

'«H76 U.S. 667 (1986).

'''Id. at 668.

'^/cf. at 678.

'"Tallahassee Mem. Regional Medical Center v. Bowen, 815 F.2d 1435, 1463-64 n.54
(11th Cir. 1987).

'^Bethesda Hosp. v. Secretary of HHS, 810 F.2d 558, 561 (6th Cir. 1987).
'"Kinney, supra note 5 at 88.



732 INDIANA LAW REVIEW [Vol. 21:705

financial incentives will force a provider group to challenge the preclusion

of review, and when that happens, the providers will rely heavily on
the Michigan Academy holding.

VII. Conclusion

The burdensome backlog of pending appeals to the Board'^'^ and

the voluminous number of court decisions '^^ are evidence that the health

care providers are willing to litigate when the Secretary or Congress
makes decisions affecting their interests. Providers are frustrated, how-

ever, by the HHS policy of non-acquiescence.^^^ Furthermore, despite
the pronouncements of the Supreme Court favoring the class action in

the administrative context, the rigid timing requirements of administrative

and judicial review make it virtually impossible for providers to get
certification to mount class action challenges to offensive regulations.'^^

The piecemeal litigation of the same issues, and the conflicting results

that are frequently obtained, have made the resolution of provider
disputes a highly technical, time-consuming, and expensive process. By
insulating certain aspects of the Medicare program from judicial scru-

tiny, '^^ Congress has foreclosed any possibility of recourse for health

care providers who believe that the provisions are unfair or otherwise
invalid.

These are volatile times for the health care industry. Prospective

reimbursement and other regulatory changes are a response to what has

been perceived as a runaway escalation of health care costs. '^^ As Congress
and the HHS look for new ways to limit Medicare expenditures, any

^"^^See supra note 57.

^^^See supra note 6.

^^^See supra note 142 and accompanying text.

'^'In order to obtain class certification, Fed. R. Civ. P. 23 requires, inter alia,

numerosity of class, common questions of law or fact, and that the representative parties
typify and be able to adequately protect the interests of the entire class. If the problems

of coordinating the appeals process among hundreds of hospitals all in the different
jurisdictions, and all winding their way through the administrative appeal process at varying

speeds could be overcome statutorily, the next task would be to determine to what extent

certification would extend to other similarly situated providers. In making this decision,

the courts must weigh the costs and burdens of unsettling previously decided claims against

the potential injustice of not doing so. McClure v. Harris, 503 F. Supp. 409, 413 (N.D.

Cal. 1980), rev'd on other grounds sub nom. Schweiker v. McClure, 456 U.S. 188 (1982).

'^*See supra notes 158-70 and accompanying text.

^"^See, e.g., Schramm, State Hospital Cost Containment: An Analysis of Legislative
Initiatives, 19 Ind. L. Rev. 919, 920 (1986); Kinney, Making Hard Choices Under the
Medicare Prospective Payment System: One Administrative Model for Allocating Medical
Resources Under a Government Health Insurance Program, 19 Ind. L. Rev. 1151, 1151

(1986).



1988] MEDICARE PROVIDER REIMBURSEMENT 733

gains made will probably come at the expense of the health care providers
rather than the health care beneficiaries. In light of these inevitable

changes, the time has come for a more expansive interpretation of the
jurisdictional parameters that govern Medicare provider reimbursement

disputes, or perhaps even legislative reform. In Michigan Academy, the

Supreme Court spoke of a strong presumption of administrative and

judicial review in the Medicare context. ^^*^ That viewpoint has been

underscored by the more recent Bethesda HospitaP^^ case as well. Since

Congress has sharply restricted significant aspects of Medicare reim-

bursement from judicial oversight,^°^ it has become even more imperative

that the Board and the federal judiciary interpret the jurisdictional statutes

broadly in disputes over the provisions still subject to review. What is
needed is statutory constructions that will allow Medicare providers the

widest access to review of the regulatory changes that affect both their

ability to function in the health care marketplace and the delivery of

health care services.

Douglas E. Cressler

"^See supra note 187 and accompanying text.

'^See supra notes 69-80 and accompanying text.

^See supra notes 158-70 and accompanying text.