Indiana Law Review Health Care Law: A Survey of 1995 Developments John C. Render* Introduction In company with most recent years, the 1995 Survey period was noteworthy for several important and instructive developments in the area of health care law. As this area of law continues to be affected frequently by swiftly changing judicial, legislative and regulatory pronouncements, this Survey emphasizes those issues of most immediate import or of most significant change to the health care law practitioner. While not all inclusive, this Survey presents a summary of important modifications or additions in areas of Medicare and Medicaid reimbursement, medical malpractice, tax exemption, physician recruitment, and fraud and abuse. I. Major Indiana Health Law Developments—General A. Statutory Developments 1. Tax Exemptions for Hospital-Owned Physician Offices and Other Hospital-Owned Property.—House Enrolled Act 1598 amended Indiana Code section 6-1.1-10-16 retroactive to March 1, 1995, to allow an exemption from property taxation if the property is owned or occupied by a non-profit hospital already granted tax exempt status. The hospital-owned property must be used for charitable purposes. 1 This law allows hospitals that own physician practices, offices or other hospital-owned property an exemption from property taxes by clarifying requirements for exemption that existed under prior law. However, the physician office, practice or other property must provide or support the provision of charity care or the provision of community benefits. Participation in the Medicaid or Medicare programs alone does not entitle an office, practice or other property described in the new legislation to an exemption from property taxes. 2 2. Managed Care Organizations may not Require Health Care Providers to Seek Accreditation in order to Enter into a Managed Care Contract.—Senate Enrolled Act 560 amended Indiana Code section 27-8-10-3(2) to prohibit managed care organizations from refusing to enter into agreements with health care providers solely because the provider has not obtained accreditation from an accreditation organization. This is of particular significance to hospitals that are not accredited by the Joint Commission on the Accreditation of Healthcare * Partner, Hall, Render, Killian, Heath & Lyman, P.C. B.S., 1 966, Butler University; J.D., 1971, Indiana University School of Law—Indianapolis. The author would like to thank the following Hall, Render, Killian, Heath & Lyman attorneys for their able assistance with the research and composition of this Survey: Richard W. McMinn, Todd J. Selby, Gregg M. Wallander, Keith D. Barber, and David M. Leonard. 1. Ind. Code § 6-1.1-10-16 (Supp. 1995). 2. Id. §6-l.l-10-18.5(a)(l)&(2). 928 INDIANA LAW REVIEW [Vol. 29:927 Organizations (JCAHO).3 While most Indiana hospitals are accredited by the JCAHO, some choose not to seek JCAHO accreditation. Hospitals not accredited by JCAHO are surveyed for compliance with the Medicare and Medicaid Conditions of Participation 4 by the Indiana State Department of Health. However, this Act does not prohibit managed care organizations from implementing performance indicators as quality standards if they are developed by a private organization and do not rely upon a survey process (i.e., an accreditation entity) for which a fee is charged. 5 3. Organ and Tissue Donation.—House Enrolled Act 1090 amended Indiana Code sections 29-2-16-1 to 29-2-16-28 concerning the provision of organ and tissue donation. One amendment provides that the hospital administrator or the hospital administrator's designee may ask any patient who is at least eighteen (18) years of age if the patient is an organ or tissue donor or if the patient desires to become an organ or tissue donor. 6 However, the governing board of the hospital must adopt procedures to determine when the administrator or administrator's designee may inquire of the patient as to organ or tissue donation.7 This amendment also states if at or near the time of death of a patient the hospital knows that: (1) an organ gift has or will be made; (2) the coroner has released a transplantation body part within the coroner's custody; or (3) the patient or individual in transit to the hospital is identified as an organ or tissue donor then the hospital shall notify the potential organ donee if the donee has been named and is known to the hospital. If the donee is not known to the hospital, the hospital shall notify an organ procurement organization. 8 The amended law also requires the hospital, upon admission of an individual at or near the time of death, to make a reasonable search for information identifying whether the individual is an organ or tissue donor. 9 Finally, the hospital must establish agreements or affiliations for the coordination of organ procurement after consultation with other hospitals and organ procurement organizations. 10 4. Criminal Background Checks for Certified Nurse Aides and Other Employees ofLicensed Health Facilities.—House Enrolled Act 1752 added a class of health care personnel for which criminal background checks must be obtained 3. JCAHO accredits hospitals on a voluntary basis at the option of the hospital. Hospitals accredited by the JCAHO are deemed to be in compliance with the Medicare Conditions of Participation found at 42 C.F.R. pt. 482 (1994). 4. 42 C.F.R. pt. 482(1994). 5. Ind. Code § 27-8-10-3(c)(l), (2) (Supp. 1995). 6. Id. §29-2- 16- 10(b). 7. Id. §29-2- 16- 10(c). 8. Id. §29-2-16-13. 9. Id. §29-2- 16- 14(a)(2). 10. Id. §29-2-16-15. 1 996] HEALTH CARE LAW 929 prior to employment in a licensed health facility or hospital-based health facility." Existing Indiana law for home health agencies requires criminal background checks to be obtained on prospective home health aides employed by a home health agency. House Bill 1752 added a new section, Indiana Code section 16-28-13-4, which requires a health facility or hospital-based health facility to obtain criminal background checks for nurse aides or other unlicensed employees prior to employment in a health facility or a hospital-based health facility. 12 However, this new section of the Indiana Code does not require criminal background checks on health professionals licensed pursuant to Indiana Code section 25-1-9-3, which includes registered dietitians or volunteers who provide nursing or nursing-related services without pay. 13 The individual may not be employed by the health facility or hospital-based health facility if the criminal background check reveals the nurse aide or unlicensed employee of the health facility or hospital-based health facility has been convicted of rape, criminal deviate conduct, exploitation of an endangered adult, failure to report battery, neglect or exploitation of an endangered adult, theft, conviction less than five years before the individual's employment date, murder, voluntary manslaughter within the previous five years, felony battery within the previous five years or a felony relating to controlled substances within the previous five years. 14 The health facility or hospital-based health facility must apply within three (3) business days from the date the person is employed as a nurse aide or other unlicensed employee for a copy of the prospective employee's limited criminal history from the Indiana Central Repository for Criminal History Information under Indiana Code section 5-2-5-1 or any other source allowed by law. 15 The health facility or hospital-based health facility may require the nurses aide or other unlicensed employee to pay for the fee to obtain the criminal background history check or to reimburse fees incurred by the facility in obtaining the limited criminal background check. 16 Finally, an individual who is denied employment or is dismissed from employment due to information received pursuant to the limited criminal history background check has no cause of action based upon the denial of employment or dismissal from employment from the health facility or hospital-based health facility. 17 This new statutory requirement could have a negative effect on health facilities and hospital-based health facilities because it may take a considerable amount of time to obtain the limited criminal background history check from the Indiana Central Repository thus delaying the processing of prospective employees who are 11. Id. §29-2-16-28. 12. Id. § 16-28-13-l(a)&(b). 13. Id. § 16-28- 13- 1(b). 14. Id. § 16-28-13-3(a)(l)-(10). 15. Id. § 16-28-13-4. 16. Id. § 16-28-13-6(b)(l), (2). 17. Id. § 16-28-13-8. 930 INDIANA LAW REVIEW [Vol. 29:927 in particularly short supply. Although the statute allows for health facilities or hospital-based health facilities to obtain the limited criminal history information from "another source allowed by law," no Indiana law currently allows for alternative sources to retrieve this information. 5. Affidavits Acknowledging Paternity.—House Enrolled Act 1006 amended Indiana Code section 16-37-2-2.1 to require all personnel of a public or private hospital who attend the birth of a child born out of wedlock to provide an opportunity for the child's mother and a male who reasonably appears to be the child's biological father to execute an affidavit acknowledging the child's paternity. 18 The affidavit shall be executed on a form provided by the Indiana State Department of Health and is not valid if executed more than seventy-two hours after the child's birth or after the mother of the child has executed a consent for the adoption of the child and an adoption petition has been filed. 19 6. Release of Survey Reports by the Indiana State Department of Health.—House Enrolled Act 1206 added a new provision to the Indiana Code at section 16-19-3-25 regarding health provider survey inspection reports performed by the Indiana State Department of Health. The new law states that the recipient of an inspection report has ten calendar days to respond to the inspection report before it is released to the public. 20 However, the Indiana State Department of Health may release the inspection report and any records relating to the inspection report to the public if such release is necessary to protect the public from an imminent threat to health or safety or to protect a consumer of health services from an imminent threat to health or safety. 21 Finally, after the inspection report is released, the inspection report and the records relating thereto may be inspected and copied by interested parties pursuant to Indiana Code section 5-14-3-3(a) and (b). This addition to the law could limit the ability of health care providers to respond in a timely manner to an inspection performed by the Indiana State Department of Health. Previously, the Indiana State Department of Health's policy allowed providers up to thirty days to respond to the inspection reports before release to the public. Therefore, this addition gives providers significantly less time in which to respond, especially where it is determined that an imminent threat to the health or safety of patients exists. This is of special concern due to the provider's inability to provide the Indiana State Department of Health with any additional information or an acceptable plan of correction 22 when the provider is cited for an adverse inspection report. 18. Id. § 16-37-2-2. 1(a)(1), (2). 19. Id. § 16-37-2-2. 1(b). 20. Id. § 16-19-3-25(b). 21. Id. § 16-19-3-25(c)(l), (2). 22. A plan of correction constitutes the provider's response to the inspection report of the Indiana State Department of Health. 1 996] HEALTH CARE LAW 93 1 II. Reimbursement Issues A. Statutory Developments 1. Changes in Indiana Medicaid Disproportionate Share Hospital ( "DSH") Payment Levels.—The Indiana legislature has redistributed "basic disproportionate share" 23 monies for the benefit of "small hospitals." 24 House Enrolled Act 1701 increased the amount of the basic disproportionate share hospital ("DSH") pool for these hospitals from $2,000,000 to an amount not to exceed $5,000,000. 25 The basic DSH pool for large hospitals remained the same at $18,000,000.26 The basic DSH pool for private psychiatric institutions27 was decreased from $9,000,000 to $2,000,000. 28 To offset this steep reduction, the Office of Medicaid Policy and Planning ("OMPP") agreed to increase the Medicaid per diem rates available to private psychiatric institutions from $346 to an effective rate of $450. 29 Qualifying state mental health institutions benefited as their DSH pool was increased from 23. A basic disproportionate share provider is a hospital whose Medicaid inpatient utilization rate is one standard deviation above the mean, or one whose low income utilization rate exceeds 25% or has 20,000 or more Medicaid inpatient days per year. IND. CODE § 12-15-16-1 (a) (1993). However, see note 32 infra and accompanying text (discussing the additional requirement in the new law that a hospital have a Medicare Utilization Rate of at least 1% to qualify as a DSH). The Indiana Code also provides for "enhanced disproportionate share providers." An enhanced disproportionate share provider is a hospital that as of the cost reporting period for July 1 , 1992 had at least 6,000 Medicaid inpatient days and at least 750 Medicaid discharges along with either a Medicaid inpatient utilization rate of one standard deviation above the state mean where the utilization rate for providers whose low income utilization rate exceeds 25% is excluded from calculating the mean Medicaid inpatient utilization rate, or the provider's low income utilization rate exceeds 25%. Ind. Code § 12-15-16-1 (1993). Enhanced disproportionate share hospitals are eligible for additional disproportionate share adjustments under Ind. CODE § 12-15-19-1 (1993 & Supp.1995). Total basic and enhanced disproportionate share payments to a hospital are limited to the hospital specific limit provided under 42 U.S.C. 1396r-4(g) (1994). See also IND. CODE § 12-15-19-l(c) (1993). 24. The statute does not use the term "small hospital" but requires a hospital to have a Medicaid inpatient utilization rate at least one standard deviation above the mean to qualify as a Disproportionate Share Hospital ("DSH"). Ind. Code § 12-1 5-16-1 (a)(1) (1993). Those acute care hospitals with 20,000 or more Medicaid inpatient days are viewed as large hospitals and receive monies from a separate pool. Id. § 12- 15- 16- 1(a)(3). See also note 26 infra and accompanying text (discussing the large hospital DSH pool). 25. Ind. Code § 12-15-16-6(c)(l) (Supp. 1995). 26. Id. § 12-15-16-6(c)(6). 27. A private psychiatric institution is one licensed to treat "psychiatric disorders, developmental disabilities, convulsive disturbances, or other abnormal mental conditions." IND. CODE§ 12-25-1-1 (1993). 28. Ind. Code § 12-15-1 6-6(c)(4) (Supp. 1 995). 29. Timothy W. Kennedy, State Legislative Wrap-Up and Case Law Update, INDIANA Legal Forum, Aug. 1 1 , 1995, at 77. 932 INDIANA LAW REVIEW [Vol. 29:927 $132,000,000 to $191,000,000. 30 The statute was changed to require all providers qualifying under Indiana Code section 12- 15- 16- 1(a) to have an inpatient Medicare Utilization Rate31 of at least one percent in order to qualify as a DSH.32 The state also acted to make state law consistent with new federal standards that cap a hospital's DSH reimbursement to the costs the hospital incurred in treating Medicaid patients. 33 2. Hospital Carefor the Indigent Program.—House Enrolled Act 1701 also streamlined the process by which hospitals receive payments under Indiana's Hospital Care for the Indigent Program ("HO"). Under the new law, a total of $35,000,000 a year is devoted to this program. Payment is in the form of a per diem rate which is added to each hospital's Medicaid base inpatient payment rate. 34 The level of payment for each hospital is determined by dividing HCI payments to the hospital in Fiscal Year 1992 under the program by total Medicaid patient days in the same year. 35 Thus, hospitals with higher than usual levels of Medicaid inpatient days in Fiscal Year 1992 are locked into a more favorable HCI reimbursement rate. 36 The effective result of these provisions is that every year hospitals receive the same amount of base HCI reimbursement as they did in 1992 except for a slight annual increase due to a proportionate increase paid into the HCI fund.37 3. Recovering and Paying Interest on Provider Overpayments Situations.—The state has authorized the collection of interest against providers that are overpaid under the Medicaid program and the payment to providers for interest when the program erroneously recovers an "overpayment." When an amount paid to a provider is later determined by an audit, settlement, or judicial or administrative proceeding to have been in excess, the state may recover interest at a rate two percentage points to the nearest whole number above the average yield on state money for the prior year (excluding pension fund investments). 38 Providers may now recover interest in the event of an erroneous overpayment recovery by the state but only at the rate of interest to the nearest whole number average investment yield for the state (excluding pension fund investments). 39 Thus, the state imposes a two percent interest penalty when the provider is 30. Ind. Code § 12-15-16-6(c)(5) (Supp. 1995). 31. The Medicaid Utilization Rate is the percentage of inpatient days devoted to the treatment of Medicaid patients. 42 U.S.C. § 1396r(b)(2) (1994). 32. Ind. Code § 12-15-17-1 (Supp. 1995). 33. Id. § 12-15-19-l(c); 42 U.S.C. § 1396r-4(g) (1994). 34. Ind. Code § 12-15-15-8(b) (Supp. 1995). 35. Id. § 12-15-15-8(a). This rate is updated annually. Id. § 12-15-15-8(c). 36. Id. § 12-15-15-8(b). The principle also functions in reverse so that hospitals with lower than usual levels of Medicaid inpatient days in 1992 are locked into a lower level of reimbursement until the statute is changed. 37. Thus, regardless of whether a hospital increases or decreases the amount of care it provides to indigents, reimbursement is frozen at the base 1992 level until the law is changed. 38. Id. § 12-15-21-3(6). The interest accrues from the date of the overpayment. Id. 39. Id. § 12-15-21-3(7). 1 996] HEALTH CARE LAW 933 overpaid but does not afford the provider the same benefit when the state underpays. 4. Reimbursement for Emergency Room Screening Services.—Under an addition to the Indiana Code, the Office of Medicaid Policy and Planning ("OMPP") must now pay 100% of the rates payable under the Medicaid fee structure for physician screening services in hospital emergency departments.40 These payments must be calculated using the same methodology used for all other physicians participating in Medicaid. 41 However, this new payment principle does not apply to persons enrolled in the Medicaid Risk-Based Managed Care Program. 42 5. Increased Payments Rates for Long Term Care.—Payment for staffing intermediate care, skilled care, ventilator care and extensive care has been increased by fifteen minutes per day. 43 In addition, Medicaid payment rates must include an incentive limited to 115% of the average inflatable allowable per resident day costs, calculated statewide for a given level of care. 44 6. Medicaid "Anti-Hassle " Program.—In response to widespread complaints from providers describing unnecessary burdens in dealing with Medicaid, the Indiana General Assembly passed legislation designed to reduce "hassles" faced by providers. a. Additional timefor hospitals to appeal notice ofprogram reimbursement, determination offinal auditfindings, and equivalent determinations.—A hospital now has 1 80 days from notification to appeal a Notice of Amount of Program Reimbursement ("NPR") under the state Medicaid program instead of the previous requirement to appeal within fifteen days. 45 This change will significantly relieve the time pressure associated with evaluating issues and formulating such appeals. b. Additional time to adapt to non-rulemaking policy changes.—Other legislation was enacted to give providers better notice of non-rulemaking changes in Medicaid policy. New bulletins or notices concerning a change in the Medicaid program, from OMPP or any contractor of OMPP, are not effective for at least forty-five days after the notice or bulletin is mailed to the affected parties. 46 Additionally, the notice or bulletin must be mailed within five days of the date on the notice or bulletin. 47 c. Committee review ofproposed new IFSSA rules.—The Indiana Family and Social Services Administration ("IFSSA") is now required to obtain approval for 40. Id. § 12-15-15-2.5. This provision relates only to payments for physician services and does not affect hospital reimbursement rates. Id. 41. Id. § 12-15-15-2.5(b). 42. Id. § 12-15-15-2.5(e). 43. Id. § 12-15-14-4. 44. Id. § 12-15-14-3. 45. Id. § 4-21 .5-3-7(a)(3)(B). This change also applies to appeal of audit findings and other equivalent determinations. Id. 46. Id. § 12-15-13-6(a). This law refers to notice or bulletins that are not subject to rulemaking. Ind. CODE § 4-22-2-2 (1993). 47. Ind. Code §12-15-1 3-6(b) (Supp. 1 995). 934 INDIANA LAW REVIEW [Vol. 29:927 new rules48 from a newly created "Family and Social Services Committee."49 The fifteen committee 50 members are appointed by the Governor and the membership is designed to assure a diverse array of representation and perspectives. None of the committee members can be employees of the executive or legislative branch of the state. 51 Provider representation is ensured by an expressly reserved position for a director, administrator or officer of a disproportionate share hospital and a separate reserved position for a licensed physician. 52 Another position is set aside for an individual "who shall represent the interests of health care providers" and who serves as a provider on the Medicaid Advisory Committee but is neither a physician nor a representative of a hospital. 53 Four positions are reserved for consumer advocates.54 Members of the committee are entitled to a copy of the agenda at least forty-eight (48) hours prior to any meeting. 55 The secretary of IFSSA and the chairperson of the committee have the power to jointly determine that a delay in adopting a rule would immediately threaten the health and welfare of citizens, violate state or federal law, have a substantial fiscal impact on the state (greater than $2,000,000 annually), or result in a forfeiture of federal waivers. 56 In such circumstances, the secretary and the chairperson can proceed with promulgation of the rule, but the rule is still subject to ratification by the committee. 57 7. Health Finance Commission and Committee.—Another new provision to the Indiana Code creates a Health Finance Commission to study health finance in Indiana. 58 The voting members of the commission are composed of the members of the Senate Planning and Public Services Committee and the House Public Health Committee. 59 To assist the Commission, a Health Finance Advisory Committee is also created. 60 This Committee is to advise the Commission and may perform some duties of the Commission, but members of the Committee may not vote on 48. Id. § 12-8-1-9. 49. Id. § 12-8-3-2. 50. The committee has 15 voting members. Id. § 12-8-3-3(a). There are a variety of non- voting members. Id. § 12-8-3-3(b). 51. Id. § 12-8-3-3(a). 52. Id. 53. Id. This provision seems designed to offer a position on the committee to a nursing home representative, chiropractor, optometrist, nurse or other health care provider currently represented on the Medicaid Advisory Committee. 54. Id. 55. Id. § 12-8-3-3(d). 56. Id. § 12-8-3-4.2(a). 57. Id. § 12-8-3-4.2(c)-(e). 58. Id. § 2-5-23. 59. Id. § 2-5-23-5. 60. Id. § 2-5-23-6. 1 996] HEALTH CARE LAW 935 Commission matters. 61 Members of the Committee are appointed from the general public, but must consist of representatives from cost accounting, actuary, medical economics, insurance, long-term care, hospital, mental health, pharmacy, physician, nurse, and community health fields. 62 In addition, the Dean of the Medical School at Indiana University or a representative must be appointed to the Committee. 63 To further assist the Commission, the Health Policy Advisory Committee is established effective May 1, 1997.64 At the request of the Commission chairman, this Committee provides information and otherwise assists the Commission in performing its duties. 65 The Health Policy Advisory Committee members will be appointed from the general public and will represent a diverse array of interests provided for in the amended statute. 66 B. Major Medicare Judicial Decision Affecting Use of GAAP In Shalala v. Guernsey Memorial Hospital? 1 the United States Supreme Court handed down a five to four decision of considerable import to many hospital providers nationwide. The issue involved whether Medicare regulations require the Health Care Financing Administration ("HCFA") to reimburse according to generally accepted accounting principles ("GAAP") or to go through the formal rule-making process for any exceptions to GAAP affecting Medicare reimbursement. 68 The plaintiffs in Guernsey presented legal arguments identical to those presented through an Indiana Hospital Association sponsored Medicare group appeal on the same issue. 69 The Guernsey decision effectively led to the dismissal of this group appeal. 70 61. Id. 62. Id. 63. Id. 64. Id. § 2-5-23-8. 65. Id. 66. Id. Interests in each of the following must be represented: public hospitals, community mental health centers, community health centers, the long term care industry, health care professionals, rural hospitals, health maintenance organizations, for-profit health care facilities, a statewide consumer organization, a statewide senior citizens' organization, a statewide organization representing people with disabilities, organized labor, businesses that purchase health insurance policies, businesses that provide self-funded employee benefit plans, a minority community, the uninsured (this member must be "chronically uninsured" and an individual "who is not associated with any organization, business, or profession represented in this subsection other than as a consumer"). Id. 67. 115 S. Ct. 1232(1995). 68. Id. at 1234. 69. See Letter From Indiana Hospital Association General Counsel to Chief Executive Officers, IHA-Sponsored Medicare Group Appeal Loss on Advance Refunding ofBonds (Nov. 24, 1995) (on file with author). 70. See Minutes of IHA-Sponsored Medicare Group Appeals Steering Committee Meeting 936 INDIANA LAW REVIEW [Vol. 29:927 In 1972, Guernsey Memorial Hospital ("Hospital") issued bonds for capital improvements and in 1985 spent $672,581 to refinance the bonds. 71 The Hospital expensed this full amount as a cost in the year it occurred. The Court did not dispute that this treatment of the transaction cost was consistent with GAAP principles. 72 However, the Hospital's treatment was inconsistent with non- regulatory reimbursement guidelines published in the Medicare Provider Reimbursement Manual ("PRM") section 233, which requires amortization of refinancing costs associated with bonds. 73 The Hospital argued that this informal guideline was inconsistent with regulations that mandated GAAP be utilized by providers participating in the Medicare program. 74 The federal regulation applicable to this issue, 42 C.F.R. section 413.20(a), does not specifically mention GAAP, but does mandate that "[standardized definitions, accounting statistics and reporting practices that are widely accepted in the hospital and related fields are followed." 75 The Hospital also argued that part (b) of the regulation mandated an accrual basis of accounting and that this had the effect of requiring the use of GAAP except when directly contradicted by another regulation. The Hospital and the dissenters argued that HCFA was authorized to promulgate a regulation, with appropriate notice and comment, that supplanted GAAP76 but could not impose, by informal guidelines, a policy that conflicts with regulations without the notice and comment required of a regulatory change. 77 Thus, the issue decided was not the substance of the policy itself, but rather whether such a policy could be adopted by HCFA as a guideline without the public notice or comment required for a properly promulgated regulation.78 The five to four majority decision assumed arguendo that "the standardized (May 19, 1995) (on file with author). 71 . Guernsey Memorial Hosp., 1 15 S. Ct. at 1234. 72. Id. at 1235. 73. Provider Reimbursement Manual § 233 provides that "[d]ebt issue costs from refunding of debt must be amortized from the date the debt is incurred to the scheduled maturity of the debt." Allowable Cost (Prov. Reimb. Man., Part 1, § 233.3), 1 Medicare and Medicaid Guide (CCH) f 5 184 (October 20, 1994). 74. Guernsey Memorial Hosp., 1 15 S. Ct. at 1235. 75. Id. (quoting 42 C.F.R. § 413.20(a) (1993)). 76. Justice O'Connor in her dissent was quite clear that the policies and rationale behind PRM § 233 were sound. "I do not doubt that the amortization approach embodied in PRM § 233 'squares with economic reality,' and would likely be upheld as a rational regulation were it properly promulgated." Id. at 1244 (O'Connor, J., dissenting) (citation omitted). 77. The Administrative Procedures Act requires that "rule making" procedures include notice and comment opportunities for those affected by the rules. 5 U.S.C. § 553(b) (1994). However, the same section exempts "interpretive rules" from this requirement. Id. Interpretive rules merely explain an '"agency's construction of the statutes and rules which it administers.'" Chrysler Corp. v. Brown, 441 U.S. 281, 302 n.31 (1979) (quoting the Attorney General's Manual on the Administration Procedure Act 30, n.3 (1947)). 78. See supra note 76 (discussing the dissent's acknowledgment that a properly promulgated regulation would have been upheld). 1 996] HEALTH CARE LAW 937 definitions, accounting statistics, and reporting practices referred to by the regulations refer to GAAP."79 However, the Court determined that the regulations refer to reporting requirements on hospital providers and not to a principle of reimbursement binding on the Secretary of the United States Department of Health and Human Services and HCFA.80 In addition, the Court found that PRM section 233 was "a prototypical example of an interpretive rule" that is not subject to notice and comment requirements. 81 The Court considered section 233 consistent with statutory provisions and regulations that require Medicare to bear no more than its appropriate costs 82 and forbade "cross subsidization" of expenses related to non-Medicare patients. 83 Finally, the court noted that GAAP is not a "lucid or encyclopedic set of pre-existing rules" but rather, a difficult source of guidance because no single authority for GAAP rules exists. 84 The Court's decision in Shalala v. Guernsey Memorial Hospital affirmed the efficacy of PRM section 233 for treatment of advance refunding of bond transactions under Medicare and generally deferred to agency discretion to adopt such instructions. The Court's decision has the effect of strengthening the authority of HCFA to implement informal guidelines without having to go through the formal notice and comment requirements normally associated with a regulatory change. Providers challenging these informal guidelines on grounds that the guidelines contradict regulations or GAAP will find Guernsey a serious impediment. Conversely, when program guidelines favor the provider's 79. Guernsey Memorial Hosp., 1 15 S. Ct. at 1235. 80. "The logical conclusion is that the provisions . . . concern record keeping requirements rather than reimbursement . . . ." Id. at 1236. Justice O'Connor in her dissent found little sense in this claim because 42 C.F.R. § 413.20(a) expressly provides that "the methods of determining costs payable under Medicare" are the standardized methods that the Court accepts means GAAP. Id. at 1 242. "It would make little sense to tie cost reporting to cost reimbursement in this manner while simultaneously mandating different accounting systems for each." Id. 81. Guernsey Memorial Hosp., 115 S. Ct. at 1239. Justice O'Connor's dissent dismissed this argument because "PRM § 233 cannot be a valid 'interpretation' of the Medicare regulations because it clearly is at odds with the meaning of § 413.20 [the regulation] itself." Id. at 1243. O'Connor argued that the regulation set a "default rule" favoring GAAP that could then only be overcome by an equivalent regulation providing an exception to the default rule. Id. at 1241 . As O'Connor put it, "interpretive rules . . . must explain existing law and not contradict what the regulations require." Id. at 1244. 82. See 42 U.S.C. § 1395x(v)(l)(A)(i) (1994). 83. Guernsey Memorial Hosp., 115 S. Ct. at 1238. O'Connor's dissent points out that the Court provides no support for the claim that immediate recognition of the advance refunding losses would violate the ban on cross subsidization in the statute. Id. at 1244. In fact, testimony and GAAP may suggest otherwise. Id. at 1245. Acknowledging that reasonable people can disagree on the point, O'Connor argues that because the statute is silent on the issue the cross subsidization argument is inappropriate. Id. 84. Id. at 1239. In dissent, O'Connor pointed out that the Secretary had changed her view which had previously concluded that 42 C.F.R. § 413.20 required Medicare reimbursement according to GAAP when that construction was to the Secretary's benefit. Id. at 1242. 938 INDIANA LAW REVIEW [Vol. 29:927 assertions, the provider can cite guidelines with greater certainty knowing that they will be viewed as binding. C. Administrative Actions 1. Medicare Fiscal Intermediary Treatment of Ancillary Outpatient Supplies.—Indiana's Medicare Fiscal Intermediary, AdminaStar Federal ("AdminaStar"), acted in 1995 to stop hospitals from continuing the long standing practice of separately billing ancillary outpatient supplies. AdminaStar took the position that routine supplies were not separately billable and that only "non- routine" supplies could be separately billed. 85 This action caused considerable confusion among hospitals during 1995 as AdminaStar and the Indiana Hospital Association sought to develop acceptable definitions of "routine" and "non- routine." Previously, hospitals considered "non-routine" to be defined by industry practice or custom. 86 AdminaStar took the position that hospitals had customarily and separately billed for most supplies used in a billable setting no matter how common or routine the use of this supply was. AdminaStar then borrowed nursing home guidelines from the Provider Reimbursement Manual to define "routine," although these guidelines had been used to define "routine supplies" in a somewhat different healthcare setting. 87 On June 1, 1995, AdminaStar published five questions, all of which had to be answered "yes" in order for a supply to be considered non-routine and separately billable. 88 These questions made it virtually impossible for any supply to be viewed as "non-routine" because one question provided that if a supply was available for patients for the diagnosis or procedure involved, it was thereby "routine" and not separately billable. 89 In response, the Indiana Hospital 85. See AdminaStar Federal, Medicare Part A Bulletin, No. 95-05-02 (May 11, 1995). 86. This position was reasonable. The Provider Reimbursement Manual defines separately billable ancillary services as "special items and services for which charges are customarily made in addition to a routine service charge." Ancillary Services (Prov. Reimb. Man., Part 1, § 2202.8), 2 Medicare & Medicaid Guide (CCH) f 6105 (Aug 13, 1993). 87. AdminaStar expressly cited PRM § 2203.2 as the basis for its definition of non-routine. This provision defines non-routine supplies as "those that are directly identifiable to individual patients, furnished at the direction of a physician, and . . . not reusable." Ancillary Services in SNFs (Prov. Reimb. Man., Part I, § 2203.2), 2 Medicare & Medicaid Guide (CCH)