Opinion
Civil Action #H-00-2526
December 6, 2001
ORDER
Pending before the Court are Defendant's Motion for Summary Judgment (Document #19) and Plaintiffs Motion for Summary Judgment (Document #22). Having considered the motion, submissions, and applicable law, the Court determines that Defendant's motion should be granted and Plaintiffs motion should be denied.
I. INTRODUCTION
Plaintiff, Professional Rehabilitation Outpatient Services ("PROS"), is an outpatient rehabilitation facility. PROS filed the instant suit to challenge a decision of the Secretary of the United States Department of Health and Human Services ("the Secretary"). PROS contends that the Secretary wrongly denied its claims for reimbursement of $152,400.05 in deferred compensation costs. PROS moves for judicial review of the Secretary's decision.
Plaintiff named as Defendant the Health Care Financing Administration. The Secretary's authority to review Board decisions regarding Medicare reimbursement has been delegated to the Administrator and Deputy Administrator of the Centers for Medicare and Medical Services, which was formerly known as the Health Care Financing Administration. The Court shall refer to the Defendant herein as "Secretary." U.S.C. § 1395x(v)(1)(A); see also Sun Towers, Inc., 725 F.2d at 325.
II. MEDICARE REIMBURSEMENT PROVISIONS
The Medicare program provides for federal reimbursement of medical care for persons over a certain age or individuals with disabilities. 42 U.S.C. § 1395c (1995); see also Sun Towers, Inc. v. Heckler, 725 F.2d 315, 318 (5th Cir. 1984). This system is accomplished, in part, through contractual arrangements with medical facilities to be "providers" of such medical care. Id. § 1395x(u). PROS is a participating provider in the Medicare system. See id. §§ 1395k(a)(2)(E), 1395x(u), 1395x(cc), 1395cc (1995).
Providers like PROS are entitled to reimbursement for reasonable costs for services rendered to Medicare beneficiaries. See 42 U.S.C. § 1395f(b) 13951(a)(8)(A)(i), 1395m(k), 1395x(v)(1)(A); see also 42 C.F.R. § 4113.1 (a)(2)(iv), 413.1(b), 413.13(c)(1)(i). The Medicare statute gives the Secretary broad authority to promulgate regulations to establish the method to determine reasonable costs. 42 U.S.C. § 1395x(v)(1)(A); see also Sun Towers, Inc., 725 F.2d at 325.
"Reasonable costs" include certain accrued costs for which a provider has not actually expended funds during the pertinent cost reporting period. 42 C.F.R. § 413.100 (c)(1) (1995), § 413.24(b)(2) (1986). One type of such accrued costs is accrued liability related to owner's compensation for services performed during a cost reporting period. Id. § 413.100(c)(2)(iv) (1995). Medicare regulations provide that a "reasonable allowance of compensation for services of owners is an allowable cost provided that the services are actually performed in a necessary function." Id. § 413.102(a) (1986). "Reasonable" means "such an amount as would ordinarily be paid for comparable services by comparable institutions." Id. § 413.102(b)(2) (1986).
Under a regulation effective July 27, 1995, Medicare reimbursement for accrued costs is only authorized where "the related liabilities are liquidated timely." Id. §§ 413.24(b)(2), 413.100(c)(1) (1995). Accrued liability related to owner's compensation must be liquidated within 75 days after the close of the cost reporting period in which liability occurs. Id. § 413.100(c)(2)(iv) (1995). If the liquidation requirement is not met, the cost is disallowed in the year of accrual. Id.
The Medicare Provider Reimbursement Manual ("the Manual") provides further guidance regarding deferred owner's compensation. Sun Towers, Inc., 725 F.2d at 326 n. 16 ("the rulings contained in this `Provider Reimbursement Manual,' while without the force of law, are entitled to be given important significance"). The Manual recognizes that compensation of officers, employees, and directors may be included for a cost reporting period if earned within a period even if not paid until after the close of a period," but it limits the availablility of Medicare reimbursement for these expenses.
Prior to February 1996, the Manual instructed that "actual payment must be made (whether by cash, negotiable instrument, or in kind) within 75 days after the close of the period." Since February 1996 (for cost reporting periods beginning on or after October 1, 1995) the Manual states that payment of unpaid owner's compensation must be liquidated through an actual transfer of the provider's assets within 75 days after the close of the period in order to meet the requirements of this section. The Manual further provides that if payment, including liquidation of negotiable instruments, is not made within the cost reporting period, or within 75 days thereafter, the unpaid compensation is not includable in allowable costs either in the period when earned or in the period when actually paid.
III. MEDICARE ADMINISTRATIVE APPEALS PROCESS
Reimbursement to Medicare providers maybe made by "fiscal intermediaries." Fiscal intermediaries are generally private insurance companies who have entered into agreements with the Secretary to act as the Secretary's agent in administering the Medicare program. 42 U.S.C. § 1395h; see also Sun Towers, Inc., 725 F.2d at 318. At the end of a cost year, each provider must file with its intermediary a cost report that demonstrates the provider's entitlement to the reimbursement it seeks. 42 U.S.C. § 1395 g(a); 42 C.F.R. § 413.20 (b), 413.24(f). The intermediary reviews the cost report and determines the actual amount of reimbursement due to the provider for the cost year. 42 C.F.R. § 405.1803; see also Sun Towers, Inc., 725 F.2d at 318. The intermediary sets forth this amount in a Notice of Program Reimbursement ("NPR") that it issues to the provider. 42 C.F.R. § 405.1803, 413.64(f)(2).
If a provider is dissatisfied with any aspect of an NPR, it may bring an administrative appeal before the Provider Reimbursement Review Board ("the Board") so long as the provider meets certain statutorily imposed jurisdictional requirements. 42 U.S.C. § 1395oo(a), (b), (f)(1); 42 C.F.R. § 405.1801, 405.1835. If the Board has the authority to decide the matter at issue, see 42 U.S.C. § 1395oo(f)(1), 42 C.F.R. § 405.1842, it may hold a hearing and issue a decision that may be subject to further review by the Secretary. 42 U.S.C. § 1395oo(a)(d), (f)(1); 42 C.F.R. § 405.1875. If the Secretary performs such a review, the provider may request judicial review of the Secretary's decision by a federal district court. 42 U.S.C. § 1395oo(f)(1); 42 C.F.R. § 405.1877.
IV. FACTUAL BACKGROUND
PROS was a provider for the Medicare program for the year ending December 31, 1995. PROS's fiscal intermediary was Mutual of Omaha. On February 2, 1995, the board of directors and shareholders for PROS voted to defer payment of the salaries of four corporate officers earned during 1995. On January 5, 1996, the board and shareholders voted to convert the accrued salaries of these officers to "Notes Payable, Shareholders," to be payable by December 31, 1998. PROS subsequently issued promissory notes to each of the corporate officers, committing itself to payment of the deferred compensation on or before December 31, 1998.
Plaintiff originally named Mutual of Omaha as a defendant to the instant suit. The Court dismissed Mutual of Omaha on February 20, 2001 . . . See Document #1.8.
The promissory notes were paid in full by December 7, 1998.
On April 30, 1996, PROS submitted its cost report to Mutual of Omaha. PROS received tentative approval of the cost report fromMutual of Omaha on May 9, 1996. On May 29, 1997, PROS received an NPR for 1995 disallowing the accrued salaries in the amount of $152,400.05. The explanation for the disallowance was that PROS had failed to comply with Medicare's owner's compensation rules, including the Manual.
PROS timely appealed the 1995 NPR with the Board. The Board conducted a hearing on September 7, 1999. On March 27, 2000, the Board reversed Mutual of Omaha's disallowance of the deferred owner's compensation claim. On May 22, 2000, the Deputy Administrator of Centers for Medicare and Medicaid Services reversed the Board's decision. The Deputy Administrator's decision is considered the final decision of the Secretary for this matter. Plaintiff now seeks judicial review of the Secretary's determination.
V. STANDARD OF REVIEW
Judicial review of this case is governed by the standards in the Administrative Procedure Act ("APA"), 5 U.S.C. § 701 et seq. 42 U.S.C. § 1395oo(f)(1); Sun Towers, Inc., 725 F.2d at 325. Pursuant to the APA, the district court may overturn the Secretary's decision only if the decision was arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with the law, or unsupported by substantial evidence reviewed on the record. See 5 U.S.C. § 706; Girling Health Care, Inc. V. Shalala, 85 F.3d 211, 215 (5th Cir. 1996); Sun Towers, 725 F.2d at 325. Accordingly, this Court's review of the Secretary's decision is a "narrow one" and PROS must satisfy the "difficult burden" of proving that the Secretary's decision should be overturned. See Sun Towers, Inc., 725 F.2d at 325.
Under the "arbitrary and capricious" standard, the reviewing court may not substitute its judgment for that of the agency. Motor Vehicles Mfrs. Ass'n v. State Farm Mut. Ins. Co., 463 U.S. 29, 43 (1983); Lousiana v. Verity, 853 F.2d 322, 327 n. 8 (5th Cir. 1988). The district court's role is "to review the agency action to determine whether the decision "was based on a consideration of the relevant factors and whether there was a clear error of judgment.'" Motor Vehicles Mfrs. Ass'n, 463 U.S. at 43. "[I]f the agency considers the factors and articulates a rational relationship between the facts found and the choice made, its decision is not arbitrary or capricious." Id.
Under the "substantial evidence" standard, the district court should accept the agency's factual findings if those findings are supported by substantial evidence on the record as a whole. Arkansas v. Oklahoma, 503 U.S. 91, 113 (1992). Substantial evidence is "such relevant evidence as a reasonable mind might accept as adequate to support a conclusion." E.g., Consolo v. Fed. Maritime Comm'n, 383 U.S. 607, 619-20 (1966). The district court should not supplant the agency's findings merely by identifying alternative findings that could be supported by substantial evidence. Arkansas v. Oklahoma, 503 U.S. at 113.
Moreover, an agency's interpretation of an ambiguous statute that is contained in a substantive rule or that is the product of formal adjudication is entitled to controlling deference so long as it is reasonable. Chevron U.S.A. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 843 (1984); see also Microcomputer Tech. Inst. v. Riley, 139 F.3d 1044, 1047 (5th Cir. 1998) ("[e]ven the adjudicative interpretations of policy-making agencies are entitled to Chevron deference"). The Secretary has been given extensive authority to determine the precise parameters of "reasonable costs." See 42 U.S.C. § 1395x(v)(1)(A); see also Sun Towers, Inc., 725 F.2d at 325. Accordingly, the regulations promulgated under the Secretary's interpretation of "reasonable costs" are owed considerable deference. Sun Towers, 725 F.2d at 325.
The Secretary's interpretation of his or her own regulations is entitled to "substantial deference" and "must be given "controlling weight unless it is plainly erroneous or inconsistent with the regulation.'" Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 512 (1994). The district court must defer to the Secretary's interpretation of a regulation unless an alternative reading is compelled by the regulation's plain language or by other indications of the Secretary's intent at the time of the regulation's promulgation. Id. at 512. Finally, the Secretary's ultimate decision in this case is not diminished by the interim contrary decision of the Board. See Homan Crimen, Inc. v. Harris, 626 F.2d 1201, 1205 (5th Cir. 1980); Sun Towers, Inc., 725 F.2d at 326.
VI. ANALYSIS
The instant dispute revolves around the Secretary's decision to deny PROS reimbursement for deferred compensation for 1995. The Secretary did not deny reimbursement because PROS's compensation costs were not related to Medicare services performed or because the requested amounts were unreasonable. Rather, the Secretary denied reimbursement based upon PROS's untimely liquidation of the liabilities for deferred owner's compensation. As discussed above, effective July 27, 1995, Medicare only reimburses providers for accrued costs (such as deferred owner s compensation) where the related liabilities are timely liquidated. Under the regulations, "timely" means that "accrued liability related to the compensation owners . . . must be liquidated within 75 days after the close of the reporting period in which the liability occurs." Here, PROS converted the 1995 deferred compensation costs to "Notes Payable, Shareholders" on January 5, 1996. These notes were payable by December 31, 1998. The Secretary thus determined that December 31, 1998 was beyond the regulation's 75-day liquidation deadline and disallowed reimbursement.
PROS argues that this Court should overturn the Secretary's decision for the following reasons. Prior to February 1996, the Manual provided that "actual payment must be made (whether by cash, negotiable instrument, or in kind) within 75 days after the close of the period." If payment was not within this time frame, the unpaid compensation was not an allowable cost. In February 1996, the Manual was revised to provide that for cost reporting periods beginning on or after October 1, 1995, unpaid owner's compensation "must be liquidated through an actual transfer of the provider's asserts within 75 days after the close of the period." According to PROS, this new requirement did not apply to the cost report provided by PROS.
PROS also contends that its action of converting the deferred compensation to notes payable by December 31, 1998 was taken only after consultation with Mutual of Omaha, who assured PROS that its actions were acceptable. Nevertheless, Mutual of Omaha later notified PROS through the NPR that it had been overpaid by $152,400.05 in the deferred compensation. According to PROS, Mutual of Omaha provided information in a memorandum regarding the issue of deferred compensation. The memorandum cited the Manual which gave permission to providers to defer salaries, as long as those salaries were "actually paid" within 75 days of the closing of the cost report period through, inter alia, negotiable instruments such as notes payable. PROS states that Mutual of Omaha's position was that "as long as a negotiable instrument is written within 75 days after the end of the cost reporting period, it constitutes acceptable payment for Medicare purposes." Under this advice, because the "Notes Payable, Shareholders" were written within 75 days after the end of the cost reporting period for 1995, they were acceptable payment as they were in the form of a negotiable instrument.
wThe Secretary notes that PROS received the internal memorandum "magically" and "inexplicably," and without the express authorization of Mutual of Omalia. The Secretary argues that "it is open to question whether the [memorandum] represented a formal statement . . . of Mutual of Omaha's policy in 1995 or at any other time, let alone of the Secretary's." The Secretary further points out that, even using the memorandum as a basis to formulate a rule for reimbursement, PROS loses because it did not comply with the requirement that the promissory note used to pay owner's compensation must be redeemed through a transfer of assets within a reasonable period, which in the opinion of the memorandum's author was sixty to ninety days beyond the liquidation period.
PROS admits that the Mutual of Omaha memorandum requires that liquidation" occur within the 75 day window. PROS argues, however, that "liquidate" can have various meanings and is ambiguous as applied to the facts of this case. PROS believes that "liquidate" does not necessarily mean that cash payment must change hands; rather, according to PROS, the notes were "liquidated" when they were made, because they made the amount of the indebtedness clear and certain and they ascertained the amount due and to whom the notes were payable.
The Court has examined the parties' briefing as well as the administrative record on file with the Court. Having performed this analysis, the Court finds no abuse of discretion or arbitrary or capricious determination on the part of the Secretary. Furthermore, substantial evidence supports the Secretary's decision.
As determined by the Secretary, section 2305 of the Manual provides the general rules for the liquidation of liabilities. There are two preconditions to reimbursement of costs related to a short term liability. First, the short term liability must be liquidated by check, other negotiable instrument, cash, or legal transfer of assets within one year after the end of the cost reporting period in which the liability is incurred. This is subject to two exceptions discussed infra. Second, where liquidation is made by check or other negotiable instrument, such forms of payment must be redeemed through an actual transfer of the provider's assets within the "time limits specified in this section." The Secretary found that the "time limits specified in this section" meant that "under section 2305 of [the Manual], as a matter of policy, the time for liquidation of a liability and the time for redeeming the negotiable instrument are concurrent."
Section 2305 has two exceptions: first, there is an exception to the one-year liquidation rule when the provider furnishes to the fiscal intermediary sufficient written justification for nonpayment of liability and the intermediary grants an extension for good cause. Here, PROS never made such a request and, therefore, this exception does not apply. Second, an exception to the one-year liquidation rule applies when another Manual section "mandates liquidation within 75 days after the end of the cost reporting period in which the liability was incurred." The Secretary applied this second exception to the one-year rule, thus requiring liquidation within 75 days rather than one year.
The 1995 version of section 906.4 of the Manual instructed that actual payment of owner's compensation must be made (whether by cash, negotiable instrument, or in kind) within 75 days after the close of the period. The Secretary construed the term "payment" as equivalent to "liquidation" and concluded that the Manual specifies the 75-day period for the liquidation of assets but does not specify the time period within which a negotiable instrument is to be redeemed through an actual transfer of the provider's assets. The Secretary determined that the time for redemption of a negotiable instrument as deferred compensation could be no more than one year after the close of the applicable cost reporting period. In reaching this decision, the Secretary determined that because 75 days for liquidation under section 906.4 was significantly shorter than the one year provided under section 2305, "it would be reasonable to conclude that the time period for redeeming the negotiable instrument under section 906.4 would be similarly shorter than the one-year period provided under section 2305 of the Manual for redeeming a negotiable instrument."
In addition, the February 1996 version of the Manual put PROS on notice that negotiable instruments had to be liquidated timely by an actual transfer of the provider's assets. Thus, a note payable December 31, 1 998mdashithree years following the end of the 1995 cost reporting periodmdashidid not meet this liquidation requirement. Regardless of whether the applicable liquidation date was 75 days or one year, PROS's notes that were payable three years after the end of the 1995 cost reporting period were beyond the deadline for liquidation. The Secretary's interpretation of the applicable regulations relating to reimbursement is entitled to considerable deference, see, e.g., Sun Tower, Inc., 725 F.2d at 325, and the Court finds no basis to overturn the decision reached in this case.
Given the foregoing, the Court is of the opinion that the Secretary's decision should not be overturned. Accordingly, the Court hereby
ORDERS that Defendant's Motion for Summary Judgment (Document #19) is GRANTED. Plaintiff's claims against Defendant are hereby DISMISSED. The Court further
ORDERS that Plaintiffs Motion for Summary Judgment (Document #22) is DENIED.