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William Beaumont Hospital v. Price

United States District Court, E.D. Michigan, Southern Division

March 29, 2018

THOMAS E. PRICE, Secretary, Department of Health and Human Services, Defendant.



         This case is before the court on Plaintiff William Beaumont Hospital's request for judicial review of a final decision by Defendant Secretary of Health and Human Services. In the decision below, the Secretary determined that Beaumont had not brought forth sufficient, contemporaneous evidence showing that Beaumont was entitled to Medicare reimbursement for certain costs it incurred in providing clinical training to nursing students. Before the court are the parties' cross motions for judgment. (Dkt. ##15, 17.) The motion is, per the court's earlier directives, fully briefed (Dkt. ##15, 17, 18, 21) and the court has determined that a hearing is unnecessary. E.D. Mich. L.R. 7.1(f)(2). For the following reasons, the court must deny both Beaumont's and the Secretary's motion, and order further briefing.[1]

         I. BACKGROUND

         A. Regulatory Framework

         Title XVIII of the Social Security Act, 42 U.S.C. §§ 1395-1395lll, commonly known as the Medicare Act, “primarily provides medical benefits to eligible persons over the age of 65” and to persons with disabilities. Med. Rehab. Servs., P.C. v. Shalala, 17 F.3d 828, 830 (6th Cir. 1994); Battle Creek Health Sys. v. Leavitt, 498 F.3d 401, 403 (6th Cir. 2007). Under the Medicare Act, certain health care providers are eligible for reimbursement by the Secretary of Health and Human Services for services they provide to Medicare beneficiaries. Providers seeking reimbursement submit their yearly cost reports to a fiscal intermediary (also known as a Medicare Administrative Contractor, or “MAC”) acting as an agent for the Secretary. 42 C.F.R. § 405.1801(b); see also Your Home Visiting Nurse Servs., Inc. v. Shalala, 525 U.S. 449, 451 (1999). After reviewing the cost reports and determining how much is due for reimbursement, the MAC issues a “notice of program reimbursement.”

         Relevant here, federal law permits health care providers to be reimbursed for their costs associated with “the clinical training of students enrolled in an approved nursing or allied health education program that is not operated by the provider.” 42 C.F.R. § 413.85(g). For eligible providers, reimbursements “are paid on a reasonable cost basis.” Id. “Reasonable costs” are those “actually incurred, excluding therefrom any part of incurred cost found to be unnecessary in the efficient delivery of needed health services.” 42 U.S.C. § 1395x(v)(1)(A); see also 42 C.F.R. § 413.9(a) (defining reasonable costs as including “all necessary and proper costs incurred in furnishing the services”).

         Eligibility for Medicare reimbursement requires providers to supply “adequate cost data”: data “based on their financial and statistical records” that is “capable of verification by qualified auditors.” 42 C.F.R. § 413.24(a). Federal regulations further set forth the requirements for adequate cost information:

Adequate cost information must be obtained from the provider's records to support payments made for services furnished to beneficiaries. The requirement of adequacy of data implies that the data be accurate and in sufficient detail to accomplish the purposes for which it is intended. Adequate data capable of being audited is consistent with good business concepts and effective and efficient management of any organization, whether it is operated for profit or on a nonprofit basis. It is a reasonable expectation on the part of any agency paying for services on a cost-reimbursement basis. In order to provide the required cost data and not impair comparability, financial and statistical records should be maintained in a manner consistent from one period to another. However, a proper regard for consistency need not preclude a desirable change in accounting procedures if there is reason to effect such change.

42 C.F.R. § 413.24(c). In addition, 42 C.F.R. § 413.20 describes recordkeeping requirements for providers, noting first that “[t]he principles of cost reimbursement require that providers maintain sufficient financial records and statistical data for proper determination of costs payable under the program.” Section 413.20(d)(1) requires providers to “furnish such information to the intermediary as may be necessary to-(i) Assure proper payment by the program . . .; (ii) Receive program payments; and (iii) Satisfy program overpayment determinations.” It also requires providers to “permit the contractor to examine such records and documents as are necessary to ascertain information pertinent to the determination of the proper amount of program payments due.” 42 C.F.R. § 413.20(d)(2).

         Non-binding guidelines and interpretive rules also appear in the Secretary's Provider Reimbursement Manual, which may assist providers and intermediaries in implementing Medicare Regulations.[2] See Battle Creek, 498 F.3d at 404. Section 2304 of the Manual provides that cost information must be current, accurate, and sufficiently detailed, including “all ledgers, books, records and original evidences of cost.” Section 2312.2(E) further provides that when it comes to split salary costs-reimbursement where employees spend some, but not all, of their time on reimbursable work-the intermediary may approve the use of periodic “time studies, ” instead of “ongoing time reports, ” to establish those costs.

         After the MAC issues its notice of program reimbursement, the provider may request a hearing with the Provider Reimbursement Review Board, an intermediate administrative body established by the Secretary. 42 U.S.C. § 1395oo(a). The decision of the Board is final unless the Secretary initiates review. 42 U.S.C. § 1395oo(f)(1); 42 C.F.R. § 405.1875(a). Where review is initiated, the Administrator for the Centers for Medicare and Medicaid Services (“CMS”) may review the Board's decision on behalf of the Secretary. 42 U.S.C. § 1395oo(f)(1); 42 C.F.R. § 405.1875(a). The Administrator's review acts as the Secretary's final decision. 42 C.F.R. § 405.1877(a). Providers may appeal that decision to federal court in certain circumstances. 42 U.S.C. § 1395oo(f); 42 C.F.R. § 405.1877.

         B. Beaumont's Medicare Reimbursement for Clinical Nurse Training

         The following facts are drawn from the testimony and documents in the administrative record and the parties' respective briefing; they are agreed upon unless otherwise noted.

         Plaintiff William Beaumont Hospital - Royal Oak (“Beaumont”) is a Magnet Hospital and level one trauma center in Southeast Michigan. It is also one of the largest teaching hospitals in the area: it provides clinical training to nursing students-training that is required for nursing students to receive their degrees.

         Medicare reimburses Beaumont for its costs for the clinical training of nursing school students. The reimbursement happens on a pass-through basis-Beaumont “passes-through” the costs to Medicare for payment. The reimbursements reflect Beaumont's “incremental costs”-costs for employees and overhead to run the clinical nursing training program above what the hospital would normally incur as part of its regular functioning. The amount of these reimbursements for Beaumont is substantial. According to the record, Beaumont's total reimbursement for the 1988 cost report year was over $250 million. (AR, Dkt. #8 Pg. ID 242.)[3] Of that total, the reimbursement for clinical nursing training costs in particular was over $1.7 million. (Id. at Pg. ID 240.)

         Beaumont was reimbursed on a pass-through basis for its clinical training costs from 1988 through 2004 without notable issue. In 2010, the MAC reviewed Beaumont's clinical training costs for fiscal years 2005 and 2006, the stated purpose for which was “to determine if the costs [were] properly documented” for the nurse training program. (AR, Dkt. #8-2 Pg. ID 790.) The MAC ultimately disallowed ...

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