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March 12, 1981


The opinion of the court was delivered by: Aspen, District Judge:


Plaintiff, In-Home Health Care Service of Suburban Chicago North, Inc. ("In-Home Health"), an Illinois not-for-profit corporation, seeks review of a determination of the Provider Reimbursement Board ("Board"), which was affirmed by the Secretary of Health and Human Services ("Secretary"), denying partial reimbursement under Part A of the Medicare program, 42 U.S.C. § 1395 et seq., for certain costs of electronic data processing and financial consulting services purchased in fiscal 1976. Final decisions of the Secretary or the Board are subject to judicial review pursuant to 42 U.S.C. § 1395oo(f) in accordance with the relevant provisions of the Administrative Procedure Act, 5 U.S.C. § 701 et seq. Accordingly, we must determine whether the Secretary's decision was "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law" or "unsupported by substantial evidence." 5 U.S.C. § 706(2)(A) and (E). Lodi Memorial Hospital v. Califano, 451 F. Supp. 651, 654 (D.D.C. 1978); Doctors Hospital, Inc. v. Califano, 459 F. Supp. 201, 205 (D.D.C. 1978).*fn1

Medicare, 42 U.S.C. § 1395 et seq., is a national program of health insurance for the aged and disabled completely financed and administered by the federal government. The Congressional statutory scheme envisions reimbursement of Medicare providers, including home health agencies such as In-Home Health, the plaintiff herein, for the reasonable cost of services rendered to Medicare beneficiaries. Defining the boundaries of "reasonable cost" can be a frustrating task. As provided in 42 U.S.C. § 1395x(v)(1)(A):

  The reasonable cost of any services shall be the
  cost actually incurred, excluding therefrom any
  part of incurred cost found to be unnecessary in
  the efficient delivery of needed health services,
  and shall be determined in accordance with
  regulations establishing the method or methods to
  be used . . . in determining such costs. . . .

Thus, the "reasonable cost" comprises the upper limit of permissible reimbursement to Medicare providers under the statute. American Medical Association v. Mathews, 429 F. Supp. 1179, 1193 (N.D.Ill. 1977). While the provider's actual costs are taken into account, the Secretary is explicitly empowered to pare unnecessary costs from the actual costs incurred for purposes of determining reimbursement. As Judge Marshall wrote in American Medical Association, supra, after a thorough review of the Medicare and Medicaid statutory framework:

  The obvious conclusion is that § 1395x(v)(1)(A)
  does not require reimbursement of all actual costs.
  Rather, it limits reimbursement to a level no
  higher than actual costs and sets broad standards
  for the subtraction of excessive and unnecessary
  costs from that figure.
  429 F. Supp. at 1197. The Secretary has promulgated regulations that attempt to define the components of reasonable cost. 42 C.F.R. § 405.451 provides that "[r]easonable cost includes all necessary and proper costs incurred in rendering the services. . . ." Necessary and proper costs, in turn, are defined as those "costs which are appropriate and helpful in developing and maintaining the operation of patient care facilities and activities."

Needless to say, neither the statute nor regulations promulgated thereunder contain a clear and concise test for determining reimbursable costs under the Medicare program. It is thus not surprising that the courts have given considerable deference to administrative agencies charged with implementing the program in order to promote uniformity and consistency. Consolo v. Federal Maritime Commission, 383 U.S. 607, 86 S.Ct. 1018, 16 L.Ed.2d 131 (1966); Udall v. Tallman, 380 U.S. 1, 16, 85 S.Ct. 792, 801, 13 L.Ed.2d 616 (1965); Good Samaritan Hospital, Corvallis v. Mathews, 609 F.2d 949, 955 (9th Cir. 1979). Judicial review of agency decisions in accordance with the Administrative Procedure Act, 5 U.S.C. § 706, as required by 42 U.S.C. § 1395oo(f) was "designed to free us from the time consuming and difficult task of weighing the evidence." Good Samaritan Hospital, supra, 609 F.2d at 955. Thus, the fact that we might disagree with the Secretary's conclusions or those of her agents, or that two inconsistent conclusions might be drawn from the record, does not prevent the agency's findings from being supported by substantial evidence. Consolo v. Federal Maritime Commission, supra; Good Samaritan Hospital, Corvallis v. Mathews, supra. With these general principles in mind, we proceed to an examination of the facts and record in the case at bar.

On December 31, 1979, following a three-day hearing, the Provider Reimbursement Review Board sustained the findings of the fiscal intermediary, Home Health Service Corporation, that $8,525 of In-Home Health's financial consulting costs and $11,586 of its electronic data processing costs for fiscal 1976 were unreimbursable because they were not reasonable and necessary within the meaning of 42 C.F.R. § 405.451. The Secretary affirmed the Board's decision on March 4, 1980, and In-Home Health petitioned for judicial review in May, 1980. In-Home Health contends that the determination of the Board and the Secretary was arbitrary, capricious, and unsupported by substantial evidence, and that the fiscal intermediary improperly applied unpublished internal reasonable cost guidelines promulgated in 1977 retroactively in disallowing portions of its 1976 costs in violation of the due process clause of the Fifth Amendment. For the reasons set forth below, the Court finds that the determinations of the Board and the Secretary are amply supported by substantial evidence in the record considered as a whole.

Cost of Consulting Services

In November, 1975, In-Home Health engaged Medipatient Home Health Care Consultants, Inc. ("Medipatient") to assist its executive director, Mr. Charles Laff, in the organization and management of In-Home Health during its first year of operation. The seven-year contract executed by In-Home Health and Medipatient provided that Medipatient would provide a variety of services, including on-site inspections, policy and procedural manual revisions, professional advice and training, advice concerning legal and regulatory matters, analysis of financial statements, and assistance in cash management and budget preparation for a flat fee of $1,000 per month or $12,000 a year. In reviewing In-Home Health's consulting costs, the fiscal intermediary first determined that a reasonable rate for consulting services was $50 per hour, the cheapest rate available in the Chicago area in 1976. It thus disallowed as unreasonable $1,550 of the $12,000 fee, the amount in excess of $50 per hour for the 209 total hours provided by Medipatient.*fn2 The intermediary then disallowed 139 1/2 hours of financial consultation and budget preparation as unnecessary costs because Charles Laff, In-Home Health's executive director, was a skilled certified public accountant who could have handled such matters himself without the assistance of a consultant. Thus, the intermediary only approved $3,475 for consulting costs payable to Medipatient for fiscal 1976.

The evidence adduced during the three days of hearings before the Board reveals that Laff was a certified public accountant with eight years of experience as comptroller, treasurer, and an ex-officio member of the board of directors of Budget Rent-A-Car Corporation from 1965 through 1973. Laff was also vice-president for financial affairs of Intercontinental Services, Inc., a holding company that made investments in the health care field, between 1973 and 1975. While he was affiliated with Intercontinental, Laff participated in the operations of its subsidiary, Claims Processing Corporation, which provided billing and bookkeeping services to hospitals and clinics, and he explored the possibility of Intercontinental's acquisition of Unihealth Services Corporation, a consulting and data processing firm serving the health care industry. When that potential acquisition fell through, Laff participated in the creation of Medipatient as a subsidiary of Intercontinental in 1975.

During 1976, while he was running In-Home Health as its executive director, Laff "moonlighted" as a financial consultant for Medipatient and did financial restructuring and budget preparation for several Medipatient clients: In-Home Health Care Service of Suburban Chicago, West; Home Health Care Service of Chicago, South; and Home Health Care Service of Chicago, North. Laff received $10,000 for 200 hours of consulting work during this period, or $50 per hour. Although Laff testified that his outside consulting activities had nothing to do with In-Home Health's need for Medipatient's financial consulting services, it was not unreasonable for the Board or the Secretary to find that Laff was sufficiently well versed in financial and budgetary affairs to forego the services of a consultant as unnecessary in such circumstances.*fn3 The Board also did not err in concluding that a seven-year contract for such services was of an unreasonable duration.

Similarly, it was not unreasonable for the Board or the Secretary to decide that $50 per hour was a reasonable rate of reimbursement for consulting services compared with the $57 per hour that In-Home Health effectively paid Medipatient for 209 hours of work in 1976. At least one consulting firm located in the Chicago area, National Health Delivery Systems, operated with a fee structure of $50 per hour and though Laff testified and the Board so found that he did not hire that particular firm for valid reasons, the $50 rate clearly was not unreasonably low. ...

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