The opinion of the court was delivered by: Will, District Judge.
In this action, plaintiff, a provider of services under Part A
of the Medicare program, 42 U.S.C. § 1395x(u), challenges an
administrative regulation, 42 C.F.R. § 405.452(b)(1)(ii)*fn1,
which alters the computation formula, in effect since the
inception of the Medicare program in 1966, used to reimburse
provider hospitals for the costs of malpractice insurance. Before
us are plaintiff's and defendant's cross-motions for summary
judgment and defendant's motion to strike plaintiff's affidavits
in Attachment C to its complaint for declaratory and injunctive
relief and sums due under the Medicare statute. For the reasons
(1) plaintiff's motion for summary judgment is granted;
(2) defendant's motion for summary judgment is denied;
(3) the matter is remanded to the Secretary for further
consideration in accord with this opinion; and
(4) we grant defendant's motion to strike that portion of
Attachment C, namely Vol. II, which contains the affidavits of
As a participant in the Medicare program, a hospital must file
a "provider agreement" with the Secretary of Health and Human
Services, 42 U.S.C. § 1395cc, under which it agrees not to charge
any Medicare patient for services covered by the Medicare
program, in return for reimbursement by the program of the
"reasonable cost" of such services. 42 U.S.C. § 1395f(b)(1)(A).
Payment to providers of services is made directly or through
fiscal intermediaries, such as Blue Cross/Blue Shield pursuant to
contract with the Secretary. 42 U.S.C. § 1395h. After the close
of its fiscal year, a provider submits a "cost report" reflecting
costs incurred during the fiscal year and an apportionment of
those costs between Medicare and non-Medicare patients. 42 C.F.R.
§§ 405.406(b), 405.453(f).
In its complaint, filed April 21, 1983, plaintiff challenges
the intermediary settlement of its cost year ending in 1980.
During that cost year, plaintiff had a provider agreement with
the Secretary for the provision of Medicare services. Prior to
the challenged regulation, plaintiff was reimbursed for its
malpractice premium costs on the basis of Medicare utilization of
services, which was approximately 30 percent for the cost year in
issue. However, the fiscal intermediary determined reimbursement
for plaintiff's malpractice costs for that cost year on the basis
of the challenged malpractice apportionment regulation, rather
than on the former basis of utilization. This resulted in
reimbursement of only 20.11 percent of plaintiff's malpractice
insurance costs. At issue is $24,159 in denied Medicare
reimbursement; allegedly the difference in sum between the
reimbursement of 20.11 percent and the Medicare utilization rate
of 30 percent for the cost year in issue.
On June 3, 1981, plaintiff, together with many Florida
hospitals and one Alabama hospital, requested a group hearing
before the Provider Reimbursement Review Board ("PRRB") pursuant
to 42 U.S.C. § 1395oo (a), appealing the malpractice insurance
costs allowed in its Notice of Program Reimbursement, and thus
challenging the legality of the malpractice regulation. The PRRB
decided that it lacked authority to determine whether the
Medicare regulation governing reimbursement for malpractice
insurance, 42 C.F.R. § 405.452(b)(1)(ii) (June 1, 1979), is
valid, found that the case falls within 42 U.S.C. § 1395oo
(f)(1), and granted the providers' requests for an expedited
judicial review of the malpractice insurance issue. Thus, this
case is before us pursuant to 42 U.S.C. § 1395oo which states in
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 controversy
whenever the Board determines . . . that it is
without authority to decide the question. . . .
We are not the first court confronted with the issue of the
validity of the new malpractice regulation. To date, seven courts
have ruled on this matter. Three courts have invalidated the
regulation. See Mt. Carmel Mercy Hospital v. Margaret M. Heckler,
581 F. Supp. 1311 (E.D.Mich. 1983) (J. DeMascio); Abington
Memorial Hospital v. Heckler, 576 F. Supp. 1081 (E.D.Pa. 1983) (J.
Fullam); Chelsea Community Hospital v. Margaret M. Heckler, No.
83CV-6126-AA, (E.D.Mich. Dec. 20, 1983) (J. Joiner). Four courts
have upheld the regulation. See Athens Community Hospital v.
Heckler, 565 F. Supp. 695 (E.D.Tenn. 1983) (J. Taylor), appeal
docketed, No. 83-5546 (6th Cir. Aug. 5, 1983); Cumberland Medical
Center v. Heckler, 578 F. Supp. 39 (M.D.Tenn. June 22, 1983) (J.
Morton), appeal docketed, No. 83-5549 (6th Cir. Aug. 9, 1983);
Humana of Aurora, Inc., d/b/a Aurora Community Hospital v.
Heckler, No. 83-Z-70 (D.Colo. Sept. 19, 1983) (J. Weinshienk),
appeal docketed, No. 83-2417 (10th Cir. Nov. 4, 1983); Walter O.
Boswell Memorial Hospital v. Heckler, 573 F. Supp. 884 (D.D.C.
1983) (J. Bryant), appeal docketed, No. 83-2223 (D.C.Cir. Dec. 2,
1983). Four substantive opinions have been written; Judges Fullam
and DeMascio have invalidated the malpractice rule and Judges
Taylor and Bryant have upheld the rule.*fn2 Because these courts
have well-described the basic facts concerning the malpractice
regulation, we shall not belabor the story. However, in the
interests of clarity, we will briefly sketch the undisputed facts
underlying this action.
Prior to the challenged regulation, effective July 1, 1979,
malpractice insurance costs were included in the "General and
Administrative" category ("G&A") of hospital expenses, along with
other insurance costs and such costs as administrative salaries.
To apportion G&A between Medicare and non-Medicare patients,
Medicare reimbursed hospitals for the costs of malpractice
insurance based upon the ratio of Medicare patient utilization of
the hospital's services to total patient utilization — the
percentage of patient bed-days used by Medicare patients. The
effect of this, albeit simplified, is that prior to July 1, 1979,
if a hospital's services were utilized "x" percent by Medicare
patients, the hospital would be reimbursed "x" percent of its
malpractice insurance premium costs by the Medicare program.*fn3
In contrast, effective July 1, 1979, the challenged malpractice
rule reimburses a hospital for that percentage of its malpractice
insurance costs equal to the ratio of malpractice losses it has
paid to Medicare beneficiaries to total malpractice losses paid
to all patients during the current and four preceding years.
42 C.F.R. § 405.452(b)(1)(ii). Further, hospitals with no
malpractice loss experience for the five-year period will be
reimbursed for only 5.1 percent of their insurance costs for the
The effects of the final rule differ markedly from the previous
rule. For example, if a hospital's insurer has paid $100,000 to
Medicare claimants and $200,000 to non-Medicare claimants during
the five-year period, the hospital would be reimbursed for
one-third of its malpractice insurance costs for the current
Plaintiff offers an example of the impact of the regulation on
a hypothetical hospital with a 60 percent Medicare utilization
rate and malpractice insurance premiums of $100,000 per year.
Under the prior regulation, Medicare would have reimbursed this
hypothetical hospital approximately $60,000 for its malpractice
insurance premium costs. Under the challenged regulation,
reimbursement would occur as follows:
(1) If the hospital, during the relevant five-year
period specified by the challenged regulation, pays
only one malpractice claim, no matter what the
amount, to a Medicare recipient, Medicare will
reimburse the ...