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January 27, 1984


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 hereinafter stated:

(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 "expert witnesses".


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 relevant part:

    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 year.*fn4

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 year.

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 ...

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