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Daviess County Hospital v. Bowen

decided: January 20, 1987.


Appeal from the United States District Court for the Southern District of Indiana. No. 83 C 1418 -- James E. Noland, Judge.

Author: Flaum

Before WOOD, JR., CUDAHY and FLAUM, Circuit Judges.

FLAUM, Circuit Judge.

The Secretary of Health and Human Services appeals from a district court order reversing a decision of the provider Reimbursement Review Board ("PRRB") and remanding for calculation of Medicare provider reimbursement to appellee Daviess County Hospital ("the Hospital"). The PRRB concluded that the Hospital had failed to keep adequate record of the physical therapy services it provided and therefore was not entitled to reimbursement for the costs of therapy services rendered to Medicare patients. The district court held that reimbursement was due because despite deficiencies in the Hospital's records, it was not disputed that some therapy services were performed for which reasonable compensation could be determined. For the reasons set forth below, we reverse the district court and remand for entry of judgment for the Secretary.


Medicare is a federally funded health insurance program established under Title XVIII of the Social Security Act, 42 U.S.C. 1395 et seq. Part A of Title XVIII establishes a plan that pays hospitalization expenses for persons 65 years of age or older or suffering from certain disabilities. The institutions that furnish health care services under Part A, known in the parlance of Medicare as "providers", apply to the Secretary for reimbursement of the cost of care provided to Medicare patients. Providers may apply for reimbursement either directly or, upon conclusion of an agreement with the Secretary, indirectly through an intermediary. 42 U.S.C. § 1395h. Requests for reimbursement are made in the form of "cost reports" that each provider must file annually. 42 C.F.R. § 405.406(b).

Daviess County Hospital is a 136-bed general short-term hospital located in Washington, Indiana. Since 1971, the Hospital has operated its physical therapy department under an independent contract with American Therapeutic Services, Inc. ("ATS"). Under this contract ATS furnishes physical therapy services to the Hospital's patients (including those covered by Medicare) in exchange for 55 percent of the gross revenues of the Hospital's physical therapy department. The principles of ATS, Marlo and Beverly Chilman, husband and wife, are licensed physical therapists. In addition to working at the Hospital themselves, the Chilmans employed several part-time aides and assistants and at least one part-time therapist in the department during the period in question.

Like most Medicare providers, the Hospital applies for reimbursement through an intermediary, in this case Blue Cross and Blue Shield Association/Mutual Hospital Insurance, Inc. ("Blue Cross"). During an audit of the Hospital's 1977 cost report, Blue Cross concluded that the Hospital had failed to maintain records of physical therapy services in accordance with procedures promulgated by the Secretary. Specifically, Blue Cross determined that the Hospital had not properly calculated its cost limitation for physical therapy services provided by an outside contractor under 42, C.F.R. § 405.432, and had not maintained a "daily log" of hours of service provided, as is required by " 1417A of the Secretary's Provider Reimbursement Manual. Because the auditors did not review the Hospital's 1977 cost report until early in 1979, Blue Cross decided not to require the Hospital to submit a daily log for 1977 (or for 1978, for which year the auditors found the Hospital's records similarly deficient). Blue Cross instead calculated reimbursement for 1977 and 1978 based on time estimates made by the Chilmans.

Because it had found the Hospital's time records deficient, Blue Cross warned the Hospital during the audit of the 1977 cost report that the Hospital was not in compliance with the record-keeping requirements of the Provider Reimbursement Manual. Acknowledging this warning in a letter to Blue Cross on March 12, 1979, the Hospital's administrator promised that the Hospital would "begin maintaining a daily log identifying all information required by Section 1417 of [the Manual]."

When Blue Cross audited the Hospital's 1979 cost report, it discovered that daily logs were not in fact kept for that year. The Hospital made two attempts to supplement its report with additional records, but Blue Cross remained dissatisfied, and ultimately decided to disallow all reimbursement to the Hospital for physical therapy services for 1979. When an audit of the Hospital's cost report for 1980 resulted in a similar determination, Blue Cross denied all reimbursement for that year as well. A total of $97,959.00 in claimed reimbursement was disallowed. The Hospital appealed Blue Cross' disallowances to the PRRB under 42 U.S.C. § 1395oo(a). A three-member panel of the PRRB affirmed the disallowances, with one member dissenting.*fn1

After the Secretary declined to modify the decision of the PRRB, the Hospital sought review in the district court under 42 U.S.C. § 1395oo(f)(1). The district court found the PRRB's decision to be "arbitrary and not supported by the evidence." The court found it undisputed that "substantial therapy services were rendered during the years in question" for which the Hospital had submitted "considerable secondary evidence," and that complete disallowance had "an unwarranted punitive impact on [the Hospital]." Memorandum Entry of June 6, 1985, at p. 5. The district court reversed the PRRB and remanded for calculation of a reasonable reimbursement sum. This appeal by the Secretary followed.


We must dispose of two preliminary matters before proceeding to the merits of the Secretary's claim. The first concerns this court's jurisdiction. The order appealed from remanded this case to the PRRB for further proceedings specifically the calculation of "reasonable reimbursement" for physical therapy services rendered to Medicare patients during the years 1979 and 1980. Ordinarily an order remanding a case to an administrative agency for further proceedings is not a "final decision" subject to immediate appeal under 28 U.S.C. § 1291. In Re Riggsby, 745 F.2d 1153, 1156 (7th Cir. 1984). In determining whether a particular order is "final" for purposes of appeal, however, this court must apply a practical, rather than technical, construction to that term. See, e.g., Gillespie v. United States Steel Corp., 379 U.S. 148, 152, 13 L. Ed. 2d 199, 85 S. Ct. 308 (1964).

Both the Secretary and the Hospital agree that we have jurisdiction, although their proffered reasons differ. The Secretary urges us to rely on the "collateral order" doctrine announced in Cohen v. Beneficial Industrial Loan Corp., 337 U.S. 541, 547, 93 L. Ed. 1528, 69 S. Ct. 1221 (1949). See also Cohen v. Perales, 412 F.2d 44, 48-49, on rehearing, 416 F.2d 1250 (5th Cir. 1969), rev'd on other grounds, Richardson v. Perales, 402 U.S. 389, 28 L. Ed. 2d 842, 91 S. Ct. 1420 (1971). As the Supreme Court observed in Coopers & Lybrand v. Livesay, 437 U.S. 463, 468, 57 L. Ed. 2d 351, 98 S. Ct. 2454 (1978), however, one of the requirements for finding a order to be "final" under the Cohen doctrine is that the order resolve an issue "completely separate from the merits of the action . . . . " The order now on appeal resolved ...

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