The opinion of the court was delivered by: Richard Mills, District Judge:
Appeal of the decision of the Provider Reimbursement Board
Issue: The PRRB refused capital cost treatment of St. Vincent
Memorial Hospital's computerized tomography (CT) scanner for
fiscal years 1987, 1988, and 1989. Was this decision arbitrary,
capricious, an abuse of discretion, unsupported by substantial
evidence or otherwise not in accordance with the law?
We begin tabula rasa: no federal court has yet reviewed this
I. Factual and Procedural Background
The Medicare Act ("the Act"), Pub.L. 89-97, Title I, 79 Stat.
286 (1965) (codified at 42 U.S.C. § 1395, et seq.), by which
the Medicare program was established, provides federal funding
for medical care for the aged and disabled. The Secretary is
charged with responsibility for administering the program. She
has delegated administration of the program to the Health Care
Financing Administration (HCFA). The Secretary also contracts
with private organizations to act as
fiscal intermediaries for managing and administering Medicare
reimbursement to Medicare providers under the program.
Under Part A of the Act, hospitals and other providers of
medical services can enter into provider agreements with the
Secretary. 42 U.S.C. § 1395cc. St. Vincent has entered into
such an agreement, and its fiscal intermediary is Blue Cross
and Blue Shield of Illinois (Blue Cross). As St. Vincent's
fiscal intermediary, Blue Cross is responsible for reviewing
St. Vincent's claims for reimbursement, which are known as cost
reports. Cost reports are submitted at the end of a cost year
and are reviewed by the fiscal intermediary, which may make
audit adjustments before issuing a Notice of Program
Reimbursement. A Notice of Program Reimbursement is the final
statement of the amount of reimbursement a fiscal intermediary
has decided is due to a provider for a particular cost year.
A provider that is dissatisfied with an intermediary's
determination is entitled to a hearing before the Provider
Reimbursement Review Board (PRRB) if the amount in controversy
is $10,000 or more and the provider makes a timely request
within 180 days of the date that the notice of the
intermediary's determination was mailed to the provider.
42 U.S.C. § 1395oo(a); 42 C.F.R. §§ 405.1835(a), 405.1841(a). The
PRRB's decision may be reversed, affirmed, or modified by the
Secretary. 42 U.S.C. § 1395oo(f). The district court has
jurisdiction to review a final reimbursement decision by the
PRRB or the Secretary, and judicial review is conducted
pursuant to the provisions of the Administrative Procedure Act,
5 U.S.C. § 701-706, and is based on the administrative record.
42 U.S.C. § 1395oo(f)(1).
Prior to October 1, 1983, the Medicare program operated on a
cost-based reimbursement scheme. Under this scheme, the
government would pay providers the "reasonable cost" of covered
services furnished to Medicare beneficiaries.
42 U.S.C. § 1395f(b)(1). Congress amended the Social Security Act in 1983.
Among the changes made was one requiring the Secretary to use a
new prospective payment system (PPS) for reimbursing hospital
providers. Pub.L. No. 98-21, Title VI, 97 Stat. 65, 149-152
(1983) (codified as amended at 42 U.S.C. § 1395ww, et seq.).
The purpose of adopting the new system of reimbursement was to
provide incentives to hold down the costs of hospital care
under the Medicare program. Hospitals became subject to the PPS
on the first day of their first cost reporting year beginning
on or after October 1, 1983.
This case concerns the treatment of costs associated with CT
scanner services. Under 42 C.F.R. § 413.130, leases and rentals
for the use of depreciable assets may be considered and claimed
as "capital-related" costs. If the payments made by St. Vincent
to MIL qualify as "capital-related" costs, the hospital may be
separately reimbursed for such payments. If such payments are
not "capital-related" costs, then they are subsumed in the PPS
payments received by the hospital.
For St. Vincent's fiscal years ending June 30, 1987, 1988,
and 1989, the Hospital claimed capital-cost treatment of the
majority of the costs incurred from the equipment owner with
respect to the CT scanner. St. Vincent's Medicare Fiscal
Intermediary for the prior year, 1986, had been Aetna Life,
who, after originally questioning the pass-through for the CT
scanner, had allowed capital-cost treatment for the same
contractual arrangement that is in dispute here. Then, for
fiscal 1987-89, Blue Cross became the Medicare Fiscal
Intermediary for St. Vincent and denied capital-cost pass
through for the CT scanner. The effect of this adjustment was
that the Medicare Program did not contribute to St. Vincent's
1987-89 capital costs associated with the CT scanner equipment.
Pursuant to 42 U.S.C. § 1395oo(f) (1989), the Hospital
appealed the Medicare Fiscal Intermediary's adjustment
disallowing CT Scanner costs to the PRRB, an administrative
tribunal within HHS. The PRRB decision affirmed the
Intermediary's adjustment for 1987-89 in a 2-1 decision.
(Sloan, dissenting). The Acting Deputy Administrator of the
Health Care Financing Administration (HCFA) declined further
review of the case. Thus, the decision of the PRRB constitutes
the final decision of Defendant Shalala.
The Provider, St. Vincent Memorial Hospital, is a 179-bed,
acute care, non-profit, general hospital which also operates a
50-bed skilled nursing unit. This appeal concerns the
intermediary's treatment of costs associated with the provision
of computerized tomographic (CT) scanning services under an
agreement with an unrelated party.
On October 26, 1982, St. Vincent entered into an agreement
with Mobile Imaging Laboratories, Inc. (MIL) for the provision
of CT scanning services for a term of three years. Under this
agreement, MIL provided fixed-site CT scanning equipment
installed at St. Vincent's facility and furnished appropriate
technicians/technologists' services to perform the CT scanning
procedures requested by St. Vincent for its inpatients and
outpatients. In addition to providing equipment and personnel,
MIL was responsible for site preparation, installation and
maintenance of the equipment and cross-training of St.
Vincent's personnel. MIL also agreed to carry public and
professional liability insurance consistent with the State's
Medical Malpractice Act. As owner of the equipment, MIL bore
full financial responsibility for the depreciation or
obsolescence of said equipment and would be responsible for
removing the equipment at its own cost upon completion or
termination of the contract.
With respect to St. Vincent's requirements, the agreement
states that adequate space within the hospital facility must be
provided to accommodate the equipment and furnishings. St.
Vincent also agreed to provide housekeeping and all utilities
necessary for the space and equipment, and to furnish the
necessary administrative services to support the provision of
this patient care service. Only St. Vincent's patients under
the care of its medical staff could utilize the CT scanning
services with St. Vincent establishing all charges and
receiving all payments for the services rendered.
In consideration of MIL's performance under the agreement,
St. Vincent agreed to pay MIL at rates predicated on a sliding
scale, fee-for-service schedule based on the average number and
type of CT scans performed. During the initial period of this
agreement (Fiscal Years 1983-1985), capital costs associated
with the CT scanning services furnished by St. Vincent were
neither claimed nor reimbursed under the Medicare program.
In 1985, the arrangement between St. Vincent and MIL changed
and an amendment to the existing contract was effected. The
amendment provided for the installation of a new
third-generation CT scanner (Toshiba TCT 80A) for which MIL
accepted full responsibility for the installation and cost of
renovation to accommodate the operation of the new equipment.
The term of the contract was extended for a period of five
years; however, at the end of three years St. Vincent had the
1. Allow the contract to extend until the end of
its term with prices adjusted for inflation.
2. Purchase the equipment from MIL for a price of
$225,000 plus sales taxes.
3. Lease the equipment from MIL for the balance of
the term of contract for a price of ...