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June 30, 1993


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


Appeal of the decision of the Provider Reimbursement Board (PRRB).

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 question.

I. Factual and Procedural Background

A. General 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.

B. Summary of Facts

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 following options:

  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 ...

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