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Martin v. Shalala


July 31, 1995




On Appeal from the United States District Court for the Southern District of Indiana, New Albany Division. No. 89 C 77 -- S. Hugh Dillin, Judge.

Before POSNER, Chief Judge, BAUER and RIPPLE, Circuit Judges.

RIPPLE, Circuit Judge.



Plaintiffs-appellants Lois Martin, a Medicare beneficiary, and Dr. Alan Kohlhaas, a physician who receives assignments of Medicare payments for his services to Medicare beneficiaries, brought suit against the Secretary of Health and Human Services ("Secretary") and Associated Insurance Companies (d/b/a Blue Cross Blue Shield) ("Associated"), the insurance carrier designated to administer benefits under Medicare's Part B program in the State of Indiana. One of Associated's duties is to establish the "locality classification" of geographical areas of Indiana. The plaintiffs object to their classification as a "Category 03" non-urban locality. The district court dismissed the case for lack of subject matter jurisdiction. It concluded that, as a suit seeking an "amount determination," the plaintiffs were required to exhaust their administrative remedies before filing a court action. For the reasons that follow, we affirm that jurisdictional decision.


A. Statutory Framework

Title XVIII of the Social Security Act, 42 U.S.C. sec. 1395 et seq., known as "Medicare," provides federal reimbursement for medical care to the aged and disabled and is administered by the Secretary. There are two components to the program. Part A provides hospital insurance benefits, and is funded out of social security taxes. Part B makes available supplementary medical insurance benefits for medical and other health services, including physicians' services, on a voluntary basis to eligible persons for a monthly premium. *fn1 As such, it is similar to private medical insurance programs but with substantial federal subsidies. See Schweiker v. McClure, 456 U.S. 188, 190 (1982). Like private insurance policies, Part B excludes or limits payment on certain medical items and services; thus, actual reimbursement on health-related services may be less than what was requested. *fn2

By statute the Secretary is authorized to contract with insurance carriers like Associated to perform administrative functions under the Medicare Act on behalf of the Secretary. The functions include administering the payment of qualified claims. 42 U.S.C. sec. 1395u. The Congress has required carriers to assure that, "where payment . . . for a service is on a charge basis, such a charge will be reasonable." Id. at sec. 1395u(b)(3)(B). Under that mandate, therefore, carriers must determine whether benefits are due, and in what amount, and to whom payment should be made (i.e., the beneficiary or his or her assignee, the physician or other person furnishing the services). *fn3 When deciding upon a "reasonable charge" for a medical item or service, the carriers must give consideration to the physician's or supplier's "customary charge" and the locality's "prevailing charge." 42 U.S.C. sec. 1395u(b)(3)(L); 42 C.F.R. sec. 405.501 et seq. The amount established by the carrier as "reasonable" is considered a "screen" above which a charge is not reasonable and reimbursement will not be paid.

B. Facts

In this case, Associated is the carrier responsible for administering the Medicare Part B program in Indiana. It established the "prevailing charges in the locality for similar services" under sec. 1395u(b)(3) and the "locality" classifications under 42 C.F.R. sec. 405.505. *fn4 Associated classified Dearborn County as a "Category 03" rural locality, with the lowest Medicare Part B reimbursement in Indiana. The complaint before us challenges this determination.

Ms. Martin is a resident of Dearborn County, Indiana, who received medical services covered by Part B of Medicare. Dr. Alan Kohlhaas, the other plaintiff, is a physician practicing medicine in Dearborn County, Indiana, and is on the staff of Dearborn County Hospital. He is an assignee of his patients who have received medical services from him that are covered by Medicare Part B. Ms. Martin and Dr. Kohlhaas filed a class action complaint against the Secretary and Associated to challenge "the methods used by which Part B Medicare benefit amounts for medical services provided in Dearborn County, Indiana, were and are determined under . . . 'Medicare.' " R.10 at para. 1. *fn5 According to the complaint, the plaintiffs were "deprived of their property rights to full payment of their respective Part B Medicare benefit amounts," in particular "because the methods used by the Carrier to determine 'the prevailing charges in the locality for similar services' for medical services rendered in Dearborn County . . . were grossly negligent and wrongful." Id. They contend that Associated's classification of Dearborn County as a "Category 03" or rural locality results in unjustifiably lower benefit payments than those paid in nearby Cincinnati, which is classified as an urban area and which therefore is given higher reimbursements for the same medical services. Id. at paras. 20, 23. The complaint alleges that the carrier's failure to determine properly the prevailing charges "caus[ed] plaintiffs and the class to be deprived of the full Part B Medicare benefit to which each is entitled." Id. at para. 24.

The complaint also asserts that there is no administrative remedy available to these plaintiffs to challenge Associated's method for establishing the locality classification of Dearborn County. Id. at para. 32. The plaintiffs seek a declaration that the prevailing charges in Dearborn County for its medical services are comparable to those in the Cincinnati area; they also seek an order that they be granted a fair hearing, damages for the losses caused by the wrongful methods used to determine the prevailing charges, as well as fees and expenses.

C. District Court Opinion

The district court granted defendants' motion to dismiss the plaintiffs' complaint for lack of subject matter jurisdiction. *fn6 Order of June 30, 1994, R.2 (elec. dkt.) at 18. When evaluating the plaintiffs' post-1986 claims, *fn7 the court noted that the Medicare Amendments effective January 1, 1987 gave courts the same jurisdiction over Part B that they had over Part A, and provided for an administrative hearing by the Secretary under 42 U.S.C. sec. 405(b) and subsequent judicial review of the Secretary's final decision under sec. 405(g). *fn8 Because the judicial review available for Part B was identical to that available for Part A of the Act, the court analyzed this case under the framework established by the Supreme Court in Heckler v. Ringer, 466 U.S. 602, 615 (1984). In Ringer, the Court held that sec. 405(h) barred federal question jurisdiction over a claim seeking payment of Part A benefits. *fn9 In Bowen v. Michigan Academy of Family Physicians, 476 U.S. 667 (1986), however, the Court found that federal question jurisdiction was available for certain actions in which the methodology used to determine benefits, rather than the amount of benefits, was challenged. Although Ms. Martin and Dr. Kohlhaas had characterized their complaint as a challenge to the methodology for establishing locality classification, the district court determined that the plaintiffs' claims were "inextricably intertwined" with the claim for Medicare benefits because they essentially sought higher benefits. As a result, the court concluded, judicial review was available only after exhaustion of administrative remedies and a final decision by the Secretary under 42 U.S.C. sec. 405(g).

Turning to the requirements of sec. 405(g), the court determined that the plaintiffs' allegation that they had presented their claims to Associated satisfied the non-waivable requirement of sec. 405(b) that they present their claims to the Secretary. However, continued the court, the plaintiffs failed to pursue adequately their administrative remedies by raising their claims in a reimbursement hearing. Reasoning that the plaintiffs' locality designation claim was part and parcel of their claim for benefits, the court also held that their claim could not be considered wholly collateral to the benefits claim. As a result of the plaintiffs' failure to exhaust their administrative remedies, the court concluded that it lacked subject matter jurisdiction over plaintiffs' claims. *fn10 The court dismissed the claims against both the Secretary and her carrier because, under sec. 405(h), plaintiffs cannot proceed against a carrier when they cannot proceed against the Secretary. Bodimetric Health Servs., Inc. v. Aetna Life & Casualty, 903 F.2d 480, 487-88 (7th Cir.), cert. denied, 498 U.S. 1012 (1990).


A. Federal Question Jurisdiction


The plaintiffs submit that the district court did have federal question jurisdiction under 28 U.S.C. sec. 1331. They urge us to rely on Bowen v. Michigan Academy of Family Physicians, 476 U.S. 667 (1986). Michigan Academy recognized that, although Congress foreclosed judicial review of Medicare amount determinations, "matters which Congress did not delegate to private carriers, such as challenges to the validity of the Secretary's instructions and regulations, are cognizable in courts of law." Id. at 680. The plaintiffs claim that their challenge to the defendants' methods of classifying Dearborn County as a "Category 03" locality is not a challenge to the benefit amount determination, but rather is an intermediate claim that falls between the two clearly defined categories, challenges to the Secretary's instructions and regulations and challenges to amount determinations. The plaintiffs contend that their case involves a challenge to the defendants' benefit determination and classification procedures, and to the methods for administering the Medicare Part B program. As a result, they submit, the district court had federal question jurisdiction under 28 U.S.C. sec. 1331.

The Secretary responds that plaintiffs are actually challenging the amount of reimbursement rather than the method by which it is calculated. In any case, the Secretary submits, that distinction between amount and method was abolished by the 1986 Amendments to Medicare, which allowed Part B claimants the opportunity for judicial review of the amount of reimbursement. She further asserts that the claims are not reviewable because plaintiffs have failed to exhaust their administrative remedies.


The district court dismissed the plaintiffs' complaint pursuant to Federal Rule of Civil Procedure 12(b)(1). We review that determination de novo. Bailor v. Salvation Army, 51 F.3d 678, 684 (7th Cir. 1995); Family & Children's Ctr., Inc. v. School City, 13 F.3d 1052, 1057 (7th Cir.), cert. denied, 115 S. Ct. 420 (1994). Just as "the district court must accept as true all well-pleaded factual allegations and draw reasonable inferences in favor of the plaintiff," Rueth v. EPA, 13 F.3d 227, 229 (7th Cir. 1993) (quoting Capitol Leasing Co. v. FDIC, 999 F.2d 188, 191 (7th Cir. 1993) (per curiam)), so must we. Because the plaintiffs are challenging the dismissal of only the post-1986 claims, we conduct our plenary review of those claims within the framework of the 1986 Amendments to the Medicare Act. *fn11 Congress amended the Act to afford Medicare Part B claimants the same administrative hearings, followed by judicial review after exhaustion of administrative remedies, that were available to Part A claimants. *fn12 The Amendments apply to medical items and services provided after January 1, 1987, and establish judicial review of both Parts A and B Medicare claims as provided under the review provisions of the Social Security Act. 42 U.S.C. secs. 1395ff(b)(1)(C); National Kidney Patients Ass'n v. Sullivan, 958 F.2d 1127, 1131 (D.C. Cir. 1992), cert. denied, 113 S. Ct. 966 (1993); see also Health Equity Resources, Urbana, Inc. v. Sullivan, 927 F.2d 963, 965 (7th Cir. 1991) (stating that Medicare statute provides for judicial review in accordance with Social Security Act). Jurisdiction for that judicial review rests in 42 U.S.C. sec. 405(g) rather than in 28 U.S.C. sec. 1331, the general federal question jurisdiction statute. See 42 U.S.C. sec. 405(h); Bodimetric Health Servs., 903 F.2d at 483 (stating that sec. 405(h) provides that Medicare claims must be brought exclusively under sec. 405(g) for judicial review). Therefore, under the amended post-1986 Medicare statute, a Part B claimant like Ms. Martin or Dr. Kohlhaas may obtain judicial review of a Medicare payment challenge provided he or she meets the conditions of presenting the claim to the Secretary and exhausting the administrative remedies. Abbey v. Sullivan, 978 F.2d 37, 43 (2d Cir. 1992).

The plaintiffs submit, however, that theirs is not a payment challenge, but rather a methods challenge. They rely upon the Supreme Court decision in Michigan Academy, 476 U.S. 667 (1986), a pre-Amendment ruling. At that time, the Medicare statute provided that judicial review was available for Part A claims under sec. 405(g), and not sec. 1331; for Part B claims, however, only a "fair hearing" before a hearing officer, but no further administrative or judicial review, was available. See Michigan Academy, 476 U.S. at 674-75. The Supreme Court, in United States v. Erika, 456 U.S. 201 (1982), had established that the Medicare statute, by not providing review of carrier Part B decisions, demonstrated the intent of the Congress to preclude federal jurisdiction over Part B payment determinations. Id. at 208 (holding there was no jurisdiction to review carrier's interpretation and application of statute's "reasonable charge" provisions). In Michigan Academy, however, the Court focused on a type of legal claim that could not be adjudicated in a hearing before the carrier. The Court determined from "persuasive evidence of legislative intent" that the Congress did not intend that there be no forum to adjudicate statutory and constitutional challenges to the Secretary's administration of Part B of the Medicare program.

The legislative history of both the statute establishing the Medicare program and the 1972 amendments thereto provides specific evidence of Congress' intent to foreclose review only of "amount determinations" . . . remitted finally and exclusively to adjudication by private insurance carriers in a "fair hearing." By the same token, matters which Congress did not delegate to private carriers, such as challenges to the validity of the Secretary's instructions and regulations, are cognizable in courts of law. 476 U.S. at 680 (emphasis added).

The Court concluded that those Part B claims based on the "methodology" underlying Medicare, rather than on the "amount" of the reimbursement, were reviewable in federal court under the federal jurisdiction statute, 28 U.S.C. sec. 1331. Id. at 680-82. See Bodimetric Health Servs., 903 F.2d at 485 (summarizing that, in Erika and Michigan Academy, the Court recognized the differences between Medicare claims challenging amount of benefits to be paid (not reviewable) and challenges to the regulatory scheme under which the amount of benefit is calculated (reviewable)).

The plaintiffs rely upon the above quotation from Michigan Academy as the basis for their jurisdiction claim. They find further support in the Court's distinction between "challenges mounted against the method by which such amounts are to be determined rather than the determinations themselves." 476 U.S. at 675. However, such reliance is misplaced when the claims being considered arose after 1986. The 1986 Amendments significantly restructured the Medicare statute and provide administrative review of all Part B claims for more than $500 and judicial review of those involving more than $1000. As a result of the 1986 Amendments, therefore, the Michigan Academy distinctions drawn between "amount of payment" and "validity of the statute and regulations" challenges are no longer meaningful or necessary. Indeed, all the courts of appeals that have reviewed the "amount/methodology" dichotomy created under Erika and Michigan Academy in light of the 1986 Amendments have rejected the distinction for post-1986 claims. See Michigan Ass'n of Indep. Clinical Labs. v. Shalala, 52 F.3d 1340, 1348 (6th Cir. 1994) (stating that the distinction is a "non-issue" after Farkas); Farkas v. Blue Cross & Blue Shield of Mich., 24 F.3d 853, 860 (6th Cir. 1994) (declaring that amount/methodology distinction of Michigan Academy is not "good law"); Abbey, 978 F.2d at 42-43 (announcing that 1986 Amendments "relegat[ed] to irrelevancy the Erika/Michigan Academy dichotomy"); National Kidney Patients Ass'n, 958 F.2d at 1132-33 (rejecting amounts/methodology distinction of Michigan Academy, stating "general rule that all part B claims, including methodology disputes that arise in disposition of specific, concrete claims, are judicially reviewable under the pattern established by secs. 405(g) & (h)"). *fn13 We agree that the Social Security Act's review provisions, incorporated into the Medicare Act in sec. 1395ff, now provide the full authority for exercising jurisdiction over both Part A and Part B disputes.

We conclude, therefore, as did the district court, that there is no federal subject matter jurisdiction over this claim for Part B increased benefits pursuant to 28 U.S.C. sec. 1331. The claim must be treated, after the 1986 Amendments, like a claim for Part A benefits. Heckler v. Ringer, 466 U.S. 602, 605 (1984) establishes that judicial review of Part A claims is available "in the same manner as provided in 42 U.S.C. sec. 405(g)." We therefore consider whether the claimants before us have met the requirements of sec. 405(g). *fn14

B. Jurisdiction under the Medicare Act

Medicare claimants, under both Parts A and B, must ordinarily present their claims to the Secretary for review and exhaust their administrative remedies by obtaining a final decision of the Secretary before they can present a claim for judicial review. 42 U.S.C. sec. 405(g); Bowen v. City of N.Y., 476 U.S. 467, 472 (1986); Ringer, 466 U.S. at 617. That final agency ruling by the Secretary is "central to the requisite grant of subject-matter jurisdiction." Weinberger v. Salfi, 422 U.S. 749, 764 (1975). The district court found that the plaintiffs had satisfied the non-waivable presentment prerequisite. Although we believe that decision is a generous one, *fn15 we shall accept, for the sake of argument, that the plaintiffs have overcome that jurisdictional hurdle and will focus on the second requirement under sec. 405(g): that there be full administrative review culminating in a final decision of the Secretary. City of N.Y., 476 U.S. at 482-83. This requirement of exhaustion of administrative remedies is waivable under certain limited circumstances. Ringer, 466 U.S. at 618.

In this case, the plaintiffs have not specifically alleged that they have exhausted, or have attempted to proceed through, their administrative remedies. They have alleged only that "[a]ll conditions precedent have been performed or have occurred," R.10 at para. 32, and that they were not granted the opportunity for a "fair hearing" and thus had no available or meaningful method to challenge Associated's locality classification. Compl. at paras. 21, 22, 31, 32, 33. There is no administrative record here. See Michigan Ass'n of Indep. Clinical Labs., 52 F.3d at 1350 (holding, in case with no administrative record and no ALJ decision, that plaintiffs' letters were not sufficient to constitute exhaustion or a basis for waiver of exhaustion). Nevertheless, the exhaustion requirement may be waived "if it would be futile, that is, if there is no reasonable prospect that the applicant could obtain any relief by pursuing them," Health Equity Resources, 927 F.2d at 965. Our court has also held exhaustion unnecessary if the claim is "collateral to the claim for benefits and . . . if requiring exhaustion would cause irreparable harm." Marcus v. Sullivan, 926 F.2d 604, 614 (7th Cir. 1991). The Second Circuit, although noting that those factors may not be applied mechanically, has neatly listed the three criteria for waiver of the exhaustion rule: (1) The claim must be collateral to a demand for benefits; (2) exhaustion of the administrative process would be futile; and (3) the plaintiffs would suffer irreparable harm if required to move through the administrative procedure before obtaining relief. Abbey, 978 F.2d at 44 (citing City of N.Y. v. Heckler, 742 F.2d 729, 736 (2d Cir. 1984), aff'd, Bowen v. City of N.Y., 476 U.S. 467 (1986)); see also Day v. Shalala, 23 F.3d 1052, 1059 (6th Cir. 1994).

The plaintiffs submit that they are entitled to bypass the waivable requirement of exhaustion because their claims are "substantially collateral" to their claim for specific Medicare benefits. According to the plaintiffs, their complaint challenged the defendants' application and administration of Medicare provisions and their methods of classifying Dearborn County as a "Category 03" locality, but did not challenge the amounts of their benefits. The district court disagreed; it held that the plaintiffs' locality designation claim was part and parcel of their claims for benefits. We believe the district court's reasoning is sound. As our discussion above indicates, when a complaint asserts that the plaintiffs have not received "the full Part B Medicare benefits" and seeks damages for lost benefits, we cannot consider it as anything other than a claim for higher benefits. These plaintiffs, unlike those in Marcus and Day, *fn16 are basically seeking additional reimbursement that is in no way collateral to an amounts determination.

The plaintiffs also claim that it would be futile to attempt to exhaust their administrative remedies because no meaningful method to challenge Associated's methods of classification is available. Plaintiffs rely on Dr. Kohlhaas' letter from the Acting Region V Administrator of the Department of Health and Human Services, dated December 4, 1987, which stated that "no such formal appeals process exists whereby a physician can appeal the methodology a Medicare carrier used to establish its reasonable charge localities." R.17. On the basis of that statement, the plaintiffs posit that there is no administrative remedy available for them, and therefore that exhaustion would have been futile.

We believe that the letter, read in full, conveys a different message. The administrator answers Dr. Kohlhaas' questions on locality determinations; he then explains the established appeals process to follow for a review of a denied claim. The full sentence, from which the plaintiffs have excerpted the portion on which they rely, states:

While there is an established appeals process a physician may utilize when he disagrees with a Medicare carrier's decision on an assigned claim, no such formal appeals process exists whereby a physician can appeal the methodology a Medicare carrier used to establish its reasonable charge localities. R.17.

Thus the above quoted statement, in context, indicates that there is no process for obtaining the sort of declaratory relief Dr. Kohlhaas might prefer, but that a claimant could ask the carrier that handled the disputed claim to review the locality designation within the context of that claim. See Michigan Ass'n of Indep. Clinical Labs., 52 F.3d at 1350 (determining that plaintiffs' fiveyear letter-writing crusade did not qualify as request for review determination or hearing). Nor have these plaintiffs presented a legal basis on which to claim that the hearing officer, administrative law judge, or appeals council do not have the competence to address the locality classification as one of the factors used to compute a reimbursement. In sum, we conclude that futility cannot be a basis, in this case, for waiving the exhaustion requirement.

Finally, the plaintiffs have not shown that they would be irreparably harmed if the exhaustion requirement were enforced. The district court properly recognized that the plaintiffs failed to demonstrate that "deferment of judicial review until exhaustion of administrative remedies would cause them injury that cannot be remedied by later payment of the benefits requested." R.2 at 15. There has been no showing of injury, hardship, or futility, and no justification for asserting that their claim is collateral to a claim for benefits. As a result, the requirement that administrative remedies be exhausted cannot be ignored. Because the plaintiffs failed to exhaust the sec. 405(g) requirements, the district court properly dismissed their claims for lack of subject matter jurisdiction.


We hold that the plaintiffs' only source of federal court jurisdiction is the Medicare Act, not the federal question statute 28 U.S.C. sec. 1331. The plaintiffs have not exhausted their administrative remedies and have not shown that a waiver of that requirement is warranted. Thus the district court properly dismissed the plaintiffs' action for lack of subject matter jurisdiction. The judgment of the district court is affirmed.


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