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December 11, 1975

GREATER NEW YORK HOSPITAL ASSOCIATION et al., Plaintiffs, United Hospital et al., Intervenor Plaintiffs,
David MATHEWS as Secretary of the United States Department of Health, Education and Welfare, and James B. Cardwell, as United States Commissioner of Social Security, Defendants

Metzner, District Judge.

The opinion of the court was delivered by: METZNER

METZNER, District Judge:

The original plaintiffs, composed of the Greater New York Hospital Association (GNYHA) and Peninsula Hospital Center, on behalf of themselves and other voluntary nonprofit hospitals which are members of GNYHA, move for a preliminary injunction pursuant to Rule 65 of the Federal Rules of Civil Procedure. They seek to enjoin the Secretary of the Department of Health, Education and Welfare (HEW) and the Commissioner of Social Security from implementing a promulgated regulation changing the mode of reimbursement for Medicare services rendered. 20 C.F.R. § 405.454(j), 40 Fed.Reg. 29815 (July 16, 1975). After the close of the evidentiary hearing held on the motion, 25 other voluntary nonprofit hospitals applied for and were granted permission to intervene in the proceedings.

 All parties have now informed the court that pursuant to Fed.R.Civ.P. Rule 65(a)(2), they consent to advancing the trial of the action on the merits and consolidating it with the hearing of the application.

 In order to understand fully the nature of the problem here presented, it is necessary to review the method of Medicare reimbursement in some detail.

 When Medicare was first instituted in 1966, interim payment was made upon presentation of patient bills to the Medicare intermediaries (insurers in their own right who were designated by the government as its agents to approve and make Medicare payments on the local level). Within two years thereafter, huge time lags in presentation of bills and resulting payments had arisen, causing serious cash flow problems in the hospitals (called "providers" by the Medicare Act).

 Accordingly, in 1968, in an attempt to alleviate this burden, the Commissioner instituted a Periodic Interim Payment plan (PIP). Under this arrangement, an average annual Medicare payment for each provider is determined in advance. That amount is then divided into 52 parts and paid weekly to the provider regardless of services actually performed. At the end of the year, an annual report of detailed costs is presented by the provider, and adjusted against payments made to reflect the actual Medicare reimbursement. Only 800 hospitals out of 6,700 hospitals in the Medicare program had elected to receive PIP reimbursement, when in January 1973, HEW placed a freeze on any additional PIP participants while it evaluated the system. All plaintiff hospitals are currently reimbursed by this system.

 It was determined in 1973 that the PIP plan paid some hospitals in advance of rendering medical care. A new Periodic Interim Payment plan was instituted, providing for biweekly payments which covered estimated services rendered in the third and fourth preceding weeks (New PIP). Under PIP the average lag in payment for services rendered is 3 1/2 days, while it is 21 days under New PIP. Providers under PIP at the time were allowed to continue under that system or transfer to New PIP. All new entrants to the system could only come in under New PIP. 600 hospitals have availed themselves of New PIP.

 To sum up, the vast majority of participating hospitals are being paid under old PIP and some 600 are being paid under New PIP.

 On January 16, 1974, a Notice of Proposed Rule Making was published announcing a proposed amendment to the old PIP system whereby old PIP providers would be converted to New PIP, 39 Fed.Reg. 2011, and on July 16, 1975, the regulation was promulgated, 40 Fed.Reg. 29815, effective September 15, 1975. Through an amendment, the effective date of implementation was extended to December 1, 1975.

 Under the plan of implementation, all old PIP providers were to miss the payment scheduled for December 1, 1975 and receive two weeks' payment on December 8, and thereafter biweekly. Starting with the payment of December 22, 1975, they were to receive a percentage less than the full amount so that by May 24, 1976 there would be an average 21-day lag, with bi-weekly payment.

 Plaintiffs claim that the regulation was promulgated arbitrarily, capriciously, without a sufficient statement of reasons, and was an abuse of discretion on the part of the defendants. They further argue that the regulation is not in accordance with law in that it violates the Medicare Act and regulations promulgated thereunder.

 Defendants contend that the regulation is not subject to judicial review and that in any case, it is neither arbitrary nor capricious, has sufficient statement of reasons, and is in accordance with the Medicare Act and regulations.

 In the instant case, 42 U.S.C. § 1395g provides in pertinent part:

"The Secretary shall periodically determine the amount which should be paid under this part to each provider of services with respect to the services furnished by it, and the provider of services shall be paid, at such time or times as the Secretary believes ...

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