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November 4, 1976

F. David MATHEWS, Secretary of the Department of Health, Education and Welfare of the United States of America, et al., Defendants

The opinion of the court was delivered by: FRANKEL


 FRANKEL, District Judge.

 Plaintiffs, the Professional Factoring Service Association, several corporations directly involved in the business of financing accounts receivable for providers participating in the Medicaid program, and five providers of Medicaid services (an optometrist, a radiologist, a dentist, an ambulance service, and a pharmacy) who utilize factoring services, sue for declaratory and injunctive relief against the Secretary of Health, Education and Welfare ("HEW"), the New York State Social Services Commission, and the New York Social Services Commission. The charge is that a newly promulgated regulation, 45 C.F.R. § 249.31, which effectively prohibits the making of Medicaid payments to or through a factor, is invalid upon one or more of several grounds. Plaintiffs have moved for a preliminary injunction. For reasons that follow, the motion will be denied.


 The Medicaid law as originally enacted in 1965, 42 U.S.C. § 1396 et seq., and the accompanying regulations promulgated by the Secretary pursuant to authority granted him by 42 U.S.C. § 1302, did not in terms preclude the reassignment by providers of their claims for Medicaid payments. Under those original arrangements, providers often obtained financing and clerical assistance by reassigning Medicaid claims to factors, including the plaintiff factors in this case, who then submitted the claims and subsequently received payments in their own names. In 1972, Congress, finding that reassignments "have been a source of incorrect and inflated claims for services and have created administrative problems with respect to determinations of reasonable charges and recovery of overpayments," S.Rep.No.92-1230, 92nd Cong., 2nd Sess. 205 (1972); H.R.Rep.No.92-231, 92nd Cong., 1st Sess. 104 (1971), U.S.Code Cong. & Admin.News 1972, p. 4989, amended the statute by adding to 42 U.S.C. § 1396a a new subdivision 32. The added provision says, with respect to state medicaid plans (which require the secretary's approval):

"that no payment under the plan for any care or service provided to an individual by a physician, dentist, or other individual practitioner shall be made to anyone other than such individual or such physician, dentist, or practitioner, except that payment may be made (A) to the employer of such physician, dentist, or practitioner, if such physician, dentist or practitioner is required as a condition of his employment to turn over his fee for such care or service to his employer, or (B) (where the care or service was provided in a hospital, clinic or other facility) to the facility in which the care or service was provided if there is a contractual arrangement between such physician, dentist, or practitioner and such facility under which such facility submits the bill for such care or service * * *."

 The legislative history of the amendment indicates that while Congress intended to prohibit reassignment of claims for Medicaid benefits, it did not intend to "preclude a physician or other person who provided the services * * * from having the payment mailed to anyone or any organization he wishes, but the payment would be to him in his own name." S.Rep.No.92-1230, supra at 205; H.R.Rep.No.92-231, supra at 104. To implement the new subdivision, the Secretary of HEW in April, 1974, promulgated 45 C.F.R. § 249.31, which basically echoed the language of the statute without providing any additional clarification.

 Following the 1972 amendment, factors and providers devised a method for effectively continuing the prior financing arrangements while complying with the statute and regulations. Under the new scheme, claims were submitted by the factors in the providers' names and payments were made by checks payable to the providers. The checks were not mailed to the providers but directly to the factors, who were able to cash them because of powers of attorney given them by the providers. Federal, state, and local Mediciaid officials initially acquiesced in, or at least tolerated, the new scheme. However, on February 4, 1976, the Secretary gave notice of a proposed regulation designed "to clarify and expand the regulations governing prohibition against reassignment of claims to payment" by explicitly prohibiting payments to or through a factor or his agent. 41 Fed.Reg. 5131 (1976). On August 27, 1976, the regulation as ultimately adopted by the Secretary was published in the Federal Register, to take effect on November 26, 1976. The regulation, assailed in this proceeding, provides as follows:

"§ 249.31 Prohibition against reassignment of claims to benefits.
"(a) Meaning of terms. For purposes of this section:
"(1) 'Facility' is a hospital or other institution which makes provision for furnishing health care services to inpatients.
"(2) 'Organized health care delivery system' is a public or private organization for delivering health services which may include, but is not limited to, a clinic or a group practice prepaid capitation plan.
"(3) 'Factor' is an organization, i.e., collection agency or service bureau, which, or an individual who, advances money to a provider for his accounts receivable which have been assigned or sold, or otherwise transferred, including transfer through the use of power of attorney, to such organization or individual for an added fee or a deduction of a portion of such accounts receivable.
"For purposes of this regulation, the term 'factor' does not include business representatives, such as billing agents or accounting firms, which render statements and receive payments in the name of the individual provider, provided that the compensation of such business representative for such service is reasonably related to the cost of processing the billings and ...

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