Appeal from a judgment of the District Court for the Eastern District of New York (George C. Pratt, Judge), declaring a demonstration project concerning review of Medicaid claims to be contrary to provisions of the Professional Standards Review Law, 42 U.S.C. §§ 1320c-1320c-22, and enjoining the project. Reversed.
Before Feinberg, Chief Judge, Newman and Kearse, Circuit Judges.
This case concerns the lawfulness under the Social Security Act of a demonstration project designed to test the relative effectiveness of various procedures for the review of hospital care and other services provided to Medicaid recipients. The project assigned the State of New York review authority for a two-year period over the Medicaid reimbursement claims of 20 New York City hospitals. The United States District Court for the Eastern District of New York (George C. Pratt, Judge) found the project to be in violation of the Social Security Act because, in the District Court's view, the Act vested review authority in an administrative arrangement that precluded review of claims by the State. Greater New York Hospital Ass'n v. Blum, 476 F. Supp. 234, 244 (E.D.N.Y.1979). We reverse.
Resolution of the narrow issue of statutory interpretation presented by this appeal requires some understanding of prior and current provisions concerning federally reimbursed health care claims. In 1972, Congress enacted the Professional Standards Review Law, Pub.L. No. 92-603, Title II, § 249F(b), 86 Stat. 1429 (1972) (current version at 42 U.S.C. §§ 1320c-1320c-22 (1976 & Supp. II 1978)), primarily as a means of seeking to control the burgeoning costs of federal health care programs, including Medicaid.*fn1 See Ass'n of American Physicians & Surgeons v. Weinberger, 395 F. Supp. 125, 140 (N.D.Ill.), aff'd, 423 U.S. 975, 96 S. Ct. 388, 46 L. Ed. 2d 299 (1975). The statute, which has been amended on several occasions since its enactment, provides for the delegation of review authority over Medicaid and Medicare reimbursement claims to so-called "Professional Standards Review Organizations" ("PSROs"), each of which ordinarily will be a nonprofit association composed of a "substantial proportion" of the physicians in the geographical area within which the PSRO functions, 42 U.S.C. § 1320c-1(b)(1)(A). The duties of each PSRO include the responsibility to determine (1) whether the particular health care services and items provided to a Medicaid or Medicare patient "are or were medically necessary," (2) whether the "quality of such services meets professionally recognized standards of health care," and (3) whether "in case such services and items are proposed to be provided ... on an inpatient basis, such services and items could ... be effectively provided on an outpatient basis or more economically in an inpatient health care facility of a different type." 42 U.S.C. § 1320c-4(a)(1).*fn2
As originally enacted, the statute expressly prohibited the expenditure of federal funds to reimburse claims for health care services or items "disapproved" by a PSRO, but left ambiguous the status of claims for services or items "approved" by a PSRO. 42 U.S.C. § 1320c-7(a). HEW consistently construed this and other provisions of the Professional Standards Review Law as if they rendered "conclusive" all PSRO determinations, both those approving and disapproving the services or items giving rise to a reimbursement claim. See Greater New York Hospital v. Blum, supra, 476 F. Supp. at 237; 42 Fed.Reg. 4259-60 (1977). "Conclusive," under the statute, in substance means immune from state agency review, but nonetheless subject to federal agency and federal court review. 42 U.S.C. § 1320c-8. Despite HEW's view, New York and other states took the position that the statute allowed them to refuse to pay reimbursement claims their state agencies thought were unwarranted, even though a PSRO had expressly approved the underlying services. In 1977, Congress amended the statute to clear up the ambiguity in the original language. Medicare-Medicaid Anti-Fraud and Abuse Amendments, Pub.L. No. 95-142, § 5, 91 Stat. 1183 (1977). As amended, the statute provides that all determinations by a PSRO concerning the medical necessity and quality of particular health care services and items are binding upon the states and "conclusive" for purposes of payment of reimbursement claims. 42 U.S.C. § 1320c-7(c).*fn3 This provision was expressly made contingent on several sections,*fn4 including § 1320c-20(a)(1), the provision at issue in this case.
Section 1320c-20(a)(1) provides, in pertinent part, as follows:
... No determination made by a Professional Standards Review Organization (concerning the medical necessity and quality of health care and services and items) shall constitute conclusive determinations under section 1320c-7(c) of this title for purposes of payment ... unless such organization has entered into a memorandum of understanding, approved by the Secretary, with the single State agency responsible for administering or supervising the administration of the State plan ... for the State in which the organization is located ... for the purpose of delineating the relationship between the organization and the State agency and of providing for the exchange of data or information, and for administrative procedures, coordination mechanisms, and modification of the memorandum at any time that additional responsibility for review by the organization is authorized by the Secretary. (Emphasis added).
As contemplated by § 1320c-20(a)(1), the PSRO responsible for Kings County, New York, entered into a "memorandum of understanding" with the State of New York in early 1979. The agreement, which was subsequently approved by the Secretary of HEW, detailed the responsibilities of the PSRO and expressly provided that once the PSRO assumes review responsibility for a particular facility, the State will cease making determinations of medical necessity and appropriateness of services for purposes of payment.*fn5 Appended to the agreement was the following qualification:
This Memorandum of Understanding shall be subject to the terms and conditions of a demonstration project being jointly undertaken by the State (of New York), (the Secretary of HEW), and the PSRO's in Erie, New York, Kings, Queens, and Bronx Counties.
Under the terms of this demonstration project, conclusive review authority over Medicaid reimbursement claims in 20 New York City hospitals was assigned to the State for a two-year period. The purpose of this arrangement was to provide a means of testing the relative effectiveness of the State and PSRO systems of review.
In July, 1979, two Kings County hospitals involved in the project and the Greater New York Hospital Association, brought this suit against New York State officials and the Secretary of HEW to challenge the project's legality. They contended that the transfer of review authority over Medicaid claims incurred at the plaintiff hospitals from the Kings County PSRO to the State of New York was impermissible under the Professional Standards Review Law.*fn6 The District Court upheld this contention and enjoined operation of the project at the plaintiff hospitals and at 15 other hospitals in New York City, whose operators had intervened.*fn7
On appeal, the State and Federal defendants contend that the project is authorized by § 1320c-20(a)(1).*fn8 They point out that this subsection requires a PSRO, as a condition of exercising its conclusive review authority, to enter into a memorandum of understanding for the purpose of "delineating the relationship" between the PSRO and the State. The memorandum of understanding that satisfied that condition with respect to the Kings County PSRO was specifically made subject to the terms of the challenged demonstration project, which accorded the State review authority for two years. The Kings County PSRO, it is urged, thus acquired its conclusive review authority over most hospitals within its area conditioned upon an exception for the exercise of review authority by the State in those hospitals within the demonstration project.
Whether § 1320c-20(a)(1) can be construed in this manner to authorize the demonstration project is a close question, to which neither the terms of the statute nor the legislative history provide a clear answer.*fn9 The District Court surely adopted a plausible construction of the subsection by emphasizing that the memorandum of understanding contemplated by the provision is to serve the purpose of "delineating" the relationship between the PSRO and the State. In the District Court's view, the demonstration project exceeded the subsection's scope because, as to the hospitals within the project, the authority of the PSRO is not delineated, it is eliminated. On the other hand, it is at least equally plausible to consider the relationship between the PSRO and the State to be properly "delineated" by an arrangement that makes the PSRO's authority generally effective, subject only to an exception for a limited period of time and a limited number of hospitals. It may well be that under the guise of delineating relationships, the states cannot conclude memoranda of understanding that allocate conclusive review authority between PSRO's and state agencies simply for the purposes of preserving substantial state authority. But the project excepted by the memorandum of understanding in this case is not part of a broad state attempt to retain authority that Congress has specified is generally to be shifted to qualified PSRO's. This project is an experiment, limited as to time and place and specifically designed to determine whether the PSRO mechanism is effective compared to state authority. We do not believe Congress would be at all reluctant to see § 1320c-20(a)(1) applied to permit a demonstration project undertaken to assess the most effective way of containing costs. Moreover, we are persuaded to adopt a construction that permits this demonstration project ...