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July 11, 1984

JOSEPH DAVID, as administrator of the Estate of IRENE DAVID, and on behalf of all others similarly situated, and SALVATORE CIVELLO, individually and on behalf of all others similarly situated, Plaintiffs, against MARGARET HECKLER, in her capacity as SECRETARY, DEPARTMENT OF HEALTH AND HUMAN SERVICES, and GROUP HEALTH INCORPORATED. Defendants.

The opinion of the court was delivered by: WEINSTEIN



 This case began in Queens Small Claims Court where Joseph David filed suit for underpayment of Medicare reimbursement claims of his cancer-ridden wife. The United States removed the case to this court where Mr. David graphically explained that the grounds for his complaint were "the arbitrary mutilation of normal charges by considerate physicians." The case has since expanded into a class action on behalf of hundreds of thousands of older people in Queens, New York whose Medicare Part B claims have been subjected to diminution and who allege that the notice and appeal procedures available to them violate due process.

 In 1982, the court certified a class consisting of persons whose disputed medical claims of $100 or more whose claims are serviced by Group Health Incorporated (GHI) pursuant to a contract with the Secretary of Health and Human Services. Millions of like claims are filed each year by the tens of millions of people in the nation who participate in the Medicare program.

 A trial was held in November 1983 focusing on the issue of adequacy of the review determination notices sent to Part B beneficiaries. The record was supplemented by further material and briefs in June 1984. The evidence demonstrated that the notices do not meet due process standards. They must be changed to provide claimants with comprehensible explanations of the actual reason full reimbursement is denied. In addition the trial revealed the persistence of error in the claims reimbursement process resulting in part from a dearth of information available to beneficiaries and those acting on their behalf.

 I. Statutory Framework

 The Medicare program -- the health insurance program for the elderly and disabled -- was established in 1965 under Title XVIII of the Social Security Act, 42 U.S.C. §§ 1395c et seq. Part A of the Act, 42 U.S.C. §§ 1395 et seq., not directly in issue in this case, covers hospital and related post-hospital services and is funded out of Social Security taxes. 42 U.S.C. §§ 1395d, 1395i.

 Part B is a voluntary supplemental insurance program covering most other health care costs. Enrolled individuals pay monthly premiums which together with government appropriations fund the program. In 1972, because some eligible elderly had been failing to enrole "due . . . to inattention, or [inability] to manage[e] their own affairs," H. Rep. No. 231, 92nd Cong. 2d Sess., reprinted in 1972 U.S. Code Cong. & Ad. News 4989, 5058, Congress amended the Medicare Act to provide that anyone who became eligible for Part B coverage would be enrolled automatically. 42 U.S.C. § 1395p(f). The Secretary of Health and Human Services is authorized by the Act to contract with private insurance carriers to administer the Part B claims process. 42 U.S.C. § 1395u. The carrier administering the program for the Secretary in the area covered by this suit is GHI.

 Enrolled individuals are entitled to reimbursement of 80 percent of the reasonable and necessary charges for covered services after a yearly deductible of $75 has been met. 42 §§ 13951, 1395x(v)(1)(A). Claims are submitted to the carrier which determines whether the claim is covered and how much reimbursement is due. The carrier then sends the claimant a notice known as the "Explanation of Medicare Benefits" (EOMB) form, together with the allowed payment, if any. 42 C.F.R. § 405.803. The claimant may then request a review of the decision. Review is by a different employee of the carrier than the one who performed the initial determination. 42 C.F.R. §§ 405.807, 405.810. After review the carrier is required to send the beneficiary a notice which is supposed to provide notification of the basis of the review determination. 42 C.F.R. § 405.811. Whenever the amount remaining in controversy is $100 or more the provider is required to provide an opportunity for, and establish procedures for, a "fair hearing." 42 U.S.C. § 1395u(b)(3)(C).

 Hearings are held before hearing officers who are employees of the carrier. The hearing officer's decision is final. See 42 U.S.C. § 1395ff; United States v. Erika, Inc., 456 U.S. 201, 102 S. Ct. 1650, 72 L. Ed. 2d 12 (1982).

 II. Facts

 A beneficiary can be denied partial or full reimbursement for payments made for medical treatment essentially for two reasons: if the treatment was not necessary or not covered or if the doctor's charge was not "reasonable." To assess the accuracy of the decision made on a claim, a beneficiary needs to be able to determine (1) whether the carrier properly classified the medical services provided and (2) whether the carrier correctly computed the reasonable charge allowance for that medical service. Under the present system most beneficiaries cannot make either of these determinations. The notices from the carrier are unintelligible to the average beneficiary. The information needed to decide whether the reasonable charge figure is correct is unavailable or inaccessible.

 Adequacy of the initial notice to the beneficiary (the EOMB form) is before the federal district court for the District of Columbia in a nationwide class action. See Gray Panthers v. Schweiker, 230 U.S. App. D.C. 219, 716 F.2d 23 (D.C. Cir. 1983) (Gray Panthers II); Gray Panthers v. Schweiker, 209 U.S. App. D.C. 153, 652 F.2d 146 (D.C. Cir. 1981) (Gray Panthers I). For that reason the initial notice has not been considered in this case. The major thrust of the trial in this case was directed to the issue of the adequacy of the review determination letter -- the letter a beneficiary receives after the carrier has undertaken a review of the beneficiary's request.

 The total amount of money involved in the millions of claims that are processed in the country as a whole is substantial. In fiscal year 1983 payment was reduced on over 72 million unassigned claims (those payable to the beneficiary as opposed to those payable to the doctor) on reasonable charge grounds. The aggregate amount of all reductions was close to 2.5 billion dollars. Pl. Ex. 80A. For the individual claimants -- may of whom live at close to the subsistance level -- the losses may impose severe hardship. In 83.9% of all Medicare Part B unassigned claims the amount the carrier determines the reasonable charge to be is less than the doctor's actual charge because of the reasonableness calculation. The national average dollar amount of the reduction is $28.48.

 For claims determined by GHI, 83% were reduced with an average reduction of $34. Pl. Exs. 62A, 72A, and 80A. In one three month period alone GHI reduced the "reasonable charges" by over 11 million dollars. The amounts cut from claims represent 23.1% of covered charges. When combined with the coinsurance (claimants are only reimbursed up to 80%) this means that on the average beneficiaries are reimbursed by GHI for only about 60% of their actual medical costs. (Pl. Ex. 80A.)

 When a claim is received by the carrier a clerk classifies the medical services provided to the beneficiary based on a computer operator's review of a short form filled out by the physician's office which contains a blank space headed "services provided." If the entry clerk fails to assign the correct code to the medical services, either because the doctor did not provide enough information, the doctor's notation was too cryptic or because the GHI clerk was careless, it is hard for the beneficiary to know what went wrong or even to know if the reimbursement is incorrect because neither the EOMB nor the review determination letter sets forth in ordinary terms the precise nature of the medical services on which the carrier has based its determination. Moreover, while the name of the doctor or other provider is stated, the exact dates of the services provided may or may not be indicated; services provided on different dates may be grouped together with only the first and last dates indicated.

 The notice plaintiff Joseph David received after he requested a review of the allowance on claims he submitted on behalf of his wife illustrates the problems with the review letter received by members of the plaintiff class. It is long and confusing, but the full explanation of the denial of additional payment reads as follows:

 Our Medicare Department has reviewed these claims and have [sic] determined that no additional allowances are warranted. They were paid correctly to the doctors' new and old profiles.

 There is no indication of what the doctor's reasonable charge allowance was even though one of the charges was for 719 dollars for which only 472 was allowed. "Doctors' new and old profiles" is not defined. Plaintiffs uncontroverted expert on readability of prose documents, Dr. Edward Fry, testified that the letter received by Mr. David is understandable by someone at the 16th grade level or above in reading capacity -- approximately the reading ability of a college senior. An employee of the carrier who testified for the government admitted that the letter sent to Mr. David was "terrible." The evidence established that this letter is not unique.

 The reading expert identified other review letters received by plaintiff class members as being written at the 12th and 14th grade levels. Mr. Fry's formula, the government argues, exaggerates the reading difficulty of the letters since it takes into account numerals and proper names, both of which are used somewhat extensively. The long strings of numbers used in the letters inevitably do contribute to the difficulty many have in reading them. As Mr. Fry pointed out, by putting the numbers in tabular form, much of the difficulty would be alleviated. Moreover, even were we to ignore the numbers and proper names, the reading level of the letters Mr. Fry examined would still be above that acquired by most of the elderly population of New York. About 48 percent of the elderly in New York City (age 65 and older) have an eighth grade education or less. Evidence established that although the primary indicator of reading ability is years in school, it is sound to assume a decline of two or three years for adults in reading skill from the reported years of school.

 The review letters defy understanding by the general populace. They are filled with confusing cross-references to "control numbers" and are composed of paragraphs that seem strung together randomly. Explanations are couched in technical jargon. The words and phrases "approved charges," "customary charges," "prevailing charges," "locality," "economic index," and "physicians' old and new profile," which are the substance of the letter, are specialized Medicare vocabulary. To a layman unfamiliar with Medicare regulations, this language has no real meaning. For example, "approved charge" is the term used in Part B notices for "reasonable charges." It does not connote -- as the common sense meaning of the term implies -- the amount actually approved for payment.A review determination letter which says a claim was "reviewed by the Medicare Department" means a clerical employee reviewed the claim, while a letter stating that the claim was "reviewed by the Medical Department" means a doctor has reviewed it. The distinction is indicated by the use of the word "Medical" rather than "Medicare." No other explanation of the difference is given. The difference may be important for if a review was by a doctor it is an indication that a close call on a medical issue was involved -- something a claimant would want to know in deciding whether to request further review. An elderly person with less than eighth grade reading ability is left with no understanding of the facial sense of the letter, let alone the actual reasons why a claim was not reimbursed to the 80% level.

 Review letters are not only incomprehensible, but the information they do contain is insufficient and misleading. They set forth the figure which the carrier says is controlling without making any pretense of showing how the carrier arrived at the figure. The notices explain the computation of the carrier's payment to the beneficiary only in generalized terms, assuming the correctness of the reasonable charge. This despite the fact that the key ingredients in the total computation are the reasonable charge figure and the method by which it is determined.

 Other paragraphs give generalized descriptions of the procedure allegedly used to determine "approved charges" but do not offer any actual computations or other back-up material. The trial evidence showed that these descriptions often conceal the facts about how computations of approved charges are made, using interpolations, incomplete data, human and computer error, subjective decisions and sometimes pure guesswork -- facts which, if disclosed, would alert anyone that more questions need to be answered before any appellate rights are waived.

 Different decisions plaintiff Joseph David received at the various review and hearing stages illustrate the many options available to a carrier in calculating the reasonable charge for computing reimbursement. Part of the David claim was for reimbursement for anesthesia services for which he had paid the anesthesiologist $320. At the original processing level the reasonable charge was calculated on the basis of 20% of the surgical allowance plus $5. The allowed amount was $208. At the review level, the reasonable charge was calculated to include an additional amount on the basis of a "relative value unit" and a "one-and-one-half surgery" rule. The allowed amount became $225.88. At the hearing stage the reasonable charge was recalculated on the basis of a listed "basic unit value" and "time units." This final amount was $265.60. See Pl. Ex. 9, pp. 16, 19-20. These differing approaches to one of the critical elements in the benefit reimbursement formula underscore the need for a meaningful and effective notice and appeal procedure.

 Lack of information is an ongoing problem in the Medicare Part B process; it is not limited to the problem of notice. When a hearing file is assembled for the beneficiary or his or her representative, the final approved ("reasonable") charge is supplied. Sometimes a printout of the doctor's customary charge calculations is included, but rarely is there an array of locality prevailing charge computations. Under present policy the only way a beneficiary can find out the customary charge by a particular doctor for a particular procedure is through the Freedom of Information Act.The file usually does not indicate when a "gapfiller" or other makeshift procedure was used in arriving at the approved fees nor does it indicate the underlying calculations used in arriving at the reasonable charge.

 The trial proof concerning a conversion factor used by GHI to pay plaintiff Salvatore Civello's claim -- along with hundreds of others -- illustrates the arbitrary and improper decisions which can underlie a carrier's "reasonable charge" computations. The carrier claimed that the conversion factor used to calculate Civello's reimbursement was based on a 1973 base year calculation, increased by the Medicare Economic Index. Pl. Ex. 15, 0.4. The nature of the base figure ($10.00) makes the number itself suspect, and the method of calculation by using the index is and was explicitly prohibited by HCFA Medicare Carrier's Manual § 5022.1B. Reasonable charge procedures prescribed in the Manual require that dollar conversion factors be recalculated each year based on prevailing charge data. Medicare Carrier's Manual § 5022.1. GHI disregarded this requirement and simply issued an internal staff memorandum stating what the conversion factor was to be. Pl. Ex. 1B.

 In 1974 the Regional Office of HCFA discovered that GHI was not using a conversion factor based on community prevailing charges, as required by regulations, but rather one of the carrier's own invention. The regional office staff recommended that GHI properly develop conversion factors during the 1974 annual review, but the carrier did nothing about it. Nonetheless HCFA continued to give the carrier satisfactory ratings for six years until the 1980 review, when the annual review downgraded the rating because of "GHI's failure to properly use conversion factors."

 This incorrect GHI conversion factor was necessarily used by the carrier on every Medicare Part B claim for surgery reimbursement where a "gap filler" was employed to calculate the reasonable charge, presumably resulting in improper payments to many beneficiaries throughout the period. The conversion figure was cut out of whole cloth in a manner highly improper under existing regulations, yet beneficiaries had no way of knowing they had been cheated.

 Coding and reasonable charge computation are the key elements in accuracy of carrier reimbursement. They are beyond the reach of review for most beneficiaries precisely because they are now adequately set forth in the notices now in use and because the information necessary to alert others to the ...

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