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NEW YORK EYE & EAR INFIRMARY v. HECKLER

September 13, 1984

THE NEW YORK EYE AND EAR INFIRMARY, Plaintiff, against MARGARET M. HECKLER, as Secretary of the United States Department of Health and Human Services, Defendant.


The opinion of the court was delivered by: SAND

LEONARD B. SAND, U.S.D.J.

This action is brought under section 1878(f)(1) of the Social Security Act, as amended, 42 U.S.C. § 1395oo(f)(1) (1982), to review a final determination of the Secretary of Health and Human Services, Margaret Heckler (hereinafter "the Secretary"), denying plaintiff's request for Medicare reimbursement sought pursuant to sections 1814(b) and 1861(w) of the Social Security Act, 42 U.S.C. §§ 1395(f), (x) (1982).

 Plaintiff, The New York Eye and Ear Infirmary, is a nonprofit hospital that is certified to participate in the Medicare program as a provider of medical services. On August 19, 1978, plaintiff closed a thirty-three bed nursing care unit on the fourth floor of its facility. The Secretary subsequently determined that the costs associated with the unit during the period from August 19 through December 31, 1978 were not reimbursable under the Medicare program. Plaintiff contends that the Secretary's decision should not be sustained since (1) it is not supported by substantial evidence, (2) the Secretary's regulations regarding standby costs are unconstitutionally vague, and (3) its decision constituted "rule making" in violation of the procedures required under the Administrative Procedure Act. Both parties have moved for summary judgment pursuant to Fed.R.Civ.P. 56. For the reasons stated below, we conclude that the Secretary's motion for summary judgment should be granted.

 FACTS

 Plaintiff is a qualified provider of health care services under Title XVIII of the Social Security Act, 42 U.S.C. § 1395 et seq. (1982), otherwise known as the Medicare Act. This statute provides for federal reimbursement of medical care for the aged and certain disabled individuals. In order for a provider of medical services to participate in the Medicare program, it must file an agreement with the Secretary in which it agrees not to bill patients who are eligible to receive medical services under Medicare. 42 U.S.C. § 1395cc (1982). In return, the government reimburses providers such as plaintiff for the lesser of its reasonable cost of providing medical services to Medicare beneficiaries or the customary charges for such services. 42 U.S.C. § 1395(f)(b)(1) (1982). *fn1"

 Medicare reimbursement is made either directly by the Secretary or through the use of a fiscal intermediary. The intermediary makes interim payments to the provider based on the provider's estimated costs; it then adjusts the amount of such payments, if necessary, based on its analysis of the annual cost reports submitted by the provider. After the intermediary conducts its examination of the provider's cost reports, it informs the provider of its reimbursement determination by issuing a written Notice of Program Reimbursement. 42 C.F.R. § 405.1803 (1983). If the provider wishes to challenge this determination and the amount in controversy is $10,000 or more, it may request a hearing before the Provider Reimbursement Review Board (hereinafter "the PRRB"). 42 U.S.C. § 1395oo(a) (1982). The PRRB's decision may be affirmed, reversed, or modified by the Secretary, on her own motion, within sixty days after the provider is notified of the decision. 42 U.S.C. § 1395oo(f)(1) (1982). The provider may obtain judicial review of the Secretary's decision. Id.

 The "reasonable costs" for which a provider may receive reimbursement are basically the costs actually incurred by the provider, less any costs deemed to be unnecessary in the efficient delivery of medical services.42 U.S.C. § 1395x(v)(a)(A) (1982). *fn2" This phrase is further defined, by regulations promulgated by the Secretary, to include "all necessary and proper expenses incurred in rendering services . . . includ[ing] both direct and indirect costs and normal standby costs." 42 C.F.R. § 405.451(a), (c)(3) (1983). *fn3" Necessary and proper costs are "costs which are appropriate and helpful in developing and maintaining the operation of patient care facilities and activities. They are usually costs which are common and accepted occurrences in the field of the provider's activity." 42 C.F.R. § 405.451(b)(2) (1983). The phrase "standby costs" is not defined further by statute or regulations.

 On August 19, 1978, plaintiff discontinued operation of a thirty-three bed nursing unit on the fourth floor of its 199 bed facility. During the period from August 19 to December 31, 1978, patients previously treated in this unit were transferred to the fifth floor. Plaintiff performed various painting, cleaning and maintenance services in the fourth floor unit during this period. Although no patients were admitted to the unit subsequent to its closing, all beds and equipment remained in the unit during the period in dispute. During the months prior to the time the unit was closed, plaintiff's average occupancy rate was approximately 56% of capacity and plaintiff maintained other unused space in its facility. *fn4"

 On May 30, 1980, plaintiff's fiscal intermediary, Blue Cross/Blue Shield of Greater New York, Inc., notified plaintiff that the costs associated with the closed unit for the period beginning August 19, 1978 through December 31, 1978, amounting to $47,331, were not reimbursable under the Medicare program. *fn5" Plaintiff appealed this decision to the PRRB, which, on May 23, 1983, reversed the intermediary's determination and found that these costs were reimbursable. On July 21, 1983, the Secretary reversed the PRRB's decision, concluding that the costs incurred in maintaining the closed unit were not "reasonable costs" within the meaning of the Medicare Act and regulations and thus were not reimbursable by Medicare. *fn6" On September 29, 1983, plaintiff commenced this action, seeking judicial review of the Secretary's decision.

 DISCUSSION

 A. Substantial Evidence

 Plaintiff contends that the Secretary's determination that the costs associated with the closed nursing unit were not reimbursable is not supported by substantial evidence.Specifically, plaintiff argues that the record does not support the Secretary's conclusion that these costs were not "normal standby costs" and that such costs were not necessary for the efficient delivery of health care services.

 Under the standards set forth in the Medicare Act, the decision of the Secretary must be upheld unless plaintiff demonstrates that it is not supported by substantial evidence in the record as a whole. See 42 U.S.C. § 1395oo(f)(1) (1982); 5 U.S.C. § 706(2)(E) (1982). Substantial evidence is "more than a mere scintilla. It means such relevant evidence as a reasonable mind might accept as adequate to support a conclusion." Richardson v. Perales, 402 U.S. 389, 401, 28 L. Ed. 2d 842, 91 S. Ct. 1420 (1971) (quoting Consolidated Edison Co. v. N.L.R.B., 305 U.S. 197, 229, 83 L. Ed. 126, 59 S. Ct. 206 (1938)).

 The Secretary's conclusion that the costs associated with plaintiff's unused nursing unit were not necessary to the efficient delivery of medical services was based on a number of factors. The record reveals that plaintiff's decision to close the unit was based on its declining patient census. Plaintiff's occupancy rate during 1978 was approximately 56%; thus, on the average, almost one-half of its entire facility was unoccupied during that year. At or about the time of the closing, other unoccupied parts of the facility were available for patient use; even taking into account the closing of the fourth floor unit, plaintiff's average occupancy rate was still below 60% of capacity. During the period in dispute, plaintiff engaged in painting, maintenance and major cleaning of the unit, and reassigned all hospital staff to other floors of its facility. Although hospital equipment was left in the fourth floor unit at all times during this period, there is no evidence that this unit was in any way used to provide ...


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