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Friedman v. Heckler

June 24, 1985


Appeal by Medicare provider from judgment dismissing complaint claiming reimbursement for expenses incurred providing covered services to Medicare beneficiaries, 42 U.S.C. § 1395 et seq. Affirmed.

Author: Feinberg

Before: FEINBERG, Chief Judge, FRIENDLY and PRATT, Circuit Judges.

FEINBERG, Chief Judge:

Jack Friedman and Sidney Greenwald, doing business as Fort Tryon Nursing Home (Fort Tryon), appeal from a judgment, entered by Judge Kevin T. Duffy in the United States District Court for the Southern District of New York, dismissing their complaint. Friedman and Greenwald brought this action pursuant to 42 U.S.C. § 1395oo(f)(1) to review a final decision of the Provider Reimbursement Review Board (the Board) affirming the denial of various of Fort Tryon's claims for reimbursement under the Medicare program, 42 U.S.C. § 1395 et seq. (the Act). As a "provider of services" under the Act, Fort Tryon is entitled to reimbursement for the "reasonable cost" of providing covered services to Medicare beneficiaries. The Secretary of Health and Human Services (the Secretary) is charged with the responsibility of determining the amount of such reimbursement. Id. § 1395g. The Secretary often contracts with private organizations, known as fiscal intermediaries, to assist with the disbursement of Medicare funds to providers. Id. § 1395h.

In this case, Fort Tryon's claims for reimbursement for fiscal years 1976 and 1978 were audited by the Travelers Insurance Company (the Intermediary), a duly appointed fiscal intermediary. Dissatisfied with the Intermediary's conclusions for the years in question, Fort Tryon requested and received a hearing before the Board, see 42 U.S.C. § 1395oo(a); 42 C.F.R. § 405.1835 (1984), which included live testimony The Board affirmed the Intermediary's conclusions in relevant part. The decision of the Board became the final decision of the Secretary when the Deputy Administrator of the Health Care Financing Administration declined to reverse, affirm or modify that decision. See 42 U.S.C. § 1395oo(f)(1).

Fort Tryon then commenced this action, challenging the Board's disallowance of reimbursement for four items in 1976 and 1978: (1) lease and ownership costs; (2) interest expenses; (3) costs of medical supplies; and (4) physical therapy costs. The district court affirmed the Board's decision "in its entirety." On appeal, Fort Tryon challenges only those portions of the district court's decision that affirmed the Board's disallowance of reimbursement for lease and physical therapy costs. For the reasons stated below, we affirm the judgment of the district court.


The relevant facts are not in dispute. Fort Tryon, a 205-bed proprietary skilled nursing facility, is a partnership comprised of Jack Friedman and Sidney Greenwald and has been operating since 1968. In 1963, Friedman and Greenwald bought a parcel of land in Manhattan under the corporate name of Sidjay Associates, Inc. (Sidjay, Inc.) for the purpose of building a nursing home. In March 1966, they conveyed 50% of their 100% ownership of Sidjay, Inc. to the Colen family, pursuant to a joint venture agreement under which the Colens agreed to obtain financing for the nursing facility and arrange for and supervise its construction. Also pursuant to this agreement, Friedman and Greenwald became two of the four directors of Sidjay, Inc. and, respectively, its treasurer and vice president.

As noted in the joint venture agreement, Friedman and Greenwald simultaneously entered into a 21-year agreement to rent the facility from Sidjay, Inc. now 50% owned by Friedman and Greenwald. The lease, as amended in March 1967, provides for certain fixed rental payments to Sidjay, Inc. without regard to any allocation among its stockholders. The joint venture agreement, however, provides that during the years in question, the first $75,000 of the annual rental in excess of the monies needed for amortization and interest payments shall be distributed to the Colens, with the balance going to Friedman and Greenwald. Friedman and Greenwald assigned their rights as tenant to Fort Tryon in 1967. Upon completion of the nursing facility in 1968, Sidjay, Inc. (hereinafter the Lessor) was liquidated and its property distributed to the former stockholders as tenants in common, as contemplated by the joint venture agreement. Under the terms of the lease, Fort Tryon's rent was $288,480 in both 1976 and 1978, the years at issue in this suit.

The Act defines the "reasonable cost" of covered services as the "cost actually incurred, excluding therefrom any part of incurred cost found to be unnecessary in the efficient delivery of needed health services." 42 U.S.C. § 1395x(v)(1)(A). The Secretary is authorized to issue regulations "establishing the method or methods to be used, and the items to be included, in determining such costs." Id. The regulations governing reimbursement to providers are codified at 42 C.F.R. § 405.401 et seq. (1984).

As a general rule, payments made by a provider to suppliers for interest expense, facilities and services are eligible for reimbursement at the provider's cost as long as the payments are reasonable and related to patient care. Under 42 C.F.R. § 405.427, however, if the provider and its supplier are "related" organizations, reimbursement is limited to the supplier's cost. Section 405.427 provides in relevant part:

(a) Principle. Costs applicable to services, facilities, and supplies furnished to the provider by organizations related to the provider by common ownership or control are includable in the allowable cost of the provider at the cost to the related organization. However, such cost must not exceed the price of comparable services, facilities, or supplies that could be purchased elsewhere.

(b) Definitions -

(1) Related to provider. Related to the provider means that the provider to a significant extent is as sociated or affiliated with or has control of or is controlled by the organization ...

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