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August 16, 1985


The opinion of the court was delivered by: LEISURE

LEISURE, District Judge :

Plaintiff, Group Health Incorporated ("GHI"), seeks damages from defendants Blue Cross/Blue Shield of Greater New York ("Blue Cross") and Blue Cross and Blue Shield Association (the "Association") (collectively referred to as "Defendants"). GHI alleges harm suffered from disallowance of Medicare and Blue Cross reimbursement for certain costs allegedly incurred by Hillcrest General Hospital ("Hillcrest") in 1974-1980, the years GHI owned Hillcrest. GHI has asserted claims for negligence, misrepresentation and breach of warranty of authority against defendants Blue Cross and the Association. Blue Cross is sued in two capacities: as a private insurer, and as the fiscal intermediary for the federal government under the Medicare program. The Association is sued in its capacity as principal of Blue Cross acting as a fiscal intermediary.

Defendants have moved for an order granting them summary judgment pursuant to Fed. R. Civ. P. 56, on GHI's first through fifth claims, and an order dismissing the sixth through eighth claims, pursuant to Fed. R. Civ. P. 12(h)(3), on the basis that this Court lacks subject matter jurisdiction because GHI has failed to exhaust administrative remedies. For the reasons stated below, Defendants' summary judgment motion is denied and the Rule 12(h)(3) motion to dismiss is granted.


 The sequence of events and many of the facts giving rise to the instant action have been described in two opinions previously rendered by judges of this Court. Group Health Inc. v. Schweiker, No. 80 Civ. 6163 (S.D.N.Y. Mar. 22, 1982); Group Health Inc. v. Blue Cross Ass'n, 587 F. Supp. 887 (S.D.N.Y. 1984). Familiarity with these decisions is assumed. In the first opinion, Judge Carter affirmed the decision of the Provider Reimbursement Review Board ("PRRB") of the United States Department of Health and Human Services ("HHS"). The PRRB affirmed Blue Cross' decision to disallow reimbursement of certain interest expenses claimed by Hillcrest. The Court of Appeals, by an unpublished opinion, affirmed Judge Carter's decision. The Supreme Court denied GHI's petition for a writ of certiorari.

 Thereafter GHI commenced this action in New York State Supreme Court. The complaint alleges that GHI is a not-for-profit corporation organized and existing under Article IX-C of the New York Insurance Law. That status subjects GHI's activities to regulation by New York's Superintendent of Insurance. When GHI proposed to expend subscriber funds to acquire Hillcrest, it was required to obtain prior Insurance Department approval. Such approval was granted conditionally upon whether a return on those funds would be included in the calculation of third-party reimbursement rates applicable to Hillcrest. Before GHI purchased Hillcrest in February 1974, the complaint alleges, GHI requested advice of Blue Cross as to whether a rate of return on the funds GHI used to purchase Hillcrest could be included in the calculation of Hillcrest's Medicare and Blue Cross reimbursement rates.

 Blue Cross is also an Article IX-C corporation. Before it could amend its reimbursement formula to permit it to reimburse for a return on equity invested in a hospital by an Article IX-C corporation, it had to receive approval from the New York Insurance Department. Blue Cross, in a letter dated June 11, 1974, from Lawrence P. Cafasso, Director of Blue Cross Provider Reimbursement Division, informed GHI that a return of nine percent on the funds used to purchase Hillcrest would be included when calculating Hillcrest's Medicare and Blue Cross reimbursement rates. In 1979, at the insistence of HHS, Blue Cross disallowed the return for Medicare and Blue Cross reimbursement purposes and subsequently recouped from GHI any amounts previously paid to it that were attributable to the return on the invested funds.

 GHI commenced this action in New York State Supreme Court. GHI's first claim alleges that Defendants were negligent in failing to consult HHS before rendering such advice to GHI. The second claim alleges that Blue Cross negligently and falsely represented that it had the authority to make such a determination. The third claim alleges that Blue Cross warranted it was authorized to act as the agent for HHS in determining whether the return would be reimbursable under the Medicare program. The fourth and fifth claims seek to hold the Association liable for the acts and omissions of its agent and sub-contractor Blue Cross and for failing in its duty to properly supervise Blue Cross' activities. The sixth through eighth claims allege that Blue Cross breached its agreement with GHI by refusing to include the rate of return in the calculation of the Blue Cross reimbursement rate and that Blue Cross is estopped from changing its position in that regard.

 Defendants removed the action to federal court and Judge Sweet denied GHI's motion to remand. Judge Sweet ruled that Blue Cross' actions were taken under color of governmental authority in that Blue Cross was acting as a fiscal intermediary on behalf of HHS and therefore the matter must be resolved in federal court. Group Health Inc. v. Blue Cross Ass'n, 587 F. Supp. at 891. In the same opinion Judge Sweet granted the motion of HHS to intervene under Fed. R. Civ. P. 24(b)(2) and to consolidate GHI's separate action against HHS.

 GHI has pursued administrative review of its Blue Cross rates and the New York Department of Health has been conducting hearings on the matter.


 Defendants argue first that, as a matter of law, GHI was not entitled to rely on Blue Cross' advice concerning the calculation of the Medicare reimbursement rate, citing Heckler v. Community Health Services of Crawford County, Inc., 467 U.S. 51, 104 S. Ct. 2218, 81 L. Ed. 2d 42 (1984) (hereinafter Community Health Services). Second, GHI purchased Hillcrest before Blue Cross ruled in the Cafasso letter that Medicare reimbursement for the return on equity would be permitted. Consequently, no reliance on the alleged negligent misrepresentation was possible when GHI purchased Hillcrest. Third, Defendants argue, in the event GHI had relied justifiably on any representation of Blue Cross, GHI's claims against Defendants are barred under the principles of sovereign immunity. Defendants are sued in their capacity as fiscal intermediaries acting on behalf of HHS, and according to the Medicare regulations, HHS is the real party in interest. Fourth, HHS submitted a memorandum of law in support of Defendants' summary judgment in which it argues that Defendants are protected by the doctrine of official immunity.

 Under the plain language of Rule 56(c), a court may grant a motion for summary judgment only if the moving party successfully demonstrates that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law. See, e.g., Adickes v. S.H. Kress & Co., 398 U.S. 144, 157, 26 L. Ed. 2d 142, 90 S. Ct. 1598 (1970); Patrick v. LeFevre, 745 F.2d 153, 158 (2d Cir. 1984); PPX Enterprises, Inc. v. Audiofidelity, Inc., 746 F.2d 120, 123 (2d Cir. 1984) (uncertainty about any material fact defeats the motion). Ambiguities must be viewed in the light most favorable to the party opposing summary judgment. Project Release v. Prevost, 722 F.2d 960, 968 (2d Cir. 1983). The burden of demonstrating the absence of any material fact genuinely in dispute rests on the moving party. Adickes, 398 U.S. at 157; Heyman v. Commerce & Industry Insurance Co., 524 F.2d 1317, 1320 (2d Cir. 1975). Because summary judgment is a "drastic device" it should be exercised with caution where, as here, one party has yet to complete pretrial discovery. *fn1" See, e.g., Gary Plastic Packaging Corp. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 756 F.2d 230, 236 (2d Cir. 1985); National Life Insurance Co. v. Solomon, 529 F.2d 59, 61 (2d Cir. 1975). Summary judgment, however, will not be denied merely because of conclusory allegations or denials by the opposing party. JSP Agency, Inc. v. American Sugar Refining Co. of New York, 752 F.2d 56, 59 (2d Cir. 1985); SEC v. Research Automation Corp., 585 F.2d 31, 33 (2d Cir. 1978).

 Was GHI Entitled to Rely On Blue Cross' Representations?

 As summarized above, defendants argue that under the authority of Community Health Services, supra, a health care provider participating in Medicare is not entitled to rely upon the policy judgment of a mere conduit acting on behalf of the Secretary of HHS (hereinafter also collectively referred to as "HHS"). Under 42 U.S.C. § 1395h(a) a fiscal intermediary is required to provide consultative services to providers to enable them to establish and maintain fiscal records, to serve as a conduit for any information or instructions furnished to it by HHS and to serve as a channel of communication from providers to HHS.

 The Supreme Court in Community Health Services stated that a health care provider has a duty to familiarize itself with the legal requirements for cost reimbursement and the nature of and limitations on the role of a fiscal intermediary. A fiscal intermediary, according to the relevant statutes and regulations and the reimbursement manual, acts merely as a conduit and may not resolve policy questions. 104 S. Ct. at 2226. The Court found that the health care provider in Community Health Services was satisfied with the policy judgment of a mere conduit and "made no attempt to have the question resolved by [HHS]." Id. Consequently, the fiscal intermediary's advice was not given under circumstances conducive to reliance giving rise to estoppel against HHS. The reasonableness of the reliance was further undermined by the oral nature of the intermediary's advice. In the context of a complex program such as Medicare, in which the need for written records is manifest, reliance upon oral advice is unreasonable. Id.

 The instant action is distinguishable from Community Health Services on several grounds. First, the issue there was whether the government could be estopped from recovering funds expended by a health care provider in reliance on an incorrect interpretation of the Medicare regulations given by a responsible government agent. Id. at 2220. As the Supreme Court stated, "the Government may not be estopped on the same terms as any other litigant." Id. at 2224. The instant issue is whether a health care provider can hold a fiscal intermediary liable for the intermediary's own negligence. See, e.g., Rochester Methodist Hospital v. Travelers Ins. Co., 728 F.2d 1006 (8th Cir. 1984); Hospital San Jorge, Inc. v. Blue Cross Ass'n, Medicare & Medicaid Guide (CCH) P 28,306 (D.P.R. 1976). No attempt is being made here to estop HHS from recoupment of expenditures erroneously made. Indeed, GHI litigated that issue with HHS and lost.

 Second, GHI received a written statement from Blue Cross that the return would constitute a reimbursable cost for purposes of Medicare. The fact that the letter was tendered subsequent to the February acquisition does not render speculative GHI's reliance on the Cafasso letter. GHI alleges that it could have restructured the financing or sold Hillcrest if it was informed in June 1974 that the rate of return on the funds used to purchase Hillcrest was not a reimbursable cost.

 GHI's argument in this regard is factually supported by a letter from Lawrence O. Monin, First Deputy Superintendent, State of New York Insurance Department, addressed to Dr. George Melcher, President of GHI, dated February 15, 1974. In that letter Monin qualified the Insurance Department's approval of GHI's application to acquire Hillcrest on two conditions. First, that the proposed amendment to the Blue Cross Reimbursement Formula had to be certified by the Commissioner of Health and approved by the Superintendent of Insurance. Second, if, as actually occurred, such approvals were not forthcoming, GHI had to obtain a non-recourse mortgage in the minimum amount of $2,000,000 within "ninety days after acquisition of the hospital." (Emphasis added). In other words, if Hillcrest were not permitted to include in its prospective Blue Cross reimbursement rates the return on equity, GHI would have ninety days after the acquisition to restructure the ...

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