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December 22, 1986

MARY COSGROVE, NANCY LELLA and JOHN SHEPSKY, individually and on behalf of all others similarly situated, and ROSE SINGER, individually and as administratrix of the estate of Emil singer, and on behalf of all others similarly situated, Plaintiffs,
OTIS R. BOWEN, in his capacity as Secretary of the Department of Health and Human Services, and CAROLYN K. DAVIS, in her capacity as Administrator of the Health Care Finance Agency, Defendants

The opinion of the court was delivered by: GOETTEL


The plaintiffs bring this putative class action challenging an administrative regulation promulgated and applied by the defendants to determine reimbursement levels for certain physicians' services under Part B of the Medicare program.


 The named plaintiffs are individuals enrolled in Medicare Part B, *fn1" a voluntary, federally subsidized health insurance program established under Title XVIII of the Social Security Act for persons 65 or older, or who are disabled. The defendants are Otis R. Bowen, Secretary of Health and Human Services (the "Secretary"), and Carolyn K. Davis, Administrator of the Health Care Finance Agency, the division that administers the Medicare program.

 The Secretary authorizes private insurance carriers to evaluate and pay claims under Medicare Part B. Reimbursement is based on a determination of the "reasonable charge" for a particular medical service. 42 C.F.R. § 405.501. Insurance carriers are instructed to exercise judgment in reviewing claims so that determinations of reasonable charges are "realistic and equitable." 42 C.F.R. § 405.502(c). Several criteria are used to establish "reasonable charge" levels. First, the carrier looks at the actual charge billed by the physician for his or her services. Next, the carrier considers the "customary charge," which is defined as the uniform amount that an individual physician charges in the majority of cases for a particular procedure or service. 42 C.F.R. § 405.503(a). Finally, the carrier considers the "prevailing charge," which is an amount high enough to cover the customary charge in seventy-five percent of cases of similar services in a particular locality. 42 C.F.R. § 405.504. Carriers are authorized to pay the lowest of these three calculations.

 In March 1983, the Secretary established a new regulation affecting the calculation of customary charges for doctors who had been working under a compensation agreement with a hospital and changed to direct "fee-for-services" billing to individual patients (or the patient's insurance carrier). The new regulation provides that "the carrier will determine the physician's customary charges on the basis of the former compensation agreement until the carrier has accumulated charge data from at least 3 months of the calendar year preceding the annual reasonable charge update." *fn2" 42 C.F.R. § 405.551(e). Thus, if a physician switched from hospital-based to direct billing after October 31, 1982, he or she would not have accumulated three months of charge data in 1982. Consequently, when "reasonable charges" were updated on July 1, 1983, based on calendar year 1982, the "customary charges" for such physicians' services were not adjusted to reflect their direct billing rates. Rather, they remained at their hospital compensation level until the next annual reasonable charge update, which should have occurred on July 1, 1984.

 In 1984, however, Congress enacted the Deficit Reduction Act ("DRA"). Section 2306(a) of the DRA imposed a 15-month freeze on Medicare reimbursement for physicians' services for the period from July 1, 1984, to September 30, 1985. *fn3" 42 U.S.C. §§ 1395u(b)(4)(A) and (B) (Supp. II 1984). "Customary" and "prevailing" charges were frozen at levels set on July 1, 1983. The effect of the DRA freeze, in conjunction with 42 C.F.R. § 405.551(e), was to preclude physicians whose "customary charges" as of July 1, 1983, were based on their hospital compensation from increasing those rates in 1984, even if they would otherwise have been eligible for an update under 42 C.F.R. § 405.551(e).

 Each named plaintiff underwent surgery in 1984 or 1985, and was billed directly for services rendered during the surgery. The plaintiffs submitted these bills to the insurance carrier designated to process their Medicare Part B claims. The insurance carrier approved only a fraction of the charges submitted, and each plaintiff received only 80% of the approved amount. *fn4" The reimbursement check sent to each plaintiff was accompanied by an "Explanation of Benefits," which stated that the amount approved was not the amount of the bill because the carrier had to select the lowest of the three possible calculations -- actual, customary, or prevailing charge. For the plaintiffs' benefit claims, the carrier indicated that the amount approved was based on the physician's "customary charge." The plaintiffs contend that the "customary charge" applied to their benefit claims was not as stated on the form. *fn5" Rather, because the physicians who rendered services to them had switched from hospital-based compensation to direct billing after November 1, 1982, the "customary charge" computation was limited by 42 C.F.R. § 405.551(e) and the DRA.

 The plaintiffs allege that 42 C.F.R. § 405.551(e) is unlawful because it reduces by two-thirds the Medicare reimbursement that beneficiaries affected by it would otherwise be entitled to receive. Plaintiffs seek a declaratory judgment that regulation § 405.551(e) violates 42 U.S.C. § 1394u(b)(3) and is unlawful, null and void ab initio. Plaintiffs further allege that defendants' application of the DRA to freeze customary charges for former hospital-based physicians is arbitrary, capricious, and contrary to law. They seek an order directing defendants to require Medicare carriers to use actual customary charges for all physicians as of July 1, 1984, without regard to the DRA, or to require carriers to employ "statutory" customary charges rather than the provisions of 42 C.F.R. § 405.551(e). Plaintiffs also allege that defendants' application of customary charge calculations under 42 C.F.R. § 405.551(e) violates Medicare beneficiaries' right to equal protection of the laws. Plaintiffs ask that defendants be directed to recalculate and reimburse members of the putative class who have been denied proper reimbursement because of defendants' application of this regulation. Finally, plaintiffs seek costs, expenses, and attorneys' fees.

 Shortly after this action was filed and the plaintiffs moved to certify the class, the defendants moved to dismiss for lack of subject matter jurisdiction. The complaint asserts jurisdiction pursuant to 28 U.S.C. §§ 1361, 2201, and 2202. The plaintiffs also assert that the action arises under the United States Constitution and Title XVIII of the Social Security Act, 42 U.S.C. § 1395 et seq. Initially, the defendants asserted that judicial review of Part B Medicare claims is precluded, except for claims concerning eligibility for benefits. See 42 U.S.C. § 1395ff(a) and (b) (1982). All other Part B claims may only be considered in an administrative hearing under 42 U.S.C. 1395u(b)(3)(C) and 42 C.F.R. § 405.801 et seq. Since the plaintiffs' claims do not concern eligibility for benefits, the defendants contended that this Court lacked subject matter jurisdiction to hear the case.

 Meanwhile, in response to defendants' motion to dismiss, the plaintiffs cross-moved for summary judgment, seeking a declaration that 42 C.F.R. § 405.551(e) is null and void as a matter of law, and that its application violates plaintiffs' fifth amendment right to equal protection of the law. The defendants asked that we consider their motion to dismiss before addressing the plaintiffs' motions for summary judgment or class certification.

 We reserved decision on all motions pending the Supreme Court's resolution of an identical jurisdictional issue. In June 1986, the Supreme Court decided the case of Bowen v. Michigan Academy of Family Physicians, 476 U.S. 667, 106 S. Ct. 2133, 90 L. Ed. 2d 623 (1986), which raised the question of whether Congress had "barred judicial review of regulations promulgated under Part B of the Medicare program." Id. at 2135. The Court held that "challenges to the validity of the Secretary's instructions and regulations, are cognizable in courts of law." Id. at 2141. Following this ruling, the defendants withdrew their jurisdictional challenge. *fn6"

 The defendants, however, have raised a new challenge to our authority to consider plaintiffs' claims for relief. In April 1986, Congress enacted the Consolidated Omnibus Budget Reconciliation Act ("COBRA"), P.L. 99-272. Section 9304 of COBRA amends 42 U.S.C. 1395u(b) to alleviate the excessively low "customary charge" level for former hospital-based physicians who converted to direct billing on or after October 31, 1982. The statute provides that, for all physicians who were hospital-based at any time between October 31, 1982, and January 31, 1985, but were no longer hospital based as of February 1, 1985, the Secretary must calculate customary charges based upon those physicians' actual charges billed during the twelve month period ending March 31, 1985. *fn7" This new customary charge calculation is applicable for physicians' services rendered during an 8-month period beginning May 1, 1986. The defendants have now filed a supplemental memorandum in support of their motion to dismiss, in which they contend that the enactment of this legislation moots the plaintiffs' claims.

 The plaintiffs assert that the following claims have not been mooted: (1) that regulation § 405.551(e) is void ab initio ; (2) that benefits for the period July 1, 1984, through April 30, 1986, should be recalculated for class members who received reduced benefits prior to the enactment of COBRA; and (3) that prospective relief is warranted since the statute was only made effective for eight months. As discussed below, the defendants' motion to dismiss is granted in part and denied in ...

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