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June 19, 1990


The opinion of the court was delivered by: Haight, District Judge:


The case of Group Health Inc. v. Blue Cross Ass'n, et al., 83 Civ. 7567 (CSH) is now before the Court on the motion of the defendants and the intervenor-defendant for summary judgment pursuant to Fed.R.Civ.P. 56(b).


The history of the captioned litigation is both extensive and complicated. While basic familiarity with the underlying dispute in these cases as well as the prior proceedings is assumed, some explanation of both is necessary here.

I. Factual Background

In the first filed of these consolidated cases, plaintiff Group Health Incorporated ("GHI")*fn1 seeks money damages from defendants Blue Cross Association, now known as the Blue Cross and Blue Shield Association ("Association"),*fn2 and the Blue Cross/Blue Shield of Greater New York, now known as Empire Blue Cross and Blue Shield, Inc. ("Blue Cross"),*fn3 for losses arising out of bad advice rendered by Blue Cross in connection with the Medicare Program.

Part A of the Medicare program "provides basic protection against the costs of hospital, related post-hospital, home health services, and hospice care" for persons over 65 years of age as well as for certain disabled persons. 42 U.S.C. § 1395c. For a period of time GHI provided hospital services to individuals covered by Medicare. GHI provided these services through Hillcrest General Hospital ("Hillcrest"), which GHI purchased on February 28, 1974 and later sold on February 29, 1980. The Medicare program allows recipients to receive health care services without having to make direct payments for such services. Health care providers ("providers") accept reimbursement for the services rendered to Medicare recipients from a trust fund established for the purpose, specifically the Federal Hospital Insurance Trust Fund. The monies in the trust fund come from the Social Security taxes levied by the United States government. 42 U.S.C. § 1395i (1983).*fn4 Providers are reimbursed from the trust fund in amounts determined under prevailing Medicare regulations. The calculation of the appropriate amount of reimbursement is done by the Health Care Financing Administration ("HCFA") or, at the option of the provider, by private organizations under contract with the HCFA pursuant to 42 U.S.C. § 1395h(a).*fn5 These private organizations are known as fiscal intermediaries.

At all times relevant to the instant actions, the defendant Association had a contract with the Department of Health, Education and Welfare, now the Department of Health and Human Services, ("HHS"), pursuant to 42 U.S.C. § 1395h(a). At all relevant times, the Association served as the fiscal intermediary for Hillcrest, itself "an operating component of GHI." Complaint at ¶ 5. The Association's contract with HHS allowed "the Association to enter into subcontracts for the performance of some of the functions required of the Association under the contract." Id. at ¶ 9. The Association entered into a subcontract with Blue Cross pursuant to that provision in its agreement with the Association.*fn6 Id.

Because GHI is a not-for-profit corporation organized under the insurance laws of New York State, it is regulated by the New York State Insurance Department ("Insurance Department"). Id. at ¶ 12. In or about 1973 when GHI first expressed interest in purchasing Hillcrest, it sought the requisite approval from the Insurance Department for such a purchase, which was necessary because GHI proposed to expend so-called subscriber funds to purchase Hillcrest. The Insurance Department premised its approval of the transaction on whether a return on the subscriber funds would be reimbursed under the Medicare program.

GHI consulted Blue Cross and requested a determination of whether the interest payments in connection with the Hillcrest purchase would be reimbursable under the Medicare program. By letter dated June 11, 1974,*fn7 Lawrence P. Cafasso, the then Director of the Provider Reimbursement Division of Blue Cross, informed GHI that the payments would be reimbursable under Medicare. GHI had purchased Hillcrest prior to receiving the letter from Blue Cross, but argues that it could have and would have refinanced the purchase had it received a negative ruling from Blue Cross.

After the purchase was consummated, "Hillcrest included in its annual cost reports from 1974 to 1980 an amount representing a nine percent return on the funds used to purchase Hillcrest." Complaint at ¶ 17. The amounts ranged from $86,657 in 1980 to $527,155 in 1977 and 1978. Id. A 1977 audit of Hillcrest conducted by Blue Cross revealed that no interest on the loan had actually been paid by the hospital. The lack of interest payments caused Blue Cross to consult the HCFA which by letter dated September 29, 1978*fn8 informed Blue Cross that the so-called Hillcrest interest payments were not reimbursable under Medicare. After receipt of the letter from Jacqueline G. Wilson, then the Regional Director of the Medicare program for the Department, Blue Cross changed its position with regard to the reimbursability under Medicare of the so-called interest payments. In 1979, the payments were disallowed by Blue Cross and any amounts previously paid to GHI attributable to the return on the invested funds were recouped.

GHI appealed the Blue Cross disallowance to the Provider Reimbursement Review Board ("PRRB") in respect of the 1974 through 1976 cost years.*fn9 The PRRB is a part of HHS responsible for conducting hearings and issuing decisions on certain Medicare reimbursement issues. See 42 U.S.C. § 1395oo. Disallowance of the interest payments was upheld by the PRRB in a decision of September 19, 1980. The Secretary of HHS did not disturb the ruling of the PRRB, which thus became final on November 18, 1980. 42 U.S.C. § 1395oo(f)(1) ("[a] decision of the Board shall be final unless the Secretary, on his own motion, and within 60 days after the provider of services is notified of the [PRRB's] decision, reverses, affirms or modifies the [PRRB's] decision").

II. Procedural History

GHI appealed the decision of the PRRB to this district. By Opinion dated March 22, 1982, Judge Carter granted summary judgment in favor of the defendants Secretary and PRRB. GHI v. Schweiker, No. 80-6163 (S.D.N.Y. March 22, 1982). GHI took an appeal from Judge Carter's decision and by Order of May 9, 1983, the Second Circuit affirmed. 742 F.2d 1434 (2d Cir. 1983). GHI next sought certiorari to the Supreme Court, but that Court did not accept the case for review. 467 U.S. 1225, 104 S.Ct. 2677, 81 L.Ed.2d 873 (1984).

GHI filed an administrative tort claim with the Secretary on September 20, 1982 seeking payment for damages suffered in consequence of the advice rendered by Blue Cross in 1974. By letter dated October 28, 1983, that claim was denied.

On September 16, 1983, GHI commenced an action against Blue Cross and the Association in New York State Supreme Court asserting, in essence, claims of negligence arising out of Blue Cross' 1974 advice. Defendants filed a verified petition for removal to the district court for this district and the case was removed to this Court as 83 Civ. 7567 (RWS). Subsequent to removal, GHI moved to remand the action to the state court and HHS moved to intervene. By Opinion dated June 13, 1984, Judge Sweet denied GHI's motion to remand the action and granted HHS' motion to intervene pursuant to Rule 24(b)(2). GHI v. Blue Cross Ass'n, 587 F. Supp. 887, 891-93 (S.D.N.Y. 1984).

On April 25, 1984, GHI commenced an action in this Court against the United States and Otis Bowen as the Secretary of HHS. That complaint alleged that the United States was liable under the Federal Tort Claims Act ("FTCA") for damages to GHI arising out of the 1974 advice rendered by Blue Cross. In addition, the complaint sought review of the PRRB's earlier decision disallowing reimbursement for the 1977 cost year. The case was assigned a docket number of 84 Civ. 2917 and was assigned to Judge Sweet, presumably as related to the earlier filed case against Blue Cross and the Association.

On July 25, 1984, GHI filed a notice of motion for consolidation of the two actions pursuant to Rule 42(a). Judge Sweet's endorsement of that unopposed motion was filed on September 25, 1984.

After some discovery was taken in the cases, defendants moved for summary judgment on the first five claims in the 1983 complaint and moved to dismiss the remaining three claims for lack of subject matter jurisdiction. By Opinion dated August 16, 1985, Judge Leisure*fn10 dismissed claims six through eight for lack of subject matter jurisdiction, but denied defendants' motion for summary judgment in respect of claims one through five. GHI v. Blue Cross Ass'n, 625 F. Supp. 69, 79-81 (S.D.N.Y. 1985). In denying defendants' motion for summary judgment, Judge Leisure held that defendants were not entitled to sovereign or official immunity, the argument which formed the basis for the summary judgment motion. Id. at 74-79.

The Blue Cross defendants appealed Judge Leisure's Opinion insofar as it denied their motion for summary judgment and rejected claims of official immunity. On June 30, 1986, the Second Circuit dismissed an appeal from the denial of official immunity for lack of appellate jurisdiction. GHI v. Blue Cross Ass'n, 793 F.2d 491, 493, 497 (2d Cir. 1986) ("[a]lthough defendants have alleged a nonfrivolous claim that fiscal intermediaries in the Medicare program are entitled to official immunity, this appeal must be dismissed") (citation omitted). The Supreme Court denied certiorari in the case. 480 U.S. 930, 107 S.Ct. 1566, 94 L.Ed.2d 758 (1987).

On June 10, 1987, Judge Leisure issued an Opinion in GHI's litigation against the government. GHI v. United States, 662 F. Supp. 753 (S.D.N.Y. 1987). GHI's FTCA claims were dismissed on the grounds that the statute of limitations had run. Judge Leisure also granted summary judgment in defendants' favor in respect of the proceedings before the PRRB. What remains of that action, 84 Civ. 2917, is the sixth and seventh causes of action, both of which assert claims arising out of the PRRB's determination in respect of the 1977 cost year. By stipulation docketed on September 27, 1988, the parties have agreed that those remaining claims will be dismissed with prejudice at such time as a decision is rendered on the instant motions.

The consolidated actions were subsequently transferred to Judge Daronco and upon his death were transferred to my docket.

III. 83 Civ. 7567 — The Complaint

The complaint in this case originally stated eight claims, but claims six through eight were dismissed for lack of subject matter jurisdiction in Judge Leisure's Opinion of August 16, 1985. 625 F. Supp. at 79-81. What remains for decision is defendants' motion for summary judgment in respect of claims one through five, which sound in negligence and related theories of recovery.

The first claim for relief alleges negligence and gross negligence on the part of Blue Cross insofar as it did not seek confirmation from the Secretary that the interest costs would be reimbursable under Medicare. GHI seeks money damages in the amount of $1,611,036.

The second claim for relief alleges that "Blue Cross had no authority to represent to GHI that a return on GHI's purchase of Hillcrest would be includable in the calculation of Hillcrest's Medicare reimbursement rate." Complaint at ΒΆ 33. GHI contends that in representing that the interest payments would be reimbursable under Medicare, Blue Cross made a false representation to GHI upon which it knew GHI would and subsequently did rely. GHI further contends that "[i]n making the false representation, Blue Cross breached a duty owed to GHI." Id. at ...

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