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February 6, 1991


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



The named plaintiffs in this class action are individuals enrolled in Part B of Medicare, a federally subsidized voluntary health insurance program for persons age 65 and older or who are disabled. The defendants are Louis W. Sullivan, the current Secretary of the Department of Health and Human Services*fn1 (the "Secretary") and the Administrator of the Health Care Finance Agency, the division that administers the Medicare program.*fn2

This case has lingered before this court for many years. Since we have no desire to reiterate its intricate history, reference should be made to this court's earlier decision for a more complete explanation of the factual background. See Cosgrove v. Sullivan, 649 F. Supp. 1433 (S.D.N.Y. 1986). However, almost three years have passed since the court last spoke in this case on the merits. Therefore, we shall briefly outline what has passed before so that what is before us today will be understandable.

Each of the plaintiffs was reimbursed by an insurance carrier designated to process their Part B claims for charges they had submitted in connection with surgery they each underwent between 1984 and 1986. Part B of the Medicare program supplements Part A's coverage of institutional health costs by insuring against a portion of other medical expenses. Eligible individuals who choose to enroll in the Part B program pay monthly premiums. See 42 U.S.C. § 1395j et seq. (1988).

Generally, reimbursement levels for Medicare Part B claims are based upon the "reasonable charges" for particular medical services. 42 U.S.C. § 1395u(b). In this case, reimbursements were determined by calculating the "customary charges" under 42 C.F.R. § 405.551(e) in conjunction with provisions of the Deficit Reduction Act of 1984 ("DEFRA"). The combined effect of these provisions was to freeze reimbursement rates for services performed by certain physicians who had switched to direct fee-for-service billing on or after November 1, 1982. As a result, the reimbursements received by plaintiffs fell far below the actual charges billed directly to them by their physicians.

Plaintiffs, who include both direct Medicare beneficiaries and physicians holding assigned claims, filed a class action against the Secretary challenging the continued application of 42 C.F.R. § 405.551(e) as arbitrary and capricious. This court agreed and ordered defendants to recalculate the reasonable charges for services rendered by the fee-for-service physicians. See Cosgrove v. Bowen, 649 F. Supp. at 1439. On November 16, 1988, the court entered a final judgment certifying the class and ordering defendants to require all Medicare carriers under their jurisdiction, after recalculating the customary charges, to pay to the plaintiff class 80% of any resulting increase in the reasonable charges that were due to the plaintiff class.*fn3 To ensure compliance, the court also ordered the defendants to report to the court their progress in the recalculations at least once every six months.

On appeal, the Second Circuit affirmed the district court's decision. Specifically, the circuit court agreed that it was arbitrary and capricious for the Secretary to continue to base Medicare patient reimbursements for physicians' services on physicians' hospital salaries years after the physicians had switched to fee-for-service billing. Cosgrove v. Bowen, 898 F.2d 332 (2nd Cir. 1990).

This court, responding to substantial delays by defendants in completing the recalculation ordered in the 1988 Final Judgment, appointed a special master on August 20, 1991 to monitor the defendants' compliance. To date, defendants have only liquidated a portion of the plaintiffs' claims. The court-appointed special master, in his first report dated January 29, 1992, stated that as of December 31, 1991, more than three years after the court's Final Judgment, defendants have recalculated and paid approximately $45 million to eligible physicians and beneficiaries. First Report of Special Master, 85 Civ. 4772 (GLG) (S.D.N.Y. Jan. 29, 1992), at 1-2. Of the twenty Tier II carriers who already possess the information necessary to complete all recalculations and payments required by the Final Judgment, seventeen have completed their payments. Id. at 8 n. 5. Progress by other carriers, including those classified in Tier IV and V who currently lack all of the data necessary for recalculations of plaintiffs' proper reimbursements, has been less forthcoming to date.

Plaintiffs now seek an order compelling defendants to pay to the plaintiff class interest on underpayments that has been accruing since November 16, 1988, the entry date of this court's final judgment.


The Medicare Act was amended by the Tax Equity and Fiscal Responsibility Act of 1982 (Pub.L. 97-248) ("TEFRA") to provide for the payment or charging of interest on underpayments and overpayments to Medicare physicians and providers. In cases involving Medicare Part B reimbursements, Congress provided:

  Whenever a final determination is made that the
  amount of payment made under this part either to
  a provider of services or to another person
  pursuant to an assignment under section
  1395u(b)(3)(B)(ii) of this title was in excess of
  or less than the amount of payment that is due,
  and payment of such excess or deficit is not made
  (or effected by offset) within 30 days of the
  date of the determination, interest shall accrue
  on the balance of such excess or deficit not paid
  or offset (to the extent that the balance is owed
  by or owing to the provider) at a rate determined
  in accordance with the regulations of the
  Secretary of the Treasury applicable to charges
  for late payments.

42 U.S.C. § 1395l(j) (1988). Plaintiffs maintain that the court's 1988 final judgment represented a "final determination" under 42 U.S.C. § 1395l(j) that the reimbursements received by the plaintiff class were deficient. Since more than 30 days have passed since the judgment was entered without repayment of these deficiencies, plaintiffs contend that the defendants should be directed to pay interest on the underpayments which the class is entitled to receive.

In response, defendants argue that the court's conclusion that a recalculation should be completed does not amount to a final determination that an underpayment has occurred. The Secretary, noting the implementing regulations for 42 U.S.C. § 1395l(j), argues that interest begins accruing once an intermediary or a carrier determines that an underpayment exists. Indeed, defendants contend that without access to information available to the Medicare carriers the court could not have determined whether or not claims had been underpaid or by what amounts.

Defendants also argue that, under 42 U.S.C. § 1395l(j), interest is only payable to providers of services and those payable pursuant to an assignment of benefits. In their view, nothing in the statute authorizes those plaintiffs who are Medicare beneficiaries with unassigned claims to receive interest payments on deficient Part B reimbursements.Finally, defendants maintain that no final determination could have been rendered by the court because statutory provisions deny the court subject matter jurisdiction over the Part B underpayment claims which form the basis of the interest claims in this case.

Defendants' arguments concerning the issue of subject matter jurisdiction are premised upon section 1395ff of Title 42 which governs the ability of individuals to challenge Medicare benefits determinations made by the Secretary. The Historical and Statutory Notes which follow the statute state that "[t]he amendments made by subsection (a) [which provided for appeals of Part B claims] shall apply to items and services furnished on or after January 1, 1987."

Defendants argue that the effective date of the 1986 amendments allowing individuals to appeal Part B benefits determinations precludes judicial review of claims for services arising before January 1, 1987. Since all the services at issue in this case were furnished between 1984 and 1986, defendants claim that the court lacks jurisdiction to review these benefits determinations and award interest. Defendants contend that the court possessed jurisdiction only because plaintiffs challenged the Secretary's methodology for calculating the Part B reimbursements. Without jurisdiction to review the underlying Part B claims themselves, the court's earlier judgment could not have determined that the reimbursements were deficient.

This argument, however, misses the jurisdictional point. As the court noted in its earlier opinion, the jurisdictional issues of the original challenge of 42 C.F.R. § 405.551(e) were settled by the Supreme Court. This action began when plaintiffs challenged the method by which they were reimbursed for certain medical expenses they had incurred. The Court held that challenges to the validity of the Secretary's instructions and regulations, are cognizable in courts of law. Bowen v. Michigan Academy of Family Physicians, 476 U.S. 667, 106 S.Ct. 2133, 90 L.Ed.2d 623 (1986). It is not necessary for this court to render a determination of the actual amounts due to plaintiffs in order for it to find that the calculation method used by the Secretary caused underpayments to occur. Jurisdiction over the plaintiffs' interest claims is distinct from a court's jurisdiction to review the Secretary's determination of the amounts due for particular benefits claims by plaintiffs. As the Supreme Court has held, Congress has precluded judicial review only of Part B amount determinations by hearing officers. Id. at 677, 106 S.Ct. at 2139.

Furthermore, not only is defendants' reliance upon 42 U.S.C. § 1395ff's effective date misplaced, but they have wholly ignored the provisions of TEFRA that originally created the Part B interest provision and specified its effective date. Section 117(a) of TEFRA, later codified in 42 U.S.C. § 1395l(j), amended the Medicare Act to provide for the accrual of interest on Part B underpayments and overpayments. Section 117(b) clearly states that "[t]he amendments made by subsection (a) apply to final determinations made on or after date of the enactment of this Act [TEFRA]." Pub.L. 97-248 § 117(b); see also 42 U.S.C. § 1395g Note. TEFRA was enacted on September 3, 1982. Whether or not this court's 1986 opinion or 1988 final judgment constituted a final determination, these actions occurred well after TEFRA's effective date. Consequently, TEFRA unquestionably grants this court jurisdiction to decide the interest accrual issue.

Moreover, 42 U.S.C. § 1395ff does not apply to final determinations concerning the accrual of interest. Section 1395ff(a) provides:

  The determination of whether an individual is
  entitled to benefits under part A or part B of
  this subchapter, and the determination of the
  amount of benefits under part A or part B of this
  subchapter, and any other determination with
  respect to a claim for benefits under part A of
  this subchapter or a claim for benefits with
  respect to home health services under part B of
  this subchapter shall be made by the Secretary in
  accordance with regulations prescribed by him.

42 U.S.C. § 1395ff(a) (1988). Section 1395ff(b) then entitles individuals to a hearing before the Secretary and permits judicial review of the Secretary's final decisions concerning determinations made pursuant to 42 U.S.C. § 1395ff(a).

The accrual of interest on Part B claims of underpayments is neither a determination of entitlement to the Part B benefits themselves nor a determination of the amount of benefits due, even if finding for the plaintiffs would entail additional payments by the federal government. Those determinations were made respectively when plaintiffs submitted their claims originally and later in connection with the recalculation ordered by the court's 1988 final judgment. While the amount of interest due will naturally depend upon the amount of underpayments found after recalculation, deciding whether interest has in fact accrued is not itself a determination of the amount of benefits due to plaintiffs. Interest is not a Medicare benefit. Rather, it represents the time value of money lost by the plaintiffs awaiting benefits that should have been paid originally.

Finally, 42 U.S.C. ยง 1395ff(a), while applying the effective date of the 1986 amendment to "any other determination with respect to a claim for benefits under part A," does not sweep so broadly with respect to Part B claims. It only extends to "any other determinations" under Part B to the extent they involve home health services. The accrual of interest does not fall within this category since the underlying services in this case involved operations performed at hospitals, not home health services. Therefore, the plaintiffs' interest claims ...

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