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July 23, 1992

LOUIS SULLIVAN, as Secretary of the Department of Health and Human Services, and the DEPARTMENT OF HEALTH AND HUMAN SERVICES, Defendants.

The opinion of the court was delivered by: WILLIAM M. SKRETNY


 Plaintiffs are twenty-eight physicians or groups of physicians specializing in radiology and providing "radiologist services" within the meaning of 42 U.S.C. § 1395m(b)(6). (Am. Complaint, P 1). They commenced this action to challenge the amounts they were receiving or were permitted to charge their patients under the Medicare statute for radiologist services. These amounts were set by a fees schedule developed pursuant to a regulation promulgated by the Secretary of Health and Human Services (the "Secretary"). Plaintiffs attacked the regulation as inconsistent with the authorizing statute.

 Defendants have moved to dismiss the amended complaint pursuant to Fed. R. Civ. P. 12(b)(1) and 12(b)(6). Further, plaintiffs have moved for an order staying the proceedings pending certain discovery.

 For the reasons articulated below, defendants' motion pursuant to Fed. R. Civ. P. 12(b)(1) is denied in part and granted in part and defendants' motion pursuant to Fed. R. Civ. P. 12(b)(6) is granted. Plaintiffs motion for a stay is denied.


 Plaintiffs bring this action against Louis Sullivan in his capacity as Secretary of the Department of Health and Human Services (the "Secretary") and against the Department of Health and Human Services (the "Department").

 The Medicare statute, 42 U.S.C. § 1395 et seq., consists of two parts. Part A, 42 U.S.C. §§ 1395c-1395i, provides for reimbursement for hospitalization expenses, and is not at issue here. Part B, 42 U.S.C. §§ 1395j-1395w, which is at issue here, provides reimbursement for non-hospital medical services, such as the radiologist services provided by plaintiffs herein. (defendants' memo, at p. 3; plaintiffs' memo, at p. 1).

 Pursuant to 42 U.S.C. § 1395m(b), the Secretary is required to develop fee schedules pursuant to which payments for radiologist services are calculated. In doing so, the Secretary must consult with various organizations (42 U.S.C. § 1395m(b)(2)) and must consider certain factors (42 U.S.C. § 1395m(b)(3)). The entire subsection (b) was added to § 1395m by the Omnibus Budget Reconciliation Act of 1987 ("OBRA '87"), and was made applicable to radiologist services performed on or after April 1, 1989. All the radiologist services for which payment is at issue in this lawsuit were performed after this date.

 To facilitate the administration of Part B, 42 U.S.C. § 1395u(a) authorizes the Secretary to enter into contracts with private health insurance carriers ("carriers"). Under such contracts, the carriers may perform various functions which are required of the Secretary, including developing fee schedules. In this case, the Secretary contracted with Blue Shield of Western New York, Inc. ("Blue Shield") to administer the Part B program in all of New York State, except for the greater New York City metropolitan area. (Am. Complaint, P 20). Blue Shield developed fee schedules in accordance with 42 C.F.R. § 405.531, the regulation promulgated by the Secretary authorizing carriers to establish such schedules. (Am. Complaint, P 22).

  Plaintiffs' *fn1" amended complaint alleges that 42 C.F.R. § 405.531 directly conflicts with the original authorizing statute, 42 U.S.C. § 1395m(b). (Am. Complaint, P 31). The statute as it read in March 1989, when the Secretary promulgated 42 C.F.R. § 405.531, required the Secretary to develop fee schedules for radiologist services "on a regional, statewide or carrier service area basis." *fn2" (Am. Complaint, P 10). 42 C.F.R. § 405.531, however, purported to direct carriers to establish "a radiology fee schedule for each locality in its service area based on a national relative value scale and any appropriate local relative value scale multiplied by locality-specific conversion factors . . ." (emphasis added), effective for all radiologist services rendered after April 1, 1989. (Am. Complaint, P 18). Consistent with the regulation, Blue Shield established separate fee schedules for radiology services performed in each of the four localities contained within its service area. (Am. Complaint, P 22). Plaintiffs rendered services in "Locality 1," the fee schedule which provides for the lowest rates of the four localities. (Am. Complaint, PP 23-24). Plaintiffs allege that had the Secretary promulgated a regulation consonant with the statute, Blue Shield would have been obliged to set a fee schedule based on a regional, statewide or carrier service area basis. As a result, participating plaintiffs would have been paid more by Medicare for their services, and non-participating plaintiffs would have been permitted to charge more for their services. (Am. Complaint, PP 25-28).

 The Amended Complaint alleges five causes of action. The First Cause of Action requests that this Court, pursuant to 5 U.S.C. § 706, set aside 42 C.F.R. § 405.531 and compel the Secretary to promulgate a rule requiring that payments to plaintiffs for radiology services be made in accordance with a fee schedule developed on a regional, statewide or carrier service area basis. (Am. Complaint, P 32). The Second and Third Causes of Action seek the same relief pursuant to 28 U.S.C. § 1361 and 42 U.S.C. §§ 1395(b) and 405(a), respectively. (Am. Complaint, PP 35, 40). The Fourth Cause of Action seeks review, pursuant to 42 U.S.C. §§ 405(g) and 1395ff, of the Secretary's determinations of the amounts paid to participating plaintiffs after April 1, 1989, and an order requiring the Secretary to redetermine the amount of these payments in accordance with a proper fee schedule. (Am. Complaint, P 44). The Amended Complaint specifically alleges as to the Fourth Cause of Action that exhaustion of administrative remedies would be futile because ". . . the Secretary would be bound by his own regulation . . . and would be without power to grant plaintiffs the relief they are seeking." (Am. Complaint, P 46). Finally, the Fifth Cause of Action seeks a declaratory judgment pursuant to 28 U.S.C. § 2201, declaring that 42 C.F.R. § 405.531 is invalid because it is in conflict with 42 U.S.C. § 1395m(b), and that 42 U.S.C. § 1395m(b) requires that payment for radiology services rendered after April 1, 1989, be calculated on a regional, statewide or carrier service area basis. (Am. Complaint, P 48).

 Defendants moved to dismiss the Amended Complaint for lack of subject matter jurisdiction, arguing that plaintiffs failed to exhaust the administrative remedies set forth in 42 U.S.C. § 405(b), which are applicable to the Medicare Act pursuant to 42 U.S.C. § 1395ff(b). In response, plaintiffs did not dispute that they have not exhausted or attempted to exhaust these administrative remedies. Rather, they claimed that no exhaustion requirement exists for their First, Second, Third and Fifth Causes of Action, and as to their Fourth Cause of Action, they alleged in the Amended Complaint that exhaustion would have been futile.

 On November 6, 1990, after defendants had filed their original motion to dismiss, Congress passed the Omnibus Budget Reconciliation Act of 1990 ("OBRA '90"). Section 4102(f) of OBRA '90 amended 42 U.S.C. § 1395m(b) to authorize the Secretary to develop a fee schedule for radiology services "on a regional, statewide, locality or carrier service area basis." (emphasis added). Moreover, Congress made this amendment effective "as if it were included in the enactment of [OBRA '87]." Thus, by adding "locality" to the statutorily authorized bases for developing radiology fee schedules, Congress removed the alleged discrepancy between 42 C.F.R. § 405.531 and 42 U.S.C. § 1395m(b)(1)(B), and made the change retroactive to cover any fee schedules established since the effective date of OBRA '87 (April 1, 1989), which encompasses all payments for radiologist services at issue in this lawsuit. Accordingly, defendants amended their motion to dismiss to allege, pursuant to Fed.R.Civ.P. 12(b)(6), that plaintiffs had failed to state a claim upon which relief could be granted.

 In response to defendants' amended motion, plaintiffs argue that before the passage of OBRA '90, they possessed statutory and contractual property rights to receive payment for the radiology services they had rendered pursuant to a fee schedule calculated "on a regional, statewide or carrier service area basis." Therefore, plaintiffs argue that the retroactive application of OBRA '90 to include "locality" as an additional basis for the development of fee schedules deprives them of their property without due process of law and constitutes a "taking" without just compensation, both in violation of the Fifth Amendment.


 I. Subject Matter Jurisdiction

 42 U.S.C. § 1395ff(b)(1) provides in relevant part:

 Any individual dissatisfied with a determination under subsection (a) of this section as to . . . (C) the amount of benefits under part A or part B of this subchapter . . . shall be entitled to a hearing thereon by the Secretary to the same extent as provided in section 405(b) of this title and to judicial review of the final decision after such hearing as is provided in section 405(g) of this title.

 Defendants argue that because plaintiffs have failed to exhaust this administrative procedure, this Court lacks subject matter jurisdiction. Defendants further argue that plaintiffs cannot avoid exhaustion by premising jurisdiction on a statute other than the Medicare Act, insofar as 42 U.S.C. § 405(h) provides that "no action against the United States, the Secretary, or any officer or employee thereof shall be brought under section 1331 or 1346 of Title 28 to recover on any claim arising under this subchapter[,]" and ". . . § 405(g), to the exclusion of 28 U.S.C. § 1331, is the sole avenue of relief for all 'claims arising under' the Medicare Act." Heckler v. Ringer, 466 U.S. 602, 615, 104 S. Ct. 2013, 80 L. Ed. 2d 622 (1984). Therefore, defendants argue that plaintiffs' claims must be dismissed for lack of subject matter jurisdiction

 Plaintiffs advance various arguments in response to defendants' Rule 12(b)(1) motion. First, plaintiffs argue that the administrative exhaustion requirement does not apply to all cases arising under the Medicare statute. Rather, under Bowen v. Michigan Academy of Family Physicians, 476 U.S. 667, 106 S. Ct. 2133, 90 L. Ed. 2d 623 (1986), the requirement applies only to challenges to the determination of the amount of benefits payable under the statute. (Plaintiffs' memo, at 10). In contrast, plaintiffs characterize this case as a challenge to the facial validity of the Secretary's regulations. Therefore, plaintiffs argue ...

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