This action concerns the interplay between two distinct but related health care programs -- Medicare and Medicaid. A brief overview of the programs is a helpful beginning.
The Medicare Act, 42 U.S.C. §§ 1395 et seq. was enacted to provide medical insurance for people over 65 years of age and for certain disabled people. Part A of Medicare provides for payment of in-patient services. Enrollment in Part A is automatic. Part B of Medicare provides the option of receiving supplementary insurance for medical services not covered under Part A, including out-patient services, physician's services, physical therapy, drugs, speech therapy, occupational therapy, psychotherapy, social work and laboratory services (collectively referred to as "ancillary services"). Id. §§ 1395j to 1395w-4(j). To enroll in Part B, eligible patients must pay insurance premiums and an annual deductible. Id. §§ 1395o to 1395s. Once enrolled, the federal government pays 80% of the reasonable costs and charges for ancillary services, and the patients themselves must pay the remaining 20%. 42 U.S.C. § 1395cc(a)(2)(A). The premium, deductible and the 20% co-payment are collectively referred to as "cost-sharing amounts." Medicare reimburses providers based on a fee-for-service basis, that is, generally it pays for the reasonable costs and charges of each service rendered.
The Medicaid Act, 42 U.S.C. §§ 1396 et seq., was enacted to pay for medical care for poor people, regardless of age. The federal government and the states jointly fund the Medicaid program. Together, the participating state and the federal government provide 100% of a patient's Medicaid costs (with 50-50 participation). Id. § 1396d(b). Unlike the Medicare fee-for-service payments, the Medicaid program in New York provides a daily ("per diem") rate for each patient at a particular facility. Generally, the per diem rate is an estimate of the average cost that a facility will incur for each patient, including costs for ancillary services and non-ancillary services. The per diem rate takes into account the direct costs (e.g., labor) and indirect costs (e.g., utilities and rent) associated with providing care, and is based in part on the cost of providing care in previous years. A facility receives the per diem rate for each day a Medicaid patient is treated, regardless of the actual nature and scope of treatment provided.
The Medicare program was designed to provide medical care to eligible elderly and disabled without regard to income. Thus Medicare is available to people who are needy enough to also be eligible for Medicaid. The people who are eligible for both Medicare and Medicaid are referred to as "dual eligibles." Because dual eligibles may not be able to afford the Medicare cost-sharing amounts, a state may agree to pay the cost-sharing amounts on their behalf and thereby acquire Part B coverage for them. 42 U.S.C. § 1395v. Such agreements are referred to as "buy-in" arrangements. Buy-in arrangements save states money because once the dual eligibles are covered by Medicare, the Federal government pays 80% of the reasonable costs and charges for ancillary services rather than the across-the-board 50% share of the Medicaid per diem. New York State has a buy-in arrangement for dual eligibles.
This case concerns the problem that arises when a health care facility provides ancillary services to dual eligibles and thus potentially may be reimbursed under both Medicare and Medicaid. At issue is whether the procedure developed by the state to prevent a health care facility from receiving double payment for the same service is appropriate.
In order to avoid paying a facility for ancillary services that Medicare is going to pay for, the state developed a method of offsetting its Medicaid payments. The state starts with the facility's Medicaid per diem rate, which, as stated, includes reimbursement for ancillary services and non-ancillary services. Then the state estimates, based on past experience, what the facility is going to receive from the federal government as payment from Medicare Part B for providing ancillary services (i.e., 80% of the reasonable costs and charges). The state then pays the facility its Medicaid per diem rate minus the estimate of the Medicare Part B payments. That offset is referred to as a "carveout." After a facility receives its actual Medicare Part B payment, the state conducts an audit of the facility to reconcile the carveout. If the audit reveals that the actual Medicare Part B payments exceeded the estimate, and thus reveals that the state carved out too small an amount, then the facility owes the state. If the audit reveals that the actual Medicare Part B payments were less than the estimate, and thus that the carveout was too large, then the facility is entitled to a refund. In short, the procedure developed by the state to assure that a provider does not receive double payment for ancillary services is simply to deduct whatever payment the provider receives from Medicare Part B for ancillary services from the Medicaid per diem rate owed to the provider by the state.
The plaintiff claims that the Medicare Part B payments for ancillary services (i.e., 80% of the reasonable costs and charges) invariably exceed the portion of Medicaid per diem payments that cover the same services. Thus when the state offsets from the Medicaid payments an amount equal to the Medicare Part B payments, it is offsetting too much. The state claims that it cannot calculate exactly the portion of Medicaid per diem rate that specifically covers ancillary services and therefore it is entitled to offset the entire amount that the plaintiff receives from Medicare Part B for those services.
In the case at bar, the state audited the plaintiff in 1986 and 1987 to reconcile the carveout for those years. On January 10, 1991, the state notified plaintiff that based on plaintiff's actual Medicare Part B receipts, the carveout for 1986 and 1987 was too small, and that plaintiff owed the state $ 246,286. The plaintiff challenged the audit at an administrative hearing. On December 31, 1992, the Administrative Law Judge determined that the auditing method was proper and that the state was entitled to offset the Medicaid payments by the full amount that Medicare Part B paid for the ancillary services. Thereafter plaintiff initiated this action in federal court claiming that the state's actions violate the Medicare Act and Medicaid Act and seeking declaratory and injunctive relief preventing defendant from utilizing its audit policy to recover the alleged Medicaid overpayment from plaintiff.
Plaintiff acknowledges that the state can properly offset its Medicaid rate to prevent a double payment for ancillary services, but that the state, by offsetting the full Medicare payment for those services, is offsetting too much. The plaintiff maintains that as a provider of ancillary services to Medicare patients it is entitled to the full 80% of the reasonable costs and charges from Medicare. As stated, the state claims that it is entitled to recoup the full amount that plaintiff receives as Medicare Part B payments for dual-eligible patients. A crucial issue that the Court must first decide is whether the patient is considered primarily Medicare or primarily Medicaid.
That issue was most directly addressed in New York City Health and Hospitals Corp. v. Perales, 954 F.2d 854 (2d Cir.), cert. denied, 121 L. Ed. 2d 369, 113 S. Ct. 461 (1992). There, the Second Circuit had to determine the legality of a regulation that prevented health providers from receiving the full Medicare rate for ancillary services provided to dual eligible patients. New York had enacted a regulation that provided that the state would not pay cost-sharing amounts for dual eligibles if the Medicare payment exceeded the Medicaid rate for those services.4 Id. at 856-57. "Because the scheduled Medicaid payments [were] almost invariably less than 80% of the corresponding reasonable costs or charges of a given type under Medicare" the provider "almost never collected more than 80% of their reasonable costs or charges." Id. at 857. The state argued that dual eligible patient should be treated as primarily Medicaid patients and providers should not be entitled to recover from the state any amount above the Medicaid rate for ancillary services.
n4 New York State offered the following illustration of how the regulation worked:
Example: Medicaid Fee or Rate = $ 45.00
Medicare [80%] Balance
Approved Medicare Paid Due
$ 80.00 $ 6.00 $ 0.00
A claim should not be submitted to Medicaid in this example.
* * *
Example: Medicaid Fee or Rate = $ 50.00
Medicare [80%] Balance
Approved Medicare Paid Due
$ 60.00 $ 48.00 $ 2.00
A claim should be submitted to Medicaid for the amount of $ 2.00.
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