Petition — Johnson County Memorial Hospital v. Heckler

IN THE

Supreme Court of the United States

OCTOBER TERM, 1982

JOHNSON COUNTY MEMORIAL HOSPITAL, ET AL.,*

Petitioner*

VS.

RICHARD S. SCHWEIKER, SECRETARY OF

HEALTH AND HUMAN SERVICES,

Respondent.

PETITION FOR WRIT OF CERTORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT

Louis Richard Gohman, Attorney of Record

Laura B. Worrell

HALL, RENDER & KILLIAN

3921 North Meridian Street

Suite 200

Indianapolis, Indiana 46208

(317) 926-2326

Attorneys for Petitioners

*See inside cover for complete list of Petitioners.

Central Publishing Company, Inc., Indianapolis, IN 46206

JOHNSON COUNTY MEMORIAL HOSPITAL,

HOWARD COMMUNITY HOSPITAL,

CLARK COUNTY MEMORIAL HOSPITAL,

St. JOSEPH MEMORIAL HOSPITAL.

PUTNAM COUNTY HOSPITAL,

HENRY COUNTY MEMORIAL HOSPITAL,

HANCOCK COUNTY MEMORIAL HOSPITAL,

MORGAN COUNTY MEMORIAL HOSPITAL,

GooD SAMARITAN HOSPITAL,

MEMORIAL HOSPITAL,

REID MEMORIAL HOSPITAL,

DUNN MEMORIAL HOSPITAL,

Scott COUNTY MEMORIAL HOSPITAL,

TIPTON COUNTY MEMORIAL HOSPITAL,

RIVERVIEW HOsPITAL,

JACKSON COUNTY SCHNECK MEMORIAL HOSPITAL,

GREENE COUNTY GENERAL HOSPITAL,

KING’s DAUGHTER'S HOSPITAL,

PERRY COUNTY MEMORIAL HOSPITAL,

ORANGE COUNTY HOSPITAL,

DEACONESS HOSPITAL,

DEARBORN COUNTY HOSPITAL,

WILIAM S. MAJOR HOSPITAL,

WASHINGTON COUNTY MEMORIAL HOSPITAL,

BARTHOLOMEW COUNTY HOSPITAL,

METHODIST HOSPITAL, GARY,

St. ELIZABETH HOSPITAL,

St. MARGARET HOSPITAL,

LAPORTE HOSPITAL,

St. ANTHONY HOSPITAL,

LUTHERAN HOSPITAL,

ELKHART GENERAL HOSPITAL,

PARKVIEW MEMORIAL HOSPITAL,

GOSHEN GENERAL HOSPITAL,

St. JOSEPH’S HOSPITAL,

St. MARY MEDICAL CENTER, INC.,

St. JOSEPH’S MEMORIAL OF FT. WAYNE, INC.,

MEMORIAL HOSPITAL OF SOUTH BEND,

WELLS COMMUNITY HOSPITAL,

DUKES MEMORIAL HOSPITAL,

MEMORIAL HOSPITAL, LOGANSPORT,

McCray MEMORIAL HOSPITAL,

MEMORIAL HOSPITAL, MICHIGAN CITY,

JASPER COUNTY HOSPITAL,

HUNTINGTON MEMORIAL HOSPITAL,

LAGRANGE CouNTry HOSPITAL,

WABASH COUNTY HOSPITAL,

ADAMS COUNTY MEMORIAL HOSPITAL,

LAFAYETTE HOME HOSPITAL,

BLACKFORD COUNTY HOSPITAL,

BROADWAY METHODIST HOSPITAL,

Petitioners.

QUESTIONS PRESENTED

1. Does the decision below conflict with other decisions

of other Courts of Appeals as to the proper interpretation of

42 U.S.C. §1395x(v)(1), and Medicare Regulation 42 CFR

§405.451.

2. Does the decision below conflict with applicable

decisions of this Court in that the decision applied

legislation retroactively in violation of the Fifth

Amendment to the Constitution of the United States.

PAGE

Cenbinnin FVOIOE so sos. od deka io ced eidecneeanee i

CIE TOME og ove kien dadoar cr retousseuteor 1

PUTCO Ss 6 vn vb cc cukekSedsgeecastepennanninem 2

Statutory Provisions Involved ................ ere 2

SR COUNONNE OE IN CI db eovi a Oh cio ironsckenaniees 3

Reasons for Granting the Writ:

1. The Decision Below Conflicts With Other

Decisions of Other Courts Of Appeals As To The

Proper Interpretation Of 42 U.S.C. §1395x(v)(1),

And Medicare Regulation 42 CFR §405.451.... 5

2. The Decision Below Conflicts With Applicable

Decisions Of This Court In That The Decision

Applied Legislation Retroactively In Violation Of

The Fifth Amendment To The Constitution Of

Tee CE I inv nv toes cs eeeniseeeaes 10

COOP occa oc ccccnucuen tie elena 15

Appendix

Memorandum Decision Of United States District

Court, Southern District of Indiana............ A-1

Opinion Of 7th Circuit Courts Of Appeals...... A-14

Opinion Of 7th Circuit Court of Appeals In Saint

Mary Of Nazareth Hospital v. Department Of

Health And Human Services, No. 82-1237 (1982) A-21

ii

CITATIONS AND AUTHORITIES

CASES: PAGE

Blanchette v. Connecticut General Insurance Corps.,

on ee ale ceils i2

Caola v. United States, 404 F. Supp. 1101 (D.Conn.

UN Bees ure wi eee a dal seca aie aioe Ont 13

Coombes v. Getz, 285 U.S. 434 (1932) .... .......... 12

E & E Hauling, Inc. v. Forest Preserve . cstrict of Du

Page County, Illinois, 613 F.2d 675 (7th Cir. 1980) = 13

Ettor v. City of Tacoma, 228 U.S. 148 (1913)........ 12

Everett Plywood Corp. v. United States, 651 F.2d 723

rs CaP dh as ie aE ae oa ya 12

Fisher v. Police Jury of Jefferson, Left Bank, 116 U.S.

I ole re ea Ce oak awe ayo xs 12

Forbes Pioneer Boat Line v. Board of Commission of

Everglades Drainage District, 258 U.S. 338

STR baGis ion can gurten gts alba betiknnwe cones es 12

Haynes v. United States, 390 U.S. 85 (1968)......... 8

Hoyt Metal Co. v. Atwood, 289 F. 453 (7th Cir. 1923) 12

Johnson County Hospital, et.al. v. Richard S. Schweiker,

Secretary of Health and Human Services, 527

F.Supp. 1134 (SD.Ind. 1961) .........ce.seees. 4

Johnson County Hospita, et.at. v. Richard S. Schweiker,

Secretary of Health and Human Services, No.

82-1213 (7th Cir. February 1, 1983) ............ 5

Lynch v. United States, 292 U.S. 571 (1934)... 11, 12, 13

Nachman Corp. v. Pension Benefit Guaranty Corp.,

596 F 30 947 (7th Cir. 1979) ....... 5.200 ccc eeee 13

Ochoa v. Hernandes v. Morales, 230 U.S. 139 (1913). 138

Presbyterian Hospital of Dallas v. Harris, 638 F.2d

Se aeeee Sac SOc iss caves sces pw neeeders 5, 8,9

Saint Mary of Nazareth Hospital v. Department of

Health and Human Services, No. 82-1237 (7th Cir.

EE AEE ise bockaveoeinads casera 5, 9, 10

South East Chicago Commission v. Department of

Housing and Urban Development, 488 F.2d 1119

eee Rs PE ook hu das couceess savaeuecuamen 12

Thorpe v. Housing Authority of the City of Durham, 393

Ses eee UE 5 vekiscou de deeadak aude enouTe 12

Treigle v. Acme Homestead Association, 297 U.S. 189

TEE Sh chat awean cd ne wand ae he elah edd see ee 13

United Airlines, Inc. v. McMann, 34 U.S. 192 (1977) 8

United States v. Larionoff, 431 U.S. 864 (1977) .... 12, 13

United States v. Upper Valley Clinic Hospital, 615

FA ee GE GAs MNO w idneiccadcciuavcesae. 10

United States Trust Company of New York v. New

deren, Sab OB. DOAGTR voc vcvciateiscés 12, 13, 14

Wisconsin Cheesman, Inc. v. United States, 388 F.2d

Te as I 6 5k k5 40 Sentcccacsnene 8

STATUTES:

ET UG AG ks bo.a's Kha wa nese save een CURE nen 3,4

Es NE count oends cadecksceupeakbaleeude Gaewee 3

EY Ss 45540 Uso a seceesnavucepaekossuneninl 3

Se EE 6 Sos ooo sp. dncyuebnsohnceesvasn eel 6

Se Brae TED oo vend civ enedssnccreans 5, 7, 8, 9, 10

Gee Oy vives ncses cnndevsrdsdeasesernee 10

42 USC §139500(fiXh)..............25. ind i teewe 3, 4

REGULATIONS:

ee EE 6 cb peek onacwnns Ueacensnenweeweewees 6

ey ee mre Mite eM Sa 6

ee cad Ga aw hw ag edie ae 9

cdl as sc etak vob eene seers ca aee 5

MISC.:

Hochman, The Supreme Court and the Constitutionality

of Retroactive Legislation, 73 Harv. L. Rev. 692

SE cbs wig dh oda Ge ek va & cw Fe eee Keeenn eee Kee 13

IN THE

Supreme Court of the United States

OCTOBER TERM, 1982

JOHNSON COUNTY MEMORIAL HOSPITAL, ET AL.,*

Petitioner*

VS.

RICHARD S. SCHWEIKER, SECRETARY OF

HEALTH AND HUMAN SERVICES,

Respondent.

PETITION FOR WRIT OF CERTORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT

PRAYER

Petitioners Johnson County Memorial Hospital, et al.,

respectfuliy pray that a writ of certiorari issue to review

the judgment and opinion of the United States Court of

Appeals for the Seventh Circuit entered in this preceeding

on February 1, 1983.

OPINION BELOW

The opinion of the Court of Appeals, not yet reported,

appears in the Appendix hereto. The opinion rendered by

the District Court of Southern Indiana also appears in the

Appendix.

JURISDICTION

The judgment of the Court of Appeals for the Seventh

Circuit was entered on February 1, 1983. This petition for

certiorari was filed within ninety (90) days of that date.

This Court’s jurisdiction is invoked under 28 USC §1254(1).

STATUTORY PROVISION INVOLVED

Section 1395x(v)(1)(A) of Title 42 provides:

“(v)(1(A) The reasonable cost of any services shall be

the cost actually incurred, excluding therefrom any

part of incurred cost found to be unnecessary in the

efficient delivery of needed health services, and shall

be determined in accordance with regulations

establishing the method or methods to be used, and the

items to be included, in determining such costs for

various types or classes of institutions, agencies, and

services; except that in ary case to which paragraph

(2) or (3) applies, the amount of the payment

determined under such paragraph with respect to the

services involved shall be considered the reasonable

cost of such services. In prescribing the regulations

referred to in the preceding sentence, the Secretary

shall consider, among other things, the principles

generally applied by national organizations or

established prepayment organizations (which have

developed such principles) in computing the amount of

payment, to be made by persons other than the

recipients of services, to providers of services on

account of sevices furnished to such recipients by such

providers. Such regulations may provide for

determination of the costs of services on a per diem,

per unit, per capita, or other basis, may provide for

using different methods in different circumstances,

may provide for the use of estimates of costs of

particular items or services, and provide for the

establishment of limits on the direct or indirect overall

incurred costs or incurred costs of specific items or

services or groups of items or services to be recognized

as reasonable based on estimates of the costs necessary

in the efficient delivery of needed health services to

2

individuals covered by the insurance programs

established under this subchapter, and may provide

for the use of charges or a percentage of charges where

this method reasonably reflects the costs. Such

regulations shall (i) take into account both direct and

indirect costs of providers of services (excluding

therefrom any such costs, including standby costs,

which are determined in accordance with regulations

to be unnecessary in the efficient delivery of services

covered by the insurance programs established under

this subchapter) in order that, under the methods of

determining costs, the necessary costs of efficiently

delivering covered services to individuals covered by

the insurance programs established by this

subchapter will not be borne by individuals not so

covered, and the costs with respect to individuals not

so covered wil! not be borne by such insurance

programs, and (ii) provide for the making of suitable

retroactive corrective adjustments where, for a

provider of services for any fiscal period, the

aggregate reimbursement produced by the methods of

determining costs proves to be either inadequate or

excessive.”

STATEMENT OF THE CASE

The jurisdiction of the district courts was invoked under

Chapter 7 of Title V of the Administrative Procedure Act, 5

U.S.C. §706, and 42 U.S.C. §139500(f)(1).

Petitioners are fifty-one (51) general, acute care, not-for-

profit or county hospitals located in the State of Indiana

who participate in the Medicare program contained in

Title XVIII of the Social! Security Act, 42 USC §1395, et

seq., and in the Hill-Burton program contained in 42 USC

§291. Petitioners sought reimbursement under the

Medicare program for the cost incurred by each of them in

the rendering of uncompensated care under the Hill-

Burton program.

All of the Petitioners claimed their respective costs of

rendering uncompensated care under the Hill-Burton

3

program in their cost reports for the fiscal periods ending

between December 31, 1977 and June 30, 1978. The Fiscal

Intermediary, Blue Cross Association/Mutual Hospital

Insurance, Inc., disallowed these costs and Appellees

perfected a group appeal to the Provider Reimbursement

Review Board (hereinafter “PRRB”). An evidentiary

hearing was held before the PRRB, and the PRRB

affirmed the Intermediary’s adjustment and held that the

hospitals could not be reimbursed for the costs of their

respective Hill-Burton uncompensated care services. The

Administrator of the Health Care Financing Administra-

tion, to whom the Secretary of Health and Human Services

(hereinafter “HHS”) has delegated the responsibility of

administering the Medicare Act, declined to reverse,

affirm or modify the decision of the PRRB and thus, the

decision of the PRRB became final.

Appellees appealed to their respective district courts in

Indiana pursuant to 42 USC §139500(f)(1) and then

consolidated both actions in the United States District

Court for the Southern District of Indiana, Indianapolis

Division.

Review was conducted by the District Court pursuant to

Chapter 7 of Title V of the Administrative Procedure Act, 5

USC §706.

The District Court rejected the analysis and decision of

the PRRB and concluded that the “Hill-Burton free care

obligation costs are indirect costs within the meaning of the

Medicare legislation and as such should be proportionately

reimbursable.” Johnson County Memorial Hospital v.

Schweiker, 527 F. Supp. 1134 at 1139(S.D. Ind. 1981). The

District Court further held that “the Hill-Burton free care

obligation is so like interest on building loans that it would

be arbitrary and capricious to exclude the indirect costs of

the free care obligation from the Medicare reimbursement

calculus if interest on building loans is to be included.” 527

F. Sup. 1134 at 1140. Accordingly, the District Court

entered judgment for the Plaintiffs and remanded the

4

matter to the PRRB for a determination of the factual

issues as to the amount of reimbursement.

From this decision, the Respondents appealed to the

United States Court of Appeals for the Seventh Circuit.

That court reversed the lower court’s decision in its opinion,

Johnson County Memorial Hospital, et. al., v. Richard

Schweiker, Secretary of Health and Human Services, No.

82-1213 (February 1, 1983).

The Court of Appeals held that the Petitioner’s claim for

reimbursement was precluded by Section 106 of the Tax

Equity and Fiscal Responsibility Act of 1982, (“hereinafter

“TEFRA”) and the Seventh Circuit’s decision in St. Mary of

Nazareth Hospital v. Department of Health and Human

Services, No. 82-1237 (February 1, 1982).

REASONS FOR GRANTING THE WRIT

1. The Decision Below Conflicts with the Decision of

the Fifth Circuit Court of Appeals as to the Proper

Interpretation of 42 U.S.C. §1395x(v)(1)(A) and

Medicare regulation 42 CFR §405.451

The Seventh Circuit held that TEFRA applied

retroactively, and therefore, no Hill-Burton costs could be

reimbursed. To reach this conclusion, the court was

required to reach the substantive issue of the existence of a

vested contractual right prior to 1982. The Seventh

Cireuit’s decision that there were no vested contractual

rights to reimbursement conflicts with the Fifth Circuit’s

decision on the same issue in Presbyterial Hospital of

Dallas v. Harris, 638 F.2d 1381 (5th Cir. 1981).

Section 1395x(v)(1) of Title 42 directs and authorizes the

Secretary of HHS to adopt regulations consistent with

congressional intent defining the term “reasonable costs”

as the term applies to the reimbursement of Medicare

expenses. Hospitals qualified as providers of medical

services to Medicare beneficiaries are reimbursed for the

reasonable cost of the medical care rendered to Medicare

5

beneficiaries by private organizations acting as “fiscal

intermediaries” under contract with the Secretary. 42

U.S.C. §1395h. At the end of a hospital’s fiscal year, the

hospital submits a cost report to the designated fiscal

intermediary, and the fiscal intermediary conducts an

audit of the cost report to ascertain the amount of

reimbursable “reasonable costs” the hospital has incurred.

42 C.F.R. §405.406(b). It is the fiscal intermediary’s

responsibility to allow or disallow in accordance with the

Secretary’s regulations those items claimed as “reasonable

costs” by the hospital.

The Petitioners are fifty-one hospitals located

throughout the state of Indiana, and each of these hospitals

received federal funds for either the construction or

modernization of their medical facilities in the form of

grants under the federal program known as the Hill-

Burton Act. 42 U.S.C. §291. In consideration for their Hill-

Burton grant, both the grant agreement and the Act

requires participating hospitals to provide a reasonable

volume of uncompensated care to those persons unable to

pay for the care. The Secretary of HHS adopted regulations

that required hospitals who received Hill-Burton funds to

provide a percentage of uncompensated care to persons in

the cost years in question based on one of the following three

formulas: not less than the lesser of (1) 10% of all federal

assistance received under the Hill-Burton Act; or (2) 3% of

the hospital’s net operating costs. As a third alternative, in

order to fulfill its obligation arising out of the receipt of

Hill-Burton funds, a participating hospital could elect to

have an “open door” policy whereby it would provide

uncompensated care to all persons admitted to the hospital

in need of medical care or treatment who could not pay for

it. 42 C.F.R. §153.111. Of the hospitals involved in this

appeal, forty-five (45) elected to provide free care to

indigents based upon the open door policy and six (6) of the

hospitals decided to provide uncompensated care based

upon the 10% formula.

The Petitioners seek Medicare reimbursement on the

primary theory that the cost of providing free care is an

indirect cost of the Medicare prograni. In the alternative,

the Petitioners assert that the cost in providing free care

under the Hill-Burton Act is so much like interest for the

use of borrowed funds that it would be arbitrary and

capricious to exclude the indirect costs of this free care

obligation while reimbursing hospitals for interest on

borrowed funds.

The Seventh Circuit held that the costs of providing Hill-

Burton free care may not be reimbursed under Medicare

because Congress did not intend these costs to be included

in the term “reasonable costs” under 42 U.S.C. 1395x(v)(1).

This determination was based upon the language and

legislative history of TEFRA. TEFRA became law after

the District Court opinion was rendered herein and while

this case was pending before the Seventh Circuit Court of

Appeals. In Section 106 of TEFRA, “reasonable costs” for

Medicare reimbursement are defined to exclude Hill-

Burton free care costs as follows:

“(a) Section 1861(v)(1) of the Social Security Act [42

U.S.C. §1395x(v)(1)] is amended by adding at the end

the following new subparagraph:

‘(M) Such regulations shall provide that costs

respecting care provided by a provider of

services, pursuant to an assurance under Title VI

or XVI of the Public Health Service Act that the

provider will make available a reasonable volume

of services to persons unable to pay therefore,

shall not be allowable as reasonable costs.’

(b) The amendment made by subsection (a) shall be

effective with respect to any costs incurred under Title

XVIII of the Social Security Act, except that it shail

not apply to costs which have been allowed prior to the

date of the enactment of this Act pursuant to the final

court order affirmed by a United States Court of

Appeals.”

Congress also provided the following statement of

congressional intent:

“Conference Agreement

“The Conference Agreement includes the House

Committee Provision. The provision is intended to

clarify that Hill-Burton free care costs have never been,

and are not allowable for Medicare reimbursement

purposes. The provision, therefore, applies to all such

costs that have been, or will be incurred except those

recognized by the final judgment of a U. S. Court of

Appeals entered into prior to enactment.” (Emphasis

supplied.)

To suggest in 1982 that the 1965 Congress never intended

to reimburse hospitals for a cost which was purely

nonexistent at the time, is to provide legislative intent

where it did not exist. Subsequent Congressional

pronouncements should not be considered as legislative

history in interpreting a statute. Haynes v. United States,

390 U.S. 85, 87 n.4 (1968); United Airlines, Inc. v. McMann,

434 U.S. 192, 200 n.7 (1977); Wisconsin Cheesman, Inc. v.

United States, 388 F.2d. 420, 423 (7th Cir. 1968).

At the time Section 106 was promulgated, the only

decision that allowed the costs of providing Hill-Burton

care to be reimbursed that had been affirmed by a United

States Court of Appeals was Presbyterian Hospital of

Dallas v. Harris, supra.

Thus, the Seventh Circuit gave retroactive effect to the

provisions of TEFRA. The court defended this action by

finding that the hospitals had no vested contractual right to

Medicare reimbursement of the costs the hospitals

incurred in providing a percentage of free care to local

indigents in fulfilling their Hill-Burton obligations. In

deciding the issue of vested contractual rights, the Seventh

Circuit reached the substantive issue of whether

“reasonable costs,” as stated in 42 U.S.C. 1395x(v)(1),

include the cost of providing free care to indigent persons in

8

fulfillment of contractual and statutory obligations under

the Hill-Burton Act.

The Seventh Circuit decision, to the extent that it decided

the substantive issue of vested rights prior to TEFRA,

conflicts with the Fifth Circuit decision in Presbyterian

Hospital of Dallas v. Harris, supra. A review of the well

reasoned opinion in Presbyterian Hospital reveals that the

Fifth Circuit carefully reviewed the precise terms of the

Medicare Act and regulations. The Fifth Circuit found that

the costs of free care are incidental allowable costs similar

in nature to interest or depreciation, neither of which go

directly to benefit Medicare patients, but which

nonetheless inure as a residual benefit tothem and are thus

compensable on that basis. Presbyterian Hospital, supra, at

1386-1387.

In its decision, the Seventh Circuit relied on its decision

in St. Mary of Nazareth Hospital v. Department of Health

and Human Services, No. 82-1237 (7th Cir. 1982) for its

ruling on the substantive issue. In St. Mary, the Seventh

Circuit stated that its review of the Medicare statutes and

regulations revealed no intention on the part of the

Congress to allow reimbursemnet from one federal

program for costs incurred in a separate and distinct

federal program.

The Fifth Circuit observed that both direct and indirect

costs are recoverable under 42 USC §1395x(v)(1) and 42

CFR 405.451. Presbyterian Hospital, supra at 1387.

Indirect costs such as depreciation, interest, some types of

bad debt, research costs, and even a return on equity

capital of proprietary owners are all reimbursable. The

court was unable to distinguish between free care ex penses

and interest. Interest on outstanding loans is clearly

reimbursable under 42 CFR §405.419(b) Presbyterian

Hospital, Id. The court reasoned that the free care

“expense” indirectly benefited Medicare patients by

qualifying the hospital for interest subsides, provided

through the Hill-Burton program, for construction and

9

modernization projects. The fact that the expenses of the

Hill-Burton program benefit non-Medicare patients was

held to be irrelevant. The determining factor is whether the

expenses were a reasonable cost incurred in the provision of

services to Medicare patients.

In St. Mary of Nazareth Hospital Center v. Department of

Health and Human Services, et.al., supra, decided on the

same day as the present case, the Seventh Circuit stated

that there was no evidence that the Congress ever intended

the Medicare program to reimburse hospitals for the

Medicare percentage of the cost of providing medical care

pursuant to the hospital!’s Hill-Burton obligations. Thus,

the Seventh Circuit’s interpretation of the statutory

language and legislative history of the Medicare and Hill-

Burton programs conflicts with that of the Fifth Circuit.

2.The Decision Below Conflicts with Applicable

Decisions of this Court in that it Applied

Legislation Retroactively in Violation of the Fifth

Amendment to the Constitution of the United

States.

Petitioners have a vested contractual right to be

reimbursed by the Medicare program for Hill-Burton

indigent care costs. The appropriate Medicare statute,

however, provides that a provider hospital is eligible for

payments under the Medicare program only if it files an

agreement pursuant to 42 U.S.C. §1395 cc (§1866 of the

Social Security Act) with the Secretary. The form

agreement is denominated as HCFA-1561 and is located in

CCH Medicare and Medicaid Guide 410,440. The fact that

the Medicare agreement constitutes a binding contract

should not be challenged by the Secretary since he has

prevailed in litigation in which he has sued for breach of

contract under this form of provider agreement. United

States v. Upper Valley Clinic Hospital, 615 F.2d 302 (5th

Cir. 1980). The contract between Appellees and the

Secretary grants to the hospitals a cognizable right for

10

reasonable cost reimbursement. This right includes the

right to be reimbursed for the reasonable cost of providing

Hill-Burton uncompensated services.

By the enactment of Section 106 of TEFRA, Congress, at

the behest of the Secretary, has attempted to repudiate the

government’s financial obligation under the Medicare Act

to pay Hill-Burton indigent care costs which are part of the

cost incurred by Hill-Burton assisted facilities in providing

care to Medicare beneficiaries. The Seventh Circuit’s

decision prohibits payment for services received by

retroactive application of Section 106 to: ervices rendered

by Petitioners prior to the effective date of TEFRA. Such

unilateral repudiation of the hospitals’ contract rights and

of the vested financial obligations by the federal

government constitutes a taking of property without just

compensation in violation of the Fifth Amendment. Lynch

v. United States, 292 U.S. 571 (1934).

In Lynch, a unanimous Supreme Court sustained the

right of beneficiaries of War Risk Insurance policies, which

had been issued by the Government, to recover on these

policies despite the existence of the Economy Act of 1933

which provided that “ail laws granting or pertaining to

yearly renewable term insurance are hereby repealed...”

The Court held that the statute violated the Fifth

Amendment due process clause as a taking of property

without just compensation. In support of its conclusion, the

Court stated:

“The Fifth Amendment commands that property be

not taken without making just compensation. Valid

contracts are property, whether the obligor be a

private individual, a municipality, a state or the

United States. Rights against the United States

arising out of a contract with it are protected by the

Fifth Amendment.”

Id. at 579. The Court went on to state that:

“...Congress [is] without power to reduce expenditures by

abrogating contractual obligations of the United

11

States. To abrogate contracts, in the attempt to lessen

government expenditure, would be not the practice of

economy, but an act of repudiation. The United States

are as much bound by their contracts as are

individuals. If they repudiate their obligations, it is as

much repudiation, with all the wrong and reproach

that term implies, as it would be if the repudiator had

been a state or a municipality or a citizen.”

Id. at 580. The vitality of the holding in Lynch is evidenced

in numerous subsequent cases dealing with the

constitutionality of state and federal legislation

retroactively repudiating contractual rights flowing from

the government to individuals. See, e.g., United States v.

Larionoff, 431 U.S. 864, 279 (1977) (action by re-enlisted

members of U.S. Navy for bonuses under the terms of the

Variable Reenlistment Bonus Program); United States

Trust Company of New York v. New Jersey, 431 U.S. 1, 26

(1977); Thorpe v. Housing Authority of the City of Durham,

393 U.S. 268, 278-9 (1969); Blanchette v. Connecticut

General Insurance Corps., 419 U.S. 102, 134-5(1974); South

East Ch .ago Commission v. Department of Housing and

Urban Development, 488 F.2d 1119 (7th Cir. 1973); Everette

Plywood Corp. v. United States, 651 F.2d 723, 727 (Ct. Cl.

1981). See generally, Forbes Pioneer Boat Line v. Board of

Commission of Everglades Drainage District, 268 U.S. 338

(1922); Coombes v. Getz, 285 U.S. 434 (1932); Ettor v. City of

Tacoma, 228 U.S. 148 (1913); Hoyt Metal Co. v. Atwood, 289

F. 453 (7th Cir. 1923); Fisher v. Police Jury of Jefferson, Left

Bank, 116 U.S. 1311 (1885).

The test for constitutionality of statutes retroactively

impacting on contractual rights flowing from the

government to individuals must be judged by the court’s

close scrutiny of three factors comprising a means-end

rationality test: (a) the nature and the strength of the public

interest served by the statute; (b) the extent to which the

statute modifies or abrogates the asserted pre-enactment

right; and (c) the nature of the right which the statute

12

alters. See Nachman Corp. v. Pension Benefit Guaranty

Corp., 592 F.2d 947, 959-960 (7th Cir. 1979); Hochman, The

Supreme Court and the Constitutionality of Retroactive

Legislation, 73 Harv. L. Rev. 692, 697 (1960).

Respecting the first element of the test, where the court

finds that the challenged statute with retroactive

application serves “no discernible public purpose” other

than the bald avoidance of the government’s financial

obligations, then the provision will fail constitutional

muster. Lynch v. United States, supra; Treigle v. Acme

Homestead Association; 297 U.S. 189 (1936); see also, E& E

Hauling, Ine. v. Forest Preserve District of Due Page

County, Illinois, 613 F.2d 675, 681 (7th Cir. 1980).

Respecting the extent of the abrogation of the asserted

preenactment contractual right, unconstitutionality

typically results where retroactive application of a statute

completely destroys preexisting rights to which it applies,

particularly where the individual whose contractual right

is abrogated has acted in reliance upon that right. See, e.g.,

Ochoa v. Hernandes v. Morales, 230 U.S. 139 (1918);

Hochman, The Supreme Court and the Constitutionality of

Retroactive Legislation, supra at 711.

Finally, concerning the nature of the right affected by

the retroactive statute, statutes which impair or diminish

the financial obligations of the government to individuals

have failed absent a clear showing of an important public

purpose. Close scrutiny of such statutes by the courts has

been justified by the obvious governmental self-interest

implicit in the enactment of such statutes. United States

Trust Co. of New York v. New Jersey, supra; United States v.

Larionoff, supra; see, Nachman Corp. v. Pension Benefit

Guaranty Corp., supra at 959 n. 23 (7th Cir. 1979); Caolav.

United States, 404 F. Supp. 1101 (D. Conn. 1975). As the

Supreme Court recognized in a closely analogous case

decided under the Contract Clause where New Jersey

attempted abrogation of its financial obligations to

individuals:

13

“If a State can reduce its financial obligations

whenever it wanted to spend the money for what it

regarded as a public purpose, the Contract Clause

would provide no protection at all.

United States Trust Co., supra, at 26.

There is no dispute that Petitioners have a contractual

right to reimbursement of the reasonable, necessary and

actual costs of providing services to Medicare beneficiaries.

For reasons previously briefed at length, an element of that

contractual right is Hill-Burton uncompensated care cost

reimbursement.

There is no discernible public purpose for the statute

other than simply reducing federal government

expenditures in accordance with the present Administra-

tion’s domestic fiscal policy. The regulatory interest which

will avoid the Lynch doctrine must go beyond enrichment

of the government coffers. The retroactive application of

Section 106 would completely eliminate the Petitioners’

contractual right to Hill-Burton care cost reimbursement

under the Medicare Act. Finally, the statute impacts in

favor of the government upon purely financial obligations

at the expense of hospitals with vested contractual rights.

These hospitals accepted Hill-Burton financial assistance

under the contractual expectation of recouping uncompen-

sated care costs from their entire hospital population. Such

hospitals have adopted and implemented rate schedules for

their entire nonindigent patient population in reliance

upon this expectation. Retroactive abrogation of the

government’s obligation leaves the Medicare portion of

those costs unfunded. Thus, the retroactive application of

Section 106 is prohibited under each of the three factors in

the means-end rationality test.

14

CONCLUSION

The Petitioner prays that this Court grant a writ of

certiorari to review the decision of the Seventh Circuit

Court of Appeals.

Respectfully submitted,

LoutIs RICHARD GOHMAN

Attorney of Record

Laura B. Worrell

HALL, RENDER & KILLIAN

3921 North Meridian Street

Suite 200

Indianapolis, Indiana 46208

(317) 926-2326

15

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF INDIANA

INDIANAPOLIS DIVISION

JOHNSON COUNTY MEMORIAL HOSPITAL, ET AL.,

Plaintiffs,

VS.

RICHARD S. SCHWEIKER, SECRETARY,

DEPARTMENT OF HEALTH AND HUMAN

SERVICES, LEONARD D. SCHAEFFER,

ADMINISTRATOR, HEALTHCARE FINANCING

ADMINISTRATION,

Defendants.

MEMORANDUM OF DECISION

Plaintiffs are 51 general, acute care, not-for-profit or

county hospitals located in the State of Indiana which

participate in the Medicare program contained in Title

XVIII of the Social Security Act, 42 U.S. C. §1395, et. seq.,

and in the grant program established by the Hill-Burton

Act, 42 U.S.C. §291. Plaintiffs seek review of the

defendants’ decision not to include the cost of uncompensated

care obligations mandated by participation in the Hill-

Burton program as reimbursable costs under the Medicare

program. Jurisdiction is based on 42 U.S.C. §139500(f)(1).

The matter now cores before the Court on the parties’

cross-motions for summary judgment.

The basic question presented for determination is that of

how to reconcile two separate bodies of legislation which

have not been coordinated by Congress.

The Medicare Act was passed in 1965. It provides that

participating hospitals will be reimbursed for the

reasonable cost of providing medical services to Medicare

beneficiaries. 42 U.S.C. §1395f(b). The Act defines

“reasonable cost” in 42 U.S.C. §1395x(v)(1)(A):

A-1

“The reasonable cost of any services shall be the cost

actually incurred, excluding therefrom any part of

incurred cost found to be unnecessary in the efficient

delivery of needed health services, and shall be

determined in accordance with regulations establishing

the method or methods to be used, and the items to be

included, in determining such costs for various types

or classes of institutions, agencies, and services....

Such regulations shall (i) take into account both direct

and indirect costs of providers of services (excluding

therefrom any such costs, including standby costs,

which are determined in accordance with regulations

to be unnecessary in the efficient delivery of services

covered by the insurance programs established under

this subchapter) in order that, under the methods of

determining costs, the necessary costs of efficiently

delivering covered services to individuals covered by

the insurance programs established by this subchapter will

not be borne by individuals not so covered, and the

costs with respect to individuals not so covered will not

be borne by such insurance programs and (ii) provide

for the making of suitable retroactive corrective

adjustments where, for a provider of services for any

fiscal period, the aggregate reimbursement produced

by the methods of determining costs proves to be either

inadequate or excessive.”

Pursuant to this statutory authority, the Secretary of

Health and Human Services has promulgated regulations

which define reasonable cost more fully. 42 CFR §§405.401-

405.488. The concept of reasonable cost is described in 42

CFR §405.451 as including “all necessary and proper

costs.” Necessary and proper costs are defined as costs:

“ ..which are appropriate and helpful in developing

and maintaining the operation of patient care

facilities and activities. They are usually costs which

are common and accepted occurrences in the field of

the provider’s activity.” 42 CFR §405.451(b)(2).

The section states that reasonable cost includes direct and

indirect costs: the objective is that costs stemming from

A-2

providing services to Medicare beneficiaries under the

program should not be borne by non-Medicare patients and

that costs due to treating non-Medicare patients not be

borne by the program. 42 CFR §405.451(b)(1) and (c\3).

The Hill-Burton Act, 42 U.S.C. §291, et. seq., was passed

in 1946 to provide federal money for the construction and

modernization of hospitals in order to assure adequate

hospital services to all. 42 U.S.C. §291. In order to receive

this federal aid, hospitals are required to provide a

reasonable amount of free care to people unable to pay for

such care. 42 U.S.C. §291c(eX2). Until 1°°2, the amount of

free care that would be considered reasonable was not

specified. In 1972, the Department of Health and Human

Services specified that a reasonable amount of free services

was an amount equal to: (1) 10% of the federal aid given; (2)

3% of operating costs; or (3) care to all indigents appearing

at the hospital in need of care (the open door policy). 42 CFR

§53.111(d).

Each of the plaintiffs entered into a Hill-Burton grant

agreement with the United States government. In doing so,

each hospital incurred an obligation to provide a

reasonable amount of free care to indigents.

The plaintiffs then sought to include their respective

Hill-Burton uncompensated care costs as allowable

indirect costs or as interest expenses in order to get

reimbursement under the Medicare Act. The Fiscal

Intermediary, Blue Cross Association/Mutual Hospital

Insurance, Inc. (“Blue Cross”), disallowed these costs. The

plaintiffs appealed to the Provider Reimbursement Review

Board (PRRB). The PRRB affirmed the Blue Cross

decision.

This PRRB decision became final when the Administrator of

the Health Care Financing Administration, to whom the

Secretary of Health and Human Services has delegated the

responsibilty of administrating the Medicare Act, declined

to reverse, affirm, or modify the decision of the PRRB.

Plaintiffs now appeal to this Court.

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Background

Judicial review of the PRRB’s final decision not to

reimburse plaintiffs for their Hill-Burton costs is based on

42 U.S.C. §139500(f)(1) which provides:

“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 Board’s

decision, reverses, affirms, or modifies the Board’s

decision. Providers shall have the right to obtain

judicial review of any final decision of the Board, or

any reversal, affirmance, or modification by the

Secretary by a civil action commenced within 60 days

of the date on which notice of any final decision by the

Board or of any reversal, affirmance, or modification

by the Secretary is received. Such action shall be

brought in the District Court of the United States for

the judicial district in which the provider is located or

in the District Court of the District of Columbia and

shall be tried pursuant to the applicable provisions

under chapter 7 of Title 5, notwithstanding any other

provisions in Section 405 of this Title.”

It must be noted that 26 of the plaintiffs are located in the

Northern District of Indiana and that the other 25

plaintiffs are located in the Southern District of Indiana.

The 26 plaintiffs from the Northern District of Indiana

originally filed an action in the United States District

Court for the Northern District of Indiana as Cause No. H

79-551 on November 15, 1979. The action was ordered

transferred to this court and filed as Cause No. IP 79-1018-

C and then consolidated with the action brought by the

other 25 plaintiffs in this court as Cause No. IP 79-905-C.

Tt could be argued that the transfer of the cause filed in

the Northern District of Indiana raises an issue of

improper venue. Jurisdiction is conferred to the federal

district courts to review reimbursement decisions by 42

U.S.C. §139500(f)(1), but that section goes on to provide that

the proper court for such actions is either the District Court

for the District of Columbia or the federal district court for

A-4

the judicial district in which the provider is located. Even

assuming an original improper venue, the defendants have

waived any objection they might have had by not

interposing a timely and sufficient objection. Therefore,

the Court’s jurisdiction over this matter and over these

parties is not impaired. 28 U.S.C. §1406(b).

The standard of review of the decision to deny

reimbursement is that standard contained in 5 U.S.C.

§§701, et. seq. The applicable provision is 5 U.S.C. §706(2)

which provides, in pertinent part, that a reviewing court

shall hold unlawful and set aside agency action, findings,

and conclusions found to be arbitrary, capricious, an abuse

of discretion, or otherwise not in accordance with law.

The issue to be resolved is how the free care costs

incurred by provider hospitals in order to obtain federal

monies to build or improve hospital facilities fit into the

reimbursement of expenses scheme of the Medicare Act.

As mentioned earlier, the Medicare Act reimburses

hospitals for the reasonable cost of any services, whether

direct or indirect costs, provided to Medicare beneficiaries.

The Secretary of Health and Human Services has

promulgated numerous regulations listing the items to be

included in reimbursement. For purposes of this case, only

a few of these regulations are relevant.

Reasonable costs is defined as including both direct cost,

the cost of services provided directly to Medicare

beneficiaries, and a proportionate share of indirect cost,

which are costs incurred for the benefit of all patients in the

hospital. 42 CFR §405.451(b)(1) and (c)(3). In addition to

this general definition, two specific inclusions and one

specific exclusion from reimbursement are relevant.

Depreciation on assets financed by grants obtained

under the Hill-Burton program is a reimbursable cost. 42

CFR §405.418(a). As explained in 42 CFR §405.418(b):

“Like other assets (including other donated

depreciable assets), assets financed with Hill-Burton

A-5

or other Federal or public funds become a part of the

provider institution’s plant and equipment to be used

in rendering services. It is the function of payment of

depreciation to provide funds which make it possible

to maintain the assets and preserve the capital

employed in the production of services. Therefore,

irrespective of the source of financing of an asset, if it

is used in the providing of services for beneficiaries of

the program, payment for depreciation of the asset is,

in fact, a cost of the production of those services.

Moreover, recognition of this cost is necessary to

maintain productive capacity for the future....”

Necessary and proper interest on current and capital

indebtedness is also an allowable cost as provided in 42

CFR §405.419(a). Interest is defined as the cost incurred for

the use of borrowed funds. 42 CFR §405.419(b)(1). To be

“necessary,” interest must (1) be incurred on a loan made to

satisfy a financial need of the provider and (2) be incurred

on a loan made for a purpose reasonably related to patient

care. 42 CFR §405.419(b)(2). To be “proper,” interest must

be incurred at a prudent rate and must be paid to a lender

not related to the provider through control or ownership. 42

CFR §405.419(b)(3).

Finally, charity care and bad debts are not reimbursable.

Charity allowances are defined as “reductions in charges

made by the provider of services because of the indigence or

medica! indigence of the patient.” 42 CFR §405.420(b)2).

Charity care is viewed as a reduction in revenue. The

regulation explains that the failure to collect charges for

services rendered does not add to the cost of providing

services, since that cost has already been incurred in giving

the care. 42 CFR §405.420(c).

In light of these regulations governing reimbursement of

costs under the Medicare Act, it is now possible to examine

the arguments raised by plaintiffs for allowing the cost of

Hill-Burton free care as a reimbursable expense.

A-6

Positions of the Parties

The plaintiffs maintain that their Hill-Burton free care

costs are allowable indirect costs of the Medicare program.

Plaintiffs also argue that Hill-Burton free care should be

viewed as interest paid on a loan and thus reimbursable

under 42 CFR §405.419. Alternatively, plaintiffs assert

that, if the full cost of the Hill-Burton free care is not

reimbursable, at least the excess of the cost over the

depreciation reimbursed on Hill-Burton f' nanced facilities

allowed in 42 CFR §405.418(a) and (b) should be

reimbursed.

The PRRB rejected these arguments, holding that Hill-

Burton free care is not reimbursable since it is furnished to

patients who are not Medicare patients. The PRRB

reasoned:

“The Board finds that to allow the cost of the free care

would be in direct opposition to the lega! and

regulatory objective of determining reasonable cost

whereby costs with respect to individuals covered by

the program will not be borne by individuals not so

covered, and the costs with respect to individuals not

so covered will not be borne by the program (Section

1861(v)(1)(A) of the Social Security Act, as amended,

and 42 CFR 405.402(a) and 451(b)(1)). The patients in

this case receiving the free care fall into the latter

category of patients. Inasmuch as they are not

Medicare beneficiaries, their costs, the free care, may

not be borne by the program.” Administrative Record,

p.0016.

The PRRB also held that reimbursement for Hil!-Burton

free care is barred by the prohibition of reimbursement for

charity allowances contained in 42 CFR 405.420. The

PRRB rejected plaintiffs’ alternative request for

reimbursement of free care cost in excess of the allowance

for depreciation for the same reasons as it rejected

reimbursement for the full cost.

A-7

Discussion

Very few courts have addressed the question raised by

this case. Of the on-point cases brought to the attention of

the Court or discovered in the Court’s own research, only

one unpublished district court opinion has gone in favor of

the government. Harper-Grace Hospitals v. Schweiker, No.

80-72082 (E.D.Mich. 1981). Two more persuasive opinions

on all fours with the case at bar have held that hospitals are

entitled to Medicare reimbursement for a portion of the

free care given to patients in fulfillment of the hospitals’

Hill-Burton obligations. Presbyterian Hospital of Dallas v.

Harris, 638 F.2d 1381 (5 Cir. 1981), and Rapides General

Hospital v. Matthews, 435 F.Supp. 384 (W.D.La. 1977)

(vacated and remanded on other grounds, No. 77-3125, 5

Cir., Oct. 23, 1978, unpublished order).

The PRRB has recently held that the Medicare

proportion of Hill-Burton costs are reimbursable, in

reliance on Presbyterian Hospital, supra. (See Mount

Diablo Hospital Medical Center v. Blue Cross Association/

Blue Cross of Northern California (PRRB No. 81-D-835,

Sept. 11, 1981); Gaston Memorial Hospital, Inc. v. Blue

Cross Association/Blue Cross Blue Shield of North

Carolina (PRRB No. 81-D-84, Sept. 11, 1981), and Catholic

Medical Center v. Blue Cross Association/New Hampshire-

Vermont Health Service (PRRB No. 81-D-87, Sept. 11,

1981).

The first major issue to be resolved is whether the Hill-

Burton free care obligation is an indirect cost within the

meaning of the Medicare Act. 42 U.S.C. §1395x(v)(1)(A), 42

CFR §405.451(b)(1) and (c)(3).

The PRRB’s argument that the free care obligation

should not be reimbursed because the services rendered to

non-Medicare patients misapprehends the point of the free

care obligation. The specific hospital services are indeed

given to indigents, but they are given by the hopsital in

exchange for the government interest subsidy. Medicare

patients do benefit from the Hill-Burton grants: the free

A-8

care given to non-Medicare patients is simply a payment

for the building improvements enjoyed both by them and

by Medicare patients. This point was addressed by the

court in Rapides, supra. The following language was noted

with approval by the Fifth Circuit Court of Appeals in

Presbyterian Hospital of Dallas, supra, at 388:

“Defendant’s opposition is a straightforward one. The

indigents receiving Hill-Burton free care are persons

other than those covered by medicare. Thus, their

stature as ‘individuals not so covered’ automatically

precludes the plaintiff from receipt of medicare

payments as to their costs. But this response

misapprehends the thrust of plaintiff's argument.

Plaintiff does not assert that the free care

beneficiaries are medicare recipients and that their

costs are reimbursable as such. Rather, plaintiff

argues that the costs of free care are incidental

allowable costs, similar in nature to interest or

depreciation, neither of which go [sic] directly to

benefit medicare patients, but which nonetheless

inure as a residual benefit to them and are thus

compensable on that basis. Consequently, defendant’s

response functions in a misplaced context.” Rapides,

supra, at 388.

The hospital plaintiffs in this case are not arguing that the

Hill-Burton care for indigents is a direct cost which should

be subsidized by the Medicare program. Rather, they

assert that it is an indirect cost of maintaining or

expanding hospital buildings which inures to the benefit of

every patient in the hospital. The Hill-Burton free care

obligation is a legal duty imposed by the terms of the grant.

The Medicare patients benefit from the improved physical

plant which results from Hill-Burton grants as they benefit

from other, specifically enumerated “necessary and proper

costs such as heating and lighting.” 42 CFR §405.451(b)2).

The Hill-Burton free care obligation costs therefore are

indirect costs within the meaning of the Medicare

A-9

legislation and as such should be proportionately

reimbursable.

The plaintiffs’ second argument is that the Hill-Burton

costs are “interest” which is clearly reimbursable within

the specific terms of 42 CFR §405.419(b). The problem with

this assertion is that the regulation defines interest so that

the Hill-Burton free care obligation does not fall within the

literal terms of portions of this definition. For example, the

Hill-Burton funds are not literally “borrowed.” They are

not repayed to a “lender.” The funds are a grant which is

repayed by furnishing a fixed amount of free care to

indigents.

However, the Hill-Burton Act imposes specific duties on

hospitals which accept Hill-Burton funds. Either the

Attorney General or a private party may sue to enforce the

free care obligation. (See 42 U.S.C. 300-6 and Newsom v.

Vanderbilt University, 6553 F.2d 1100, 1107 (6 Cir. 1981).)

This obligation functions exactly as does interest: hospitals

accepting Hill-Burton funds must provide care to indigents

in return for the grants. These funds are only acquired if

the hospital agrees to “repay” the government by treating

indigents without charge. In spirit, this free care obligation

is an exact equivalent of interest, which is most generally

defined as ‘...the cost incurred for the use of borrowed

funds.” 42 CFR §405.419(b)(1).

The Rapides court held, in its discussion of this issue:

“We believe there exists an inherent inconsistency in

allowing the cost of interest to be compensable by

medicare, while at the same time disallowing the cost

of the free care obligation. The source of both costs is

the same. Both are costs imposed on the plaintiff as a

result of the expansion of its facilities. The origins and

goals of the cost differ. The interest cost arose out of the

loan from the bank and is payable to the bank. The free

care obligation arose out of the Hill-Burton loan

guarantee and is owed to the indigent public.

However, these variances are irrelevant insofar as we

A-10

are concerned. The issue that is and remains before us

is that both costs entail expenditures on the part of the

plaintiff, and that the existence of both is compelled

solely by the desire of the plaintiff to create additional

means to alleviate the distress caused by health

disorders suffered by both medicare and non-

medicare patients.” Jd. at 388-89.

This Court concurs with that conclusion. The Hill-Burton

free care obligation is so like interest on building loans that

it would be arbitrary and capricious to exclude the indirect

cost of the free care obligation from the Medicare

reimbursement calculus if interest on building loans is to

be included.

One remaining argument by the defendant is that the

free care obligation is “charity,” which is specifically

excluded from the “reasonable cost of services’

computation. 42 CFR §405.420. However, the free care

rendered by the hospitals is a legally enforceable

obligation.

The scant definition of charity allowances at 42 CFR

§405.420(b)(2) provides:

“Charity allowances. Charity allowances are

reductions in charges made by the provider of services

because of the indigence or medical indigence of the

patient.”

The hospitals in this case have not provided these services

because of the indigence of the patients, but rather because

of their Hill-Burton free care obligations These free care

obligations do not fall within the ordinary meaning of the

term “charity” (see, e.g., Webster’s New Traditional

Dictionary, Second Edition: charity is an “eleemosynary

gift” (when used in a legal contest), and “gift” is a

“voluntary transfer of real or personal property without

consideration”).

The parties have not come forward with any cases which

define “charity” within the meaning of the Medicare

regulations, nor has the Court found any on its own

A-11

research. The Seventh Circuit has defined charity as a

“gift.” Todd v. Citizen’s Gas Company of Indianapolis, 46

F.2d 855, 865 (7 Cir. 1931).

It is clear that this free care obligation is no gift; it is an

obligation, a duty. The government’s argument that the

hospitals gave indigents free care before the obligation was

imposed upon them is inapposite. Before they had accepted

Hill-Burton funds, and particularly before the 1972

guidelines were established, these hospitals had the right to

discontinue all free care to indigents. The acceptance of the

Hill-Burton funds are conditioned upon the legal obligation

to furnish free care to those unable to pay for hospital

services. This “free” care is simply not charity. Therefore,

no obstacle remains to the plaintiffs’ recovery other than

the issue of the amount of reimbursement. Although the

plaintiffs have asked the Court for a ruling on this issue, the

case will be remanded to the PRRB. That body must

determine the extent to which each hospitai nas been

reimbursed for its Hill-Burton free care expenses. To the

extent that the plaintiffs have not been reimbursed, the

PRRB must determine precisely what the Hill-Burton

expenses are. See Presbyterian Hospital, supra, at 1388. It

is inappropriate for the Court to make that type of factual

determination de novo. As noted by the Fifth Circuit in the

Presbyterian Hospital case, supra:

“Where an error of law has been corrected by a

reviewing court, and the only issues remaining in the

case are questions which have not yet been considered

by the administrative agency but are nevertheless

within the agency’s authority, the appropriate action

is a remand to the agency so that it may exercise its

authority. As the Supreme Court explained in FPC v.

Idaho Power Co., 344 U.S. 17, 20, 73 S.Ct. 85, 86, 97

L.Ed. 15 (1952), ‘the guiding principle. ..is that the

function of the reviewing court ends when an error of

law is laid bare. At that point the matter once more

goes to the Commission for reconsideration.” [citations

omitted].” /d., at 1389.

A-12

The defendants’ motion for summary judgment is hereby

denied. The plaintiffs’ motion for summary judgment is

granted on the questions of law. This matter is hereby

remanded to the PRRB for a determination of the residual

factual issues in accordance with this decision.

Dated this 16th day of December, 1981.

S. Hugh Dillin, Judge

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in the

United States Court of Appeals

For the Seventh Cirrnit

No. 82-1213

JOHNSON COUNTY MEMORIAL HOSPITAL, et al.,

Plaintiffs-A ppellees,

v.

RICHARD S. SCHWEIKER, Secretary of Health and Human

Services,

Defendant-A ppellant.

Appeal from the United States District Court for the

Southern District of Indiana, Indianapolis Division.

Nos. 79 C 905, 79 C 1018—S. Hugh Dillin, Judge.

ARGUED OCTOBER 27, 1982—DECIDED FEBRUARY 1, 1983

Before BAUER and COFFEY, Circuit Judges, and

WispoM, Senior Circuit Judge.*

CoFFEY, Circuit Judge. This is an appeal from the de-

cision of the district court granting the plaintiffs’ motion

for summary judgment while denying the defendant’s

like motion on the grounds that the costs incurred by the

plaintiffs in providing a percentage of free care to indi-

gent persons in fulfillment of the hospitals’ obligations

* The Honorable John Minor Wisdom, Senior Circuit Judge

of the United States Court of Appeals for the Fifth Circuit, is

sitting by designation.

A-14

under the Hill-Burton Act did not constitute “charity al-

lowances” and thus were reimbursable expenses under

the Medicare program. Reverse.

The plaintiffs are fifty-one hospitals located through-

out the state of Indiana, and each of these hospitals

received federal funds for either the construction or

modernization of their medical facilities in the form of

grants under the federal program known as the Hill-

Burton Act.! 42 U.S.C. § 291. In partial repayment of

their Hill-Burton grant, the Act requires participating

hospitals to provide a reasonable volume of free care to

indigent persons residing in the hospitals’ “territorial

area.” The Secretary of the \/nited States Department of

Health and Human Services has adopted regulations that

direct hospitals who received Hill-Burton funds to pro-

vide a percentage of free medical care to local indigent

persons based on one of the following three formulas: not

less than the lesser of (1) 10% of all federal assistance

received under the Hill-Burton Act; or (2) 3% of the

hospital’s net operating costs. As a third alternative, in

order to fulfill its obligation arising out of the receipt of

Hill-Burton funds, a participating hospital could elect to

participate in the “open door” program and provide care

to all local indigents admitted to the hospital and in need

of medical care or treatment. 42 C.F.R. § 53.111. Of the

hospitals involved in this appeal, forty-five elected to pro-

vide free care to indigents based upon the open door pro-

gram and six of the hospitals decided to provide uncom-

pensated care based upon the 10% formula.

All of the hospitals in this case have also been quali-

fied by the Secretary of the Department of Health and

Human Services as providers of Medicare services and as

! The Hill-Burton Act was enacted in 1946 to assist in the

construction and modernization of hospitals and to ensure

adequate — services for all persons. As an obligation

po out of their receipt of federal funds under the Hill-

Burton Act, hospitals are required to provide a reasonable

volume of charity services to persons unable to pay therefore.

42 U.S.C. § 291c(e)

A-15

such, the hospitals are entitled to reimbursement from

the Medicare program for the “reasonable costs” they

incur in providing medical treatment to Medicare bene-

ficiaries. 42 U.S.C. § 1395f(b). Under the Secretary’s

regulations, the Secretary enters into contracts with

private organizations designated as “fiscal intermedi-

aries” who reimburse the hospitals for the “reasonable

costs” the hospitals incur in providing medical treatment

to Medicare patients and who are in turn reimbursed by

the government for the sums tiuey pay to the hospitals.

Each of the hospitals involved in this case sought Medi-

care reimbursement from their fiscal intermediary (Blue

Cross/Blue Shield) ‘on the primary theory that the free

care obligation is an indirect cost of the Medicare Pro-

gram.” The hospitals argued in the alternative that “the

cost in providing free care under the Hill-Burton Act

constitutes interest for the use of borrowed funds and is

reimbursable under the Medicare Program” as a “rea-

sonable cost” of providing care to Medicare beneficiaries.

The fiscal intermediary disallowed Medicare reimburse-

ment of the “costs” claimed for the rendering of charity

care to indigents pursuant to the hospitals’ obligations

under the Hill-Burton grant agreements, and the plain-

tiffs appealed to the Provider Reimbursement Review

Board.? After a hearing, the Provider Reimbursement

- Hospitals qualified as providers of medical services to Medi-

care beneficiaries are usually reimbursed for the reasonable

cost of the medical care rendered to Medicare beneficiaries

by private organizations acting as “fiscal intermediaries”

under contract with the Secretary. 42 U.S.C. § 1395h. At

the end of the hospitals’ fiscal years, the hospitals submit cost

reports to the designated fiscal intermediary, and the fiscal

intermediary undertakes an analysis of the cost reports to as-

certain the amount of reimbursable “reasonable costs” the

hospitals incurred. 42 C.F.R. § 405.406(b). It is the fiscal inter-

mediary’s responsibility to allow or disallow in accordance

with the Secretary's regulations those items claimed as “rea-

sonable costs” by the hospitals. 42 C.F.R. § 1803.

3 Congress established the Provider Reimbursement Board,

and gave the Board the authority to conduct a hearing when a

provider disputes the decision of a fiscal intermediary, if the

(Footnote continued on following page)

A-16

Review Board upheld the fiscal intermediary’s finding

that the free care hospitals provided to the indigent in

fulfillment of their Hill-Burton obligation was a “charity

allowance,” an expense not reimbursable under the Medi-

care program. The Administrator of the Health Care

Financing Administration, acting for and on behalf of

the Secretary of the United States Department of Health

and Human Services, declined to review, affirm or modi-

fy the decision of the Provider Reimbursement Review

Board, and therefore the Board’s decision became final.

Thereafter, the hospitals sought review‘ of the Provider

Reimbursement Review Board decision disallowing Medi-

care reimbursement for the costs the hospitals incurred

in providing a percentage of free care to local indigent

persons in partial repayment of their Hill-Burton obli-

gations.

In ruling on the parties’ cross motions for summary

judgment, the district court found that the cost of pro-

viding a percentage of free care to indigents under the

Hill-Burton Act indirectly inured to the benefit of Medi-

care patients because the free care given to indigents is

“simply a payment for the building improvements en-

joyed both by them [the indigents] and by Medicare

3 continued

total amount in controversy is at least $10,000. 42 U.S.C.

139500. In the instant case the Provider Reimbursement

view Board consolidated the appeals of the fifty-one Indiana

hospitals into one appeal.

4 Twenty-six of the hospitals involved in this case are located

in the Northern District of Indiana, and therefore filed suit in

the District Court for the Northern District of Indiana. The

other twenty-five hospitals filed suit in the District Court

for the Southern District of Indiana, as these hospitals are

located in the Southern District of Indiana. Upon the motion

of those plaintiffs who filed suit in the Northern District of

Indiana, their case was transferred to the District Court for

the Southern District of Indiana and was consolidated with the

action brought by the other hospitals in that court. The deci-

sion in this consolidated case is reported as Johnson Count

we Hospital v. Schweiker, 527 F. ed 1134 (S.D. ind,

)

A-17

patients.” The court ruled that “(t]he Hili-Burton free

care obligation costs therefore are indirect costs within

the meaning of the Medicare legislation and as such

should be proportionately reimbursable.” The court went

on further to hold that the hospitals’ obligation to pro-

vide a percentage of free indigent care functions exactly

as interest on a loan since it arises out of the receipt of the

monies used in the construction or modernization of the

hospitals’ medical facilities. The court concluded that “it

would be arbitrary and capricious to exclude the indirect

cost of the free care obligation from the Medicare reim-

bursement calculus if interest on building loans is to be

included.” Finally, the court found that because the

hospitals were obligated to provide a percentage of free

care to indigents under the Hill-Burton Act, this free

care could not be characterized as “charity,” as charity is

freely given and does not arise out of an obligation. Based

on this reasoning, the district court denied the defen-

dant’s motion for summary judgment while granting the

plaintiffs’ like motion, and the Secretary of the Depart-

ment of Health and Human Services appealed from the

decision of the district court.

ISSUE PRESENTED

Are hospitals who provide medical services to Medi-

care beneficiaries entitled to Medicare reimburse-

ment of a percentage of the cost of providing free

care to indigent persons in fulfillment of their obli-

gations under the Hill-Burton Act?

On September 3, 1982 section 106 of the Tax Equity &

Fiscal Responsibility Act of 1982 became effective. Sec-

tion 106 amended 42 U.S.C. § 1395x(v)(1) which directs

and authorizes the Secretary of the United States De-

partment of Health and Human Services to adopt

regulations consistent with congressional intent defining

the term “reasonable costs” as the term applies to the re-

imbursement of Medicare expenses. Section 106 provides:

“(a) Section 1861(vX1) of the Social Security Act

[42 U.S.C. § 1395x(v\(1)] is amended by adding at

the end the following new subparagraph:

A-18

‘(M) Such regulations shall provide that costs

respecting care provided by a provider of serv-

ices, pursuant to an assurance under Title VI or

XVI of the Public Health Service Act that the

provider will make available a reasonable vol-

ume of services to persons unable to pay there-

fore, shall not be allowable as reasonable costs.’

(b) The amendment made by subsection (a) shall be

effective with respect to any costs incurred under

Title XVIII of the Social Security Act, except that it

shall not apply to costs which have been allowed

prior to the date of the enactment of this Act pur-

suant to the final court order affirmed by a United

States Court of Appeals.”

Congress also provided the following statement of con-

gressional intent:

“Conference Agreement

The Conference Agreement includes the House

Committee Provision. The provision is intended to

clarify that Hill-Burton free care costs have never

been, and are not allowable for Medicare reimburse-

ment purposes. The provision, therefore, applies to

all such costs that have been, or will be incurred

except those recognized by the final judgment of a

U.S. Court of Appeals entered into prior to enact-

ment.” (Emphasis supplied).

The plaintiffs contend that the retroactive application

of section 106 is unconstitutional as it constitutes a taking

of property without just compensation in violation of the

fifth amendment. It is the hospitals’ position that they

have a vested contract right to Medicare reimbursement

of the costs the hospitals incurred in providing a per-

centage of free care to local indigents in fulfillment of

their Hill-Burton obligations. We refuse to accept the

plaintiffs’ position that they had 2 vested contractual

right to Medicare reimbursement ¢_ the costs incurred in

providing free health services to indigents because a fair

reading of the Hill-Burton and Medicare Acts, from their

inception, reveals that these two federal Acts as estab-

A-19

lished are separate and distinct federal aid programs,

and Congress never intended to reimburse hospitals with

Medicare funds for the free care the hospitals are obli-

gated to perform under the terms of the Hill-Burton Act.

Moreover, it would be improper to allow the hospitals to

receive a double payment from the government, and Con-

gress did not intend to compensate hospitals a second

time for medical care for which the government has

already paid through contractual agreements for indi-

gent care under the Hill-Burton Act.

The disposition of this case is controlled by the holding

in a case decided this date. In Saint Mary of Nazareth

Hospital v. Department of Health & Human Services, No.

82-1237 (7th Cir. 1982), this court held that the retroactive

application of section 106 was constitutional and that the

Secretary of the Department of Health and Human Serv-

ices acted properly in adhering to his long standing

policy of disallowing Medicare reimbursement for the

costs hospitals incurred in providing a percentage of indi-

gent persons with free health care in partial fulfillment

of their Hill-Burton contractual obligations. We reverse

the finding of the district court and hold that the decision

of Saint Mary of Nazareth Hospital v. Department of

Health & Human Services is controlling as to the issues

raised herein.

A true Copy:

Teste:

Clerk of the United States Court of

Appeals for the Seventh Circuit

A-20

iu the

United States Court of Appeals

For the Seventh Cirentt

No. 82-1237

SAINT MARY OF NAZARETH HOSPITAL CENTER,

Plaintiff-A ppellant,

Vv.

DEPARTMENT OF HEALTH AND HUMAN SERVICES, ET AL.,

Defendants-A ppellees.

Appeal from the United States District Court for the

Northern District of Illinois, Eastern Division.

No. 81 C 2750—Frank J. McGarr, Judge.

No. 82-1253

St. JAMES HOSPITAL,

Plaintiff-A ppellee,

v

RICHARD S. SCHWEIKER, Secretary of the Department of

Health and Human Services,

Defendant-A ppellant.

Appeal from the United States District Court for the

Northern District of Illinois, Eastern Division.

No. 80-C-735—George N. Leighton, Judge.

ARGUED OCTOBER 27, 1982—DEcIDED FEBRUARY 1, 1983

A-21

Before BAUER and COFFEY, Circuit Judges, and

Wispom, Senior Circuit Judge.*

CoFFEY, Circuit Judge. This appeal is the consolida-

tion of two conflicting district court decisions challenging

the payment of Medicare funds to hospitals in reimburse-

ment of Medicare’s percentage of the costs incurred by

hospitals in rendering medical care to indigents in fulfill-

ment of the hospitals’ obligations to the federal govern-

ment as recipients of Hill-Burton funds. In Saint Mary of

Nazareth Hospital Center v. Department of Health and

Human Services, 531 F. Supp. 419 (N.D. Ill. 1981), the

district court granted the defendant’s motion for sum-

mary judgment on the grounds that the plaintiff hospital

was not entitled to Medicare reimbursement for the

percentage allocated to Medicare of the free care the

hospital provided to indigents in fulfillment of its obliga-

tion under the Hill-Burton Act, while in the St. James

Hospital v. Harris! case, 535 F. Supp. 751 (N.D. IIl.

1981), tne court granted the plaintiff hospital’s motion for

summary judgment on the grounds that the hospital was

entitled to such reimbursement. The St. James Hospital

court also found that a bedside telephone furnished by a

hospital was not a “personal comfort item” and thus the

* The Honorable John Minor Wisdom, Senior Circuit Judge of

the United States Court of Appeals for the Fifth Circuit, is sit-

ting by designation.

! In a footnote, the court noted:

_ “Patricia Roberts Harris, who is here sued only in her of-

ficial capacity, has been succeeded in office by Richard S.

Schweiker. However, for literary reasons, there having

been no motion for substitution, the court has treated the

case as against the Secretary during whose term of office

this controversy arose. Under the circumstances, by opera-

tion of law, the substitution is automatic; and the judgment

in this case is against the current incumbent who becomes

the named defendant. See Bracco v. Lackner, 462 F. Supp.

‘ig? ag Cal. 1978); Fed. R. Civ. P. Rule 25d), 28

435 F. Supp. at 765 n.1. For the pu of this appeal, the

current Secretary has been sebstisaead tor Ms. Harris.

A-22

Secretary erred when he ruled that 42 C.F.R. § 405.310(j)2

controlled and prohibited reimbursement of the costs the

hospital incurred in furnishing bedside telephones to

Medicare patients. We affirm Saint Mary of Nazareth

Hosmital v. Dept. of Health and Human Services, and

reverse St. James Hospital v. Harris.

Saint Mary of Nazareth Hospital, located in Chicago,

Illinois, is a 490 bed acute care general hospital and was

rated qualified by the Secretary of the United States

Department of Health and Human Services as a provider

of medical services under the provisions of the Social

Security Act relating to the Medicare program. 42 U.S.C.

§ 1395 et seg. (1976). Qualified hospital providers such as

Saint Mary’s are entitled to reimbursement for the

reasonable costs of providing medical treatment to those

qualified for Medicare benefits under the Social Security

Act, as defined in the Secretary's regulations. 42 U.S.C.

§§ 13°5f(b), 1395x(vK1XA) (1976). A private health in-

surance organization (Blue Cross/Blue Shield) acting as a

“fiscal intermediary” initially analyzes the Medicare cost

2 42 C.F.R. § 405.310(j) states:

“no ae may be made for any expenses incurred for

the following items or services:

(j) Personal comfort items and services (for example a

television set, or telephone service, etc.);”

3 Medicare providers are usually reimbursed for the

reasonable cost of care the hospitals render to Medicare

beneficiaries by private organizations acting as “fiscal in-

termediaries” pursuant to contracts with the Secretary. 42

U.S.C. § 1395h. It is the fiscal intermediary's responsibility to

ascertain the amount of reimbursable “reasonable cost” in ac-

cordance with regulations promulgated by the Secretary. At

the end of the hospitals’ fiscal years, the participating hospitals

must submit cost reports to the fiscal intermediary document-

ing the “reasonable costs” provided to Medicare beneficiaries.

42 C.F.R. § 405.406(b). As the liaison between the government

and the provider hospitals the fiscal intermediary determines

whether the hospitals are acting in a fiscally responsible

(Footnote continued on following page)

A-23

reports submitted by hospitals, and after review of these

cost reports, allows or disallows the costs claimed to

have been incurred by the hospitals and reimburses the

health care providers for the “reasonable cost” of the

services rendered to Medicare beneficiaries. 42 C.F.R.

§ 405.401(c). In 1974 Saint Mary’s entered into a contract

with the federal government and received funds under

the Hill-Burton Act to construct its present facility. The

Secretary’s regulations implementing the Hill-Burton

Act require that, in repayment of the grant, par-

ticipating hospitals provide a percentage of free medical

care and services to indigent persons residing in the

hospitals’ “territorial area,” 42 U.S.C. § 29ic(e), based on

one of the following three formulas: not less than the

lesser of (1) 10% of all federal assistance received under

the Hill-Burton Act; or (2) 3% of the hospital’s net

operating costs. As a third alternative, the hospital could

elect to adopt the “open door” policy and provide care to

all local indigents who are admitted to the hospital and in

need of medical care or treatment. 42 C.F.R. § 53.111.

Saint Mary’s elected to provide uncompensated care un-

der the 10% formula and for the fiscal years 1977 and

1978 Saint Mary’s provided free care to indigents amount-

ing to $120,656 and $180,065 respectively. Saint Mary’s

then sought to have the Medicare program reimburse

the hospital for the costs they incurred in fulfillment of

their Hill-Burton obligation to indigents. The fiscal in-

3 continued

manner and undertakes an analysis of the cost reports. 42

C.F.R. § 1803. After reimbursing the provider hospitals for the

reasonable costs of the medical treatment the hospitals

rendered to Medicare beneficiaries pursuant to the Secretary's

regulations, the fiscal intermediary is itself reimbursed by the

government.

‘ The Hill-Burton Act, 42 U.S.C. § 192 et seq., was passed in

1946 to assist in the construction and modernization of

hospitals and to assure adequate hospital services for all. In

order for a participating hospital to receive federal funds un-

der the Hill-Burton Act, the hospital must provide “a rea-

sonable volume of services for persons unable to pay therefor.”

42 U.S.C. § 291c(e).

A-24

termediary denied Medicare reimbursement of the

“costs” claimed for the rendering of free care to indigents

arising out of Saint Mary’s Hill-Burton obligation. The

Provider Reimbursement Review Board® upheld the deci-

sion of the fiscal intermediary. Thereafter, the Deputy

Administrator of the Health Care Financing Administra-

tion acting for and on behalf of the Secretary of the

Department of Health and Human Services declined to

review the Provider Reimbursement Review Board’s

finding and thus the Board’s administrative decision

became final.

On May 18, 1981 St. Mary’s Hospital brought this ac-

tion and sought judicial review of the Provider Reim-

bursement Review Board’s decision pursuant to 42 U.S.C.

§ 139500(f). The parties (Saint Mary’s Hospital and the

Secretary of the Department of Health and Human Ser-

vices) each filed cross motions for summary judgment

and the district court granted the Secretary’s motion for

summary judgment while denying Saint Mary’s motion.

In granting the Secretary’s motion for summary judg-

ment Judge McGarr ruled that Congress, in adopting the

Medicare legislation did not intend to reimburse

hospitals with Medicare funds for the expenses they in-

curred in providing a percentage of free services to in-

digents in repayment of their contractual financial

obligation to the government as recipients of Hill-Burton

funds. Agreeing with the rationale of the Provider Reim-

bursement Review Board, the court found that since the

hospital had already received compensation for the free

care it rendered to indigents under the Hill-Burton Act,

if the federal government was noWrequired to again

pay for these free medical services to indigents with

Medicare funds, the net result would be to “compensate

the [hospital] a second time for those costs which the

government has already paid.” Citing Gaston Memorial

* The Provider Reimbursement Review Board is empowered

to conduct a hearing when a provider is not satisfied with and

disputes the decision of a fiscal intermediary, if the total

amount in controversy is at least $10,000. 42 U.S.C. § 139500.

A-25

Hospital v. Blue Cross, PRRB No. 81-D84 (September 11,

1981). The court recited that it strained the bounds of

logical reasoning to believe that Congress would require

hospitals to provide a certain amount of free health care

to indigents as compensation for receiving federal funds

from one program and then reimburse the hospital with

federal funds from another program for the obligation it

originally incurred in accepting the Hill-Burton federal

grant. Thus, the court upheld the Provider Reimburse-

ment Review Board’s ruling that the cost of providing

free care to indigents pursuant to the hospital’s Hill-

Burton obligations was not a reimbursable expense un-

der the Medicare program.

St. James Hospital, located in Chicago Heights, Illinois,

is also a general hospital the Secretary of the United

States Department of Health and Human Services found

to be qualified as a provider of medical services under

the Medicare program and thus entitled to reimburse-

ment for the “reasonable costs” of providing health care

services to qualified Medicare beneficiaries. 42 U.S.C.

§ 1395 et seg. (1976). St. James Hospital also received

Hill-Burton grants® and elected to participate in the 10%

formula for partial repayment of these grants. In 1977, in

fulfillment of its Hill-Burton obligation St. James pro-

vided free medical care to indigents in the amount of

$159,300. St. James’ administrator calculated the per-

centage of the hospital’s overall operating expenses as

represented by Medicare patients and sought reimburse-

ment from the Medicare program for this percentage of

the hospital's cost of providing uncompensated care to in-

digents. St. James contends that its obligation to perform

a percentage of free services to indigents under the Hill-

Burton Act was a proper cost arising out of a financial

transaction, and was akin to interest on a loan and

therefore reimbursable under the Medicare program.

The fiscal intermediary, in disallowing reimbursement,

ruled that the Hill-Burton obligation to provide a per-

* St. James used these funds to modernize its existing facility

and to construct new facilities.

A-26

centage of uncompensated medical care to indigents

represented “charity allowances” and thus had “no

relationship to beneficiaries of the health insurance

program [Medicare] and are not allowable costs.” 42

C.F.R. § 405.42Qg). The Provider Reimbursement

Review Board agreed with the findings of the fiscal in-

termediary that the cost of providing free care to in-

digents was a “charity allowance,” and Congress never

intended to allow participating hospitals to “charge back”

this “obligated charity cost” to the Medicare program.

During the same 1977 fiscal year, St. James Hospital

decided to furnish bedside telephones to all hospital

patients, including Medicare recipients. In their annual

report to the fiscal intermediary and in order to comply

with the Secretary’s regulations St. James entered the

cost of this “personal comfort item” on worksheet A-8 of

the 1977 Medicare Costs Report. The effect of this

worksheet (A-8) entry acted as a “self-disallowance” of

the overall patient telephone costs ($17,000) and thus the

question of the telephone costs was not presented to the

fiscal intermediary for review. St. James, at a later date,

reconsidered this telephone cost reporting technique of

“self-disallowance” and raised the issue and sought reim-

bursement for the cost of telephone service for the first

time on its appeal to the Provider Reimbursement Re-

view Board (PR Review Board). The PR Review Board

consolidated St. James Hospital’s appeal with that of a

number of Florida hospitals on the issues of the telephone

costs reimbursement and the disallowance of the percent-

age of free indigent care allocated by the hospitals to

Medicare.

After a hearing on St. James’ claim for patient tele-

phone costs, the Board held that:

“this Board does not have the authority to rule on

coverage issues and is locked into the Regulation

that states that the patient telephone is a luxury

item.

The Board finds that the controlling Regulations and

Program Policy require the exclusion from allow-

A-27

able costs of all costs associated with telephone

services and other personal comfort items which are

used for the convenience of patients.”

When the Board’s decision on both questions became

final, St. James filed suit in the Northern District of IIli-

nois pursuant to 42 U.S.C. § 139500(f) asking for review

of the decision of the Provider Reimbursement Review

Board, and the parties filed cross motions for summary

judgment.

In granting the plaintiff St. James Hospital’s motion

for summary judgment, Judge Leighton reasoned that

the fiscal intermediary and the Board erred as a matter

of law when they classified the rendering of a percentage

of free medical services pursuant to the Hill-Burton

obligation as “charity.” The court reasoned that because

St. James was obligated under its Hill-Burton grant

agreement to provide a percentage of free care to in-

digents, the free care St. James provided indigents

should not be considered as “charity.” Moreover, the

court further stated that the rendering of free services

was “no different than costs which the hospital could

have been required to pay as interest on the grants it

received under the Hill-Burton Act.” The court ruled that

the Hill-Burton obligation of providing free care was not

“charity” and that the Secretary’s refusal to set aside the

fiscal intermediary’s disallowance was tantamount to “an

abuse of discretion and not in accordance with law.”

As to the issue of Medicare’s reimbursement of patient

telephone costs, the court found the Provider Reimburse-

ment Review Board’s decision that they were with-

out jurisdiction to rule on the claim resulted in a “hy-

pertechnical construction of the statute and regula-

tions.” The court ruled that the Provider Reimburse-

ment Review Board had jurisdiction to review St.

James’ self-disallowance because the Board’s jurisdic-

tion may be invoked by a provider if the provider is dis-

satisfied with the amount of total program reimburse-

ment and the amount in controversy exceeds $10,000,

regardless of whether the fiscal intermediary was pre-

A-28

sented with the question of the reimbursement of the tele-

phone costs.

Turning to the merits of St. James’ claim for reim-

bursement of the expenses it incurred in furnishing bed-

side telephones to Medicare patients, the court noted that

the telephones were used by both hospital personnel and

patients alike. The district court found persuasive the ex-

pert medical testimony and clinical studies supporting

the theory that bedside telephones had therapeutic value.

While noting that the Secretary has broad discretion in

adopting regulations governing payment to Medicare pro-

viders, the district court went on to find that the Medi-

care section disallowing reimbursement for “personal

comfort items” was not intended to exclude the payment

for patient telephones per se. Rather, the court reasoned

that it was Congress’ intent to exclude such items from

coverage if they were required only for the convenience

of a patient and had no meaningful relationship to the

medical treatment of an illness or an injury or the func-

tioning of a malformed body member. It was the court’s

decision that a bedside telephone had therapeutic value

and was essential to the delivery of health care and

therefore the Secretary of Health and Human Services

abused his discretion in refusing to reimburse hospitals

for the costs incurred in supplying Medicare patients

with bedside telephones. The Secretary has appealed

from the decision of the district court.

ISSUES PRESENTED

Issue 1: Is the cost of providing a percentage of free

care to indigent persons pursuant to a hospital’s

obligation under the Hill-Burton Act reimburs-

able under Medicare as a reasonable cost of

providing medical services?

Issue 2: Did the district court err in ruling that patient

bedside telephones are not “personal comfort

items” within the meaning of the Medicare Act?

A-29

1. Hili-Burton Costs’

Subchapter XVIII of the Social Security Act. entitled

Health Insurance for Aged and Disabled, authorizes the

payment of “reasonable costs” to qualified hospitals that

provide medical services to Medicare beneficiaries and

directs and empowers the Secretary of Health and

Human Services to draft regulations to define and inter-

pret what constitutes “reasonable costs” within the pa-

rameters of the Social Security Act. 42 U.S.C. § 1395x(v).

On August 17, 1982, Congress passed section 106 of

the Tax Equity & Fiscal Responsibility Act of 1982, and

the bill became effective September 3, 1982. Section 106

provides:

“(a) Section 1861(vX1) of the Social Security Act

[42 U.S.C. § 1395x(vX1)] is amended by adding at

the end the following new subparagraph:

‘((M) Such regulations shall provide that costs

respecting care provided by a provider of ser-

vices, pursuant to an assurance under Title VI

or XVI of the Public Health Service Act that

the provider will make available a reasonable

volume of services to persons unable to pay

therefore, shall not be allowable as reasonable

costs.’

(b) The amendment made by subsection (a) shall be

effective with respect to any costs incurred under Ti-

tle XVIII of the Social Security Act, except that it

shall not apply to costs which have been allowed

prior to the date of the enactment of this Act pur-

suant to the final court order affirmed by a United

States Court of Appeals.”

Accompanying this provision the Congress included the

following statements of congressional intent:

“House Committee Provision

The House Committee Provision requires the

Secretary to provide, by regulation, that the costs in-

71 For a discussion of the Hill-Burton Act, see note 4, infra.

A-30

curred by a hospital or skilled nursing facility in

complying with its free care obligation under the

Hill-Burton Act would not be considered reasonable

costs for purposes of Medicare reimbursement. The

provision is effective for costs incurred on or after

date of enactment.

Conference Agreement

The Conference Agreement includes the House

Committee Provision. The provision is intended to

clarify that Hill-Burton free care costs have never

been, and are not, allowable for Medicare reimburse-

ment purposes. The provision, therefore, applies to

all such costs that have been, or will be incurred ex-

cept those recognized by the final judgment of a U.S.

Court of Appeals entered into prior to enactment.”

H. R. Rep. No. 97-160, 97th Cong., 2d Sess. at 431 (8/17/82)

(emphasis supplied).

From the inception of the Medicare Program, the

Secretary has adhered to the intent of Congress that

Medicare was established exclusively to reimburse

hospitals for the reasonable cost of providing medical

treatment to those individuals who qualify as Medicare

beneficiaries and not to reimburse hospitals for their

charity obligations under the Hill-Burton Act. In

response to the congressional mandate contained in sec-

tion 106, the Secretary adopted regulations revising 42

C.F.R. § 405.420(bX2), (g), “to state explicitly that un-

compensated services furnished in fulfillment of a Hill-

Burton free care obligation are considered charity

allowances and as such cannot be considered allow-

able costs in computing Medicare reimbursement for

providers.” 47 Fed. Reg. No. 191 October 1, 1982 at

ban 4 In support of his regulation, the Secretary further

noted:

“This rule is consistent with long standing Medicare

policy in this area, and, as noted in the preceding

section of this preamble, is explicitly required by

Sections 1861(vX1) of the Act (as amended by Sec-

A-31

tion 106 of Pub. L. 97-248). We believe this change

will clarify our regulations and prevent further dis-

putes with providers and others on this issue... .

Section 106 of Pub. L. 97-248 is effective with

respect to all costs incurred under Medicare, both

before and after enactment of the amendment, ex-

cept those specific costs allowed under court order in

the Presbyterian Hospital decision. Consequently,

this rule is applicable to all past disputes concerning

Medicare disallowances of costs of free care furnished

under a Hill-Burton obligation except those cost years

specifically litigated in the Presbyterian Hospital

case, as well as future treatment of these costs. Any

Hill-Burton costs paid by Medicare under the princi-

ple of the Presbyterian decision, but not specifically

litigated therein, are impacted by this statutory

amendment. These cost reports will be reopened and

the Hill-Burton free care costs will be disallowed.”

Id.

Saint Mary’s and St. James’ Hospitals challenge the

congressional amendment and the subsequent regu-

lations promulgated by the Secretary on the grounds

that these governmental actions repudiate the hospitals’

vested contractual rights to Medicare reimbursement for

Hill-Burton indigent care costs and thus constitute a tak-

ing of property without just compensation in violation of

the fifth amendment. Moreover, the hospitals assert that

all patients should share proportionately in defraying the

costs of providing the free care to indigents pursuant to

the Hill-Burton Act because all patients benefit from the

hospitals’ use of Hill-Burton funds. Since the Secretary

requires hospitals to accept Medicare patients if they

previously received Hill-Burton funds and now refuses to

reimburse those hospitals for the Medicare patients’

share of the Hill-Burton charity care costs, the hospitals

assert that they are being forced to operate at a loss when

treating their Medicare patients. However, our review of

the Medicare Act and the Hill-Burton Act reveals that

these two Acts as established are two separate and dis-

tinct federal programs, each designed to accomplish a

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distinctly different purpose. The Hill-Burton Act was

designed to promote the construction and modernization

of hospitals, and as a quid pro quo for the receipt of Hill-

Burton funds, participating hospitals agreed to provide a

percentage of charity care to local indigents. The

Medicare Act, on the other hand, was adopted only to

provide medical care for the disabled and the aged who

qualify as Medicare beneficiaries. It was Congress’ in-

tent that these two programs remain separate and apart

from each other and that hospitals should not be reim-

bursed by one program (Medicare) for the care they

provide in fulfillment of the other, their Hill-Burton

obligations. Thus, it is evident from the legislative history

of the two Acts and the Secretary’s long standing policy

and from the language of the statutes that Congress

never intended to allow the Medicare program to reim-

burse hospitals for a percentage of their annual Hill-

Burton free care costs.

To date, two circuit courts of appeals have addressed

the application of section 106 of the Tax Equity and

Fiscal Responsibility Act of 1982. In Harper-Grace

Hospitals v. Schweiker, No. 81-1305 (6th Cir. October 22,

1982), the Sixth Circuit applied section 106 and in doing

so affirmed the decision of the district court that the costs

of providing free care to indigents pursuant to the

hospital’s obligation as a recipient of Hill-Burton funds

were not reimbursable costs under the Medicare Act.

However, the court did not address the issue of the con-

Stitutionality of section 106, but rather relied upon the

general rule that courts must apply the law that is in

effect at the time the court renders its decision. See

asta v. Richmond School Board, 416 U.S. 696, 711

_In a recent decision, the Eighth Circuit reversed the

finding of the district court and held that the Secretary

of the Department of Health and Human Services was

correct when he relied on his regulation and denied the

hospitals Medicare reimbursement for the costs the

hospitals incurred in providing a percentage of free care

to local indigents pursuant to the Hill-Burton contractual

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agreement. Metropolitan Medical Center v. Harris, Nos.

81-2401, 82-1014 (8th Cir. Nov. 22, 1982). The court

declined to rely on the retroactive application of section

106 of the Tax Equity and Fiscal Responsibility Act and

instead rested its decision on the fact that the Hill-Burton

Act and the Medicare Act embody separate and distinct

federal programs and the legislative history of each

revealed that Congress never intended to allow the use of

Medicare funds to reimburse hospitals for the Medicare

percentage of the free care rendered to indigents under

the Hill-Burton Act. The court rejected the hospitals’

claim that they had a right to Medicare reimbursement

for the free care they provide to indigents as recipients of

Hill-Burton construction aid because “(t]he text of the

Act, its implementing regulations, its legislative history

and the case law construing it all [demonstrate] that

medicare reimbursement for free care costs is inconsis-

tent with the Hill-Burton Act.” Metropolitan Medical

Center, Nos. 81-2401, 82-1014, slip op. at 12.

In another case, Arlington Hospital v. Schweiker, 547

F. Supp. 670 (D. Vir. 1982), the district court found sec-

tion 106 constitutionally seund in the face of an attack

based upon an uncompensated “taking” within the mean-

ing of the fifth amendment. The court balanced the

nature and the strength of the public interest served by

section 106 against the nature of the hospital’s asserted

right to reimbursement and found that the “strength of

the public interest involved, and the relative insubstan-

tiality of the plaintiff's interest” required the court to up-

hold the constitutionality of section 106. /d. at 675. We

agree with the overall reasoning of the Sixth and Eighth

Circuit Courts and the specific reasoning in the

Arlington Hospital case dealing with section 106, and in

so ruling we hold that strong public policy outweighs the

hospitals’ insubstantial interest, and section 106 is clear

in that it is nothing more than the reaffirmation of the

longstanding policy that it was never the intent of Con-

gress to allow Medicare payments to be used to reim-

burse hospitals for the percentage of free care they

provide indigents in repayment of their obligations under

the Hill-Burton Act.

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To reach any other conclusion would put the govern-

ment in the anomalous position of acting as a permanent

life support system for health care facilities who provide

services for the indigent without requiring that the

hospitals fulfill the contractual obligations they incurred

when accepting Hill-Burton funds. This type of financial

reimbursement advocated by the hospitals is totally in-

consistent with the principles of the Hill-Burton Act. We

believe it is incumbent upon hospital executives to ad-

minister their respective hospitals in a fiscally responsi-

ble manner, contingent upon the reasonable cost of the

services they provide within the limits of the Medicare

guidelines. We refuse to permit hospitals to subvert

federal aid programs through the use of other federal

funds ay subsidize the financial dilemma they themselves

created.

It is well settled “that legislative acts adjusting the

burdens and benefits of economic life come to the Court

with a presumption of constitutionality and that the

burden is on one complaining of a due process violation to

establish that the legislature has acted in an arbitrary

and irrational way.” Usery v. Turner Elkhorn Mining

Co., 428 U.S. 1, 15 (1976). In analyzing the constitu-

tionality of retroactive legislation, case law suggests

that courts undertake a balancing of three factors: (1) the

nature of the asserted right that is altered by the legisla-

tion; (2) the nature and strength of the public interest

served by the legislation; and (3) the extent to which the

legislation impairs the asserted interest. See Nachman

Corp. v. Pension Benefit Guaranty Corp., 592 F.2d 947,

959-60 (7th Cir. 1979).

As to the first element, the hospitals’ purported right to

Medicare reimbursement for Hill-Burton uncompensated

care costs was never expressly granted by either statute

or regulation. Rather, this alleged right simply arises out

of the hospitals’ reading of the Medicare Act through rose

colored glasses, a reading which is to the hospitals’

pecuniary advantage, and the Fifth Circuit's interpreta-

tion of the Medicare Act and the Hill-Burton Act. See

Presbyterian Hospital of Dallas v. Harris, 638 F.2d 1382

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(5th Cir. 1981). However, neither the Harris decision nor

the hospitals’ reading of the Medicare Act rise to the

level of establishing a “vested right” in hospitals to

receive Medicare reimbursement for Hill-Burton un-

com pensated care costs, but merely represents a “hospital

administrator’s dream” and the wild expectation that

hospitals should now receive even more government

money for the services they have previously contractually

agreed to provide to indigents in repayment of their Hill-

Burton grants. There is not a scintilla of proof in this

record that Congress ever intended the Medicare pro-

gram to reimburse hospitals for the Medicare percent-

age of the cost of providing medical care pursuant to

their Hill-Burton obligations.

The public interest to be served by section 106 is evi-

dent from our review of the legislative history of that sec-

tion. Congress was acting to remedy what it perceived as

a misinterpretation of the Medicare Act in recent litiga-

tion. There is clearly a strong public interest in the

proper interpretation of congressional acts, and the adop-

tion of section 106 by Congress was merely to clarify an

already accepted fact that Medicare was never intended

to provide hospitals with a second cash payment for the

care they provide local indigents and is necessary to

eliminate “windfalls from an unexpected judicial deci-

sion.” C. Hochman, The Supreme Court and Constitu-

tionality of Retroactive Legislation, 79 Harv. L. Rev.

692, 705 (1960). Furthermore, public policy supports the

application of section 106 because to allow hospitals to

use one federal program to fund their obligations under

another in an attempt to “charge back” their excess costs

to the government runs contrary to a reasonable reading

of the two Acts. Therefore, we hold that section 106 is

constitutional.

2. Bedside Telephone

Before reaching the merits of the district court’s deci-

sion that patient bedside telephones are not “personal

comfort items” within the meaning of the Medicare Act,

we must first determine whether the district court had

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jurisdiction to decide the question. 42 U.S.C. § 139500(g)

states:

“(t]he finding of a fiscal intermediary that no pay-

ment may be made under this subchapter for any ex-

penses incurred for items or services furnished to an

individual because such items or services are listed

in section 1395y of this title shall not be reviewed by

the Board, or by any court pursuant to an action

brought under subsection (f) of this section.”

The Secretary contends that the courts do not have

jurisdiction over the telephone cost reimbursement issue

because the fiscal intermediary disallowed the cost of

patient bedside telephones on the grounds they are “per-

sonal comfort items.” Because the term “personal comfort

item” is “listed in section 1395y,” the Secretary asserts

that section 139500(g) restricts the jurisdiction of the

courts in the following language: “The finding of the

fiscal intermediary . . . shall not be reviewed by the

Board, or by any court ... .” However, we do not agree

with the Secretary’s position that the telephone reim-

bursement cost issue cannot be reviewed by the courts.

There is no definition or description of the term “personal

comfort item” in the statute, and therefore, pursuant to

his statutory duty and authority, the Secretary adopted

regulations and interpreted the term “personal comfort

item” to include personal telephones. Thus, we are faced

only with a challenge to the Secretary’s interpretation

contained in his regulations of the term “personal com-

fort item.” Contrary to the Secretary's position, section

139500(g) does not restrict this court’s jurisdiction to

review the Secretary’s interpretation of what a personal

comfort item consists of.

In a second challenge, the Secretary also contends that

the Provider Reimbursement Review Board was without

jurisdiction to act upon St. James Hospital's claim for

reimbursement of the cost of bedside telephones because

the hospital itself had “self-disallowed” the costs when

they filed worksheet A-8 of their Medicare Costs Report.

The Secretary takes the position that the relevant

statutes require an initial presentation of the question of

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the reimbursement of telephone costs to the fiscal in-

termediary before the hospital is entitled to a hearing by

the Provider Reimbursement Review Board. 42 U.S.C.

§ 139500(d) provides that:

“The Board shall have the power to affirm, modify,

or reverse a final determination of the fiscal in-

termediary with respect to a cost report and to make

any other revisions on matters covered by such cost

report (including revisions adverse to the provider of

services) even though such matters were not con-

sidered by the intermediary in making such final

determination.” (Emphasis supplied).

This section vests broad authority in the Provider Reim-

bursement Review Board to review the finding of the

fiscal intermediary and make any adjustment to the cost

reports the Board deems necessary. As the statute itself

expressly states, the Board may consider any matter

“even though such matters were not considered by the in-

termediary in making such final determination.” 42

U.S.C. § 139500(d). Therefore, since the statute allows the

Board to consider matters outside of the cost reports, we

hold the Provider Reimbursement Review Board had the

authority to consider whether the costs of providing

Medicare patients with bedside telephones are reimburs-

able expenses under the Medicare Act.

Reaching the merits of the court’s decision to overrule

the Secretary and order reimbursement under the

Medicare Act of the cost of providing Medicare patients

with bedside telephones, we initially note that 42 U.S.C.

§ 1395hh grants the Secretary the broad discretionary

power to “prescribe such regulations as may be necessary

to carry out the administration of the insurance

programs under this subchapter.” While Congress has

mandated that no payment may be made for items

“which constitute personal comfort items,” 42 U.S.C.

§ 1395y(aX6), Congress did not define the term “personal

comfort item.” Therefore, the Secretary of the Depart-

ment of Health and Human Services, as the Ad-

ministrator of the Medicare Program had the duty to

draft and implement the following regulation defining

the term “nerennal eomfort item:”

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“no payment may be made for any expenses incurred

for the following items or services:

(j) Personal Comfort Items and Services (for

example a television set, or telephone service,

etc.);”

42 C.F.R. § 405.310.

It is the duty of the courts to interpret congressional

acts, and though courts are not bound by interpretative

regulations such as section 405.310, Skidmore v. Surift &

Co., 323 U.S. 134, 140 (1944), courts will defer to the

agency’s judgment unless it can be shown that the agen-

cy’s determination was arbitrary and capricious or con-

stituted an abuse of discretion. 5 U.S.C. § 7062)(A). See

also Citizens to Preserve Overton Park v. Volpe, 401 U.S.

402, 416 (1971). As recently stated by the Supreme Court,

“there certainly is no reason to think judges or juries are

better qualified than appropriate professionals in making

such decisions. See Parham v. J.R., 442 U.S. 584, 607, 99

S. Ct. 2493, 2506-2507, 61 L. Ed. 2d 101 (1979); Bell v.

Wolfish, supra, 441 U.S. at 544, 99 S. Ct., at 1877 (Courts

should not ‘“second-guess the expert Administrator on

matters on which they are better informed.”’).” Young-

berg v. Romeo, 102 S. Ct. 2452, 2462 (1982). The Sec-

retary’s regulation banning the reimbursement of the

cost of a telephone used for a Medicare patient’s persona!

comfort is clearly authorized by 42 U.S.C. § 1395y(a)(6).

Since the Secretary has the broad authority to adopt

regulations within the confines of the stated con-

gressional intent, and because St. James has failed to

show that the Secretary abused his discretion in deter-

mining that bedside telephones are personal comfort

items, we hold that the cost of providing a Medicare

patient with a bedside telephone is not a reimbursable

cost under the Medicare program.

In sum, we defer to the professionai expertise of the

Secretary of the Department of Health and Human Ser-

vices, and in doing so we uphold the Secretary’s deter-

mination to exclude from Medicare reimbursement the

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“average cost” of each telephone supplied to a Medicare

beneficiary and we further hold that the Secretary’s

regulation which prohibits the reimbursement of

hospitals for bedside telephones provided as personal

comfort items to Medicare patients is valid and en-

forceable.

As pointed out earlier, we hold that section 106 of the

Tax Equity and Fiscal Responsibility Act of 1982 which

prohibits the reimbursement by Medicare of costs in-

curred by the provider hospitals in fulfillment of their

obligation to provide a percentage of free care to in-

digents under the Hill-Burton Act is constitutional and

thus, we affirm the decision of Saint Mary of Nazareth

Hospital v. Department of Health and Human Services,

and reverse St. James Hospital v. Schweiker.

A true Copy:

Teste:

Clerk of the United States Court of

Appeals for the Seventh Circuit

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