The opinion of the court was delivered by: LACEY
Under the Health Insurance for the Aged Act (Medicare Act), 42 U.S.C. § 1395, Et seq., hospitals, nursing homes and similar-type facilities, known as providers of Medicare services to eligible patients, do not directly charge such patients for the services provided. 42 U.S.C. § 1395cc(a)(1). The Secretary of Health, Education and Welfare (Secretary), usually through designated fiscal intermediaries, reimburses the providers for the "reasonable cost" incurred by them in providing Medicare services. 42 U.S.C. §§ 1395f(b) and 1395h.
The Medicare Act, at 42 U.S.C. § 1395x(v)(1), authorized the Secretary to adopt, in his discretion, regulations for determining "reasonable cost," and, at § 1395x(v)(1)(A)(ii), directed the Secretary to adopt regulations establishing "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." The Secretary, pursuant to that authority, has adopted and published regulations defining, determining and governing methods of "reasonable cost." 20 C.F.R. § 405.401-405.488 (1977).
Under 42 U.S.C. § 1395g, the Secretary is required to determine periodically, and during a provider's fiscal year, how much that provider should be paid before final audit by the General Accounting Office. Pursuant to that statutory provision and implementing regulation (20 C.F.R. § 405.405), the Secretary, at least monthly, reimburses a provider, subject to later adjustment for overpayments or underpayments, on "final settlement" at the end of the provider's "accounting period."
Prior to August 1, 1970 the Secretary, by regulation defining methods of determining "reasonable cost," recognized both straight-line depreciation, and one of two types of accelerated depreciation, of a provider's capital assets as a "reasonable cost" item. 20 C.F.R. § 405.415 (1967). n1
n1 Straight-line depreciation requires an even allocation of the cost of a capital asset, less its salvage value, over its useful life. Accelerated depreciation allocates more of the cost of a capital asset to the early years of the asset's useful life, rather than to an even amount annually.
If a provider buys a bed for use by a Medicare patient in 1967 at a cost of $ 1,000 with an expected life of 10 years and a zero salvage value, he would claim depreciation, under the two methods, as follows:
If the provider were to be fully reimbursed for this cost, and if, for example, after 1970 the bed was no longer used for a Medicare patient, use of the double declining balance method would mean that after 4 years the provider would have been paid a total of $ 597.60, rather than the actual depreciation of $ 400, reflected by the straight-line method, or approximately 150% Of what the provider was justly entitled to. Only if the bed were used by the provider for a full 10 years would the different methods of depreciation reimbursement give substantially the same result. To do otherwise would be to subject the Medicare plan and budget to costs of depreciation which were not shared by Medicare patients.
Prior to February 5, 1970 the Secretary recognized that there was a defect in the depreciation regulation. Under it, excessive reimbursement payments were being made to providers who depreciated their capital assets under an accelerated method and either ceased participating in, or substantially reduced their participation in, the Medicare plan well before the expiration of the useful life of their capital assets. Thus, on February 8, 1970, the Secretary announced a proposed regulation which would amend the existing depreciation regulation. 35 Fed.Reg. 2593, codified at 20 C.F.R. § 405.415(d)(3) (1977). Effective August 1, 1970, new providers were no longer allowed to claim accelerated depreciation. With respect to old providers using the accelerated method of depreciation who either terminate or substantially reduce their participation in Medicare before the expiration of the useful life of their capital assets, the Secretary could recapture from the provider all reimbursed costs to the extent they were attributable to accelerated depreciation costs in excess of what would have been allowed under the straight-line method.
Plaintiff, a New Jersey corporation, Lincoln Park Nursing Home, owns and operates (through plaintiff Lincoln Park Nursing and Convalescent Home, Inc.) a nursing home bearing the same name, Lincoln Park Nursing Home, 521 Pine Brook Road, Lincoln Park, New Jersey.
Defendant, Joseph Califano, as the Secretary of Health, Education and Welfare, is the cabinet-level officer of the United States bearing overall responsibility for the administration of the Social Security Act, 42 U.S.C. § 301 Et seq., which, pursuant to provisions of 42 U.S.C. § 1395, Et seq., includes the Medicare program.
Pursuant to agreements with the Secretary under 42 U.S.C. § 1395cc, the plaintiff participates as a provider of services in the Medicare program.
Pursuant to an agreement with the Secretary under 42 U.S.C. §§ 1395h and 1395u, Blue Cross Association acts as a fiscal intermediary and performs for the Secretary certain designated functions in the administration of Part A (42 U.S.C. §§ 1395c to 1395i-2, Hospital ...