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University of Medicine and Dentistry of New Jersey v. Corrigan

October 17, 2003


On Appeal from the United States District Court for the District of New Jersey D.C. Civil Action No. 99-cv-05046 (Honorable Harold A. Ackerman)

Before: Scirica, Chief Judge,*fn2 Ambro and Weis, Circuit Judges

The opinion of the court was delivered by: Scirica, Chief Judge


Argued April 23, 2003


This is an action seeking an injunction against a planned Medicare audit of New Jersey teaching hospitals by the inspector general of the Department of Health and Human Services. The District Court held that it did not have standing to consider plaintiffs' claims under the Administrative Procedures Act, 5 U.S.C. § 704, and that plaintiffs failed to state a due process claim. The District Court also granted defendant's motion to enforce subpoenas related to the audit. We will affirm.


A. Medicare Billing.

The underlying dispute in this case involves Medicare billing at teaching hospitals. The parties differ on when physicians could bill for work performed by interns and residents under Health and Human Services regulations in effect before July 1996. Plaintiffs contend defendant's planned audit of their billing records would use an improper standard and should be enjoined.*fn3

The Medicare program is the responsibility of the United States Department of Health and Human Services. Within the department, the program is administered by the Centers for Medicare and Medicaid Services, the successor to the Health Care Financing Administration. The processing of bills submitted by the healthcare providers for particular services rendered has been contracted out to several insurance companies known as "carriers." Because the carriers handle the billing and payment, they have initial responsibility for ensuring compliance with the statutes and regulations governing Medicare billing of individually billable services.*fn4

Medicare payments to healthcare providers fall under two categories. Medicare Part A covers general hospital expenses, including residents' and interns' salaries. Part B covers payments made on a fee-for-service basis, reimbursing direct care by physicians, among other services. Consequently, at teaching hospitals, most services performed by residents are covered under Part A, which reimburses the hospitals for residents' salaries, but does not reimburse them on the basis of particular services they provide. 42 U.S.C. § 1395x(b)(6). Physicians providing care to patients, by contrast, are reimbursed under Part B based on the service performed and in line with reimbursement paid to physicians for services outside of teaching hospitals.

But this distinction is not so easily drawn. Physicians can also bill Medicare for services in which residents and interns participate, so long as the physician is sufficiently involved in the provision of services. The appropriate standard for determining when physicians may bill under Part B for work performed by residents and interns is the subject of the underlying dispute in this case.

In 1968, HHS promulgated regulations for Part B reimbursement of services performed at teaching hospitals. The regulations authorized payment to an "attending physician" for services "of the same character, in terms of the responsibilities to the patient that are assumed and fulfilled, as the services he renders to his other paying patients" if the physician "provides personal and identifiable direction to interns or residents who are participating in the care of his patient." 20 C.F.R. § 405.521 (1968). Notwithstanding, "[i]n the case of major surgical procedures and other complex and dangerous procedures or situations, such personal and identifiable direction must include supervision in person by the attending physician." Id.

In 1980, Congress amended the statute, largely adopting the standard HHS stated in its regulations, but omitting the specific references to surgery and other hazardous procedures. The statute now provides that if a physician "renders sufficient personal and identifiable physicians' services to the patient to exercise full, personal control over the management of the portion of the case for which the payment is sought, [and] the services are of the same character as the services the physician furnishes to patients not entitled to benefits under this subchapter," the physician may bill for the services under Part B. 42 U.S.C. § 1395u(b)(7)(A)(i)(I).

HHS's regulations were changed in 1992, but continued to authorize payment to a teaching physician only when the attending physician "furnishes personal and identifiable direction to interns or residents who are participating in the care of the patient." 42 C.F.R. § 405.521(b)(1) (1992). And the regulations continued to require that the physician "personally supervise" the residents and interns in the case of major surgery or other dangerous procedures.

Between 1992 and 1996, the Health Care Financing Administration began to interpret the phrase "furnishes personal and identifiable direction" as requiring the physician to be physically present when and where the resident or intern provides the billed service in order to be eligible for Part B payment. This interpretation led to widespread complaints from healthcare providers, many of whom claimed that it amounted to a change in the regulation. A physician could provide "personal and identifiable direction," it was claimed, without being physically present when the resident performed the billed care. The university contends that in response to these comments, the Health Care Financing Administration agreed to refrain from imposing such a requirement until there was a new rule clarifying the agency's position.

In December 1995, HHS adopted a new rule governing physicians at teaching hospitals that took effect July 1, 1996. The rule now provides, "If a resident participates in a service furnished in a teaching setting, physician fee schedule payment is made only if a teaching physician is present during the key portion of any service or procedure for which payment is sought." 42 C.F.R. § 415.170.

Because the carriers are initially responsible for enforcing the billing standards, the carriers themselves often issue clarifying instructions to the healthcare providers, furnishing a source of information about Medicare billing requirements in addition to the statute and regulations.

B. The Inspector General.

The Office of Inspector General of HHS, along with inspector generalships for other federal administrative agencies and departments, is governed by the Inspector General Act of 1978, 5 U.S.C. App. 3.*fn5 Offices of Inspector General are designed to be "independent and objective units" separate from their respective departments and agencies. 5 U.S.C. App. 3 § 2. They are directed to "conduct and supervise audits and investigations relating to the programs and operations" of their respective agencies. Id. Their primary task is to prevent fraud and abuse within such programs and operations. The Office of Inspector General of HHS is thus an independent office with a primary function to investigate fraud and abuse within the Medicare program.

The Inspector General Act grants inspectors general broad discretion to determine which investigations and audits are necessary to its mission, authorizing them "to make such investigations and reports relating to the administration of the programs and operations of the applicable establishment as are, in the judgment of the Inspector General, necessary or desirable." 5 U.S.C. App. 3 § 2.

C. The PATH Audits.

The HHS inspector general's auditing of teaching hospitals for overbilling began with an audit of the University of Pennsylvania Health System's Medicare billing records from 1989 to 1994. The audit disclosed three purported deficiencies in the University of Pennsylvania Health System's billing. First, the inspector general reported a substantial amount of billing by physicians for work performed by residents. Second, the audit revealed a certain amount of "upcoding"—billing for procedures more complex than were actually performed. And finally, the inspector general contended that documentation was inadequate for many of the billed items. The University of Pennsylvania Health System paid $30 million to settle any potential False Claims Act charges.

Following that audit, the inspector general (then June Gibbs Brown) decided to expand the investigation to determine if these practices were widespread. The result was the Physicians at Teaching Hospitals ("PATH") initiative, under which the inspector general selected a large number of teaching hospitals nationwide for audits looking for the alleged problems discovered in the University of Pennsylvania audit.

The PATH initiative was launched in 1996, the same year the new HHS regulations expressly adopted a physical presence requirement. PATH audits—including the one now challenged—were directed at billing in the years before the rule change. The operative rules for these audits, therefore, are primarily the rules as amended in 1992, which spoke of "personal and identifiable direction," but did not expressly state that a physician's presence was required. 42 C.F.R. § 404.521(b)(1) (1992).

PATH audits are of two types. "PATH I" audits are those performed by the Office of Inspector General at its expense. A healthcare provider can choose, however, to hire an independent auditor to perform the audit, reporting the results to the inspector general. This is a "PATH II" audit.

A number of healthcare providers and medical professional organizations objected to the initiative, claiming the PATH audits amounted to retroactive application of the 1996 rules. The inspector general contended instead that the rules had always required the physical presence of the physician for ...

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