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Mercy Home Health v. Leavitt

February 3, 2006


On Appeal from the United States District Court for the Eastern District of Pennsylvania (D.C. Civ. No. 03-06860). Honorable Juan R. Sanchez, District Judge.

The opinion of the court was delivered by: Greenberg, Circuit Judge.


Argued December 7, 2005




This matter comes on before this Court on an appeal by Mercy Home Health ("MHH") from an order of the district court entered March 18, 2005, granting summary judgment in favor of the Secretary of Health and Human Services (the "Secretary"). MHH sought review in the district court of the Secretary's final decision denying certain Medicare reimbursements for home office costs that MHH claimed pursuant to an alternative cost allocation method previously approved by the Medicare fiscal intermediary. For the reasons set forth below, we will affirm.


A. Medicare Reimbursement

Under Title XVII of the Social Security Act (the "Medicare Act"), 42 U.S.C. § 1395 et seq., the Secretary administers the Medicare program through the Centers for Medicare and Medicaid Services ("CMS").*fn1 Most Medicare providers receive reimbursement through fiscal intermediaries ("intermediaries") for services provided to Medicare beneficiaries. Intermediaries contract with the Secretary to determine the amounts due and are bound by the Secretary's regulations and interpretive rules. See 42 U.S.C. §§ 1395h, 1395kk-1; 42 C.F.R. § 421.100.

Congress authorized the Secretary "to promulgate regulations 'establishing the method or methods to be used' for determining reasonable costs." Shalala v. Guernsey Mem'l Hosp., 514 U.S. 87, 91-92, 115 S.Ct. 1232, 1235 (1995) (citing 42 U.S.C. § 1395x(v)(1)(A)). The Secretary's implementing regulations define "reasonable cost" as including reimbursement of only "necessary and proper" costs for furnishing covered services related to beneficiary care. 42 C.F.R. § 413.9(a). During the time period at issue, Medicare reimbursed home health agencies based on their "cost actually incurred," lessany costs "unnecessary in the efficient delivery of needed health services." 42 U.S.C. § 1395x(v)(1)(A).

1. Prohibition on Cross-Subsidization

The Medicare Act requires the Secretary's regulations to "take into account both direct and indirect costs of providers of services," and to ensure that Medicare does not pay costs of non-Medicare patients, and that other insurance programs do not pay the costs of Medicare patients. Id. To prevent cross-subsidization, the act further directs the Secretary to "provide for the making of suitable retroactive corrective adjustments where . . . the aggregate reimbursement produced by the methods of determining costs proves to be either inadequate or excessive." Id.

2. Record Keeping Requirements

Because the Secretary must verify the provider's actual costs to ensure proper payment, "[i]t is hardly surprising that the reimbursement process begins with certain record keeping requirements." Guernsey Mem'l Hosp., 514 U.S. at 94, 115 S.Ct. at 1236. To this end, the Medicare Act provides that "no such payments shall be made to any provider unless it has furnished such information as the Secretary may request in order to determine the amounts due such provider" for the cost period at issue. 42 U.S.C. § 1395g(a). The implementing regulations further state that "[p]roviders receiving payment on the basis of reimbursable cost must provide adequate cost data." 42 C.F.R. § 413.24(a). According to the regulations, the data must be "accurate and in sufficient detail to accomplish the purposes for which it was intended," and the data must be auditable. Id. at § 413.24(c).

3. Cost Allocation

The home office of a chain of commonly-owned health care providers is not a Medicare provider and cannot directly receive Medicare reimbursement. See 42 U.S.C. § 1395cc. Nevertheless, inasmuch as home offices may perform certain centralized services for a provider subsidiary, Medicare treats those support services as though "obtained from [the provider] itself." 42 C.F.R. § 413.17(c)(2). The Secretary's interpretive rules, found in the Provider Reimbursement Manual, CMS Pub. 15-1 ("PRM"), address how a provider may obtain reimbursement for home office support functions.

To obtain reimbursement for home office support functions related to the care of Medicare patients, the provider's home office files a cost statement, which identifies the allowable home office costs and how they are allocated among each of its subsidiary companies (also called "components"). See PRM § 2150.3. First, the home office totals all of its own costs, including those that it incurred on behalf of its subsidiary companies, and deletes from that total all unallowable costs. See id. at § 2150.3(A). Second, the home office uses "direct allocation" to allocate as many of its costs as possible. Direct allocation accounts for home office costs that are for the benefit of, or directly attributable to, its Medicare subsidiary or its other subsidiaries. See id. at § 2150.3(B). Third, the home office must allocate as many of the remaining costs as possible on a "functional basis." See id. at § 2150.3(C).

After the home office allocates as many home office costs as possible to its subsidiaries by direct and functional allocation, a "pool" of allowable costs for general management or administrative services remains ("pooled costs"). See id. at § 2150.3(D). If the chain consists of companies providing health care services and other types of companies, all the companies "share in the pooled home office costs in the same proportion that the total costs of each component (excluding home office costs) bear to the total costs of all components in the chain." Id. at § 2150.3(D)(2)(b). Thus, the CMS-prescribed default methodology for allocating pooled costs is a cost-to-total cost allocation methodology.

If a home office has higher costs for one of its non-Medicare providers, but performs few services for that company, the home office may use a more sophisticated alternative allocation method to allocate the pooled costs more precisely. See id. at § 2150.3(D)(2)(b). The PRM specifies the procedure the home office should follow if it wants to use an alternative allocation method:

If evidence indicates that the use of a more sophisticated allocation basis would provide a more precise allocation of pooled home office costs to the chain components, such basis can be used in lieu of allocating on the basis of either inpatient days or total costs. However, intermediary approval must be obtained before any substitute basis can be used. The home office must make a written request with its ...

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