IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF FLORIDA
UNITED STATES OF AMERICA ex rel. JAMES F. ALDERSON,
QUORUM HEALTH GROUP, INC., et al.,
Case No. 99-413-CIV-T-23B
MEMORANDUM OF AMICUS CURIAE
AMERICAN HOSPITAL ASSOCIATION IN SUPPORT
OF DEFENDANTS’ RULE 12(b)(6) MOTION TO DISMISS
This case arises from the Government’s novel suggestion that defendants’ (collectively, "Quorum") use of reserves for Medicare reimbursement, and their failure to submit their reserve calculations and work papers to the fiscal intermediaries together with their costs reports, gives rise to an inference of fraud under the False Claims Act. 31 U.S.C. §§ 3729(a)(1), (2) and (7). (See United States’ and Alderson’s Complaint at ¶¶55-56, 69, 71, 75-77, 84, 202, at 3-4, 20, 39)
The American Hospital Association ("AHA") believes that the Court should reject this argument for three reasons: (1) Nothing in the Medicare Act or its associated regulations requires a hospital to submit its reserve calculations and work papers along with its cost reports. (2) The Government has known, or should have known, that hospitals have kept reserves for Medicare reimbursement, but ordinarily have not submitted their reserve calculations and work papers with their cost reports since the Government first published the cost reporting regulations. Accepting the Government’s position that this practice results in an inference of fraud has potentially catastrophic effects on hospitals which have done nothing other than follow an industry practice that at least implicitly has been assented to by the Government. (3) Now that the Government wants to change its long-standing practice and institute a new policy preventing hospitals from maintaining reserves or requiring hospitals to submit reserve calculations and work papers, it should do so prospectively, after following the notice and rulemaking procedures established by the Administrative Procedure Act ("APA"), rather than retrospectively, by changing the rules after-the-fact through litigation.
INTEREST OF AHA
AHA is a not-for-profit association founded in 1898, which has become the primary national membership organization for hospitals and health systems in the United States. Its membership includes approximately 4,500 hospitals and other health care institutions, as well as over 35,000 individual members. AHA’s mission is to advance the health of individuals and communities; AHA leads, represents, and serves healthcare provider organizations that are accountable to the community and committed to health improvement.
Almost every institutional member of AHA participates as a health care provider in the Medicare program. Those members must comply with the standards for health, safety, and quality of patient care, as well as the rules, regulations and procedures for obtaining reimbursement, established by the Secretary ("Secretary") of Health and Human Services ("HHS"). The AHA and its members have no tolerance for Medicare fraud and other abuses. At the same time, AHA’s members have a substantial interest in ensuring that the Secretary administers the Medicare Act in a manner that is clear, fair, and faithful to the intent of Congress. The AHA works with HHS to achieve this goal through compliance programs, self-disclosure, dispute resolution, a model practices initiative, and other efforts to address the common confusion and misunderstandings that arise out of the complexities of Medicare.
The Medicare Program
The Medicare Program represents a massive undertaking by the federal government. Medicare’s beneficiaries number in excess of 38 million individuals, representing approximately 14 percent of the population of the United States. Timothy S. Jost, Governing Medicare, 51 Admin. L. Rev. 39, 40 (Winter 1999). The Secretary runs the Medicare program through the Health Care Financing Administration ("HCFA"). In 1996, HFCA administered a Medicare budget of $196.6 billion. Id. at 82.
The Medicare Act and the regulations promulgated by the Secretary to administer that Act comprise a complicated and often seemingly contradictory maze for the reimbursement of covered health care services to Medicare beneficiaries. The Act alone consumes 430 pages in the United States Code; the Secretary’s rules and regulations are even more voluminous – The Mayo Clinic has calculated that Medicare regulations span a total of 132,720 pages, including 111,088 pages of HCFA documents. Modern Healthcare, Vol. 29, No. 11, March 15, 1999 at 64. As one United States Court of Appeals has commented, the statute and regulations of the Medicare program "are among the most completely impenetrable texts within human experience." Rehabilitation Ass’n of Virginia, Inc. v. Kozlowski, 42 F.3d 1444, 1450 (4th Cir. 1994). Needless to say, the sheer bulk and complexity of the statute and regulations results in substantial uncertainty as to their meaning, scope and purpose.
Reimbursement of Claims
Under the Medicare Act, the Government reimburses hospitals "for inpatient hospital services" (usually the largest portion of the hospital expense) furnished to Medicare beneficiaries based on a "predetermined amount per discharge" unrelated to the hospital’s cost. 42 C.F.R. § 412.2(a). The Government, however, reimburses other costs, such as hospital outpatient services, based on "the cost actually incurred," excluding any costs "found to be unnecessary in the efficient delivery of needed health services." 42 U.S.C. §1395x(v).
Because a hospital cannot accurately determine its actual costs until the end of its fiscal year, the hospital receives prospective "periodic interim payment[s]" during the course of the fiscal year under Medicare’s Prospective Payment System. 42 U.S.C. § 1395g(e). After the end of the fiscal year, the hospital must provide "cost reports" to the appropriate "fiscal intermediary" – a private company under contract with the Secretary – so that the fiscal intermediary can determine the actual amount due to the hospital. 42 C.F.R. § 413.20(b). The fiscal intermediary documents its decision in a Notice of Program Reimbursement. 42 C.F.R. § 405.1803. If the amount due to the hospital exceeds that amount of the interim payments, the fiscal intermediary must pay the difference. 42 U.S.C. §§ 1395(h), 1395x(v)(1)(A)(ii). On the other hand, if the hospital was due less than the amount of the interim payments it received, the hospital must refund the difference. Id. The fiscal intermediary may make its determination as to the amount of reimbursement due to the hospital months, or years, after the end of the hospital’s fiscal year.
If a hospital finds itself dissatisfied with an adverse benefit determination by a fiscal intermediary concerning a claim under Part A of the Medicare Act in excess of $100, it can obtain a hearing before an administrative law judge employed by the Secretary. 42 U.S.C. § 1395ff; 42 C.F.R. § 405.720. This appeals process adds further delay and uncertainty. HCFA hears appeals under Part A involving amounts in excess of $10,000 through the quasi-independent Provider Reimbursement Review Board ("PRRB"). 42 U.S.C. § 1395oo; 42 C.F.R. §§ 405.1835 to 1873. In 1994, the PRRB commonly set hearing dates four years later, in 1998. See Phyllis E. Bernard, Empowering the Provider, 49 Admin. L. Rev. 269, 281-82 (Spring 1997). The Administrator of HCFA can review a decision of the PRRB and may affirm, reverse, modify, or remand the case. 42 C.F.R. §§ 405.1871(b), 405.1875(g). Between 1975 and 1989, the Administrator reversed approximately one-half of the PRRB decisions that were favorable to providers. 49 Admin. L. Rev. at 287 (citing David Holthaus, First Step in Medicare Appeal Can Be A Long One, Hospitals, May 5, 1989, at 40). Once the Secretary has reached a "final decision," the hospital can seek judicial review in federal district court. 42 U.S.C. § 405(g).
The Cost Reports
The Secretary’s regulations expressly provide that the cost reports submitted by hospitals must follow "[s]tandardized definitions, accounting, statistics and reporting practices that are widely accepted in the hospital and related fields." 42 C.F.R. § 413.20(a). The Secretary’s Provider Reimbursement Manual ("PRM") specifically provides that, "financial statements, when prepared in accordance with the standards promulgated by the American Institute of Certified Public Accounts, can establish your ability to meet the general requirements for proper cost reporting." PRM (Volume II) § 1102.3(B) (excerpts attached as Exhibit A) The American Institute of Certified Public Accountants ("AICPA") requires Hospitals to use Generally Accepted Accounting Principles ("GAAP"). AICPA Audit and Accounting Guide, Health Care Organizations ("Guide"), § 1.01 (1999) (excerpts attached as Exhibit B) ("Financial statements of health care organizations should be prepared in conformity with [GAAP]").
The AICPA expressly directs hospitals to use reserves for third-party payor reimbursements:
Some third-party payors retrospectively determine final amounts reimbursable for services rendered to beneficiaries based on allowable costs. These payors reimburse the health care organization on the basis of interim payment rates until the retrospective determination of allowable costs can be made. In most instances, the accumulation and allocation of allowable costs and other factors result in final settlements different from the interim payment rates. Final settlements are determined after the close of the fiscal periods to which they apply and may affect materially the health care organization’s financial position and results of operations. Consequently, a reasonable estimate of the amount receivable from or payable to these payors should be made in the same period that the related services are rendered.
Guide, § 1.11 (1999) (emphasis added) .
As the Guide explains, a hospital need not expect that the fiscal intermediary will reject any particular request for reimbursement to establish a reserve – like other reporting entities, the hospital can base its estimate on its prior experience or the experience of other institutions in the health care field with denial of claims by fiscal intermediaries. This experience generally supports the creation of accounting reserves – fiscal intermediaries invariably reimburse hospitals for less than all of the costs claimed, requiring a hospital using GAAP to make some provision in the financial statement for the same pattern to continue in the future. Moreover, while a fiscal intermediary’s past decisions, the PRM, or the Secretary’s regulations may make certain claims "presumptively non-reimbursable," requiring a hospital to file a cost report under protest, other costs may fall into a "gray area" of claims which these materials do not address. Hospitals consequently follow the Guide and GAAP and establish reserves for denials of claims in this "gray area."
Medicare regulations and the PRM outline what materials a hospital must provide with its cost reports. The regulations provide that a hospital "must furnish such information to the intermediary as may be necessary to … [a]ssure proper payment by the program …." 42 C.F.R. § 413.20(d). The regulations further state:
(a) Principle. Providers receiving payment on the basis of reimbursable cost must provide adequate cost data. This must be based on their financial and statistical records which must be capable of verification by qualified auditors.
* * *
(c) Adequacy of cost information. Adequate cost information must be obtained from the provider’s records to support payments made for services furnished to beneficiaries. The requirement of adequacy of data implies that the data be accurate and in sufficient detail to accomplish the purposes for which it is intended.
42 C.F.R. § 413.24(a) and (c) (italics in original).
The PRM contains similar language. It states that, "Providers receiving payment on the basis of reimbursable cost must provide adequate cost data based on financial and statistical records . . ." PRM (Volume I), § 2300 (emphasis added). It also states that "[c]ost information as developed by the provider must be current, accurate, and in sufficient detail to support payments made for services rendered to beneficiaries." PRM (Volume I), § 2304. The PRM recognizes that hospitals do not submit every possible piece of information to fiscal intermediaries – the fiscal intermediary "maintains the right to request, and the provider must submit, additional detailed supporting documentation as deemed necessary." PRM (Volume II) § 1102. See also 42 C.F.R. § 413.24(f)(5)(iii) ("If the cost report is considered unacceptable, the intermediary returns the cost report with a letter explaining the reasons for the rejection").
I. Nothing In The Medicare Act, The Regulations Promulgated By The Secretary Under That Act, Or The PRM Requires A Hospital To Submit Its Reserve Calculations With Its Cost reports
The gist of the Government’s allegations in this lawsuit is that the practice, followed by hospitals throughout the health care field, of preparing reserves for reimbursement by the Government without providing those reserves and the supporting materials to a fiscal intermediary renders the filed cost reports actionable under the False Claims Act. (See United States’ and Alderson’s Complaint at ¶¶55-56, 69, 71, 75-77, 84, 202.) The Government’s allegations are unsubstantiated. Nothing in the Medicare Act, the Secretary’s regulations or the PRM prohibits a hospital from maintaining reserves, or requires a hospital to submit its reserve calculations with the cost reports.
The Medicare Act does not directly address whether a hospital can maintain reserves or what information a hospital must submit to a fiscal intermediary. The Secretary’s regulations state that a hospital must "furnish such information to the intermediary as may be necessary to … [a]ssure proper payment by the program," 42 C.F.R. § 413.20(d), and that the information is "accurate and in sufficient detail to accomplish the purposes for which it is intended." 42 C.F.R. § 413.24(c). These regulations do not require a hospital to submit its reserve calculations – which often reflect nothing more than the hospital’s (or similar institutions’) experience with the reimbursement process – as part of the cost report. Since the Secretary first proposed these regulations decades ago (Section 413.20(d) was published 1973, 38 Fed. Reg. 6386 (Mar. 9, 1973) and Section 413.24 was published in 1966, 31 Fed. Reg. 14818 (Nov. 22, 1966)), hospitals have followed the practice of not regularly submitting their reserve calculations and work papers. As the costs reports often run hundreds of pages without supporting information, a hospital cannot reasonably submit all of the supporting data. The fiscal intermediary otherwise would find itself awash in a sea of paper – a situation that more likely would lead a fiscal intermediary to pay claims that it should not than the current situation.
Despite the lengthy history of these regulations, the Secretary has not previously required the submission of the calculations and work papers supporting its reserve estimates as part of the cost reports. To the contrary, the PRM prepared by HHS provides that the submission of financial statements "prepared in accordance with the standards promulgated" by AICPA – in other words, GAAP – will "meet the general requirements for proper cost reporting." PRM, (Volume II), § 1102.3(B). GAAP requires hospitals to keep reserves. The PRM also gives a fiscal intermediary the right to request "additional detailed supporting documentation as deemed necessary" or to deny a request for reimbursement for lack of sufficient documentation. PRM (Volume II) § 1102. By providing for requests for additional information, the PRM makes clear that a hospital need not provide all of the supporting calculations and work papers as part of the initial cost report. Because hospitals generally provide financial statements prepared in accordance with GAAP to the fiscal intermediaries, the fiscal intermediary can determine both the existence and amount of the hospital’s reserves and request additional information if it deems it appropriate. The failure to provide the reserve calculations with the cost report therefore cannot support a claim of fraud.
The Government seems to take the position that all Medicare claims are either plainly reimbursable or not, and those that are not must be filed under the "protest rule." (See Response, at 5 n. 2 ("Properly created reserves would include . . . instances in which Quorum filed a cost claim ‘under protest’ . . . where reimbursement had been disallowed in the past . . ."); Id. at p. 10 ("it is permissible to include claims within a filed cost report for presumptively nonallowable reimbursement . . . under protest . . .")). The protest rule applies "if a provider disagrees with the intermediary’s past decisions, with the instructions or guidelines in the Provider Reimbursement Manual, or with the regulations, the provider must file the cost report ‘under protest.’" (See Response, p. 28 quoting U.S. v. Calhoon, 97 F.3d 518, 529 (11th Cir. 1996)). However, not all cost report items involve a ‘presumptively nonallowable reimbursement’ or a disagreement with a past decision, instruction, guideline, or regulation. There are many "gray area" items in every cost report that a hospital believes in good faith are reimbursable, and the fiscal intermediary disagrees, that need not be filed under this protest rule.
This case differs dramatically from the Eleventh Circuit’s decision in U.S. v. Calhoon, 97 F.3d 518 (11th Cir. 1996), relied on by the Government. In that case, Calhoon "freely admitted both in an investigative interview and at trial that he believed at all times relevant that the royalty fees and CMCI interest were presumptively nonreimbursable under the applicable Medicare provisions." Id. at 524 (emphasis added). As a result, Calhoon had to submit those claims "under protest." Id. at 529. Calhoon’s failure to do so supported liability. In contrast, in this case the Government has not limited its allegations to such "presumptively non-reimbursable" claims, but also seeks to use reserve calculations that hospitals adopted based on historical experience, or claims that the intermediary’s past decisions, the PRM, and the regulations do not directly address. The Government accordingly seeks to stretch Calhoon well beyond its breaking point. The Court therefore should hold that the mere failure to provide reserve calculations and work papers as part of a cost report does not give rise to an inference of fraudulent conduct.
II. Accepting The Government’s Position Exposes Hospitals Throughout The Health Care Field That Followed Industry Practice To Unexpected And Potentially Ruinous Liability
For decades, hospitals throughout the health care field have followed the prevailing practice of maintaining reserves in anticipation of the likelihood that a fiscal intermediary will reimburse less than all of its claims. The hospitals, however, have not routinely submitted their calculations and work papers supporting those reserves with their cost reports. These hospitals have acted without any fraudulent intent, but rather in conformity with "industry practice." Moreover, the Government has been, or at very least should have been, aware of these practices and to AHA’s knowledge, it has never objected to them before this lawsuit. However, the Government now seeks to change the rules and to use this practice as support for its allegations under the False Claim Act. This "sea change" in the Government’s position raises the specter of substantial liability for hospitals throughout the United States who have done nothing more than follow the "industry practice," a practice assented to by more than 30 years of the Government’s acquiesence. Because Medicare reimbursements constitute a substantial percentage of the income of many hospitals, this unexpected and unfair liability might endanger their existence. For this reason as well, the Court should reject the Government’s effort to create an inference of fraud from a hospital’s decision to maintain reserves.
III. Requiring Reserve Information Is A New Rule Subject To The Notice And Comment Requirements Of The Administrative Procedure Act
The Court should not permit the Government to make a "sea change" in it’s long-standing policy through an enforcement lawsuit brought against an unsuspecting hospital, but rather should require the HHS to follow proper rule making procedure pursuant to the APA, 5 U.S.C.A. § 551 et seq. Generally, the APA requires an agency promulgating a new rule to follow the rule making procedures established by the APA, including the "notice and comment" provisions of the APA. 5 U.S.C.A. § 553(b) and (c). An agency must "provide notice of a proposed rule in the Federal Register, and afford an opportunity for interested persons to present their views." Jean v. Nelson, 711 F.2d 1455, 1474 (11th Cir. 1983) vacated as moot 727 F.2d 957 (11th Cir. 1984) (en banc) (dismissing appeal on APA issue as moot since government had issued new regulations in accordance with APA rule making requirements), citing 5 U.S.C.A. §553(b) and (c). See also Boyd v. Glickman, 12 F.Supp.2d 1261, 1270 (M.D.Ala. 1998), citing 5 U.S.C.A. § 553(b) and (c).
This "notice and comment" procedure serves three distinct purposes. First, it improves agency rulemaking by exposing the agency regulations to diverse public comment. The procedure assures that the public and the persons whom the agency seeks to regulate have the opportunity to participate in the process, to provide information to the agency and to suggest alternatives, all of which helps to educate the agency about the impact of a proposed rule and leads to a fair and mature decision. See, e.g., Lloyd Noland Hospital and Clinic v. Heckler, 762 F2d 1561, 1565 (11th Cir. 1985); Lewis-Mota v. Secretary of Labor, 469 F.2d 478, 482 (2nd Cir. 1972). Second, notice and the opportunity to be heard are essential components of fairness to affected parties. See, e.g., Small Refiner Lead Phase-Down Task Force v. United States Environmental Protection Agency, 705 F.2d 506, 547 (D.C. Cir. 1983); U.S. v. Two Hundred Thousand Dollars in U.S. Currency, 590 F.Supp. 866, 872 (S.D. Fla 1984). Third, by giving the affected parties an opportunity to develop the record to support their objections to a rule, notice enhances the quality of judicial review. Small Refiner Lead Phase-Down Task Force, 705 F2d at 547; Two Hundred Thousand Dollars in U.S. Currency, 590 F.Supp. at 872.
The APA defines a "rule" as "the whole or a part of an agency statement of general or particular applicability and future effect designed to implement, interpret, or prescribe law or policy …." 5 U.S.C.A. § 551(4) (emphasis added). The Eleventh Circuit has held that "reversing [a] longstanding old policy and instituting [a] new policy ‘is clearly a rule.’" Jean, 711 F.2d at 1476. See also Boyd, 12 F.Supp.2d at 1270 ("rules that reverse or depart radically from prior longstanding policy, the agency must invoke the notice-and-comment process required by the APA."); Vencor v. Shalala, 988 F.Supp 1467, 1471 (N.D.Ga. 1997); American Federation of Government Employees, AFL-CIO v. U.S., 622 F.Supp. 1109, 1116 (N.D.Ga. 1984), aff’d, 780 F.2d 720 (Fed.Cir. 1986) ("rules … create additional conditions to the statutory scheme … or substantially modify existing regulations or methodology."); 2 Am. Jur. 2d Administrative Law § 160 (1994) ("rules are those which effect a change in existing law or policy, add additional substantive requirements, or affect previously existing individual rights or obligations.")
This lawsuit is not the first time that the HHS has tried to unfairly avoid the "notice and comment" procedures that hospitals and health care providers rely on. When Congress passed the Omnibus Budget Reconciliation Acts of 1986 and 1987, it instructed the Secretary to comply strictly with the APA notice and comment rulemaking procedures when issuing policies on reimbursement and other issues. See Pub. L. No. 99-509, 100 Stat. 2017 (codified at 42 U.S.C. § 1395hh (1998)); Pub. L. No. 100-203, 101 Stat. 1330 (codified at 42 U.S.C. § 1395hh (1998)). In explaining the later provision, Congress has expressed its concern "that important [Medicare] policies are being developed without benefit of the public notice and comment period and, with growing frequency, are being transmitted, if at all, through manual instructions and other informal means." [Emphasis added] H.R. Rep. No. 100-391(I), 100th Cong., 1st Sess., title IV, pt. 5, § 4073, p. 340 reprinted at 1987 WL 61524 at 228.
The Court should not permit the Secretary to change the long-standing policy of the HHS without going through this "notice and comment" procedure. For decades, the HHS has neither objected to the prevailing practice of hospitals maintaining reserves for Government reimbursement, nor required hospitals to submit the calculations and work papers supporting their reserves as part of their cost reports. As the Eleventh Circuit has recognized, if the HHS changes its longstanding policy and adopts a new policy requiring hospitals to submit the materials supporting their reserves, that change represents a new rule. The Secretary should proceed through the proper "notice and comment" procedure before adopting this new rule. This procedure will give hospitals and others affected by the new rule the opportunity to provide information and to suggest alternatives, as well as provide fundamental due process. Congress has objected to the Secretary’s past attempts to avoid the "notice and comment" period. The Court therefore should reject the Government’s request for the Court to accept an inference of fraud predicated on a hospital’s decision to maintain reserves. Holding hospitals to a new standard of accounting practice is not the proper measure against which a violation giving rise to liability can occur. Unless and until the Secretary follows the APA’s "notice and comment" procedures, the Court should reject any inference of fraud.
Nothing in the Medicare Act or in the regulations promulgated under that Act require a hospital to submit its reserve calculations and work papers along with its cost reports. For over thirty years, since the Government first published the cost reporting regulations, hospitals routinely have not submitted their reserve calculations and work papers with their cost reports. Accepting the position that this practice results in an inference of fraud has potentially catastrophic effects on hospitals which have done nothing more than follow the industry practice. If the Government wants to change its long-standing regulations and to institute a new policy requiring hospitals to submit reserve calculations and work papers, it should do so prospectively, after following the notice and rulemaking procedures established by the Administrative Procedure Act, rather than retrospectively changing the rules by which hospitals must operate after-the-fact through enforcement litigation.
American Hospital Association, Amicus.
One of its Attorneys
Troy M. Lovell
Foley & Lardner
100 North Tampa Street
Tampa, Florida 33602-5804
(813) 221-4210 (fax)
James D. Dasso
Foley & Lardner
One IBM Plaza
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Chicago, Illinois 60611