Recently, the Court of Appeals for the Ninth Circuit further expanded the possibility of reimbursement for Medicare providers seeking review based on dissatisfaction with an intermediary’s final determination regarding a cost report. In Loma Linda University Medical Center v. Leavitt, No. CV-02-00025-RT (9th Cir. July 11, 2007), the Court concluded that the Medicare Provider Reimbursement Review Board (“the Board”) may decide whether to order reimbursement for costs or expenses not “expressly claimed or explicitly considered” by a fiscal intermediary in a Notice of Program Reimbursement (“NPR”). Specifically, the Ninth Circuit held that when the Board has jurisdiction over a cost report, it may base its decision with respect to that cost report on evidence of costs or expenses not claimed by the provider or considered by the intermediary, if the costs or expenses were incurred within the period for which the cost report was prepared.
Medicare Part A providers, e.g., skilled nursing facilities, hospitals, home health agencies, and hospices, file annual cost reports for reimbursement with their fiscal intermediaries. An intermediary reviews the cost report and renders a final payment decision via an NPR, specifying the amount of total reimbursement due and explaining any adjustments made to the costs claimed. Providers that remain dissatisfied with the final determination may appeal to the Board within 180 days, pursuant to the requirements set forth in applicable regulations. The Board’s decision is final, unless reversed or modified by the Secretary of Health and Human Services (“the Secretary”), acting through the Medicare Program Administrator (“the Administrator”). Final decisions are subject to judicial review.
The Ninth Circuit’s decision alters the previous circuit split between the First and Seventh Circuits, tipping the balance in favor of broad discretionary authority of the Board to address additional claims not previously considered by the intermediary on the NPR. With this decision, providers who discover such claims during a pending Board appeal, after an NPR is issued, or even after the cost report is filed, should find it easier to get the Board to consider those claims during a valid appeal for that cost reporting period, if the claims are raised prior to the hearing.
II. THE NINTH CIRCUIT DECISION
A. Factual Summary and Procedural History
Loma Linda University Medical Center (“Loma Linda”), a Medicare-participating hospital, inadvertently omitted claims for interest expenses amounting to more than $1 million in its 1985 Medicare cost report by zeroing out reimbursable interest. The intermediary, Blue Cross of California (“Blue Cross”), issued an NPR with no adjustment for interest expense. Loma Linda filed a timely appeal with the Board raising six issues with the NPR unrelated to interest expense. Loma Linda discovered the error while its appeal was pending and asked the Board to add the interest expense issue to its pending appeal. Blue Cross contested the Board’s jurisdiction to consider the issue, arguing: (1) that a final determination by the intermediary concerning the interest expense was required before the Board could properly consider the issue; and (2) that Loma Linda’s request was untimely. The Board, however, accepted jurisdiction and considered the unclaimed interest expense.
After all other issues in the appeal were resolved, the parties stipulated that if the correct income offset had been used in the 1985 cost report, the allowable interest expense would have been $1,029,279. The Board’s jurisdiction was left as the dispositive issue. The Board ruled in favor of Loma Linda, holding that no statute or regulation makes a determination or an audit adjustment by the intermediary a prerequisite for the Board’s consideration of costs or expenses on appeal. The Board found that the intermediary actually made an audit determination regarding the offset amount when it accepted the interest income offset that eliminated the entire interest expense incurred by Loma Linda. Both the interest expense incurred and the amount of the offset were covered on the cost report, which was reviewed by the intermediary’s auditor.
In the Board’s view, the error was clear and obvious on the cost report and should have been corrected by the intermediary. The Board concluded that jurisdiction was appropriate under the applicable statutory and regulatory provisions1 because both the offset amount and the incurred expense were covered by the cost report, even if the intermediary had not considered the matter. On the merits, the Board found that Blue Cross had incorrectly determined Loma Linda’s total reimbursable cost due to the understatement of interest expense in the amount of $1,029,279. In sum, the Board’s decision ruled that Blue Cross should have: (1) noticed the clear and obvious error concerning the unclaimed interest expense since it was included on Loma Linda’s cost report; (2) corrected that error; and (3) determined that Loma Linda was owed an additional $1,029,279 in allowable interest expense.
On review, the Administrator vacated the Board’s decision, finding instead that the Board lacked jurisdiction over the matter. The Administrator first concluded that no existing Medicare law hindered Loma Linda from claiming a portion of the interest expense as reimbursable on its cost report. The Administrator next found that Loma Linda’s failure to claim reimbursement as to a particular item prevented Loma Linda from satisfying the core jurisdictional requirement of provider dissatisfaction. In other words, Loma Linda was not “dissatisfied” within the meaning of the applicable statute. The Administrator reasoned that the Board’s jurisdiction is proper only where the provider is dissatisfied with a reimbursement determination made by its intermediary.
The Administrator also noted the availability of alternative options for providers seeking to correct cost reporting errors. In addition, the Administrator concluded that jurisdiction must be established properly under 42 U.S.C. § 1395oo(a) before the Board can exercise its powers and duties under § 1395oo(d). Ultimately, the Administrator found that the scope of an appeal is, in fact, limited to costs and expenses raised in the cost report and previously decided by the intermediary. The Administrator’s decision constituted the “final agency decision” on the matter. Loma Linda sought review in district court.
The district court ordered reinstatement of the Board’s initial decision, subject to review by the Secretary on the merits. Specifically, the court found that the Administrator’s interpretation of the statute was arbitrary and capricious and contrary to the language and intent of the Medicare Act. The court also determined that it only had jurisdiction over the final agency decision; thus, it refused to consider the merits of the interest expense issue. Therefore, the district court’s decision was limited to the Administrator’s dismissal of the administrative appeal for lack of jurisdiction. Both parties appealed to the Ninth Circuit.
B. Ninth Circuit Ruling
The Court of Appeals for the Ninth Circuit affirmed the district court decision, holding that the federal Medicare statute provides for a hearing on the cost report when a provider is dissatisfied with the intermediary’s final determination of the amount of total reimbursement. The Court declined to impose limits on the scope of the hearing with respect to the cost report. Specifically, the Court found that the plain language of the Medicare Act grants the Board jurisdiction to hear the claims of dissatisfied providers, even where such claims were not previously submitted to the intermediary. The Ninth Circuit held that a Board with jurisdiction over a cost report may base its decision, with respect to the cost report, on evidence of costs or expenses not claimed by the provider or considered by the intermediary if the costs or expenses were incurred within the period for which the cost report was prepared.
The Secretary first argued that a provider cannot be dissatisfied with respect to costs for which it could have claimed reimbursement but did not. Loma Linda, on the other hand, asserted that the Board obtained jurisdiction with respect to the 1985 cost report when Loma Linda filed an appeal from Blue Cross’ final determination. Loma Linda further maintained that the Board has power under § 1395oo(d)2 to revise matters covered by the cost report even when the intermediary had not considered those matters previously.
Relying heavily on the plain language of § 1395oo(a),3 the Court found that a Medicare provider dissatisfied with the intermediary’s final determination of the amount of total reimbursement may obtain a Board hearing with respect to its cost report. The Court determined that Loma Linda was unquestionably dissatisfied with Blue Cross’ final determination of the total reimbursement due with respect to its 1985 cost report, because Loma Linda had appealed. Accordingly, the Court found that the Board had jurisdiction to hold a hearing with respect to Loma Linda’s cost report. The Court held that the Board was entitled: (1) to affirm, modify, or reverse Blue Cross’ final determination based on the record, including evidence considered by the intermediary as well as any evidence obtained or received by the Board; and (2) to revise the final determination based on matters covered by the cost report “even though such matters were not considered by the intermediary in making such final determination.4” The Court, however, conditioned its ruling on the fact that a hearing had not yet been held.
The Secretary also argued that a provider can never claim dissatisfaction unless it has included an allowable claim in its cost report. The Court disagreed, maintaining instead that the Secretary had misinterpreted the interplay between §§ 1395oo(a) and (d) of the Medicare Act. The Court determined that the Act, when interpreted properly, enables a Board with jurisdiction to base its decision with respect to the cost report on evidence of costs or expenses not claimed by the provider or considered by the intermediary, provided that such costs or expenses were incurred during the period for which the cost report was prepared. The Secretary had contended that such a ruling would be inconsistent with well-established Ninth Circuit precedent. The Court, however, distinguished this case from its prior precedent, explaining that where, as here, a provider appeals an initial NPR, the Board has jurisdiction to review a broad range of issues. 5
The Secretary maintained that the Ninth Circuit previously rejected the First Circuit’s view that the Board’s jurisdiction is discretionary.6 The Court, however, clarified that once the Board has jurisdiction over a cost report based on a provider’s dissatisfaction with the intermediary’s final determination, the Board then has discretion: (1) to consider evidence that was not before the intermediary; (2) to affirm, modify, or reverse the intermediary’s final determination; and (3) to revise matters covered in the cost report that were not considered by the intermediary.
Lastly, the Secretary encouraged the Court to accept his position as a matter of policy. Specifically, the Secretary alleged that granting the Board broad jurisdiction would lead to an increased number of “time-consuming,” complex appeals and would promote “gamesmanship.” The Court dismissed this argument, pointing to Congress’ decision to give the Board broad jurisdiction to consider matters covered by a cost report, even where those matters were not presented to or considered by the intermediary.
On cross-appeal, Loma Linda claimed that the Administrator had no authority to reverse the Board’s jurisdictional decision. Specifically, Loma Linda argued that the Board’s ruling—as outlined in a letter forwarded to the Secretary—constituted a final decision. The Ninth Circuit disagreed, finding that the Board’s pre-hearing decision was not, in fact, a final decision. Contrary to Loma Linda’s additional assertions, the Court determined that the Secretary is not bound by stipulations entered by parties at a hearing before the Board.
Linda Loma also sought an award of interest, pursuant to § 1395oo(f)(2).7 The Ninth Circuit denied this request, affirming the district court’s conclusion that the scope of review was limited to the jurisdictional issue. Ultimately, the Court concluded that a final agency decision on the merits had not been issued and, as a result, found that a reimbursement award for statutory interest was unwarranted in this case.
III. THE CIRCUIT SPLIT
A. The First Circuit
The Ninth Circuit decision in Loma Linda is closely aligned with a prior decision by the First Circuit holding that the Board has statutory jurisdiction to hear claims not first raised before the intermediary and may accept or decline such cases as a matter of discretion.
In St. Luke’s Hospital v. Secretary of Health and Human Services, the First Circuit concluded that the Board has statutory jurisdiction to decide issues not initially raised before the fiscal intermediary.8 St. Luke’s Hospital (“St. Luke’s”) submitted a 1979 cost report which listed, but did not claim, sick leave expenses to the Board. This cost report was submitted pending an appeal of the intermediary’s final determination with respect to St. Luke’s 1978 claims for sick leave expenses. St. Luke’s subsequently appealed the final determination with respect to the 1979 cost report and raised an additional claim for the 1979 sick leave expenses not previously considered by the intermediary. The matters were consolidated, and the Board ordered reimbursement of the 1978 sick leave expenses, but declined to consider the 1979 costs. The Administrator reversed the Board’s decision. The district court reversed again, finding instead that the Board was correct on the merits.
The First Circuit vacated the district court’s decision and also found that the Board incorrectly failed to consider the 1979 sick leave claims. The Court reasoned that: (1) the plain language of § 1395oo(e) indicates that Congress left it up to the Board to decide whether to hear claims not raised before the intermediary; (2) legislative history supports this view; (3) the Board, similar to appellate courts, may review questions and issues not first raised before the agency in extraordinary circumstances or in order to correct an obvious mistake; and (4) the special features of the Board suggest that its reviewing powers are broader than typical reviewing bodies.
The Secretary had argued that § 1395oo(d) denies the Board the power to decide any issue not raised initially before the intermediary. The Secretary also urged the Court to defer to the agency’s interpretation of the statute. The Court, however, declined to do so, on the grounds that the statute is not vague or ambiguous and because the agency’s prior interpretations had been inconsistent. St. Luke’s had argued that the Board was empowered to hear the 1979 claim and that the Court should order the Board to do so. St. Luke’s further maintained that it “selfdisallowed” the sick leave costs, fearing that the 1979 claims would be rejected by the intermediary just as the 1978 claims had been. The Court concluded that the Board maintained discretion over whether to hear the 1979 claims and found that the Board’s initial refusal to hear the claim—based on the belief that it lacked the legal power to do so—was in error. The First Circuit ruled that it is up to the Board to decide whether to hear claims for expenses not first considered by the intermediary.9
B. The Seventh Circuit
Unlike the First and Ninth Circuits, the Seventh Circuit maintains that the Board may not consider a dissatisfied provider’s unreviewed claims while an appeal is pending. In Little Company of Mary Hospital & Health Care Centers v. Shalala, the Court held that a provider that fails to request reimbursement for all costs to which it is entitled cannot, on appeal to the Board, ask for new costs.10 Little Company of Mary Hospital (“Little Company”) appealed the denial of its claims with respect to a medical education subsidy. The appeal raised the related issue of dissatisfaction with respect to the intermediary’s final determination of the total amount of reimbursement due.
More specifically, Little Company sustained a sizable financial loss on the restructuring of its debt and a smaller loss based on the sale of a portion of its land. Little Company deducted the total loss from its investment income, and thereby reduced its investment income to zero. This enabled Little Company to claim a larger reimbursement. Little Company did not, however, mention the land loss on the cost report. The intermediary rejected the deduction as a violation of governmental policy. Little Company appealed to the Board.
Little Company argued that it was dissatisfied on grounds other than those which it originally presented to the intermediary. The Seventh Circuit, however, held that the Board is permitted to review an intermediary’s ruling only if the provider is dissatisfied with the final determination of the fiscal intermediary regarding the total reimbursement due. The Court reasoned that the plain language of the Medicare statute entitles intermediaries to “the first shot” at issues within their realm of expertise. Little Company contended that it was unable to present the land loss issue to the intermediary, because: (1) there was nothing left from which to deduct the land loss after the entire transaction; and (2) there was no way to use the loss to claim a larger reimbursement. The Court countered that there was nothing preventing Little Company from presenting alternative theories to justify a larger reimbursement award. Hence, the Court concluded that Little Company failed to give the intermediary the first shot at the land loss issue and affirmed the denial of Little Company’s reimbursement claims. Accordingly, the Seventh Circuit found that the intermediary must have the first shot, i.e., it must render a decision with respect to omitted expenses before the Board can properly consider the expenses on appeal.
The Ninth Circuit’s Loma Linda decision is of significance for health care providers filing Medicare cost reports. It signals a clear departure from the previous division among circuits with respect to Medicare provider reimbursement as well as the jurisdictional authority of the Provider Reimbursement Review Board. Notwithstanding the existing circuit split, the Ninth Circuit decision is a strong indication that federal courts are leaning toward broader jurisdiction of the Board to review provider reimbursement and expense claims, even those that were inadvertently omitted from the original cost report or otherwise not considered by the intermediary. This gives providers a stronger basis to request that the Board consider such claims during a Board appeal. Moreover, providers located in First Circuit and Ninth Circuit states11 in particular – but other jurisdictions as well – have a stronger position to defend the Board’s exercise of authority over such claims.