We use cookies to better understand how you use our site and to improve your experience by personalizing content. Please review our updated Privacy Policy and Terms of Use. If you accept the use of cookies, please click the "I accept" button.I acceptI declineX
Skip navigational links

Third Circuit Reverses Decision Denying Reclassification Of Graduate Medical Education Costs


HLD, v. 32, n. 10 (October 2004)

Third Circuit Reverses Decision Denying Reclassification Of Graduate Medical Education Costs

In 1989, Mercy Catholic Medical Center's (Mercy's) Medicare fiscal intermediary (FI) informed Mercy that it was reopening its cost reports for fiscal years 1985 through 1988 to reexamine the graduate medical education (GME) costs that are reimbursed by Medicare. The FI made downward adjustments to the GME costs, and refused to reclassify certain operating costs as GME costs. Mercy appealed the reaudit results to the Provider Reimbursement Review Board (board), which declined to readjust the reaudit results. Mercy sought judicial review of the board's decision. The district court affirmed the board's decision. The district court determined that there were restrictions on the use of substituted documentation because many of Mercy's files documenting the GME costs were lost or had been destroyed and Mercy failed to provide sufficient documentation to verify the costs. Mercy appealed.

The Third Circuit reversed the district court's judgment and remanded the case. Mercy argued that the Secretary of the Department of Health and Human Services acted arbitrarily and capriciously in failing to consider time studies Mercy conducted in 1990 to support its requested adjustment to the 1985 GME costs. The result of the 1990 time study was that Mercy determined it had misclassified GME costs as operating costs. The Secretary had issued a special rule directed at FIs for reauditing GME costs when contemporaneous records do not exist. The rule allows for later time studies to be used to verify any originally claimed GME costs in a year, but not to support the addition of costs not originally claimed as GME costs. An exception to the record-keeping policy provides that subsequent documentation may be used when contemporaneous records are not available, but cost reports from a later period may not be used to increase or add physician costs to resident amounts.

The Secretary argued that the exception to the contemporaneous records requirement can only be used to verify GME costs and cannot be used as a basis for increasing costs. The appeals court concluded that the Secretary's interpretation contradicted the express language of the regulation because the plain language of the regulation did not limit the use of reaudit corrections to misclassified operating costs. The regulation clearly provides that reaudit corrections may be used not only for misclassified GME costs but also for all misclassified costs, said the appeals court. The appeals court determined the Secretary's interpretation of the regulation was not entitled to deference because it is at odds with the principle that audits should catch errors. The Centers for Medicare and Medicaid Services has inconsistently applied the Secretary's instructions about the reaudit process, said the appeals court, and the change in position affects the amount of deference that will be afforded to the Secretary's interpretation.

The appeals court agreed with Mercy's claim that the district court and the board erred in rejecting Mercy's requests for review on the grounds Mercy did not have physician allotment agreements for three departments. Reversing the district court's decision on that ground, the appeals court held Mercy had produced sufficient contemporaneous evidence of teaching programs to support reclassification of the costs. The appeals court also held that Mercy had met its burden of providing sufficient evidence for adjusting its hospital-specific rate. Accordingly, the appeals court reversed and remanded the district court's judgment.

Mercy Catholic Med. Ctr. v. Thompson, No. 03-2292 (3d Cir. Aug. 18, 2004). To read the case, go to


© 2018 American Health Lawyers Association. All rights reserved. 1620 Eye Street NW, 6th Floor, Washington, DC 20006-4010 P. 202-833-1100 F. 202-833-1105