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September 11, 1980

Patricia Roberts HARRIS, Secretary of Health and Human Services, Defendant

The opinion of the court was delivered by: QUACKENBUSH


 In 1965, the Congress of the United States passed Public Law 89-97, Title XVIII of which has commonly become known as "Medicare". 42 U.S.C. § 1395. The foregoing statutes and the federal regulations adopted pursuant thereto provide for the payment by the United States Government of medical costs for the care of the aged and disabled. The providers of medical care are reimbursed for the "reasonable cost" of such medical care. 42 U.S.C. § 1395x(v)(1)(A).

 In at least the matter of hospital care, a beneficiary under the Medicare Program may choose between the type and class of hospital which he or she elects, however, the Medicare Program reimburses the provider only for the "reasonable cost" thereof as determined by the Secretary of H.E.W., her agents or designees, and the beneficiary is billed for any excess charges, over and above the "reasonable cost".

 In 1972, Congress recognized that in a number of smaller communities where only one hospital "provided" the needed care existed, beneficiaries in fact had no choice between a non-existent "non-luxury" institution where Medicare would pay all of the beneficiary's expenses and the existing hospital whose charges and service were so-called "first-class", thus resulting in charges to the beneficiary in addition to those paid by Medicare. Senate Report 92-1230, Report of the Committee on Finance to accompanying H.R. 1, the Social Security Amendments of 1972 (3 U.S.Code Congressional & Administrative News 1972-pp. 5069-5070). The 1972 Amendments to the Medicare Act, however, prohibit a provider of services from imposing total charges to the patient and the medicare bureau in excess of costs actually incurred. 42 U.S.C. § 1395x(v) (1)(A).

 In response to the 1972 Congressional enactments and the intent thereof, the Secretary of H.E.W., (now H.H.S.) promulgated and enacted certain regulations to exempt "sole community providers" from the limitations on costs. The portions of the regulations pertinent to this appeal are contained in 42 C.F.R. § 405.460(f)(4) which provide as follows:

"42 C.F.R. § 405.460(f)(4) provides an exemption as a sole community provider.
(f) Exceptions, exemptions, and adjustments. The following types of exceptions, exemptions and classification adjustments may be granted under this section but only upon the provider's demonstration that the conditions indicated are present:
(4) Exemption as sole community provider. The limitation on costs imposed under this section shall not be applicable where a provider by reason of factors such as isolated location or absence of other providers of the same type, is the sole source of such care reasonably available to beneficiaries."

 As above indicated, a determination concerning the Plaintiff's status as a "sole community provider" (S.C.P.) in the Wenatchee, Washington community is the basis for this action.

 In administering the Medicare program, the Government operates through fiscal "intermediaries" as authorized by 42 U.S.C. § 1395h(a). Such "intermediaries" are private organizations which operate through contracts with the Secretary of H.H.S. (formerly H.E.W.). The "intermediary" performs various functions for the Secretary or her delegate including review of cost reports, setting of "reasonable cost" figures, payment of estimated sums owing a provider on a monthly basis, and the making of determinations such as "sole community provider" status as herein involved. In this case, Blue Cross, Inc., of Washington and Alaska was the supervising "intermediary".

 Decisions of an "intermediary" are appealable by a provider to the Provider Reimbursement Review Board (PRRB). 42 U.S.C. § 1395oo. The congressional enactment creating this Board mandated that the Board be composed of five members knowledgeable in the field of cost reimbursement, at least one of whom must be a certified public accountant. 42 U.S.C. § 1395oo (h).

 A decision of the Provider Reimbursement Review Board is to be based upon the record made at the hearing and is to be supported by substantial evidence when the record is viewed as a whole. 42 U.S.C. § 1395oo (d).

 The decision of the Board is a final order appealable by the provider to the United States District Court, unless the Secretary intervenes on her own motion. 42 U.S.C. § 1395oo (f)(1). The Secretary of H.E.W. (now H.H.S.) has delegated this intervention authority to the Administrator, Health Care Financing Administration (hereafter Administrator). 42 Fed.Reg. 44599, 44600.

 The Administrator, in turn, has further assigned responsibility in these cases to an attorney-adviser who recommends initiation of "own-motion" reviews together with recommended disposition of the case. 41 Fed.Reg. 18900.


 Prior to February 15, 1974, the Plaintiff was the owner and operator of a single facility hospital in Wenatchee, Washington known as Deaconess Hospital.

 On February 15, 1974, the Plaintiff executed an Option Agreement for the purchase of the assets of St. Anthony's Community Hospital in Wenatchee, Washington.

 Prior to the exercise of this option, the Plaintiff was required to obtain a "Certificate of Need" from the Washington State Department of Social and Health Services pursuant to Chapter 70.38 of the Revised Code of Washington. Chapter 70.38 of the Revised Code of Washington is a Comprehensive Health Planning Act passed by the Washington State Legislature in its 1971 Session to comply with the mandates of Public Law 89-749. 42 U.S.C. § 246.

 Pursuant to the Plaintiff's application for a "Certificate of Need" for the purchase of St. Anthony's Hospital and consolidation of St. Anthony's Hospital with Deaconess Hospital, various meetings were held in which the public was given the opportunity to present their views in connection therewith. Likewise, notices of the application and hearings were published in the Wenatchee area newspapers and a Court hearing concerning the matter was held in the City of Wenatchee.

 On April 29, 1974, the Washington State Department of Social and Health Services, Health Services Division, issued a "Certificate of Need" for the purchase of St. Anthony's Community Hospital by the Plaintiff. A "Notification of Action" of the issuance of the "Certificate of Need" was forwarded to the Regional Health Administrator, United States Department of Health, Education, and Welfare (H.E.W.). At the time of the issuance of the "Certificate of Need" by the Washington State Department of Social and Health Services, Dr. John A. Beare, the Director of said agency, stated by letter as follows:

"The consolidation of the two principal hospitals in Wenatchee will result in numerous operational advantages such as the elimination of duplication of basic medical and surgical services. Also the purchase will provide a greater base to support the addition of new and specialized services."

 The Plaintiff then changed its name to Central Washington Health Services Association, completed the purchase of the St. Anthony Hospital assets and facilities which it designated as its Rosewood branch, and effective July 1, 1974, proceeded with the operational consolidation of the two facilities. The Plaintiff's plan, since accomplished, involved both a physical and operational consolidation of the two facilities into one physical unit. Physical consolidation involved the issuance of a 12 million dollar bond issue to finance the construction of additional facilities.

 Effective July 1, 1974, a true consolidation of the two facilities (Deaconess and Rosewood) was effected by the Plaintiff and all operational aspects of administration, personnel, and medical facilities were integrated into one single operation as follows:

 (1) The medical staff of St. Anthony's was dissolved and a combined medical staff was established. This medical staff thereafter served the patients at both facilities. (TR 124)

 (2) The two facilities were operated under one personnel policy. The personnel were assigned to the two facilities based upon the need therefor. (TR 124 and 125)

 (3) A single contract was negotiated with the Licensed Practical Nurses and Registered Nurses Association which was treated as one negotiating unit. (TR 124)

 (4) The housekeeping in both facilities was performed by one single consolidated housekeeping staff. (TR 180)

 (5) One single pharmacy was established to service both facilities (TR 194).

 (6) The physical therapy departments were combined into one operation. (TR 127)

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